THE GOLD STANDARD: Should the U.S. Go Back to It?

As they met last week in Washington, delegates to the meeting of the World Bank and International Monetary Fund studiously avoided discussion of one subject: a change in the world’s gold policy. Reason for the reticence: their host, the U.S. Treasury, is unequivocally opposed to any change. Since the U.S. is the world’s largest gold holder, no adjustment can be made without U.S. initiative. Yet speculation about a change continues to be an irrepressible topic of conversation among financiers and statesmen around the world.

Talk about a change takes two forms. One is that the U.S. should junk its present managed-money system (in which gold is used only as a currency reserve and to settle international accounts) and return to the fully convertible gold standard, abandoned in 1933, under which dollars could be exchanged for gold coins. The other—usually joined with the first—is that the U.S. should double or triple the present gold price of $35 an ounce, thus devaluing the dollar and in effect automatically increasing the monetary value of the official gold holdings of the free world’s nations.

Among the chief advocates of a return to the full gold standard for both the U.S. and European nations are French Economic Adviser Jacques Rueff, the architect of France’s successful financial-austerity program, and Philip Cortney, president of Coty, Inc. and chairman of the U.S. Council of the International Chamber of Commerce.

They, like the rest of a small but dedicated group of economists, believe that the gold standard is the only answer to the world’s present monetary problems, such as inflation and a concentration of capital. They believe that a return to the rigid fiscal discipline of the gold standard would act as a brake on inflation by preventing governments from overspending, head off world recessions by doing away with the excesses that lead to them. A full gold standard, as they see it, would also put a damper on sudden expansions of credit not backed by gold, help stabilize prices, and step up the flow of capital—and thus international trade—by making all currencies freely convertible into gold.

A return to the gold standard would probably have to be accompanied by a price hike in gold to provide more adequate backing for the vast expansion of money and credit in the last few decades. Some economists who do not advocate a return to the gold standard nonetheless want a price hike. They argue that the U.S. has artificially kept gold at a fixed price since 1934, while the prices of the world’s goods and services have more than doubled, and that not enough gold has been produced to keep up with the world’s economic strides. The freeing of gold, they feel, is a logical economic adjustment that would 1) step up production of gold, 2) increase the free world’s purchasing power in dollars by some $20 billion (if the price were doubled), 3) bring most of the $10 billion to $12 billion in gold hoarded by wary Europeans back into productive use.

But the great majority of the world’s economists strongly oppose both the gold standard and a price hike. Says a top U.S. Treasury officer: “The full gold standard is oldfashioned, impracticable, a discipline enforced with the lash. The world has moved on without it.” In place of that rigid discipline, nations have built up flexible disciplines better suited to control the ups and downs of the complex modern world, such as the International Monetary Fund. Opponents of return to the standard of a quarter of a century ago insist that the U.S. is already as near to a gold standard as necessary, since gold still backs up its currency, and its dollar can be converted into gold by foreign governments and central banks.

Nor do most economists see any reason for making a price hike now. The British Radcliffe Report on monetary policy this year concluded that such an increase is not “immediately necessary or the most hopeful approach to the problem of international liquidity,” and the International Monetary Fund has come out against it. Gold-short nations that need the most help would benefit least by the change; the major gains would be made by such big gold producers as Russia and South Africa.

Economists still believe firmly in gold’s prime importance as the ultimate financial standard. They consider it psychologically vital to fiscal confidence, useful as a long-term guarantee that countries can meet their bills. But they have long since ceased to regard it as the sole test of a currency’s stability. More important in today’s world is the health of a nation’s economy, the real rise in its national income, the strength of its built-in fiscal controls. Most nations now have learned the heavy price of unsound financial and fiscal policies; they no longer need the lash of gold.