Real and Pseudo Gold Standards
Author(s): Milton Friedman
Source: The Journal of Law & Economics , Oct., 1961, Vol. 4 (Oct., 1961), pp. 66-79
Published by: The University of Chicago Press for The Booth School of Business,
University of Chicago and The University of Chicago Law School
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REAL AND PSEUDO GOLD STANDARDS'
MILTON FRIEDMAN
University of Chicago
INTERNATIONAL monetary arrangements have held a consistent
place among the topics discussed at the meetings of our So
eminently fitting, since there is probably no other major facet
policy with respect to which liberals (in the sense of our Society
divergent conclusions from the same underlying principles.
One group, of which Philip Cortney is a distinguished mem
continuation of the formal linking of national currencies to
change rates between different national currencies, a doubling o
doubling of the official price of gold in terms of national curre
abandonment of governmental measures designed to evade th
gold. This group is apparently indifferent about whether gol
coin; it is satisfied with a gold bullion standard.
A second group, represented by the Economists' National C
Monetary Policy, also favors a continuation of the formal linkin
currencies to gold together with rigid exchange rates between d
tional currencies. But it emphasizes the importance of gold coina
widespread use of gold coin as money in national as well as inter
ments. Apparently, this group believes there is no need for a chan
official prices of gold, or, at least, in the United States price.
A third group, of which I count myself a member, favors a se
gold policy from exchange-rate policy. It favors the abandonmen
change rates between national currencies and the substitution of
floating exchange rates determined from day to day by private
without government intervention. With respect to gold, there are
ences, but most of us would currently favor the abandonment o
ment by governments to buy and sell gold at fixed prices and of
reserve requirements for the issue of national currency as well as
any restrictions on private dealings in gold.
I have stated and defended my own policy views elsewhere at s
1 Paper written for the Mont Pelerin Society meetings in September 196
2 See, in particular, "The Case for Flexible Exchange Rates" and "Comm
Currency," in my Essays in Positive Economics, pp. 157-203, 204-50 (1953
gram for Monetary Policy, pp. 77-84 (1959).
66
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REAL AND PSEUDO GOLD STANDARDS 67
Hence, I would like to use this occasion instead to explor
liberals can reach such radically different conclusions.
My thesis is that current proposals to link national curre
gold whether at present or higher prices arise out of a confu
different things: the use of gold as money, which I shall
standard; governmental fixing of the price of gold, whether
national, which I shall call a "pseudo" gold standard. Tho
many surface features in common, they are at bottom fundam
-just as the near identity of prices charged by competitiv
basically from the identity of prices charged by members of
cartel. A real gold standard is thoroughly consistent with liber
I, for one, am entirely in favor of measures promoting its de
believe, are most other liberal proponents of floating ex
pseudo gold standard is in direct conflict with liberal principle
by the curious coalition of central bankers and central pla
formed in support of it.
It is vitally important for the preservation and promotion o
that we recognize the difference between a real and pseudo go
aside, nothing that has occurred in the past half-century has, i
more to weaken and undermine the public's faith in liberal pr
pseudo gold standard that has intermittently prevailed and
have been taken in its name. I believe that those of us who su
belief that it either is or will tend to be a real gold standard a
fostering trends the outcome of which they will be among the
This is a sweeping charge, so let me document it by a few ex
will incidentally illustrate the difference between a real an
standard before turning to an explicit discussion of the differ
ples are mostly for the United States, the country whose mon
have studied in most detail.
A. EXAMPLES OF EFFECTS OF A PSEUDO GOLD STANDAR
I. UNITED STATES MONETARY POLICY AFTER WORLD WAR I
Nearly half of the monetary expansion in the United States came after
end of the war, thanks to the acquiescence of the Federal Reserve System
the Treasury's desire to avoid a fall in the price of government secur
This expansion, with its accompanying price inflation led to an outflow of
despite the great demand for United States goods from a war-ravaged wo
and despite the departure of most countries from any fixed parity betw
their currencies and either gold or the dollar. The outflow of gold finally
came Treasury reluctance to see the price of government securities fall. B
ning in late 1919, then more sharply in January 1920 and May 1920
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68 THE JOURNAL OF LAW AND ECONOMICS
Federal Reserve System took vigorous deflationary steps that pro
slackening of the growth in the stock of money and then a s
These brought in their train a collapse in wholesale prices a
economic contraction. The near-halving of wholesale prices in a tw
period was by all odds the most rapid price decline ever exper
United States before or since. It was not of course confined to the United
States but spread to all countries whose money was linked to the dollar either
by having a fixed price in terms of gold or by central bank policies directed at
maintaining rigid or nearly rigid exchange rates. Only those countries that
were to experience hyperinflation escaped the price collapse.
Under a real gold standard, the large inflow of gold up to the entry of the
United States into the war would have produced a price rise to the end of the
war similar to that actually experienced. But neither the postwar rise nor the
subsequent collapse would have occurred. Instead, there would have been an
earlier and milder price decline as the belligerent nations returned to a peace-
time economy. The postwar increase in the stock of money occurred only be-
cause the Reserve System had been given discretionary power to "manage"
the stock of money, and the subsequent collapse occurred only because this
power to manage the money had been accompanied by gold reserve require-
ments as one among several masters the System was instructed to serve.
Under a wholly fiduciary currency, with floating exchange rates, the initial
postwar expansion might well have occurred much as it did, though the depre-
ciating value of the dollar in terms of other currencies might have been a
quicker and a more effective check than slowly declining gold reserves. But
the subsequent collapse would almost surely not have occurred. And neither
the initial price inflation nor the subsequent price collapse would have been
communicated to the rest of the world.
The world-wide inflation and then collapse was at the time a severe blow to
a belief in free trade at home and abroad, a blow whose severity we now under-
rate only because of the later catastrophe that overshadowed it. Either a real
gold standard or a thoroughly fiduciary standard would have been preferable
in its outcome to the pseudo gold standard.
2. UNITED STATES MONETARY POLICY IN THE 1920'S AND BRITAIN'S
RETURN TO GOLD
There is a widespread myth among gold standard advocates that
States monetary policy during the 1920's paved the way for the G
sion by being unduly inflationary. For example, Cortney writes, "
Reserve Board succeeded in the 1920's in holding up the pric
surprising length of time by an abnormal expansion of inflationary
in so doing it helped produce the speculative boom."3 Nothing cou
' In Introduction to Charles Rist, The Triumph of Gold, p. 8 (1961).
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REAL AND PSEUDO GOLD STANDARDS 69
from the truth. The United States monetary policy in the
cially in the late 1920's, judged in terms of either a real gold
abstract or prior United States experience, was if anything un
ary.
The sharp 1920-21 price decline had brought prices to a level much closer
to the prewar level than to the postwar peak though they were still appreciably
above the prewar level. Prices rose only moderately in the subsequent cyclical
expansion which reached its peak in 1923. From then until 1929, wholesale
prices actually fell, at a rate of roughly 1 per cent a year.
As to gold, credit, and money, the Federal Reserve System sterilized much
of the gold inflow, preventing the gold from raising the stock of money any-
thing like as much as it would have done under a real gold standard. Far from
the Reserve System engaging in an "abnormal expansion of inflationary
credit," Federal Reserve credit outstanding in June 1929 was 33 per cent
lower than it had been in June 1921 and only 16 per cent higher than in June
1923 although national income was nearly 25 per cent higher in 1929 than in
1923 (in both money and real terms). From 1923 to 1929, to compare only
peak years of business cycles and so avoid distortion from cyclical influence,
the stock of money, defined to include currency, demand deposits, and com-
mercial bank time deposits, rose at the annual rate of 4 per cent per year,
which is roughly the rate required to match expansion of output. On a narrower
definition, excluding time deposits, the stock of money rose at the rate of only
2, per cent per year.4
The deflationary pressure was particularly strong during the great bull
market in stocks, which happened to coincide with the first few years after
Britain returned to gold. During the business cycle expansion from 1927 to
1929, wholesale prices actually fell a trifle: one must go back to 1891-93 to
find another expansion during which prices fell and there has been none since.
The stock of money was lower at the cyclical peak in August 1929 than it had
been 16 months earlier. There is no other occasion from the time our monthly
data begin in 1907 to date when so long a period elapsed during a cyclical ex-
pansion without a rise in the stock of money. The only other periods of such
length which show a decline have an end point in the course of severe con-
tractions (1920-21, 1929-33, 1936-37).
So far as the United States alone was concerned, this monetary policy may
have been admirable. I do not myself believe that the 1929-33 contraction
was an inevitable result of the monetary policy of the 1920's or even owed
much to it. What was wrong was the policy followed from 1929 to 1933, as I
shall point out in a moment. But internationally, the policy was little short of
' These statements are based on estimates of the stock of money from 1867 to date con-
structed by Anna J. Schwartz and me in connection with a study for the National Bureau
of Economic Research. Hereafter, I will use the term "stock of money" as referring to the
first of these two definitions.
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70 THE JOURNAL OF LAW AND ECONOMICS
catastrophic. Much has been made of Britain's mistake in returnin
1925 at a parity that overvalued the pound. I do not doubt th
mistake-but only because the United States was maintaining a
standard. Had the United States been maintaining a real gold s
stock of money would have risen more in the United States than
would have been stable or rising instead of declining, the United
have gained less gold or lost some, and the pressure on the pound
been enormously eased. As it was, by sterilizing gold, the United
the whole burden of adapting to gold movements on other countr
addition, France adopted a pseudo gold standard at a parity
valued the franc and proceeded also to follow a gold sterilization
combined effect was to make Britain's position untenable. The
sequences for faith in liberal principles of the deflationary polici
Britain from 1925 to 1931 in the vain effort to maintain the re-established
parity are no less obvious than they were far-reaching.
3. UNITED STATES POLICY IN 1931 TO I933
United States monetary behavior in 1931 to 1933 is in some ways a repeti-
tion of that from 1920 to 1921, but on a more catastrophic scale, in less for-
tunate circumstances, and with less justification. As we have seen, in 1919
the Reserve System deviated from the policy that would have been dictated
by a real gold standard. In 1920, when it saw its gold reserves declining rap-
idly, it shifted rules, over-reacted to the outflow, and brought on a drastic
deflation. Similarly, from 1922 to 1929, the Reserve System sterilized gold
and prevented it from exercising the influence on the money stock that i
would have had under a real gold standard. And again in 1931, when Britain
went off gold and the United States experienced an outflow of gold, the Re-
serve System shifted rules, over-reacted to the outflow, and catastrophically
intensified a deflation already two years old.
The circumstances were less fortunate in 1931 than in 1920 in two different
respects, one domestic and the other foreign, and both in some measure
the Reserve System's own creation.
The domestic difference was that the deflationary action of 1920 came at
the end of a period of expansion which was widely regarded as temporary
and exceptional, and served to intensify without necessarily prolonging a re-
cession that would probably have occurred anyway. The deflationary action of
1931 came after two years of severe contraction which had been showing
some signs of terminating; probably served to nip in the bud a revival; and
both greatly intensified and substantially prolonged the contraction, turning
it into the most severe for nearly a century.
This difference was largely the Reserve System's creation because of its
inept handling of the banking difficulties that started in the fall of 1930. Until
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REAL AND PSEUDO GOLD STANDARDS 71
that date, the contraction, while rather severe, had sh
liquidity crisis. Widespread bank failures culminating in
Bank of the United States in late 1930 changed the aspect of
This episode turned out to be the first of a series of liq
characterized by bank failures and runs on banks by de
convert deposits into currency, and each producing strong
on the stock of money. The Reserve System had been set up
aim of dealing with precisely such crises. It failed to do so
because it lacked the power or the knowledge. At all ti
power to provide the liquidity that the public and the banks
and the provision of which would have cut short the viciou
bank failures. The System failed because accidents of per
of power within the System left it with no dominant perso
avoid the usual outcome of committee control: the evasio
by inaction, postponement, and drift. More fundamental
reflected the adoption of a monetary system that gave grea
number of men and therefore was vulnerable to such accide
and shifts of power. Had the liquidity crisis been cut sh
1930 and the Bank of the United States kept from failin
would have occurred before the Federal Reserve System
would probably have been vigorously expanding by Septe
of being precariously balanced on the verge of another liqui
The international difference in circumstances that was less fortunate in
1931 than in 1920 was the monetary situation in other countries. In many
countries, monetary arrangements in 1920 were in a state of flux, so they
could adapt with some rapidity. By 1931, a new pattern of international
monetary arrangements had become established, in considerable measure un-
der the patronage of the Federal Reserve Bank of New York, as well as the
Banks of England and France. More serious and more directly to be laid at
the Reserve System's door, its gold sterilization policy had, as we have seen,
increased the problem of adjustment for many other countries and so left
them more vulnerable to new difficulties. In the event the monetary world
split in two, one part following Britain to form the sterling area; the other,
following the United States, in the gold bloc. The sterling area countries all
reached bottom and began to expand in late 1931 or early 1932; most gold
bloc countries experienced further deflation and did not reach bottom until
1933 or 1934.
The deflationary monetary actions had less justification in the fall of 1931
than in 1920 for two different reasons. First, in 1920, the Federal Reser
System was still in its infancy, untried and inexperienced. Set up under one
set of conditions, it was operating under a drastically different set. It had n
background of operation in peace time, no experience on which to base judg-
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72 THE JOURNAL OF LAW AND ECONOMICS
ments. By 1931, the System had more than a decade of experi
developed a well-articulated body of doctrine, which underlay th
lization policy and which called for its offsetting an outflow of g
than reinforcing its deflationary effect. Second, the gold situatio
tically different. By early 1920, the gold stock was declining rap
Reserve System's gold reserve ratio was approaching its legal min
to September 1931, the System had been gaining gold, the m
stock was at an all-time high, and the System's gold reserve
above its legal minimum-a reflection of course of its not having
accordance with a real gold standard. The System had ample reser
the gold outflow without difficulty and without resort to deflation
And both its own earlier policy and the classical gold standard
shrined by Bagehot called for its doing so: the gold outflow was st
lative and motivated by fear that the United States would go
outflow had no basis in any trade imbalance; it would have exh
promptly if all demands had been met.
As it was, of course, the System behaved very differently. It r
ously to the external drain as it had not to the internal drain by
count rates within a brief period more sharply than ever before
result was a major intensification of the internal drain, and an un
liquidation of the commercial banking system. Whereas the stock
had fallen 10 per cent from August 1929 to August 1931, it fell a
per cent from August 1931 to March 1933. Commercial bank
fallen 12 per cent from August 1929 to August 1931; they fell a f
per cent from August 1931 to March 1933. Never was there a mor
sary monetary collapse or one which did more to undermine publ
of liberal principles.
Once again, either a real gold standard throughout the 1920's
a consistent adherence to a fiduciary standard would have been va
erable to the actual pseudo gold standard under which gold inflow
gold outflows were offset and substantial actual or threatened go
were over-reacted to. And this pattern is no outmoded histori
witness the United States reaction to gold inflows in the early
World War II and its recent reaction to gold outflows; witne
recent German sterilization of gold inflows. The pseudo gold stan
much a living menace.
4. UNITED STATES NATIONALIZATION OF GOLD
After going off gold in March 1933, the United States re-established a
official price of gold in January 1934, raising the price to $35 an ounce.
current proponents of a rise in the official price of gold approve this act
regarding it as required to bring the value of the gold stock into line wit
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REAL AND PSEUDO GOLD STANDARDS 73
allegedly increased fiduciary circulation. Perhaps a rise in
was desirable in 1934 but it cannot be defended along these lin
the United States itself. In 1933, the ratio of the value of
the total stock of money was higher than it had been in 1913
between. If there be any valid argument for a rise in the pric
these lines, it is for 1929, not 1934.
Whatever may be the merits of the rise in the price of gold
little doubt that the associated measures, which were taken in
rise in the price of gold should have the effect desired by the
ministration, represented a fundamental departure from liber
established precedents that have returned to plague the fre
of course, to the nationalization of the gold stock, the prohib
possession of gold for monetary purposes, and the abrogation
in public and private contracts.
In 1933 and early 1934, private holders of gold were req
turn over their gold to the federal government and were
a price equal to the prior legal price, which was at the tim
below the market price. To make this requirement effective,
ship of gold within the United States was made illegal exce
arts. One can hardly imagine a measure more destructive o
of private property on which a free enterprise society rests.
ference in principle between this nationalization of gold at an
price and Fidel Castro's nationalization of land and factories at
low price. On what grounds of principle can the United Sta
one after having itself engaged in the other? Yet so great
of some supporters of free enterprise with respect to anythin
gold that as recently as last year Henry Alexander, head
Guaranty Trust Company, successor to J. P. Morgan and Co
the prohibition against the private ownership of gold by U
zens be extended to cover gold held abroad! And his propo
by President Eisenhower with hardly a protest from the bank
Though rationalized in terms of "conserving" gold for mone
bition of private ownership of gold was not enacted for an
purpose, whether itself good or bad. The circulation of go
tificates had raised no monetary problems either in the 1920's
monetary collapse from 1930 to 1933. Except for the fina
ceding the banking panic, the internal drain had not been
currency of any kind in preference to deposits. And the final
the consequence of the rumors, which proved correct, that Ro
to devalue. The nationalization of gold was enacted to ena
ment to reap the whole of the "paper" profit from the ris
gold-or perhaps, to prevent private individuals benefiting fro
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74 THE JOURNAL OF LAW AND ECONOMICS
The abrogation of the gold clauses had a similar purpose. A
was a measure destructive of the basic principles of free enterpr
entered into in good faith and with full knowledge on the
parties to them were declared invalid for the benefit of one of th
This collection of measures constituted a further step away fro
standard to a pseudo gold standard. Gold became even more c
modity whose price was fixed by governmental purchase and sale
ing rather than money or even a form of money.
5. INTERNATIONAL MONETARY FUND AND POSTWAR EXCHANGE POLICY
I agree fully with Professor Rist's criticisms of the International Monetary
Fund and the arrangements it embodied.5 These arrangements are precisely
those of a pseudo gold standard: each country is required to specify a formal
price of gold in terms of its own currency and hence, by implication, to specify
official exchange rates between its currency and other currencies. It is for-
bidden to change these prices outside narrow limits except with permission.
It commits itself to maintaining these exchange rates. But there is no require-
ment that gold serve as money; on the contrary, many of the IMF provisions
are designed to prevent it from doing so.
The results have been anything but happy from a liberal viewpoint: wide-
spread controls over exchange transactions, restrictions on international trade
in the forms of quotas and direct controls as well as tariffs; yet repeated ex-
change crises and numerous changes in official exchange rates. No doubt, con-
ditions are now far better than shortly after the war, but clearly in spite of
the IMF and not because of it. And the danger of foreign exchange crises and
accompanying interferences with trade is hardly over. In the past year, the
United States moved toward direct interferences with trade to cope with a
balance of payments problem; Germany appreciated; and Britain is now in
difficulties.
B. THE DISTINCTION BETWEEN A REAL AND A PSEUDO GOLD STANDARD
Because of its succinctness and explicitness, Cortney's numbered list of
prerequisites for the restoration of "monetary order by returning to an inter-
national gold standard" forms an excellent point of departure for exploring
the difference between a real and a pseudo gold standard. His point number
(6) concludes "the price of gold will have to be raised to at least $70 an
ounce." His point number (7) is "Free markets for gold should be established
in all the important countries, and trading in gold, its export and import
should be absolutely free."6 Here is the issue in a nutshell. Can one conceive
of saying in one breath that worldwide free markets should be established in,
5 See Charles Rist, op. cit. supra note 3, pp. 188-93.
6 Ibid., p. 37.
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REAL AND PSEUDO GOLD STANDARDS 75
say, tin, and in the next, that the price of tin should "be
specified figure? The essence of a free market is precisely
"raise" or "fix" price. Price is at whatever level will clear t
varies from day to day as market conditions change. If w
point (7) seriously, we cannot simultaneously take his poin
and conversely.
Suppose we follow up the logic of his point (7) and suppos
to prevail in gold. There might then develop, as there has in t
gold standard. People might voluntarily choose to use gold
is to say, to express prices in units of gold, and to hold gold a
abode of purchasing power permitting them to separate an ac
a sale of goods or services for money and the purchase of
with money. The gold used as money might be called differen
ferent languages: "or" in French, "gold" in English; it mig
in different units: say, in grams in France and ounces in t
special terms such as "napoleon" or "eagle" might develop t
venient amounts of gold for use in transactions, and these
different countries. We might even have governments certifyi
fineness, as they now inspect scales in meat markets, or
"eagles," "double-eagles," and the like. Changes in nomencla
of measure, say, the shift from ounces to grams, might be ma
but these would clearly have no monetary or income or redist
they would be like changing the standard units for measuring
gallons to liters; not comparable to changing the price of g
ounce to $70 an ounce.
If such a real gold standard developed, the price of comm
of gold would of course vary from place to place according to
costs of both the commodities and of gold. Insofar as differen
gold, and used different units, or coins of different size, the p
of gold in terms of another would be free to vary in accordan
erences by each country's citizens for the one kind or the oth
variation would of course be limited by the cost of conver
gold into another, just as the relative price of commodities is si
Under such a real gold standard, private persons or governm
into the business of offering storage facilities, and warehouse
be found more convenient than the gold itself for transactions
persons or governments might issue promises to pay gold eith
after a specific time interval which were not warehouse receipt
were widely acceptable because of confidence that the promise
deemed. Such promises to pay would still not alter the basic ch
gold standard so long as the obligors were not retroactivel
fulfilling their promises, and this would be true even if such p
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76 THE JOURNAL OF LAW AND ECONOMICS
fulfilled from time to time, just as the default of dollar bond iss
alter the monetary standard. But, of course, promises to pay
default or that were expected to be defaulted would not sell at fa
as bonds in default trade at a discount. And of course this is w
pened when a system like that outlined has prevailed in pra
much of the pre-Civil War period in the United States).
Such a system might and I believe would raise grave social p
foster pressure for governmental prohibition of, or control over
promises to pay gold on demand.' But that is beside my present p
is that it would be a real gold standard, that under it there might
national names for the money but there would not be in any mea
either national currencies or any possibility of a government
change in the price of gold.
Side by side with such a standard, there could, of course, e
national currencies. For example, in the United States from 1862-
backs were such a national currency which circulated side by side
Since there was a free market in gold, the price of gold in terms o
varied from day to day, i.e., in modern terminology, there was a
of exchange between the two currencies. Since gold was in use
Britain and some other countries, its main use in the United S
foreign transactions. Most prices in the United States were quote
backs but could be paid in gold valued at the market rate. Howeve
ation was reversed in California, where most prices were quoted i
could be paid in greenbacks at the market rate. No doubt, in t
episode, the expectation that greenbacks would some day be m
to pay gold had an effect on their value by expanding the deman
But this was not essential to the simultaneous coexistence of the tw
cies, so long as their relative price was freely determined in the
as silver and gold, or copper and silver, have often simultaneously
at floating rates of exchange.
If a government abjured a national currency, it might still borro
community in the form of securities expressed in gold (or
clauses), some of which might be demand obligations and might be
bearing. But it would thereby surrender everything that we now c
policy. The resources it could acquire by borrowing would d
interest it was willing to pay on interest-bearing securities and o
of non-interest bearing demand securities the public was willin
It could not arbitrarily issue any amount of non-interest bearing
wished without courting inability to meet its promises to pay gol
seeing its securities sink to a discount relative to gold. Of course,
tion in governmental power is precisely what recommends a real
7 See my A Program for Monetary Stability, pp. 4-9 (1959).
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REAL AND PSEUDO GOLD STANDARDS 77
to a liberal, but we must not make the mistake of supposing t
the substance by the mere adoption of the form of a nom
gold.
The kind of gold standard we have just been describing is not the kind we
have had since at least 1913 and certainly not since 1934. If the essence of a
free market is that no one can "raise the price," the essence of a controlled
market is that it involves restrictions of one kind or another on trade. When
the government fixes the price of wheat at a level above the market price, it
inevitably both accumulates stocks and is driven to control output-i.e., to
ration output among producers eager to produce more than the public is will-
ing to buy at the controlled price. When the government fixes the price of
housing space at a level below the market price, it inevitably is driven to
control occupancy-i.e., to ration space among purchasers eager to buy more
than sellers are willing to make available at the controlled price. The controls
on gold, like the related controls on foreign exchange, are a sure sign that the
price is being pegged; that dollar, pound, etc., are not simply different names
for different sized units of gold, but are national currencies. Insofar as the
price of gold in these currencies and the price of one currency in terms of
another are stable over considerable periods, it is not because of the ease of
converting one quantity of gold into another and not because conditions of
demand and supply make for stable prices, but because they are pegged prices
in rigged markets.
The price of $35 an ounce at which gold was supported by the United
States after January 1934 was initially well above the market price-like the
price at which wheat is currently being supported. The evidence is in both
cases the same: a rapid expansion of output and the accumulation of enor-
mous stockpiles. From 1933 to 1940, production in the United States rose
from less than 2.6 million ounces to 6 million ounces; in the world, from 25
million ounces to 41 million ounces; the gold stock in the Treasury rose from
200 million ounces to 630 million, or by 13 times as much as the total of
world output during the intervening period. Had this pace of increase in out-
put and stock continued, the gold purchase program might well have been
limited in scope; perhaps, as the United States silver purchase program finally
was, to domestic output alone.
But the war intervened, which stopped the inflow of gold and brought a
major rise in the stock of money. The resultant rise in other prices with no
change in the price of gold has altered the character of the fixed United States
price. It is now probably below the market price (given the present monetary
use of gold), like rents under rent control. The evidence is again in both cases
the same; a reduction in production, a decline in stocks, and a problem of
rationing demanders. The United States gold output is now less than in 1933
though world output still exceeds the level of that year. The United States
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78 THE JOURNAL OF LAW AND ECONOMICS
gold stock has declined to roughly 500 million ounces, well below its
peak but still 2? times its level when the present price for gold was e
The restriction on the ownership of gold abroad by United States ci
first, and feeble, step toward still tighter rationing of demanders. T
men's agreement among central banks not to press for conversio
balances into gold is a more far-reaching if still rather weak additio
The history of every attempt at government price fixing suggests t
pegged price is far below the market price for long, such attempts
to fail.
Doubling the price of gold would no doubt reverse the situation
the pegged price again above the market price. Gold production a
States gold stocks would no doubt rise. But to what avail? Gold would
simply a commodity whose price is supported; countries would conti
their separate monetary policies; fixed exchange rates would freeze t
market mechanism available under such circumstances to adjust inter
payments; foreign exchange crises would continue to succeed on
and direct controls of one kind or another would remain the last res
one often appealed to, for resolving them.
This kind of pseudo gold standard violates fundamental liberal p
in two major respects. First, it involves price fixing by governm
always been a mystery to me how so many who oppose on principle
ment price fixing of all other commodities can yet approve it for
Second, and no less important, it involves granting discretionary aut
a small number of men over matters of the greatest importance; to th
bankers or Treasury officials who must manage the pseudo gold stan
means the rule of men instead of law, violating one of our fundamen
ical tenets. Here again, I have been amazed how so many who op
principle the grant of wide discretionary authority to governmental
are anxious to see such authority granted to central bankers. Tru
bankers have on the whole been "sound money" men with great symp
private enterprise. But since when have we liberals tempered our fea
centrated power by trust in the particular men who happen at a
moment to exercise it? Surely our cry has been very different-that be
or not, tyranny is tyranny and the only sure defense of freedom is
persal of power.
C. CONCLUSION
Let me close by offering a proposal, not for reconciling our views, but at
least for possible agreement among us on one part of the gold problem. Can
we not all agree with Mr. Cortney's point (7): the establishment of a thor-
oughly free market in gold, with no restrictions on the ownership, purchase,
sale, import, or export of gold by private individuals? This means in partic-
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REAL AND PSEUDO GOLD STANDARDS 79
ular, no restrictions on the price at which gold can be bought
of any other commodity or financial instrument, including nat
It means, therefore, an end to governmental price fixing of g
national currencies.
The major problem in achieving such a reform is, as for the United States
wheat program, the transitional one of what to do with accumulated govern-
ment stocks. In both cases, my own view is that the government should im-
mediately restore a free market, and should ultimately dispose of all of its
stocks. However, it would probably be desirable for the government to dispose
of its stocks only gradually. For wheat, five years has always seemed to me
a long enough period so I have favored the government committing itself to
dispose of I of its stocks in each of five years. This period seems reasonably
satisfactory for gold as well, and hence my own proposal for the United States,
and also other countries, would be that the government should sell off its gold
in the free market over the next five years. Perhaps the greater ratio of the
accumulated stock to annual production for gold than for wheat makes a
longer transitional period appropriate. This seems to me a matter of expe-
diency not of principle.
A worldwide free market in gold might mean that the use of gold as money
would become far more widespread than it is now. If so, governments might
need to hold some gold as working cash balances. Beyond this, I see no reason
why governments or international agencies should hold any gold. If individuals
find warehouse certificates for gold more useful than literal gold, private en-
terprise can certainly provide the service of storing the gold. Why should gold
storage and the issuance of warehouse certificates be a nationalized industry?
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