REVIEW of REVIEWS

Gold Standard Has Many Faults

Other plans for a stabilized international currency have been found imperfect.

WILLIAM C. EWING January 1 1932
REVIEW of REVIEWS

Gold Standard Has Many Faults

Other plans for a stabilized international currency have been found imperfect.

WILLIAM C. EWING January 1 1932

Gold Standard Has Many Faults

REVIEW of REVIEWS

Other plans for a stabilized international currency have been found imperfect.

WILLIAM C. EWING

ALL over the world it is recognized that the changing value of money is an evil that must somehow be done away with. When commodity prices are falling nobody buys more than is necessary, for the reason that next week prices may be lower still. When commodity prices are rising everybody buys, it is true, because next week prices may be higher; but, on the other hand, increasing wages and salaries must be paid in order to keep step with the increased cost of living, and that leads to strikes and serious disagreements of all kinds. The thing to be desired then, is to have stable values; some new kind of money, to be used throughout the world, which will always purchase the same amount of goods or service, neither more nor less.

Many articles have recently been written on this subject. Many writers argue that the gold standard must l>e supplanted by something better; others maintain that no standard can possibly be better. One of these articles appears in The Forum for December, 1931. The author is William C. Ewing, and the part of it which deals with suggested plans for the stabilization of money is as follows:

“We should realize that the problem of unstable currency is an international problem; if there was ever a time when we might have solved this problem for ourselves, that time is now definitely past. International exchange would wreck any plan that might be designed on a purely national basis.

“There are four types of stabilization plans which are being given serious consideration:

"The Central Bank Plan. All the progress which has been made up to this time in stabilizing monetary units has been made by this plan. Many of the world's leading biinkers are endeavoring to secure national stability through their central banks and are hoping that the Bank for International Settlements, at Basle, will be a powerful agency for bringing about international stability. In our own country, the Federal Reserve System has exerted such a stabilizing influence that most observers believe that but for its salutary influence we should have suffered a far worse debacle than we have experienced during the past years. The Federal Reserve officials do not make any exorbitant claims along this line; they realize that certain notable successes in stabilizing the value of the dollar may be matched by failures, due sometimes to the newness of the system and sometimes to pressure by the Treasury Ldepartment. They oppose legislation requiring them to keep the general price level stable, partly because they are not sure that they could always obtain that result and partly because they do not dare to experiment very much with such a powerful engine.

'The great inflation of 1919-1920, from whose reaction we are now suffering, was due to action which was forced upon the Federal Reserve System by the national administration, under emergency war legislation. If Congress could make such action possible in time of war, it can do so at other times if there is sufficient pressure from

interested classes. The present personnel of the Federal Reserve System is greatly interested in securing stability of the dollar; but this is not their first duty as prescribed by Congress. Moreover, this personnel is determined by a combination of Presidential appointment and election by commercial banks. It is conceivable that at some future time this combination might replace the present Federal Reserve officials with men concerned only with the interests of some particular class.

“Whatever we may think of the dangers of requiring the Federal Reserve System to stabilize the dollar, or of leaving stabilization to the judgment of its officers, as is now the practice, it must be admitted that at the present time the Federal Reserve System and similar central banks in other countries are our sole reliance in preventing violent fluctuations in the purchasing power of money.

"The Fiat Money Plan. A generation ago it was the ‘long-haired, wild-eyed’ agitator who suggested doing away with a metallic base for our currency. Today we find serious

economists citing the fact that since the war we have reduced our legal gold reserve ratio to forty per cent and have left in the hands of officials the determination of the amount of money to be issued. They ask why we should not carry this scheme to its logical conclusion by reducing the gold reserve to zero, since the value of money is dependent upon its amount rather than upon our ability to exchange it for gold. The objection to this plan is the same as the objection to our Federal Reserve legislation: the question whether such powers should be left to any group of officials and whether, in time of emergency. Congress will not require these officials to inflate the currency. If it is true that history repeats itself, this is a dangerous plan. But perhaps we have become so wise that we can avoid repeating the mistakes of the past.

"The Compensated Dollar Plan. This is the most fundamental plan yet proposed. Instead of increasing or decreasing the amount of available money, as in the Central Bank Plan, it determines by definition that a dollar shall be that number of ounces of

gold which shall be necessary to purchase a fixed quantity of goods, as determined by the index number of the general price level. Theoretically this would seem to give a unit of value which would be unchanging; but in practice it would be necessary to adjust the weight of the dollar at fixed intervals, as weekly or monthly, or at whatever time is necessary to keep the fluctuations of value wûthin fixed bounds. This, however, could be relied upon to keep the purchasing power within very narrow limits, while our lack ol plan in the past has resulted in variations of nearly 300 per cent. As at present developed, the weakness of this plan is in the field of international exchange; unless the principal countries adopted this plan at the same time, all the gold might be drained out of the country which alone adopted it, or all the world’s gold might be attracted to that country.

“From a scientific point of view this plan is interesting because it attacks the root of instability. For our unit of length we have the invariable distance between two marks on a bar in the Bureau of Standards; for our unit of capacity we have a definite number of cubic inches; for our unit of weight we have the weight of a particular piece of metal in the Bureau of Standards; but for our unit of value we have, not a specific value, but a certain number of grains of gold. This plan proposes to substitute for this weight unit a value unit.

“The Mine Control Plan. Professor Lehfeldt, of South Africa, proposed, in view of the threatened shortage in the supply of gold in the near future, that those nations which produce the world’s gold should take over the mines within their boundaries and, by joint action, control their output as well as the proportion of that output which should be allowed to flow into commercial use. This would make it possible for the gold base of the various national currencies to be kept at such amounts as might be necessary in order to stabilize the units of value of each nation. Aside from the difficulty of securing such united action, this plan has the defect of dealing only with the gold base. Since most of our transactions are by the medium of paper money and bank cheques, we should still have to control the purchasing power of our money through the central bank or other method.

"Bimetallism is another plan by which it has been proposed to accomplish much the same purpose as that at which the Lehfeldt plan aims. Under the bimetallic plan, thç dwindling gold supply would be supplemented by the use of silver at such ratio as would keep the two metals at parity as a basis for the credit structure. Economists are practically united in the opinion that bimetallism would be ineffective on a national basis. International bimetallism would have, in addition to the difficulties of the Lehfeldt plan, the added problem of adjusting the ratio between two metals as their production varied independently of each other.

“It is by no means impossible that the ultimate solution will be a combination of two or more of the proposed plans.”