Ties of Gold
IN one respect at least we may speak of economic collaboration between the English-speaking peoples as having been secured. This is in reference to money. War-debt adjustment remains a will-o’the-wisp; the two countries still have to negotiate the shoals of a trade agreement; but there has already been a meeting of minds on money. This was expressed in the tripartite arrangement with France of September 25, 1936. Of course, the understanding is on a twenty-four hour basis, as everything seems to be in this world of flux. But even so limited a rapprochement is better than the state of affairs the arrangement superseded.
Previously there seemed to be a great gulf fixed between the ultimate monetary goals of the two countries. Exchange near-stability had been attained, but only as a temporary convenience, and there had been no dissipation of the fear overhanging the world markets since 1933 of an eventual competitive depreciation race. Such a contest would have been cosmic fiddling with a vengeance.
But the event in 1936 dispelled such a fear. It pledged the coöperation of the three powers in the maintenance of ‘equilibrium in the system of international exchange.’ Since then the exchange relations between the United States and the United Kingdom have been removed from political controversy. In other words, the dollar and the pound have not only remained fairly stable in their relations; they have been on speaking terms of a much more cordial nature than once seemed possible.
I am not here concerned with the failure of the three-power understanding to keep the franc stable. The arrangement was concluded simultaneously with the devaluation of the franc. Possibly all three parties were at fault in not allowing for sufficient devaluation to meet French needs. French instability, however, has not disturbed the perpetuation of the twenty-four-hour collaboration between Washington and London. And it is on the strengthening of this particular link that any economic AngloAmerica depends; an entente which, in the eyes of the Roosevelt administration, is the nucleus of an even wider association — nothing less than a return to a common standard for world moneys. In the administration’s opinion, such an achievement is a necessary correlative of Secretary Hull’s effort to promote a world standard of commercial integrity.
The new standard, like the old, is gold. But as yet only the United States is a close adherent to it. I mean that the United States has engaged itself by law to buy and sell gold, though not for internal use, at a fixed price. No other government has done that. Thus the United States Treasury is the market for the yellow metal. Gold, if you like, is on a dollar standard.
The case of the United Kingdom is somewhat different. There is no fixed relation between gold and the pound, but the British, though under no legal obligation to buy and sell gold, are once removed from such a direct link, the connection being established through their dollar dealings under the threepower arrangement. Clearly, if the paper pound and the gold dollar are kept fairly stable, the paper pound and gold will remain fairly stable. Thus the Honorable R. H. Brand, the British banker, describes Britain as having ‘since 1931 ridden on the back first of France and then of the United States.’
No doubt Americans would like to see the British attach their currency directly to gold. One or two overtures to that end have come from Secretary Morgenthau. But the British prefer to see gold remain on a dollar standard, at least for the time being. Such modesty satisfied Secretary Morgenthau in the fall of 1936. No doubt, however, he wanted Britain to tie up with gold in another way — namely, to share with America the burden of supporting the gold market pending a definitive stabilization of currencies on gold. Such coöperation was regarded as the ‘spirit’ of the tripartite understanding.
For even at that time the gold problem had become acute in the United States. Since 1934, when gold and the dollar returned to a fixed relation, at a 69 per cent premium, the metal had been coming to America in boatloads. America’s supply had swollen to half the world stock — attracted either by the premium or by the safety of American vaults. Most of the pundits, if you can recall the 1936-1937 winter, entertained dark forebodings of a ‘gold inflation,’ as a result, partly, of what Mussolini once called this ‘gold hemorrhage’ from Europe.
Paul Einzig in his new book, Will Gold Depreciate?, tells a story illustrative of this influx to America. A schoolteacher asked his class what was the capital of Europe. ‘New York,’ replied one of the boys, without hesitation. ‘Nonsense,’ said the teacher. ‘I asked what is the capital of Europe, not where is the capital of Europe.’
It was hoped that the tripartite agreement would result in the repatriation at least of French capital. Nothing of the sort happened. In fact, another source of gold supply opened up. This was the private hoards held in London banks till the devaluation circle had been completed with France’s defection from the pre-depression gold standard. Most of the new metal came to America because of a rumor that the administration might reduce its buying price for gold. Sellers, trying to get under the wire, feared that America would take this countervailing step to ward off the ‘gold inflation.’
Assuredly the administration became restive under what was described as ‘carrying the gold baby.’ Just before I left for Europe last summer, I went to Washington, and heard open grumbling that Britain was not buying enough gold. There is reason to believe, indeed, that the plain intimation went out to London that if there were not more coöperation from Britain the United States might in fact be compelled to lower its buying price. Thealarm in Washington, however, seems peculiar in the light of recently published facts. It turns out that the British, far from refusing to pull their weight, have been industriously engaged in mopping up the dumped gold, along with the United States. In 1936 Britain actually bought more gold than the United States. For the six months ended September 30, 1937, it bought $500,000,000, as compared with American purchases of about twice that sum. What the right proportion should be is anybody’s guess. It is interesting to record, however, that Britain, with a third of America’s figure for population, holds a third as much gold as America. Meanwhile the American slump has caused world dishoarders to rehoard, and there has been an outflow of gold from America.
In point of fact, nowadays the maintenance of the American price of gold at $35 is, on balance, in the British interest. When President Roosevelt offered a premium of 69 per cent on the price of gold, he made, in the words of the Midland Bank of London, an ‘economic paradise’ of the Rand, the world’s greatest producer. South Africa, probably the weakest link in the chain of the British Commonwealth, relies upon gold. It follows that South African goodwill toward Britain depends upon British goodwill toward gold. Almost as much can be said for India, where unrest has been mollified by the high price of gold, and the ready market for it. Incidentally, the experts who used to talk of India as a ‘sponge’ or ‘sink’ for gold have been thoroughly disillusioned by the manner in which even the goldloving Hindus will disgorge their holdings when the price is attractive.
The difficulty of restoring Britain to a direct gold standard hides a history of disillusionment with America’s international monetary policy. To the British the Morgenthau overture had ‘an ancient, fish-like smell.’ Two experiences are cited: President Roosevelt’s murder of the world monetary conference held in London in mid-1933, and the American silver policy.
The former experience has an interesting story attached to it. President Roosevelt, in torpedoing the world conference, was helped to that decision primarily by a director of the Bank of England! The late Sir Basil Blackett was that director’s name. Just before the world conference, he had written a book called Planned Money, which Colonel House brought to the President’s attention during the course of the London parley. The new goal of monetary policy — a domestic commodity dollar — which the President then set for America has its rationale in Planned Money, though the goal seems now to have disappeared among the New Deal mists.
In the eyes of the British, however, such high authority does not improve the look of the monkey wrench which broke up international monetary stabilization. Mr. Roosevelt ditched the world plan in 1933 after bringing the British Prime Minister to America to discuss it. This slight still rankles in England. At the time the British simply turned elsewhere for monetary allies, and banded a new monetary bloc together called Sterlingaria, dominated by the pound.
The silver policy came as an equal affront to the British. Through 1934— 1935, turmoil reigned supreme in the silver market. Possibly many citizens of the British Commonwealth made huge profits by selling silver as well as gold to the United States Treasury. For American requirements ran the price up from 45 to 81 cents an ounce in about six months. But to the British these shortrun profits were at the expense of the permanent ruin of the silver market. And their fears have come true. Silver was the only commodity that did not join the upward march of commodity prices in the last recovery movement.
Moreover, to add insult to injury, there was the grandiose but unsuccessful plan born in Washington to force British coöperation in the rehabilitation of silver as a monetary metal. This was a scheme to prod England through India. It was felt in Washington that American buying would elicit British coöperation in managing the market out of fear that the price of silver would rise past the melting point of the rupee. For, with the Indian unit worth more as metal than as coin, the British would be faced with Indian currency disorganization.
This price-boosting scheme fizzled out in ineptitude, though American buying of foreign silver is still being pursued on a selective basis. It won nothing from England but criticism, to put it mildly.
Nevertheless, new factors have arisen which constitute new British arguments for coöperating with America at least in accumulating gold. Three may be cited:
1. Britain finds that it has its own ‘hot’ money problem. This makes its gold holdings a kind of trustee account against the day of foreign withdrawals. That ‘hot’ money can be protected only by gold holdings.
2. Britain now regards gold as a war chest. If the American neutrality policy is invoked to the full in the event of a European war, then British gold can be shipped in British bottoms to American shores, and buy necessary American goods.
3. British gold is in part the ultimate reserve for the moneys of Sterlingaria.
In these circumstances the purchases do not appear now, as they did formerly, as a transference of social values for ‘unwanted gold.’
In the United States, too, this question has arisen with the derisory comments on the lack of vault space. An expensive hole in the ground has been dug in Kentucky. It is irresistible to poke fun at the world spectacle of Arctic miners under Stalin’s direction digging up gold for reburial in mid-America. But, having bought so much, the United States has an even greater stake in propping up its price, and seeing Great Britain prop it up, than British producers — apart from the obvious stake in maintaining some kind of monetary order. For the $12,000,000,000 in America to-day constitutes by far the world’s greatest mine. If the United States were to reduce its buying price, the result, apart from the world chaos that would be caused, would be to depreciate the value of those extensive holdings.
The extent of the loss that would be sustained is easily calculated. Gold holdings amount to $12,000,000,000. If there were a cut in the buying price of gold of, say, 10 per cent, the immediate loss to the Treasury on this accumulation would be $1,200,000,000. Offsetting such a loss would be the savings of sterilization costs. Nowadays, when gold enters the United States, it is set apart in an idle hoard, the metal being bought out of the proceeds of short-term borrowing. But interest rates on these Treasury bills bear an average of only 0.4 per cent, so that on this basis the sterilization of, say, $1,200,000,000 of gold would cost only $4,800,000 a year. Compared with a $1,200,000,000 loss, $4,800,000 is a trifle, but the contrast is seldom made by those who, like the satirical author of I’d Rather Be Right, see the gold movements as merely a transfer from hole to hole.
Still the suggestion of some impediment to the outpouring of gold as a method of warding off inflation harried European monetary minds last summer. It was calculated that production had gone up twice in weight and three times in value since 1929. The last meeting of the Bank of International Settlements voted for a restriction on world gold output. Two directors, I understood, favored an agreement with America to mark down the buying price, one of them the President, L. J. A. Trip, of Amsterdam. The ‘scare’ that unless something was done there would be a world inflation particularly gripped the economists in Sweden. Nobody thought in terms of deflation. Yet when I landed in America, in the month which many European observers prophesied would be ‘the month of inflation, if nothing is done about gold,’ I ran into the American deflation! I came back with a profound disrespect for economic experts who talk of current developments ex cathedra!
Now, with the American slump upon us, the gold rumors deal with the possible need to increase the price as an antirecession weapon! Either the world moves at a dizzy pace or gold has become a perpetual headache. May not the trouble arise in part because policy on the part of the two dominant nations is on a twenty-four-hour basis? If the two countries have revived their love for gold, if gold has any significance at all, the time may be nigh when they should have some policy toward gold, at least for translation into action at some future day; and that policy must surely be in the direction of extending the use of gold to like-minded nations. Sufficient for the present, however, to be grateful that the dollar-pound understanding has stood the test of eighteen months’ wear.