The Gold Dilemma
Author(s): C. R. Whittlesey
Source: The Quarterly Journal of Economics, Vol. 51, No. 4 (Aug., 1937), pp. 581-603
Published by: Oxford University Press
Stable URL: http://www.jstor.org/stable/1881680 .
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THE GOLD DILEMMA
SUMMARY
I. Quantitativebases of the gold problem,581 -II.
Alternative
policies:(1) Automaticadjustmentof gold costs and prices,590; (2)
Limitationofgoldproduction,
591; (3) Maintenanceofpresentpolicies,
592; (4) Reductionin thedollarvalue ofgold,592 - III. Conclusion.
Immediatesteps,601.
The United States is now faced with a major dilemma.
The firsthornof this dilemmais: If we continueour present
policy of buying and sterilizinggold a badly unbalanced
nationalbudgetwillbe drivenstillfurther
out ofequilibrium.
The otherhornofthe dilemmais: If we abandon our present
policy we are almost certainto experiencelosses,througha
fall in the value of our presentstocks of gold, runninginto
the billionsof dollars.' The argumentofthispaper adopts as
a pointofdeparturetheview that thisdilemmais inescapable
and, therefore,
that the presentproblemis to searchforthe
course that is likely,in the long run, to resultin the least
sacrifice.Beforeproceedingto this discussionit is necessary
to indicatethe bases of the dilemma. This can best be done
by presentingthe quantitativeaspects of the gold situation.
In 1915 world production of gold reached 22,594,000
ounces, equal to $790,790,000in terms of presentdollars.2
This total was the highestthat had ever been attained and
was notreachedagain until1932. The outputofgoldthroughout the 'twentieswas considerablybelow the 1915 figure.
Afterthe beginningofthe depression,and especiallyafterthe
1. It is necessary,however,to point out that actual loss to this
countrywouldbe incurredonlywithrespectto that part of our gold
stockwhichis, or otherwise
mighthave been,sentabroad. If the same
amountofgoldwererequired
formonetary
it wouldmakevery
purposes,
littledifference
whatvaluationwas put uponit, just as it doesnotmatterwhatvaluationis seton a postoffice
building.See infra,pp. 595-596.
2. FiguresarefromtheSeventhAnnualReportoftheBankforInternationalSettlements
(Basle,1937)exceptwhereotherwise
noted;values
are expressed
in termsofpresentdollars.
581
582
QUARTERLY JOURNAL OF ECONOMICS
CHART I
A. WORLD GOLD PRODUCTIONANDGOLD IMPORTSTO THE
UNITED STATES,BY MONTHS, 1933-1937
B. GOLD IMPORTSTO THE UNITED STATESANDGOLD PURCHASES
FORTHE TREASURY'SINACTIVEFUND, BY WEEKS,
DECEMBER 1936-JUNE 1937
(In million dollars)
120
6
600 -
80
Purchases
frh5~~~~.540
imports
400
JVM
A
,~
20A
-200SW~~~~~~~~~~~I,
Ie
,.u ,,,..]....
XLlmlsl
I
A. Federal Reserve Bulletin.
B. Commercial and Financial Chronicle.
devaluation of the dollar, productionof gold rose sharply
(see chart).3 The total outputin 1929 was 19,673,000ounces,
equal to $688,555,000. By 1936 worldproductionhas risen
to 35,254,000 ounces, worth $1,233,890,000,a physical
increaseof 79 per cent over the total for 1929 and of 56 per
cent over the total for 1915. Because of devaluation this
representedan increase in terms of dollars currentat the
time-which,
in the presentinstance,is more significant
than quantity-of 203 per cent over 1929 and 164 per cent
over 1915.
3. A considerable
lag is to be expectedat a timeofchangein theproductionofgold. The increasein 1934-35was probablymoreinfluenced
by the 1931devaluationsthanby thedevaluationofthe dollar.
583
THE GOLD DILEMMA
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QUARTERLY JOURNAL OF ECONOMICS
084
Figuresof gold productionby leading countries,together
withpercentageincreasesover theprecedingyear,are shown
in Table 1.4 The annual output of gold relative to total
centralbank reservesat the end oftheprecedingyearis given
in Table II. The absolute increasein the output of gold in
TABLE
II.-
GOLD
PRODUCTION
AND CENTRAL
BANK
RESERVES,
1915-1936
(Millionsof 1936dollars)
World
Gold
Production'
791
1915
1923
1924
1925
1926
1927
1928
1929
1930
1931
1932
1933
1934
1935.......
1936
.
623
667
666
678
681
685
689
725
783
851
893
967
1,085
1,234
Gold Reserves
of
CentralBankS2
10,561
14,620
15,129
15,193
15,592
16,199
16,977
17,448
18,482
19,118
20,142
20,197
21,051
21,5863
(P) 23,5623
Gold Productionas
Percentageof Central
Bank Reservesat End
of PrecedingYear
8.75
4.38
4.56
4.40
4.46
4.37
4.23
4.06
3.92
4.10
4.23
4.42
4.79
5.153
(P) 5.723
1 SeventhAnnual Report,B.I.S., p. 37.
2 Federal Reserve Bulletin,June 1933, p. 368; December 1934, p. 801; June 1937,
p. 612.
' IncludesestimatesforRussia and Spain fromSeventhAnnualReport,B.I.S., p. 45.
p Preliminary.
1936 was the greatestever recordedfora singleyear,tho the
percentageincreaserelativeto total supply and to previous
outputhas been exceeded.5
in that
The increasein productionis especiallysignificant
of goldin Russia
beenreportedthattheproduction
4. It has recently
ouncesinsteadof
in 1936willprobablyproveto have been 10,600,000
7,350,000ouncesas reportedby the B.I.S. Allowanceforthisestimate
accentuatethe extentof the increasenotedabove. The
wouldfurther
Economist,June5, 1937,p. 572.
5. SeventhAnnualReport,B.I.S., p. 37.
THE GOLD DILEMMA
585
it comesat a timewhenthe total monetarygold stockof the
world has been greatly increased throughdevaluation of
currencies. Inasmuch as price levels are below their 1929
level,thisconstitutesa genuineincreaserelativeto the monetaryworkto be done,and signifiesthat additional gold is far
less needed than in the past. In 1931 gold stocks of central
banks amountedto 546,250,600ounces,worth$11,291,000,000in termsof1931dollars. At theendof 1936theyamounted
to 675,771,000ounces, worth $23,562,000,000in terms of
1936 dollars.6 The physicalincreaseof 24 per cent is chiefly
explained by new productionand the release of gold from
hoards. The value increaseof 109 per cent is the resultof
the physicalincreaseof gold and devaluation.
Gold stockshave becomemuchmoreunevenlydistributed
in recentyears,as is seen fromTable IIJJ7This inequalityin
the distributionof gold has been furtheraccentuatedby the
heavy flowof gold to the United States in 1937. According
to latest available estimates,8the United States now holds
over halfof the centralbank reservesof gold outsideRussia.
Net importsof gold into the United States are shown in
Chart I. It is apparentthat importsinto the United States
have at timesexceededthe total of new production.In view
of the reductionin the gold reservesof many countriesand
the extentof dishoarding,this is not, of course,surprising.9
The amounts of gold purchased by the United States
Treasury under the gold sterilizationpolicy announced
December 21, 1936 are also indicatedin Chart I, B. Such
purchaseshave recentlyexceeded importsof gold, the differencepresumablyconsistingof gold producedin this countryand gold acquiredfromthe StabilizationFund.1
6. The 1936totalincludesestimatesforRussia and Spain fromthe
SeventhAnnualReport,B.I.S., p 45 Otherdata are fromtheFederal
ReserveBulletin,June1937,p 612.
fundsarenotalwaysincludedin
7 The goldholdingsofstabilization
materially
totalsofcentralbankreserves This factdoesnot,however,
withthe
ofgoldsincethecountries
affectthequestionofconcentration
largestcentralbank reserveshave also the largeststabilizationfunds.
8. FederalReserveBulletin,June1937,p 612.
9 Cf SeventhAnnualReport,B.I S., p. 47.
June12, 1937,p. 3383.
and FinancialChronicle,
1. The Commercial
586
TABLE
QUARTERLY
III.-
JOURNAL OF ECONOMICS
DISTRIBUTION OF CENTRAL BANK GoLD RESERVES,
1929and 19361
(Millions of dollars currentat time)
Country
1929
Per Cent
of
Total
1936
Per Cent
of
Total
Per Cent
Increase
(+)
or
Decrease
501
490
463
275
240
208
203
188
46
27
1,119
47.8
12.7
11.0
49
2.8
2.7
2.2
2.1
2.1
2.0
1.2
1.0
.9
.8
.8
.2
.1
4.7
+189
+ 83
+264
+686
+470
+288
+ 6
+ 15
+172
- 15
+115
+264
- 24
+464
+141
+ 92
- 95
+ 36
23,5623
100.0
+1293
3,900
UnitedStates.......
1,633
.
France.
710
UnitedKingdom....
147
Russia.
115
.........
Switzerland
163
Belgium. .. ..
495
Spain..............
434
Argentina...
.180
Netherlands
542
Japan.....
128
BritishIndia........
66
Sweden....
273
Italy......
36
........
SouthAfrica
78
Canada.
24
Austria.
544
...........
Germany
............ 838
Othercountries
37.8
15.8
6.9
1.4
1.1
1.6
4.9
4.2
1.8
5.3
1.2
.6
2.7
.3
.8
.2
5.3
8.1
11,258
2,995
2,584
1,1552
655
632
Total (52 countries).. 10,306
100.0
5232
1Federal Reserve Bulletin,June1933,p. 568; June 1937, p. 612.
p. 45.
2 EstimatesfromSeventhAnnual Report,B.I.S.,
8 IncludingestimatesforRussia and Spain.
demand
Therenowarisesthequestionofthe non-monetary
for
forgold. This demandis oftwo types,the demand industrial purposes and the demand for purposes of hoarding.2
From 1920 to 1929 industryabsorbed about 20 per cent of
the annual outputofnew gold. In recentyearsthe industrial
demand forgold has declinedgreatly. At timesit was less
than the amount obtained fromthe meltingdown of old
gold,leavingthe entirecurrentoutputavailable formonetary
is heretreatedas non-monetary.
2. Forthesakeofclarityall hoarding
This is perhapsless trueof hoardingin westerncountriesthan in the
East.
THE GOLD DILEMMA
587
uses. Some recoveryin the industrialdemand forgold has
since taken place, but it is estimatedin the latest reportof
the B.I.S. that during1936industryabsorbednot morethan
fiveper cent of new production. The pre-wartotal, according to this report,is not likelyto be reachedagain.3
The flowof gold intoand out of privatehoardshas played
a very importantrole since 1929. The amount of gold
releasedfromhoards in India and China between1931 and
1936 has been estimatedat nearly$1,500,000,000(Table IV).
TABLE
IV.-
GOLD MOVEMENTS FROM THE EAST,
(Millionsof 1936dollars)
India
China
Hong Kong
1931-1936
Total
1931........
1932........
155.8
331.3
17.6
38.6
20.6
19.3
194.0
389.1
1934........
1935........
1936..
230.7
161.7
121.2
17.6
14.0
12.1
22.2
11.1
9.5
270.5
186.9
142.8
124.1
115.4
1,453.5
1933........
Total .....
213.3
1214.0
24.2
32.7
270.2
Source: SeventhAnnual Report,B.I.S., p. 40.
The amount of gold releasedfromEuropean hoardsin 1936
is put at over $325,000,000.4 Much ofthis came fromhoards
in France. It is estimatedthat the Frenchhoardedas much
as $493,000,000in gold fromJune 1931 to September1936.5
Dishoardingin Europe has been chieflyresponsibleforraising
the amount of gold available for monetarypurposesto an
estimated total of at least $1,633,500,000,or 32 per cent
above the worldoutputof new gold duringthe year.6
3. SeventhAnnualReport,B.I.S., pp. 40-41.
4. Ibid., p. 43.
5. Ibid., p. 42.
6. SeventhAnnualReport,B.I.S., p. 37. It is calculatedthatabout
two-thirds
of thistotalwas added to reportedgoldholdingsof central
banks and governments
and the remainderto exchangestabilization
authorities.Seventh
fundsand otherunreported
holdingsof monetary
AnnualReport,B.I.S., p. 43.
588
QUARTERLY JOURNAL OF ECONOMICS
It now appears likely that the developmentsof recent
years withrespectto private hoardingand dishoardingwill
be reversedin the near future.' Westernhoards have been
considerablyreduced,and it is probable that the East will
soon beginto absorbgold again. From 1926 to 1929 the East
importedgold at the rate of approximately$125,000,000
(present dollars) annually. It is expected that with the
returnofprosperitythe movementof gold to the Orientwill
becomesomewhatgreaterthan this,because of the depletion
of hoards since 1929 and the demand forgold to be used as
monetaryreservesin China. Nevertheless,the amount of
gold absorbedby the East will probablybe relativelysmall,
perhaps around ten per cent of new production.8While
demandforgold are not likely
changesin the non-monetary
to provide importantadditions to the available supply of
role in absorbgold, neitherwill theyplay a verysignificant
ing increasesarisingout of new production.
It is improbablethat the movementofgold to this country
willcontinueon thepresentscale. The reductionin European
hoards,whichhas recentlybeen an importantelementin the
supplyofgold comingon the market,cannotcontinueindefinitely,and it seemshardlylikelythat thissourcewill be succeeded by releasesfromforeigncentralbank holdings.9But
even dismissingthese factorsand consideringonly new production,the problemof excessive supplies of gold remains
extremelygrave.
During the currentyear productionwill greatlyexceed
the 1936 output of $1,233,890,000. How long this upward
trendwill continueno one can say, but no reliefis in sight.
What is to becomeof this gold? Thereis no reasonto doubt
that the United States will be obliged, unless a marked
change of policyis effected,to absorb the lion's share of it.
Industrywill absorb only a small proportion,perhaps five
per cent a year; the East may be expectedto take perhaps
7 SeventhAnnualReport,B.JS., p. 55.
tentative
8. This estimateis to be regardedas extremely
9 In 1936an amountof goldfullyas largeas worldoutputforthe
yearcame out of the reservesof the Bank of France. SeventhAnnual
Report,B I S., p 54.
THE GOLD DILEMMA
589
ten per cent. The probability
of substantialreliefthrough
an increasein thegoldholdings
ofothercountries
is anything
but encouraging;'
nor can privatehoardingin Europe be
counteduponto take substantial
amounts.The conclusion
is virtually
inescapablethat,ifpresentpoliciescontinue,
the
UnitedStates,Englandand Francewillbe obligedto add to
theirpresentholdings,
outofcurrent
production,
an amount
ofgoldrunning
anywhere
froma billionto a billionanda half
dollarsannually. The UnitedStateswill apparentlyhave
to absorbthelargerpartofthis.
This is the prospectwe face,if we continueour present
policies. The basis of the difficulty
is brieflythat these
of a sellingpriceforgold
policiesinvolvethe maintenance
whichis nearly70 per centhigherthan the 1929 level in
monetary
termsand about82 percenthigherin realterms,
as judgedby wholesalepricesin SouthAfricaor theUnited
of gold
on the production
States. The resultingpremium
has expandedoutputbeyondall relationto theworld'sneed
forgoldorits desireto purchaseit.
On the otherhand,to reduceour demandforgold substantiallywould probablyprecipitatea sharp fall in its
declinein
value. The effect
ofthiswouldbe a corresponding
thevalueofourpresentgoldholdings.2
Sincetheseare now
in excessof$12,000,000,000,
thiswouldmeana bookloss of
for
nearlya billiondollars everydeclineofeightpercentin
thevalueofgold.
11
thepresformeeting
Therearefourprincipal
alternatives
entsituation.We may:
intothemonetary
(1) allowgoldto enterfreely
systemin
of costsand
the expectation
thata satisfactory
adjustment
priceswillbe reachedautomatically;
to limitthe produc(2) seekan international
agreement
tionofgold;
lending,for
1. This could hardlyoccurwithoutlargeinternational
whichthereseemslittleprospect.See also infra,p. 601,n. 4.
2. See note1, p. 581.
590
QUARTERLY JOURNAL OF ECONOMICS
and segregatourpresent
policyofabsorbing
(3) continue
inggold;or
(4) reducethevalueofgoldrelativeto thedollar(and,if
possible,othercurrencies).
fora situation
automaticcorrective
(1) The traditional,
suchas the presentis to allowgoldto enterthemonetary
to the
to sterilize
it. According
systemwithoutattempting
principles
of the goldstandardthiswouldraisepricesand
incomesuntilthe costsof mininggold wereadjustedto a
priceofgold. The overlevelcorresponding
to theexisting
then
cease.
production
ofgoldwould
wouldavoidthefiscal
theproblem
Thismethodofmeeting
sinceDecemuse
in
in
thiscountry
objections
to themethods
ber,1936,but it wouldraiseotherproblems.How greata
therelachangein priceswouldbe needed?To reestablish
in
thatexisted 1929,a
tionbetweengoldand commodities
priceriseof over80 per centfrompresentlevelswouldbe
required,but it is not certainthat this wouldproducea
adjustment.The risein pricesnecesdesirableequilibrium
ofproduction
saryto bringsufficient
automaticcurtailment
orit mighthave
mightnothaveto be as greatas suggested,
to say at whatlevelofprices
to be greater.It is impossible
investment
theRussianproduction
ofgold,inthefaceoffixed
curtailed.SouthAfrica
alreadysunk,wouldbe substantially
is saidto be savingherlowcostoresforfuture
use,butwedo
theseoreswouldbe low costwithprices
notknowwhether
withoresnow
readjusted
or are lowcostonlyin comparison
beingmined. It is possiblethatthe expansionof business
activitywouldhelp to relievethe gold situationmoreby
intootherlinesthanby creating
a use
attracting
enterprise
forthepresentexcessivesupply,butwe cannotbe sure,
The greatestobjectionto the automaticadjustmentof
is not,howforthepresent
problem
pricelevelsas a solution
orthat
ever,thatit wouldfail,inthelongrun,to be effective
but that it
the preciseadjustmentrequiredis uncertain,
to deter
wouldinevitably
involvea priceriseofa magnitude
standard.
advocateofan automatic
eventhemostunbending
is corrective,
It mustbe admittedthatthisalternative
and
THE GOLD DILEMMA
591
notmerely
palliative,
as is thecasewithrespect
tosomeofthe
othercoursesofactualor proposedpolicy,and iftherewere
no othermeansofeffecting
an adjustment,
thiscoursemight
be desirable. Nevertheless,
the degreeof price rise contemplated
constitutes
a veryseriousdrawback.
(2) The proposalthatseemsto havethegreatestsupport
at present,
especially
in England,is to limittheproduction
of
gold by an international
agreement.This wouldnot solve
theproblem
ofexcessivereserves
ofgold,butit wouldavoid
addingto themat thepresent
rate. Theinsuperable
obstacle
inthewayofitsrealization
is thatit callsforan unattainable
degreeofinternational
cooperation.
Evenifsucha planwere
putintoeffect,
it is notat all certainthatit would
however,
succeed.Artificial
maintenance
ofthepriceofan important
raw materialis verydifficult
to accomplish,
as experience
withrubber,coffeeand nitrateshas shown. Such policies
have had limitedsuccessin a fewcases,notablydiamonds
and tin,but conditions
of gold production
are such as to
to maintain
thepriceofgoldat present
augurillforattempts
levels.Thisis truewhether
is directed
control
towardrestrictortowardcreating
ingproduction,
as underthisproposal,
an
artificial
in
demand,as underthepolicynowbeingfollowed
theUnitedStates.
It is certainthat,ifsucha planwereputintoeffect,
prowouldnot be contentto bear the entire
ducingcountries
certain
burdenofrestricting
production.In all probability
of the countries
the
normallyimporting
gold,presumably
UnitedStates,EnglandandFrance,wouldbe askedtoindemin part,at least,fortherestriction
nifyproducing
countries,
ofoutput,notwithstanding
thefactthatproducing
countries
losersifgoldwereto
wouldbe,in thelongrun,theprincipal
that one
fall in value. Thereseemsto be no possibility
of
countries
continue
to
group
wouldwillingly
pay another
for
as
the
So
group not producing. long
presentcost-price
relationship
remained,
a tremendous
incentivewouldexist
to producemorethan the stipulatedquotas. Eitherthe
countrieswould
plan would break down or contributing
be saddled with the perpetualburdenof an indemnity
592
QUARTERLY JOURNAL OF ECONOMICS
to producingcountries. The fundamentaldefectof this proposal is that it is not corrective.
(3) The thirdalternativeis to continueto absorbgold and
withhold it from monetary use. This involves a heavy
burden for countriessupportingsuch a policy. At present
thisburdenis beinglargelycarriedby the UnitedStates. By
taxingthe importationof gold, or possiblyby taxingforeign
investmentsin this country,othercountriescould be forced
to bear a part of the burden,but the cost is certainto fall
veryheavilyupon the United States.
At the momentthis is, nevertheless,the easiest course to
follow,and forthe immediatefutureit wouldprobablybe the
least disturbingand perhapsthe least expensive. It constitutes a diseconomyin the utilizationof gold and is costly,
but it can be done. We may continueto increase reserve
requirementsof the bankingsystem;this would involve,at
a shiftingof the burdenof diseconomizing
least temporarily,
gold to the banks. We may continueto buy gold through
the Treasury and then sterilizeit by withholdingit from
monetaryuse, this would mean shiftingthe burdento taxpayers. Or we mightconceivablyreplacesome of the money
now in circulationwith gold in hand-to-handcirculation;
thiswouldnot materiallyaltertheburdenofholdinggold but
it would conceal part of the gold surplusfrompublic view.
The idea that,because thisgold would thenbe used,it would
is obviouslyan illusion.
not be in excess of requirements,
of an economic
All such devicesforreducingthe efficiency
agent are clearlyundesirable. They are deliberatelyanachronistic. In this case it would involve maintainingthe
presentexcessive value of gold, and would thereforemean
that the United States, and possiblyEngland, France and a
few othercountries,must continueto subsidizethe production of unwantedbillionsof gold. It mightpostponea crash,
but it would do nothingto preventone. It might,at best,
help to tide over a periodof transition,but it is no solution
whatsoever.
(4) The reasontoo much gold is beingproducedis simply
that the pricenow paid forit is altogethertoo high. Since we
THE GOLD DILEMMA
593
got into our presentpositionby raisingthe priceof gold, the
indicatedremedyis to lowerits price,tho not necessarilyto
the point fromwhichwe started. This step is more than a
remotepossibility.CertainSwedisheconomistshave declared
that Swedenmighttake such action; and the rumorthat the
United States would do so is so reasonablethat it refusesto
die, despite all the officialdenials that have been issued to
squelch it. Action of this sort mightbe undertakenjointly
by a numberof different
countriesor by the United States
alone. Again, the legal link withgold mightbe retained,or
it mightbe entirelydissolved,leavinggold freeto fluctuate,
in termsof money,like any othercommodity.The meritsof
these various alternativeswill be consideredin the following
discussion.3
a. Wouldloweringthepriceofgoldbe deflationary?
Much concern has been expressed about the probable
deflationaryeffectsof a reductionin the priceof gold. This
fear largelyexplainsthe recentweaknessof commodityand
securityprices. How real is this danger? On strictbullionist
reasoning,loweringthe price of gold from$35 to $30 an
ounce should lowerthe pricelevel by one-seventh.But this
argumentis tenable onlyon the basis of one of two assumptions: first,that monetaryreservesof gold are now fully
utilized or, second, that the value of gold in termsof commoditiesis constant. Neitherof these assumptions,it need
hardlybe stated,has the slightestvalidity.
A reductionin the dollar price of gold would add further
impetus to the tendencyfor this countryto develop an
"unfavorable" balance of trade. This mightinjure certain
protectedindustries,and it mightmake exportation,at least
temporarily,more difficult,
but the transitionto a passive
balance of trade must, in any event, be effectedin the
United States sooner or later. Our creditorposition has
demandedit foryears,and the demandis now reinforced
by
3. Except whereotherwisestated,this discussionof the effectof
loweringthe priceof gold relatesto the simplefactof a changein the
ratiobetweenmoneyand gold,regardlessof whetherthe new ratiois
legallyfixed.
594
QUARTERLY JOURNAL OF ECONOMICS
the changein our gold position. Such an adjustmentis
certainto benefit
morepeoplethanit injures,andthereis no
reasonto supposethat it wouldinvolvethis countryin
generaldeflation.
effect
It is frequently
saidthatthepsychological
ofreducingtheAmerican
buyingpriceforgoldwouldalonebe suffiin thiscountry.It is techcientto bringabout deflation
nicallypossiblethatthiswouldbe the case, but the probabilityis extremely
remote.In thefirstplace,the velocity
ofbankdepositsis alreadyso lowthatanygreatdeclinein
- the principalway in whichpsychological
influvelocity
- is veryimprobable.In the
encescouldproducedeflation
secondplace,centralbankweapons,including
a lowering
of
reserverequirements
fromthehighlevelto whichtheyhave
beenraised,are nowso strongthattheycouldeasilyoffset
thequantitative
effects
ofa changein thepriceofgold. It
seemsutterly
thatpsychological
factorsmaking
improbable
fordeflation
wouldprovepowerful
enoughto overcomethe
objectivefactors
opposing
it.4
The beliefthatlowering
thepriceof goldwouldproduce
in thiscountryis of a piecewiththewidelycircudeflation
latedtheoryof 1932-33thatraisingthepriceofgoldwould
lead directly
and at onceto inflation.Eventsprovedthat
is just as
the presentcontention
theoryto be unfounded;
The basisoferrorliesin failureto distinguish
meretricious.5
4. Withoutdenyingthe importance
of psychological
considerations,
it maybe suggested
thattoo muchsigmficance
can easilybe attachedto
this element. Businessmen are temperamentally
indisposedtoward
changeand are certainto regardany substantialalterationin policyas
unsettling.Strictadherenceto theirpreferences
wouldlargelyblock
progress.Alarmoverthedisturbing
effect
ofchangewillnotsurvivein
thefaceoftheprospectofsatisfactory
profits,
thoit willbe succeededby
oppositionto further
change. Chiefregardshould,therefore,
be given
to objectivefactors.Againsta subjectivepossibility,
thepsychologically
effect
ofa changeinpresentpolicies,mustbe settheobjective
unsettling
certaintythat presentgold policiesare seriouslyunsettlingto the
nationalbudget,international
balancesofpayments,
and thepatternof
economicactivitythroughout
theworld.
5. The effect
ofa changein exchangeratesuponpricesis influenced
by the size of the countrytakingthis action,the coursefollowedby
othercountries,
thenatureofthecountry's
economy,
and otherfactors.
It is possibleto suggestconditionsunderwhichthe contention
would
holdtrue.
THE GOLD DILEMMA
595
betweenwhatis deflationary
and whatis anti-inflationary.
A reduction
in thepriceofgoldis, indeed,anti-inflationary,
butit is notbythatfactdeflationary.
It wouldbe deflationaryonlyifit overshot
itsmark. Monetary
policymayvery
easilymissthegoalat whichit aims,butit is farmorelikely
to fallshortofits goalthanto overreach
it. Thishas been
demonstrated
again and again. Abandonment
of the gold
standardbyEnglandandSwedenin 1931was designed
as an
of
anti-deflationary
move. But the authorities
werefearful
inflation
and therefore
credit
immediately
appliedrestrictive
policies,maintaining
discountratesand resisting
expansion
of the moneysupply,withthe resultthat fora timethe
processofdeflation
continued,
thoat a muchreducedpace.
the deliberatereflation
Similarly,
in the UnitedStatesfell
farshortofrestoring
prices,as intended,
to the 1926level.
in
The moralto be drawnis thatanyprobablereduction
the priceof gold,designed- as it would be - to resistinfla-
in
tion,wouldin all likelihood
be onlypartiallysuccessful
achieving
itspurpose.We shouldthenhavea risein prices,
thothisrisewouldbe lesspronounced
thanwillbe thecase
ifwe fallto undertake
anti-inflationary
measures.But the
beliefthatanyreduction
in thepriceofgoldmustinevitably
resultin deflation
is whollyimaginary.6
b. The lossfromloweringthepriceofgold.
Whilethesupposeddeflationary
theprice
effect
oflowering
of goldhas attractedmostattention,
otherpossibleconsequencesare ofgreatsignificance.
As has alreadybeensaid,
theimmediate
effect
ofa reduction
intheofficial
priceofgold
wouldbe a corresponding
lossin thebookvalueofourexistinggoldreserves.The reduction
wouldnothaveto be very
greatto wipeout the entirebookprofit
thatresultedfrom
devaluationof the dollar. Sincetheseprofits
werechiefly
assignedto the Stabilization
Fund set up at thattime,the
effect
mightprovedamagingto thisfund. Furthermore,
if
6. It doesnotfollowthata reduction
in thedollarpriceofgoldwould
be theonlyor thebestpolicyto followin orderto checkinflationThe
presentsituationcalls also forimmediateand heavytaxation- but it
probablycallsin vain
596
QUARTERLY JOURNAL OF ECONOMICS
goldwas sold at the lowerrate,criticswouldbe quickto
pointout thatourgoldprogram
had resultedin a verybad
bargain.Therewouldbe a loss,in monetary
terms,
equalto
thedifference
betweenthepricepaid forgoldand theprice
at whichit wassold. Moreover,
ifthereduction
inthedollar
priceof goldcausedgoldto depreciate
in termsofinternathe losswouldbe real as well
tionallytradedcommodities,
as nominal.
The loss would,however,be less genuinethan might
appear. So longas we continue
to holdgoldwhichwe do not
needwe are experiencing
a loss,and whensuchgoldis sold,
evenat less thanthe pricepaid forit, the countryderives
morebenefit
thanfrommerelycontinuing
to holdit. The
country
partedwithrealvaluesat thetimethegoldwaspurchased,andthesacrifice
thisentailedis beingcompounded
so
longas fundsare tied up in thisunproductive
form.The
burdenis not reducedby continuing
to hold the gold,no
matterwhatofficial
valuationwe chooseto putuponit. The
onlywayto cutthiscostis to getridofgold. In thelightof
all present
indications,
thehopethatbyhanging
on we shall
be able to sell at a relatively
highpricesometimein the
futureappearscertainto be blighted.Continuance
of our
presentpolicywillinevitably
add to the burdenof buying
and holdinggold. It wouldbe betterto acceptthelossnow
involved
thanto haveto acceptan evengreater
losslateron.7
c. Theeffect
on goldimports.
Sinceone of the mosttroublesome
featuresof our gold
problem
is theheavyflowofgoldto thiscountry,
theprobable effect
on thismovement
oflowering
thepriceofgoldis
ofprimary
importance.Unfortunately,
theeffect
cannotbe
predicted
withanyexactness.
The normalexpectation
is that gold importswouldbe
checkedby a reduction
in the priceoffered,
but it is not
7. The effects
upongoldproducing
countries
oflowering
thepriceof
gold cannotbe consideredhere. Admittedly
theywouldbe injurious,
but thisdoes not justifyrecognizing
the presentexcessivepriceofgold
as a vestedinterest.The priceto whichproducers
are "entitled"is an
equilibrium
priceand nothingmore.
THE GOLD DILEMMA
597
impossiblethat the immediateeffectwould be to increase
them; for normal expectationsare based on considerations
of price, and prices are only partially responsiblefor the
presentmovementof gold. Loweringthe dollarpriceof gold
would tend to diminishthe economicadvantage of shipping
reductionsin the price
gold to thiscountry,but ifstillfurther
the speculative
of gold wereanticipated,it mightstrengthen
incentive. Even so, the burdenon this countrywould probably be reduced. The cost to this countryper physicalunit
of goldimportswouldbe lowerin proportionto the reduction
in the officialbuyingprice. Of greatestimportanceis the
fact that the reduced price would be corrective. It would
to the productionofnew
diminishthe premiumnow afforded
gold. Inasmuch as we are, in effect,absorbingthe world's
output of gold, it is to our interestto have this output
diminished. Moreover, a lower price would facilitatethe
acquisitionof gold by othercountries. The long-runeffect,
would certainlybe to reducethe movementofgold
therefore,
to this country.
d. Internationalpricerelationships.
It is clear that as a resultof reducingthe priceof gold the
exchangevalue of the dollar would rise relativeto the currenciesof countriesthat did not allow theirunitto appreciate
equally in terms of gold.8 The effectof a higherforeign
exchangevalue forthe dollarwould be to encourageimports
and to discourageexports. Howeverdesirablethismay be in
termsofinternationalequilibriumand ofbroadnationalgain,
it would evoke bitteroppositionin this country.This undercannotbe
8. The questionofwhetherthe dollaris nowundervalued
economicpositionof
treatedhere Recentchangesin the international
the United States would probablymake it impossibleto determine
accuratelythedegreeto whichthedollarmaynowbe overvalued.The
intoBelgiumin anygreatamountindicates
factthatgoldis notflowing
that the existenceof a fixedquotationforgold is not the onlyfactor
of gold. Otherfactorsinclude
movements
the international
governing
here,possibleovervaluin economicand politicalconditions
confidence
ofinvestand theattraction
ationofthedollarin termsofcommodities
overmentinAmericansecurities.The last suggeststhatin considering
as well
ofa currency
thepricesofsecurities
valuationor undervaluation
are significant.
as of commodities
598
QUARTERLY JOURNAL OF ECONOMICS
standableoppositionis a barrierto the institutionof reform
along these lines and would be an obstacle to the success of
the programifit wereundertaken.If the priceof gold could
be loweredin cooperationwithothercountriesof the Stabilization-FundBloc, this difficulty
would be largelyremoved.
This would be the ideal arrangement,
but unfortunately
this
degreeofinternational
cooperationis notlikelyto be achieved.
Tho England, herself,might perhaps be willing to join,
oppositionfromSouth Africaand othergold-producing
areas
of the Empire would, in all probability,make it politically
impossibleforherto do so.9 The limitofinternationalco6peration along these lines would probablybe some informal
agreementon the part of England and othercountriesof the
Stabilization-FundBloc to absorb a largerquantityof gold,
instead of lettingthe United States carryso large a shareof
the burden. It is possible that such an agreement has
alreadybeen reached.
If the priceof gold wereto be loweredjointlyby all countries,existinginternationalpricerelationshipswouldpresumably not be disturbed,but this degreeof cooperationis likewise not to be expected. For the United States to take this
step alone wouldupset existingpriceadjustmentswithother
countries,and this,at a time whenthe worldis just getting
back to a reasonablysatisfactoryprice adjustment,is a discouragingprospect. The hope of avoiding this disturbance
mightbe sufficient
groundforclingingto arbitraryand costly
howmethods,such as those we now have. Unfortunately,
ever, our presentpolicies offeronly postponement,not prevention. To postponethe reckoningis likelyto compound
the cost and may make the ultimatedisturbancegreater.
e. The international
functionsofgold.
The discussionup to this point applies whetheror not a
fixedratio between currencyand gold is establishedat the
lower level. The objection to establishinga fixedprice for
9. In 1929,72 percentandin 1936,53 percentofthetotalworldoutputofgoldwas producedin countries
belonging
to theBritishEmpire.SeventhAnnualReport,B.I.S., p. 40.
THE GOLD DILEMMA
599
gold is that this would interferewith possible later adjustmentsand wouldinvitea repetitionofthe verysituationnow
confronting
us. Failure to set a legal priceforgold would go
far to removethe unique monetarypretensionsof gold and
reduceit to a simplecommoditystatus,albeit the status of a
commoditywithpeculiaradvantagesin internationalmonetary affairs. This would be in accord withBritishpolicy of
recentyears; and gold would stillbe able to perform
its most
importantinternationalfunctions.It would be a mistaketo
suppose that, because gold no longerplays the r6le it once
did as the basis of a world-widemonetarystructure,
it is no
longer of any importance.' Gold still continuesto move
between countriesin settlementof internationalaccounts.
In this capacityit has been ofprimaryimportancein making
possiblethe steadymovementofforeigncapital to this countryin recentyears. Similarly,the importsof gold have presumablyfacilitatedthe exportof goods fromthis country.
Withoutthismovementthe declinein the ratioof commodity
exportsto importswould probablyhave been even sharper.'
Gold is also of great importancetoday as the basis of
exchangestabilizationfunds. In this capacity it continues,
as in the past, to cushionthe firstshock of sudden adjustmentsin internationalbalances of payments. Thus a large
in gold standard
part of the world'sgold whichwas formerly
reservesis now in the accountsof stabilizationfunds,where
it continuesto performmany of its traditionalfunctions,
particularlyin the internationalsphere,under a different
name and subject to different
rules.
So far as these internationalfunctionsof gold are con1. The problemssuggestedhereare treatedat some lengthin the
writer'sInternational
MonetaryIssues (New York,1937).
2. The presentpositionwithrespectto exportsand importscannot,
of course,be calleda normalone,but forthat matterthe relationship
betweenexportsand importscan hardlybe said to havebeen "normal"
at any timesince1914. The abnormalities
ofthe warperiodweresucceededby theabnormalities
resulting
fromexcessivelendingduringthe
'twenties,
thenby the abnormalities
of the depression
period,and now
bythoseconsequent
upontheflowofgold. The presentsituationcannot
be expectedto be any morepermanent
thanthatof any of the earlier
periods.
600
QUARTERLY JOURNAL OF ECONOMICS
cerned,however,there is nothingthat gold now does that
could not be done better,fromthe standpointof any individual country,if that country'scurrencywere not tied to
gold. The factthatthe dollaris todaylinkedto gold does not
enable gold to serve this countrybetter. On the contrary,
since we must buy gold at the legal pricein dollars,we are
virtuallypowerlessto take effective
stepsto stemthe flowof
gold to this country. Under presentconditionswe can operate in only one directionin influencing
exchangerates. We
can and mustbuy gold,but we cannot,in fact,sell gold. This
is solelybecause the dollaris tied to a legal paritywithgold.
England, because she is subject to no such restriction,can
adjust her currencyrelativeto gold or to othercurrenciesby
movingin eitherdirection. She is thus able to bringabout a
betteradjustmentin her internationalaccounts,and this is
preciselywhat she has been doingfornearlysix years.
Whilethefactthat the dollaris tied to goldinterferes
with
the best internationalfunctioning
ofgold so faras the United
States is concerned,it helps,paradoxically,to make it functionbetterforothercountries.The fixedpriceforgold maintainedby thiscountryexercisesa powerfulinfluencein stabilizingthe value ofgold and is, in particular,a bulwarkagainst
its depreciation. But for this relative stabilityof gold, the
operationsofforeignstabilizationfundswould be muchmore
difficult
and farless effective.
The highpurchasingpowerof gold,forwhichthis country
is largelyresponsible,is advantageousto countriesproducing
gold, and the presentstabilityin the purchasingpower of
gold, whichwe largelyassure,is advantageous to countries
with stabilization funds. These benefitsentail, however,
certaindisadvantagesto the rest of the world. The chiefof
these is that our policyis producingan increasinglyunequal
distributionofgold.3 This factmay hold grave consequences
3. It is interesting
to note that the threegreat democracies,the
UnitedStates,Franceand GreatBritain,hold over70 per centof the
visiblemonetary
goldstocksoftheworld,exclusiveofRussia,whilethe
threegreatFascistcountries,
Germany,
Italyand Japan,holdonlythree
ofthisdiviper cent. The possibleeconomicand politicalsignificance
sionaffords
materialforspeculation.
interesting
THE GOLD DILEMMA
601
forthe futureof gold.4 Nevertheless,so far as concernsthe
immediatesituation,it may perhaps be said that our gold
policy is advantageous for every countryexcept ourselves.
III
In the face of the presentimpasse we temporize,hoping
for God knows what - some miraculousreductionin the
supplyofgold comingon the marketor some equallyimprobable revivalin the foreigndemandforgold. Thereis not the
slightestchancein theworldthatthepresentrelationbetween
the price of gold and the cost of producingit can be maintainedindefinitely.If thereadjustmentin thisrelationcomes
withoutinflation,we shall be fortunate;but come it must.
The most practicable and least objectionable method of
effecting
a readjustmentis throughreducingthe dollar price
of gold, preferablywithoutattemptingto maintain a fixed
ratio at the lower level. But forgood and bad reasons we
hesitate to take this step. The question thereforearises:
what immediatemeasuresmay be taken while we make up
our mindsabout undertakinga fundamentalreform?
The firstmove shouldbe forthe Tleasury to cease sterilizing gold. It should revertto the formerpolicy of allowing
importsof gold to enterthe bankingsystem. The increased
reservesshould probablythen be offsetby furtherincreases
in reserverequirements,even tho this would require new
legislation.' Heavier taxation of foreigninvestmentsin this
countryis a second step. Besides allowingus to recapture
some of the gain fromspeculativemovementsof capital to
this countryand renderingtax evasion by our own nationals
more difficult,
this would presumablyrestrictthe importof
goldby makinginvestmenthereless attractive. It wouldnot
4. In thefirst
place,it signifies
thatthefuture
ofgoldis placedlargely
in thehandsoftheUnitedStates,Englandand France. In the second
place,thefactthatmanycountries
have foundit possibleto administer
theirmonetarysystemsreasonablywell withlittlegold is believedto
have reducedtheireagernessto possessgold.
5. The expansionofbankdepositsnowpossibleon thebasisofexcess
reservesis muchless thanis currently
assumed.
602
QUARTERLY JOURNAL OF ECONOMICS
be correctiveof fundamentalmaladjustments,but it should
help to relievethe strainon this country.
A thirdmeasurewould be to increasethe spread between
the buyingand sellingpoints forgold. This would be less
drastic than an outrightreductionin the legal ratio, and
wouldaccomplishsomeofthesameresults. It woulddiminish
the rigidityof the presentsituationand would afforda certain latitude in internationalmonetary policies. And it
mightservea usefuleducationalpurposein gettingthe public
accustomed,as has been successfullydone abroad, to a more
flexiblemonetarystandardthan we have at present. Finally,
it would assist if we were to facilitateimportsby further
reductionof tariffbarriers. This would probably have to
comeabout throughan extensionofthe presentTrade Agreementsprogram.The effectofsuchactionwouldbe to increase
foreignpurchasingpowerin this country,so that it would be
less necessaryto sendgoldin settlement
ofbalances. The possibilityof an ultimateoutflowof gold would be increased.6
These measureswould not removethe necessityof a fundamental readjustmentbetweengold and the dollar,but they
wouldrendermoretolerableand less hazardousthe exigencies
of the present.
The great mistakeof our monetarypolicy since 1933 did
not lie in abandoningthe gold standard. Numerousinvestigations,includingstudiesby the League of Nations and by
competentacademic economists,indicatethat forthis as for
6. It is sometimes
maintainedthatthepresentsurplusofgoldcould
be absorbedby theexpandingrequirements
of tradeif restrictions
on
international
trade were drasticallyreduced. In view of the great
increasein stocksof gold and the relativelylow level of commodity
pricesthe expansionin tradethatthissuggestsis unrealistically
large.
It wouldbe incorrect
to supposethatthe volumeof gold requiredfor
international
trade is proportional
to the volumeof trade. Gold is
primarily
concernedwithbalancesratherthan totals,and thereis no
reasonto supposethatbalanceswillbe proportional
to thetotalofcommodity transactions.
Probablythe most importantfactorjustifyinga relativelylarge
volumeofgoldreserves
at thepresenttime,as comparedwithformerly,
is thegreatamountofso-called"hotmoney"outstanding,
especiallyin
theUnitedStatesandEngland. The economics
of"hotmoney"deserves
moreattention
thanit has received
THE GOLD DILEMMA
603
othercountriesthe departurefromgold facilitatedrecovery
fromthe depression.7The fundamentalerrorwas ratherthat
we did not preserveour freedombut proceeded,instead,to
tie the dollarto goldagain. Our presentdilemmais the direct
consequenceof this step. England and most othercountries
avoided thispitfall,and havingdone so are spared the worst
in whichwe are now entangled.
of the difficulties
The present policy toward gold is leading deeper and
deeper into a blind alley. The overproductionof gold is
not correctingitself. On the contrary,it is rapidlyincreasing and, as the recentreportof the Bank for International
Settlementspoints out, there is every probabilitythat it
will continueto increaseso long as the presentadjustment
the choice
of costs and pricesis maintained.8We are offered
whetherwe shall continue,at enormouscost,to subsidizethe
worldto producemoreand moregold or shall take a stiffloss
in the nominal value of the gold we now own. All the
Micawbers in the world will not save us fromone or the
otherof thesealternatives.The best we can hope foris that
we shall not be impaledon both hornsof the dilemma;forit
is possibleto incurthe expenseentailedin thefirstalternative
withoutavoiding the loss contingenton the second. Some
loss is inevitable,and theway to keepthat loss at a minimum
is to lowerthe priceof gold.
C. R. WHlTTLESEY.
PRINCETON UNIVERSITY
7. See especiallyEconomicIntelligenceService,MonetaryReview
(Geneva,1936) and S. E Harris,ExchangeDepreciation(Cambridge,
1936).
8. SeventhAnnualReport,B.T S., pp. 38-39.