All Commentary
Thursday, May 1, 1980

Gold Has RisenBut Remains the Same


Dr. Donald H. McLaughlin, mining geologist and engineer, formerly served as president and continues as a director and chairman of the executive committee of Homestake Mining Company.

Not very long before his untimely death, Jacques Rueff in his fluent but slightly accented English commented that further debates on the status of gold in the monetary system seemed hardly necessary for “events were taking over.” And indeed they have.

With surprisingly little fanfare, gold is maintaining its firm place in the world’s reserves where it commands a respect far greater than any of the fiat currencies that pass for money these days. That this could happen in spite of the persistent anti-gold position of successive United States Administrations over more than four decades still further emphasizes its durability as money and the firm faith all manner of men have in it—apart from those who rule in Washington and bankers whose skill is largely in manipulation of the technicalities of increasingly complex instruments of credit.

The long record of human history surely reveals that when money, whether in the form of precious metal or credit, is debased and abused, a nation or even the entire world suffers. Today we are in a period of such misbehavior and mismanagement but the persistent strength of gold even under these trying conditions offers hope that, if it is used wisely and effectively, order can eventually be restored.

The principle currently known as Gresham’s Law has been recognized for tens of centuries. It is as sound today as it was when Aristophanes used it in a metaphor to illustrate how good men were driven from public life in Athens in the same way that untrustworthy money forced better money out of circulation. At about the same time, Aristotle stated the concept more logically perhaps, but less poetically. Today, the principle is well understood in most high circles in Europe. In 1973, Milton Gilbert noted that gold remained unused in the vaults of the central banks—but not unloved. In America, unfortunately, the money managers and politicians seem less familiar with the classics.

Since then, eighteen governments (but not the United States) are valuing their official gold stocks closer to market prices—or more rationally expressed are putting the currencies they hold in a realistic ratio to gold. Furthermore, by utilizing gold at a market- related rate, the recently created European Monetary System has provided the Common Market countries with a mechanism for employing their gold reserves effectively in foreign exchange transactions. These wise moves tend to reduce the discrepancies that tend to immobilize gold in response to Aristophanes’ or Gresham’s Law, even though they do not remove all fears arising from the continued depreciation of fiat money.

According to our official policy, gold has now been demonetized and henceforth fiat currencies and credit instruments will be relied upon exclusively to perform the services expected from money. Their most distinctive quality unfortunately appears to be a tendency to decline in purchasing power, a very troublesome defect in anything that claims to be money.

“Paper Gold”

To overcome the restrictions imposed by national sovereignty and political borders, a strange device known as Special Drawing Rights was created by the International Monetary Fund, at first vaguely attached to gold and now defined in terms of a “basket” of currencies, all of which are depreciating in real value though at different rates. In essence, the SDRs were an attempt to create an international form of fiat money. For a time, their enthusiastic supporters even referred to them as “paper gold.” So far, their acceptance even under duress has been restrained, to put it mildly.

Even though “demonetized” by the dictum of the United States, nearly a billion troy ounces of gold are still firmly held in the official reserves of the western nations, rather a substantial amount to declare was no longer legal money. This obvious preference for gold should be rather disquieting for those who regard Gresham’s Law as obsolete.

A monetary system based exclusively on credit possibly could be made to function, if managed by a small group of knowledgeable men of intelligence and integrity, with complete political independence and power, as well as mastery of the technical intricacies of money and finance and unprejudiced understanding of both national and international conditions that influence policies. Until such paragons can be brought into existence, however, it will be safer to retain the discipline of gold as an element of the monetary system than to expect that those who manage money based on credit and on government fiat will do so with sufficient skill that it will in time attain the confidence now commanded by gold. From the record of centuries this can hardly be regarded as even a forlorn hope.

Significant Experiments

In the natural sciences, ideas and hypotheses are tested by controlled experiments and confirmed or rejected by their outcome. In the social sciences such definitive tests are rarely possible. But with regard to gold’s place in the monetary system there have been episodes that have provided results of unusually positive sort.

The first that should have been regarded as a significant experiment was the effort of several governments at the instigation of the United States 22 years ago to maintain the official price of gold at $35 per ounce by making gold available at this rate on the London market to all who desired to purchase it. It was a costly experiment. After several billion dollars had been spent with little effect, except to transfer gold into hands eager to accept it at a bargain price, the drain on gold reserves soon became too apparent and excessive to be tolerated and the sales were abandoned close to the Ides of March in 1968, with self- serving explanations that the mission had been accomplished. It was accompanied by the abrupt announcement that sales and purchases of gold by the participating governments would be discontinued at the official rate except between Central Banks.

The restrictions on ownership of gold were not repealed but miners and others with gold to sell were permitted to do so on the market to specifically authorized purchasers for whatever price their metal might command. In spite of predictions by several prominent economists and politicians that without the support of the dollar the gold price would sink to much lower levels, this didn’t happen. After a short period of little change, the price started to rise, and this trend has continued with the usual market swings but with each new peak rising above the last. The results of this experiment alone should have been accepted as proof that the price of gold can not be tied to an unconvertible currency, subject to manipulations that cause it to depreciate in value.

A second test with equally decisive results occurred during the international financial turmoil in 1971 that led to the closing of the “gold window” on August 15th, when the United States Administration announced that it would (or could) no longer redeem dollars held by Central Banks in gold at the official price which by that time had been raised from Roosevelt’s $35 an ounce to the strangely precise figure of $42.22 per ounce. The magnitude of claims in dollars had for some time made it apparent that the pledge to honor them in such terms had become impossible to meet. In effect, the United States admitted bankruptcy, as far as its obligation was concerned to redeem such dollars in gold at the official rate. Again it was made clear except to those whose anti-gold fixation made them blind to realities that a fiat dollar can not control the worth of gold.

The third experiment was the attempt to check the rising price of gold on the market and the weakness of the dollar that it revealed by substantial sales of gold from the reserves of the United States Treasury and the gold held by the International Monetary Fund. Whatever those who initiated this policy had in mind, it is unlikely that they anticipated or desired that the market price of gold would rise in spite of the large quantities they disposed of.

Furthermore, in the course of these sales, the Central Banks of Europe have not reduced their stocks of gold and indeed have firmly held the gold returned to them by the IMF which hardly seems in accordance with the decision, sponsored by the United States, that gold had been demonetized. Even a number of the Developing Countries have preferred to accept their allotment of the IMF sales in gold rather than in the paper in which the so-called aid would have presumably been paid to them.

In the natural sciences, when the outcome of a series of experiments is so definite, even the most ardent advocates of the ideas being tested usually accept them as conclusive. Unfortunately, the anti-gold group in power in Washington continues to ignore their clear message.

An Encouraging Sign

Restoration of the gold standard, which would require redefinition of the major currencies in terms of gold and establishment of unrestricted convertibility at new fixed rates, hardly seems attainable until the abuses of credit and the increasing worldwide inflation have been corrected and ended. It is still an objective worth striving for but to achieve it would require more drastic and disciplined action than our electorate and our politicians seeking reelection are likely to accept in the foreseeable future.

Even though restoration of the gold standard for the time being may be ruled out, a new monetary system appears to be evolving in which gold will continue to have an important place and be a strong and stabilizing element. Progress toward this end is revealed, not only by the firm retention of gold stocks by the major reserve banks—with the exception of the ill-considered sales by the U.S. Treasury and its sycophant, the IMF—but also by the removal of restrictions on ownership of gold by citizens and the issuance by many nations of gold coins whose worth is primarily determined by their weight in gold. Among them, the one-ounce Krugerrand, various handsome Mexican coins with gold content stated in metric units, and new coins struck from old dies such as the Austrian Krona are notable examples. The designations in national currency units that some still bear are obviously meaningless. The principal contribution by the issuing government is its seal that justifies confidence that the gold content is as stated.

A timely step that would simplify and create better order, as well as strengthen the function of gold in the evolving monetary system, would be the creation and dissemi nation of a coin of uniform gold content, fineness and size that could become a standard by which other monetary devices could be measured.

A Coin of Uniform Weight

With one gram of gold adopted as the basic unit, a coin containing 10 grams of gold (0.322 ounces troy), in the 90% alloy with copper commonly used in coinage to provide hardness, would be a convenient size, slightly larger than the old American five-dollar gold coin or the British sovereign.

The acceptance of such a golden unit would probably be facilitated if the coins were minted by each of the major nations and their authenticity established by them. Uniformity in design would not be necessary. Their essential quality would be the common gold content. Competition in beauty and esthetic appeal would have much to commend it.

If an appropriate name for such 10 gram gold coins could be found that would be easily comprehended internationally, so much the better, but if not, there would be no harm in each nation using a term based on some aspect of the design in which it took pride.

The unit of measurement, however, should be one gram of gold which could be abbreviated as 1 gm Au, a designation that would be understood and translated into any language in this age of common scientific nomenclature. The 10 gm Au coin which could be acquired and handled would give the unit a tangible reality. This is a quality that Special Drawing Rights can never acquire, in spite of the presumption of their creators in calling them “paper gold.”

Leave It to the Market

The rigid discipline of the gold standard, however, need not be imposed until desired. No tie need exist between any national fiat currency and the golden units. Any country would be completely free to indulge in whatever political, social or economic policies (or nonsense) it desired. The only restraint imposed by the gold in the reserves and the golden coins would be the effect on the market price of the currencies expressed in grams of gold. The objectionable term “the price of gold” could be abandoned, with currencies, as well as commodities and services, priced on the market in a unit containing a specific weight of gold. The plethora of quotations of currencies—dollars, marks, francs, yen, sovereigns, and the like expressed in each other, all variables measured by other independent and sometimes erratic variables—could be eventually abandoned. It would do no harm to continue such exchange quotations as long as the momentum of tradition required. But they should be accompanied by quotations in the proposed gold units, which would reveal the status of each national currency in one common standard.

Abuses of credit and excesses in creation of fiat currencies based on debt could hardly be concealed, for they would be promptly revealed in the price of the paper in gold. The economy obviously needs both elements—credit and stable mon-ey-but with gold effectively utilized in the monetary system a badly needed base would be provided upon which deficits, changes in quantity of fiat money and inflation, among other evils of the times, could be clearly revealed.

The Individual’s Choice

The individual should of course have the privilege of acquiring the golden coins at rates determined by the market price of the currency he possessed. The denial of such a freedom by any government would in all probability be immediately and unfavorably reflected in the price of the currency.

The right to buy gold—especially coins—actually puts into the hands of anyone desiring to do so, a very special commodity that has long possessed the essential qualities of money, viz., a medium of exchange, a means of measuring the relative value of other commodities and services, and a safe way to store wealth. The latter quality is not possessed today by any national currency.

The existence of a dominant gold coin—such as the one proposed, containing 10 grams of gold—would provide a simple constant, so to speak, against which all currencies could be measured with ease and confidence. It would, of course, not be a constant of value in the strict sense the term is used in mathematics and the physical sciences, but it would at least stand for a fixed quantity of gold. No commodity—not even gold—can claim to be invariable in worth and to provide an unchanging base for measurement of values of materials and services, but over the centuries gold has come nearest to doing this, as Roy Jastram has so well demonstrated in his recent book, The Golden Constant: The English and American Experience, 1560-1976 (John Wiley & Sons, Inc., 1977).

Three years ago, the title of a speech I gave at an annual gathering in a redwood grove in California was “The Resurrection of Gold Without Benefit of Clergy.” Since then, in spite of the high priests in the Treasury and elsewhere in the government, Gold Has Risen as the dollar and other fiat currencies have deteriorated, and yet its worth, expressed in the cost in gold of a good dinner, a suit of clothes, a haircut or even a barrel of oil has not changed much. The Resurrection of Gold should now be regarded as demonstrated and as an important advance toward a sounder monetary system, with clear distinction between the status of money based on the relatively stable worth of the traditional monetary commodity—gold—and the variable national currencies that represent nothing more than credit in one form or another.

If this is coming about without formal conferences and long debates, so much the better. The open market even for currencies is a masterful device and one that is essential for economic freedom. It will continue to prevail and exert its influence even over the value of un-convertible currencies. With the variety of trustworthy coins now available, gold is already gaining more and more recognition as money in which currencies can be measured, and if a gold coin of established quality gains wide acceptance, the monetary system will be approaching a status in which there will be far better hope of attaining stability than has existed since World War II.

Fiat Money Rejected

How the present uncertainties will end is hard to predict. In the last few months, the market “price” of gold has risen at an unexpectedly rapid rate. There are undoubtedly some undesirable factors involved, such as excessive transactions in gold futures, but by and large the accelerating rate at which gold has risen is to a much greater extent a result of the growing concern about the domestic economy and the deteriorating international situation, not to mention the persistence of deficit financing and the resulting unavoidable inflation. If the price of currencies were quoted in units of gold rather than the other way around, the instability attributed to gold by some of its detractors would be more clearly revealed as weaknesses in the artificial devices we now must use as money.

I do recall, however, that a few years ago when I was asked in a radio interview how high the price of gold would go, I replied that it had approached infinity in German marks in 1923. That need not and should not happen in America but with a few more years of persistent deficits and unwillingness to forgo extravagances in our way of life, it is a possibility that should not be lightly dismissed.

Stop Deficit Spending and Monetization of Debt

The first essential step to prevent such a disaster is to keep expenditures by the government within its income and to end monetization of debt. The second even more serious need is to find the least painful means of dealing with the tremendous and still mounting debt—domestic and international—that has now reached magnitudes that make its retirement by conventional means practically impossible. Reduction by default and/or by inflation are unfortunately much easier. Repudiation of debt in a more dramatic way would be the substitution of a new dollar for a number of existing dollars. Unfortunately this procedure is not without precedent. In 1926-28 Poincaré and in 1958 Charles de Gaulle created new francs for the then current francs that became known as “ancien francs.” The creation of the Deutsche Mark is another example. These procedures were drastic though probably unavoidable. Such moves, however, in general are likely to be a mixture of good and evil—probably more of the latter than the former. But, if a country is forced to “bite the bullet” to correct past mistakes and excesses, liquidation of excessive debt by payment of a small fraction in sound money may not be the worst way and might even be the best way if the new currency—or the new dollar or whatever it might be called—were made convertible into gold, when a durable rate could be established.

None of these disturbing developments is inevitable, but unless the American people and their leaders who are dependent on their votes have the will to put our house in order and accept the austerity that must be faced, events will indeed take over—and they are not likely to be pleasant.