22 MARCH 1968, Page 9

The greatest myth of all


If the gold 'crisis' that erupted last weekend has left any impression at all on those members of the public who have gallantly tried to grasp what it was all about, it must be something like this. The western world stood on the brink of a great disaster, almost as great as the depression years of the 'thirties. The inter- national monetary system, which all good men revere and respect, was under attack by an evil alliance of that monster General de Gaulle and the sinister freemasonry of international speculators. Their objective was nothing less than to devalue the dollar by buying up all America's gold. Happily, America, summoning her loyal friends to her side, was able to save western civilisation—or at least earn us a tem- porary reprieve—by a deft if mysterious stroke, which seemed to tell the speculators that they could pretend that gold was worth more if they wanted to, but all good men and true would continue to exchange it at the old price of $35 for an ounce. For the time being—but per- haps only for the time being—disaster has been averted. If we are to exorcise this terrible threat for ever, we must get rid of gold altogether while there is still time.

What is interesting about this popular account is that from beginning to end it is nonsense. Indeed. I cannot remember a time when so much palpable rubbish has been spoken and written on a single issue. Of course, the public have largely been led astray by the press, which (with the notable exception of the Financial Times) has been uniformly confused and confusing, and by television, whose re- portage and comment have never been more ignorant. But Fleet Street and the BBC have in turn been deceived over this politico-economic issue by academic economists who do not understand politics (and in any case refuse to accept that there can be any merit in any system, such as that based on gold, which they have not invented themselves) and by politi- cians (such as Mr Johnson and Mr Callaghan) who have no understanding of economics.

But there- are deeper reasons, too, for the unquestioning assumption that last weekend the world faced disaster—as if there were not enough genuine disasters to worry about. I would tentatively identify five but no doubt there- are others. First, the General and the speculators figure • prominently in the folk- demonology of our time: any success for them must be a Bad Thing. Second, they were pitted against the- goveriunents of the United States and Britain; and there is still sufficient respect for governmental authority (even after Stan- sted) for many people in this country to assume automatically that any defeat for government Policy must ipso facto be a disaster. Third, there is, I think,- a feeling that since everything had been going along perfectly smoothly until quite recently, all the sudden excitement could only mean a crisis. Fourth, there is the un- doubted fact that the world's biggest gold pro- ducers are South Africa and Russia. How can what's good for them be good for us? And, fifth, there is what might be termed the Leach7 syndrome: gold is a traditional and old- fashioned standard of value; ergo it must be a barrier to progress. The mythology of an age cannot be dispelled in a single article, but let us at least make a start. First, the so-called speculators. These were millions of people throughout the world buying gold for the simple reason that they thought it would go up in price. A few days ago millions of people in this country were buying whisky, cigarettes and everything else they thought might go up in the budget. They, too, were speculators—in precisely the same unsinister sense as the gold buyers. Of course gold buying, unlike the purchase of whisky, seems dubious and un-British; but this is simply because citizens of this country have for several years been prevented from buying gold by law: in many other countries no such restriction exists.

So much for the speculators. All the same, it is worth asking just why they thought the dollar price of gold was likely to rise, if only because this will enable us to test the twin propositions that gold is the weak link in the present monetary system, and that everything was fine until the General and the speculators began their alleged wrecking campaign.

The nations of the world keep their mone- tary reserves (needed to enable them to finance temporary balance of payments deficits with- out recourse to undue internal deflation) largely in the form of gold, but to a considerable ex- tent in dollars as well. A few are actually bold enough to hold sterling, too. This is known as the gold-exchange system. The only trouble is that if people are to be content to hold part of their reserves in the form of another coun- try's currency, they have got to be convinced that that currency is not going to be devalued in _terms of other currencies: in other words, the country concerned has got to make a special point of paying its way at the existing ex- change rate. This—as we in this country know only too well—is what is meant by the burden of running a reserve currency.

The United States, however, has been run- ning a balance of payments deficit for the past ten years. Various measures have been attempted during both the Kennedy and John- son administrations to cure it, but to no avail. Regular official forecasts of a dramatic im- provement, as in Britain, have been as regu- larly falsified by events. And latterly, with spending on the Vietnam war rising still further, the American payments deficit has looked likely to get worse rather than better. So, 'in a rational world' (to use Mr Jenkins's phrase), holders of dollars have reasoned that if America cannot end her deficit any other way, she will have to follow Britain's example and devalue. But if they sell their dollars, what do they buy instead? Sterling, the only other widely available currency, is still suffering post- operational weakness. The answer has to be gold.

The plain fact is that America cannot both manage her economy at home and conduct policies overseas which together add up to a continuous payments deficit on a substantial scale, and at the same time expect the rest of the world to hold its monetary reserves in dollars. This would remain true even if gold did not exist at all: in that event the fear of a dollar devaluation would have had far more serious repercussions—a stampede to buy com- modities and other 'real' values of all kinds. What the latest affair has shown, in short, is not the danger of relying on gold, but the danger of relying on the dollar. Contrary to popular superstition, it is gold that has pro- vided the only safety valve and source of stability in the gold-exchange system.

Nor has the latest 'crisis' been conjured out of thin air. America's deficit is more than a decade old, and all the while her gold reserves have been steadily falling. The gold pool itself was formed as far back as 1961 as a tourniquet to try to staunch the bleeding (which is why its abolition last weekend is hardly the Ameri- can 'triumph' its apologists have made out), and it was only a few months later that Presi- dent Kennedy dramatically made use of the newly launched Telstar satellite to beam to the world a pledge that the price of gold would remain fixed at $35 an ounce. But in spite of more than ten years' advance warning, the Americans have been unwilling or unable to pursue policies that would make that pledge credible. The blame for the present inter- national uncertainty lies fairly and squarely with Washington.

'That may be so,' I hear someone say, 'but if the Americans lose, whether or not they're to blame, and the price of gold is greatly in- creased, won't this lead to the distrust of money and a second world slump? Haven't we got to support them?' The truth is precisely the opposite of this. I suspect the popular canard stems from the fact that Britain's re- covery from the last world slump began when we 'went off the gold standard' in 1931. True enough. But what 'going off the gold standard' meant was increasing the sterling price of gold. Shortly afterwards Preseident Roosevelt, in his first action after his election, allowed the dollar price of gold to rise as well, eventually stabilising it in January 1934 at the present price of $35 an ounce—some 70 per cent above the old price. He did this specifically to stimu- late an economic recovery. Lest anyone should remain in any doubt about the true conse- quences of an American 'defeat' over gold, listen to the words of Dr Otmar Emminger of the German Bundesbank, perhaps the most re- spected central banker in Europe—and some- one who, unlike the generality of commentators on this subject, actually knows what he is talk- ing about. Dr Emminger says he is 'terrified' at the unofficial French proposal to double the price of gold. It would, he eiplains, 'enable all countries to pursue much more expan- sionary policies than would otherwise be possible.'

So much, then, for the alleged dangers of a return to the 'thirties as a result of the gold rush. But the persistent purveyor of the con- ventional Anglo-American wisdom still has a last argument left. Gold is old-fashioned and arbitrary: its production depends not on world needs but on the vagaries of mining discoveries and technology, it is laborious to produce and it provides windfall profits for Russia and South Africa. Civilised countries have long ago ceased using gold as an internal currency, preferring instead rationally [sic] managed paper currencies. Why not replace gold as an international currency, too, by a rationally managed international paper currency? There is, I'm afraid, a very short answer to this. Paper currencies need governments to manage and control them. We possess national govern-

ments. We do not, as yet, have a world government.

This is why, in spite of the proliferation of perfectly sensible schemes for a 'rational' sub- stitute for gold, and five years of intensive international negotiation to this end, only the smallest mouse has emerged. The impossibility of reaching international agreement on any real gold-substitute is hardly surprising when it is • realised that the (literal) licence to print money is of the most fundamental essence of sovereignty and power. To whom, in the ab- sence of a world government is this sovereignty and power to be ceded?

The answer in practice is all too clear. As Sir Roy Harrod—who, like Dr Emminger, is one of the minority who actually know what they are talking about on this complex issue —has put it with his old-world.courtesy :

. . it is expedient to consider the nature of

• the agencies that would operate this new func- • lion of world government. It is surely clear , at present that. such agencies would be dominated by the thinking of central bankers. These include men of the highest calibre, of wise judgment, flexible outlook, and enlighten- ment. But central bankers, by their training and age-long traditions, are apt to have their attention concentrated on certain aspects only • of the totality of an economic policy. . . . To bring the matter to a head, one may ask the • question outright—do central bankers have a Are in their belly in relation to growth policy?'

For the answer, I refer you to Dr Emminger's remark already quoted. As Mr George Brown , pointed out in his resignation speech, in present conditions 'Power can very easily pass, not merely from Cabinet to one or two ministers, but effectively to sources quite outside political control altogether.' This is what would hap- pen if there really were agreement on a 'rational' substitute for gold—as the old man in the Elyse realises full well.

In September 1966 the SPECTATOR ex- pressed its own policy on this whole issue. 'If a second world crisis is to be averted,' we wrote, `there are three prerequisites. First, the United States must greatly reduce, and Britain . eliminate, their balance of payments deficits. Second, this must be done not by protection or deflation, which cut back world trade, but by a means that will allow world trade to expand : and this, in our case at least, means devaluation. And third, there must be an ex- pansion of world liquidity; and this, now that international agreement on a new system has proved impossible, must involve an increase in the price of gold.'

Since then, happily, there has been con- siderable progress towards these ends. Britain has devalued, and the world is now halfway

towards a rise in the price of gold (which dis- cussion of the 'son' plan can only futilely post-

pone). America will still have to reduce drasti- cally her payments deficit, but at least, with her still considerable gold stocks, a doubled price for the metal will enable her to buy time—and in time the Vietnam war will have come to an end. The success of the speculators last weekend, so far from bringing the world

face to face with disaster, was the most hopeful event for a very long time. For it showed that

even the most powerful of governments, when pursuing irrational policies and committed, with its supine allies, to a collision course, can

be stopped in its tracks by the activities of millions of private citizens if reason is on their aide.