Intelligent woman's guide to gold MONEY
NICHOLAS DAVENPORT
It has become impossible to dine out in London in these post-devaluation days without being pelted with questions—especially from women —about the great gold rush. As Shaw failed to write `an intelligent woman's guide to gold' I must do what I can in my confined column hoping that it will be widely distributed in places where women usually meet to discuss public affairs, that is, their hairdressing salons.
As several generations have grown up since gold coins were used as currency it must be very difficult for the average young woman to understand what President de Gaulle means when he urges a return to the old gold standard. This was a device for keeping the currencies of the world in a fixed relationship of value based on the relative weight of gold they con- tained. Each nation maintained a fixed ratio of gold to the paper notes issued at home. But gold flowed out whenever its price level became high relative to those in other countries. Its central bank then raised bank rates and re- stricted bank credit and so forced traders not to use so many paper notes. This meant restricting trade and employment and forcing workers to accept lower wages through the fear of un- employment. Was that not similar, you ask, to the `stop-go' technique of today? Indeed it was but the vital difference was that it was auto- matically applied by the central bank whenever the movement of gold gave the signal; it was not dependent on the whim of unstable poli- ticians. The General prefers what he calls `the immutability, the impartiality, the universality which are the privileges of gold.'
There were other objections to the old gold standard apart from the political disadvantage of handing power over to the central bank governors. The main one was that it depended on a steady output of gold from the world's gold mines to enable the supply of paper money to expand with the growth of trade without up- setting the gold ratios. The French are now arguing that this is no serious matter because if there is a shortage of gold the price of gold can be doubled or trebled. (It has never been changed since it was raised from $20 to $35 an ounce in 1934.) The Americans object strongly to raising the price of gold partly because this does not help the poor developing nations who have none, partly because it gives an unfair advantage to the gold producing nations— especially South Africa and Russia. But the more enlightened Americans also hold strongly to the view that a return to gold is a retrograde step and that gradually the world should make less and less use of gold for currency purposes and more and more use of good, sound paper, like the dollar. But what is good, sound paper?
Here we arrive at the fundamental difference between the French and the American attitudes towards monetary reform. Since 1945 the world has been using the gold exchange standard laid down in the so-called Bretton Woods agree- ment. (You may recall that the Americans turned down Keynes's plan, which was far better, for an international clearing union and a super-central bank empowered to create inter- national money.) Under this agreement the nations subscribed gold and currency to an International Monetary Fund whose members undertook to stabilise their currencies in a fixed relationship to the gold dollar and to work to certain economic and financial rules to achieve exchange stability. The dollar was the only cur- rency actually defined with a certain weight of gold. The initial exchange parities fixed on the dollar were not regarded as sacrosanct and have, in fact, been altered. The most important change was the devaluation of sterling by 30 per cent in 1949 and of the French franc by 17-1 per cent in 1958. And now the 14.3 per cent sterling devaluation of November 1967. Are the French justified in saying that the next will be the devaluation of the dollar in terms of gold?
Under the present gold exchange standard the world has been making use of dollars and £s as trading currencies in supplement to gold. (I will avoid the question of 'reserve' currencies, because sterling, not being freely convertible into gold, is not strictly a `reserve' currency, although held as such by most members of the sterling area.) Whenever the United States or Britain runs into a deficit on its international payments account the trading world is flooded with more dollars or pounds. This has been particularly marked in the case of dollars since the Vietnam war. In fact, the annual American deficit of between $1,000 and $2,000 million a year has been responsible for the creation of the so-called Euro-dollar market. The General calls this `the export of American inflation' and is very angry when these paper dollars are used to buy up good French industrial companies.
The General denies that the French are behind the present gold rush in the bullion markets which has put $700 million of gold into private hoards since June, but there is no doubt that if the dollar is to be upset it will be done by forcing up the dollar price of gold. Most of us are denied the liberty of buying and selling gold but there is an official gold bullion market in London and Paris and unofficial or black markets in other places in the Middle East and Far East. The official price is either side of $35 an ounce but when the hoarders or specu- lators suddenly step up their demand the price can momentarily rise above that level. When it rose to over $40 an ounce in 1960 the gold powers set up a 'gold pool' in London which is managed by the Bank of England drawing mainly on the American gold stock at Fort Knox as occasion arises. In the recent gold scramble the pool had enough gold to satisfy all the demand but it was not helped by the French suddenly announcing that they had withdrawn from the pool last June. This sug- gested that the burden of meeting the hoarders' demand would fall entirely on the Americans who would soon tire of the game and put up a notice at Fort Knox that no more gold was available for sale. It is no laughing matter that private hoards have now secured over 25 per cent of the world's total stock of gold (which is put at around $60,000 million).
At the end of the war the Americans had a gold stock of around $25,000 million. By the middle of this year it had fallen to $13,000 million of which about $10,000 million is still officially (but unnecessarily) earmarked as gold cover to the note issue. (The 'hawks' also argue that $10,000 million is the minimum stock which the nation should hold as a war emergency.) If the European and Middle East gold hoarders go on capturing each year the whole supply of new gold from the mines (about $1,460 million) America will sooner or later have to call a halt to gold sales at Fort Knox. I have no doubt the General would like to see a universal writing-up of gold. For myself, who would always rejoice at the overthrow of the golden calf, I can see the world falling eventually into two currency blocs—the dollar-sterling bloc with an exchange rate floating against the gold bloc. As I have said we are witnessing a crumbling of the inter- national monetary front.
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