Shall We Abandon the Gold Standard?
WE frequently try to imagine what the mythical man from Mars would think of us. We never succeed; for us there can be no such thing as a detached view of the world in which we live. Nevertheless, the attempt to look at human institutions as if we had never seen them before is a useful exercise of the imagination. Undoubtedly, we stage many old dramas in exactly the same way, year in and year out, simply because we cannot take a seat in the orchestra, and with ample perspective watch our own performances. The man from Mars has an advantage over us. What would he think of our monetary system?
Doubtless he would ask many questions, to which he would receive answers as puzzling as the Mad Hatter’s answers to his own riddles. Let us hear the dialogue: —
‘ What are these apparently worthless pieces of green paper that men accept in exchange for useful articles?’
‘ They are promises to pay the holders 23.22 grains of gold in exchange for each dollar certificate.’
‘ Where is the gold and what is done with it?’
‘It is merely piled up in vaults. Nothing at all is done with it.’
‘Why gold? Is that the most useful thing in this world ? ’
‘ By no means. Many other substances are more useful — copper, for instance, and iron and rubber and wool. Land, too, is more useful.’
‘Then there must be some other reason for making gold the basis of currency. Does the production of gold bear a definite relation to the growth of business?’
‘Far from it. The supply fluctuates widely with discoveries of new mines and with labor costs.’
‘At any rate, you say there is now enough gold in the vaults to pay all these paper claims?’
‘No, indeed. For example, the law requires the Reserve agents to keep on hand only enough gold to pay forty per cent of the Federal Reserve notes.’
‘Then the Government could not keep its promises to pay ? ’
‘Not all its promises at once; but that does not matter, for hardly anybody asks for the gold.’
‘ Is all exchange in this country made by means of gold or gold warrants?’
‘Assuredly not. More than ninety per cent of the exchanges of goods in this country are made without the use of gold or gold warrants. The debits and credits are merely entered on books.’
‘All this is passing strange! You say that gold is not very useful, yet everybody wants it. Everybody wants it, yet scarcely anybody asks for it. There is not enough gold to redeem all the paper money at any one time, yet everybody prefers the paper, the value of which depends on the promise of somebody to pay the bearers more gold than there is in the country. Yet even these pieces of paper are not used in most of your business transactions. Then I do not see why your internal trade would not go on just the same if these stores of gold were made into bracelets, or sunk in the sea, and if the paper money were kept at exactly the same volume merely by government regulation.’
It might be well at this point to assure the man from Mars that the situation is not as incomprehensible as it seems. At any rate, he is on the right track; for nobody can understand how the work of the world is carried on until he understands the part that money plays; and nobody can understand the part that money plays in the world’s work until he understands the part that gold plays in money.
I
To many terrestrial citizens, as well as to the man from Mars, the workings of our mechanism of exchange seem incomprehensible. Even Mr. Edison asks many questions; and it is too much to say that satisfactory answers are found in elementary textbooks. One writer goes so far as to say that finance ‘pertains far more to the realm of mystery, like astrology, and to what has been called the “Science of the Infinitely Absurd,” than to any of the exact sciences.’ Whether or not this is true of other phases of the subject, there is at least nothing mysterious about the way in which gold came to be adopted as the basis of money. Even the Ford propagandists see no mystery here. All governments, they declare, made the error of adopting gold, ‘on no better grounds, very likely, than a sentimental preference.’ Monetary history, however, seems to show that gold gradually displaced all other commodities as the basis of money for scientific rather than sentimental reasons: gold survived because of inherent qualities of gold, for which we can hardly hold monarchs or bankers or economists responsible.
Early in the history of human intercourse, men began to use a medium of exchange. For this purpose they tried innumerable commodities, from primitive times, when some use appears to have been made of shells and furs and cattle, down to recent times, when certain hard-pressed farming communities in the United States have tried to make corn legal tender. It is said that tobacco, salt, dried fish, eggs, iron spikes, and bullets have been used for media of exchange. However that may be, there is no doubt that many kinds of money have passed current, from time to time, and from place to place. As they varied widely in their fitness for the purpose, it was natural that in the struggle for existence the fittest should survive.
There is no mystery connected with the fact that cows did not survive as currency. The early Greeks, who in the Homeric poems express the value of coats of armor in terms of the number of kine they would bring in the open market, were well aware of the fact that cows, however admirable for certain purposes, were not all that could be desired as circulating media. In the first place, they were not easy for ladies to take with them when they went shopping. Nor were they readily divisible in making change, at least not without trouble to the traders and damage to the cows. Nor were they durable: before the owner could spend them, they might lose weight or die. Furthermore, no two cows were exactly alike: as a result, arguments were always in order, not merely concerning the value of the goods offered for sale, but likewise concerning the value of the medium of exchange. In short, cows were destined to escape the arduous work done by money, — which Bassanio, centuries afterward, dubbed ‘the pale and common drudge ’tween man and man,’ — because they did not possess those traits of a satisfactory currency which are now discussed in the textbooks as portability, divisibility, durability, homogeneity, and uniformity.
There is still another essential attribute of money that helps to explain why gold survived. It is easy to recognize a piece of gold. It is easy, for that matter, to recognize a cow: but an acceptable currency must satisfy all the tests; and men have gradually discovered, first in one part of the world and then in another, that no single commodity possesses all the essential qualities in so high a degree as gold. No other commodity having the other needed characteristics is so easily carried about as gold: most of us could carry in our pockets, in the form of gold coins, all the money we could afford to spend in a day, without being aware of the weight. No other commodity, equally good in other respects, is also both infinitely divisible and virtually indestructible. If a gold coin had been placed in circulation in the boyhood days of Methuselah, and had since been subjected only to the ordinary wear of currency, it would still be a gold coin.
But this does not tell the whole story. Paper money can be made that is sufficiently durable, that is more easily carried about than either gold or silver, and that is just as satisfactory in respect to all the other qualities we have enumerated. Until comparatively recent times, however, paper money did not meet the needs of trade because there was no assurance that it would be generally accepted. Something was needed which was widely desired on its own account. Gold met this test because it was in universal demand for use in the arts. In some countries gold is still valued as highly for ornament as for money. A débutante in India joyously carries on her person thirty pounds of gold trimmings, with the reckless disregard for comfort that is shown by her fur-bearing sister on a warm day at Atlantic City. In most countries, however, the present demand for gold in the arts depends in part upon the fact that it is used as the basis of money. The greater the demand for gold as a medium of exchange, the more it was desired in the arts: its prestige as money enhanced its value as ornament.
All these requisites of a medium of exchange, although still dealt with at length in books on money, are no longer live issues. If we needed nothing more to aid us in carrying on the work of the world than to find a medium of exchange which satisfied all these tests, the problem would now be settled by the adoption of gold — settled on better grounds, evidently, than ‘a sentimental preference’; settled in such a satisfactory manner that for most people — Mr. Henry Ford and Mr. Thomas Edison and Mr. Charlie Chaplin to the contrary notwithstanding — the subject would have merely an historical interest. It would create no more controversy than the use of mercury in thermometers.
However, to be beyond reproach as money, a commodity must have still another quality: it must have stability of value. Let us admit at once that gold, though relatively free from fluctuations in exchange value, is nevertheless far from being absolutely free. That is one reason why the problem of a stable monetary unit, even in the only countries which are still on a gold basis, is a major interest — perhaps the paramount interest — of business. But having admitted that, the gold basis does not ensure stability in purchasing power, — a point to which we shall return presently, — let us also take due account of the other outstanding lesson of monetary history, namely, that no other basis has been as effective as gold in curbing fluctuations in the purchasing power of money. This is mainly because the annual production of gold has been but a relatively small addition to the world’s permanent stocks of gold.
Most of the evils attributed by the Ford International Weekly to gold are the evils of unstable money; and they are evils whether money is unstable on a gold basis or on any other basis. Says the Ford weekly: ‘If . . . articles were traded in on the basis of ancient barter, each trader would receive an adequate value in exchange. As soon, however, as the modern method of finance on the gold basis requires that each article must first be reduced into terms of gold, values are dislocated, and the goldless trader is penalized accordingly.’
This statement is contrary to the facts. It is in barter-trading that the exchange values of goods are most uncertain. This is partly because the inconvenience of barter greatly restricts the markets, whereas it is free and wide markets that tend to stabilize values. Indeed, barter-trading would probably develop no ‘market price’ at all, but many different prices. Throughout the world to-day, it is precisely where the gold basis has been abandoned that values are most badly dislocated, and precisely where the gold basis is maintained that values are most nearly constant.
Like Coin’s Financial School and the Bryan campaigners of old, Mr. Ford attributes our business depression to the gold standard. ‘Goldless Germany is humming, busy, productive. Gilded United States is stagnant, timid, lopsided.’ But this argument does not explain how it happened that a few years ago Germany and the United States, both on the ‘gold standard,’ were the busiest and most productive countries in the world; and how it happens that to-day Russia and Austria, the two great nations that have wandered farthest from the ‘gold standard,’ are the most stagnant and unproductive of all. The fact is that the gold basis, of and by itself, neither causes nor prevents either booms or panics. But it does mitigate their severity. Those countries are the most prosperous today — despite some superficial appearances to the contrary — in which the gold basis has done most to curb fluctuations in the price-level.
II
Gold helps to meet the financial requirements within a country in two ways: first as currency, and second as reserves. When a country is on a gold basis, the amount of gold needed for currency, and the amount of gold coins which, in consequence, the banks must carry as till money, depend on the volume of business, the habits of the people, and the degree of their confidence in the ability of the country to maintain the circulation of paper dollars on a par with gold dollars. In many European countries this confidence is to-day nil. In the United States, on the other hand, gold has all but disappeared as a medium of exchange, not because there is any premium on gold, but because most people prefer paper money and bank checks. The fact that the people do not insist on exchanging their paper for gold, even when the banks deliberately put difficulties in the way of free convertibility, shows that there is a widespread belief in the ability of the country to maintain the circulation of paper dollars on a par with gold dollars. Or, to speak more accurately, it is because, on account of this belief among the few people who do any thinking at all on the subject, all forms of paper money actually do circulate on a par with gold.
The Ford arguments overlook this fact. They insist that ‘the underlying explanation as to why the people are satisfied to be on a gold basis despite the difficulty of obtaining gold on demand is due to the impression, constantly fanned among the masses, that the “money” they handle is as good as gold.’ This statement is in error. People do not now accept paper money because they think it is convertible into gold. They accept it because their daily experience has convinced them that other people will freely accept it. If, with money on any other basis, they had the same daily experience, year in and year out, they would continue to accept the money and continue to think nothing about its basis. But that is a large‘ If’. Every country that has abandoned the gold basis has found it impossible to maintain the belief among its people that its fiat money would be accepted as if it were ‘as good as gold.’ _
To justify this belief, no country is obliged to keep on hand enough gold reserves to satisfy all the claims of all the people who, as holders of various kinds of paper money, have a legal or customary right to demand gold. No country that is on an assured, convertible basis needs such vast reserves. In the United States, for example, there is an immense inverted pyramid: at the bottom, a comparatively small volume of gold; based on this gold, a larger volume of legal tender notes; and, on top of all that, an even larger volume of bank credit. To keep all these paper promises on a par with gold, only enough bullion is needed to meet actual, legal demands for gold. ‘Before the war,’ says Mr. Edison, ‘German currency was on a gold basis; to-day she has many millions of gold in the Reichsbank. Is n’t she still on a gold basis? If not, at what particular state of her holding of gold did she cease to be on a gold basis?’ The answer is clear and simple. When a country is on a gold basis, it meets its obligations in gold, dollar for dollar, as far as it is called upon to do so. The moment it fails to do so, it is off the gold basis.
There are no runs on the banks of the United States to-day, although it is well known that, even in this country, which has at least one third of the world’s monetary gold supplies, there is not enough gold to meet all the legal demands that, theoretically, might be made. But because there is not a dollar of gold behind every dollar of money in circulation, Mr. Edison is concerned; and Mr. Ford bombards the country with denunciations of its ‘fake banknotes,’ ‘imaginary money,’ ‘fraudulent standards.’ ‘The deception, it is said, ‘bleeds the common people for the enrichment of the gold barons.’ And so the new shock troops of Michigan, using as the sinews of war large munitions of gold-supported money, are out to destroy the gold standard. It can hardly be called a ‘deception,’ however, when every day the United States Treasury publishes the exact figures for gold bullion, gold coin, Federal Reserve bank-notes, silver coin, and every other form of money. Furthermore, the socalled deception injures nobody except the gold barons themselves, if by that term is meant the owners of gold and gold mines; and they lose merely because, if there were no superstructure of bank credit and paper money on the gold basis, gold would be even more valuable than it is to-day. But perhaps we may assume, after all, that some opponents of the ‘gold standard’ are not so concerned as their words imply over what they call the inadequacy of the gold reserves, since they themselves urge the abolition of all gold reserves.
Except in times of crises, we do not know how large the reserves must be to ensure convertibility. We do know that nearly all the nations of the world except the United States have encountered difficulties, which seemed to them insurmountable, in maintaining an adequate reserve. From the beginning of the World War to 1921, the ratio of gold to note issues fell, in England, from 118 to 29 per cent; in France from 61 to 14 per cent; in Germany from 45 to 1 per cent; and in other countries the gold all but vanished. The so-called convertible notes of these countries were merely fair-weather notes. They were exchangeable for gold only when the demand for conversion fell within the usual, narrow limits of quiet times. It is only in a hurricane, however, that a ship’s anchor is fully tested; and it takes a world war to demonstrate whether a country’s gold anchor is sufficient to keep it from drifting away upon multitudinous seas of inconvertible paper.
To maintain the confidence of the people, gold reserves must be used, in time of stress, freely and boldly. To try to protect them when a panic threatens would be like sealing up the fire-extinguishers whenever an alarm sounded. This is contrary to the popular notion. Says the Palladium: ‘Only a very little of the money the government makes is allowed by the banks to get to the people, [the banks] preferring that the people be dependent on bank credit.’ As a matter of fact, the people, and not the banks, decide the relative amounts of gold and of bank notes and of bank credit that are to be used in daily exchange. When a bank makes a loan of a thousand dollars to a farmer, or a stockbroker, or a bank, or a railroad, or to anybody else, the one who receives the loan is free to draw out the full amount in gold, or to draw it out in bank notes, or to transfer the credit to other persons by writing checks, or to leave it in the bank. Even though an individual bank may make restrictions concerning the form in which a loan shall be used, the borrower may draw checks, which are promptly deposited in other banks where there are no such restrictions. And so it is the choices made by all the bank depositors every day that determine how much of ‘the money the government makes’ gets into circulation.
III
The chief purpose of the gold reserve is to prevent the depreciation of paper money by adequately providing for its convertibility into gold. This object can be achieved only by the limitation of the volume of paper money. But any limitation whatever causes what is called ‘scarcity of money.’ After Germany had increased its issues of paper marks more than one-hundred-fold, merchants were still complaining that there was ‘not enough money to do business with.’ Russia, with the largest volume of money ever printed, to-day finds business impeded by a ‘dearth of currency.’ This is not surprising. As there are always people who are sure that they would be better off if they had more ‘ready cash,’ campaigns for freedom from the restraints of the gold basis occur in every country as regularly as the movements of the business cycle. Particularly in times of depression, when currency seems unusually scarce, governments are urged to issue ‘fiat’ money — that is to say, money which is supposed to be just as good as any other money merely because the governments say so. Such was the Continental money of Revolutionary days in the United States, which the Government insisted was perfectly good money even after it had become so nearly valueless that the phrase ‘not worth a continental’ passed current, as the paper would not. Such were the irredeemable ‘greenbacks,’ which were favored in the seventies by such eminently successful business men as Peter Cooper. Such would be the ‘Muscle Shoals Greenbacks,’ if issued according to the plan advocated by men so wonderfully able in their own special fields as Mr. Ford and Mr. Edison.
The thirty millions of dollars which seem necessary to develop the power plant at Muscle Shoals, Alabama, Mr. Ford declares can be obtained from the printing press, at little cost to the Government. Mr. Ford is right, if only initial cost is considered; but he is wrong, if he thinks that he has discovered anything new in finance. The same plan was carried out in the days of American wildcat money, until the time came when a Mississippi steamboat captain who asked the price of firewood received the answer, ‘Cord for cord.’ Exactly the same reliance on printers’ ink has now brought Russian currency to the point where it takes a bale of one-ruble notes to buy a cheap hat. Indeed, it was Mr. Ford’s proposal, carried out logically in Central and Eastern Europe, that did even more 1 han the war to demoralize the industry and trade of the world. We say ‘carried out logically,’ for if the printing press is all we need for thirty millions of dollars, why not thirty billions? If one plant is a sufficient basis for currency, why not a thousand plants? If the Government should print money to assist the projects of one citizen, why not all citizens? And with such boundless issues of paper dollars, how would our own currency differ from that of Russia? It would differ not at all. Indeed, it is the Lenin-Trotsky policy of paying bills with irredeemable paper money — a method first employed, according to Goethe’s Faust, by the Devil — that Henry Ford, through his various publicity agents, is now urging upon the United States.
It is true that money issued against anything of value might circulate at par with gold certificates, with or without the fiat of the Government, provided the volume of notes was not too large. Thirty millions of dollars, ‘representing’ the Muscle Shoals project, or Hood River apple ranches, or even Ford cars, would not ruin the currency if the issues stopped there. One drink does not make a drunkard. Such an able business man as Mr. Ford could probably stop short of a currency debauch, by making his Muscle Shoals plant yield sufficient profits to retire the original notes; but we could not trust Congress to stop with Mr. Ford’s project. When, however, Congress has to borrow money instead of printing it, automatic stops are provided.
But Mr. Ford and Mr. Edison insist that for the Government to pay interest on loans is stupid. Says the Dearborn Independent, ‘It is a fact, that if the Government issued all money, contracting or expanding the currency in accordance with the nation’s economic needs, it would eliminate that choice bit of investment paper — the government bond.... No government bonds — no public debt — and there would be no interest.’
This is the Russian method, pure and simple. When public expenses exceed public revenues, there are two ways of paying the bills: by borrowing money, and by printing money. When a government borrows money, — whether it borrows the savings which people have entrusted to the banks, or borrows directly from the people through the sale of bonds, — it must pay, as any other borrower must pay, whatever interest is necessary to obtain the funds. And, in so far as it borrows savings, it does not inflate the currency. But when a government pays its deficits by printing money, it pursues the very policy of inflation that has brought Russia to financial and industrial chaos. For a nation to spend money which is not the savings of its people is as unsound financially as for an individual to sign checks without having first deposited money in the bank.
Various other monetary matters are badly confused in the Muscle Shoals project — the distinction between money and capital, the theory of bank credit, the factors that change the purchasing power of money, and the far-reaching effects of depreciated currencies— subjects which cannot be dealt with here. But we ought not to leave this discussion without a passing reference to two other substitutes for the gold basis which are now urged: labor hours and land.
IV
The labor-hour, as a unit of exchange and a substitute for gold, has been proposed many, many times in the past, has been tried recently in Russia, and is now enthusiastically advocated by the Equitist Society. The argument is that all wealth is the product of labor; that labor should therefore be the basis of money; and that, as a matter of justice, every man should be able to exchange the product of his labor for the product of the same amount of labor of any other man. Accordingly, it is proposed that every worker should receive one exchange-unit, for every hour he works, and that the price of each commodity should be as many exchangeunits as it took hours to produce it. Thus, if it took a hatter three hours to make a hat, he would receive for his labor three exchange-units, and they would entitle him to a book that was made in three hours.
The difficulties of carrying out the labor-hour plan are insuperable. In the first place, by what means are we to determine how many hours it took to produce a given article? Consider, for example, a copy of the latest novel. How long did it take to make the ink, dies, glue, and thread used in the book? How much of the labor of the author, advertiser, and bookseller are to be charged to this copy of the book? How much of the time of the fireman who stoked the engine that hauled the car that carried the pulp that went to the mill that made the paper the book used. We need go no further to show the impossibility of pricing the book on a labor-hour basis, though we should have to go much further before we had found all the miners, stenographers, bank clerks, freight agents, postmen, fishermen, salesmen, and so on, whose labor helped to produce that book and to place it in the hands of the man who bought it.
In the second place, what is to be done with all the products that nobody will buy at the fixed price — the books that nobody wants, the cakes that were spoiled in the making, the hats that are out of style? How, on the oilier hand, are goods to be distributed when the demand, at the labor-hour price, exceeds the supply? Which lovers of art are to have the privilege of exchanging their labor, hour for hour, for the labor of our greatest portrait painter? Somebody must decide: the artist, could not honor the labor-hour checks of all the eager patrons of art who had the right to present them. There is a third objection: under a plan by which every man’s wages are the same, regardless of the work he performs, where are we to get our ditch-diggers, our telephone operators, our heads of great industrial enterprises? Why should anyone choose the hard or the disagreeable jobs? The fourth objection is also the crucial objection to Communism. Few workers would find adequate incentives to do their best in any position, if rewards bore no relation to achievements. The whole world would suffer, therefore, because of decreased output. Finally, the labor-hour unit would be more disastrously unstable in value than cows, or nails, or hides, or any of the other commodities that have been used as media of exchange. This extensive examination of labor-hour units is unnecessary, perhaps, for the purpose of showing the futility of the plan; but it may help to make vivid the infinitely complex work which monetary units on a gold basis perform daily, with almost incredible smoothness.
V
Now others are advancing the equally alluring, equally old, and equally unsound proposal that money should be issued ‘representing’ farm-lands. Why not? ‘Our need is more money,’ says H. L. Loucks, ‘and we must take another step in the evolution of our medium of exchange and base the increased supply on “the best security in the world — productive land”; and in addition, as needed, on the non-perishable, stored products of labor. We can no more have too much of the representatives of wealth than we can have too much wealth.’ This idea makes a strong appeal to many farming communities. Why not eliminate banks? If a farmer needs money to buy land, or even to buy ploughs and seeds for the land he already owns, why should he either stop planting or be obliged to pay interest on a loan? Why should not the Government issue new currency, based on the land. Then the laborer would have the needed money, production would go forward, and nobody would make profits merely by lending money — which, after all, it is the sole privilege of the Government to issue. This is the most attractive form in which the landbasis argument can be presented. It sounds plausible. It has always sounded plausible.
It seemed entirely plausible to the French people at the time of the Revolution. They decided to issue money which ‘represented’ property. They called the new money assignats, because the notes were supposed to be assignments of public land. At first 7,000,000,000 were issued, then; 10,000,000,000; and soon 45,000,000,000. In an attempt to maintain the value of this land-basis currency, the law declared that anyone who gave or accepted it at less than face value should spend twenty years in irons. In spite of the law, the assignats depreciated until the holder of a note professing to be worth as much as five United States dollars was lucky if he could pass it off for as much as two cents. Mr. Edison errs in assuming that France ‘would have been worse off without assignats than with them,’ because the country was bankrupt. Printers’ ink aggravates rather than alleviates the malady of bankruptcy. Massachusetts found tins out when, in colonial days, it issued land-currency. Unmindful of these and similar experiments elsewhere, Japan, in 1868, issued money on the ‘security of land.’ The usual depreciation in value and the usual fruitless efforts of t he Government to stop it by law followed promptly.
Thus land as a basis for money has always failed to stabilize its purchasing power. The reason is simple, and is an answer to half of Mr. Edison’s questions. A ship is not held in place merely because it is made fast to another ship, which is itself drifting. When we use land as the basis of issues of money, the dollar-value of the basis itself increases with the increased volume of money and the consequent depreciation of the dollar. Then we can issue more dollars on the same basis, with the same result; and so on, up an endless spiral. Thus land provides eventually for issues of paper money as boundless as Russian rubles.
This brings us back to the efficacy of gold as a restraint on the universal tendency toward inflation. The whole world knows exactly what is meant by the convertibility of a paper dollar into a fixed weight of gold. The whole world accepts gold in settlement of trade balances. But what, is meant by the convertibility of a paper dollar into land? What is meant by a unit of land? Where could the holder of money get it, and what could he do with it? Who would accept it in exchange? How could it be sent across the ocean to settle international balances? Nobody questions the value of land for certain purposes, but for monetary purposes it is more cumbersome than cows.
Nevertheless, people are still insisting that money cannot depreciate if it ‘ represents’ land. There is a bill now before Congress authorizing the Government to issue paper money up to sixty per cent of the value of any farm-lands upon which the owner wants to borrow money. And recently new enthusiasm has been aroused over the old proposal that ‘international currency’ should be issued on the security of ‘ property of all forms.’ ‘My solution,’ says the versatile Charlie Chaplin, ‘would be to eliminate the gold standard and have the Government issue currency based on production.’ It. is to be hoped that this solution will never become as popular as the proposer; for, if notes are to be limited merely by what they represent, it would do just as well to have them represent the energy of the sun or the estimated number of fish in the ocean. Unless ‘representation’ means convertibility on demand into a commodity freely acceptable in exchange for goods of all kinds, then the value of notes cannot be maintained unless the new issues are strictly limited to the increase of consumers’ goods actually on the markets. But the history of the world is one long story — of which the present European currency debauch is merely another chapter — of the failure of frail human governments to limit their volumes of inconvertible paper money.
It is true that the banks now issue Federal Reserve notes against liquid assets — goods in process and in transit. But these notes are not. ‘ commodity money.’ If a member bank turned over to a reserve bank commercial paper in connection with a shipment of pig iron, and received Federal Reserve notes in return, it would do no good to stamp the money ‘pig-iron notes.’ There is only one commodity that can maintain the purchasing power of a paper dollar on a par with a gold dollar, and that is gold. Reserve notes may be issued against a peach crop that fails, or a cargo of rubber that, goes down at sea, or an invoice of shirts that nobody will buy; but that does not trouble the holder of the notes, for they are payable, not in peaches, or rubber, or shirts, but in gold. The bank that issued the credit may suffer loss, but not the owner of the notes.
VI
We must admit, however, that the gold basis is not ideal. The annual production of gold bears no known relation to the changing monetary needs of the world. The yearly output has always been subject to accidental discoveries and to various other unpredictable influences. At any time in the future, the world’s stock of gold may be increased a hundredfold through the discovery of the ‘philosopher’s stone,’ which men have eagerly sought in all ages, and which, contrary to mediæval ideas, need be no more magical than the radiophone. There is the further possibility that gold may be extracted from the sea in sufficient quantities to throw into confusion all monetary systems based on gold. In short, gold has failed to ensure a stable monetary unit in the past; and in the future its failure may be even greater — that is to say, unless, in addition to the gold basis, we adopt more satisfactory methods than have yet been employed for preventing fluctuations in price-levels.
It is true that an absolutely invariable standard of value is unattainable. On this point, Mr. Edison is right. If the processes of evolution continue undisturbed by current controversy, there can be nothing unchangeable to which a monetary unit may be related. Nowadays, the favored basis is a collection of commodities. But even such a standard will change from time to time, as new products appear and new needs arise. The item of candles in the family budgets of a century ago and the item of automobiles in the budgets of to-day show that ‘commodities used by an average family’ is a shifting standard. But this is not a valid objection, either to the use of index numbers, or to attempts to stabilize the dollar. In the midst of a world in which nothing is stable, we nevertheless succeed in attaining degrees of stability sufficient for most human enterprises, and we may yet succeed in attaining a sufficiently stable monetary standard.
‘Must we always remain on a gold basis? Is it beyond the wit of man to devise any equivalent method?’ These questions of Mr. Edison, the experience of the world is insufficient to answer. Until, however, some basis is proposed that is less elusive than cosmic energy, or farm land, or labor-hours, or anticipated production of fertilizers, or the credit of the nation, it is folly to abandon the one basis of money that all nations have recognized. What a timely achievement it was for the world to reach an agreement before the present chaotic era! It is not certain that the current session of the the Congress of the United States could agree on any sound financial policy whatever. It is quite certain that all the Congresses of the world, as now constituted, would have even greater difficulty in coming to a common understanding. Fortunate is the world in having long ago settled upon a basis that, in spite of the fortuitous output of mines and the equally fortuitous acts of legislatures, has come nearer than any other basis to maintaining stability of the monetary unit. The nations which have lost the support of the gold basis appear to have no prospect of restoring economic relations, foreign and domestic, which they all desire, until they get back upon a gold foundation on some parity, new or old. True, when we think of the way in which the United States dollar shrank during the war until it had lost more than half its purchasing power, we look with scorn upon the term ‘gold standard’; but when we think of the precipitous fall of the German mark, from a value of about twenty-four cents to less than one third of a cent, we look with some respect, at least, upon the gold basis. Confusion is better than chaos.
It may be admitted that no arrangement is ideal that requires the hoarding and carrying back and forth across the oceans of vast stores of gold, which men have dug from the bowels of the earth and refined only with the hardest kind of labor. But there is no immediate need of devising an ideal system, for there are no communities of ideal men to use it. If all men were honest, the world could do away with vaults and prison bars, and thus save tons of iron and steel. If nations were sufficiently wise, they would get on without armaments. But nations are not sufficiently wise to abolish at once their jails or armaments or gold reserves. In some far-distant day, there may be such widespread and accurate knowledge of the dependence of general welfare upon stable money, and such sound understanding of foreign trade, that men will need no metallic restraint upon their experiments with the currency.
Meanwhile, we have the satisfaction of knowing that the waste involved in storing and transporting gold is a minor matter: the people of the United States pay far more each year for chewing-gum than for the maintenance of gold reserves. Indeed, when we consider the magnitude of the interests involved, the waste seems negligible. A nation may lose more wealth in a year by cutting loose from its anchor of gold reserves than is required to maintain those reserves for a generation. When business men object to the maintenance of large gold margins of safety, as they did in England before the war, what they really object to is not the waste of gold, but the limitation thus imposed on note issues and other forms of circulating credit; whereas it is the necessity for this very limitation which is the chief reason for maintaining any metallic basis at all.
VII
We must conclude that, however interesting, and even ultimately profitable, it may be to try to devise a perfect form of currency for a different race of human beings, the immediate need is for a monetary system that will come the nearest to perfection in actual use among human beings as they are. And, as we have seen, those who have come nearest to preserving the one most elusive quality of their currency, namely, its stability, are those who have not departed from the gold basis. Whatever the defects of this system, therefore, and whatever modifications must be made, in the interests of a greater stability of value than any currency has yet attained, it seems that we human beings — with all our defects upon our heads— must, at least for a long, long time to come, make some use of a gold basis.
Many earnest and high-minded reformers, convinced that our economic system does not function as it should, are impatient with a defense of any part of the system. They seem to take the position that, because something is wrong, everything is wrong: that, because change is the law of progress, any change must be progress. To them a defense of the gold basis seems reactionary and therefore bad. We must agree that it is hopelessly unprogressive to insist that everything is all right, when periodically we have surplus rawproducts, idle factories, idle workers, idle dollars, and no way of getting the materials, machines, men, and money into such relations that they can go on with the work of feeding and clothing humanity. We do not need the perspective of the man from Mars to see that something is wrong. But when there is a hot-box, we cannot set the machinery in motion by seizing hammers and pounding the engine in the wrong place. Not only is valuable time thus wasted, attention diverted from the right place, and the machinery injured, but meanwhile the bungling mechanics work themselves into such bad temper that there is less prospect than ever of eliminating the real troubles. To attack the gold basis of money is to hammer the economic machinery in the wrong place.