Midas, or the Future of Gold
WHEN Macaulay’s New Zealander, fresh from the devastation n long the Thames, comes to inspect the ruins of the American Dream, he may perhaps find the most paradoxical spectacle situated at Fort. Knox, Kentucky. Fort Knox has become the main burial ground of America’s gold stock. It has been chosen because of its inaccessibility to the foreign invader. In process of conveyance into this brand-new vault is six billion dollars’ worth of treasure out of total American holdings amounting to eleven billions, more than half the world’s supply. The metal is being enclosed in a cube of chilled steel constructed securely enough to defy any tool or weapon now known to potential belligerents.
On at least two grounds our New Zealand visitant would be astonished. Looking into the records of the contemporary world, he would find in the troubled relations among the nations ample reason for a policy of national defense, in spite of American ‘insulation.’ But he would be somewhat puzzled by the contrast between the care taken to bury gold in mid-continent and the carelessness revealed by the manufacture of the country’s aircraft engines on the Atlantic seaboard. Surely there could have been no question as to which was more valuable in the feared War in the Air. Why, then, this extraordinary precaution in regard to gold? From the archives the peripatetic Antipodean would discover that the metal was ‘standard’ money. But another paradox would be presented by this knowledge — that the money was so precious to the people that they had denied themselves the luxury of circulating it. Instead they had used paper, which, in the quaint language of the limes, was based on gold. In short, they had refused to handle their own money and had made doubly certain, by a cunning device of stone and steel, that nobody else should handle it. Midas himself stood in less awe of his hoard!
In the twenties this gold, or metal like it, was in ‘circulation’ — that is, it could be obtained dollar for dollar for paper money. But ‘circulation’ was so much more theoretical than actual that the place of gold in the monetary system had to be explained to the people (if they were interested) as carefully as the Einstein theory. Gold circulated mainly as souvenirs. It served, for instance, to tie the bonds of affection between fond uncles and graduating nieces. If you tried to tender a ten-dollar eagle in payment of a bill, as likely as not the saleslady would look at you suspiciously, giving you the uncomfortable feeling that she regarded you as a counterfeiter. Hard-money tenders in silver as well as gold had the same reception. I once got a penetrating stare for paying a lunch bill with a silver cart wheel. Hard money, plainly, had gone out of fashion, save in such loyal and traditional states as Nevada, where the stranger is still likely to be hustled out of town, and unceremoniously, if he is seen using paper money.
The money in general employment in the prosperous twenties consisted of paper, in the form of either checks or bills. And the gold behind it was so ample that the monetary authorities, let alone the people, had no need to regulate the money supply by the size of this gold stock, any more than they have today, in spite of the loose use of the words ‘base,’ ‘backing,’ and ‘standard.’
And yet the paper money in the twenties was all engraved with various designs promising to pay out gold on demand. We thus called our monetary system a promissory, or credit (credere, to believe), system. No question arose as to this explicit pledge while credit, which Tom Paine defined as suspicion asleep, remained good. The paper was handled freely, in buying and selling, in investing and lending, in remitting and receiving — that is, in lubricating the endless chain of economic activity. It was when this activity slowed down that the public look more not ice of their paper money. They detained it longer, then they hoarded it, and finally, having scrutinized (probably for the first time) its written promise, they began to convert it into gold. This phenomenon, which occurs near the bottom of the self-accelerating tailspin of the business cycle, is called the ‘flight to cash,’or ‘taking the cash and letting the credit god People want to hold the money behind their money— namely, their ‘standard’money. But in 1929 we discovered that there was not enough gold to go around; not a tenth enough. So, the facts being too patent to brook any further denial, the government had to break its solemn pledge and order the closing of the gold-paying-out windows.
Evidently the present Administration is determined that the pledge shall stay broken. And (he determination is not limited to New Dealers. The great enemy of the ‘tyrant gold’ is the Republican West. Not a word on the subject appeared in the Western-dictated 1936 platform of the traditional party of the gold standard, the Republicans, Governor Landon, to be sure, mentioned gold in his famous telegram to the Cleveland convention. But his promise to restore it to the people was hedged around with enough qualifications to have permitted him to keep the promise in permanent cold storage. As for the Roosevelt Administration, it could not permit the people to have access to the country’s gold, because it is committed to general regulation of the people’s economic activity.
The regulation having to do with money is aimed at keeping the purchasing power of money reasonably stable. To this end the controllers must monopolize ‘standard’ money as part of the control mechanism. To allow it to enter into circulation would be to thrust a brake into the hands of private individuals — a brake that at any time private individuals could use simply by demanding gold for their paper dollars. Thus the government would be sharing control with the public. This would never do. The way that private individuals exercise their options on gold is generally to control the government, as well as the monetary system. As J. M. Keynes says, a convertible gold standard is a method of ‘strapping down Ministers of Finance,’so that they will not endanger reasonable stability in money, it is unlikely that the New Deal would give this hostage to fortune.
Yet it is not entirely inconceivable. Memories are short, and the tirades against gold have come and gone with the downs and ups of the business cycle. The Administration is committed to the control of returning prosperity. Not much courage has been required in the use of the brakes so far. All that has been clone is to impound bank reserves not yet in use, called ‘excess’ reserves; also to ‘sterilize’ gold not yet the foundation of money supplies. The time may come when the fear that recovery might get out of hand may be even stronger than the fear of giving private individuals a check upon government. Then the people may be allowed again to handle their gold, either in bullion or in warehouse receipts, as a method of limiting its employment as the base of more money than is represented by its face value. It is, as I say, unlikely, but not inconceivable as an anti-inflation weapon.
However that may be, it is clear, I think, that gold has again confounded the prophets, and taken on a new lease of life. The very care adopted to guard the American supply shows that the metal has come to be recognized as the prime war material. Italy and now the Spanish loyalists are demonstrating that fact. Gold is not a munition in any shape or form, but it is universally acceptable money for munitions, as Italy found out even among the sanctionists, because it is so widely esteemed as a preserver of values.
The preference for gold over anything else as a store of value is some thousands of years older than the relatively modern system of the gold standard. The manner in which it has surviv ed the abolition of the gold standard shows that the spell of gold has not lessened very much since it was buried with Babylonian kings to ensure their immortality. Macaulay’s New Zealander, after all, may not be very much astonished by the spectacle at Fort Knox. It is logical to bury even something that you have just dethroned if you think it valuable enough.