DE GAULLE’S CALE THE RISE AND FALL OF THE GOLD STANDARD

Press, Volume CIV, Issue 30678, 18 February 1965, Page 12

DE GAULLE’S CALE THE RISE AND FALL OF THE GOLD STANDARD

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PATRICK COLDSTREAM

in the "Financial Tima*")

(Reprinttd by arrangement > “You have to choose (as a voter) between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the Government And with due respect for these gentlemen, I advise you, as long as the Capitalist system works, to vote for gold.” Thus George Bernard Shaw; in suggesting, with a fine attempt at seriousness, that the world should return to the Gold Standard, General de Gaulle is in a long tradition of reformers.

The latest of these, whose views clearly stand behind much of the General’s thinking, is his adviser, Mr Jacques Rueff. Three years ago Mr Rueff, who has been involved with French monetary policy since 1926, was predicting disaster unless there was a major change in the system of international payments: "A grave peril hangs over the economy of the West,” he wrote in 1961. “Every day its situation more and more resembles the one that turned 1929 recession into the great depression. The instability of our monetary system is such that a minor international incident, or small economic or financial disturbance could set off world-wide disaster.” Mr Rueff had no doubts about the remedy. It was. he argued, to turn into gold all the dollars held as reserves by countries outside the United States.

1844 Charter Acta To return to the full gold standard would indeed be (to use an American banker’s words) “repealing the twentieth century.” The gold standard in its original form was based on the British Bank Charter Act of 1844. Under the Act the British currency was to consist entirely of gold or notes representing gold—apart from some £l9m of “free notes,” known as the “fiduciary issue.” Gold was freely imported and exported and was turned into coin by the Mint free of charge. There was no means whereby currency could be increased except by importing gold and no way it could be decreased except by export. A country with a favourable trade balance gained gold which expanded both the credit base of the economy and the money in circulation. The tendency was for interest rates to fall and demand to expand. This expansion led (in theory) to a higher price level which took the competitive edge off a country’s exports. Similarly a country in deficit lost gold, which forced the authorities to contract the note issue—the contraction being achieved by “open market operations” —the sale of Government securities. By borrowing, that is to say, the Government took money out of circulation. Classical Economics This had all the simplicity of classical economics—a machine for maintaining “equilibrium” between the markets of different trading countries. But the stresses and strains of World War I damaged the machine almost irreparably. The main trad-

ing countries became worried that the flow of business between them would be cut back by a shortage of gold. Accordingly they agreed (at Genoa in 1922) that they should “economise in the monetary use of gold.” The theory was that in future

only a few currencies need be backed directly by gold; and that the remaining countries could use these "key" currencies as reserves. At the time the United States was the only country still on the gold standard and the dollar the only “key” currency. In 1925, however, it was joined by sterling. Britain went back on to the gold standard. But sterling’s value was fixed at too ambitious a level; British exports began to be priced out of world markets and unemployment followed. It grew worse as the world slid into depression in 1929.

Keynesian economics discredited the whole idea. Once it was accepted that “interference” by national Governments in the free play of their economic systems was desirable—and full employment became an economic objective of itself—a system which left a country dependent on the short-term ebbs and flows of gold was an impossible constriction in freedom of action. Moreover, as Keynes pointed out, the machine itself did not work very well. In theory prices and wages should have fallen as a country’s cash was reduced by a gold outflow. In practice wages proved slow to move. The process of adjustment operated only halfheartedly. The gold standard as a system was abandoned. Notes were issued without gold backing. The system of reserve currencies abroad gained ground. Powerful Currencies The result was the growth in power of the pound and the dollar. This power is in

essence simple. It gives the United Kingdom and the United SUtes greater scope to run balance of payments deficits without taking immediate action to correct them: the debts can be paid in sterling or dollars and held by creditor countries as part of their reserves. This has the attraction for central bankers that interest can be earned on reserves held in the form of currencies, while gold remains idle capital in the vaults. Over the years the United States deficit has been financed by the piling up of dollars in the hands of foreign central banks. America's liabilities to other countries amount to 23,000 million dollars: the gold reserve to only 15.000 million dollars. It is this that General de Gaulle resents. But a direct return to the old-style gold standard is out of the question. No European government could conceivably forgo the management of its own level of home demand for the sake of freeing the traffic in gold. Moreover, the volume of gold available is quite inadequate. Without a revaluation the volume of international liquidity would shrink to a point where world trade was throttled. What, then, is General de Gaulle thinking of? Exerting Pressure The most that Is clear is that he is exerting pressure for a reform of the international monetary system along the lines France would favour. This is probably not a return to a gold standard but the creation of a new international monetary unit for reserves to be issued to countries by the International Monetary Fund in proportion to their gold holdings. In a word—though the details are far from clear —the idea is to remove the dollar and sterling from their positions of privilege. General de Gaulle has made clear his resentment of a situation where American governments can continue to run a deficit on foreign trade without taking steps to deflate and correct it. It is the “discipline” implied by the gold standard rather than the system itself that the French seem to be .aiming to relimpose.

A call for a return to the gold standard was made by President de Gaulle at a press conference this month.