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• Foreword
• On the Manipulation of Money and Credit Three Treatises On Trade-cycle Theory
• Stabilization of the Monetary Unit— From the Viewpoint of Theory
• Introduction *
• I: The Outcome of Inflation
• II: The Emancipation of Monetary Value From the Influence of Government
• III: The Return to Gold
• IV: The Money Relation
• V: Comments On the “balance of Payments” Doctrine
• VI: The Inflationist Argument
• VII: The New Monetary System
• VIII: The Ideological Meaning of Reform
• Appendix: Balance of Payments and Foreign Exchange Rates *
• Monetary Stabilization and Cyclical Policy
• Preface *
• Part I: Stabilization of the Purchasing Power of the Monetary Unit
• I: The Problem
• II: The Gold Standard
• III: The “manipulation” of the Gold Standard
• IV: “measuring” Changes In the Purchasing Power of the Monetary Unit
• V: Fisher’s Stabilization Plan
• VI: Goods-induced and Cash-induced Changes In the Purchasing Power of the Monetary Unit
• VII: The Goal of Monetary Policy
• Part II: Cyclical Policy to Eliminate Economic Fluctuations
• I: Stabilization of the Purchasing Power of the Monetary Unit and Elimination of the Trade Cycle
• II: Circulation Credit Theory
• III: The Reappearance of Cycles
• IV: The Crisis Policy of the Currency School
• V: Modern Cyclical Policy
• VI: Control of the Money Market
• VII: Business Forecasting For Cyclical Policy and the Businessman
• VIII: The Aims and Method of Cyclical Policy
• The Causes of the Economic Crisis an Address
• I: The Nature and Role of the Market
• II: Cyclical Changes In Business Conditions
• III: The Present Crisis
• A.: Unemployment
• B.: Price Declines and Price Supports
• C.: Tax Policy
• D.: Gold Production
• IV: Is There a Way Out?
• The Current Status of Business Cycle Research and Its Prospects For the Immediate Future
• 1.: The Acceptance of the Circulation Credit Theory of Business Cycles *
• 2.: The Popularity of Low Interest Rates
• 3.: The Popularity of Labor Union Policy
• 4.: The Effect of Lower Than Unhampered Market Interest Rates
• 5.: The Questionable Fear of Declining Prices
• The Trade Cycle and Credit Expansion: the Economic Consequences of Cheap Money
• 1.: Introductory Remarks *
• 2.: The Unpopularity of Interest
• 3.: The Two Classes of Credit
• 4.: The Function of Prices, Wage Rates and Interest Rates
• 5.: The Effects of Politically Lowered Interest Rates
• 6.: The Inevitable Ending

III

The “Manipulation” of the Gold Standard

1.

Monetary Policy and Purchasing Power of Gold

Most important for the old, “pure,” or classical gold standard, as originally formulated in England and later, after the formation of the Empire, adopted in Germany, was the fact that it made the formation of prices independent of political influence and the shifting views which sway political action. This feature especially recommended the gold standard to liberals who feared that economic productivity might be impaired as a result of the tendency of governments to favor certain groups of persons at the expense of others.

However, it should certainly not be forgotten that under the “pure” gold standard governmental measures may also have a significant influence on the formation of the value of gold. In the first place, governmental actions determine whether to adopt the gold standard, abandon it, or return to it. However, the effect of these governmental actions, which we need not consider any further here, is conceived as very different from those described by the various “state theories of money”— theories which, now at long last, are generally recognized as absurd. The continual displacement of the silver standard by the gold standard and the shift in some countries from credit money to gold added to the demand for monetary gold in the years before the World War [1914– 1918]. War measures resulted in monetary policies that led the belligerent nations, as well as some neutral states, to release large parts of their gold reserves, thus releasing more gold for world markets. Every political act in this area, insofar as it affects the demand for, and the quantity of, gold as money, represents a “manipulation” of the gold standard and affects all countries adhering to the gold standard.

Just as the “pure” gold, the gold exchange and the flexible standards do not differ in principle, but only in the degree to which money substitutes are actually used in circulation, so is there no basic difference in their susceptibility to manipulation. The “pure” gold standard is subject to the influence of monetary measures—on the one hand, insofar as monetary policy may affect the acceptance or rejection of the gold standard in a political area and, on the other hand, insofar as monetary policy, while still clinging to the gold standard in principle, may bring about changes in the demand for gold through an increase or decrease in actual gold circulation or by changes in reserve requirements for banknotes and checking accounts. The influence of monetary policy on the formation of the value [i.e., the purchasing power] of gold also extends just that far and no farther under the gold exchange and flexible standards. Here again, governments and those agencies responsible for monetary policy can influence the formation of the value of gold by changing the course of monetary policy. The extent of this influence depends on how large the increase or decrease in the demand for gold is nationally, in relation to the total world demand for gold.

If advocates of the old “pure” gold standard spoke of the independence of the value of gold from governmental influences, they meant that once the gold standard had been adopted everywhere (and gold standard advocates of the last three decades of the nineteenth century had not the slightest doubt that this would soon come to pass, for the gold standard had already been almost universally accepted) no further political action would affect the formation of monetary value. This would be equally true for both the gold exchange and flexible standards. It would by no means disturb the logical assumptions of the perceptive “pure” gold standard advocate to say that the value of gold would be considerably affected by a change in United States Federal Reserve Board policy, such as the resumption of the circulation of gold or the retention of larger gold reserves in European countries. In this sense, all monetary standards may be “manipulated” under today’s economic conditions. The advantage of the gold standard—whether “pure” or “gold exchange”—is due solely to the fact that, if once generally adopted in a definite form, and adhered to, it is no longer subject to specific political interferences.

War and postwar actions, with respect to monetary policy, have radically changed the monetary situation throughout the entire world. One by one, individual countries are now [1928] reverting to a gold basis and it is likely that this process will soon be completed. Now, this leads to a second problem: Should the exchange standard, which generally prevails today, be retained? Or should a return be made once more to the actual use of gold in moderate-sized transactions as before under the “pure” gold standard? Also, if it is decided to remain on the exchange standard, should reserves actually be maintained in gold? And at what height? Or could individual countries be satisfied with reserves of foreign exchange payable in gold? (Obviously, the flexible standard cannot become entirely universal. At least one country must continue to invest its reserves in real gold, even if it does not use gold in actual circulation.) Only if the state of affairs prevailing at a given instant in every single area is maintained and, also, only if matters are left just as they are, including of course the ratio of bank reserves, can it be said that the gold standard cannot be manipulated in the manner described above. If these problems are dealt with in such a way as to change markedly the demand for gold for monetary purposes, then the purchasing power of gold must undergo corresponding changes.

To repeat for the sake of clarity, this represents no essential disagreement with the advocates of the gold standard as to what they considered its special superiority. Changes in the monetary system of any large and wealthy land will necessarily influence substantially the creation of monetary value. Once these changes have been carried out and have worked their effect on the purchasing power of gold, the value of money will necessarily be affected again by a return to the previous monetary system. However, this detracts in no way from the truth of the statement that the creation of value under the gold standard is independent of politics, so long as no essential changes are made in its structure, nor in the size of the area where it prevails.

2.

Changes in Purchasing Power of Gold

Irving Fisher, as well as many others, criticize the gold standard because the purchasing power of gold has declined considerably since 1896, and especially since 1914. In order to avoid misunderstanding, it should be pointed out that this drop in the purchasing power of gold must be traced back to monetary policy—monetary policy which fostered the reduction in the purchasing power of gold through measures adopted between 1896 and 1914, to “economize” gold and, since 1914, through the rejection of gold as the basis for money in many countries. If others denounce the gold standard because the imminent return to the actual use of gold in circulation and the strengthening of gold reserves in countries on the exchange standard would bring about an increase in the purchasing power of gold, then it becomes obvious that we are dealing with the consequences of political changes in monetary policy which transform the structure of the gold standard.

The purchasing power of gold is not “stable.” It should be pointed out that there is no such thing as “stable” purchasing power, and never can be. The concept of “stable value” is vague and indistinct. Strictly speaking, only an economy in the final state of rest—where all prices remain unchanged—could have a money with fixed purchasing power. However, it is a fact which no one can dispute that the gold standard, once generally adopted and adhered to without changes, makes the formation of the purchasing power of gold independent of the operations of shifting political efforts.

As gold is obtained only from a few sources, which sooner or later will be exhausted, the fear is repeatedly expressed that there may someday be a scarcity of gold and, as a consequence, a continuing decline in commodity prices. Such fears became especially great in the late 1870’s and the 1880’s. Then they quieted down. Only in recent years have they been revived again. Calculations are made indicating that the placers and mines currently being worked will be exhausted within the foreseeable future. No prospects are seen that any new rich sources of gold will be opened up. Should the demand for money increase in the future, to the same extent as it has in the recent past, then a general price drop appears inevitable, if we remain on the gold standard.1

Now one must be very cautious with forecasts of this kind. A half century ago, Eduard Suess, the geologist, claimed—and he sought to establish this scientifically—that an unavoidable decline in gold production should be expected.2 Facts very soon proved him wrong. And it may be that those who express similar ideas today will also be refuted just as quickly and just as thoroughly. Still we must agree that they are right in the final analysis, that prices are tending to fall [1928] and that all the social consequences of an increase in purchasing power are making their appearance. What may be ventured, given the circumstances, in order to change the economic pessimism, will be discussed at the end of the second part of this study.

[1. ]Cassell, Gustav. Währungsstabilisierung als Weltproblem. Leipzig, 1928, p. 12.

[2. ][Eduard Suess (1831–1914) published a study in German (1877) on “The Future of Gold.”—Ed.]