A Weekly Dose of Hazlitt: How to Return to Gold

How to Return to Gold” is the title of Henry Hazlitt’s Newsweek column from January 25, 1954. Here, Hazlitt considers the difficult issue of how to return to a gold standard. Note that Hazlitt rightly calls for a gold coin standard, rather than a gold exchange standard.

If we grant that there is a great potential danger in trying
to return immediately to a full gold standard at $35
an ounce, by what steps are we to return? And how are
we to determine the dollar-gold ratio—which would
decide the new “price of gold”—at which the return
should be made? It is a sound general principle that
unless there are the strongest reasons for change, the
dollar-gold ratio, once fixed, ought not to be tampered
with. This rule certainly applied to the pre-1933 rate of
$20.67 an ounce, because that was a real rate, at which
anybody was entitled to demand gold, and got it. But
the $35 rate, fixed by Roosevelt-Morgenthau whim in
1934, is not a rate at which real convertibility has existed.
It is only foreign central banks, not American citizens,
that are permitted to buy gold from our Federal Reserve
Banks at $35 an ounce, and even they are allowed to do
this only under certain conditions. For example, they
are not supposed to buy from us at $35 an ounce in order
to resell it at a profit in the open market. The present
$35-an-ounce gold standard is a window-dressing standard,
a mere gold-plated standard, a sham gold standard.
We have been able to maintain it only because
most other nations in the last twenty years have been
inflating even more than we have. There is no reason
for treating the $35 figure as sacrosanct.

The new dollar-gold ratio that we should aim at is
one at which gold convertibility can be permanently
maintained, and that will not be in itself either inflationary
or deflationary—that will neither, in other
words, bring about a rise or a fall in prices.

There are some economists who contend on unconvincing
evidence that $35 an ounce is that rate. Others
profess to have some mathematical formula for arriving
at such a rate, and on this basis confidently advocate
$70 an ounce or some other figure. Their diverse
results in themselves invite suspicion. Values and prices
are not set by mathematical calculations, but by supply
and demand operating through free markets.

And because of the enormous inflation in the
twenty years since we departed from a real gold standard,
and the enormous shock to confidence that inflations,
devaluations, and repudiations have produced, we
must test the state of confidence in a temporary free
market for gold—a market that will also give us a guide
to a new dollar-gold ratio that we can hold.

This time schedule of gold resumption is set forward
chiefly for purposes of illustration:

1—The Administration will immediately announce
its intention to return to a full gold standard by a series
of steps dated in advance. The Federal Reserve Banks
and the Treasury will temporarily suspend all sales or
purchases of gold, merely holding on to what they have.
Simultaneously with this step, a free market in gold will
be permitted.

2—After watching this market, and meanwhile
preventing any further inflation, the government, some
time before June 30, 1955, will announce the dollar-gold
ratio at which convertibility will take place.

3—On and after July 1, 1955, foreign central banks
will be permitted to convert dollar holdings into gold
bullion, and vice versa, at the new ratio. The free market
will continue to be permitted.

4—On Jan. 1, 1956, the country will return to a full
gold-bullion standard. Conversion of dollars into gold
bars, or vice versa, will be open to all holders without

5—On Jan. 1, 1957, the country will return to a full
gold-coin standard, by minting gold coins and permitting
free conversion.

A full gold-coin standard is desirable because a
gold-bullion standard is merely a rich man’s standard.
A relatively poor man should be just as able to protect
himself against inflation, to the extent of his dollar
holdings, as a rich man. The reason for returning to
a full gold-coin standard in several stages is to prevent
too sudden a drain on gold reserves before confidence
has been re-established. A program like the foregoing
would provide a faster schedule.

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