Two Tiers Crumble

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This first appeared in The Libertarian Forum, Vol VI, NO.2, September, 1974

In March, 1968, the august authorities of the international monetary Establishment undertook a reform that would copper-rivet their rule and banish gold forevermore. Since World War II, the basis of the international monetary order had been the Bretton Woods system, in which every national currency was fixed in terms of the almighty dollar, and the dollar in turn was fixed in price at $35 an ounce of gold. The capstone of the system was the $35 an ounce gold system, which all the leading economists and bankers and bureaucrats assured us was written in tablets of stone. Never, never would an alteration of the magical $35 figure take place. The problem was that as American inflation continued and grew, the free markets of the world evaluated the dollar as ever less and less valuable in relation to the hard money, gold. Hence, the free gold markets of the world – notably London and Zurich – felt enormous pressure upward on the gold price from $35 an ounce. In order to maintain the price at $35, the United States Treasury kept dumping gold on the free market. But inflation and the subsequent acceleration of upward pressure, meant that the U. S. Treasury lost even more gold than continued to flow abroad from the ever-weakening dollar. Finally, a dollar panic on the free gold market in the spring of 1968 led the world Establishment to reconstitute the international monetary system: to end the pesky gold problem and eject it from the monetary order.

The countries decided to ignore the free gold market by sundering the gold market in two: from March, 1968 on, the monetary authorities would simply ignore the free gold market, would have nothing further, ever to do with it. Let it go to blazes! Instead, the Federal Reserve System would continue to redeem the dollar at the rate of $35 per ounce in gold, to any Central Banks that wished such redemption; and the Central Banks would continue to evaluate gold at this ordained price. There would now be “two-tiers” in the gold market, or rather, two “markets”; and the world Central Banks would simply go about their business, insulated from the free market. Gold would be cut off from the real business of the monetary authorities, and would remain as only an accounting device between governmental central banks. To maintain this, all the Central Banks pledged themselves never, ever to buy or sell gold again in the free market, or in any way outside their own cozy cabal.

It is instructive to remember how the whole raft of anti-gold economists, from Milton Friedman and Fritz Machlup on the right to the Samuelsons on the left, greeted this development. They all solemnly assured us that it was not gold that propped up, or gave backing to, the dollar. The truth was the other way round! Now cut off from its dollar moorings, they opined, gold would soon fall to its “proper”, non- monetary price on the free gold markets: in short, to somewhere around $10 an ounce. The wicked gold speculators and the evil South Africans (the largest suppliers of new gold) would at last get their comeuppance.

The rest is history. In the years since, not once did the free-market gold price fall below $35 an ounce; on the contrary, it has generally been considerably above that, and as accelerating inflation has weakened public confidence in the dollar and other fiat currencies (a process intensified by the U. S. abandoning all gold redemption in August, 1971), the price of gold has risen ever more sharply. Proposals of pro-gold economists to double the price of gold to $70 an ounce were, until very recently, greeted with ridicule by the anti-gold economic Establishment. A price of $70 was considered absurdly high and out of the question by almost all of the “experts.” And yet, at last reading, the price of gold on the free market had risen to no less than $150 an ounce, and the end is scarcely in sight. Once again, it is us “gold bugs” who have had the last laugh; gold has once again buried its would-be undertakers.

Now, at last, in November, 1973, in a little-heralded move, the U. S. and its allies in the monetary Establishment have thrown in the towel. The two-tier gold system, the lofty isolation of the Central Banks from the free gold market, is no more. The U. S. and the other nations announced that no longer would there be the two-tier isolation; from now on, any Central Bank would be free to buy or sell its gold at will.

Incredibly, the United States was able to save face on making the announcement by conning the media into claiming that here, once more, was the coup de grace to gold and to all the wicked speculators and “gold hoarders.” Fed Chairman Arthur Burns loftily announced that now Central Banks would be able to sell gold on the free market and thereby bring the price down. What Dr. Burns neglected to mention, of course, is that Central Banks would also be free to buy gold and dump some of their supply of excess and unwanted dollars. Whether gold was to be the winner or the loser from the liquidation of the two-tier system became obvious when no Central Bank was observed rushing to sell any of its precious stock of gold. And, indeed, they would have to be unusually dimwitted to do so. If you were a central banker, would you sell gold at $150 an ounce when all indications were that gold would keep rising in the future?

Another result of the crumbling of the two tiers is to render obviously and strikingly idiotic the “official” U. S. definition of the dollar as weighing 1/42 of a gold ounce (i.e. the official U. S. gold price of $42 an ounce). So long as the two tier system remained, we could preserve the fiction of $42 (embodying two tiny devaluations over the last few years from $35), because the Central Bank “market” was to be kept insulated from the unclean doings on the free gold market. But now that Central Bank isolation has been ended, the $42 an ounce price becomes so much hot air. In fact, every Central Bank, including even the fanatically anti- gold Federal Reserve Bank, will be increasingly and irresistibly tempted to upvalue their gold stocks from the phony $42 to the realistic free gold price. Any country that does so will find that, as if by magic, it will have nearly four times as much precious gold as it did before (i.e. their stock of gold ounces will be worth four times as much.) Why should the U. S., for example, struggle along with a dwindling and puny gold stock of $11 billion when, by simply recognizing the facts of reality, it could jump instantaneously to something like $40 billion?

No, gold is alive and flourishing throughout the world. Its health, and its role, is better than it has been in decades, and its prognosis is terrific. Natural law is once again winning the fight against the schemes of economic dictators.

 

The Best of Murray Rothbard

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