Two
Tiers Crumble
by
Murray
N. Rothbard
Mises.org
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.
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