Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future, by Edwin Walter Kemmerer

There aren’t a lot of good books about the gold standard — the monetary system of the world until 1971 — after WWI. There aren’t a lot before WWI either, but it starts to get pretty bad after 1920. Ralph Hawtrey’s books have some merits, but they also have too many errors to serve as a definitive source.

Gold and the Gold Standard: The Story of Gold Money, Past, Present and Future (1944) is something of an exception to this pattern. Edwin Walter Kemmerer was a professor at Princeton.

Wikipedia on Edwin Kemmerer

He was born in 1875, and in 1903 was appointed Financial Advisor to the U.S. Philippine Commission. In this role, he set up the Philippines’ “gold exchange standard,” which was essentially a currency board with the U.S. dollar although it also had direct gold convertibility. This was done in 1905. In 1917-1924, he was a financial advisor (helping set up new central banks and gold standard systems in the floating currency aftermath of WWI) in Mexico, Guatemala and Colombia. In 1924-25, he helped set up a gold standard system for South Africa. In 1925, he was part of the Dawes Committee, which helped re-establish the gold reichsmark in Germany (replacing the rentenmark of 1923). In 1925-31, he helped re-establish gold standard systems in Chile, Poland, Ecuador, Bolivia, China, Colombia, and Peru.

We have here not the usual professor type who simply parrots something he heard once in a class — rather, a real expert who created effective and functional systems in the real world. He had another book, called Money (1937), which is available here:

Money (1937), by Edwin Walter Kemmerer

It is a brief book. I liked this passage (p. 218):

 The third function that convertibility performs is fundamentally the most important one. It is the function of maintaining the gold parity of the monetary unit by continually adjusting the currency supply to the changing currency demand. In this connection, a nation’s gold reserve functions as a buffer fund or, as it is sometimes called in Spanish, a lunda reguladora. The process may be briefly described as follows.

When, under a normally functioning international gold standard, the supply of currency in any country becomes excessive relative to the demand, as compared with other countries, money becomes cheap at home relative to abroad, prices of commodities and of securities tend upward, the exchange rates move toward the gold-export point, and, when that point is reached, gold is sufficiently more valuable abroad than at home to make its exportation profitable. The exportation of gold is an evidence that, under existing conditions of business, there is a relative redundancy of currency circulation at home. Since local paper money and fiduciary coins have almost no international market, the redundant currency is drained off largely in the form of gold exports. These exports are continued until the exchange rate falls below the gold-export. point and the currency·supply is ‘reduced to a quantity that places the price level of a country more nearly in equilibrium with the price levels of other countries; or, in other words, until the reduction of the country’s money supply has made the monetary unit so valuable at home that further exportation of gold becomes unprofitable.

Under conditions of such currency redundancy and resulting gold exportation, the central banks must always be in a position to give out gold freely for exportation, as long as it is required, to relieve the country of its relatively redundant currency and to force exchange rates below the gold-export point, thereby bringing the country’s price level and discount rates back more nearly into equilibrium with those of the rest of the world.

Obviously, a country’s normal gold reserve should be sufficient to provide for the absorption, through redemption in gold of any currency in circulation that may be rendered excessive by the usual fluctuations in business. In addition, it should be large enough to afford a reasonable margin of safety for extraordinary emergencies.

Here, he dismisses the idea that there was some kind of “balance of payments imbalance” causing gold outflows (p. 214):

On this subject there has been much confusion growing out of the popular notion that gold moves in international trade only “to pay balances.” As a matter of fact, gold moves for the same fundamental reason that any other commodity moves-to seek the best market. It goes abroad whenever it is worth abroad more than it is worth at home, by a sufficient margin to yield an attractive profit after paying all the expenses of its exportation. Its importation from abroad is merely the other side of the same shield.

Like me, Kemmerer wished to use the term “gold standard” to mean the general class of systems which aimed to keep the value of the currency equivalent to the market value of some fixed quantity of gold — instead of the term “gold standard” meaning, as it does to many today, a situation in which the issuer allows direct conversion into bullion coins in unlimited size. We are then left without an adequate term for the general class of systems.


Definition and Explanation

From the preceding historical discussion the reader has seen the nature of the generic gold standard. This standard may be briefly defined as a monetary system where the unit of value, in terms of which prices, wages, and debts are customarily expressed and paid, consists of the value of a fixed quantity of gold in a large international market which is substantially free.

This definition calls for some explanation. It contains no mention of gold coin or of free coinage of gold. Both of these may be of great convenience and may facilitate the efficient operation of a gold standard, but neither is necessary to the existence of a gold standard. The gold-bullion standard, and the gold-exchange standard, which are described in the next chapter, do not ordinarily make any provision for the ‘minting and circulation of gold coins, but both of these standards are clearly forms of the gold standard. The definition makes no mention of legal tender, a useful quality for standard money to posses, but not a necessary one. Legal tender is a purely legal concept of late historical development, usually relating only to debt-paying rights, and a gold standard can exist and perform all of its necessary functions without any legal-tender laws whatsoever. On the other hand, full legal-tender money has at times been driven out of circulation through the force of Gresham’s law or of custom by non-legal-tender money.

There is no mention in the definition of redeemability in gold (or its equivalent) of paper money and of fiduciary coins, which is a privilege in most successful gold-standard systems. This privilege is highly desirable, but it is not necessary, provided that sufficient other effective means are used for maintaining the parity of the different kinds of money with the gold unit, such as limiting their supply and receiving them without limit in payment of taxes and other public dues. All the above-mentioned qualities are useful devices for maintajning the gold standard, but not one of them is absolutely necessary. Furthermore, a currency system might conceivably have any or even all of· them and still not be a true gold standard. A good illustration of the principle here discussed is found in the experience of the Union of South Africa in 1919 and 1920. At that time gold sovereigns, which were unlimited legal tender in the Union, and which enjoyed the free-coinage privilege in England–there was no mint in the Union of South Africa–circulated freely in the Union, and the bank notes there were redeemable at their respective banks of issue in gold sovereigns on demand at parity. However, the exportation of gold bullion from the Union was rigidly controlled by the Government. South African gold coins could not be legally exported to what would otherwise have been their best market, but were extensively smuggled out of the country and sold for more than the foreign-currency equivalent of a South African pound. A sovereign in South Africa, and likewise the gold bullion content of a sovereign, were worth there less than in the outside free-gold markets of the world. In order to get the sovereigns with which to redeem their notes on demand, as required by law, the South African banks of issue were compelled to buy raw gold in London at a premium, to get it coined in London in the usual way at the. British mint, and then to bring it to South Africa. At times they had to pay as much as 26 or 28 shillings of South African bank notes to obtain a sovereign in England. The sovereign was then paid out in South Africa by the bank of issue in redemption at par of a 20-shilling bank note. Monetary history offers many instances of gold coins dammed up in a country and circulating there at a discount from their bullion value in outside free markets.

On the other hand, a governmental prohibition on the importation of gold in a supposedly gold-standard country, by restricting the supply within the country, might force up the value of gold bullion and gold coin within the country above their values in the free international markets and thereby give them an artificial scarcity or monopoly value. Whenever the gold value of the monetary unit of a country is divorced from the market value of gold in the free markets of the world, the country cannot be said to be on a true gold standard. Regardless, therefore, of which of the many common means may be adopted by a nation to maintain the value of its money, such as convertibility, legal tender, and free coinage, the supreme test of the existence of the gold standard is the answer to the question whether or not the money of the country is actually kept at a parity with the value of the gold monetary unit comprising it, in the outside free international gold market, assuming, of course, that such a market of reasonable size actually exists. It is not a question of the means adopted to obtain a particular result, but rather, one of the result itself. The gold standard exists then in any country whenever the value of a fixed quantity of gold in a large and substantially free international market is actually maintained as the standard unit of value.

(pp. 134-138)

Mostly, books about the gold standard are a wasteland of error and fallacy. This is something of an exception, and stands on its own. Certainly, if you want to know anything about the so-called “gold exchange standards” of the 1920s, you might want to listen to the man who created them.