The value of gold is arbitrary; so is the length of a yardstick. But just as it is necessary to sell cloth by the yard or coal by the ton, so it is necessary to have some arbitrary unit of value in which to price the yard of cloth and the ton of coal. It would be ideal to have something of absolutely invariable value in which to price them. But there is no absolutely invariable thing in the world. The relative constancy of the gold supply, the durability of the metal, the fact that over the centuries the amount of human exertion necessary to get it out of the rocks changes very slowly—for these and other reasons gold is the least unstable thing man has found for purposes of money, hence his preference for it.
Once the quantity of it was important, merely as money. That is no longer true. The total stock of monetary gold in the world could be stored in one small barn. Yet if the mechanism of credit and exchange were perfect and all people could be trusted, by themselves and by one another, to keep the convention, one ton of it, one ounce of it, in fact, would serve the modern purpose.
One of the singular characteristics of gold is its extensibility. Between two pieces of fine leather made from the intestines of an ox it may be beaten to the impalpable thickness of l/3OO,OOOth part of an inch, so that one troy grain may be made to cover 56 square inches. On the number of pure gold leaves, 4" x 7", that could be beaten from one ounce, worth $20.60, you could print the Old Testament in the ordinary Bible type, if the leaves would bear printing.
The ancient goldbeater's art may astonish the senses. More astonishing to the imagination is the extensibility of gold in a fictional dimension. Out of this same tame and friendly metal, men have beaten a pure fiction of gold, the very spirit of it, and this fiction or spirit is infinitely extensible and infinitely divisible. The gross name for this fiction or spirit of gold is credit. The business of extending and dividing the spirit—the business, that is to say, of creating credit and setting it free— is in the hands of bankers, banking systems and governments; and the convention, namely, the true meaning of the gold standard, is simply their undertaking that the amount of credit created and set free shall bear a certain relation, called a ratio, to the amount of actual gold in their possession. The ratio is variable, from time to time. If and as the business of the world increases faster than the gold supply, so that there is really a need for more money and credit, the ratio may be raised.
It is not the ratio itself that is so all-important, as many people think, especially debtors who are always wanting cheap money with which to pay their debts, or, on the other hand, creditors, whose advantage is in dear money. The imperatives are simple and three.
First that there shall be some definite ratio.
Second, that it shall have been agreed upon when we were all in our right minds.
Third, that we hold to it in good faith. For this now is the modern function of gold—to limit the amount of money and credit that may be willfully, irresponsibly created and set free.
Organized credit is relatively a strange thing in the economic life. New and experimental forms of it are continually being invented and we love to deceive ourselves with them. We forget that credit in any form represents debt in some other form. We know about ourselves that we have seizures of ecstasy and mass delusion; that again a time may come when the temptation to throw the monetary machine into wild motion so that everybody may become infinitely rich by means of infinite debt will rise to the pitch of mania, as it did, for example, in 1928 and 1929. With this intelligent knowledge of ourselves we make bargains beforehand with reason; we agree that money, credit and debt shall not be inflated beyond a certain ratio to gold, under certain penalties such as we shall be very loath to pay and yet such as we cannot refuse to pay under worse penalties still.
So long as the convention is reasonably kept in the faith of credit nobody wants gold. People know what the fiction is. They may read for themselves in the published figures of the bank that its liabilities exceed its gold tenor twentyfold, and yet they feel no anxiety about the gold value of their deposits. They may read for themselves in the figures from the public treasury that the gold reserve is only one half or one third as much as the amount of paper money in circulation. Yet they will treat that paper money as if it were gold. Nobody would dream of supposing that a country, no matter how rich, could redeem its bonds in gold. Yet its bonds will be treated as if they were gold, and one who happens to want gold for them may freely have it. All so long as the convention is kept.
Does this mean, as some of the silly textbooks used to say, that we are all gambling upon a mythical law of averages? No. It means a very definite thing. It means that if every kind of physical wealth were priced in gold, all in one moment of inventory, the aggregate value of it would not be less than the total amount of money, credit and debt outstanding against it. Then all the money is as good as gold, all the credit is gold credit, gold itself is a nuisance in the pocket.
But let the faith be broken, let the delusion arise that the fiction is the reality, let the limit upon the amount of credit that shall be set free be left to imagination, and presently there is no way of telling what anything is worth by pricing it.
For a while this difficulty of not knowing what anything is worth but inflames the ecstasy. Everything will be priced higher and higher to make sure it is high enough; there will be the illusion that things are becoming dear and scarce. They seem to be dear because the value of the money and credit in which they are priced is falling; they will seem to be scarce because people are buying in the expectation that prices will go higher and higher still. Suddenly doubt, then coming awake and panic. The spirit of gold has been debased by senseless inflation. The faith is lost. All with one impulse people rush to seize the gold itself as the only reality left—not only people as individuals ; banks, also, and the great banking systems and governments do it, in competition with people. This is the financial crisis.
All of it has happened. It was not the gold standard that did it; it was breaking faith with the gold standard that did it, and the case would be the same if the standard were anything else.
And who is responsible for breaking the faith? In this country no one is responsible. American banking is governed by law; the law assumes that bankers cannot be trusted not to ruin themselves and their depositors. Therefore, we have more laws to mind banking practice than any other people—and more bank failures in spite of them. The federal and state governments employ thousands of examiners who go round and round, looking into the private books of the banks to see if they are solvent and law-keeping, and the law says that when they find one to be insolvent they must shut it up immediately. And still they fail.
We go on the assumption that a bank is more interested in gain than in its own solvency and if it is not watched its greed for gain will wreck it. Therefore it must be policed. Examiners clothed with arbitrary power must appear at unexpected moments, taking the bank by surprise in any wickedness, and say: "Throw open your books." And yet they fail.
It will be always impossible to keep a bank solvent by law. The law that specifies the maximum risk a bank may legally take with other people's money turns out to be a law of minimum security. A good banker will not take a risk simply because the law says he may; he will use his own judgment. On the other hand, a reckless banker will find a way to do what his greed desires, no matter what the law is, even a legal way.
A BUBBLE THAT BROKE THE WORLD
By GARET GARRETT June 1 1932
