Mr. Alsogaray, Ambassador to the United States from Argentina, wrote this article in March, 1968. It expresses his concern over the gold problem and the meetings at that time in Stockholm and Washington.
In 1965 as I was traveling from Tokyo to Paris I had to stop over in Bangkok because of the Indo-Pakistan War which had just broken out. I went to the offices of Pan American Airways to change my itinerary since the one I had, via Calcutta and New Delhi, was cut off. An American woman was talking at that moment with the representative of the company. She was asking that her flight to Calcutta be confirmed for the following morning. "I am very sorry, madam, but for obvious reasons our planes cannot land there," answered the employee. "Yes, but I bought my ticket and I want to go to Calcutta," insisted the lady. The employee, believing that he had not made himself clear, repeated, "But, madam, war has been declared and it is impossible to cross that territory." To which the lady replied imperturbably, "It is not my problem if there is a war; I bought my ticket in the United States, your company agreed to take me to certain places, and therefore you must make arrangements for me to be in Calcutta tomorrow morning." The conversation continued in that vein for almost an hour. Finally, the employee, on the verge of despair, asked the traveler, "Madam, is what you have to do in Calcutta so important?" To which she replied, "I have nothing to do there but I bought my ticket in the United States and you should stand behind your company." This is a superlative expression of the faith of the United States citizen in the value of commitments and of the social order prevailing in his country.
A few days ago when the bank holiday was decreed in the principal countries of Europe as a result of the gold race, United States tourists in some places had to face a different situation but one that was connected with the same problem. There was no war but, in the hotels, shops, and even the banks, American dollars were not accepted except in very small amounts. If it had occurred to one of those tourists to argue that the gross national product of the United States is more than $800 billion and that the United States’ potential and resources are practically incalculable, probably the clerk would have shrugged his shoulders and answered that in any case he was not prepared to change more than a few dollars.
In Argentina these small-great dramas are very familiar to us. There were times when the Argentine peso, our national currency — once one of the hardest and most stable currencies in the world — was not accepted anywhere, or else brought only a fraction of its official value. Besides, each time a devaluation was to take place, we saw closed banks and a reluctance to change foreign currencies for pesos. We are also aware of the nature and ultimate reason for these phenomena: a lack of faith which is the malady that afflicts even powerful nations today.
Modern "Sorcerers"
The loss of confidence and with it the alteration or failure of an established order does not come about as a result of unforeseen factors or of natural castastrophes. Nor is it a punishment from the gods. It simply results from mistakes in human behavior, nearly always inspired by a new class of politicians and "experts" in economy which might well be termed modern "sorcerers." Like the alchemists of old and like Goethe’s Faust, these manipulators of the economy of the twentieth century believe in miracles and promise happiness to the common man without requiring from him anything other than that he demand it vehemently from his government. He is assured, besides, that by means of a divine breath called "development" they can transform printed paper into large hydroelectric presses, steel plants, atomic plants, and all kinds of goods that they will distribute according to an elevated "social justice." In short, that they have discovered the modern philosopher’s stone!
In Argentina some of these "sorcerers” even had official status. There was a government that announced a grand development plan and the head of that government said publicly: "I have so much gold in the Mint that I cannot even walk in the corridors." And as for carrying out the plan, "why worry about money because one could always make use of Miranda’s ‘magic wand’ to get all one needed." When matters did not go very well, the "sorcerers" lost their official designation but continued to function disguised under such other names as "developmentists," "managerial planners," "men gifted with a great social conscience," or simply "experts" in economy. For twenty years they managed the country directly or indirectly by means of bureaucratic measures more or less severe according to the times, but always aimed at preventing the free play of individual initiative and energies.
The magic formula of the "sorcerers" in Argentina — and in all parts of the world — consists in promising the man in the street a better life and at the same time robbing him of part of the fruits of his labor in order that a few (the first to appear) may benefit from that advantage. Everything goes very well at first while the presumed beneficiaries as well as those who are forced to contribute are unaware of the fraud; but finally the system fails and the fraud is out in the open. Except, that it is then too late and the consequences are already irreparable. The "sorcerers" who brought them about disappear from the scene or are expelled from it, but their place is soon taken by others of the same ilk.
In Argentina, in less than a quarter of a century, the "sorcerers" were able to downgrade the currency by more than 99 per cent and to transform a potentially rich country, full of possibilities, into a comparatively underdeveloped one.
The Gold Crisis
This story is applicable to the present crisis in the international monetary system and the race for gold. The common man, and not just the speculators and hoarders, has begun to lose faith in the currency of the most powerful country in the world and of the monetary system created by the "experts" to by-pass the rigid discipline imposed by gold. The new system was an attempt to replace that discipline by a voluntary and conscious discipline to be put into practice by politicians and "experts" in economy.
For many years, that anonymous common man, who constitutes the basic cell of human societies, did not notice that his leaders did not adjust to that new discipline and that they allowed the modern "sorcerers" to direct the course of the economic processes by means of equations and statistical indices. Then some of those men, who make up the vast majority of the people everywhere in the world, began to realize what was happening. They tried to escape from the ills they felt instinctively were approaching, by buying gold. Then the whole complex system devised as a substitute for the order imposed by gold underwent such a shake-up that everyone was obliged to accept the truth: that printed paper no longer had the value the governments said it had. Today, those who worked and saved can no longer buy the same amount of gold they could yesterday. Soon, if heroic measures are not taken, they will no longer be able to buy ordinary goods at former prices. Overnight, a good portion of the fruit of their labors has evaporated.
Confusion Among the "Sorcerers"
The "sorcerers" cannot understand why all their complicated scaffolding has fallen about them. For many years they asserted that "the new economic science" had found a way to manage the economy with more finesse and that the crises of the past could not be repeated. They were now in control over the "blind and irrational" forces that unleashed such crises. Their methods, all of them based on subtle ways of restraining the economic freedom of the individual and substituting for the latter the intelligent decisions of high government officials, would prevent the recurrence of the old problems. Having discovered new ways of choking freedom, they felt secure in their position of disguised dictators. Today, they cannot understand what is happening to them.
What these "sorcerers" did not know is the big secret, as old as humanity, that man is free and that sooner or later he is bound to rebel against any kind of slavery, whether it be visible and brutal as in political tyrannies, or subtly imposed by means of an economic system. The only subjection that man admits is that imposed by law.
When the "sorcerers" attempted to oblige workmen and businessmen to pay forced tribute through inflation, those men, even the most humble and least informed, reacted against that veiled form of slavery and tried to free themselves by buying gold. It is useless for the "sorcerers" to accuse the speculators and the hoarders. There are always speculators and hoaders; but they can never cause harm when freedom reigns, however imperfectly. Only when official regulations reach a point at which they begin to choke the common man and he rebels do the speculators and the hoarders find a propitious soil for their activities. And this is what has happened at the present time.
A Discipline as Well as a Protection
For thousands of years gold has represented, for some reason deep-seated in human nature, a discipline and at the same time a protection for the individual. On the one hand, it guarantees his savings which are the result of his work. On the other, it obliges him to submit to certain rules the most fundamental of which is that he may not enjoy anything that is not the product of that effort. On the government level it works in the same way. The gold reserves of a country constitute the best guarantee and protection for its inhabitants and are the result of the intelligence and work of the whole nation. At the same time, if the reserves are well used, they prevent the modern "sorcerers"(demagogues and false "experts" in economy) from wasting the resources of the community and surreptitiously enslaving men. These "sorcerers" can fall back on all the magic formulas they want to, but in the end they will be unable to prevent men from buying gold; and the discipline this imposes will prevent the "sorcerers" from carrying out their designs.
This discipline annoys the "sorcerers." The impotence they feel is well reflected in a cartoon published in the United States during the recent crisis. In it appears a monument with a resplendent gold calf. At the foot of the monument, the World is kneeling. The caption below says, "Still doing business in the same old way!"
Though the symbolism is different—because the annoyance is not against the "materialism" of gold but rather against the discipline it imposes — what appeared to be dead seems to reappear with characteristic immutability.
If the "sorcerers" — and others — wish to escape from the discipline imposed by gold, they should invent another discipline. They cannot live with a permanent deficit. They cannot squeeze blood from a turnip. They cannot multiply material goods by means of the simple expedient of printing a piece of paper. They have to work, save, invest; and only then, when the desired goods have been produced, may they enjoy them.
The "sorcerers" still have a card up their sleeve to justify themselves. They will now say that there has been an excess of economic freedom in the world, that the lack of sufficient controls on international trade has brought about imbalances and that the governments have not known how to plan and take a firm enough hand in the economic processes. That is to say, they will fall back on the great political fraud of blaming the crisis upon a freedom that has not existed, taking care to hide the fact that their maneuvers in the monetary and investment plane —principally those of a public nature — and other more refined controls that restrain freedom have actually precipitated the crisis.
Inflation: Cause of the Crisis
The fundamental cause that has lead to the present crisis can be found in inflation. Inflation does not consist, as many believe, in the rise in prices. This is simply a consequence of inflation or a visible sign of it, in the same way that fever is a sign of illness.
Inflation occurs when, through various schemes, greater means of payment are placed in the hands of the public than should be available from goods already produced and from certain individual expectations with regard to liquidity and savings. Among those schemes, the most usual are deficits in national budgets, privileges granted to certain large private and state enterprises that are allowed to exist outside the market in a state of insolvency, salary raises above increases in productivity, and attempts to force development by financing with currency issues and false credits. This all means one thing: a deficit. It implies a political and moral problem; not an economic one. One lives with a deficit because that is the way he prefers or because there is no will to resist pressures exerted by those who use techniques to bring it about. Ultimately, the problem simply comes down to the fact that one spends more than he produces.
Inflation is the social cancer of our times. Individual freedom and order in free communities depend on whether it is possible to overcome that ill. I should like to remind you here of warnings expressed more than a decade ago by two eminent men who have played a decisive role in the reconstruction of the postwar world: Ludwig Erhard and Jacques Rueff.
With regard to the individual problem, Erhard pointed out: "These ideas, thought out fairly and consistently, should move us to include monetary stability among the fundamental rights of man who has the right to expect the State to protect every citizen…."
On the fate of communities, Rueff has been tirelessly repeating warnings such as these:
Since 1945 we have been developing the mechanism which, unquestionably, unleashed the disaster of 1929-1933. It is up to us to decide if we are going to allow our civilization to be propelled toward the inevitable catastrophe. Though we are on the brink of disaster it is still possible to avoid it if we are determined enough…. The problem (of the present international monetary system) will be solved soon either under pressure of an emergency or by peaceful deliberation…. If action is taken in time, the peoples of the West will be saved from the disorder and suffering of a new world crisis…. Today, after 40 years of inflation, freedom will be saved through the rehabilitation of money….
Inflation, which moved slowly at first but gained momentum during the past few years, has already led us to the first lap of the crisis. I have heard many people say, "Nothing will happen to gold or the monetary system until November because then there will be elections in the United States and it is not advisable to deal with such problems during the election period." As if it were possible to avoid crises until convenient to the political parties! The fact is that the inflationary illness has ignored the electoral calendar and obliged everyone to take heed of it.
On Saturday the 16th and Sunday the 17th of March of this year, a meeting took place in Washington among the governors of the principal central banks and international financial institutions; and they did the only thing they could do: they gained time. Some of them have been expressing warnings that no one wanted to hear and now they have the disagreeable task of doing what they never wanted to do. With the few instruments at their disposal, they have obtained a respite that should be utilized. The future of free society depends on what is done during the next few months.
The measures that were taken do not in any way solve the problem. They simply postpone it, and at the cost of admitting that it was not possible to keep faith. This is a severe blow to stability and confidence, subtle mechanisms on which the whole social order is based. But there was no other way, and it had to be done.
The Two-pronged Problem
There are two separate problems which, due to the relationship between them, are often confused.
The first is the price of gold and the holdings of dollars in the central banks. The second is the discipline to which community life must adjust in order not to spend more than is produced.
The first problem can be solved by means of monetary artifices and a political decision taken jointly by the principal nations. But if the second problem is not solved simultaneously—that is, adjusting from now on to a specific discipline in order to eliminate deficits — the gold problem will crop up again and the sacrifices imposed by its temporary solution will have been entirely worthless. A monetary devaluation — or gold revaluation — makes sense if it is aimed at canceling past errors and building a better life in the future by avoiding further errors of that nature. That cancelation, that is in the nature of a surgical operation, does not in itself solve the problem nor does it guarantee that it will not reappear. It simply puts an end to an untenable situation; after that, everything depends on whether the true causes of the ill are eliminated.
This first step which has been taken does not as yet have the characteristics of liquidation. As I have said, it constitutes a means of gaining time. Now we will have to study and solve the above mentioned problems with all speed. Conditions today are much worse than those prevailing three or four years ago, when public confidence had not been undermined. But in any case, they are better than those that will come up in the future if the consideration of said problems is postponed again.
In many countries, among them Argentina, we have lived through this kind of experience dramatically for the past 25 years. Today, these problems are extended on an international scale. The future of the free world depends on the leaders of the West finding a way to check inflation and establishing a monetary order without which freedom cannot be safeguarded.
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Diluting the Money
As well might they have attempted to show that a beverage made by mixing a quart of wine with two quarts of water would possess all the exhilarating quality of the original, undiluted liquid.
ANDREW DICKSON WHITE
Fiat Money Inflation in France