Managed Currency

by Hilaire Belloc

The advantages of gold as a medium of exchange have been familiar to all our civilization since it began. Gold is easily divisible, of great value for its weight, almost imperishable, easily divided and minted. It is also easy to test. The disadvantages are that even with gold- as with any other actual thing-the value fluctuates. It would be the same thing if you had platinum or potatoes for your currency. When the value of gold for any reason goes up, general prices (that is the average cost of things as a whole) go down, and vice versa. These inevitable fluctuations in the value of the gold medium have had a great effect on history, especially in highly civilized societies where long-term payments are enforceable, or where custom powerfully regulates payment. But when the fluctuations are slow the inconvenience is not noticed; when they become more rapid they are still tolerated for the sake of the compensating advantages of having a currency which everyone understands and knows all about and which is expressed in a real thing which cannot be falsified without the falsehood being discovered. But when the fluctuations are very large people try to escape them by all sorts of tricks. Of late, for various reasons, the fluctuation in prices- that is, in the value of gold as against goods and services-have been enormous. Gold has become worth a great deal more-40 per cent more-than it was even five years ago. Debtors are therefore paying or liable to pay in real things and services more than they promised to pay in real things and services when they entered into their debt, and creditors are receiving fare more. Also everyone is frightened lest there should be still more violent fluctuations in the future.

The obvious way out is a ‘Managed currency’, and a ‘Managed currency’ means the following:

Instead of the law making people pay and receive in gold, or promises to pay gold, they are to pay or receive in little bits of paper or metal tokens on which the Government shall print some name or other and the counterfeiting of which shall be rigorously prevented. It is clear that if you limit the number of such and such an amount they will have such and such an exchange value in circulation, for the settlement of such and such an amount of transaction.

For instance, supposing on the 1st of June of the year 2000 the number of transactions in goods and services all over the world were the equivalent of one hundred million ounces of gold. People all over the world during that day promised to pay or receive for things or work sums which added together came to one hundred million ounces in gold. Suppose gold to disappear altogether, so that payment in gold (or promises to pay gold) no longer had any meaning, and suppose the world to have one Government. That government need only print one hundred million bits of paper each with the inscription, ‘Worth one ounce of gold’, to keep prices exactly as they were. That is putting it very crudely, because of course you have to estimate not only the amount of the actual medium of currency, but the instruments of credit based on it, and these ‘instruments’ are indefinitely large in number, including verbal agreements; but this statement suffices to show the principle. If the volume of transactions remained the same in amount and value day after day the amount of this artificial currency fabricated by the Government would only have to be kept at exactly the same level (issuing a new note for every note destroyed) to keep prices stable.

But the number of transactions fluctuates. More or less things are made, larger or smaller crops are grown, more or less services are exchanged. So that if you keep the amount of the currency level while the volume and value of the transactions are rising or falling your currency will appreciate or depreciate and prices will fall or rise. Merely to fabricate a certain amount of artificial money therefore and to keep it at the same figure will subject you to the same inconvenience as you would have with any other medium, while getting none of the advantages of a real currency. Hence the use of the term ‘managed’. For the authorities who would stamp the bits of paper would have to be continually estimating what the amount of transactions was and making the amount of the currency follow suit, if they wished to keep prices stable.

In the light of these simple principles we can understand the argument of those who are now working in England for a managed currency and for the getting rid of gold as a medium of exchange. Their motives are various: the motive of the debtor who wants to pay less than he has contracted; the motive of the patriot who want to keep society at peace through stable prices; the motive of the economist who sees that stable prices will tend to regulate production and eliminate the wretched cycle of slump and boom-and so on. All these motives combined form a powerful current of tendency at the present time and especially in a country which, like ours, is under the weather.

If you have a real currency such as gold you cannot inflate without being found out, for the price of gold is the index of inflation. If, for instance, you mix your gold with too much alloy, up goes the price of fine gold and the trick is found out. It is the same thing if you print too much paper, nominally based on gold. If you print more paper than you can redeem in gold, up goes the price of the gold and the fraud is discovered. But if you have a ‘Managed currency’ the fraud cannot be discovered. A ‘Managed currency’ needs, therefore, superhuman virtue in those who manage it as well as superhuman knowledge; and this is true even when your managed currency applies to the great bulk of the world.