Some Theoretical Aspects of the Gold Problem

Abstract

A great deal of most ingenious and elaborate statistical speculation has been applied to find a theoretical foundation for the solution of the problem as to whether economic stability is compatible with the maintenance of gold as the basis of the world's monetary system. The analysis of the essential r6le of gold and of the position of the gold producing industry in the economic system has receded into the background. A rather mechanical view has grown up. Certain stereotyped calculations are performed, mostly comparing economic progress, a very nebulous concept, with the rate of increase of the gold base-a concept whose apparent simplicity tends to disappear on an analysis of its deeper economic significance.2 I do not propose to follow this line of approach, because it will become evident from the considerations below that this method can hardly furnish a clear answer to the gold problem, even when most countries are on the gold standard. It appears to be almost useless when, as at present, the automatic gold mechanism has been abandoned by most countries. More hopeful, perhaps, would be an attempt to reformulate the economic dynamics of the process of absorption of gold, especially newly produced gold, by the system, and the consequences of this process. We shall try to discover the reactions to a change in the effective volume of the monetary gold stock, first in a closed economic system and then in a world of interdependent national economies. Both will have to be analysed under the assumption first of full employment of productive factors, and then of