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UNCLE AM is now sitting on top of the highest pile of gold the world has ever seen --nearly 21 billion dollars worth of the precious metal, nearly three-quarters of all the gold in the world. And by the 1933 Gold Prohibition Law (as Mr. Scherman terms the anti-hoarding act of the banking crisis days) no one else in the United States but the Treasury, not even the Federal Reserve Banks, can hold any gold at all. Further, the President by executive decree can fix the weight of the gold in a dollar pretty much as he pleases. This particular power expired in 1939 and it is in the renewal of F. D. R.'s authority to establish the gold content per executive pleasure that Scherman sees a real danger.
By raising the value of its gold hoard, the government can make another tremendous paper profit to fill the hole in the budget left by deficit financing. Thus in 1933 F. D. R. made $2,800,000,000 by reducing the gold in the dollar to fifty-nine cents. $675,000,000 of that sum has already been used to wipe out part of the government debt; and the rest has been allocated to our Exchange Stabilization Fund. Suppose, though, that the President lowered the gold in the dollar to twenty or even to ten cents. F. D. R. might be able to show a surplus over relief and defense expenditures! This modern Midas touch, though, would also bring it is difficulties. Such an increase in government expenditures would multiply the money supply, raise prices, and bring on inflation. Mr. Scherman, who makes no bones about distrusting our "entrenched bad government," thinks that the only protection for the common man against these dire consequences is to repeal the Gold Prohibition Act. Then, whenever F. D. R. decides to make another paper profit, the common man can demand gold for his paper currently and reduce the gold hoard so much that the profit won't even exist on paper.
All this is true. However, Mr. Scherman has found only one of the numerous Ethiopian tribesmen in our gold pile. The New Dealer's inflation which lie fears would at least come by wilful choice; but the tremendous excess reserves now in the banking system could just as easily finance a major boom which both Treasury and Reserve Board would find hard to combat. And experience has proved that in time of crisis the government disbursements, for defense or for relief, will be financed by any and every means available. Issuing billions of dollars of modern Liberty Loans may yet be necessary. In the trying financial days ahead, when consumer income goes up at the same time that the consumption goods industries turn to war goods production, the Defense Board will have a hard time in nailing prices at current levels. That job will be made more difficult if, as Scherman suggests, the fears and whims of the common man are given a greater influence than they already have. The danger does not lie in the gold at all. What Mr. Scherman really fears is the men who run our government; and those men today have little choice of action. They don't want inflation any more than Book-of-the-Month-Club-President Scherman does, but they are taking a more complete view of our position. No simple, mechanical monetary technique will solve the problems we are about to face. The pure gold standards of Mr. Scherman's sort of individualistic liberalism lie interred with the bones of Mr. Hoover's chicken in every pot.
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