Is a Gold Shortage the Cause of Unemployment? (1931)

From the January 1931 issue of the Socialist Standard

Gold is causing considerable disturbance in the minds of many people just now. The plea is being put forward that the present abnormal amount of unemployment is due to a fall in prices caused by a shortage of gold.

This supposed shortage of gold is attributed to two causes: (1) Decrease in the production of gold, and (2) Unequal distribution of gold available.

The way this alleged shortage of gold is supposed to affect prices is by causing a shortage in the total amount of money available to buy goods.

The first point to meet, then, is the question, "Is there a shortage of gold? ” and the answer is, "Most emphatically, no! ”

The total world production of gold has gone up from 69 million pounds in 1920 to 83½ million pounds in 1929 (see Economist, February 15th, 1930). This represents an increase of over 20 per cent. in ten years. The Transvaal, which produces 53 per cent. of world’s total, has increased its production by 10 million pounds since 1920, and, according to The Times of December 11th, its production for the eleven months of 1930 is well up over 1929 for the same period.

In the meantime new rich finds of gold have been reported in Australia and Venezuela, and new depths and cheaper working in South Africa.

The Gold Delegation of the League of Nations have made a comprehensive survey of past, present and future production of gold, and have published an interim report on the matter in September, 1930. The conclusion they have come to is that, leaving out of account new finds of gold and improved technical methods, there will be no inadequacy in the supply of gold for at least another ten to fifteen years. On page 75 of their report, Cassel, one of its members, points out that:—

  The net result of the war on the world's monetary system is an extraordinary reduction in the monetary demand for gold, chiefly caused by an almost complete cessation of the use of circulating gold coins. This reduction in the demand for gold has resulted in a fall in the value of the metal and a rise in the general level of commodity prices to about 150, as compared with 100 before the war.

The City Editor of the Evening Standard, referring to the position in England, makes the following remarks in the issue of November 21st last:—

  For the creation of more credit we have now a substantial basis. A year ago the gold held by the Bank of England amounted to 133 million pounds. To-day we have 150 million pounds.
  At present the gold is not being fully used. Inactive Bank of England notes total £64,172,894 against £37,016,505 a year ago. These figures show that the increase of 26 million pounds in our gold has not yet got into active circulation. It is, so to speak, stored up in the reserve.
  . . .   In other words, we have now a reserve army of credit.

In the Evening Standard for December 10th the City Editor writes as follows:—

  The appreciation in the price of gold has been a boon to gold mines containing only low-grade ore. It has made it possible to work them at a profit, and so has given increased employment to those engaged in the industry; has put money into the pockets of shareholders, and has increased the world’s supplies of gold at a time when such increase is most welcome.

A shortage of gold, then, does not exist and, consequently, the present industrial depression cannot be attributed to this cause.

The idea that an unequal distribution of gold is at the root of the trouble is based on the same misconception as the idea that there is a shortage of gold.

The view held is generally known as the “quantity theory of money," and is defined by one of its principal exponents, Sir David Barbour, as follows:—

  Other things being equal the level of prices is proportionate to the quantity of money. (Influence of gold supply on Prices and Profits, p. 47.)
  Under modern conditions, the tendency is for money to change hands more rapidly than before, the resulting influence enabling exchanges to be effected with a less quantity of money, and thus acting in the direction of raising prices. (Ibid, p. 52.)

It is not necessary here to go into the question of the validity of the quantity theory. It is sufficient to point out that this theory cannot account for the fundamental differences in prices (for instance, between corn, oil, and diamonds).

However, let us examine the question on the ground of the quantity theory—that there is not enough gold for currency purposes owing to the fact that America and France are cornering such a large amount of the world’s supply.

If this view be accepted, then America and France should be flourishing. In fact, however, the depression in America is even more marked than here and they are anticipating an unemployed army of about seven millions this winter. In France the clouds are beginning to gather; unemployment is growing and the first fruits of the crisis are already causing considerable disturbance among politicians, as is shown by their efforts at Cabinet building.

In England an examination of the Bank return for the past few months entirely disposes of any idea that there is a shortage of currency. All through October and November there has been over sixty millions of unused currency notes lying in the banking department of the Bank of England. The Bank Return for December 17th shows that even at this time of the year, when there is an abnormal call on currency for Christmas buying, there is still forty-five and a half millions of currency notes lying idle in the banking department.

If it be urged that the alleged shortage does not show itself in currency, but in credit, and thereby lessens the amount available for investment, then it is sufficient to point out that there is a vast amount of money awaiting investment which cannot find an opening, as witness the share issues that are over-subscribed to the amount of millions of pounds in a few hours. This matter is dealt with elsewhere in this issue, and we will only add one or two further illustrations to those already given. In their “City Notes” The Times of November 24th makes the following observations :—

  Some of our correspondents appear to think that the present trade depression, which is reflected in the fall of commodity prices, can only be cured by tackling what is described as the scarcity of gold and currency. There is, however, little evidence of either. America, for instance, has a huge gold stock and a credit-creating power far beyond anything she is making use of at present; the same might be said of France, and in this country the difficulty of banks is to find borrowers of the credit they are anxious to lend.

The Financial Times for November 10th, under the heading “Ample Funds for Investment,” states:—

  The fact that about 70 million pounds was subscribed for the issue of 5 million pounds S. Africa 4½ per cent, loan 1955-75, offered last week at 95½, serves to draw attention once again to the great volume of money available for investment, etc.

The Evening Standard of November 25th reports that Sir Andrew Duncan (head of the Central Electric Board) said: “The eager over-subscription of yesterday [£6 million C.E.B. stock] . . . is an additional proof of the plethora of money awaiting safe investment."

The evidence is therefore conclusive that there is a superabundance of gold, of currency, and of money awaiting investment. Why, then, the gold scare? There are two reasons; both of them old and both of them a consequence of the present system of Capitalist private ownership.

On the one hand, the Capitalists’ professional spokesmen, at a loss to understand the source of the disorganisation and misery produced by the working out of the economic laws of Capitalism, clutch at any straw that gives the appearance of an explanation. On the other hand, any explanation that gives the Capitalists a weapon to force down wages is joyfully laid hold of and used with vigour.

The ignorance or knavery of the leaders of the Labour Party makes them willing tools in the hands of the Capitalists, as the following statement by Mr. William Graham, President of the Board of Trade, at Middlesbrough on December 7th, testifies :—

  I fervently hope that American and British financial authorities will be able to arrive at an agreement in the use of gold reserves which will provide on a sound basis a great credit structure, and so minister to a common recovery.

(News-Chronicle, 8 Dec., 1930.)

Thus do Labour leaders help the Capitalists to obscure the real cause of the present depression, which is, in fact, an accentuation of the over-production of goods. So fruitful are the means of production to-day, that the wholesale limitations imposed upon production have failed to prevent an over-stocked market. Capitalism is being choked by an enormous surplus of goods, and yet there are millions of workless and starving.

Increased production of gold or increase in money is, therefore, not the solution of the evils. The only solution is for the working class of the world to take over the means of production and carry on the work of society on a new foundation that will secure to each member of the community a sufficiency to satisfy his needs, and will ensure that a surplus of production will only mean less work for each.

Gilmac