The Twilight of Gold


The Twilight of Gold, by Melchior Palyi, Chicago: Henry Regnery, 1972, Pp. 365, $15.

Published posthumously (Dr. Palyi died in 1970), THE TWILIGHT OF GOLD is not merely a treatise on gold and the gold standard but a crucially important contribution to the political and economic history of that turbulent period from 1914 to 1948written by a man who was in a unique position to observe first-hand the events that led to the 1929 crash…and to the current international monetary chaos.

Hungarian-born Palyi became chief economist of the Deutsche Bank in 1928, then the largest bank in continental Europe, and was later managing director of the bank's Institute for Monetary Research from 1931 to 1933. An advocate of individual rights and freedom, Palyi could not have survived in Nazi Germanyand when Hitler rose to power, Palyi came to the United States and served as visiting professor at three universities, Chicago, Northwestern, and Wisconsin.

TWILIGHT OF GOLD, typical of Palyi's writings, is the antithesis of "conventional wisdom" in economics and demolishes a number of well-established misconceptionse.g., that the convertible gold standard is too inflexible because it does not provide enough "liquidity," or that it ties a country's monetary system to the ups and downs of gold mining.

Under a convertible gold standard, says Palyi, the world for most of the 19th century and up to 1914 "was a world of almost nominal taxes, a world in which virtual freedom of enterprise, competition, and highly flexible wage-price structures prevailedone in which private property and contractual agreements were enforced.… Above all, it was a world of real growth, at an average annual rate of 3% during the six decades before 1914, with rising living standards for the masses."

There were various warts and flaws and abuses in the gold standard, of course, and Palyi discusses them; but he stresses that everyoneeconomists, sociologists, politicians, and even avowed Marxistsfully recognized the virtues of the gold standard because they realized that, if nothing else, it made wars very difficult and very brief: governments did not have the necessary funds (i.e., gold) to finance military expenditures.


Germany, however, under the influence of Bismark, was already a welfare-warfare state by 1914; and when World War I exploded, the gold standard was its first casualty. The governments of the warring nations, says Palyi, discovered that they could conscript the central banks into the service of their treasuries to provide them with "cash" and to manage the national debt.

The disastrous precedent had thus been set. From then on, central banks lost their independence, and economic and monetary science became the whore of politics.

When the war ended, everyone wanted to return to the gold standard. But political considerations now loomed larger than economic; and every nation, in a tragic reversal of cause-and-effect, lost sight of the benefits of the international division of labor and made the immediate goal of domestic prosperity more important than a sound financial system. The general feeling was:

"If governments could raise and spend billions to finance the war, why should they not be able to use their power to assure greater postwar prosperity?"

Well, they did try. By turning to the printing presses; by refusing to dismantle the vastly bloated (and uneconomic) agricultural and industrial productive capacity that had been built at home to meet the exigencies of the war, and that could be sustained only through subsidies and import restrictions once the excessive wartime demand had ended; by thus wrecking the international division of labor; and finally, by making currencies inconvertible into gold.


Before that time, any citizen distressed at his government's financial irresponsibility could protect his savings against inflation by converting paper money or bank deposits into gold, says economist Donald Kemmerer in his preface to Palyi's book. When currencies became inconvertible, "a citizen lost his right to vote 'no confidence,' a ballot he could formerly cast any day, not just on election day, to warn government to live within the income it was willing to raise by taxes."

Paradoxically, citizens of most nations lost this right at a time when politicians of all stripes were rhapsodizing about "democracy."

Americans, as the freest people on earth, were the last to lose that right. By that time, the crash had already occurred, thanks to the inflationary policies unleashed by most governments in the 1920's and to the speculative excesses that go hand-in-hand with inflation.

The gold standard was replaced with the "gold exchange standard"a hybrid system which involved the use of some key currency as a substitute for and supplement to gold in settling balance-of-payment differences among nations. This hybrid gold-and-paper standard failed miserably in 1931and then again in 1971.

Where do we go from here?

Those same nations that witnessed the successive collapses of a hybrid paper-and-gold system, are now informing us that a new hybrid systemthis one consisting of paper and "paper-gold" (alias, Special Drawing Rights)will do the trick. The mystic notion that wealth is created by issuing billions of little pieces of paper with the portrait of some national hero on it, is now sweeping the world.

Gold is now in a period of twilight, says Palyi, and nations are officially rejecting itwhile actually attempting to accumulate as much gold as possible. Why? To fight the Commies, the Japs, or the Martians. I was not always a pacifist. However, after reading Palyi's book, anyone will be seriously considering whether any war is worth its cost of human lives and spiritual and material values. As things stand, we haven't yet paid the full price of World War I.

Eugene Guccione is senior editor of ENGINEERING & MINING JOURNAL, and director of the COMMITTEE FOR MONETARY RESEARCH AND EDUCATION.