Originally posted on Tuesday, August 6th, 2013
Charles Dawes was one of the truly great men of his era.
Inaugurated, under Coolidge, in 1925 as 30th Vice President of the United States (and serving contentiously, Dawes being a far better money man than politician), he also shared in the 1925 Nobel Peace Prize for the “Dawes Plan” — to resolve the problem of reparations. He also served as Comptroller of the Currency, was the first director of the Bureau of the Budget, Ambassador to Great Britain, and served briefly as head of Hoover’s Reconstruction Finance Corporation.
Dawes was a financial wizard who proficiently grasped the mechanisms, and beauty, of the classical gold standard. In 1894 he authored a brief but magisterial work, The Banking System of the United States and Its Relation to the Money and the Business of the Country. It demonstrates the highest sophistication in monetary affairs. Some samples:
from the chapter on Bank-Credit Money:
Thus, as long as the United States Treasurer stands ready to cash Treasury notes, or United States notes, or silver certificates in gold, over his counters on demand, so long will all the money of the United States circulate on a par with gold, and be as good as gold. When, however, the United States refuses this redemption, and by its own act discriminates between its different forms of money, then will the forms of money, other than gold and gold certificates, become discredited and depreciated in value, as compared with gold, and gold money will go out of active circulation.
In carrying out its policy to keep every one of its dollars as good as a gold dollar, by readiness to redeem other forms of currency in gold on demand, this Government is at present holding, on a par with gold, if we include National bank notes, over $1,000,000,000 of paper and silver money which has, therefore, equal purchasing and debt-paying power with gold. It was in pursuance of this policy that Congress repealed the Sherman law under which the ”Treasury notes of 1890″ were issued, and which was adding about $4,000,000 per month of Treasury notes to the already large amount of other money held at par by the dwindling gold reserve. We have gone somewhat into detail in speaking of the money issued by the United States Government for reasons which will appear hereafter. Yet this $1,600,000,000 of money does not constitute all of the money which is used by the people of the United States. In fact, it is by far the smallest part of the total money which they use in the daily transaction of their enormous business.
from Its Relation to Silver Question:
Advocates of the free coinage of silver give tables covering many years, by which they attempt to show, by a decrease in cost of wheat and corn, etc., an increase in the value of a dollar in a gold-standard country, or, as they unjustly term it, an increase in the value of ” gold,” using it as synonymous with money.
The impossibility of gauging accurately the value of a commodity like gold, which is subject to the law of supply and demand, by its average equivalent in other commodities also subject to their laws of supply and demand, especially when the value of gold money is influenced by the supply and demand of other money doing the work concurrently with gold and in place of gold, the volume of which other money fluctuates constantly, has always seemed to us very manifest. And when we contemplate the immense fluctuation which has occurred in the purchasing and debt-paying power of a dollar, during this last year, in this ”gold standard” country, we are still more inclined to doubt the reliability of these tables, whose makers have assumed such a scientific air.
Always assuming that the Government of the United States maintains in its Treasury, as under its present policy, the comparatively small amount of gold necessary to meet any demands for redemption of its other currency, which, in the light of experience and existing conditions, may be made, the fact is that, under our money system, the increase in the world’s gold supply, or our own gold supply, cuts very little figure in the determination of the purchasing or debt-paying value of a dollar.
No system of logic can disprove the proposition that the value of money depends upon the law of supply and demand. If, therefore, the supply of money is increased by bank- credit currency, the value of money measured in commodities, including gold money, is decreased ; and correspondingly, when bank-credit currency is contracted, and the total supply of money is thus diminished, the value of all money, including gold money, is increased.
When we remember that the proportion of bank-credit money used in business is ordinarily over ten times the amount of cash money, we can see that the fluctuations in bank-credit money have a greater effect upon the purchasing and debt-paying power of actual money than any other one cause. The effect of the annual increase or decrease in the output of gold at the mines, or as money, pales into insignificance in comparison. Thus we see that where the banking business is extended, as it is in this country, and where the Government, for the purpose of keeping ample the money supply, injects its credit, with proper restrictions, into the currency, as in this country, the fact that we use a gold standard, and are on a gold basis, and repealed the Sherman law, which was becoming a menace to our ability to keep on a gold basis, does not justify any one in assuming that a crime against the debtor class is being committed.
Dawes’s bulletproof assessment anticipated, and would have preempted, many of the follies committed, in the 1980’s, under the name of “monetarism.” In repairing the monetary disorders besetting the world today, and in restoring a climate of job creation, equitable prosperity, economic growth, and deficit reduction a new “Dawes Plan,” — this time for America — based on the kind of sure grasp of monetary policy to be found in The Banking System of the United States and Its Relation to the Money and the Business of the Country — would be salutary.
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