The Role and the Rule of Gold: An Argument (1965)

This Princeton Essays in International Finance pamphlet is a published dialogue, introduced by Fritz Machlup, between Jacques Rueff and Fred Hirsch after de Gaulle’s February 1965 statement on gold. Its structure is dialogic: Machlup frames the political moment; Hirsch tests Rueff’s claims from the standpoint of managed international liquidity; Rueff replies with a defense of gold as an automatic settlement rule.

Rueff’s central thesis is that the gold-exchange standard disables balance-of-payments adjustment. When U.S. deficits are paid in dollars and those dollars are immediately reinvested in New York, the debtor does not lose liquidity, so the deficit has no reason to correct itself.

And the main consequence is that there is no reason whatever for the deficit to disappear, because it does not appear.

This is Rueff’s core conceptual move: reserve-currency privilege is not just credit, but circular credit that suppresses the signal of loss. He therefore rejects reforms that merely rename the dollar shortage as a general liquidity problem. For him, the problem is institutional and mechanical, not simply quantitative.

The aim is to restore a system which is not contrary to the most elementary common sense; in other words, to ensure that the debtor country loses what the creditor country gains.

Hirsch’s role is essential to the pamphlet’s force. He presses Rueff on Triffin-style alternatives, IMF credit creation, the danger of deflation, the arbitrariness of gold supply, and whether a rise in the gold price would merely give the United States more room to continue deficits. Rueff answers by separating the future rule from the liquidation of the past: central banks should cease accumulating dollar assets, while inherited dollar balances must be funded or repaid.

Well, we have called lack of liquidity what is really lack of dollars, and we have really lost three years in discussing questions which are not real.

The historical argument turns on Rueff’s reading of 1931. He denies that the catastrophe was caused by the gold standard as such; it came, he argues, from the earlier accumulation and sudden repatriation of sterling balances under the gold-exchange standard. Contemporary devices—swaps, Roosa bonds, IMF quota increases, Basle arrangements—appear to him as comparable postponements of adjustment.

Hirsch states the modern objection with unusual clarity: Rueff seems to prefer an impersonal metal discipline to conscious international credit management.

In effect what you are saying is that you prefer the anonymous, and we would say arbitrary, discipline of gold to the conscious discipline of men—of credit-controllers, international credit-controllers.

Rueff accepts “anonymous” but rejects “arbitrary.” Gold matters because it transfers purchasing power between monetary areas and thereby makes deficits felt. The “rule” of gold is thus more important than gold’s “role” as an object of reserve.

If I want the gold standard, it is not because it will impose on central banks a certain policy. It is because it will exert its own influence by the transfer of purchasing power which is the result of the transfer of gold.

The closing discussion links international reform to Rueff’s French experience in 1958 and to possible British assainissement: exchange-rate correction, competition, credit reform, and removal of rigidities must be pursued together. He denies being a deflationist, but insists that a change in the gold price is legitimate only as part of settling past dollar claims.

I consider it a crime to speak of a change in the price of gold without speaking of the reimbursement of the dollar claims, because the change of the price of gold has no other justification, it is only the means to liquidate a situation which is the result of our past errors.

The pamphlet remains relevant because it stages a precise 1960s conflict: automatic international settlement versus managed liquidity. Hirsch gives the institutionalist critique; Rueff offers a theory of reserve-currency disorder as an accounting loop that lets debtors postpone loss and creditors finance the postponement.