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monetary unit of another countryor for that matter for coin or bullion. During the Civil War in the United States and for a decade and a half thereafter, for example, U.S. currency was inconvertible in the sense that the holder of a greenback could not turn it in to the Treasury and get a fixed amount of gold for it. But throughout the period he was free to buy gold at the market price or to buy and sell British pounds for U.S. greenbacks at any price mutually agreeable to the two parties. |
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In the United States, the dollar has been inconvertible in the older sense ever since 1933. It has been illegal for American citizens to hold gold or to buy and sell gold. The dollar has not been inconvertible in the newer sense. But unfortunately we seem to be adopting policies that are highly likely, sooner or later, to drive us in that direction. |
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The Role of Gold in the U.S. Monetary System |
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Only a cultural lag leads us still to think of gold as the central element in our monetary system. A more accurate description of the role of gold in U.S. policy is that it is primarily a commodity whose price is supported, like wheat or other agricultural products. Our price-support program for gold differs in three important respects from our price-support program for wheat: first, we pay the support price to foreign as well as domestic producers; second, we sell freely at the support price only to foreign purchasers and not to domestic; third, and this is the one important relic of the monetary role of gold, the Treasury is authorized to create money to pay for gold it buysto print paper money as it wereso that expenditures for the purchase of gold do not appear in the budget and the sums required need not be explicitly appropriated by Congress; similarly, when the Treasury sells gold, the books show simply a reduction in gold certificates, and not a receipt that enters into the budget. |
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When the price of gold was first set at its present level of $ 35 an ounce in 1934, this price was well above the free market price of gold. In consequence, gold flooded the United States, our gold stock tripled in six years, and we came to hold well over half the world's gold stock. We accumulated a "surplus" |
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