Revaluation of Gold
A most simple and logical solution of gold revaluation was put forward by Sir Roy Harrod. Since 1934, the price of gold has been rigidly fixed in terms of the U.S. currency at $35 per ounce. But the absolute level of commodity prices in U.S.has value of official gold reserves are much less than they would have been if the relation between commodity prices and the price of gold had remained the same because of the increase in commodity prices, the money value of a given quantum of imports has greatly enhanced and the existing gold reserves have become inadequate. As such a logical remedy according to Sir Roy Harrod is the raising of the price of gold. He pleaded for a 100 per cent rise into the price of gold form the current price of $35 per ounce to $70 per ounce. In other words, he suggested devaluation of the dollar by 50 per cent. He viewed that such increase in the price of gold would restore normal relation between the commodity prices and the price of gold and thus helps to solve the problem of international liquidity.
However, the proposal has not been received sympathetically. It has been objected to on various counts:
1. Most economists opine that this method will set up a speculative rush for gold and a run on the dollar by owners of dollar balances.
2. Countries with huge gold stocks would reap a great benefit from such a policy, while countries with small reserves of gold will not gain anything substantially. Particularly the revaluation of gold will result in windfall gains to gold producing countries like South Africa and former Russia, which may be undesirable and unnecessary.
3. Moreover, by devaluing dollar (as a result of gold devaluation) the United States also may not gain any advance since other counties would probably devalue their currencies along with the dollar to maintain existing exchange liquidity.
4. A major argument against U.S. devaluation is that it would result in an international monetary crisis, because it would lead to a destruct in the dollar as an international store of value and will correspondingly reduce international liquidity.
5. Even with the increased price of gold, it is doubtful if gold production would be greatly increased since the material deposit is fixed by Nature.
6. As Prof. Lutz points out, there is again the danger that the additional international reserves created by the increase in gold price would be absorbed fairly quickly by an inflationary process because the government of the countries gaining from such a policy might be stimulated to launch a programme of increased spending.
As such the gold revaluation proposal though very simple and logical could not gain deserving popularity.
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