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E. W. Kemmerer and the Gold Standard

Photo courtesy of Wikipedia E. W. Kemmerer was a great thinker and writer on monetary policy who taught international finance at Princeton University, but was he in favor of 100% reserves?  The Mises Institute has done a great service digitalizing and making available many out of print but otherwise largely inaccessible works.  Kudos to them for that.  One of those works was Kemmerer's wonderful Gold and the Gold Standard: The Story of Gold Money, Past, Present, and Future.  But in advertising the book, they write:

"Kemmerer was a favorite of Murray Rothbard, and Murray loved this particular book. To be sure, Kemmerer doesn’t go as far as Rothbard or Mises in demanding the abolition of the central bank, and his naiveté is on display here in thinking that government could manage a gold standard. Even so, his gold standard plan is just about as pure as anyone’s in his generation, insisting that banks operate as real businesses and calling for 100 percent reserves [emphasis added]."

However, I can't find anything in the book remotely implying that his plan called for 100% reserves–nowhere does Kemmerer even bring up commercial banks holding 100% reserves under any scenario.  Kemmerer writes how government demand for specie to pay for wars drains reserves (p. 42), problems associated with the resumption of specie redeemability after the Civil War (p. 87), inadequate gold reserves from some countries returning to the gold exchange standard (along with this wonderful line in a great paragraph: "It was not so much a question of management or no management as one of too much management and too many incompetent managers," p. 119-20),  a discussion of bank reserve ratios in the hectic March 1933 period (pp. 124-125), a discussion of Philippine pesos and gold reserves (pp. 160-3), an explanation of the Genoa International Conference and the Gold-exchange Standard and the gold reserves associated with it (pp. 164-6), an explanation of how the gold exchange standard worked in several South American countries (pp. 169-71) including:

On the whole, and allowing for a few important exceptions, the postwar gold-exchange standard functioned successfully for several years, under principles laid down by the Genoa Conference, many of which had been widely adopted. Then, however, as the pressures that led to the world crisis beginning in 1928 to 1929 began to be felt, these principles were increasingly ignored, and gold-exchange standards, like gold-bullion standards and gold-coin standards, broke down in the crisis and depression of the early thirties.

So here he explains that all three systems broke down during the crisis–hardly singling out a ringing endorsement for any particular one including the "gold-coin standard" that I think the Mises Institute misreads.  Later on pages 171-2, Kemmerer explains:

Lack of Efficient Checks and Balances. Another claim is that the gold-exchange standard does not automatically function so effectively, i.e., set up as efficient a set of forces of checks and balances as does the gold-coin standard. Under the latter, one country exports gold at its gold-export point and another country receives the gold at its gold-import point. The monetary supply is contracted in the country exporting the gold and is expanded in the country importing it. Under a gold-exchange standard functioning through central banks at both ends of the line, drafts purchased at home, drawn on the reserve deposit abroad, are usually debited to a bank-deposit account at home and credited to one abroad; and the opposite takes place when a draft is sold by the reserve agent abroad on the central bank at home.

And he elaborates on his next point immediately after about how holding gold reserves at the home country facilitates war (p. 173).  The book gives a short history of the gold bullion standard (p. 174):

Although gold in such unspecialized forms as dust, nuggets, bars, and the like, has been used as standard money for thousands of years, and although under the gold standard itself gold bars have been extensively employed in bank reserves and in making international payments, a formally and legally organized gold-bullion standard is an institution of comparatively recent development. After the First World War, most countries returning to the gold standard adopted a gold-exchange standard, a gold-bullion standard, or a combination of the two.  Under a gold-bullion standard no national gold coins are minted or circulated. The monetary unit consists of a fixed weight of gold, as in the gold-coin and the gold-exchange standards, but it is not coined. Gold reserves are held in the form of standard gold bars, mostly of large denominations, and the national currency is usually convertible into these bars on demand. The hoarding of gold is kept at a minimum, because the value of a gold bar is too great to make it easily available to the masses of the people.

When talking about the US gold standard (1918-1933), Kemmerer contrasts the US strength of its gold standard with other countries, "the postwar gold standards established in most countries were weak types of the gold standard and were put into operation under very unfavorable financial conditions. These facts are everywhere recognized. Practically, all these standards were gold-bullion and gold-exchange standards, as contrasted with the stronger gold-coin standard of prewar days." And here I suspect is where we get to the crux of the issue.  Since Rothbard was a vocal proponent of a 100% reserve "gold coin" monetary system (without a central bank–a point of which we are all here in agreement), is it possible that the nameless Mises Institute reviewer got confused?  Of course, Kemmerer here simply refers to the "stronger gold-coin standard of prewar days" when we had no central bank, monetary gold coins circulated commonly–and banks took deposits and lent out under a working fractional reserve system.  So let's be clear that here, at least, Kemmerer is not even discussing Rothbard's pet theory.  When Kemmerer uses the term "gold-coin standard" he means the fractional reserve system under the classical gold standard prior to World War I.

On page 212, the book describes different types of gold standards and explains how some are more appropriate for some countries than others and how countries might be best served switching between them depending on changing circumstances (hardly a call for Rothbard's cookie-cutter one-size-fits-all approach, and nowhere here does Kemmerer even bring up commercial banks holding 100% reserves under any scenario):

The gold-bullion standard provides no gold for internal circulation and makes it difficult to obtain gold for hoarding. Its reserves, however, are held in the form of gold bullion. Therefore, although requiring less gold than the gold-coin standard, the gold-bullion standard requires much more than does the gold-exchange standard. Consequently, it takes an intermediate position. In general, the richest nations would probably choose the gold-coin standard, while the poorest nations, as well as colonies and other dependencies, would prefer the gold-exchange standard. Countries in an intermediate position would prefer the gold-bullion standard.

The shifting from one type of gold standard to another might be used as an instrument of international monetary policy directed toward the stabilizing of the value of gold.

Here on page 220, Kemmerer ignores his contemporaries Ludwig von Mises and F. A. Hayek (among others) who opposed central planning through central banking:

While no one [sic] denies that a nation's central bank should be administered with primary regard to the public welfare and with very little effort to earn profits above a modest return on capital, it is not so well recognized that, in the great majority of cases where central banks have suspended gold payments, this has been done under the political pressure of governments to meet fiscal needs.

Funny how some Rothbardians claim Kemmerer was a favorite of Rothbard and simultaneously attack the dean of the denationalization of money movement Hayek!  Was Kemmerer's flexible gold standard(s) with a central  bank plan "just about as pure as anyone’s in his generation" compared with, say, Mises himself or his protege F. A. Hayek?  No, not even close.  How about Vera Smith?  Nope.  How about picking from the list of authors from the LvMI site?  Problem there is that one would be hard pressed to find any of Kemmerer's generation better than Mises-Hayek who didn't subscribe to Rothbard's diversion from Austrian and Classical thought on banking regarding fractional reserve lending.  Of course, all of us mere mortals have our faults, just as Rothbard, Kemmerer and Hayek all did. Kemmerer continues on pages 220-1:

The trouble has been caused much oftener by governmental exploitation than by exploitation for profit by private interests. Gold reserves have been unduly depleted, not so much through being drawn out of the country by foreign countries as through being flooded out by fiscal inflation at home. The nation's monetary authority, which should be the board of directors of the central bank, should have a substantial government representation but should not be under government domination. This is the very realistic lesson of monetary history.

Also, take a look again at how the LvMI sells Kemmerer, "Kemmerer doesn’t go as far as Rothbard or Mises in demanding the abolition of the central bank" which is pretty comical because not only does Kemmerer not go as far as demanding the abolition of the central bank, he not only supports them (with different versions of gold standards) but he explicitly calls for an international central bank!  And not just a central bank for central banks, but one that lends out in a fractional reserve system!  He explains (p. 221) that "An efficient international gold standard will call for an international bank, with which the central banks of all gold standard countries should be affiliated and to which they should contribute the necessary capital. The functions of this bank should be exclusively of a monetary and banking character" and that "The principal functions of the bank should be (1) to serve as an international clearinghouse for the member central banks; (2) to hold part of the reserves of the member central banks [emphasis added]. . ."

Clearly, Kemmerer's call for an international central bank which would hold "part of the reserves of member central banks" is not clarion call for Rothbard's central bank-free gold coin 100% reserve system!

Of course, Kemmerer was a distinguished teacher and prolific writer.  I honestly cannot claim to have read everything he's written–neither here nor in other writings by Kemmerer that I know of did he favor 100% gold reserve banking. I would welcome citations if he did support it elsewhere, though.  I do however have a copy of his 1935 book Money: The Principles of Money and Their Exemplification in Outstanding Chapters in Monetary History.  This too is a great book.  Unfortunately, as far as I know, there is no electronic copy available–perhaps the Mises Institute should add this to their digitalization queue (though I fear the book description they might write).
Chapter III The Elementary Banking Functions of Kemmerer's Money should be required reading of anyone interested in the basics of how commercial banks operate–and specifically those falling under the Rothbardian viewpoint.  There is absolutely no hint that Kemmerer "[insisted] that banks operate as real businesses and calling for 100 percent reserves" in his explanation of elementary banking functions.  The opposite is clearly true.
In his next chapter on the Quantity Theory of Money, Kemmerer talks about "the tendency for the maintenance of a more or less constant percentage of bank reserves to deposits" and elaborates (p. 55):

The percentage of a reserve which a bank needs to hold against its deposits varies with the bank's location, character and the sizes of its individual deposits, its reputation, and the general financial condition of the community it serves, the state of business confidence at the time and the reserve requirements, if any, imposed by law.  It also varies from season to season according to the seasonal fluctuations in the production and trade of the community it serves.  But a bank must at all times maintain a sufficient reserve to meet all probable demands.  A considerable margin of safety, moreover, is desirable [emphasis added]; for failure promptly to meet its obligations means either a damaged reputation or bankruptcy.  The result is that banks find it to their advantage to maintain reserves well in excess of the net amounts they are actually likely to pay out.

I am at a complete loss as to how anyone familiar with Kemmerer's views could read his explanation of how fractional reserve lending works and how he himself states explicitly that this is "desirable" (both for commercial banks and an international central bank!) and then characterize it as "insisting that banks operate as real businesses and calling for 100 percent reserves" as the Ludwig von Mises Institute does.

Kemmerer expounds on p. 58 that " there is a high correlation between movements in business confidence and movements in the ratio of bank reserves" and cites his Money and Prices (pp. 121-126) published in 1918 and a 1908 Quarterly Journal of Economics article of his.  So here we have four decades of E. W. Kemmerer's own writing explicitly and consistently on fractional bank reserve lending saying the exact opposite of the characterization of his views presented by the LvMI.  I have come across none of his writings that deviate from what I have presented here. In Part II, Chapter V The Monometallic Standard in a section called "The Gold Coin Standard" (pp. 70-2), this favorite economist of Rothbard gives a traditional rendering of what nearly all of us would call a gold coin standard that the price of an ounce is always an identical proposition–complete with the line, "It is like saying a food is always twelve inches long."

There is no diversion from the tradition understanding of a gold coin standard towards the Rothbardian re-write.  There is no discussion of reserve ratios as having anything to do with a gold coin standard.  One can read as much into Kemmerer's rejection of the Rothbardian re-write not only but what Kemmerer says but also by what he doesn't.  In short, a "gold coin standard" is one where gold coins circulate freely as money under a fractional reserve lending regime as during the classical gold standard.

Clearly then, the LvMI's bookstore copywriter's characterization of Kemmerer's views as similar to Rothbard's deviation from Austrian and Classical economics is not substantiated by the Gold and the Gold Standard or the Money and Prices books or the other works of his cited in those books on this topic.  Not only is Rothbard's 100% reserve position much lonelier than the LvMI's site suggests, but the copyrighter either doesn't understand the positions of one of the Rothbard's favorite economists–or he don't think that their readers are smart enough to see through their misrepresentations.  For a group so concerned with alleged "fraud" where none exists with fractional reserve banking, they ought to be more careful.  The Mises Institute needs to educate their copywriters better and correct their site,  or it opens itself up to the perception that they're perpetrating the fraud claiming esteemed economists share their distraction.
UPDATE:  a friend at Mises says the description is a mistake and is being replaced