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 almost doubled since 1940.
Consequently, the volume of new gold output and the 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 in the price of gold, from 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, help 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 advantage, since other countries 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 distrust 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. Luts, 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 governments 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.