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“Hugh Morgan Interview: WMC Chief Trashes Paper Money,”
The Optimist, Nov/Dec 1988, pp. 16-17.

Hugh Morgan is the Managing Director of Western Mining Corporation Limited, one of the five largest companies in Australia. Recently he made a speech in which he advocated a return to the gold standard and recommended that the Reserve Bank should abdicate its monopoly control of the Australian currency.

Extracts of his speech were quoted in The Australian newspaper, following which were printed comments from five respectable economists. Damning themselves the economists used phrases to describe the recommendations ranging from “good grief, no” to “silly”, “loonytunes” and “mad, crazy people buy it [gold].”

The Optimist felt such a serious subject deserved better than this perfunctory treatment by Australia’s leading national newspaper.

Professor Lawrence W. Reed, chief economist for the James Blanchard Group, interviewed Hugh Morgan, to expand on his position and to discover his views on the role of gold in the future.

Opt: In a recent speech in Sydney you drew a great deal of controversy by calling for a return to the gold standard. What has made you come to that conclusion?

H.M.: The manifest incapacity of governments, of all political persuasions from all around the world, to provide sound money once the nexus between the national currency and gold was broken.

Opt: Assume for the moment that the Australian government tells Hugh Morgan, “O.K., Hugh, it’s all yours. You’re in charge of the nation’s currency.” In that situation, how would you go about restoring gold’s role and otherwise adjusting Australia’s finances?

H.M.: There are two separate issues concerning the money supply. The first is the question of responsibility for issuance of notes. The second is the backing behind a note issue, the redeemability of a note, and at what price. Governments do not have to be in the note issuing business. In Hong Kong private banks issue their own notes which are redeemable at a fixed rate in US dollars.

I would advocate a policy of giving licence to sell to all registered banks in Australia to issue their own currency to be redeemable, on demand, at say, A$500 per ounce. The Australian government could charge a seignerage fee which could claw back a percentage of the seignerage profit.

Opt: Politically speaking, how realistic is the prospect for a return to gold? Could Australia do it by herself? Would it make any difference if America and Australia’s other major trading partners did not return to gold while Australia did?

H.M.: A government can do whatever public opinion allows it to do. Sound money has always been popular with the electorate. Menzies campaigned in 1949 on putting value back into the pound. Unfortunately, his government did not know how to do that. Australian governments have a major credibility problem if they talk about sound money. A government which produced it would, like Margaret Thatcher, gain enormous prestige.

A criticism levelled at the proposal that small countries, such as Australia, could unilaterally return to a gold back currency is that, once backed by gold, such currencies would be so much in demand in international money markets, that their export industries would be priced out of would commodity markets.

The gold price in US dollars has been steady, or falling gently for some time. If inflationary expectations in the US, say, did spark an upsurge in demand for a gold backed Australian currency, which Australian banks found difficulty in meeting, the US or European or Japanese banks could be licensed to issue Australian notes. It would be profitable for them and for the Australian government if that were to occur. Interest rates on Australian dominated securities would adjust downwards. The Swiss have had the most durable currency since the war (although not as durable as the gold backed pound sterling of the pre World War I era) and they have been able to cope pretty well with their relatively sound money. You will recall that at times the Swiss Franc has had negative interest rates!

Opt: Opponents of gold say the standard was abandoned because it was defective and inflexible. Obviously you disagree. Why do you think gold was abandoned?

H.M.: Gold was abandoned because the gold standard prevented governments from expropriating resources and defaulting on their sovereign debts through the ancient mechanism of increasing the money supply. In order to be able to break with the gold standard, gold has to be discredited. This took many years and much polemic. Keynes’ role in this polemic was crucial.

Opt: What role would the central bank play if Hugh Morgan had his way?

H.M.: A much reduced role. It would have a prudential certification and monitoring role.

Opt: Inevitably, critics are saying your position is motivated by the fact that you work for a company which has a vested interest in gold. How do you respond to that criticism?

H.M.: The role of gold mining under a genuine gold standard would not be significantly different than at present. While the downside risk of prices less the redemption rate would go, the upside gains of prices greater than the redemption rate would vanish. Gold mining predictability of revenue would become less risky. This would allow greater diversification into other mining activities where prices were less stable. All mining activity, indeed all economic activity, would benefit greatly from the low interest regimes which sound money brings.

Opt: Of the many famous economists, living and dead, which do you feel you most closely identify with and why?

H.M.: Adam Smith. His marriage of liberalism and conservatism is highly congenial. His understanding of human nature is a source of continuing delight.

Opt: Turning to the gold market, where do you see gold heading over the next 3 years? What about inflation?

H.M.: I believe gold has acted as a stabilising influence on the US dollar and will continue to do so under the present Federal Reserve Board, regardless of the outcome of the presidential election. The present gold price and the futures price indicate little market expectation of the prospect of inflation.

Opt: Some analysts are saying that recent gold discoveries and new technologies will act as powerful brakes on any upward movement in the gold price. How do you assess the possibility?

H.M.: Annual gold production, current or projected, has little influence on gold stocks, which are 40 to 50 times current annual production. Gold is therefore a unique commodity.

Opt: What are the prospects for a continued boom in the Australian gold mining industry? Should investors be concerned about measures by the government to increase taxes or regulations? Will Australian gold continue to be competitive with gold mined elsewhere?

H.M.: The proposed changes to the tax regime covering gold mining will may result in a rapid decline in exploration and a lagged decline in production post 1991.

I hope the Opposition will produce a tax policy which will lead the debate on these issues. Australia, despite all the official bravado, is not internationally competitive in the burden of taxation and regulation which the mining industry has to bear. The IAC analysis of net assistance to various industry sectors shows that mining is the only industry suffering a net burden compared to other sectors.

Governments, sooner or later, will have to face up to this question of their international competitiveness, just as industries have had to.

I hope it is sooner rather than later.

(in order of appearance on Economics.org.au)
  1. Hugh Morgan Demands Return to the Gold Standard and the Abdication of the RBA
  2. Viv Forbes Wins 1986 Adam Smith Award
  3. Exclusive Ron Paul Interview for an Australian publication in 1988
  4. The Discipline of Necessity
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