18 OCTOBER 1968, Page 24

Fakers and fudgers MONEY


A month ago I was writing• about the gold game—the final round, I thought, in the world championship stakes. But it is still going on. - No victory was won at the recent IMF meeting. I agree with William Janeway that the game seemed to be going in favour of the United . States. The former members of the gold pool did not demur to the American proposition that if the price of gold were to fall to $35 or below—or looked like falling so—and if South Africa were in balance of payments trouble, the IMF would then buy South African gold and so protect the value of existing gold reserves. But the European central bankers made it clear that they were not at all ready to consider demonetising gold, as the Ameri- cans are, and were not even prepared to con- sider the `gold conversion account' plan whereby holders of gold could deposit • their gold with the IMF and receive in return SDRS or other IMF reserve assets. (Some such plan would, of course, have to go into operation in the event of demonetisation.) They were willing to work towards a diminishing role for gold in a gold-paper ex- change system—which would be inevitable when the SDRS come into being—but they would not be willing to see a fall in the free market price below $315 which might threaten the value of their existing gold holdings. (The total mone- tary stock of gold in the world is just over $40,000 million.) There the game rests for the time being. The feelings of the South Africans about Mr Henry Fowler, Secretary of the us Treasury, daring to alter the rules of the gold game are said to be unprintable.

Some unprintable things about the Ameri- cans were also said at the so-called Inter- national Monetary Seminar, which has just concluded a three-day conference in London. I read that 'some three hundred delegates, com- prising heads of large corporations, businessmen and major investors from many countries heard speaker after speaker call for an increase in the dollar price of gold and criticise schemes to set up a new monetary system based on paper.' Professor John Jewkes of Oxford un- generously accused the United States of meanness—of `imposing illiberal and autarchic economic controls,' blocking the flow of Ameri- can capital abroad and restricting the oppor- tunity of other countries to sell to the United States. In his opinion, Mr Secretary Fowler should try to eradicate his balance of pay- ments deficit by writing up the price of gold, in other words, by inflation, not by restriction. The naive professor seemed to be unaware that there has been a grave danger of the inter- national monetary system being turned into a speculators' paradise in which the `bears' of the 'reserve' currencies would reap enormous profits on the writing up of the official price of gold. I wonder how many of the three hun- dred delegates at this business conference have been profit-motivated in demanding a doubling or trebling of the dollar price of gold.

If the gold inflationists have been counting on Mr Nixon becoming the new President and playing their gold game they are likely to be disappointed. Mr Nixon has said that be will make the dollar `strong and free,' but he his not subscribed to the gold views of the French. He appears to have accepted the current American distrust of the gold -system as pro- pounded by President de Gaulle. He may be toying with the idea of more flexible exchange rates, but he wants to see the paper dollar re- spected as the strong currency he believes it to be. And it seems to be going his way. As a result of the 'restrictive' measures taken by President Johnson the deficit on the American balance of payments is likely to be reduced this year to around $1,500 million against $3,600 million in 1967. I cannot see any American President, having sold $10,000 million of gold since 1958 at $35 an ounce, trying to buy it back at $70 an ounce in 1969. An end to the Vietnam war would, it is thought, make the dollar impregnable—as a paper currency, not as a gold currency.

Who should turn up at this shadowy Inter- national Monetary Seminar but the great mone- tary realist Mr .Enoch Powell. He was apparently given a standing ovation. Having said elsewhere that If I became Chancellor of the Exchequer, at two o'clock the same morning I would float the the conference must have been expecting Mr Powell to en- dorse its claim for writing up the price of monetary gold. But it was not at all clear that he was prepared to do so. 'All things,' he said, `goods and services, even gold and money, are best allowed to price themselves against every- thing else in a market as free as we can make it' . `Only harm came from the attempts of governments and individuals to fake and fudge and maintain a system which is based not on true value.'

How would he apply this judgment to the `faked and fudged' gold system? Mr Harold Lever, the Financial Secretary of our Treasury, has said in an August interview with Mr Eliot Janeway in the Chicago Tribune that `the operation of the two-tier system has already exploded the myth that the gold price has been artificially held down by the monetary authori- ties. The free market price would be lower than the monetary price if it were not propped up by the latter.' It is obvious that in the event of even a partial demonetisation of gold there would be a considerable slump in the free price because of the large. monetary stocks which could be thrown on to the market out of the huge total of $40,000 million.

After such a fall there would no doubt be a recovery in the free market price of gold.

About half the world's output of new gold is presently being absorbed by jewellers and other industrial users and in ten years' time it is thought that this demand will have doubled. There is also a genuine savings de- mand for gold in India and the Middle East. As a substantial fall in the market price of gold would put many of the old mines out of production, it is possible that the free price would eventually stabilise at not far below the `faked' monetary price of $35 an ounce. But how could Mr 'Powell -support a doubling or trebling of an already artificial' price? Only harm comes, as he remarked, from the attempts of governments to `fake and fudge and main- tain a system which is based not on a true value.' If Mr Powell had 'really said what he must have been feeling in his bones he would have denounced the whole gold system. de- manded demonetisation and pleaded for a floating exchange of paper currencies.