Mr. Roosevelt and Gold
THE President's message to Congress on the devalu- ation of the dollar is a document of immense inter- national importance. Between its lines is written the future of the gold standard not only in the United States but throughout the world. If America were definitely to cut loose from gold, the standard might very soon have to be abandoned even by its most stalwart defenders. If, on the other hand, she were to return to gold in the pre-depression sense, it can hardly be doubted that Great Britain would do likewise, with other countries in her train. The parities might be different, the conditions of operating the standard might be reformed, but the principle of the international gold standard would be restored to full authority. The President's message actually avoids both those courses, and depicts, though with still invisible ink, a future for monetary gold very different from anything we have yet known.
The immediate measures foreshadowed by the message were not unexpected. The Treasury is to take over, in exchange for gold certificates, the gold reserves of the Federal Reserve Banks, at their old nominal value. Wall Street denounces this action as confiscatory, but it has many precedents in other countries—including our own—and the banks are in substance no worse off than they were when the dollar was attached to gold. Secondly, the President proposes an upper limit of 60 cents for the new gold value of the dollar ; he is already bound by a lower limit of 50 cents. This provision is to be interpreted as meaning, not that permanent devaluation will yet be put into effect at some rate between those extremes, but that the Treasury will immediately take the profit arising from a 40 per cent, devaluation (equal to some £500,000,000 at par), leaving a definitive decision to the future. Thirdly, out of the paper profits thus created by the writing up of the gold reserves, an " exchange equalization fund " of £400,000,000 is to be established, " to bring some greater degree of stability in the foreign exchange rates in the interests of the American people."
The long-term principles that the message lays down arc, if anything, even more important. Metallic reserves are required, says Mr. Roosevelt, for two reasons only— to assure the public that token or paper currency will not be issued beyond the genuine needs of the country, and to settle international trade balances. Silver as well as gold must be considered by the nations of the world in determining the future of monetary bases ; meanwhile time is needed to try out the London Agree- ment for the regulation of the silver market. The President significantly made no mention of international exchange stability in his account of the purposes of a metallic base, though in setting up the £400,000,000 fund he admitted the advantages of greater stability ; he preferred to stress the principle that the dollar should have " in so far as is possible a fairly constant standard _ of purchasing power." Here, therefore, is a modified expression of the commodity dollar theory.
Is it possible out of these ingredients to construct a new international gold standard ? There are clearly three possibilities—that international machinery should be set up to provide that gold itself should have a constant pur- chasing power ; that the dollar (or the currency of any other country pursuing a similar policy) should be defin- itely attached to gold, but that the rate of exchange into gold should be varied at long intervals so as to counteract any alteration of the level of gold prices ; or that the new relation of the dollar to gold, whether fixed or variable, should not be allowed in practice to determine the ex- change rates, which would fluctuate independently acenrd- ing to movements of relative price levels. These are, almost certainly, in inverse order, the three stages by which the international gold standard will eventually be re-established. It will never be restored in full until international monetary co-operation gives a satisfactory guarantee against a periodical depression of gold prices. As a preliminary, we shall probably see a half-way stan- dard, which would differ from the full standard only when, and to the extent that, the national policy of a participating country indicated a change in the gold equivalent of its currency.
Such a system, however, presupposes a readiness to establish a free market for gold at some rate or other, variable though it might be from time to time. It is not at all certain that the United States is yet prepared—or, if prepared, is able—to take that step. If the gold value placed on any currency were above what it was worth internationally, comparing the internal price level with the price level outside, then gold would be drained out of the country. If it were too low, then gold would pour in. Now a depreciation of the dollar to 60 cents gold would correspond to an exchange. rate of about $5.30 to the £ (taking the franc at 81 to the £, where it stood on Monday), whereas the actual rate before the new Presi- dential policy became known was about $5.09. Probably, the dollar was really worth even more. Thus unless the American Treasury is prepared to buy gold and foreign currencies on a very large scale the devaluation to 60 cents cannot become effective.
On the other hand, the establishment of the new fund is some indication that even without a free gold market the authorities mean to hold the dollar down to the equivalent of 60 cents. It would be a costly business. Thousands of millions of dollars have been invested by Americans in foreign securities during the past year as .a long-term speculation against the dollar—quite apart from the short-term bear accounts, the liquidation of which has already cost the Reconstruction Finance Corporation about $90,000,000 in payment for gold. Effective devaluation would start a big repatriation of this capital, forcing the Treasury either to take it in the form of gold or to allow the dollar once more to appreciate in external value.
How prolonged and how successful the attempt to hold down the dollar would be is a matter for speculation; some such attempt will certainly be made. The under- valued dollar is a deflationary element in world economy, handicapping (through the intensification of American competition and the heightened barrier to American markets) the recovery of world prices. If the pound is to maintain a relation to the dollar which will give us a fair chance in competition, it must fall in relation to gold currencies. But to keep the Paris rate at, say, 75 francs would be almost as costly for the Exchange Equalization . Account as the new policy is likely to prove for the American fund—apart from the added menace to the stability of European gold currencies. Thus the day of sterling-dollar stabilization has been once again postponed: It can be safely and effectively achieved only on a basis of comparative purchasing power. The prospects, there- fore, of world exchange stability and of an inflationary movement of world prices are intimately bound up with the future course of prices in the United States. Unless and until they rise to meet the new exchange rate, the American devaluation must be reckoned a hindrance to stability ; yet without devaluation as a first step, stabil- ization was clearly outside the field of practical politics;
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