The front is crumbling MONEY
NICHOLAS DAVENPORT
In the autumn of our devaluation I referred in this column to 'the crumbling international monetary front' and was rebuked in certain solemn quarters for being unduly alarmist. But the whole IMF system is now moving into crisis and it is doubtful whether the special drawing rights agreement will come into force in time to prevent an explosion of de- valuations or the writing-up of the price of gold.
The great weakness of the system, as we all know, is that with the fixity of exchange rates ordained by the Bretton Woods agree- ment, there is no automatic adjustment mech- anism to correct international payments when they get seriously out of balance. Last year the United States and Great Britain were so badly in deficit—to the extent of nearly $5,000 million and over f500 million respectively—that drastic action had to be taken by both countries. The steps being taken by Washington to cut the deficit by $3,000 million together with the devaluation of sterling and the deflationary package now being wrapped up by Mr Jenkins are bound to have a depressing effect upon continental trade. If every nation threatened by these measures were to embark on counter-deflationary action to protect its own exchange rates and reserves we could end up with a protectionist orgy of higher tariffs and import quotas and a general world trade recession. Both tariffs and quotas have been threatened by Washington if their present measures do not work.
The first to feel the pinch of the Anglo- American defensive action have been Canada and Japan. As Canada has long been depen- dent on American capital it is more vulner- able than any other nation to the Washington order that American industrialists must stop investing overseas and remit a higher propor- tion of their overseas profits to their parent companies at home. The Canadian dollar has been weak ever since this January blast from the White House and the finance minister has been forced to draw $(us)426 million from the IMF to protect the present parity of 92.5 cents to the American dollar (which was fixed at the last devaluation in 1962).
The rate could hold for the moment. The weekend rumours about the Japanese yen were perhaps more unexpected than those about the Canadian dollar. A Japanese business news- paper actually reported that the government was seeking a $1,000 million standby credit
from the IMF, but there has so far been no official confirmation. The yen is certainly weak at its low trading level of 362.7 to the American dollar, supported only by reserves of under $2,000 million, but the prime minister has hotly denied that there is any thought of devaluation. The perennial trouble in Japan is that its keen export businessmen are always pushing their investment abroad too fast and over-committing themselves. If they cannot lay their hands on sufficient American dollars they quickly run into trouble. It looks as if they have. If the yen is devalued the Australian dollar would probably follow suit.
Every devaluation brings nearer the possi- bility of a rise in the price of gold. The Americans cannot understand the European and Eastern passion for the hoarding of gold, but there is nothing mysterious about it. It is the peasant's suspicion of government paper which can be printed to excess at any time and made worthless; it is the cautious man's, fear of inflation, the frightened man's fear of war and monetary catastrophe, the shrewd businessman's bet that since gold has been getting cheaper in terms of nearly every other commodity, since its supply has started to turn down and its demand from hoarding and commercial uses to move up—especially from hoarders as the world crisis deepens— the price of gold before long will just have to go up.
I entirely agree with the intellectual's con- tempt for the gold exchange standard—I was busy debunking the gold standard itself in another journal in the late 'thirties—but I disagree with the American notion that if they served notice on the world that they would sell but no longer buy gold at $35 an ounce the price would drop to, say, $12. With world tension increasing as the Vietnam war drags on there would be a rush on the part of all who held dollars to acquire the American stock of gold while it lasted.
The more likely course of events is a notice at Fort Knox that gold sales are to be sus- pended to prevent the stock falling below the `safe' level for war. This would immediately be followed by a rise in the dollar price of gold on the free gold markets. The price has been fixed at $35 an ounce since 1934 and since that time there has been a considerable inflation of all other commodity prices, a huge rise in demand (hoarders taking the entire supply of new gold from the mines so that the central bank reserves have had none) and a flattening- out of gold mining output and a drying-up of gold sales from Russia. (Is the Soviet govern- ment short or do they think gold is too cheap at $35?)
The free-world gold output started to fall at the beginning of 1967 and after 1972 the decline will begin to accelerate. This prospect is already beginning to disturb the contin- ental gold bloc and I have a shrewd suspicion that the entire bloc—not merely France—will sooner or later retire from the London gold pool (Canada has just done so). This pool, managed by the Bank of England, was set up in the early 'sixties to meet the spurts in de- mand from hoarders and it was expected to replenish itself when that demand died down. But if it cannot, if the hoarding demand in- creases and the supply of new gold vanishes, are the continental central banks likely to go on supplying gold out of their own reserves? And if they retire, will the Americans be will- ing to be the sole supplier indefinitely? One smells a gold crisis coming. And when that `no sale' notice at Fort Knox appears I doubt whether the free price will stop rising before it doubles.
Previous page
