Gold and the Dollar
By NICHOLAS DAVENPORT
ONE needs the quiet of a holi- day to think calmly about gold. The Americans get mad when Europeans talk about devaluing the dollar or writ- ing up the price of gold; the Europeans get mad when, with gold reserves still mal- distributed, the Americans stubbornly persist in immobi- lising $12,000 million of gold as a so-called reserve for their internal currency (who in the world today thinks of backing domes- tic currencies with gold except a few eccentrics like S. W. Alexander?); all good trade expansion- ists (myself included) get mad when the Western industrial nations pile up trouble for themselves by refusing to devise a payments system freed from the gold limitations of the imperfect Bret- ton Woods agreement. In fact, gold seems to make everyone mad and for all I know it may be divine punishment for running after a false god. President Kennedy tried to introduce a little sanity into the gold debate by making a few positive logical statements of the American position at a recent news conference dramati- cally televised to the Western world through the Telstar satellite. 'The United States,' he said, 'will not devalue the dollar. And the fact of the matter is that the United States can balance its balance of payments any day it wants—if it wishes to withdraw its support of our defence expenditures overseas and our foreign aid.' This back-handed slap caused the European selling of dollars and buying of gold to stop abruptly. Every currency speculator knows that America runs a surplus balance of its 'visible' trade (1959 was the solitary exception) and that it is only its prodigal public spending on defence and aid abroad, coming on top of its private overseas investment, that has been running up an annual deficit of between $2,000 and $3,000 million. In point of fact, the overall balance is improving. Mr. Roosa, the Under-Secretary to the US Treasury, expects the payments deficit this year to be only between $1,000 million and $1,500 million against last year's deficit of $2,500 million. A terrific drive is being made by Mr. McNamara, the Secretary of Defence, to cut service costs abroad. An annual reduction of $1,000 million, he says, is already in sight and fie hopes to double it by 1966. He has stopped the Navy buying cheap steel in Germany and Japan, he is employing fewer foreign workers on his installations, he has ordered that all supplies for American forces overseas must be bought in the United States unless they are over 50 per cent, cheaper abroad. and by rotating men abroad at more frequent intervals he is avoiding any service families living overseas. It is clear that Mr. Kennedy has no need to threaten cutting down on foreign
aid or defence if the ingenious Mr. McNamara can make these vast economies. It would not be surprising to see the American Govern- ment payments deficit eliminated in a year or two.
There remains the problem of the movement of private capital. This can still be dangerous, seeirig that the amount of foreign deposits in US currency exceeds the amount of free gold. (Deduct the unnecessary domestic reserve ot $12,000 million from the total gold stock, now reduced to a little over $16,000 million, and we have only. $4.000 million free gold to meet foreign short-term liabilities of $19,000 million.) Dr. Reierson of the Bankers Trust has lately been trying to reassure Mr. Kennedy with talk of private capital flowing back to the United States, where the growth potential, he says, is now greater than in over-employed Europe. But this surely depends upon the outcome of the negotiations between the UK and the Six. If the UK is not to join, Dr. Reierson may be right. American capital could flow back very quickly and in a trice the £ would be the cur- rency in danger.
So we can well understand Mr. Kennedy's confident statement of faith in the almighty dollar which he televised to the Western world. We can all agree with him that, as in the Bretton Woods agreement, currencies are fixed in rela- tion to the American dollar, which is alone fixed in terms of gold and so registered at the IMF, devaluation of the dollar means devaluation all round—without any change in the existing parities unless the Bretton Woods agreement is to be scrapped. But may it not be right to scrap it and create something more reasonable? May it not be advisable to write up the dollar price of gold? What Mr. Kennedy does not seem to realise is that as prices .rise throughout the West he cannot stop simple people from losing their confidence in paper currencies and wanting gold as a store of value, particularly as they believe that it will have to be :written up in price in the long run. It is no doubt Very deplorable, but it seems to be a common human weakness.
And history supports the doubters. The Euro- peans recently got very nervous about adding to their holdings of dollars and the Federal Re- serve had to make agreements with the European central banks to hold one another's currencies up to certain specified limits. The Swiss National Bank was hotly criticised at home for holding so much in dollars and was obliged to switch $50 million into gold last month. The private demand for gold has lately been so heavy that the Euro- pean gold pool of $250 million is virtually ex- hausted. But let us suppose this confidence in the dollar has now been completely restored by Mr. Kennedy and Mr. McNamara, and that capi- tal begins to flow back to the US; what then? Other countries' reserves will then be depleted, and as few have sufficient gold reserves to stand any severe strain, devaluation will be threatened for some other currency (perhaps the £) unless the IMF comes again to the rescue with an enor- mous loan. (This- may explain the haste with which the UK has repaid the IMF loan in order to set free the $6,000 million stand- by credits which the IMF has arranged for
the defence of key currencies.) So it will go on, this silly currency game, and it will eventually have to be admitted by Mr. Kennedy that at the present price of gold everyone's reserves— outside the US, which still holds nearly 40 per cent. of the free world's gold stock—are inadequate and that more people will want to buy more gold as a store of value at the next currency crisis.
In the economic debate before the House of Commons rose for its summer holiday, Mr. Maudling agreed that the patchwork measures recently taken to ease the strains on world liquidity in general and on the dollar in par- ticular were not in themselves sufficient and that he intended 'to take the initiative' at the September meeting of the IMF. I hope that he will propose something which can lead to the adoption of an international currency system less rigidly tied to gold.
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