The gold drama MONEY
NICHOLAS DAVENPORT
Behind the scenes of our daily life a gold drama is being played which is as incompre- hensible to most people as the Japanese Noh Theatre. This is unfortunate, for gold touches upon our daily life, as our `Noh' budget has revealed. If we were not being forced to pro- vide a surplus on our balance of payments to help pay off $2,500 million (in gold dollars) to the IMF we would rightly have expected Mr Callaghan to allow the economy to move into normal or accelerated growth.
The gold exchange standard, binding each currency to a fixed rate of exchange on the gold dollar (unless an incurable payments crisis compels the rate to be changed), has been creaking along with the help of a little oil from the two 'reserve' currencies—the dollar and the pound sterling. It is incorrect, of course, to speak of sterling as a reserve currency because, unlike the dollar, sterling is not freely con- vertible into gold. However, the £ is so widely used in world trade and such large sterling bal- ances have been accumulated by foreign credi- tors and the old sterling area currency boards, that sterling has come to be regarded as a make-do or second-class reserve currency. But in the current gold drama it has only a sub- sidiary role to play. The lead is taken by the convertible gold dollar.
Now the gold dollar has been running into trouble as a reserve currency because the United States have been piling up deficits for so long on their balance of payments. In the 'sixties these deficits have ranged from $1,000 million to $4,000 million a year. The cause has been the enormous amounts spent abroad on aid and defence and the Vietnam war, "which have eaten up the surplus on visible trade and left a mounting debt. Under the gold-exchange rules foreign creditors can turn these deficit dollars into gold at $35 per ounce. While the French were running a surplus on their payments
account the General insisted that they should do so. But other countries have been less de- manding. The average annual loss of gold by the American Treasury (about $700 million) has, in fact, been well below the average annual deficit. Yet in spite of this accommodation the Americans have become exceedingly touchy about the conversion of dollars into gold, having seen their gold pile go down from over $22,000 million to $13,100 million as at 31 March 1967. As they owe the IMF $800 mil- lion and foreign depositors nearly $30,000 million they may feel that the pile is as low as it ought to be.
A rumour went the rounds recently that the American authorities had secretly notified foreign governments that if they went on turn- ing dollars into gold the Treasury might have to stop selling gold at Fort Knox. This was actually suggested by a vice-president of the Chase Manhattan Bank—in the bank's monthly letter—who seemed to think that this was the monetary equivalent of the nuclear deterrent. The idea was perhaps prompted by the extraordinary statement a few weeks earlier by Mr Henry Fowler, the Secretary of the American Treasury, that the us might be forced to take 'unilateral action' or 'withdraw from commitments' if they failed to get the necessary cooperation in international finan- cial matters from other countries. The Chase Manhattan suggestion had to be officially de- nied by the us Treasury, who put out a state- ment that there had been no fundamental change in the international monetary policy of the United States.
The Chase Manhattan move seemed to me a foolish gambit for if the us Treasury ever did put up a notice at Fort Knox saying 'No More Sales of Gold' the dollar would be regarded as `off' gold and there would be an immediate rise in the dollar price of gold on the free market. The Chase kite did, in fact, cause a rise to $35.18 on the London bullion market, indicating that European or Middle East or Far East buyers still preferred to have gold rather than dollars. Of course, the gold price cannot jump much above $35.20 while the 'gold pool' established by the central bankers con- tinues to operate—the 'pool' stands ready to sell gold when it rises above $35.20 and buy gold when it falls below $35—but if the American government were really considering an alteration in the rules of the gold exchange standard, as some people still believe, the Europeans would quickly retire from the gold pool arrangement and let the dollar price of gold soar. What the Chase Manhattan banker should have suggested—what, in fact, was said by Mr Charles Kindleberger of the Massachu- setts Institute of Technology—is that the American Treasury should put up a notice at Fort Knox saying 'No More Buying of GA But Unrestricted Sales at $35 While the Stock Lasts.' This would be regarded as an attempt to demonetise gold, which is Mr Kindlebeiger's ambition, but it would be a crude way to go about it.
It would also be very dangerous. I am fear- ful of any upheaval in the world's monetary system, rotten as it is, for it could lead to a crisis in world trade, a slump in all exports and a fearful deflation and depression everywhere. But America might well • contemplate altering its buying rules. As long as it undertakes to buy all gold at a fixed price of $35 it is, in fact, underwriting the bears of the dollar and helping those who prefer to hoard gold rather than hold dollars. It could, therefore, say that while it will continue to sell gold against dollars it will only buy gold at discretion—when it suits its monetary and political purposes. This might frighten the gold hoarders and bring about enough dis-hoarding to replenish the gold re- serves of the central banks which are short. But I am passionately on the side of the reformers who contend that gold reserves must be supplemented by some form of international paper. Ultimately, of course, we must set up an international central bank which will issue its own notes against deposits of national cur- rencies and these notes must be regarded as the equivalent of gold. But it was foolish of Mr Fowler to ask Europeans at the moment to re- gard dollar paper as 'gold paper.' It just isn't!
The great international monetary debate is surely approaching a crisis. The Americans, backed by Mr Callaghan, are asking for a new form of international (paper) reserve: the French and Belgians are demanding a reform of the imE with larger automatic drawing powers for its members (35 per cent against the present 25 per cent). If it comes to a real show- down between the dollar bloc and the gold bloc, the dollar, followed by sterling, might float against the gold bloc, which was the recom- mendation of the Brookings Institute to the late President Kennedy. That could, in fact, be the best solution of all. And it could bring down the curtain on the gold drama which is now being played to increasingly sceptical audiences.
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