Moving away from gold?
MONEY
NICHOLAS DAVENPORT
An aggrieved correspondent, living in East Malaysia, writes: 'Millions of Asiatics hoard gold. It can never in your lifetime or mine be supplanted by a paper monetary system. Mil- lions like myself have experienced paper money —Germany after the First World War and the sale of an old shirt for 300.000 yen near the end of the Second War. With an estimated 2,000 million peasants saving, hoarding their trinkets representing the only true value, how can you persist in writing of paper money as a substitute for gold? It is very regrettable that one whose writings are of interest is imbued with a bee in his bonnet.'
If I were sharing my correspondent's bunga- low in that outlandish spot I feel sure that I would be hoarding trinkets in my bonnet as well as bees, but I hasten to assure him that I have never advocated paper money as a sub- stitute for gold but only as a supplement to gold. His letter confirms me in my belief that the world, being divided between thousands of millions of simple peasants and hundreds of millions of sophisticated business people, should never have one universal monetary standard. It should have at least two or possibly three. That is why I foresee that eventually the paper dollar and the paper pound, used by the two most highly sophisticated trading and banking nations, will float, linked together, against the gold currencies of the rest of the world who re- fuse to follow a managed paper standard.
The way is already being prepared for such a wonderfully relaxing—and expansionist— future. First, Mr Paul Volcker, Assistant Secretary of the us Treasury, is over here tour- ing the capitals of Europe to sound out his European counterparts on the question of inter- national monetary reform, especially the idea of greater flexibility in exchange rates. This may be regarded as a preliminary step towards the eventual float. The reason why the Americans are looking so far ahead is because they realise that the Special Drawing Rights (seas) of the IMF—the agreed paper supplement to gold—may be a non-starter. They had hoped that there would be a huge share-out of this Paper in 1970—of the order of $6,000 million— but they found that the creditor nations wanted to go slow rather than fast over the issue and, what is more, were likely to insist on the agreed preliminary, which is the balancing of the international accounts of the us and Britain. Neither account looks like being balanced in the near future.
With the American economy set on an ex- pansive phase—investment expenditures are expected to rise sharply to counter the current price inflation—the outlook for the us balance of payments is certainly not rosy. Last year there was only a tiny surplus on trade account of under $200 million against a surplus of nearly $3,500 million in 1967, while the over-all surplus of over $2,000 million was entirely due to 'window-dressing'—the conversion of $2,300 million of foreign central bank claims into 'Roosa' bonds which counts as an inflow of foreign capital. The balance of payments will remain in deficit—and the average us official or businessman could not care less.
The reason why the Americans care little about their balance of payments is that they no longer worry about gold. The two-tier system has diverted the gold hoarders to the free market which acquired nearly $3,000 mil- lion in the gold rush of November-December last. It was notable that in the recent crisis over the franc there was no evident alarm among the central bankers when the gold price on the free Paris market went up temporarily to $44. Under the Washington agreement of March 1968 the central banks are not allowed to deal in the free market: nor can they buy new gold from the South Africa Reserve Bank unless the price on the free market falls to $35 or below. This implies, first, that central bank reserves for the time being will not be replenished with newly mined gold, second, that this is acceptable to them because they are looking towards eventual replenishment with paper gold (the snas). It may, therefore, be concluded that the setting up of the two-tier system is a recognition of the fact that the use of gold in central bank' reserves is slowly on its way out and that the ground is being prepared for the currency of those people who do not believe in gold and are not prepared to raise its price to float against the currencies of those who do.
It is obvious that the South Africans have sensed the danger in this change of view on the part of the Americans and are fighting hard against the Washington gold agreement. There was the mysterious European visit in January of Dr Nicolaus Diederichs of the South African Reserve Bank who was no doubt probing and propagating the idea that central banks should be allowed to buy new gold whatever the price in the free market. It seems that South Africa did sell a quantity of gold on the free market at the end of last year at over $40 and has also sold some gold direct to Portugal and to the IMF against Rand drawings by Britain and others. It is estimated that in the last twelve months South Africa has disposed of 42 per cent of her gold output at an average price around $40. But she must be getting nervous about her position as the world's largest goki producer with an output of 31 million ounces.
I do not suppose that Dr Diederichs attempted on his European tour to advance the propaganda for a rise in the monetary price of gold. This has been left to Lord Boothby who raised the question in the House of Lords on 12 March. In view of the growing fears of inflation, not only in the United States but in South Africa itself, a rise in the monetary price of gold is not likely to receive much support at the moment. On the other hand there is an increasing propaganda in favour of floating exchange rates. At a joint conference of British and American business economists at Churchill College, Cambridge, last weekend both Mr Douglas Jay and Professor Harry Johnson attacked the system of fixed exchange rates. While the Professor advocated a free floating rate Mr Douglas Jay argued for a restricted flexibility in what is known as the system of the 'crawling peg.' The title 'crawling peg' arouses sufficient mirth to laugh this system out of court. So we come back to Mr Volcker's reasonable plea for greater flexibility in ex- change rates, which simply means widening the points. But make no mistake about this: you cannot 'reform' the international monetary system without moving further away from gold.
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