The shortage of gold MONEY
NICHOLAS DAVENPORT
The story of world monetary reform runs through the newspapers like a serial, boring everyone to death except when it works up to a suggestion of murder or rape. With luck we are now running into a suggestion of rape. The deputies of the Group of Ten central banks and the executives of the board of the Inter- national Monetary Fund have been holding a number of meetings trying to draw up an agreed plan for world monetary reform to lay before the September annual meeting of the IMF at Rio de Janeiro. The fourth and last was held in Paris last week. If it were not for their political masters these experts would have settled long ago upon a reasonable scheme for creating a new international reserve pool of money but unfortunately the draft scheme was backed by the Americans and British and the French would have none of it. An alternative scheme for doubling the existing gold tranche drawing rights on the IMF was then put forward and this the French agreed to, provided strict rules for their use and repayability were laid down and provided voting procedures of the IMF were changed in order to give the European bloc a collective veto.
The Americans, despairing of getting European agreement to the creation of a new reserve monetary unit, consented to this alter- native scheme going forward but there is still no positive agreement about the rules for work- ing it. The French refuse to allow the increased drawing rights to be 'as good as gold,' that is, automatic and transferable from one country to another and not repayable except at the option of the drawer. The finance ministers of the Six are to meet at Brussels early in July to draft out stricter rules for the use of these drawing rights. and this will be considered by the
Ministers of the Group of Ten when they assemble in London at the end of July under the chairmanship of our Mr Callaghan. It should be a lively meeting.
But what made the Paris conference of the Deputies last week more exciting than the usual dreary run of monetary reform was the dispatch from M Gabrysiak which appeared in The Times on Monday. It said that the French were very happy about this meeting because they now have a secret plan for sterling, which will provide a 'solution to all the problems' involved in the sterling balances and the changed 'role for sterling in a new world.' As we all know that the French do not want to admit us into the European Common Market unless we give up the reserve role of sterling and fund the sterling balances this 'secret plan' might seem at first sight to be a simple rape of the sterling exchange rate. But the French are too sophisticated to imagine that one can rape sterling without raping other currencies as well, particularly the dollar. What they may have in mind is therefore some revision of the existing gold exchange parities if they cannot get American agreement to a revaluation of the price of gold.
The recent report of the Bank for Inter- national Settlements was pretty gloomy about the chances of monetary reform at the coming IMF meeting at Rio de Janeiro. 'Where the matter stands,' it said, 'is that an alternative to the present gold exchange standard has not been found; nor is there a clear view about how to operate that system with a very limited flow of new monetary gold.' Now the increasing shortage of gold is making a revision of the present gold exchange standard more and more a matter of urgency. The startling fact, brought home by the Ens report, is that in the twenty-one years since the end of the Second World War only $9,900 million of gold was added to the monetary reserves of the western world out of a total of $25,200 million of newly mined gold. The gold mines of the western world produce about $1,440 million of gold a year. Last year for the first time the official gold stocks outside the IMF failed to register an increase: the hoarders took all the new supplies! Gold hoarding and other non- monetary demands have, in fact, absorbed $6,620 million of gold in the last five years. How on earth is it possible to operate a gold exchange standard when outsiders are running off with the new gold? The subscribers to the IMF system will have to alter their rules. If they are not prepared to make it illegal for their respective nationals to buy and hoard gold they will have to meet the coming shortage of gold either by raising its price or by creating more paper reserves.
The Americans have done their best to relieve the shortage by running up deficits on their international payments and letting their creditors take all the gold they want in exchange for dollars. At the end of the war the us Treasury had a gold pile of about $24,000 mil- lion: this has now been reduced to $13,200 million. But a large part of this pile is still ear- marked as a gold cover for the internal car- rency, leaving only $3,200 million free to meet the claims of foreign depositors which amount to about $27,000 million. Mr McChesney Martin, the chairman of the board of the Federal Reserve, called upon his government this week `to act now to eliminate the, 25 per cent gold cover requirement,' so that American gold can continue to meet the world's needs.
Of course, if the world were a civilised, rational society it would now be using paper for international exchange as it is using paper for internal or domestic exchange. It would be using in particular the paper of the advanced industrial nations whose currencies have been held as 'reserve currencies.' But the world is not a rational society. It is still irrational, suspicious, vile and torn with hatred and envy. To make matters worse, the 'reserve currencies' of the advanced industrial nations have come under suspicion because their governments have been trading at a deficit and have not enough gold to meet the claims of their foreign creditors if there were a run on their 'banks.' Fortunately we have avoided so far a run on the dollar 'bank' and have overcome the three or four runs on the sterling 'bank.' But it has been a close-run thing.
Dollar paper has already come to the rescue of the gold exchange standard and there is no doubt that it will continue to do so. The cur- rency 'swaps' which the us Treasury has arranged with other central banks already amount to $5,000 million and will no doubt be extended. The French will therefore make a big mistake if they insist on gold too rigidly. American patience could be exhausted and the us Treasury could announce at any time that it will no longer buy gold at $35 but will con- tinue to sell it until its pile of $13,000 million is exhausted. The danger of such a 'show-down' with the gold bloc is that it would disrupt world trade and could set in motion a worldwide deflation. As the French are well aware of this there will no doubt be one more compromise with the nu at Rio de Janeiro.
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