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Even if President Johnson successfully persuades American banks and businessmen to voluntarily restrain their investments abroad, the United States will face a gold loss in 1965 of immense and perhaps crisis-making proportions.
The President's "guidelines" are designed to improve the deficit in our balance of payments. Because Americans now spend abroad more than foreigners spend here, there is a net outflow of dollars from the United States, Central banks in other countries have the right to convert their surplus dollars to gold. And the resulting gold drain jeopardizes the stability of U.S. currency.
In past years, the Treasury has induced central banks abroad to retain their dollars instead of converting them to ingots. Using "Roosa bonds" (named for former Under Secretary Robert Roosa) and complicated currency swaps the Treasury has "financed" the balance of payments deficit. Foreign central banks have backed a portion of their currency with dollars (and pounds), just as the Federal Reserve backs our own currency with gold. Last year, as a result, the deficit was 3 bilion dollars, but the gold drain was only 125 million.
This year, however, Europeans already have more dollars than they want. And, regardless of our balance of payments, they'll be cashing in for gold. "You can keep your businessmen from investing, your banks from loaning and your tourists from spending," says a representative of Deutsche Bundesbank, "but you can't prevent the banks on the continent from wanting gold. They're scared about a lot of things--your balance of payments, the pound's weakness, and the possibility of devaluation--and De Gaulle isn't the only one who's worrying."
Since January 1, the United States has lost $825 billion in gold, as compared to $125 million in all of 1964. France has been responsible for over half (450 million) of that decline. But Germany has quietly raised her gold-reserve ratio by 6%; Spain has cashed in 60 million dollars for gold. And Switzerland, the Netherlands and Italy have all contributed to the problem. The U.S. gold stock fell last month to $14 billion, the lowest in 26 years. And experts predict that the worst is yet to come.
African and Asian countries will be increasing their purchases in Europe this year--paying for them with dollars. These underdeveloped countries hold most of their reserves in dollars and pounds. When the prices of their primary commodities rise, they build up reserves; and when prices decline, they use their dollars to pay for goods and services in Europe. Through the last two quarters of 1964 and the beginning of 1965, commodity prices have trended downward.
"It should be noted," says a report by the monetary committee of the European Economic Community, "that the 1964 American deficit was financed largely through the holding of dollars by developing countries. If and insofar as the dollar holdings of the developing countries are transferred to community countries, which usually hold a large share of their reserves in gold, the U.S. might find itself required to cope not only with the problems of financing the 1965 deficit, but also with the need to refinance that of 1964."
In the long run, some economists predict that the monetary problem will solve itself when the balance of payments is corrected. Foreigners then will have no extra dollars to turn into gold, and their increased confidence will lead them to retain the U.S. currency they already have. But, despite these optimistic forecasts, many Europeans now question the viability of the present monetary system. This system depends on the world's confidence that the dollar may be exchanged in the United States for a set amount of gold. And, although the Treasury stands ready to exchange one ounce of gold for every 35 dollars, the United States does not have enough gold to redeem every dollar outstanding at this rate.
When foreign central banks exercise the legal right to cash their dollars in for gold, they drain gold from the United States. This decline in the gold stock causes people to lose confidence in the current rate of exchange. An initial decline in the gold stock, resulting in a loss of confidence, could precipitate a "run" on the dollar, forcing the U.S. to devalue. And because countries back their currencies with dollar and pound reserves, devaluation of these currencies--or even the fear of devaluation--could cause a world-wide crisis.
In view of the weakness of the pound and the U.S. balance of payments deficit, the Common Market may soon take initial steps toward a joint monetary policy; and the Paris Club of Ten, an elite group of central bankers from major world countries, is expected to consider some form of automatic control to regulate the accumulation of dollars by central banks.
"There is an emerging consensus among the international community," notes Pierre-Paul Schweitzer, managing director of the International Monetary Fund, "that the creation of international liquidity, like the creation of domestic liquidity, should become a matter of deliberate decision." The debate now raging with regard to the future of the world monetary system will probably result in some revision by 1970.
Confidence in the dollar has ben bolstered temporarily by President Johnson's determination to eliminate the deficit in our balance of payments. But increased gold losses this year may undermine that confidence, inducing foreigners to cash in their dollars on a larger scale. Even departing Secretary of the Treasury C. Douglas Dillon concedes the desirability of some revision in the present monetary system. When the U.S. "gets into balance," he told the House Banking Committee some weeks ago, "the world will need to consider whether some other form of reserve asset than the dollar will be needed." The gold loss that the U.S. suffers in 1965 will intensify that process of consideration.
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