XIII. The Sad Predicament of the Fool's Paradise

As these lines go to press, the problem has reached the critical stage. We have lost in less 128 AN INFLATION PRIMER than three years over $5.2 billion of our gold re serve (closer to $6 billion, including the gold bor I rowed from the International Monetary Fund), more than $2 billion in the last four months to mid-January, 1961. Where are the surplus dollars coming from, to be turned into gold by redemption at the Federal Reserve Bank of New York or by purchasing gold on the London, Toronto, and other markets? Our balance of payments is "leaking" in several places, through which dollar claims are flowing out in excessive quantities: $3.3 billion in 1958, over $5 billion in 1959, an estimated $3.5 to $4 billion "only" in 1960. A temporary leak was created by the Federal Reserve System itself. Since early 1960. it has irresponsibly lowered and kept low the short-term money rates, thereby creating a broad-yield differ ential between foreign and domestic credit instru ments. The result was a great deal of American capital flow to London and Frankfurt. However, since the European central banks willy-nilly re duced their discount rates (in order to please the Americans), the differential has been cu~ to a point where it scarcely covers the costs involved in transferring short-term funds from these shores to the others.

Potentially far more important is a second leak: flight from the dollar. At home and abroad, peo pIe have come to suspect that the dollar will be 129 THE SAD PREDICA1VIENT OF THE FOOL'S PARADISE devalued. A rational reaction is, for the foreigner: to get rid of his dollars; for the American: to hedge by buying gold or gold certificates, possibly even on money borrowed abroad (on 97 per cent margin). But the total of such transactio~s has been, so far, the proverbial drop in the bucket. Mr. Eisenhower's order to liquidate gold holdings held abroad affects residents of this country only; it could scarcely be policed. 1 In any case, it amounts to fighting the smoke, rather than the fire that produces the smoke. The run on the dollar is not caused by the run on the dollar; it is caused by lack of trust in our willingness to defend the dollar, to overcome the persistent deficit in our balance of payments.

EROSION-HOW MUCH LONGER? That brings us to the decisive "holes" from which the deterioration of the payments balance and the consequent gold outflow stems. They are: directly, the lavishment of governmental expendi tures abroad, totaling between $8 billion and $9 billion a year; indirectly, the domestic cost-price inflation. The latter reduces the export prowess of American business, fosters the emigration of American plants, and generates excessive imports. If our private consumption is "conspicuous," as we are being told, it is because of unreasonable taxation and of inflation fears that induce reck less spending and purely speculative investing. As 130 AN INFLATION PRIMER to our ability to compete, we formerly led the world in technological progress. Where we are presently, after many years of spoon-fed "growth," was aptly summarized by the Wall Street Journal: Frequently shoddy workmanship. Crippling strikes for whimsical reasons. Disdain for the contract. The enormous economic toll of featherbedding which is rapidly turning this into a high-cost economy, as reflected in the inability of U.S. products to compete, as once they did, in world markets. Perhaps most important of all, the erosion of values once held high .

. . . if there is softness in America today it is not pri marily inferior education or "inadequate" public spend ing but this union and statist sponsored philosophy of indolence. The problem is more than economic, it is moral. For what we are witnessing on every side is not only the finan cial disintegration of governments. We are witnessing the collapse of individual responsibility. Reduced exports and high imports, on top of the "political" dollar flow, add up to an abund ance of dollar balances and claims in foreign hands. They are claims on gold, in the ratio of an ounce of gold of 9/ IOths fineness to each $35. How long can the creditors feel assured that their claims are really worth the gold if the pile of claims-over $27 billion already, with the gold re serve down to $17.5 billion-keeps rising at a daily rate of well over $10 million? Presently, the central banks of the industrial nations (Europe, -Canada, Japan) refrain, as a rUlle, from withdraw131 THE SAD PREDICAMENT OF THE FOOL'S PARADISE ing dollar funds they had accumulated on this side. But of the funds they acquire from here on, about 75 per cent is being converted into gold.

Naturally, they cannot indefinitely tie up in dollar balances their ultimate liquidity reserves while the dollar's convertibility is not assured. Their monetary sovereignty, the freedom to act with some degree of financial independence, is at stake. As it is, they cannot help but consider dollar re serves as a permanent "investment," of which no major fraction could be withdrawn without spark ing a panic on, and the collapse of, the dollar. Our problem, then, is to cut the cloth to the size of the figure-to hold the deliberate outpour of funds within the limits set by the surplus pro duced through current (commercial) transactions with the outer world. As to bolstering that com mercial surplus,. there is one effective way, one only: balance the budget and stop the monetiza tion of the national debt by the Federal Reserve System. AT THE END OF CREEPING INFLATION'S ROPE With their eyes riveted on the gross national product and similar "aggregate" concoctions, the addicts of managed money and creeping inflation ignore the "golden rule" of a free society. It is this: If you overstrain your financial system, you lose your gold. Gold, pooh-poohed by the pseudo liberals as a "barbaric relic," is the ultimate regu132 AN INFLATION PRIMER lator that keeps the economic world in balance.

Gold is the governor that restrains the credit apparatus from expanding wildly and the welfare states from running headlong into collectivism, if not into ruthless tyranny. The attraction and virtues of gold are that govern ments can't roll it off or create it with the stroke of a pen. It imposes some monetary discipline by affording a safe guard, a store of value which may escape looting, debase ment and other forms of spoliation. That is why the people of the East, with centuries of experience of rascality by rulers, bandits and other depre dators on human welfare, hoard a few pieces of gold against the days of pillage and spoliation. That is why the supposedly enlightened peoples of the West have to tie their money systems in some way to a real commodity, acquired by an expensive and ugly outlay of human toil. And it is precisely because governments in our time have grossly debauched the currency that they now hope to cover up the distortions by manipulating the price of gold. George Schwartz, "Really Cheap Money," The Sunday Times) London, November 13, 1960.

There is no escape from the rule of gold, except by taking national insolvency on the chin, which is what dollar devaluation means. Raising the dollar price of gold would be the signal to devalue all currencies-global inflation with all-round, semi totalitarian controls over international transac tions, domestic prices, profits, and wages. It would be the greatest irony of history, and an unparalleled tragedy for western civilization, if America, by exporting inflation) would force the 133 THE SAD PREDICAMENT OF THE FOOL'S PARADISE world back into the commercial and monetary chaos from which it has been slowly emerging wiping out the stabilization, for the sake of which the American taxpayer has spent a round $80 bil lion since World War II. At that point, inevitably rising prices would make illusory all (alleged) ad vantages resulting from a boost of the gold price and would call for more of the same fake medi cine. And it would mean a thorough defeat in the cold war, with the material, political, and prestige advantages accruing to the Soviets.

1. Little New Zealand, an island country, tries hard but does not succeed in stopping gamblers from transferring domestic funds with which to play in Australian lotteries, Irish sweep stakes, and British football pools. 134 APPENDIX MONEY SUPPLY AND INFLATION WHAT IS MONEY SUPPLY? The collectivist propensity to invent fresh argu ments in order to justify ever more inflation is something to behold. A latest sample is the com plaint that we are suffering from deflation: in the twelve-month period to the end of May, 1960, the money supply-meaning the sum of currency out side the banks and adjusted net demand deposits in the banks-has declined by $3 billion, or 2.5 per cent. So, let's hurry and print more money. The facts are, however, that during the current (alleged) decline of the money supply the net vol ume of outstanding debts rose by $50 billion or more, bank loans increased by $12 billion, or al most 10 per cent, and the consumer price index went up by 2 per cent.