Assurance vs. Acts

August 13, 1962

In his press conference of July 23 the President announced that “those who speculate against the dollar are going to lose. The United States will not devalue its dollar.” The effect was dramatic. Gold-mining shares fell. The dollar was stronger on the foreign exchanges.

It was gratifying to have this assurance reiterated. But Mr. Kennedy gave this same assurance in his first month in office and it is necessary to point out once more that the dollar cannot be defended merely by uttering the right phrases. These must be followed by actions and policies which will convince the world that such pledges can and will be kept.

The right policies have not followed the right words. The Administration has been pursuing a policy of deficits and cheap money. The outward flow of gold has continued. Three days after the President’s pledge of July 23 the Treasury announced a further weekly loss of $90 million, bringing the nation’s supply of monetary gold down to $16.2 billion, the lowest in 23 years. Against this our short-term liabilities to foreigners and international institutions total $23 billion.

Yet in the same week in which Mr. Kennedy made his renewed assurance he let it be known that he favored a tax cut of “at least $7 billion a year.” As a deficit of some $3 billion to $6 billion is already in prospect, this could mean a total deficit of $10 billion to $13 billion.

INFLATION THE CAUSE

Now the blunt truth, as I pointed out in this column of Dec. 4, 1961, and on other occasions, is that our balance-of-payments deficit is simply the consequence of our internal inflation. No matter what solution we adopt for our dollar problem, the first and indispensable step is to halt this inflation. Yet not only the Administration, but the greater part of the business and banking community, has been treating this problem either with astonishing lack of understanding or with disturbing levity. One of the country’s outstanding business organizations has been advocating a big slash in taxes without a corresponding slash in expenditures.

Two exceptions to this irresponsible attitude deserve honorable mention. Last November Hans A. Widenmann, a partner in Carl M. Loeb, Rhoades & Co., pointed out that the only solution to the dollar problem was to “balance our budget and put an end to inflationary trends.” Anything else was a mere “gimmick.” He listed eleven such gimmicks that the Administration had already tried or suggested—from reducing tourist duty-free imports to $100 and the proposal to eliminate the 25 percent gold-reserve requirement to attempts to “improve liquidity” through the International Monetary Fund. And he showed that each of these gimmicks was at best a stopgap, and that some would mean dangerous steps in the direction of more world inflation.

UNDERMINING THE DOLLAR

In May of this year, John Exter, senior vice president of the First National City Bank of New York, made a brilliant analysis of the cause of the dollar crisis. He stated his conclusions bluntly: “A balance-of-payments deficit is caused by monetary policy alone. It is a question of creating too much money . . . of running the printing presses. If one country runs its printing presses faster than other countries run theirs—remember Gresham’s Law—then that country is going to have a balance-of-payments deficit.” He went on, like Widenmann, to list the gimmicks to which the Administration had resorted to solve the problem, and pointed out that they enabled us at best to postpone it. “Why do we continue easy money when it becomes clearer day by day that it is relentlessly undermining the dollar?”

If I may presume to answer his question, I should say: Because we are still under the delusions of Keynesianism and inflationism. Because we still think that economic salvation lies in government spending, in deficits, and in cheap money. Because many of us hold the insane belief that balanced budgets and sound money cause depression and unemployment. Because we have not stopped to ask ourselves how irreparable the damage would be if confidence were once undermined in the world’s anchor currency—the dollar.