Gold and the Dollar

June 5, 1961

The Kennedy Administration’s proposal to eliminate the gold-reserve requirements for Federal Reserve Banks is extremely ill-advised and dangerous. It is fortunate that the opposition to it was so extensive as to cause Congress to postpone the scheduled hearings. We should utilize the breathing space to consider not only the objections to such a drastic measure but what positive steps we need to take in monetary reform.

The most important step is to halt the inflation. It is the almost uninterrupted inflation of the last quarter century that has created the whole gold and dollar problem. The inflation has been the primary cause of the “deficit” in our balance of payments. It has been the primary cause of our loss of gold, and of the threat of further loss. It is the inflation that has undermined confidence in the dollar. It is the inflation that has raised our prices and wages to a point where we are having increasing difficulty in competing in the world market.

To halt the inflation it is simply necessary to stop expanding the supply of money and credit. We must balance the budget. We must end the folly of foreign economic aid. We must cut Federal nondefense expenditures on scores of projects. We must stop all Federal Reserve or government efforts to push down interest rates. We may even have to freeze the total of bank loans and investments till we are sure the inflation is halted.

INFLATION VS. FIXITY

But the Administration today does not dream of taking even the mildest of these measures. It looks upon an unbalanced budget with complete complacency. It is expanding all the old spending programs and proposing scores of new ones. It is increasing the pace of inflation, and daily intensifying the very dollar problem it is trying to solve.

But—and this is the sad situation at which we have arrived—even if the Administration took every requisite measure to halt the inflation, it could not solve the immediate problem that confronts us. That problem is the result of 27 years of inflation combined with the maintenance of a fixed exchange rate for the dollar and the commitment to sell gold at $35 an ounce to any amount asked for by foreign central banks.

Our gold base has become too narrow in comparison with the vastly increased amount of notes and deposits created against it. Since 1934 our average domestic price level has more than doubled, but an ounce of gold can be obtained for the same price. Our increased money supply and price level encourages imports, discourages exports, and makes our gold the biggest price bargain the U.S offers the rest of the world. If we keep our $35 an ounce price, and allow foreigners to draw out as much gold as they want at that price, we stand to lose our entire gold supply. The only alternative would be a deflation so drastic that our people would find it intolerable.

IS $35 TENABLE?

This is what those who think we could keep gold convertibility at the present price, and even extend it to American citizens, fail to see. They refuse to face the fact that our inflation has already gone too far to make the $35 an ounce price any longer tenable—unless, of course, we turn the ostensible “convertibility” of our dollar into a meaningless fiction.

The least harmful thing we could do, therefore (reluctant as one is to make the suggestion), would be to put a temporary embargo on gold export. The next step would be to legalize a free exchange market and a free gold market. Special arrangements could be made to protect foreign central banks against loss (in terms of their own currencies) on their existing dollar claims on us. Then we could try to set a new gold value for the dollar that would be neither inflationary nor deflationary, and return to a full gold standard, with convertibility for Americans as well as foreigners.

Whatever objections there may be to such a course, it is infinitely preferable to any of the alternatives now being proposed, such as trying to maintain the present mock gold standard at $35 an ounce, or plunging into a new worldwide inflation through the Triffin plan or a money-printing IMF, or abandoning our own gold-reserve requirement.