Heed the Red Lights

January 19, 1958

Since I last wrote here (Nov. 17 and Dec. 8, 1958) about the common market and the free-trade area, major decisions have been taken which mark great steps forward.

The first effects of the rivalry between the six common-market countries—France, Germany, Italy, Belgium, the Netherlands, and Luxembourg—and the proposed free-trade area that would include eleven other European countries have been unexpectedly good. For the common-market countries, in order to blunt British charges of “discrimination,” agreed at the last moment to extend their 10 percent tariff cut, which went into effect Jan. 1, not only to each other but to all nations subscribing to GATT, including the United States. They also offered extension of the first 20 percent increase in quotas to the eleven other European nations.

And when Britain, partly to counter the common market, announced that the pound sterling would be made completely convertible for nonresidents, all the principal European nations felt encouraged or obliged to make a similar announcement. France felt that in order to do so it had to make a still further devaluation of the franc, this time of about 15 percent—from an official rate of 420 to 493.7 to the dollar. In order to offset the shock to confidence, France at the same time announced an anti-inflation program and a “revaluation” of the franc. It dropped two zeros from each unit of 100 francs to create a “heavy franc” with 100 times the purchasing power of the old franc, making it once more about five to the dollar. It remains to be seen whether the steps France takes will in fact be adequate to convince the world that this is its “last devaluation.”

FREER TRADE ABROAD

Nevertheless, the overall effects of the European announcements during Christmas week are of the first importance. The establishment of the common market—together with the initial extension of its benefits to the rest of the Western world—is the most dramatic step taken since the end of World War II toward a lowering of international trade barriers. The establishment of convertibility for the pound and other currencies is the most important single step taken since the war toward a restoration of international monetary order, stability, and discipline.

There have been two other significant developments. The new “heavy” franc is not tied to a round number of American dollars, but made equal to 18/100 gram of fine gold. The European Payments Union, with its automatic credits right, will go out of existence; it will be supplanted by the European Monetary Agreement, under which debt balances must be settled entirely in gold. Perhaps the restoration of the international gold standard is not the vain dream that so many have supposed.

INFLATION AT HOME

But while Europe has been taking giant forward steps, what of the United States? We have been preaching all these fine reforms to Europe, but show no desire to take our own medicine. As Europe is moving toward freer trade, we are moving toward more protection, and particularly toward more import quotas—on farm products, metals, petroleum.

We believe in getting out of recessions, not by internal adjustments, but by more inflation. In the twelve months ending November 1958, notwithstanding unemployment averaging between 6 million and 7 million, average hourly wage rates were pushed up from $2.11 to $2.17. We look forward to a budget deficit this fiscal year of $12 billion. In the twelve months ended October 1958, the country’s money supply, as represented by total deposits and currency, increased $13.6 billion. This was chiefly brought about by the monetizing of government securities. The violent rise of the stock market to new high records, in the face of mediocre corporate earnings, is flashing a signal of lack of confidence in the future value of the dollar. And so is the loss of gold. “Our gold outflow,” says the First National City Bank of New York in its January letter, “is saying that the government is spending too much.”

The dollar, like Caesar’s wife, must be above suspicion. When are we going to heed these signals?