In the Wrong Direction

December 12, 1960

Within the next few weeks or months we may be forced into major decisions regarding gold and the dollar. It is vital that whatever decisions we make should at least be in the right direction.

That is why the proposals made by Henry C. Alexander, chairman of the board of the Morgan Guaranty Trust Co. of New York, in a speech before the Investment Bankers Association on Nov. 28, are a cause of concern. Alexander’s position and standing may give these proposals great influence, and yet they would take us, I believe, in the wrong direction. They would tend to encourage further inflation.

Two in particular call for discussion. The first is that we repeal even the present requirement that the Federal Reserve Banks keep a 25-percent reserve in gold against their note and deposit liabilities. (Until 1945 the required reserve ratios were 35 percent against deposits and 40 percent against notes.) The second is that we continue to forbid American citizens to own gold at home and even forbid them to own it abroad.

THE LAST VESTIGE

The proposal that we abandon even the 25-percent gold reserve requirement was made a year ago by Roy L. Reierson, vice president and chief economist of the Bankers Trust Co. of New York. I discussed it in Newsweek of Dec. 21, 1959, and Jan. 11, 1960. As Alexander makes substantially the same arguments for it, we may repeat the same answer. By taking this step, we would drop the last vestige of a domestic gold standard. We would, at best, keep the dollar good for foreigners for a while longer at the cost of permanently undermining its value for Americans. We would remove even the feeble restraint against inflation that a 25 percent gold requirement has exercised on our monetary managers.

When those monetary managers asked Congress in 1945 to lower the gold reserve requirements from 35 and 40 percent to 25 percent, they did so under the plea of war emergency. But though the war ended a few months later, they continued to permit and promote inflation. At the end of 1944, total bank deposits and currency amounted to $151 billion; today they amount to $252 billion. The increase of 67 percent in total money supply accounts for the increase of 69 percent in consumer prices in the same period. Monetary managers, under constant political pressure, tend to inflate to the extent that the law permits them to inflate.

Alexander contends that the pseudo gold standard that we improvised in the ’30s and formalized with the International Monetary Fund in the ’40s “has proved workable.” In whose favor? Hardly in that of the pensioners, bondholders, policyholders, and savings-bank depositors who have seen half the value of their savings wiped out.

WHY HOARDERS?

It is a sign of the extent to which the system has not worked that we are now in a gold and dollar crisis. Alexander thinks this can be cured only by removing all gold reserve requirements, and prohibiting Americans even from owning gold abroad. His argument for these measures is that gold “hoarding” by “speculators” or “eccentrics” undermines confidence in the paper dollar and reduces the amount of gold for “legitimate” monetary purposes. But these “speculators” are people who dislike being forced to speculate in a constantly rotting paper dollar. These “hoarders” and “eccentrics” are people trying to protect themselves against further expropriation of their savings by the monetary managers, whose idea of “legitimate” monetary purposes includes constant inflation.

Alexander rightly insists that “sound money” can only be achieved by “sound, honest, wise fiscal and economic policies.” He deplores “submitting to the automatic, unreasoning operation of a gold coin standard with full convertibility here at home.” But he seems to forget that it was precisely the function and merit of the full gold standard that it enforced strict limits on the inflationary schemes of the politicians.

What this country faces today is only secondarily a crisis in the “balance of payments.” It is primarily a crisis of inflation. Until we halt inflation, our problem is insoluble.