Saving the Dollar

February 27, 1961

Once more, in his message to Congress on the balance of payments, the President pledged that: “The U.S. official dollar price of gold can and will be maintained at $35 an ounce. Exchange controls over trade and investment will not be invoked. . . . A return to protectionism is not a solution.” Once more the actual policies he proposed would make it impossible to keep all these pledges.

Solutions must deal with causes. The “deficit” in our balance of payments is not the basic cause of our gold and dollar problem. The basic cause is inflation. This includes both the inflation that has been built up for the last quarter century and the future inflation that is now feared. The “deficit” in our balance of payments is itself one of the consequences of this inflation. Yet ninetenths of the economic proposals that Mr. Kennedy has made in his first weeks of office would increase the inflation.

The assumption that the basic cause of our gold and dollar problem is the “deficit” in our balance of payments is a relic of seventeenth-century mercantilism. And most of the immediate measures that Mr. Kennedy proposed, seeking to eliminate this “deficit” directly, move in fact toward protectionism and exchange control.

RESTRICTIONISM

This is true, for example, of his proposal to reduce the duty-free allowance for returning travelers from $500 to $100. This might have been urged on the ground that the larger allowance discriminates in favor of people who can afford to travel; but it was actually urged on a “balance of payments” argument that would be just as good or bad for any other measure to restrict imports.

His other measures lead toward exchange controls and further restrictions on the freedom to trade and invest, to buy and sell, to lend and borrow. This applies to his endorsement of the prohibitions on Americans against buying or owning gold at home or abroad. It applies to his proposals for laws “to prevent the abuse of foreign ‘tax havens’ by American capital abroad as a means of tax avoidance”—leaving it to bureaucrats to decide just what is “legitimate” private investment abroad. It applies to his proposals to control and compartmentalize interest rates, discriminating in favor of foreign lenders, and keeping up short-term rates while pushing down long-term rates. Such schemes could not be made to work at all without exchange controls, government discrimination as between both borrowers and lenders, and detailed government intervention in the money market.

Finally, it is disturbing to have Mr. Kennedy decry as “speculation” every effort of Americans to protect themselves against further devaluation or debasement of the dollar. This view must lead to exchange control.

HALT THE INFLATION

Mr. Kennedy’s statistical pictures seems unduly optimistic. The fact is that against $17.4 billion of gold reserves we have short-term liabilities to foreigners of $20.9 billion. Nearly two-thirds of these are official holdings for which gold could be demanded; most of the rest could easily be turned into official holdings. Of our $17.4 billion gold reserves less than $6 billion are “free.” The remaining $11.4 billion are held as a required 25 percent reserve against Federal Reserve notes and deposits. Mr. Kennedy hints that we could abolish the reserve requirement. This would merely protect foreigners a little longer at the permanent expense of our own citizens. One can imagine what the effect of such an announcement would have been if Americans as well as foreigners were free to convert their dollars into gold.

The first and only cure of the dollar problem, and the so-called balance-of-payments problem, is to halt the inflation. Nearly all of Mr. Kennedy’s proposals would increase the inflation. He is right in saying that “our costs and prices must be kept low.” But one does not keep them low by increasing the minimum wage. To pour more inflationary funds into the economy, and raise money-wages and prices, will only encourage and discourage exports still further, and increase the “deficit” in the balance of payments. We cannot cure the evils of inflation with more inflation.