The Dollar Problem

June 19, 1961

In the issue of June 5, I suggested that the least harmful solution of the dollar problem today would be to put a temporary embargo on gold export, to legalize a free exchange market and a free gold market, to guarantee foreign central banks against any long-run loss (in terms of their own currencies) on their existing dollar claims against us, and then, after setting a new gold value for the dollar that would be neither inflationary nor deflationary, to return to a full gold standard.

Whatever objections there may be to such a course, it is infinitely preferable to the alternatives. Four main courses are now being advocated by various groups: (1) The Administration plan to abandon our whole legal gold reserve requirement. (2) The proposal to keep our gold reserve requirement, and to make the dollar convertible at $35 an ounce, not only by foreign central banks, but by American citizens. (3) Devaluation of the dollar, with the retention of the present International Monetary Fund system. (4) The Triffin plan or some similar proposal to turn the IMF into a world central bank with power to create “reserves” (i.e., more paper money) for national central banks.

RESERVES AS A BRAKE

Every one of these courses is inadvisable and dangerous. But the Administration plan to abandon the legal gold reserve would do the quickest irreparable harm. I discussed this in Newsweek of May 22. Here I will content myself with an excerpt from the vigorous analysis by Prof. Walter E. Spahr of the Economists’ National Committee on Economic Policy:

“The common experience of nations with central banks lacking the protective device of reserve controls has been overexpansion of nongold money and credit, decline in the purchasing power of the currencies, and repeated devaluations. . . . Bank reserves are needed . . . to place restraints on the extension of notes and deposits. . . . Under present reserve requirements, the braking mechanism is in the form of a normal minimum requirement of 25 percent and a progressive tax on deficiencies below that percentage. . . . Without this protective device, foreign holders of nongold dollars could take all our reserves, and without penalty, leaving our money and banking system a hollow shell of irredeemable paper money the value of which could fall, quickly or slowly, to any depth. Our people and nation could be ruined as a consequence.”

FREE-MARKETIZATION

Unfortunately, however, our inflation, our increase in notes and deposits, and the increase in our price and wage level have all gone so far since 1934 or even since 1945 that it will soon no longer be possible to maintain real gold convertibility of the dollar at $35 an ounce, even for foreign central banks, let alone for American citizens. If we tried such a thing, the Federal Reserve System would quickly be drained of all its gold or we would have to impose a drastic deflation to prevent it. Either consequence would be intolerable. Those of us who have been fighting inflation for twenty years must be realistic enough to recognize that it has now gone too far to make real redemption at a rate of $35 an ounce any longer possible.

This does not mean, however, that it would be necessary or wise to devalue the dollar at some arbitrary rate (say at $70 an ounce) and go on with the present IMF mock-gold system. The rate so fixed might be inflationary. A new inflation would probably take off again from that point. The proposal for a “free-marketization” of gold, with the purpose of getting back eventually to a full gold standard, should not be confused with a new dollar devaluation.

The greatest danger at present, apart from the abandonment of our legal gold reserve, is the adoption of the Triffin plan or its equivalent. British publicists are pushing hard for this plan. Its appeal is that it looks like a simple and easy way of increasing world “reserves” (of IMF paper money) so that the bureaucrats of all countries could go right on with their inflation. If its sponsors could succeed in putting over such a plan, the gold standard would become the merest fiction, and the world would be launched on an inflationary binge without visible end.