To Preserve the Dollar

December 4, 1961

The world in the last few decades has not been on the gold standard, but on an American dollar standard. Under the International Monetary Fund system, most other countries have fixed official par values for their currencies in terms of the dollar. Relying on our promise and our ability to keep their dollar holdings convertible into gold at $35 an ounce, foreign central banks have based their own operations on the assumption that the dollar is “as good as gold.” They have used dollars, precisely as they have used gold itself, as part of the reserves on which their own internal credit structures and national currency units are based.

If anything should happen to the integrity of the dollar—if we should find ourselves obliged to pay out gold until our reserves were exhausted, or if, to avoid this, we should either suspend exports of gold or devalue the dollar, we would not only destroy the international status of the dollar and irreparably impair our own prestige, both political and economic, but also we would do immeasurable damage to world confidence. As Secretary Dillon has admitted: “The dollar, as the world’s basic reserve currency, is the very foundation of international trade and commerce.”

PLEDGES NOT ENOUGH

Yet, grave as this danger is today, it is being treated in Washington with levity. President Kennedy did, indeed, take the first necessary step when he gave assurance in his first month in office that “the dollar must be protected . . . in its present value” and went on to pledge more specifically that he would take no action “to increase the dollar price of gold from $35 an ounce” or “to impose exchange controls.” But the dollar cannot be defended merely by uttering the right phrases. These must be followed by actions and policies which will give the world assurance that such pledges can and will be kept.

The policies Mr. Kennedy has been following, far from giving such assurance, are calculated to give rise to the deepest misgivings. The President and his aides have dealt, at best, only with short-term expedients or surface symptoms. They have attempted to deal directly with the balance-of-payments problem by reducing the duty-free allowance of returning American travelers from $500 to $100 and by ordering our forces in West Germany to buy their coal from the U.S. Such measures are trivial; they do nothing to remedy the basic situation. To the extent that we discourage imports we discourage exports, by depriving foreign counties of that amount of dollar exchange with which to buy our goods.

HALT THE INFLATION

The Administration made efforts at Vienna in September to solve our alleged “balance-of-payments” problem by increasing the lending power of the IMF so that we could borrow more. But as M.W. Holtrop of the Nederlandsche Bank pointed out, there is no solution “in just feeding the excess reserves of the surplus countries back into the international circuit, so as to enable the deficit countries to continually finance their deficits. This would only create the perfect machine for perpetual inflation.” And as the First National City Bank of New York asks: “Would not massive drawings on the fund be interpreted as an admission that the United States could not settle its deficit by selling gold? Should a banker seek to negotiate borrowings from depositors?”

The blunt truth is that our balance-of-payments deficit is simply the consequence of our internal inflation. This raises our prices to discourage exports at the same time as it increases the dollars with which we buy imports. No matter what solution we ultimately adopt for our dollar problem, the first and indispensable step is to halt the inflation. This calls for remedies unpalatable in Washington, which continues to be hypnotized by the superstition that inflation is necessary for “a high rate of growth.” We can still prevent a deficit of $7 billion in the current fiscal year by starting immediately to slash into our fantastic $89 billion spending program. And we can signalize a halt in our cheap-money policy by a simple increase in our rediscount rate.

Or must Washington wait until after disaster has happened before it can be brought to reexamine its ideology?