Why We Lose Gold

December 22, 1958

The recent concern about our loss of gold cannot be dismissed as unwarranted. Between Feb. 19 and Dec. 10, 1958, the United States gold stock declined by $2.2 billion, a drop already exceeding that for any previous year.

This country, it is true, still holds $20.6 billion, more than one-half of the free world’s monetary gold. Yet behind the recent rate of gold loss is a situation that is more serious. Of our gold reserves of $20 billion on Dec. 3, $11.7 billion was required as the 25 percent legal cover for Federal Reserve note and deposit liabilities. This left “free” gold reserves of only $8.3 billion. And United States short-term liabilities to foreign countries on official as well as private account amounted in August 1958 to $14.2 billion.

The United States, in other words, owes foreigners more in dollars than it holds in excess gold reserves. If these foreigners elected to withdraw all their liquid dollar assets in the form of gold, they would more than wipe out the “free” gold we now have. It is also worth keeping in mind that if Congress had not reduced the gold-reserve requirements in 1945 to only 25 percent, instead of the previous 35 percent against deposits and 40 percent against notes, the amount of “free” gold today would be only $2.2 billion.

TO RESTORE TRUST

The probability that foreigners would actually seek to withdraw all their dollar balances in the form of gold is at the moment low. They can do so only through their central banks. They prefer, moreover, to keep a certain amount of dollar balances here because they earn interest, and because they are needed for working capital. In addition, foreigners owe American creditors dollars on long-term account.

But we cannot remain complacent about the situation. As the First National City Bank of New York points out in a sober discussion:

“A flight from the dollar—not only by foreigners but by Americans as well—might well be touched off if the idea gained ground that conditions were developing under which a rise in gold price would appear inevitable. Because of the strategic importance of the United States and the dollar, foreign bankers, businessmen, and investors are—understandably—watching how we handle our monetary and fiscal affairs. What counts is the determination of the United States Government and of the Federal Reserve System to safeguard economic and monetary stability and thus prevent—by deeds, and not by words alone—spread of doubts concerning the assured maintenance of dollar stability. The fact that excess gold reserves are still so far above minimum requirements gives time—but not indefinite time—to repair policies that hurt trust in the dollar.”

FIVE POSSIBLE STEPS

Here are some of the specific steps we might consider to keep or restore confidence in the dollar:

1—Let the Federal Reserve definitely abandon cheap-money policies. Moderately firm interest rates will not only discourage the withdrawal of foreign balances but will stop encouragement to credit expansion.

2—Congress could show its own determination to protect the integrity of the dollar either by restoring the pre-1945 Federal Reserve gold-cover requirements or by otherwise limiting further credit expansion.

3—The situation plainly calls for a drastic reduction in foreign aid. It is absurd to increase inflation here, and to undermine our own currency unit, by giving away more dollars to countries that already have deposits or short-term claims here in excess of our free gold supply.

4—We must immediately put our own fiscal house in order, drastically reduce our prospective $12 billion deficit in the current fiscal year, and try to eliminate any deficit in the next fiscal year. This could be accomplished by drastic cuts in foreign aid, in farm subsidies and price supports, and in a score of other directions.

5—Revise the Federal laws that put grossly excessive bargaining power in the hands of union leaders, make it all but impossible for employers to prevent “wage inflation,” and adversely affect our competitive position and our balance of trade.