Waging the Gold War

Fort Knox last week bore an uncomfortable resemblance to a besieged stockade on the plains of the Old West. The fort was under attack not by redskins but by sharp-eyed and pin-striped foreign bankers. In the past fortnight, U.S. gold reserves have fallen by $80 million, now stand at a 23-year low of $16.7 billion. This is $2 billion less than total short-term foreign claims against the dollar. While U.S. officials rightly insist that foreigners will scarcely call all their claims at once, the fact that U.S. gold reserves could theoretically be wiped out on call is a threat to confidence in the dollar.

The gold drain, a major U.S. affliction since 1958, results from the fact that the U.S. spends and lends more abroad than it earns there. In its foreign trade, the U.S. regularly shows a comfortable surplus ($5.6 billion last year). But this is more than outweighed by tourist spending, private investment abroad, foreign aid, military assistance to U.S. allies, and the cost of maintaining U.S. troops overseas--all of which added up to $16.6 billion last year. Things have improved somewhat since 1960, when the nation lost a jarring $1.7 billion worth of gold. But the fact that the U.S. was losing gold this month--when it actually gained some gold in March a year ago--had Washington newly uneasy last week. Even if the total gold drain for 1962 could be held to the 1961 level of $700 million, as the Administration expects, there would be no cause to cheer. If--improbably--the U.S. continued to lose gold at that rate indefinitely, Fort Knox would go bust sometime around 1984.

Friendly Persuasion. Because the whole free world has a stake in seeing that Fort Knox doesn't go bust, Washington has recently been inundated with a flurry of radical suggestions for keeping it solvent. A group of Republican Congressmen want the Government to discourage speculation in gold by abandoning the guaranteed U.S. purchase price of $35 an ounce. French Economist Jacques Rueff, who masterminded De Gaulle's successful currency reform plan, urges complete scrapping of the managed-money system and a return to the classical gold standard--a step that he argues would stimulate the international flow of capital and trade. This is supported by Philip Cortney, president of Coty Inc., who also wants the support price of gold raised to $70 an ounce, thus doubling the value of the diminishing U.S. reserve.

Few in Washington take these ideas seriously--if only because the Administration has opened up a broad offensive in the gold war that is already producing some preliminary signs of success. Washington wants all good men to come to the aid of the dollar by helping the U.S. to spend less and earn more abroad. Friendly foreign governments are proving to be receptive, if not out of gratitude for past favors, then out of hardheaded realization that the West's basic currency cannot be permitted to go to pot. A progress report from the many fronts in the gold battle:

o The Treasury and Defense Departments are pressuring allies to buy more of their military hardware in the U.S. The West Germans have already agreed to buy $600 million worth yearly--which just about equals U.S. troop upkeep costs in Germany.

o The State Department is stepping up the "Buy America'' program in foreign aid. Where two-thirds of past aid funds had to be spent in the U.S., four-fifths of future funds will be so "tied."

o The Treasury is making it unprofitable to speculate in foreign currencies and gold. It has begun 1) to buy and sell foreign currencies to keep their prices stable relative to the dollar, and 2) to sell some gold on the London market to keep prices low. Last month, for the first time in 18 months, London gold prices dipped fractionally below the U.S. support level.

o President Kennedy is pressing to increase the U.S. export surplus by slashing tariffs. His No. 1 legislative goal this year is passage of his trade expansion bill. Stumping for it last week. Treasury's Douglas Dillon argued that exports can be meaningfully expanded "only if through negotiations, we ensure that the doors to major foreign markets be opened wider for U.S. products."

Unfriendly Barriers. Europe and Japan can afford to do a lot of widening. Their economies have now become so robust--thanks in large part to $50 billion in U.S. aid during the postwar era--that they can comfortably scrap many anachronistic tariffs, quotas and excise taxes against U.S. imports. Equally important, the foreigners--notably the affluent French and Germans--could well afford to step up greatly their own foreign aid and thereby take some of the financial burden of the underdeveloped countries off the U.S.

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