The Solid Gold Dilemma

Seeking economic advice last week, John F. Kennedy asked Roger Blough over to the White House. The invitation aroused sardonic comment from businessmen around the country, but the problem at issue was one that concerned the chairman of the U.S. Steel Corp. no less than the President: the chronic U.S. gold drain.

Already this year, the nation's gold supply has shrunk $455 million; it is now down to a 23-year low of $16.4 billion. So persistent are rumors that the U.S. might be forced to devalue the dollar by raising the price of gold that speculators have grabbed up gold shares enthusiastically enough to make them the only group of common stocks to defy the plunge on Wall Street.

The rumors are strongly denied in Washington. Devaluation of the dollar would theoretically increase the value of the U.S. gold reserve and decrease the price of U.S. exports. But President Kennedy is said to be dead set against devaluation because it would undermine faith in the West's most crucial economy, and would not solve anything because all other nations would quickly devalue their own currencies.

Trouble at Fort Knox. The dollar is still the world's strongest currency--largely because it is backed with the immense hoard of gold that the U.S.

piled up as a result of the movement of capital out of Europe inspired by World War II. But the hoard is dwindling fast because the U.S., since the war. has spent, lent and invested more abroad than it has taken in. Despite a healthy trade surplus, the U.S. has pumped so much into postwar foreign aid and military spending overseas (total: more than $100 billion) that its balance of payments has run a net deficit of $20 billion over the past decade. Fort Knox has onlv $4.7 billion left to go before it breaks through the $11.7 billion floor of gold legally required to back U.S. paper currency and the banking system. Although the Fed can suspend the requirement at will, a drop below that minimum could cause a run on the dollar and compel Washington to clamp controls on U.S.

foreign trade, travel and investments.

To prevent that, Washington has taken many piecemeal actions--from limiting the duty-free souvenirs that tourists can bring home to pressuring allies to buy more of their military gear in the U.S.

More imaginatively the Fed has begun to stock up on foreign currencies, so that foreign nations with payments claims against the U.S. can be paid off in their own money instead of gold or dollars. Adopting an old European technique, the U.S. last week swapped $50 million for Dutch guilders; in similar earlier swaps, it picked up $50 million worth of French francs and $50 million in British pounds.

Advice from Europe. Many bankers both at home and abroad sniff that this is overly mild medicine. The real reason for the continuing gold drain, they argue, lies in low U.S. interest rates, which encourage U.S. investment capital to flow out to higher-interest countries abroad.

As evidence, they point out that the Fed, in an effort to stimulate U.S. economic expansion with loose-money policies, has increased the nation's money supply by $4.8 billion since 1958--but that the U.S. has lost $4.1 billion in gold during the same period. To the bankers, this means that the new money reserves have simply poured out to other countries.

Fortnight ago, the Bank for International Settlements, which is a kind of European central bankers' union, made a blunt public suggestion that it was time for the U.S. to raise its interest rates.

But tighter money is anathema to the Kennedy Administration, which contends that higher interest rates would choke off borrowing for the very kind of industrial modernization that the U.S. needs to put zip into its economy. Besides, the New Frontiersmen say, tighter money is unnecessary. Proudly pointing out that there has been no gold outflow at all for the past month, they predict that the U.S. balance of payments will be in the black by 1964. To accomplish that, they are counting on a surge in U.S. exports--which would have to increase by only 10% to cover the balance-of-payments deficit.

European bankers regard this as a dangerously iffy prospect. They recognize that in addition to stopping the gold outflow, the Kennedy Administration has other cherished objectives: stimulating the domestic economy, continuing a high level of foreign aid and maintaining the nation's military strength abroad. But they argue that some order of priorities should be established. Said one European economist last week: "The U.S. is fully justified in thinking that with the economy slack, low rates of interest are appropriate for recovery. But low interest rates are not necessarily appropriate for a country with a balance-of-payments deficit."

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