Symptoms of Malaise

After last November's devaluation of the British pound, persistent fears of a much greater upheaval began gnawing at the foundation of world finance. The resulting rush to exchange dollars for gold drained well over $1 billion from the dwindling U.S. hoard of bullion, cost the seven-nation London gold pool close to $2 billion. Like Britain, the U.S. has been living extravagantly be yond its budget, partly because of the heavy cost of the Viet Nam war but also through increased spending at home. Speculators' appetite for gold is only the most dramatic symptom of a monetary malaise that has also bred inflation, balance of payments deficits and a downturn in the world stock market.

Last week a second gold fever gripped Europe and again it was fed by doubts about the strength of the dollar and the international monetary system. On the London market, gold purchases reached some $300 million, many times the nor mal demand. Because the fortunes of sterling and the dollar are closely linked, that was enough to drive the value of the pound down to a record low of $2.392, despite efforts by the Bank of England to prop it up. (In Montreal, quotations in 9210 Canadian dollars registered a comparable price.) Gold sales also soared in Paris, Zurich and Frankfurt. Everywhere, buyers were betting that the U.S. would be forced to raise the price of gold -- a step tantamount to devaluing the dollar. Though the Treasury and White House Press Secretary George Christian reaffirmed the obviously firm U.S. intention of continuing to sell gold at $35 an oz., the rush only quickened at week's end. Bullion dealers reported that hoarders and speculators from all over the world were seizing what many believed to be a last chance to buy gold that cheaply.

Spreading Ripples. Some influential U.S. bankers have been prodding Washington lately to drop its insistence on the price fixed for gold in 1934. That heresy prompted rumors in Paris that the U.S. would embargo further sales of its gold. Two weeks ago, in a Senate speech, New York Republican Jacob Javits added to the doubts by urging that the U.S. pull out of the London gold pool, stop selling gold to foreigners on demand, support the dollar by buying and selling foreign currencies as other countries do. (The Treasury promptly denied any such intention.) Then there were reports that South Africa, the leading gold producer, might switch from Britain to France to mar ket its metal. South African Finance Minister Nicolaas Diederichs scarcely quelled that worry when he commented last week: "A change isn't impossible."

Predictably, the gold rush spread ripples through stock markets on both sides of the Atlantic. The price of gold-and silver-mining shares spurted on the London Stock Exchange in response to heavy domestic, continental and U.S. orders. On the New York Stock Exchange, the Dow-Jones average dipped to a 14-month low of 827.03, then rallied a bit to end the week at 835.24.

Disappointing Balance. The dispirited state of the stock market also reflected Wall Street's growing concern over such subsurface problems as how much future escalation of the Viet Nam war may drive up prices and aggravate the payments deficit. Last year Viet Nam accounted for $1.5 billion of the $3.6 billion U.S. payments deficit, the largest since 1960. So far, 1968 has seen a disappointing improvement; unofficial Commerce Department estimates last week put the deficit for the first quarter at a $2 billion annual rate.

On top of that, major elements of President Johnson's economic program are badly bogged down. Having stymied the President's plea for higher income taxes, the House Ways and Means Committee last week shelved his request for a per-diem tax on foreign tourist travel. If the tax proposal remains pigeonholed, as seems likely, the Administration will lose $250 million of the $3 billion reduction promised in the payments deficit. The President counted on a $500 million gain this year in the trade balance. Normally this surplus of exports over imports is the only big plus in the U.S. balance of payments. Last year inflation-fed domestic demand led to a sharp rise in imports, shaving the surplus to $4.1 billion (compared with a peak of $7 billion in 1964). Preliminary figures for January show continuing shrinkage; much of it is attributable to skyrocketing copper imports because of the prolonged mineworkers' strike.

As another means of fattening the trade surplus, the Administration has tentatively proposed a temporary 5% tariff surcharge or a 2% border tax on imports, with an equivalent tax rebate to spur exports. Even the prospect of such a levy shocks many businessmen. With good reason they fear that it would unleash a chain reaction of protectionist retaliation, nullifying many benefits won in the Kennedy Round of tariff cuts. Japan has already reacted by preparing to lower its ceiling on tourist expenditures overseas from $500 per trip to $500 per year. As an alternative to trade restrictions, Washington has been urging the Common Market to put its own Kennedy Round tariff cuts into effect faster than scheduled. Last week EEC ministers, led by West Germany, pressured the reluctant French to agree to at least study that possibility.

Help Abroad. The U.S. sought more balance of trade help from Western Europe at a high-level Paris meeting under the auspices of the 21-nation Organization for Economic Cooperation and Development. Treasury Under Secretary Frederick L. Deming and Arthur Okun, new chairman of the presidential Council of Economic Advisers, asked Europe to commit itself to faster economic expansion. Such a policy would help the U.S. by raising its exports to Europe, which can afford the cost because it enjoys a payments surplus.

Europe responded halfheartedly to such appeals for foreign aid, and last week the U.S. store of gold sank to $11.88 billion, less than half its postwar high of $24.6 billion and close to the $10 billion reserve required by law to back the nation's currency. At President Johnson's request, the House has passed, and the Senate will consider, a bill repealing the "gold cover" requirement, thus freeing the entire U.S. gold supply to defend the dollar abroad.

A Quick Way. The value of the dollar, as the key currency of international trade and investment, is pegged to that of gold. But most non-Communist currencies are measured against the value of the dollar. Thus any change in the dollar price for bullion would upset the value of every other currency, risking global monetary chaos. Still, if the U.S. fails to stanch its decade-long balance of payments hemorrhage, sooner or later it will own too little gold to defend the $35-an-oz. price.

Until lately, most Western bankers figured that the creaking monetary system would hold together long enough--perhaps another three years--to let reserves artificially created by the IMF begin to supplement gold's historic role. British devaluation and two subsequent runs on gold have drastically shrunk the transition time. "The monetary system is now in a continuous and drawnout crisis," says Roy L. Reierson, senior vice president and chief economist of Manhattan's Bankers Trust Co. Last week Reierson added his voice to those demanding that the London gold pool be closed, and that the U.S. limit its $35-an-oz. sales of bullion to the settlement of debts with other countries. That "selective convertibility" recipe stops short of outright dollar devaluation be cause some gold would remain avail able at today's price. It would also keep U.S. gold losses to a minimum. The free-market price of gold would un doubtedly soar, but that at least would promote mining and hinder future spec ulation. Raising the price of gold would require authorization from Congress, a process so subject to debate and delay and consequent speculation in gold that it is a practical impossibility. Reierson's plan, on the other hand, could be put into effect swiftly. It needs no approval by Congress and only administrative as sent from other countries.

This file is automatically generated by a robot program, so reader's discretion is required.