The Battered Dollar

For most of the last 20 years, the U.S. has emptied its pockets abroad with the abandon of a sailor on shore leave. European bankers have grown hoarse warning that the dollar outflow and resulting drain of U.S. gold reserves could eventually wreck the purchasing power of the dollar overseas and endanger the world's monetary system. Last week a succession of dismal developments gave those warnings a new and compelling urgency:

THE TREASURY DEPARTMENT reported that U.S. gold reserves have dipped to their lowest level since 1935. During June some $61 million in gold dribbled out of Fort Knox and into foreign hands. This reduced net reserves of gold to $9.96 billion--even though it has been widely felt that the U.S. would never permit its gold reserves to fall below $10 billion. According to the Treasury, the monetary reserves were $13.5 billion. But that figure included $2.7 billion in potential credits from the International Monetary Fund, which the U.S. can draw on if necessary, as well as more than $320 million in assorted foreign currencies. This leaves some $10.5 billion in gold, but $548 million of that is gold that the IMF has either sold or lent to the Treasury on condition that it is returnable to the IMF on demand.

THE NATION'S TRADE BALANCE declined further in June. For the third straight month, imports exceeded exports. The June discrepancy was $362.6 million, the largest so far this year. Commerce Secretary Maurice Stans stunned a congressional subcommittee by telling it that the U.S. may run a trade deficit for 1971, the first since 1893.

THE PRICE OF GOLD in European free markets reached a two-year high of $42.40. The rise reflected a growing feeling abroad that the U.S. Treasury is perilously short of backing for its pledge to swap dollars for gold at the rate of $35 per ounce, and thus may have to raise the official gold price, which would devalue the dollar. European central bankers are moving to liquidate their dollar holdings. Two weeks ago the Swiss Central Bank sold $50 million in dollars to an unnamed source for gold.

The immediate peril is that a big rush from dollars into stronger currencies or gold could easily set off still another monetary crisis, one which would make Europe's brief speculative spree last May seem mild by comparison. Already there are enough dollars circulating in the Eurodollar market to empty out Fort Knox several times over. The deeper danger is that European governments will clamp stern controls on the international exchange of money--particularly on the inflow of dollars--and that the U.S. will put equally rigid controls on the import of goods. In Washington, there is much discussion of imposing surtaxes on imports. Any of these steps would damage the system of free trade and investment, which has done so much to promote postwar economic growth. A much more prudent move would be for the U.S. to adopt an incomes policy, centered on wage and price guidelines. This would show skeptical Europeans that the U.S. is serious about curbing inflation--and thus strengthening the dollar.

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