XII. The Dollar on the Sickbed

The speaker was Mr. Morgenthau, FDR's Secretary of the Treasury. He would rank today as a right-wing Republican. His common-sense state ment came virtually at the historic moment when common sense and American monetary policy parted company. In 1940, the dollar was indeed "good as gold" again. Since then, as a nation, we take neither gold nor promissory notes for the ex cess of goods we ship; instead, we give the for eigners our own promissory notes (dollar balances) 119 AN INFLATION PRIMER as a sort of bonus; lately we "ship" out the gold, too. Nothing wrong with all that, indicated the Chairman of the Federal Reserve Board on Feb ruary 24, 1960) after the country had lost nearly $3~ billion of gold in two years. "Proper United States policy," he said, "could prevent any ... 'hypothetical dilemma' [due to our continuous balance of payments deficits] from arising." The dilemma to which the chairman was refer ring-the choice between losing our gold and re straining the inflationis far from hypothetical or easily preventable. Actually, we are up against an explosive problem posed by the relentless growth of short-term dollar claims in the hands of for eigners and the simultaneous erosion of the gold reserve that is the coverage of last resort of a rapidly growing money supply. The candle of the dollar is burning at both ends.

THE SICK BALANCE OF PAYMENTS The threat to the dollar is due to a persistent deficit in the country's international accounts. Our balance of trade with the outside world (mer chandise and services, including tourist traffic, transportation, return on investments) produces an export surplus every year. Yet, for the last decade our over-all balance of payments showed a deficit in every single year-more payments due than receipts coming in. Table A summarizes in the conventional fashion 120 THE DOLLAR ON THE SICK. BED Surplus or Deficit (-) $1.4 1.0 Unilateral Payments and Loans by U.S. Government & Privates (Net) $- 6.4 -10.6 - 6.7 - 7.0 - 6.0 - 6.2 - 6.7 - 7.3 - 6.7 - 6.3 - 8.6 - 8.9 - 8.4 - 8.4 TABLE A4t U.S. BALANCE OF PAYMENTS-WITHOUT GOLD AND FOREIGN CAPITAL MOVEMENTS (Billions of Dollars) Trade Balance: Surplus of Exports or Imports (-) of Goods & Services 1946..... . $ 7.8 1947...... 11.6 1948.... . . 6.7 1949...... 6.4 1950..... . 2.3 195L..... 5.2 1952...... 4.9 1953.... .. 4.7 1954...... 5.0 1955...... 4.4 1956.... . . 6.5 1957..... . 8.2 1958...... 4.6 1959 ..... 1.9 -0.6 -3.7 -1.0 -1.8 -2.6 -1.7 -1.9 -2.1 -0.7 -3.8 -6.5 ·Source, Tables A, B, and C: U.S. Department of Commerce, Sur vey of Current Business, July, 1954, and the June issues, 1955 to 1960.

the recent development of our international bal ance of payments, omitting the in-and-out move ments of gold and of foreign capital. (They may be considered the balancing items, as we shall see~) It shows that billions more than the excess we earn businesswise is either given away by the government or lent out and remitted privately, in unilateral payments. But private investments and remittances abroad absorb only a small part of our trade surplus. What brings about the huge defi ciency in the over-all balance is shown in Table B: the cornucopia of governmental handouts and military spending abroad.! 121 AN INFLATION PRIMER TABLE B SOURCES OF DE'FICIT ON U.S. FOREIGN ACCOUNTS (Billions of Dollars) Net U.S. Government U.S. Military Handouts Spending (Nonmilitary) Abroad (Net) Year 1950 . 1951 . 1952 . 1953.< . 1954 . 1955 . 1956 . 1957 . 1958 . 1959 . Total . S 3.7 3.3 2.5 2.2 1.8 2.3 2.5 2.7 2.8 3.6 27.4 S 0.6 1.3 2.0 2.5 2.5 2.8 3.0 3.2 3.4 3.1 24.4 Total S 4.3 4.6 4.5 4.7 4.3 5.1 5.5 5.9 6.2 6.7 51.8 DOLLARS IN OVERSUPPLY By the end of 1959, the United States had lost $5 billion gold; exactly $5.264 billion since August, 1947. Another $0.526 billion left our gold reserve in the first eight and one-half months of 1960.

A fraction of the annual deficiency is accounted for by unaccounted items: "errors and omissions." Another fraction is covered by the net inflow of foreign long-term investments. But the main off setting items are two: either we pay in interna tionally acceptable cash, which is gold; or the for eigners leave the money in the United States by acquiring bank balances and short-term treasury paper. What has actually happened is set out in Table C. Three of every four "excess" dollars our govern122 THE DOLLAR ON THE SICK BED $-3.7 -1.0 -1.8 -2.6 -1.7 -1.9 -2.1 -0.7 -3.8 -6.5 $3.6 1.0 1.7 2.5 1.7 1.9 2.1 0.7 4.0 6.6 t 0.5 0.5 0.2 t 0.5 0.6 0.8 0.4 0.8 $1.9 0.6 1.6 1.1 1.4 1.4 1.8 0.7 1.2 4.7 16.4 Gold Gain (-) or Loss * $1.7 -0.1 -0.4 1.2 0.3 t -0.3 -0.8 2.3 1.1 5.0 TABLE C U.S. BALANCE OF PAYMENTS DEFICIT AND OFFSETTING ITEMS (Billions of Dollars) Total Balance of Net Inflow Statistical Off-Payments of Foreign Errors and Setting Deficit Capital Omissions Items (from Table A)Year 1950 .

1951. . 1952 . 1953 . 1954 . 1955 . 1956 . 1957 . 1958 . 1959 . TotaL . ·Gold "gain" means import of gold; hence minus sign. tLess than 0.05. ment dissipates abroad return like homing pigeons as claims on our gold reserve. At latest count (end of June, 1960) foreign-owned bank balances and short-term treasury securities amounted to $20.34 billion, having doubled in ten years. That is not all. American liquid assets, including currency, owned by foreigners other than banks and public authorities, may now stand around $2.4 billion. (The official estimate was $2.676 billion for 1957 and $2.522 billion for 1958.) Also, $2.3 billion of U.S. government notes and bonds with "original" maturities of more than one year are held by banks abroad and could be liquidated on fairly, short notice. At this writing, the total of foreign-held liquid dollar assets is in the order of $25-odd billion (Table D).

123 AN INFLATION PRIMER TABLE n· End of Year 1949 . 1950 . 1957 . 1958 . 1959 . Mid-1960 . 9/14/60 . Foreign Liquid Assets t in U.S. (in millions) $ 9,757 11,715 18,593 19,597 23,723 25,175 not available U.S. Gold Reserve (in millions) $24,563 22,820 22,857 20,582 19,507 19,363 18,939 Ratio (%) of Foreign Claims to Gold 39.7 51.3 81.3 95.2 121.6 130.0 n.a. ·Sources: U.S. Department of Commerce, Survey of Current Busi ness, August, 1959, and June, 1960; Federal Reserve Bulletin, August, 1960. tlncluding U.S. government securities with original maturities of more than one year and estimated foreign nonbank holdings of American liquid assets. The outer world's dollar shortage (that was to last forever, remember?) turned into an over supply of dollars abroad. This is a unique situa tion: a country deliberately and systematically squanders its gold reserve and piles up a mountain of "hot-money" obligations of the most volatile sort, though it does not wish to impair the gold value of its currency. To make things worse, the Federal Reserve deliberately lowers its discount rates to foster domestic inflation-and the gold outflow.

CAN THE BALANCE OF PAYMENTS BE REDRESSED? The give-away programs are a built-in feature of our national policy. In the official theory, they are a must for the cold war. Why they have to total an annual $8 to $9 billion, rather than $5 billion 124 THE DOLLAR ON THE SICK BED or $11 billion, has never been explained. The standards, if any, by which the volume of this fan tastic subsidy (to the special interests in exports) is determined, are seemingly divorced from any con cern about the balance of payments, the gold stock, or the stability of the dollar. There is scant likelihood that o'ur balance of trade should improve greatly and in a lasting fashion. 'l"he huge surpluses of the early post.. 1945 era (Table A) are out of the question since Europe's and Japan's recovery. Their competitive prowess makes itself felt sharply along innumer able lines of merchandise. It is greatly strength ened by operations under American licenses and by the exodus of American firms in search of more profiitable climates. If our exports have risen this this year (1960) as against last, it is largely because of the coincidence of a domestic slowdown with a superboom abroad. However, unit cost differen tials still tend to broaden in our disfavor, due to the effect of (American-financed) technological progress abroad, combined with much lower wages there than on this side. Once the cyclical slowdown reaches Europe, as it well may, and non recurrent factors fade out,2 European exports will increase and their imports from the United States will decline.

Two-fifths of our exports consist of raw com modities and semimanufactured items, the ~eakest links in the world price structure. Foodstuff im125 AN INFLATION PRIMER ports are restrained everywhere; the unloading of farm surpluses (unless in exchange for payment in irredeemable currencies) is up against severe ob stacles. Most industrial staple prices are depressed; a moderate recession in Europe would bring them down further. There is no hope for an early re vival of our coal, petroleum, and metal exports which accounted for more than half the 1958-59 shrinkage in our total exports. As to economizing on imports, a severe domestic recession would do, ironically. Higher tariffs and restrictive quotas would not do; they run counter to the national policy of fostering interna tional trade and would boomerang in higher do mestic costs and fewer exports. At that, Washing ton nods to European "integration" movements, although their result is to discriminate against our exports.

In its embarrassment, the U.S. government pres sures the Allies, especially Germany, to "play the game" and chip in with credits to the under developed nations. This the Allies do, on a mod erate scale. What they contribute (mostly in their own "backyards") means an addition to, rather than a substitute for, our aid. The discussion about tying our aid directly to our exports has died down; it would not solve the problem any way. Shifting a major part of the cost of maintain ing u.s. garrisons in the host countries may dis courage their own armament efforts. 126 THE DOLLAR ON THE SICK BED Foreign governments may be persuaded to accelerate payments on their long-term debts to the United States. They are making advance pay ments. Evidently, the effect could only be minor. If feasible at all, an attempt to discourage foreign central banks from withdrawing gold would most certainly boomerang.

Theoretically, recourse could be taken to Amer ican investments abroad, at least on the "liquid" assets amounting to $5.6 billion (end of 1958); the government owns $2.14 billion. How much could be liquidated-risking an international panic-is open to question. Uncle Sam did borrow from the International Monetary Fund, but he will have to repay sooner or later. Such stratagems are helpful in a short-lived emergency only. That is not what weare up against. In fact, the dollar predicament is to continue indefinitely. Presently, foreigners could claim some 30 per cent more gold than we possess. How imminent is the menace that they might?-bearing in mind that international trade and finance, the domestic price structure, in fact the whole economic system) are intimately linked to gold and its present dollar price. 1. Military transfers under grants, consisting of weapons, etc., are not included among the unilateral payments, and they do not affect the balance of payments.

2. A temporary upsurge of European demand for cotton, aluminum, and airplanes, an.d the "upward adjustment" of our cotton and wheat subsidies, are primarily responsible for the rise of the "visible" trade balance by nearly $2 billion in the first half of 1960. Merchandise exports are likely to increase in a recession. 127 XIII THE SAD PREDICAMENT OF THE FOOL'S PARADISE HEADING FOR INSOLVENCY "We-you and I and our Government-must avoid the impulse to live only for today, plunder ing for our own ease and convenience, the precious resources of tomorrow. "We cannot mortgage the material assets of our grandchildren without risking the loss also of their potential and spiritual heritage. We want democ racy to survive for all generations to come, not to become the insolvent phantom of tomorrow." These were the memorable farewell words of President Eisenhower. Unfortunately, it took nearly eight years before his administration dis covered that the country is up against an impend ing balance-of-payment crisis. There is nothing "impending" about it any longer. It will not take eight months, possibly not even eight weeks, be fore the incoming Kennedy administration will have to take drastic steps-and, especially, to leave out some it was planning to take-in order to cope with that crisis.