Foreign Scapegoats

April 13, 1964

Will we recognize in time that it is our own unsound policies that have been causing the deficit in our balance of payments (with our loss of gold) in thirteen of the past fourteen years? Will we adopt corrective measures before it is too late? The outlook is not promising. In fact, nothing more disheartening has occurred in this regard than the publication (on March 19) of a report on the U.S. balance of payments by the Congressional Joint Economic Committee.

The report puts all the blame on foreigners. The U.S. has been altogether virtuous. “The main factors contributing to this unfavorable payments position have been substantial currency devaluations by other countries, the rebuilding, with American help, of the war-damaged economies of Europe and Japan, and heavy commitments abroad for private investment, economic and military assistance, and defense programs.” Not a word (except for a few Republican footnotes) about the 28 deficits in the Federal budget in the last 34 years, nor about the multiplication in our issue of paper dollars, nor about our cheap-money policies.

It appears that our deficit has been caused by the bad policies of the countries that have a surplus. For these wicked countries “counter inflation with tight-money policies and high interest rates.” This embarrasses our own inflation by encouraging capital export and dollar export. The committee suggests that these countries either follow inflationary cheap-money policies so that we can keep our own going, or revalue their currencies upward.

BEAM IN OUR OWN EYE

The committee self-righteously accuses the surplus countries of imposing “quantitative restrictions on imports, controls on capital exports . . . [and] export subsidies. These measures are inconsistent with free market economic principles and have contributed substantially to the U.S. balance-of-payments deficits.” This blandly ignores that our government itself imposes quantitative restrictions on imports (e.g., sugar and oil), has asked for a punitive tax on the purchase of foreign securities, and pays export subsidies on farm products.

But the committee’s recommendations are even worse than its diagnosis. Because, at the end of 1963, only $2.6 billion of the total U.S. gold stock of $15.6 billion was “free” gold available to “defend the dollar,” because this “free” gold reserve has declined by an average of nearly $1.4 billion a year since 1957 and might be “eliminated within two or three years,” the committee recommends that “The U.S. gold stock should be freed immediately of its domestic reserve function and made fully available for international monetary purposes.”

THE LAST BARRIER

This recommendation can only shake confidence in the dollar. The reasoning behind it is ironic: “For many years U.S. residents have not been permitted to redeem their dollars in gold. The only remaining domestic function of gold is to place limits on the expansion of the domestic money supply. But this expansion can be limited equally well without requiring a gold reserve against Federal Reserve liabilities.”

Now the chief function of a minimum legal gold reserve has always been precisely to place limits on the expansion of the money supply. If even the 25 percent legal gold reserve had been combined with the requirement of domestic as well as foreign convertibility, the enormous expansion of the U.S. money supply in the last 30 years could not possibly have taken place; the Treasury would have been long since drained of its gold. The official argument at the time American citizens were deprived of their right to convert to gold was that all that was really necessary was to maintain convertibility for foreigners. But now that we have issued so many paper dollars as to threaten even our ability to do that a Congressional committee is asking for the repeal of even that 25 percent requirement—i.e., of the last legal barrier to more inflation.

The last recommendation of the committee, to “expand international liquidity,” means that its proposed ultimate cure for our own monetary ills is a worldwide inflation.