No Gold at All?

February 1, 1965

Since the end of 1957, our official gold stock has fallen from $22.8 billion to $15.4 billion. In the same seven years the country’s money supply (demand deposits and currency) has risen from $136 billion to $161 billion. If we also include time deposits, our money supply has increased from $193 billion to $285 billion. So against our active money there is now less than a 10 percent gold reserve, and against our money supply including time deposits there is only a 5 percent gold reserve.

All this is nowadays considered academic because our own citizens can no longer demand gold for their paper money. But vis-à-vis foreigners our position is increasingly embarrassing. Against our gold supply we now have short-term liabilities to foreigners of $28 billion (against only $15 billion at the end of 1957).

25 PERCENT RESERVE

We are obliged to keep by law a 25 percent gold reserve against the combined note and deposit liabilities of the Federal Reserve banks. This requires as of now a legal gold reserve of a little more than $13 billion. This means, it is being said, that we can legally let only about $2 billion gold move abroad in response to demands by foreigners.

So many people are asking that the 25 percent gold-reserve requirement be abolished entirely as “meaningless.” This, they tell us, will “free” all our gold reserves for foreigners who want to convert their dollars into gold; and once foreigners know that this huge supply is available, they will not want to convert; our gold hemorrhage will be stopped, and confidence in the dollar will be restored. The President has let it be known that he will either ask for such a change in the law, or at least removal of the gold-reserve requirement against deposits if not against notes, so “releasing” nearly $5 billion more of gold.

There are serious factual misconceptions as well as economic fallacies behind these proposals. Though it will of course be necessary, if gold convertibility is to be maintained, to let gold be drawn out even if our gold reserve falls below 25 percent, this is already provided for in the law as it stands. But the law also provides for progressive tax penalties and rises in interest rates as the gold reserve is allowed to fall. Are the advocates of reducing or wiping out the 25 percent gold reserve asking for the abolition of these penalties—and of any other restriction on the expansion of credit? How can the removal of such penalties or restrictions on monetary expansion increase foreign confidence in the dollar?

NEED FOR DISCIPLINE

It is, in fact, a little difficult to see the basis for the belief that making our whole $15.4 billion of gold legally free to leave the country will completely reassure foreigners. Our total short-term liabilities to foreigners now reach $28 billion (of which $24.6 billion are to banks and official institutions). Against these we have only $6.9 billion short-term claims on foreigners. Whatever way we figure it, our gold falls short.

Abolishing the last vestige of a legal gold reserve against our money would not solve anything. It would further shake confidence of Americans in their own currency, and would give at best a short-run reassurance to foreigners.

Only one thing will cure the deficit in the balance of payments and assure confidence in the dollar. That is monetary discipline. And the government does not intend to have any.

If the government really means to maintain dollar convertibility at $35 an ounce in gold, it must immediately stop further expansion of the money-and-credit supply. In today’s ideological atmosphere such a proposition will be regarded with blank incredulity. For it is the fixed (but fallacious) belief of our government authorities that it is necessary to have cheap money and a continuous expansion of the money-and-credit supply to maintain “economic growth” and “full employment.” So the authorities are systematically blind to the effect of this cheap money and inflationary expansion in causing the deficit in the balance of payments and the declining confidence in the dollar. Instead of stopping the policies that are causing the disease, they plan to extend the penalties on Americans who lend or invest abroad.