The Dollar Crisis

October 31, 1960

The present dollar crisis was immediately precipitated by the irresponsible spending and soft-money promises in the Democratic platform and in the speeches of Senator Kennedy, combined with an increasing fear that he may be elected.

But the dollar has been in an increasingly precarious position for the last two years. We have had a heavy deficit in our balance of payments and a heavy gold loss. As a result of unbalanced budgets, huge foreign- aid programs, inflation, and cheap-money policies, our gold holdings have dropped from $24 billion in 1949 to $18 billion. Our short-term liabilities to foreigners (payable in gold if their central banks demand it) exceed our entire gold reserve. They have risen from less than $8 billion in 1949 to more than $20 billion today.

The Democrats in Congress have done everything to undermine confidence in the dollar still further. They refused the President’s request to repeal the legal interest rate ceiling of 4 percent on long-term bonds, thus forcing more inflationary short-term financing. The Democratic platform, instead of giving assurance of economy, has proposed huge new expenditures in every direction. Nixon has estimated the increased expenditures it proposes at from $13 billion to $18 billion a year. Kennedy has refused to attach any price- tags to his promises and has said nothing about what taxes he would boost. At a time when our interest rates have been kept relatively too low, he has accused the Republicans of following a “tight” money policy. This is a demand that our interest rates be forced even lower.

PARALLEL WITH 1932

The integrity of the dollar can be protected, it can be kept on a gold basis at $35 an ounce, only if Kennedy immediately gives the strongest assurances that, instead of increasing nondefense expenditures, he will strive to cut them; that he will never seek either to overrule the Federal Reserve Board or to force it to follow cheap-money policies; and that, instead of agitating for still cheaper money, he will support monetary discipline firm enough to assure the outside world that we mean to maintain the dollar. Such assurances would require a complete reversal of the policies he has hitherto espoused.

There is an ominous parallel between our inflation crisis today and the deflation crisis between the defeat of President Hoover in November 1932 and the inauguration of President Roosevelt in March 1933. It was in this four-month interregnum that the great bank runs developed.

HOOVER AND F.D.R.

Hoover, in his memoirs, has given a detailed account of his persistent but futile efforts to get the cooperation of Roosevelt in halting the degeneration of confidence. Despite Roosevelt’s specific assurances prior to the election, there were spreading fears that he was determined to abandon the convertible gold standard for a managed currency or devaluation. There was a foreign run on our gold. In February, Hoover sent a confidential letter to Roosevelt declaring that it “would serve greatly to restore confidence” if “a very early statement by you” would give “prompt assurance that there will be no tampering or inflation of the currency; that the budget will be unquestionably balanced; . . . that the government credit will be maintained. . . .” No such reassurance was given.

The present crisis, of course, cannot be blamed on the proposed policies of Senator Kennedy alone. Behind the dollar crisis today lie years of wrong policies and irresponsibility on the part of both political parties and of the Federal Reserve System. The World Monetary Fund was set up without understanding of the terrific load it put upon us. It made the American dollar, in effect, support all other currencies. Our foreign-aid program was launched and expanded with no thought of the great pressure it would put upon the dollar. Federal “welfare” expenditures have been steadily increased. Our Federal Reserve authorities have pushed interest rates below the level necessary to prevent inflation, gold loss, and loss of confidence in the dollar.

If the dollar is to be saved, it can only be by courageous monetary policies and the united determination of the leaders of both parties.