The Gold Outflow

May 25, 1959

Last year the United States lost the record amount of $2.3 billion of gold. The outflow slowed down in the first three months of this year to only $92 million. But in April and the first two weeks of May it rose to $197 million for the six weeks.

It is sometimes said that any concern about the present outflow of gold is premature. The reasons given are that, even though the United States gold stock has declined from its peak of $24.6 billion in 1949 to its present level of $20.2 billion, this is still a tremendous sum and more than half of all the monetary gold in the world. It is also contended that this loss of gold is actually healthy because it makes for a sounder distribution of gold reserves and strengthens the currencies of other countries.

Any complacency about the situation, however, is unwarranted. Though some $20 billion is still held in the United States, it is not, strictly speaking, owned by the United States. The “free” gold supply is comparatively small. The notes and deposits of the Federal Reserve Banks are required by law to be backed by 25 percent of gold. As of May 6, this called for a gold cover of $11.7 billion, leaving the Treasury with only $8.5 billion of “free” monetary gold.

(It is also instructive to recall that if Congress had not reduced the reserve requirements to only 25 percent as a “war” measure in 1945, and had kept the previous requirements of 35 percent gold reserve against deposits and 40 percent against notes, the amount of “free” gold today would be only $2.5 billion.)

WHAT THE THREAT IS

As against the Treasury gold holdings, banks in the United States already have short-term liabilities to foreigners totaling $16.6 billion. So if foreigners really elected to withdraw their deposits and short-term assets in gold, and could do so through their central banks, the situation would become very serious.

One of the explanations most frequently offered for the loss of United States gold in the last sixteen months is a “deficit in the balance of payments with the rest of the world.” This explanation confuses cause and effect, and suggests the wrong remedies. The chief reason for the outflow of gold is distrust of the future of the American dollar, brought about by our inflationary policies. These policies also cause the deficit in the balance of payments. Unless we have the sense and courage to halt these inflationary policies in time, the withdrawal of gold could become accelerative.

FOUR POSSIBLE STEPS

Discussing this subject in Newsweek of Dec. 22, 1958, I listed a few specific steps we should consider to restore confidence in the dollar. I repeat the substance of them here, with some change in emphasis and detail:

1—The Federal Reserve Board should definitely abandon the effort to make money artificially cheap by open-market purchases, further reduction in reserve requirements, and similar measures. Firm interest rates will not only discourage the withdrawal of foreign balances but stop encouragement to credit expansion.

2—The Administration and Congress should take dramatic steps toward slashing the deficit and balancing or even overbalancing the budget. They should do this not by increasing taxes still further (which would only act as a deterrent to production) but by slashing unjustified expenditures. Swollen veterans’ aid and the whole farm subsidy and price-support program are obvious candidates for the ax.

3—It makes no sense to continue and even to expand an enormous foreign-aid program when our problem is already inflation, excessive government spending, the loss of gold to foreigners, and a deficit in the balance of payments. Our military-aid program should be much more selective. Our economic-aid program, which rests on dubious socialistic assumptions, should be discontinued. Particularly ill-timed is the pending subscription of some $1.3 billion by our government to the International Monetary Fund, which operates on questionable monetary assumptions.

4—Revise the Federal legislation and NLRB decisions that enable labor leaders to force excessive wage rates on employers and tend to price our products out of world markets.