To Defend the Dollar

May 20, 1963

If the Kennedy Administration continues the economic policies it has pursued since it came to office, if it reduces taxes while increasing expenditures, if it runs deficits in the current and next fiscal year of $9 billion to $12 billion, if it continues to press for easy-money policies, and the Federal Reserve continues to accede to them, what will be the consequences for the dollar?

Let us see how far we have come even over the last four years. At the end of 1958 our gold stock amounted to $20.6 billion. Net foreign short-term claims against this amounted to $13.6 billion. Today, however, our gold stock has fallen to $15.8 billion and net foreign short-term claims against it have risen to more than $20 billion. In other words, potential foreign claims exist to draw out our entire gold stock and $4 billion besides.

Our gold and creditor position continues to deteriorate. In 1958 the deficit in our national balance of payments was $3.5 billion; in 1959, $3.7 billion; in 1960, $3.9 billion; in 1961, $2.4 billion; in 1962, $2.2 billion. Administration spokesmen continually refer to the diminished rate at which we went into debt in 1961 and 1962 as an “improvement” or “reduction” of our balance-of-payments deficit. But this is wholly unwarranted. It is as if a man who went into debt $3,500 in 1958, $3,700 more in 1959, and $3,900 more in 1960 were to declare that his financial position was better now because he had only gone further into debt by $2,400 in 1961 and by $2,200 in 1962. The simple truth would be that a debt of $11,100 accumulated at the end of 1960 would have increased to $15,700 at the end of 1962. This is the real analogy.

IF WE CONTINUE

Moreover, even the rate of deficit accumulation is estimated to have increased again, in the first quarter of 1963, to $3 billion annually. We have been able to postpone gold losses by currency swaps and other expedients. But all of these deal merely with symptoms. We cannot permanently halt the deficit in our balance of payments or staunch the gold loss until we put our house in order.

If we continue our present fiscal and monetary policies, we must continue to lose gold. It is impossible to say at what point the loss of gold would precipitate a run on the remaining gold supply. If such a run starts, our government will be tempted—or feel forced—to resort to one of four main expedients:

1. Borrow heavily from the International Monetary Fund. 2. Try to get through the fund a general devaluation of world currencies. 3. Devalue the dollar alone. 4. Suspend gold exports.

AN AVOIDABLE CRISIS

Any one of these courses would be a blow to the prestige of the United States and to the prestige of the dollar. Other countries probably would not lend to us through IMF unless we agreed to put our house in order—to stop the deficits, stop increasing the money supply, allow interest rates to go up. But why wait until we are humiliatingly forced to do what it is in our interest to do now voluntarily?

Another general devaluation of world currencies would tremendously shock confidence. It would be a signal for renewed world inflation on a huge scale. Devaluation of the dollar alone—say say to $70 an ounce for gold—would double prices of imports overnight, touch off a huge domestic inflation, and end the dollar as a key currency. Suspension of gold exports would put us on a pure paper basis The dollar would plummet immediately in the foreign-exchange market What happened to it eventually would depend on our monetary and budget policy from there on out.

Yet such a crisis is not inevitable. As John Exter of the First National City Bank of New York has pointed out, we might still end our balance-of-payments deficit overnight if we merely “turned off the faucet” of new money and credit and allowed interest rates to go up. All that is necessary is for the Administration to put its house in order and to abandon the specious idea that budget deficits and easy money are either necessary or sufficient to create prosperity and full employment.