Flood of Money

When it comes to taking the world's political and economic fever, there is no thermometer more accurate than the flow of capital in and out of Swiss banks. In a sally making the rounds of Swiss financial clubs, two bankers meet in the street. "How is business?" asks one. Answers the other: "It's terrible. We've got so much money we don't know what to do.''

To Western European bankers and government officials, the joke is about as funny as a bad check. With their economies booming along at record levels, not only Switzerland but much of Europe last week had a Croesus-like problem: a surfeit of money. Most heavily inundated are Great Britain, West Germany and Switzerland, which have been deluged with a flood of gold and foreign currency that threatens to burst the bank vaults, pitch all three nations onto a new wave of inflation.

The unwelcome money was chiefly of two kinds: "flight" capital driven to Europe by unsettled conditions in such places as the Congo, Cuba and South Africa, and "hot money" that restlessly seeks the level of the world's highest interest rates. Much of the hot money besieging Europe is from the U.S., following the gradual lowering of U.S. interest rates by the Federal Reserve Bank. Gold outflow from the U.S. since June totals more than $300 million, and U.S. gold stocks have shrunk to $19 billion, lowest in 20 years.

Whatever the source, the three nations most afflicted with too much money are all hard at work to discourage getting any more--an attitude so alien to a banker's mind that one Swiss official could only mutter: "It is an ungentlemanly act."

The Swiss, who do not draw much hot money because they have no short-term securities, have been swamped, with flight capital: more than $200 million from the Congo and Cuba in July alone. The Swiss solution: a 1% charge on all foreign deposits v. the 1.5% interest formerly paid on them, and a ban on using funds that have entered Switzerland since July 1 to buy Swiss stocks and bonds.

The West Germans, with exports running well ahead of imports, last June stopped the sale of short-term currency securities to foreign buyers, discontinued interest payments on all foreign deposits. But gold and foreign currency holdings continued to grow, now stand at $6.7 billion. In a rare banking move, the Deutsche Bundesbank last week offered to pay depositors a 1% bonus if they would switch their marks into dollars.

The British position is even more paradoxical. Despite a 5% drop in exports in the last three months and an unfavorable balance of payments, Britain now has gold and dollar reserves of $2.9 billion, some $600 million of it in hot money that has rushed in since last June (much of it from the U.S.) when Britain's discount rate was raised to 6% to curb domestic inflation. Chief current fear of British businessmen is that when U.S. interest rates go up again, the fickle hot money will just as quickly race back across the Atlantic, undermine the delicate psychological balance of the pound's value.

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