Barriers Up & Down

Gold--man's ancient measure of national wealth and power--prodded France and the U.S. along opposite economic paths last week.

The French dealt from strength. After 30 years of controls, the government restored freedom to the franc and, to the surprise of moneymen everywhere, abolished controls over gold as well. In the U.S., the Federal Reserve Board reported a symptom of weakness: the nation's gold stock fell another $571 million last year, to $13.2 billion, the lowest level since 1937.

By dropping all barriers to the import and export of francs and securities, and by ending restrictions against converting the franc into other currencies, De Gaulle's government aimed at raising France's relatively low standing as an international financial center. Frenchmen can now hold accounts in foreign banks, pay for hotel bills, purchases and apartments abroad with a French check. Though foreign investment and borrowing in France remain subject to some restrictions, foreigners can now freely acquire up to 20% of the capital of a French firm, invest in French stocks, buy French property.

Smugglers' Delight. All that will help Europe revive its money markets. Their present weakness not only helps to raise the cost of borrowing throughout Europe but indirectly contributes to a host of other problems, from industrial inefficiency to the technology gap. In freeing gold and the franc, De Gaulle also undercut the deeply ingrained instinct that has made France a nation of hoarders and smugglers. Restrictions on money leaving the country had sharpened the Gallic impulse to spirit cash into secret Swiss bank accounts or bury gold in gardens and mattresses. Les hirondelles, the friendly black marketeers, could scarcely believe what happened last week: at a stroke, De Gaulle had all but wiped them out.

France gained the monetary strength to choose this freedom greatly at U.S. expense. Cashing in the dollars it earns from its trade surplus, France since 1958 has drained the U.S. of $3.6 billion in gold, amassed a solid $5.5 billion official store of the yellow metal to back its currency. Though private gold holdings have been illegal in the U.S. for a generation, the nation backs its dollar abroad with gold, has lost gold in twelve of the past 16 years.

"Overcommitted." How to plug that drain, which is caused by the U.S. balance of payments deficit--has fired increasing debate. Former Treasury Under Secretary Robert Roosa contends that the U.S. is "overcommitted at home and abroad," warns that "rapidly mounting deficits in our foreign accounts could make 1967 a crucial year for the dollar, and even for U.S. leadership in world affairs." Most bankers agree with Roosa that domestic interest rates must be lowered only gradually to protect the U.S. against a perilous outflow of dollars and gold to high-rate Europe.

President Johnson, however, is pushing for cheaper money at home and more direct controls to keep it there. To the dismay of many Europeans, the President recently asked Congress to give him power to double the 1% tax on foreign securities sold in the U.S. and foreign loans of more than a year by U.S. banks. Last week Federal Reserve Board Member Sherman Maisel, a Johnson appointee, proposed still sterner curbs, including U.S. income taxes on foreign earnings of U.S. corporations and a direct tax on foreign investment by U.S. firms. "The present tax policy leads to outflows of capital," insisted Maisel, "and therefore to balance of payments problems."

Many businessmen contend that Maisel is on shaky ground, if only because U.S. companies last year brought more dollars home in profits than they invested overseas. Whatever the prescription, the U.S. clearly must move soon to control the dollar hemorrhage--or face unpleasant consequences.

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