THE DOLLAR IS NOT AS BAD AS GOLD

MEN are largely motivated by three basic desires--food, love and money--and of these, the least understood is money. Even Lord Keynes said that the agreement for the world's "gold-exchange" monetary system, framed 24 years ago at Bretton Woods, N.H., sounded as if it had been written in Cherokee. But beneath the current confusion of talk about payments balances and gold flows, just about everybody realizes that something is wrong with the international system of money and gold. The time has come, if not for sweeping reform, at least for searching reappraisal of the apparatus through which major nations finance their global trade, tourism and investment.

The symptoms of monetary malaise are abundant. Because its sterling is tarnished, Britain has been forced to deflate and then devalue, causing its citizens to pay more for what they buy from the rest of the world. The dollar is also under assault. Betting that its value will decline, some cautious bankers and quick-profit speculators are selling dollars for gold at a rapid rate. The hemorrhage of U.S. gold has become alarming--nearly $1 billion in the past two months--and last week President Johnson took some stern actions to stop it (see THE NATION and BUSINESS). It is obvious that for some time to come, gold will continue to color the decisions of governments from Paris to the Pedernales.

One problem is that in the "gold-exchange" system nations pay for most of their global commerce in gold or dollars, and the U.S. is pledged to sell its gold bullion for any paper dollars that foreign central bankers turn in. Moreover, the U.S. guarantees the official price at $35 an ounce. Because of its now familiar balance of payments deficits, the U.S. has papered the world with its dollars, creating plenty of calls on the nation's gold stock. Since 1957, U.S. gold reserves have declined by almost half, to less than $12 billion, and foreign claims on U.S. gold have doubled, to $31.2 billion. If foreigners decided to redeem most of their dollars for gold, the U.S. could not meet its short-term obligations and would have to take drastic measures.

At high levels in Washington, officials are talking out loud about what was previously unthinkable: the eventual severing of the dollar's ties to gold. In the White House, the Treasury, the Federal Reserve and Congress, a growing number of policymakers are asking why the U.S. has to concern itself with gold at all, and whether the world's richest nation might not be wise to cast its currency loose from a metal that Lenin once said was fit only to build public toilets. Behind this question is the sound conviction that the dollar, backed by the powerful U.S. economy, is not as bad as gold. At home and abroad, most monetary experts believe that the gold-exchange system is on the way out. The question is how--and with what--to replace it.

In Gold They Trust

In the recent maneuverings over gold, the U.S. Treasury's performance has resembled that of a man who leaps out of the way of an oncoming car only to be hit by a truck coming from the other direction. After the British pound was devalued, Treasury Secretary Henry Fowler warned that the dollar was next in line for speculative attack. That warning was actually aimed at Congressman Wilbur Mills in an attempt to gain support for the domestic surtax proposal, but its chief result was to further fan speculation and cause a heavy loss of U.S. gold. Last month's unprecedented visit by Treasury Under Secretary Frederick Deming to a meeting in Basel of the Bank for International Settlements, a clubby group of bankers who pointedly exclude government officials, started frenzied rumors that the U.S. was proposing some drastic step. That set off another round of speculation, which, by expert estimate, cost the U.S. anywhere from $100 million to $400 million in gold. Who did all the buying? Mostly speculators, ranging from Middle Eastern sheiks and wealthy Latin Americans to some Americans who dodge U.S. restrictions on gold ownership by dealing through Canada or Switzerland.

The mystique of gold is not fully grasped by most Americans, who lack the Midas complex of Charles de Gaulle and other foreigners. McGeorge Bundy was not quite right when he cracked that only the greedy, the frightened, country folk and Frenchmen love gold. Anybody who has seen his fortunes dissipated by recurrent invasions, inflations and devaluations views gold as a safer haven than any paper money. Men die to dig gold out of two-mile-deep mines and then bury it in hermetically sealed vaults because, when all other currencies fail, gold can buy anything, anywhere. Particularly prized by political refugees, nervous dictators and indulgent sugar daddies, gold is eternal, objective and anonymous. Says U.S. Economist Sidney Rolfe, a 24-carat expert: "To an American, 100 shares of Xerox represents security. To a European, gold is security."

Demand for gold has intensified so much lately that for the first time in history, it outstrips the amount newly mined. This intensifies the gold shortage, which aggravates the U.S.'s immediate difficulties. Gold is exceptionally difficult to mine, and most U.S. miners find that the price of $35 an ounce is too low to pay them to dig it out. In fiscal 1967, only $1.4 billion worth was unearthed, but $1.7 billion worth was bought by industry, jewelers, dentists and speculators. The $300 million difference was made up mostly by sales from the U.S. to the so-called "London gold pool"--a free market that meets shortages to stabilize prices. While the U.S.'s action helped to hold the price at $35 an ounce, it further reduced the stocks at Fort Knox.

What Is Being Talked About

There has been considerable discussion that the U.S. should raise the official price of gold. By doubling the price, say proponents of the idea, the U.S. would immediately double the value of existing gold reserves, inspire gold miners to increase production and gold hoarders to empty out their mattresses. The hitch is that raising the price would amount to a devaluation of the dollar, because it would take more dollars to buy an ounce of gold. For a host of political, practical, moral and economic reasons, the U.S. simply will not devalue. Says Wisconsin Congressman Henry Reuss, one of the few gold experts on Capitol Hill: "This Congress is never going to increase the price of gold and thus reward the speculators for their attack on the dollar."

The move would punish the U.S.'s best friends and provide a windfall for those who bet on the dollar's downfall. Grave losses would be suffered by allies that have helped the U.S. by holding large sums of monetary reserves in dollars instead of cashing them in for gold. Large rewards would be reaped by countries that converted their dollars into U.S. gold, notably France, and by the world's primary gold producers, South Africa and Russia. Besides being a blatant repudiation of promises echoed by every President since F.D.R., a price increase would enthrone gold--a basically inelastic and unsatisfactory medium of exchange--and run counter to the whole postwar movement to alleviate the alarums caused by gold and create a better system, in which men can have mastery over their monetary affairs.

Another idea under discussion is for the U.S. to pull out of the London-based international gold pool. Today the pool is supported primarily by the U.S. and sells mainly to speculators. It is a means by which big and little Goldfingers can get at U.S. bullion, and protects them from loss by putting a floor under the price. A collapse of the pool would probably lead to a three-price system for gold. There would be an official price of $35 for transactions among nations; a "green" gold price of $35 plus a tax of $10 or so for use in dentistry, jewelry and industry; and a "red" tag of perhaps $50 for speculators. Yet even the advocates of this plan do not suggest that the U.S. should adopt it for several years--until it can prepare the groundwork in delicate negotiations.

A still more radical step, also under discussion, would be for the U.S. to stop selling gold entirely, which it doubtless will do if it scrapes close to the bottom of its gold stock. In that case, Washington would put much of the world on a dollar standard. Gold would be demonetized, all currencies would be fixed in terms of the dollar, and monetary reserves would be held almost wholly in dollars. By choice or because of U.S. pressure, many countries--Canada, Britain, and quite a few in Latin America, Asia and Africa--are now very close to being on a dollar standard.

Some economists argue that the U.S. should consciously empty out its gold stocks. Says Princeton's Fritz Machlup: "Sell it, but don't buy any more of it. In the future, gold won't buy lunch. Dollars will." Adds Minnesota's Walter Heller: "Perhaps we should invite the world to 'come and get it.' " As the Incas did to the conquistadores, advocates of this idea would like to pour molten gold down the throats of bullion-hungry foreign bankers and speculators. The U.S. would then declare that a dollar is worth a dollar not because of the gold that it can buy but because of the American goods and services that it can buy. Under this theory, gold would become useless in international economics, would have only a relatively small value--say $6 an ounce --and speculators would be caught with their hoards up.

Whatever the attractions of such extreme ideas, their flaw is that nobody seems certain of the consequences. Some experts believe that if the U.S. cut free from gold, the value of gold would fall; but just as many think it would rise. The dollar's worth vis-`a-vis other currencies would fluctuate daily, and this very uncertainty would damage commerce. Foreign countries might accept all the dollars that the U.S. would send them--or they might refuse to sell for anything less than gold. At worst, the world would break up into several money blocs, or revert to a primitive barter system. The U.S. must always bear in mind that sharp changes in the system can severely damage the mutual trust on which all worldly money affairs are based. Federal Reserve Chairman William McChesney Martin points to an old banking axiom: threatened by a run on your money, don't try to change the rules.

What Should Be Done

There are a number of practical steps that the U.S. can and should take now to strengthen its monetary position. The first of these is to quickly remove the mandatory 25% gold "cover" on the dollar. This gold-backing for the domestic currency immobilizes $10 billion, leaving less than $2 billion in bullion to meet foreign claims. A few supporters--notably the Daughters of the American Revolution--believe that the cover should be kept, but just about every economist views it as an anachronistic hangover from the pre-1933 days when green dollars were completely convertible into $5 gold pieces. Says Otmar Emminger, head of West Germany's Bundesbank: "Free this bullion, and many foreigners will regain confidence that the dollar will not be devalued." President Johnson is expected to call for such a move in his State of the Union message, and Congress almost certainly will pass it.

For the longer term, the U.S. is leading a drive to create a new monetary system that will, in time, loosen the world's umbilical ties to gold. From the American viewpoint, the current system unfairly penalizes the U.S. because it has run up deficits doing things that benefit the world, such as spending for foreign aid and tourism, lending and investing in capital-short areas. Thus, any new system has to provide a liberal and flexible credit window for tiding over countries with justifiable deficits. Most important, the system has to be one that eases the world shortage of monetary reserves and makes nations less dependent on the vagaries of gold. The world needs a system that, in President Johnson's words, "will make the creation of new reserve assets a deliberate decision of the community of nations to serve the welfare of all."

Plans to concoct a new money to supplement gold the dollar have been put forward by economists from Britain's Prime Minister Harold Wilson to the U.S.'s Robert Triffin. They call for some or most of the world's nations to create and regulate an international money that would be handled only by governments, not people. The first tentative steps toward that were taken at last fall's meeting of the 107-member International Monetary Fund. The IMF voted to create an Ersatzgold called "special drawing rights." There is one big hangup: these "S.D.R.s" will probably not be activated until the U.S. and Britain markedly reduce their balance of payments deficits. But it is quite possible that by 1975 the S.D.R.s will increase the world's reserves by 25%. Says German Banker Hermann Abs approvingly: "It's like putting a paper tiger in your bank."

The Highest Priority

The overwhelming conviction of money experts is that the most important change needed right now is for the U.S. to bring its balance of payments deficit down to about $1 billion. The deficit in recent months has been running at an annual rate of well over $5 billion. That might not seem like much, considering that the U.S. produces more than $800 billion in goods and services annually. The U.S. could be compared to a man who earns $8,000 a year, has a rising income and a debt of only $50 to a creditor in another city. He doesn't worry--so why should the U.S.?

The answer is that there is a basic difference between the money that a country spends domestically, and the money that it spends abroad. When a country runs a deficit abroad, it usually must settle up quickly or else foreign creditors cut it off. When that happens, the debtor country often has to resort to deflation, cutting back on jobs and incomes to reduce demand and imports. In sum, a debtor nation tends to lose some of its sovereignty and freedom of action. No U.S. leader wants that to happen here, but then, none can deny that the U.S. position is precarious and that the U.S. cannot speak from full strength in world monetary affairs until it achieves a semblance of balance.

So long as the special payments drain caused by Viet Nam continues--and the war effort should by no means be reduced for monetary reasons--the U.S. will have to take measures that will pinch almost everyone's pocketbook. The President spoke bravely last week, but now he has to show that he--and Congress--have the courage to back oratory with muscle. That means not merely trying to persuade tourists that the Tetons are prettier than the Alps or appealing to businessmen to put patriotism above profits, but enacting tough taxes and rigid rules to discourage travel and investments or loans abroad during the current emergency.

There is no cheap or easy way for America to solve its deficits dilemma. No matter how it tinkers with the golden rules, it ultimately will have to achieve what the bankers call equilibrium--which is to say, a surplus or deficit of not much more than $1 billion yearly. As soon as it does that, the gold problem will disappear. "Then," says Germany's top banker, Emminger, "the U.S. can do whatever it wishes about the gold price. Then everyone, or almost everyone, will be quite content to hold onto his dollars. There is no advantage in holding onto the metal once you become convinced that the dollar will truly hold its value."

At that time, the U.S. will be able to drift away from the gold pool and greatly lessen the monetary emphasis on gold, thus ridding the world of much of the alarm, speculation and instability caused by what William McChesney Martin calls "that barbarous metal." Most bankers and economists believe that the major monetary trend of the future will be a shift away from gold and toward a truly international paper currency, supported by contributions of currencies from all major nations. When that happens, money will be regulated by men instead of metal, and the value of each nation's currency will more truly reflect its real economic strength.

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