Crisis Again?

Is the Western world stumbling toward another gold and monetary upheaval? An increasing number of bankers and economists fear that it is. "The international monetary situation is still unstable," says President Karl Blessing of the West German Bundesbank. South African Finance Minister Nicolaas Diederichs has repeatedly predicted that an international flareup will come in the second quarter of this year. Princeton Professor Fritz Machlup, a top expert on global finance, expects a new currency crisis "in the foreseeable future."

Such worries have been reinforced by signs of strain in the world's monetary system. Eight hours after Treasury Secretary David Kennedy was sworn in last week, he talked down one source of uneasiness. In a statement approved by President Nixon, he ruled out any change in the official $35-per-oz. price of gold. "We see no need or reason for such action," he said.

A Preference for Metal. It was a ritual pledge, made in response to urgent requests by European bankers to help quell a new outbreak of speculation. The free-market price of gold had been creeping up for more than a month, partly because of tensions in the Middle East and partly because Kennedy inadvertently raised hopes in December that the new Administration might raise the official gold price. Mindful of Nixon's orders to avoid taking policy positions before the inaugural, Kennedy replied to a question about gold prices by saying that he would "keep all options open." Despite disclaimers by Nixon's press aide, speculators caught the scent of possible quick profits.

Two weeks ago, the free-market price in London and Zurich climbed to $42.75 per oz. That was the highest in the ten months since a buying panic forced central bankers to adopt a two-price system and stop supporting the price of privately traded gold at $35. After Kennedy's declaration last week, the free-market price retreated to $42.

Still, the 20% gap between the different prices revived skepticism about the durability of the "two-tier" price system. In last year's gold rush, the $3 billion that drained out of official reserves created a price-stabilizing oversupply of the metal in the free market. Now that cushion is depleted because speculators have bought it up. If the price gap grows larger, the central bankers of smaller nations might be tempted to unload official stocks of gold at the much higher free-market price--thereby circumventing the two-tier arrangement.

The two-tier system has worked well so far, but its future is imperiled by a fundamental defect. When central bankers decided to let the marketplace set the price of gold for speculators, hoarders and industrial users, they also agreed to stop buying and selling the metal except to settle debts among nations. Thus the world's monetary gold stocks were artificially frozen at $40 billion. But nations' appetites for gold have grown stronger, and their trust in paper currencies has become weaker. In the past year, these countries have changed the percentages of gold (as against paper money and credits) in their national reserves in the following way:

1967 1968 Belgium 57% 63% Portugal 57% 64% Italy 44% 52% Switzerland 87% 90%

Countries made this shift largely by trading dollars for U.S. gold. During 1968, the U.S. lost $1.2 billion in gold, leaving the U.S. with only $10.9 billion of the metal to meet $30 billion of potential foreign claims against the dollar. Though most of the loss came before April and the U.S. gold stock has stabilized since the two-tier system was set up, the total is low enough to cause concern. Warns Vice President Harold

Cleveland of New York's First National City Bank: "The U.S. gold stock has been reduced to the point where the U.S. guarantee to convert dollars into gold at $35 is no longer credible."

Window Dressing. For the moment, however, the dollar seems secure against the devaluation that a gold-price increase would involve. The U.S. last year ran a tiny balance-of-payments surplus, its first in eleven years. It was a victory with a high price. "No one should be deluded," says Treasury Secretary Kennedy. "Underneath the overall result, our trade balance has sagged to the vanishing point under the pressure of inflation, and additional controls on American investment were imposed to achieve the balance. We do not plan to rely indefinitely on tight controls or statistical window dressing to disguise but not cure a basic deficit."

A new crisis could be set off by any substantial deficit in the U.S. payments balance or by a bad British trade report, a weakening of the French franc, or some political event that would fan distrust of paper currencies. Of all the possibilities, bankers worry most about the increasing disparity between the economic strength of West Germany and the weakness of France and Britain.

To strengthen their financial defenses in advance, the major nations might increase their reserves of monetary gold. South Africa is sitting on a horde of $1.25 billion in gold, waiting for a crisis that would lift its price. But the South Africans seem willing to make a deal. They would probably sell half of their gold to the official market at $35 per oz., if they could also get permission to sell the other half at a higher price on the free market. At the same time, the world's monetary authorities would put a floor under the gold price by agreeing to buy South Africa's bullion if and when the free-market price ever falls below $35. Continental moneymen are increasingly convinced that the Nixon Administration will accept such a deal. Once again, in 1969, the fraternity of central bankers will probably have to use inspired improvisations to keep the world's monetary mechanism operating.

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