Fixing a Floor

On the London market last week, the price of privately traded gold dipped to $34.80 per ounce for the first time since it was freed to find its own level 22 months ago. The decline, from a high of $43.80 as recently as last March, represented a resounding defeat for speculators and for theorists who had argued that the official price of gold should be raised and the dollar should be devalued. It was a victory for the U.S. and for those moneymen who believe that gold's power in world affairs should be diminished.

U.S. officials, far from celebrating their victory, were negotiating an arrangement to prevent the free-market price from dropping below $35. They intended to do so by loosening up the U.S.-inspired boycott against South African gold. Under the boycott, central banks had bought hardly any South African gold; this had forced South Africa to sell on the free market, driving down the price. But as the free-market price skidded, European central bankers feared for the value of their own gold reserves. In addition, the Europeans wanted to bring some new South African gold into the international monetary system in order to lessen their dependence on U.S. dollars as a reserve currency.

Secret Meeting. Since the Europeans had made the victory possible by agreeing not to buy South African gold in the first place, the U.S. could hardly refuse their request to ease the boycott. For its part, South Africa was ready to sue for peace. Its 1969 trade deficit reached an estimated $700 million by October, largely because of imports of machinery needed to modernize its economy. Unless the South African government could sell more gold at a good price, it would have to either 1) pursue risky policies of austerity and deflation during an election year, or 2) restrict imports of machinery and compensate by upgrading the skills of black African workers.

At a secret meeting last week in Rome, South African Finance Minister Nicolaas Diedrichs and Paul Volcker, U.S. Treasury Under Secretary, framed a compromise. It would permit South Africa to sell a certain amount of new gold to the International Monetary Fund whenever the country's balance of payments was in deficit and the free price sank to $35 or less. The I.M.F. would pay the official price of $35 and could then resell the metal to central banks. The deal would provide a floor under the gold price, and something of a ceiling as well. Since the I.M.F. would buy only a little gold, South Africa would have to sell most of its metal on the free market, and that would tend to hold down the price.

Stiff Price. The deal brought an angry response from Congressman Henry Reuss, chairman of the Joint Congressional Subcommittee on International Exchange and Payments. He said that the U.S. "would pay a stiff price for any compromise with South Africa." A floor under the private price of gold, he argued, would encourage speculation by taking the risk out of it, and would possibly tempt foreign bankers to demand conversion of their dollar reserves into gold.

Since all dealings will be made through the I.M.F., Reuss can do little to block the agreement. Moreover, the Europeans wanted the deal and, as one Treasury official put it, "we have to live with these people." Nonetheless, the compromise represented a setback in the world's steady progress toward replacing gold with other forms of reserves, including the I.M.F.'s special drawing rights, and relegating the metal to the status of the "barbarous relic" that John Maynard Keynes held it to be.

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