HOW BALANCE-OF-PAYMENTS PROBLEMS ARISE
Q: You mentioned our balance-of-payments problem. How does a nation get involved in such a problem?
A: A balance-of-payments problem arises for a nation when that nation is in deficit on external account. A deficit means, in effect, that such a nation spends more than it takes in — that it lays out more than it can afford.
For a while this can be done at the expense of reserves and/or by contracting obligations abroad. But in the long run it leads to loss of confidence outside one's borders, and finally to international insolvency. No matter what the contentions of the modern economists, it would appear unlikely that they will be able to abolish gravity, that they will show us how to run balance-of-payments deficits forever.
Q: How long has the United States been running in the red on its international account?
A: Except for one year, the U.S. has been in the red on its balance of payments for 17 years. Over the eight calendar years 1958 to 1966 the U.S. chalked up a cumulative balance-of-payments shortfall of roundly 26 billion or one of 22 billion — depending on how you calculate and which set of figures you pick.
During the same eight years — and this is not a matter of the selection of statistics — this country lost almost $7.4 billion of its official gold stocks. Moreover, from 1949 to late 1967, our gold loss came to more than $12.1 billion, i.e. our official monetary stock was practically halved in 18 years.
And all this happened although Uncle Sam, 1958 to 1966 alone, recorded a huge cumulative trade surplus of anywhere from $30.5 to $35.9 billion — here again depending on which statistics you use. And this balance is still in the black. Also in the black for years has been the account of private American direct investments abroad.
Q: But how can this be? How can we have a trade surplus, but a balance-of-payments deficit?
A: Admittedly, our official trade surpluses are by no means altogether "real." For one, U.S. trade statistics calculate both exports and imports f.o.b., even though only about one-tenth of our international sea-borne trade is carried by American flag vessels. Secondly, there is the matter of our tourism deficit — presently running pretty close to $2 billion annually.
But thirdly, and by far the most important, our trade surpluses include unrequited sales and giveaways. Some of them are on terms as protracted as forty years, against all kinds of soft currencies, most of which we shall never be able to collect. We already "hold" or are about to "own" — without the right to dispose of them freely — some 17 billion Indian rupees. This is more than half of New Delhi's entire paper money in circulation!
We seem to be obsessed with the Messianic notion that in one short shrift we can lift up the entire world, while, along the way, we are buying or at least renting friends.
It is the cost of this missionary zeal in our parts which keeps our balance-of-payments in the red. It also keeps the U.S. dollar, the currency of the foremost nation in the Free World, under a heavy cloud of suspicion.
Q: When did we begin to recognize the seriousness of our balance-of-payments problem? And what have we done to correct it?
A: For more than nine years, the shortfall of this Country's international accounts was no secret. Yet, for the longest of time, the issue was unceremoniously swept under the rug. Then came attempts to make others — whom Uncle Sam had once generously helped — help us. Messrs. Anderson and Dillon [former members of the U.S. Treasury Department] went on a Canossa Pilgrimage to Bonn to beg the Germans for assistance. But to this day, while foreign Central Banks — in self-interest — have, indeed, closely cooperated to maintain dollar strength, some of the major industrial countries are not exactly enthused about unending help for the chief deficit of the world, namely the United States.
Q: What happened after this?
A: Next came a spate of palliatives and gimmicks. These ranged from intricate swap operations to gold borrowings from the I.M.F. to the so-called Roosa bonds. The latter are something this Country cannot very well be proud of. The most powerful Nation of all time with the most potent economy in history went begging.
Just one example: Little Austria, which after World War II had received some $1.4 billion in U.S. assistance of all kinds, was asked to lend the U.S. a measly $25 million, and did so only against specially printed, schilling-denominated U.S. Treasury paper.
We also pressed nations which had been the beneficiaries of historically unprecedented American generosity and magnanimity to prepay their debts to us — prior to maturities — and to buy military hardware here.
Yet, all these and even more palliatives — some of them tragicomically — only treated symptoms without attempting to cure. They failed to bring this Great Nation's balance-of-payments into equilibrium. They failed to stop the chronic gold hemorrhage. They failed to lift the dollar substantially above par on major markets abroad. And they did not prevent leading Central Banks on the Continent from setting limits on the dollars they are willing to hold in their reserves.
Q: What does this limitation on the dollars that foreign bankers are willing to hold mean?
A: It means that, at highest level abroad, the U.S. dollar is, indeed, not really acceptable in unlimited amounts. Thus it is fully convertible only by causing a still greater outflow of gold from our shores.
The world prefers gold to dollars, and no matter how much we may like to make gold our servant, it remains our master. It would be easy to abolish the mystique of gold which for millennia has guided man's thought — provided we could persuade every cobbler in Pakistan, every merchant in India, every peasant in France and every banker in Switzerland and Holland to abandon his faith in the yellow metal and to switch over to, say, cowry shells or pickled strawberries. But until that time . . .
Q: What about the argument voiced by some that the dollar is superior to gold — that the strength of a currency lies in the economy behind it?
A: It is true that the fundamental prowess of a currency ultimately rests on the economic power and human talent behind it. But all the founding of a currency upon the productive capacity behind it, and all the foreign exchange regulations so far have been shattered on the cliffs of man's amply justified disbelief in the integrity of politicians, i.e. governments.
Some 160 years ago Talleyrand said that diplomats and politicians are paid to lie until the truth suffices to mislead their listeners. And as recent events have demonstrated, this statement is as true today as ever.
Q: Why do people trust gold so implicitly?
A: People trust gold because it is an instrument of discipline and a standard of measure which is steady. In the words of George Bernard Shaw:
"The most important thing about money is to maintain its stability . . . With paper money this stability has to be maintained by the government. With a gold currency, it tends to maintain itself even when the natural supply of gold is increased by discoveries of new deposits, because of the curious fact that the demand for gold in the world is practically infinite. You have to choose as a voter between trusting the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And, with due respect for these gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold."
Q: Under what circumstances could the nation abolish the gold standard?
A: We could abolish it if everyone else abolished it. But "everyone" hardly consists of a few politicians, mainly in the Anglo-Saxon countries, and the new-economists who want to "dethrone gold" to cover up their own guilt — the mistakes of their own making. I don't think that these people will abolish gravity.
Now I'm not madly in love with gold at all. But I do recognize that the faith in gold of the vast majority of the people of this world — and that includes the Russians — is very strong. I'm not making a fetish of it; I'm just reporting the facts. The whole world has demonstrated that it likes gold — that it hasn't too much faith in anything else. Since the whole world believes this it certainly would be a long time job to dislodge this belief and to "dethrone gold" as some want to do.
Q: What about a return to the pure gold standard as some are advocating. Is this necessary? Indeed, is it even possible?
A: We cannot very well return to the pure gold standard, because to finance world trade and international investment there is not enough gold around. An upgrading of gold would probably cause more uncertainties than it would do good. The Exchange and Gold Standard, created at Bretton Woods 22 years ago, worked well, and would continue to serve its purpose if this country and Britain were to eliminate their balance-of-payments deficits.
We must bring down our fiscal deficit to something more civilized. And we must also protect the dollar's domestic purchasing power. We are now going through the nastiest inflation in memory. Officially it is at an annual 4 to 4.5 percent, but in truth it is a great deal more. Just ask any housewife!
If the dollar were kept shining and hard and steady — fully acceptable — we would always have enough liquidity.
For many years during the Forties and Fifties the dollar was as good as gold. People took it that way. It's much nicer to fold a currency bill and put it in your pocket than to lug a small brick of gold around!