Money: De Gaulle v. the Dollar

Perhaps never before had a chief of state launched such an open assault on the monetary power of a friendly nation. Nor had anyone of such stature made so sweeping a criticism of the international monetary system since its founding in 1944. There was Charles de Gaulle last week proclaiming that the primacy of the dollar in international dealings was finished, calling for an eventual return to the gold standard —which the world’s nations scrapped 50 years ago — and practically inviting other countries to follow France’s lead and cash in their dollars for gold. It was a particularly nettling irritant just as the U.S. was deeply involved in making some hard decisions about its monetary policy.

The Drain. President Johnson faces the unpleasant task of producing what he calls “strong and specific” actions to deal with the persistent U.S. balance-of-payments deficit, a problem intimately related to gold. The President’s advisers are still debating just how “strong” these imminent measures should be.

There is a growing awareness, heightened by De Gaulle’s offensive, that past attempts to close the payments gap have been mere palliatives — and that the problem has begun to undermine U.S. influence around the globe.

Just before De Gaulle spoke, Treasury Secretary Douglas Dillon made the first public admission that the U.S. payments deficit in 1964 moved higher than anyone had expected. It totaled about $3 billion, all of which the U.S. is legally committed to exchange for U.S. gold on demand. The Federal Reserve announced that the U.S. gold supply declined last week by $100 million, to a 26-year low of $15.1 billion.

France converted $150 million into gold last month, plans another $150 million conversion soon. Following that lead, Spain has quietly exchanged $60 million of its dollar reserves for U.S. gold—the biggest such transaction of the Franco era. To free more gold to meet rising demand, a congressional committee last week approved President Johnson’s proposal to eliminate the 25% gold backing now legally required for deposits held in the Federal Reserve System. But concern is growing in Washington that nations that have so far refrained from converting dollars out of consideration for the U.S. may cash them in for gold once the extra bullion becomes available—and thus send still more gold-laden truckloads rolling out of Fort Knox.

Signal Privilege. Into this tense situation stepped De Gaulle, disregarding his 1963 promise to support the present international monetary system, in which the dollar plays the dominant role and all free world trade is financed by a mix of dollars, British pounds and gold. The time has long since passed, he told a press conference (see THE WORLD), when the currencies of any one or two nations can enjoy “this signal privilege, this signal advantage.” The present-day world, said De Gaulle, needs “an indisputable monetary base, and one that does not bear the mark of any particular country. In truth, one does not see how one could really have any standard criterion other than gold.”

De Gaulle seemed to be calling for a somewhat modified form of the classical gold standard when he ambiguously recommended “complementary and transitory measures” to accompany it. Nonetheless, there was no doubting his intention: to promote his drive to reduce U.S. economic, military and cultural influence abroad.

Under a gold standard the U.S. would no longer be able to pay its foreign debts in dollars, but only in gold. U.S. businessmen would have to curtail their investments in foreign companies. (De Gaulle last week called such U.S. investments “a form of expropriation”). Until the U.S. balanced its payments in gold, American consumers would also have to reduce their purchases of foreign goods. Reason: since dollars would no longer be as good as gold, they would be cashed in abroad for gold as soon as spent. The U.S. would immediately become less potent in world economic affairs because, though it has twice the gross national product of the Common Market nations, it holds scarcely more gold than the Six.

Stern Discipline. Conscious no doubt of the irony involved in his unneighborly attack, De Gaulle christened his plan the “Golden Rule.” What could be said for his proposal? The value of money would be guaranteed by the immutability of gold. In theory, the world monetary system would become more stable, less vulnerable to crises of confidence. By tying the money supply to gold, the system would prevent overspending. In the U.S. and Britain, which now can pay their deficits out of their own currencies, it would impose a stern fiscal discipline, curb deficit financing and do away with many of the excesses that lead to inflation and recessions. Among other things, it would force the U.S. to eliminate its balance-of-payments deficit quickly, by hook or by crook.

To counter criticism that the system would also paralyze international trade because of the global shortage of gold, champions of the gold standard advocate another step that they consider necessary: to double or triple the $35-an-ounce price of gold, thus vastly increasing the monetary reserves that finance world trade.

For the present at least, most of the world’s leading economists, money managers and financiers believe that this golden future, however desirable in theory, is nearly impossible to achieve in practice. After De Gaulle’s press conference, British and West German government leaders said that they took a dim view of a return to the gold standard. The U.S. Treasury declared that the scheme would produce economic warfare: nations would demand that their foreign debtors pay off fully and immediately in gold—and many countries would not have enough gold to go around. Many nations would then have to embargo gold, raise tariffs, restrict trade. At a recent meeting in Bellagio, Italy, 30 of the world’s top 32 international economists opposed a return to the gold standard.

The great majority of economists and financiers also reject the idea of an increase in the price of gold—in effect, devaluation of all the world’s currencies. Says Yale’s Robert Triffin, a ranking gold expert: “It would help unfriendly nations and hurt our friends, and lead to the collapse of international monetary cooperation.” The biggest gold producers, South Africa and Russia, would be helped; their gold would immediately become worth two or three times what it is now. The countries that have helped the U.S. by holding large amounts of dollars in reserve would be hurt, especially Germany, Japan and Canada.

Moreover, since Congress normally would have to debate and vote on changes in the price of gold, many holders of dollars would rush to cash them in for gold. In theory, revaluation of gold could be prepared in secret by all nations concerned and announced simultaneously. In practice, economists believe, this might be nearly impossible to carry out. For all these reasons, President Johnson, in his Economic

Message two weeks ago, repeated six times that the U.S. is determined to hold gold at its current price.

New European Axis. De Gaulle probably does not really believe that the world will return to the gold standard. He has been much influenced by Jacques Rueff, his economic mentor and probably the world’s foremost proponent of a return to gold; Rueff greeted De Gaulle’s blast last week as “an invitation to a common enterprise that will deliver the West from an absurd monetary system.” But De Gaulle, however much he may admire the theory, is an artist of the possible, and he is probably using the threat of a gold standard in hopes of pressuring the U.S. and Britain into accepting lesser changes in the monetary system favorable to France. For the past six months he has been urging the creation of a new international reserve currency called the “cru” (for collective reserve unit), which would give greater weight to gold and more financial power to nations with heavy gold supplies. The U.S. has opposed it, but De Gaulle’s attack on the dollar may force Washington to reconsider.

High officials of the Federal Reserve Board believe that De Gaulle, aided by Spain’s Franco, is trying to form a new European axis designed to embarrass and weaken the U.S. by attacking the dollar. To buttress the dollar, Federal Reserve Chairman William McChesney Martin Jr. has been strongly urging President Johnson to move swiftly and dramatically to wipe out the deficit in the balance of payments. “Some way or other, something has to be done,” Martin said recently. “It is important that we face up to the fact that we have become a chronic deficiteer—and that leaves us in a weak position.”

Martin, Douglas Dillon and Budget Director Kermit Gordon are lobbying for measures that would drastically affect the nation’s foreign and domestic policies. Among the proposals that one or all three of them have forwarded: an exit tag of $50 or $100 per person to discourage tourism abroad, direct controls on U.S. investments abroad, a further cutback in foreign aid and, if necessary, a sharp reduction of U.S. troop strength in Europe. These proposals have been hotly debated at a series of secret meetings in the White House. The State Department is dead set against foreign aid cuts or troop withdrawals, and the Commerce Department argues that restrictions on investment would destroy the U.S.’s reputation as the world’s freest capital market. The White House figures that a “head tax” on outward-bound tourists would be political poison.

Johnson’s Compromise. The State Department believes, in fact, that a $3 billion payments deficit should not really bother a nation that boasts both a $650 billion economy and twice as much in claims against foreign currencies as foreigners have against the dollar. It argues that the U.S. could reduce the deficit by $500 million simply by counting short-term foreign deposits in the U.S. as assets instead of liabilities.

Strong support for this optimistic view came last week from Pierre-Paul Schweitzer, the managing director of the International Monetary Fund and the world’s top currency controller. “A more realistic assessment would some what lower the figures for the overall deficit,” he said. “The structure of the U.S. balance of payments is one of underlying strength.”

With his usual preference for compromise, President Johnson had decided early last week on some fairly mild prescriptions. These were to include a slight tightening of the domestic money supply to prevent dollars from flowing abroad, a tax on loans by U.S. banks abroad, and a jawbone campaign to persuade U.S. businessmen to reduce their foreign investments. De Gaulle’s bombshell may have convinced the President that tougher action is needed. In any case, official Washington agrees with De Gaulle on at least one point: some changes should be made in a world monetary system that puts the U.S. under such strain.