• U.S.

Money: The Dollar Drought

4 minute read

Seen through foreign eyes, U.S. dollars are something like U.S. tourists or soldiers: foreigners may grumble when too many of them come over, but they really howl when the flow is cut back. Now that Washington has tightened up on the spending and lending of dollars abroad to close the U.S. payments gap, the cries are rising from Bern to Canberra. The U.S. has been a vast commercial bank to a capital-starved world, having pumped $25 billion abroad in the past decade, and other nations are reluctant to part with this rich source of money. Said London’s Evening Standard last week: “Already there is talk of a new dollar shortage of the kind which made economic life so difficult in early postwar years.”

Weak Francs. Europe’s businessmen, who previously complained that the unchecked inflow of U.S. dollars aggravated the Continent’s inflation, are now warning that the cutback raises the danger of deflation. The Swiss franc and the French franc have weakened in relation to the dollar on international money markets, and the short-term lending rate for Euro-dollars—the $5 billion-plus hoard of dollars that is circulated by Europe’s banks—has jumped from 41% to 5% as borrowers scramble for funds to finance expansion. In Australia, where the Sydney stock market suffered its sharpest fall in four years as a result of the curbs on dollars, Prime Minister Sir Robert Menzies passed the word last week that he will ask Lyndon Johnson to soften the restrictions. Japanese businessmen, mindful that U.S. money has provided 10% of the financing for their postwar boom, also urged Washington to go easier.

Washington is willing to bend, but only a bit. Commerce Secretary John Connor said last week that U.S. businessmen may lend and invest freely in the underdeveloped nations. The U.S. is in no mood to relax its restrictions on the 22 “developed” nations—including all of Europe as well as Japan and Australia—because it is continuing to lose gold. The nation’s gold supply dropped another $250 million last week, bringing the year’s loss up to $825 million and the stock at Fort Knox down to a 27-year low of $14.6 billion.

More than half of this year’s drain to date has been due to Charles de Gaulle’s attack on the dollar, which is continuing week by week. The U.S. is also under pressure from one of its staunchest monetary allies, West Germany. Speaking for West Germany, Bundesbank Chief Karl Blessing recently urged nations to place less reliance on the dollar, hold their international reserves two-thirds in gold and only one-third in dollars and British pounds. In 1964 the Bundesbank quietly traded in $200 million for U.S. gold and boosted the proportion of gold in its reserves from 54% to 61% (v. 73% in France and 87% in Switzerland).

Strong Motives. The continuing air of unease lent urgency to the cry for reform of the international monetary system, in which the world still depends heavily on dollars. The U.S. Joint Congressional Economic Committee last week proposed that all hard-money nations should at long last kick in to create a new pool of reserves, thus sharing with the U.S. both the burdens and rewards of serving as banker to the world.

Going even farther, Britain’s Labor government is willing to transform the International Monetary Fund into a world central bank that would not only lend money but also create it. Though De Gaulle’s call for a return to the gold standard has been roundly rejected, the French believe that they have won an important psychological battle: just about everybody wants to change the money system to give the world more floating capital.

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