FOREIGN TRADE: Vanishing Exchange

Last week some $500,000,000 of Allied gold arrived in Manhattan. It was unloaded from 120-odd trucks behind machine guns at the Federal Reserve Bank entrance on Maiden Lane, carried into subterranean vaults whose outer flanks are lapped by seepage of the sea. Like a cloudburst over the cataract that has brought $12,000,000,000 of gold to the U. S. since 1934, this $500,000,000 raised the total monetary gold owned or held in the U. S. to around $2 1, 000,000,000, of which over $19,000,000,0001s U. S. Government-owned. This is over 60% of all the monetary gold in the world.

The fact that the U. S. has a”favorable” export balance and will buy gold from all comers at $35 an ounce was not the main attraction for last week’s ship ments. Like most of the gold shipped here in the past six years (probably three-fourths of which has been capital, not payment for U. S. exports), its motive was fright. Nevertheless, financial columns raised anew the gloomy question: what good is all this gold to the U. S.? Will it have any post-war value except to dentists? Nobody knew. Some pointed out that in almost any post-war world billions of expatriated gold would go home again.

But many noted that the classical theory of gold’s function — a balance wheel for international trade — was, for the time be ing, becoming more classical every day.

Most disturbing facts about U. S. gold policy (now under review by Senator Wag ner’s Banking & Currency Committee) are two: 1) since the gold influx turns up in the Federal Reserve in the form of certificates that are the country’s credit base, it creates enormous excess reserves, which help to lower interest rates, set the stage for credit inflation; 2) it enables foreign capitalists and importers to cut themselves a slice of our profits and goods, paying for them in an inedible metal of which we already have too much. In lukewarm defense of U. S. gold-buying, realistic bankers, while pointing out that gold is still the only universal medium of exchange, grant that it has also become a weapon of U. S. foreign policy. For the U. S. to alter its gold policy now might not hurt the U. S., but would throw international money markets into a panic, especially derange the purchasing program of the Allies, who produce over half (about $700,000,000 last year) of the world’s new gold. Said this month’s bulletin of the National City Bank: “Apparently we have a bear by the tail and cannot let go.”

More like the simple faith of a lyth-Century mercantilist’is Secretary Morgenthau’s defense of gold. Last month he called it “the safest physical asset in the world.” But even he admitted a doubt. Picturing a Nazified economic area in which “international trade and finance may assume the character of domestic trade,” he said: “. . . It might well be that gold would no longer be needed. But under those circumstances life would be so different that the possible loss in the value of gold would, I am sure, be the least of our troubles.”

But last week the British Government, in its effort to prevent a Nazified world, announced sweeping changes in its foreign-exchange policy that seemed to bring Henry Morgenthau’s horrid vision closer to reality. All trade with the British, French, Dutch and Belgian empires (excluding Canada, Newfoundland and Hong Kong) is henceforth to be parceled and controlled. Inside this “sterling area” (onefourth the world’s population), trade will be virtually in one currency, since all four currencies are pegged to each other. Between the sterling area and all other countries except two, trade will be done through clearing agreements based on the pound’s official rate. The other two countries are Switzerland and the U. S., homes of the only two free currencies left in the world.

Ever since March, the pound has been partly controlled, part free (TIME, April 15). Other important European free currencies have either entered the sterling bloc or disappeared entirely. Hence New York foreign-exchange brokers, for years a diminishing tribe, have recently subsisted mainly on the market for free sterling. Importers of all British goods except rubber, tin, furs, jute, whiskey and diamonds, and capitalists who wished to remove their sterling deposits from Britain, bought and sold enough spot and future sterling to keep over a score of foreign-exchange brokers alive. But Britain’s announcement last week meant two things: 1) all British goods must now be paid for in pounds bought at the official rate of $4.03½ and 2) no nonresident holders of British securities can sell them. Thus both the demand for and a big source of supply of free sterling in New York were wiped out overnight.

Immediate reaction was a sensational rise in free sterling’s price. Shorts, both speculative and commercial, rushed to cover their commitments in the vanishing exchange, drove it from $3.19 to $3.88 in two days. With few remaining ways in which it can be spent (except for shipping costs, immigrant remittances, etc.), the already narrow market began to dry up altogether. Foreign-exchange brokers looked around at the changing world, wondered whether to take up Swiss francs or dry up too.