Nation: THE GOLD DRAIN: How It Might Be Stopped

FEW economic problems have troubled John Kennedy more than the U.S. gold outflow—the steady erosion of the nation’s gold reserves by foreign claims. Early in his Administration, the President determined to make a concerted drive to stem the flow. That determination remains. But many businessmen and economists are concerned about whether the Administration is actually doing enough to stop a long-term outflow that could eventually drain the nation’s reserves to a perilous level and destroy international confidence in the dollar.

Although the U.S. still has the world’s largest gold supply, it has been shrinking at an average rate of about 6.5% annually since 1958. This year alone it has already sunk by $455 million, to a 23-year low of $16.4 billion. Since $11.7 billion of this total must be held by law to back U.S. paper currency, that leaves only $4.7 billion in “free gold” to pay off foreign claims—some $14 billion less than the U.S. would have on hand to pay out in the unlikely event that all claims were called at once. If the gold drain continues at the rate of recent years, U.S. free gold supplies could be completely drained in four or five years, thus creating an emergency not only for the U.S. but for the entire free world in which the dollar is the key currency.

The steady gold outflow is caused by a huge and continuing deficit in the U.S. balance of payments, reflecting the fact that the U.S. spends and lends (and gives) more abroad than it takes back home. Though the Kennedy Administration has measurably improved the balance of payments by various methods (including encouraging exports and limiting tourist purchases abroad), the situation is still serious. This year’s balance-of-payments deficit is expected to reach at least $1.5 billion, a billion less than last year’s but a good $500 million more than the Administration had hoped for.

The balance of payments accurately reflects the role of the U.S. on the international scene, where it has assumed many heavy burdens since World War II. Were it not for the commitments that it has made to help other nations prosper and to build up the defenses of the free world, the U.S. would be able to boast a nice fat payments credit. With that in mind, many economic thinkers are seriously examining what steps might be taken to improve the balance of payments, short of the undesirable measures of devaluing the dollar or imposing controls on capital movements. Among the possibilities that might be explored:

> Without acting in any antagonistic spirit, the U.S. might take a new, searching look at its foreign aid&$151;where it goes, what good it does, and how it might be cut back. The U.S. has doled out nearly $62 billion in foreign economic aid since 1945. Many nations may no longer need so much, and some, like Germany and Japan, have become so prosperous that they should be able to take on more of the burden of providing aid for underdeveloped countries. The Administration could step up its policy of requiring nations receiving aid to make their purchases in the U.S., which now falls far short of the Administration’s goal of having 80% of all financial aid sent abroad returned to the U.S. in the form of payments for U.S. exports. And the U.S. could cut its aid bill by insisting on more quality rather than quantity in foreign aid, much of which is now wasted by bad administration or outright corruption in receiving countries.

> The drain caused by military expenditures abroad—which have totaled $29 billion since World War II—could probably be cut back without damaging the military posture of the free world. The U.S. has already persuaded Germany to offset the dollar cost of U.S. troops stationed there (about $600 million a year) by buying an equivalent amount of arms in the U.S.; more pressure might produce similar arrangements with other nations. Some feel that the U.S. military abroad should be supplied directly from the U.S. on a larger scale.

>Interest rates could be raised to keep U.S. capital from flowing abroad and to encourage investment in the U.S. by foreign capital, now attracted to higher interest rates overseas. The danger: that higher interest rates might contribute to choking off domestic business activity, as it did before the 1958 recession, and create a worse evil than it was meant to cure.

>The balance-of-payments problem is directly affected by the general health of the U.S. economy. A booming economy would raise confidence in the dollar and spur capital investment and exports, all measures that would help lessen the payments deficit. The sluggish growth of the U.S. economy has been caused largely by a constant rise in costs, a squeeze on profits, and a serious lag in investment. Holding down costs and encouraging investment in more modern and efficient plants would enable U.S. products to compete more favorably abroad. Part of any tax revision program should be a cut in the corporate tax rate from the present 52% to below 50%—a move that would give a boost to both profits and confidence.

One way to encourage investment is a thoroughgoing overhaul of the U.S. tax system, which places a heavier burden on investment than in any other industrialized nation in the world. But real tax reform depends largely on responsible fiscal policies and a curb on excessive government spending. The fact is that continued deficits and steadily rising government expenditures make businessmen, both at home and abroad, fearful of the dollar’s future. In the U.S. the result is deferred investment; abroad it often takes the form of cashing in dollars for U.S. gold. The U.S. obviously has not yet done enough to solve its balance-of-payments problem, but few solutions are likely to work over the long run unless the U.S. economy is growing at a brisk rate and U.S. businessmen feel ready to take on the world—in trade rather than aid.