Money: The Gold War

Charles de Gaulle, who has long since learned how to use economics as a political weapon, last week hit the U.S. where it hurt: right in its gold reserves. In so doing, he sent shock waves throughout the international monetary system, of which the U.S. is the mainstay, and revived doubts about the system’s basic strength and resiliency.

The French Ministry of Finance revealed that, following De Gaulle’s order, France will convert at least $300 million of its $1.3 billion hoard of dollars into gold—in addition to the $400 million to $500 million it routinely cashes in each year. De Gaulle thereby served notice that he intended not only to cause mischief for the American economic colossus, but to test the money system in its global entirety. The move was important not so much for its size as for the furor it caused and the specter it roused of what would happen if other dollar holders decided to imitate France.

Firm Stand. The French action sent speculators off on a gold-buying binge, upset markets and confidence around the world. The price of gold on the London exchange soared to $35.20 an ounce, the highest since the Cuban missile crisis. As gold rose, the value of paper money decreased. The dollar declined on markets in Germany and Switzerland, and Britain’s beleaguered pound fell fractionally. This week the Bank of France was expected to move to ease tension on the gold markets-but that would not alter the long-term French determination to put pressure on the U.S.

To calm fears about the dollar’s stability, President Johnson hastened plans to reduce the amount of gold that the U.S. must legally hold to back its dollars, thus making more gold available for international dealings. The Treasury later confirmed that Congress will be asked to approve the change, issued an unusual public statement that tried to allay fears about the dollar.

“Any speculation against the basic price of gold,” warned the Treasury, “would inevitably end on the losing side.” A change in the gold-backing law, it said, “will be appropriate in order both to assure the availability of credit in a growing domestic economy and to relieve any doubt that the United States gold supply stands firmly behind the dollar in international markets at the immutable price of $35.” In short, the U.S. has no intention of devaluing the dollar.

Strongest Weapon. Though France has a huge and rising deficit in trade with the U.S., it still rakes in plenty of nontrade dollars with which to do battle. Every year in France, U.S. military forces spend $200 million, U.S. tourists leave behind $300 million and U.S. businessmen invest well over $1 billion. After subtracting for its imports from the U.S., France runs up an annual dollar surplus of $700 million, for which it can demand U.S. gold. Says Yale Economist Robert Triffin, one of the world’s top gold authorities: “One of the two strongest bargaining weapons that France has to use against the U.S. is its dollar reserve—and the other is its atomic threat.”

France’s right to convert its dollars is, of course, incontrovertible. The French keep relatively less gold on hand than many other countries; they aim to keep it at 76% of reserves, but that is now down to 73% . Britain, Switzerland and Belgium keep 90% of their reserves in gold, only 10% in dollars and other currencies. On the other hand, the U.S. has persuaded West Germany to hold only 55% in gold and Japan only 15% —leading French officials to sniff that “dollars are for defeated countries.” Last week’s decision to cash in that extra $300 million—which may only be a starter—will raise the total of U.S. gold flow to France this year to at least $700 million.

It was the timing of De Gaulle’s thrust that upset global money markets and affronted the U.S. Coming just when rumors abounded that Britain might have to devalue the pound because its reserves are so low—and that the U.S. would then inevitably have to devalue the dollar to remain competitive on world markets—the French action seemed to be an attempt to bother both currencies. De Gaulle clearly felt that by throwing his weight into world money markets, he could increase the franc’s value against dollars and sterling, dramatize the shortcomings of the international monetary system, which France has long criticized, and show the U.S. that it will have to cut farther into its gold supply to finance the continuing takeovers of French firms by U.S. companies.

Genuine Scare. A few weeks ago, De Gaulle instructed Finance Minister Valery Giscard d’Estaing to strike the U.S. on its soft, golden underbelly. Giscard undertook the task with some pleasure: he was still smarting from his rebuff by U.S. and British moneymen at last fall’s meeting of the International Monetary Fund in Tokyo, where he tried to get the IMF to adopt a new international currency based on gold that would favor the French. During last month’s British money crisis he also got a genuine scare that both the pound and the dollar might be devalued, leaving France holding a billion-dollar bag of cheap currency.

In launching his latest economic offensive, De Gaulle at first wanted to change as many dollars as possible into gold. Some influential supporters egged him on, and he was likely influenced by the ideas of French Economist Jacques Rueff, who has long lobbied for a worldwide return to the gold standard, and of Foreign Minister Couve de Murville, who can always use another weapon to supplement France’s increasingly independent foreign policy. But more moderate minds persuaded De Gaulle against such drastic action, and what started out as a reported $1 billion conversion, in rumors leaked to the press by the foreign ministry, wound up as a $300 million operation—with perhaps more to come.

That would by no means amount to a Goldfinger kind of raid on Fort Knox, where the bulk of U.S. gold is held. Still, the U.S. holds 36% of the world’s gold supply, and France’s move was bound to cause trouble just when the U.S. could ill afford it. The U.S. is committed by law to back its money with a 25% gold “cover.” In the past year, the cover has dropped from 29.7% to 27.7%, largely because the Federal Reserve issued so much new money to service the expanding economy while the nation’s gold supply has remained static. This year the outflow of U.S. gold to foreign countries is expected to reach its highest level since 1960, and the gold cover will slip perilously close to the 25% floor.

Little Choice. De Gaulle’s power play left the U.S. little choice. Because the U.S. is dead set against devaluation, revision of the cover law has long been urged by the Treasury and some top U.S. bankers. Now the Administration hopes to get Congress to keep the 25% cover on the $35 billion worth of green dollars in circulation, but remove it from the $20 billion in deposits in the Federal Reserve system. That would free $5 billion in gold for the U.S. to meet any claims against the dollar.

The fact that the U.S. is forced to proceed with this plan in an atmosphere of crisis does not help to increase world confidence in the dollar—even though many Britons consider the 25% cover requirement nonsensical. Nor does it raise confidence in the efficiency and fairness of the world money system. Despite its $7 billion trade surplus, the U.S. has to worry about an outflow of gold under the current rules simply because it spends so much abroad for tourism, investment, foreign aid and the common defense of the western world. More and more money experts have begun to complain that any system that penalizes such beneficial spending is in need of overhaul.