Mr. Kennedy's Gold Dollar
By NICHOLAS DAVENPORT IT might be thought humili- ating for the American Presi- dent, chief priest of the free enterprise world, to have to confess publicly that his capi- talist system cannot work a- without controls. But Mr.
that the shock was hardly
o o - felt in the stock markets—
except in vulnerable Canada. A 'sympathetic hearing was, of course, due to him, because one of the causes of the continuing deficit on the US balance of payments is the vast expenditure he has maintained on the defence of and aid for the free world. He is now going to cut this sharply down—by $900 million in the next eighteen months. Military spending is to be re- duced by $500 million by the end of 1964 and foreign aid by $500 million by the end of 1965 —with 80 per cent of the remaining aid tied to American goods. But his main attack was on the outflow of private capital—both short-term and long-term. The short-term outflow is to be checked by the raising of the New York re- discount rate from 3 per cent to 34 per cent— provided, of course, European countries do not raise their bank rates in return, as Belgium has done—and the long-term by a new 'interest equalisation' tax on American purchases of foreign securities. This will have the effect of making foreign borrowers pay about 1 per cent more for loans in New York, for Americans buy- ing new foreign securities will have to pay (in tax) a premium up to 15 per cent. This is certainly control with a bang. The tax will completely kill the issue of long-term foreign securities in New York, which amounted to $1,200 million last year and has been running at the rate of $1,700 million this year. COngress is being asked to pass the legislation with retrospective effect to the date of this remarkably tough speech.
The President justified this interference with the free market mechanism by a delightful piece of Jesuitical-Irish reasoning. He said that foreigners come to New York for cheap money because of direct controls and inadequate capital markets in their own countries. Now to stop this by making money dear in New York would. he said, throw the American economy into reverse, increase unemployment and reduce imports. thus damaging the economy of every free nation. But to impose direct capital controls, as other countries do, would be to offend American prin- ciples of free enterprise and free markets. So he was merely putting a temporary tax on ex- cessive financial enterprise. Of course, he would not interfere with American companies making direct investment abroad through their sub- sidiaries in foreign countries, where labour was cheaper even if money was dearer. His tax would apply only to Americans making portfolio in- vestments in foreign securities or making issues for foreigners in New York. There would be no limitations on these operations and no govern- mental screening of borrowers. Thus, free enter- prise would be still honoured. The tax could be paid only by those who stretched free enterprise too far and made the payments deficit intoler- ably heavy. By 1965, he assured us, the deficit would be corrected, the gold drain stopped and the tax removed. This would be no mean achievement, seeing that the deficit in the last
three years has been $3.9 billion. $2.5 billion and $2 billion.
The real truth about the American gold losses was not disclosed in Mr. Kennedy's clever speech. The US is not in any trouble on its current trading account,, which throws up an annual surplus of around $4,000 million. This surplus should normally be able to take care of its overseas (net) expenditure on defence— after the cuts—and its passion for foreign travel. The trouble is the persistent investment abroad of American companies, who find it cheaper or more convenient to manufacture in foreign countries because of rising American costs and widening foreign markets. This capital outflow ought to be controlled by direct Treasury regula- tion—as it is to a large extent in the UK—but the US has regarded control as unnecessary in view of the enormous pile of gold it has to draw upon. In 1948 this pile was as large as $24,000 million. By July, 1963, it had fallen to $15,680 million, the lowest level for thirty-nine years. This is really what the President and his banker advisers are worried about—not because of their silly 25 per cent internal gold ratio (requiring $12,000 million gold), but because they re- gard gold as a sort of strategic reserve for defence. But why—if they do not like letting it go at the artificially low price of $35 an ounce —why do they not raise the price to $70 an ounce? The remaining stock, still huge, would go farther and last longer at $70 an ounce.
For the first time there is now a powerful reason for raising the price of gold without wait- ing for IMF reform. If the President succeeds in eliminating his payments deficit he will be depriving the outside world of dollars to the extent of 2.000 million over the next two years. This will have a very deflationary effect unless the countries whose reserves are being depleted take steps to increase their domeStic money supply. The writing-up of their gold stocks would enable them to do so.
Mr. Kennedy is• very conscious of the defla- tionary trends he is causing and to counter them', he is prepared, he says, to discuss ways and means of improving the international payments. system. The fact that he has arranged a $500 million stand-by credit with the IMF is evidence of his new interest in that arthritic itistitotion., But do not let us be too hopeful. The free capi- talist world is still ruled by hard-faced bankers and one of the hardest of them—Mr. Schweitzer —is now in charge 'of the IMF. The last thing he would want to do is to turn the IMF into a note-creating super-central bank'. And let us not forget that Mr. Kennedy's new control is really designed to stop gold being written up and to stop it flowing out of Fort Knox to replenish- inter alia--the meagre reserves of the
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