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University Daily Kansan Thursday. Oct. 27, 1960
Devaluation Hopes Spur Gold Speculation
By Charles E. Staley
(Editor's Note; Mr. Stauley is an assistant professor of economics. He received his Ph.D. from Massachusetts Institute of Technology in his thesis was in the field of international economics and has been teaching in this field for five years.)
The important feature of the current speculative mania in the London gold market is that it is a dramatic manifestation of a long-term problem in America's foreign economic relations. There are, in addition, some peculiar features of our economic institutions which accentuate the price movements in London.
The long-term picture is that each year since 1950 (except 1957) foreigners have added to their holdings of liquid dollar assets and gold purchased from the United States. The cause of this change is that the United States has been paying out more dollars abroad, for goods, services, investments, and government assistance, than foreigners have been responding with us for goods, services, and investments.
THE EXCESS DOLLARS may be accumulated by the people who receive them, or they may be sold to their monetary authorities for local currency. The monetary institutions in their turn may hold the dollars in the form of bank accounts, time deposits, or short-term U.S. government bills, or they may buy gold from the U.S. Treasury with them.
Thus, in 1959, we paid out $29.5 billion, and received $25.8 billion. The difference of $3.7 billion was split up into $3 billion which foreigners added to their dollar holdings and $0.7 billion of gold purchased by foreigners. In 1958, $1.1 billion was added to foreign dollar holdings and $2.3 billion was taken out as gold; so far in 1960, our position has continued about the same, with a payment excess of about $2.9 billion on an annual basis and a continued gold outflow.
AS A RESULT of these transactions, the United States gold stock has shrunk from $24.6 billion in 1949 to $18.5 billion now, and foreign holdings of dollars are around $21 billion.
The performance of our balance of international payments is essential to an understanding of gold speculation because a situation like this must be adjusted. Foreigners will not accumulate dollars indefinitely nor is the U.S. gold stock limitless.
The adjustment may involve the U.S. paying less abroad (as, for example, when there is a recession and we buy fewer imports, or as would happen if we cut our foreign aid), or it may involve earning more abroad such as through an expansion of our exports. Such adjustments typically involve government action. One of several traditional ways to force adjustments is to devalue the currency; i.e., to increase the number of dollars which Americans have to pay to buy one pound sterling, franc, etc.
THIS ACTION cuts our payments by making foreign goods more expensive to us, and increases our receipts by making our goods cheaper to foreigners. Such an action is not called for because the evidence is that our goods are competitive.
More appropriate measures are for European countries to take over more of the foreign aid burden and for the Federal Reserve to raise our interest rates in line with foreign rates (cutting down on our incentive to invest abroad), offsetting the deflationary effects on our economy with fiscal policy. And in my opinion devaluation will not occur. But to many people a devaluation of the dollar is a distinct possibility.
Under our constitutional arrangements, the foreign currency value of the dollar is maintained by our policy of buying gold from and selling gold to foreign central banks at $35 an ounce. A devaluation would involve raising the buying and selling price of gold, and here at last we come to the London gold market. The thought that the U.S. might raise the price of gold encourages speculators to buy gold now and hold it for the coming (?) price rise.
THE INSTITUTIONAL structure of international finance focuses the speculation on London, where gold is sold to private holders of dollars.
The U.S. will buy and sell gold only to foreign monetary authorities, not to private individuals. Hence speculators must operate in the London market, or other much more minor markets.
The source of gold in the London market is basically new gold from South Africa and Australia, occasionally some Russian gold, and now and then some gold sold by central banks which happen to need dollars and decide not to sell it in the U.S.
tors may add a little push to the basic psychology of speculation on the U.S. gold price.
What are the effects of the speculative market on the United States? It involves no direct gold loss to the United States and cannot by itself force a devaluation. The outstanding effect is that is dramatizes and makes
The demand for gold there comes from private individuals and occasional central bank operation. In the current splurge, which has sent the gold price up from a little more than $35 an ounce to about $40, the major source of demand has been speculative beyond any doubt.
everyone aware of the need to take positive measures to bring our international accounts into balance. The next Administration will not be able to drift, waiting for things to right themselves, the way the Eisenhower Administration has done.
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THE NEW YORK TIMES, which has had a remarkably complete coverage of the episode, has mentioned some contributory factors to the boom in gold: diversion of "hot money" from Switzerland, where bank accounts are now assessed one per cent rather than earning interest; capital flight from Cuba and the Middle East; declining stock market prices in Europe; perhaps some theorizing about the financial policies of the next President. These fac-
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