43. Memorandum From Henry C. Wallich of the Council of Economic Advisers to Secretary of the Treasury Anderson0
SUBJECT
- Comments on Secretary Strauss’ Study of Export Prices1
The Study sent by Secretary Strauss “Has the U.S. been pricing itself out of our export markets” seems reassuring and accords with appraisals I have seen from other sources. The gold flow for the time [Page 102] being also seems to have leveled off, and this may be viewed as a very tentative and partial confirmation of the Commerce Department’s analysis.
For the long run, however, we continue to face the fact that even without a deterioration of our export position, our balance of payments is likely to continue in deficit. It has been in deficit almost uninterruptedly for nearly 10 years. Our real problem, as I see it, therefore, is not any immediate threat to our gold reserves. The threat is the persistent build up of short-term liabilities against an unchanging gold reserve.
This increase in the world’s holdings of U.S. dollars is not really necessary to finance a normal expansion of world trade over the foreseeable future, according to the (rather optimistic) estimates of the International Monetary Fund. The international liquidity needs of the world would be met, according to the Fund, from new gold production alone. But the fact that the world may not need additional dollar balances does not imply that something will automatically happen to end our balance of payments deficit.
For the very long run, this raises the question whether a world currency system based upon growing world dollar holdings, which in turn are based upon a static U.S. gold reserve, should not be buttressed by some other elements, such as a greatly strengthened IMF.
More immediately, the question is whether we should not try to get such gold reserves as we have into a more maneuverable position. At present, $12.0 billion of our $20.6 billion holdings are tied up in Federal Reserve requirements. Since we do not practice domestic convertibility of currency into gold, these reserves perform no immediate function. They do perform another function: that of bringing pressure on us to pursue conservative financial policies, in order to avoid a shortage of reserves. This pressure is beginning to be felt now, but it is likely to lead to many undesirable side effects: cuts in foreign aid, more protectionism, less stimulation of foreign investment. The traditional gold standard mechanism, therefore, is apt to produce very painful repercussions today.
It would seem wiser not to bank on this mechanism, and instead to use our reserves as effectively as we can. That would mean getting rid of the 25 percent gold reserve requirement of the Federal Reserve. We would then have over $20 billion to meet our $17.6 billion foreign liabilities. The talk about the weakness of the dollar probably would come to a quick end.
Such a step should not be taken at a time when the dollar was under pressure. That would look like panic. But any prolonged levelling off of the gold flow would present an opportunity. Of course, the [Page 103] interest in taking action also diminishes at such a time. The next few months may present an opportunity and I think it would be worthwhile to study the pros and cons.
- Source: National Archives and Records Administration, RG 56, Records of the Department of the Treasury, Robert B. Anderson, Subject Files, Commerce Department. No drafter is indicated on the source text. The source text bears the stamp: “Noted R.B.A.”↩
- A summary report headed “Has the U.S. Been Pricing Itself Out of World Markets’?”, with attached statistical tables, was enclosed with a letter of February 24 from Secretary of Commerce Lewis Strauss, which indicated that it was a preliminary report of an ongoing study. (Ibid.)↩