Money: Waging the Gold War

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Gold—and the U.S.'s steady loss of it—has been the prime preoccupation of the free world's financial strategists since John F. Kennedy declared repeatedly in Europe last month that "unless we master our gold problems, they will master us." Last week, under pressure from European financial leaders who fear that the continuing gold drain could start a worldwide deflationary cycle by further undermining the dollar, the U.S. took three actions. It set higher interest rates on short-term borrowing, put indirect controls on longer-term exports of U.S. money, and surprisingly indicated a readiness to borrow from the International Monetary Fund, which the U.S. originally helped to set up at Bretton Woods in 1944 to bail out poorer foreign countries.

Limit for Freedom. The three moves were quite a change from Washington's earlier attempts to nibble at the problem by reducing tourists, duty-free imports and inducing allies to prepay their postwar debts. As the U.S. Treasury reported that U.S. gold stocks have dropped $100 million so far this month, to a 24-year low of $15.6 billion, a top economic adviser to President Kennedy conceded that "our old program had become an obvious failure." Washington hopes that its new program will cut the U.S. balance-of-payments deficit—which rose to an annual rate of $3.2 billion in the first quarter and is growing worse—by $2 billion in the next 18 months. It now predicts a payments surplus by 1967 or 1968. But despite the new moves, two of the biggest drains on gold—U.S. foreign aid and military spending abroad—remain unaffected.

For the first time in 30 years, foreign rather than domestic considerations prompted the Federal Reserve Board to raise interest rates. Lifting its discount rate to member banks to 31% from 3%, where it had stood for three years, the Fed said that its move was designed to discourage foreign borrowers, who raised well over $1 billion in the abundant U.S. capital market last year. Though the U.S. earns interest on these foreign loans and stands to get them back in the future, the exported dollars flow into foreign central banks and are often swapped for U.S. gold.

The U.S. prides itself on having completely free capital markets. That boast shrank somewhat when President Ken nedy last week ordered an indirect control called an "interest equalization tax." If Congress approves, as expected, U.S. purchases of most new foreign stocks and bonds will be dampened by a tax on American buyers of up to 15% of face value. The purchaser of a 20-year, $1,000 foreign bond, for example, will be taxed 12.25%, which would raise his overall costs to $1,122.50. The U.S. hopes that purchases of such securities —now running to $1.8 billion a year—will be slashed to the $500 million-$600 million rate of the late 1950s. This means that for foreign governments and companies, money in U.S. markets will be much harder to come by.