U.S. Business: SOME QUESTIONS & ANSWERS ABOUT GOLD

Why Is Gold So Important?

Partly because it has been the universal symbol of wealth since before the Lydians invented money. More practically, gold is limited in supply and therefore fairly stable; it is valuable even in small amounts, and thus eminently portable. Unlike paper currencies, it is immune to inflation, loss of value and most other disasters. It is a keystone of the international monetary system, more highly prized than most paper currencies.

What Is the International Monetary System?

It is a series of treaties and gentlemen's agreements among the world's nations about how they will finance their trade with one another. Since there is no truly global paper money, most trade is paid for in gold or in the two internationally accepted "reserve" currencies whose value is backed by gold: dollars and pounds.* This system has led to the creation of such organizations as the International Monetary Fund, which lends reserve currencies to nations with a trade deficit, and the World Bank, which gives underdeveloped nations needed capital.

How Has the System Worked?

Fairly well, considering the task. It was set up in 1944 at Bretton Woods, N.H., by a conference of finance ministers and economists from the allied powers. They aimed to prevent a repetition of the disasters of the 1930s, when there was a chain reaction of devaluation, deflation and depression. The system has not only succeeded in that goal, but has stimulated trade and economic growth. Lately, it has shown signs of age and inadequacy, which have served to place the two reserve currencies under a strain.

Why Are the Dollar and the Pound Reserve Currencies?

Says a U.S. Treasury official: "We didn't plan it that way—it just happened." The strength of a country's currency depends upon its political, military and economic might. After the war, Europe's money was unstable and inconvertible—but the dollar could buy anything, anywhere. Britain's pound also weakened, but continued to be important because of Britain's worldwide banking and trading connections.

What Does the U.S. Get Out of Being a Reserve Currency Country?

Power, prestige—and headaches. Its tourists and businessmen can convert their money around the world at favorable exchange rates, since nearly everybody wants dollars because of their stability and superior buying power. Many foreigners convert their own moneys into more secure dollars, then deposit the dollars in U.S. banks, where U.S. bankers invest them at a profit. On the other hand, the foreigners have the legal right at any time to cash in their dollar holdings for U.S. gold-and the U.S. thus has to maintain a multi-billion-dollar stock of gold, which earns no interest.

Why Is the U.S. Losing Gold?

Because it puts so many dollars into foreign hands in the form of foreign aid, military aid, tourist spending, investment and loans. Last year all these added up to almost $10 billion. Result: despite its healthy $7.2 billion surplus in foreign trade, the U.S. ran a foreign-payments deficit of about $2.65 billion or more.

What Has the U.S. Done to Narrow the Deficit?