RESPITE FOR WASHINGTON: THE TWO-PRICE GOLD SYSTEM
By Dick Roberts
There is one opinion that is almost unanimously held by American financial authorities about the "two-price" gold system patched together in Washington March 17: it won't work -- at least, not in the long run.
This view was asserted by Edwin L. Dale, Jr., the New York Times economic expert in Washington, the day before the two-price system was announced:
"The seven governments gathered here cannot solve the crisis They may well set free the London gold price by refusing to supply any more monetary gold to private buyers.
"But the resulting 'two price' system has unknown and possibly dangerous consequences for the monetary system. For example, if, as expected, the free price rises, there will be a strong temptation for central banks around the world to cash their dollars for gold at the U.S. Treasury and turn a profit by selling it on the free market. This could quickly drain the U.S. stock."
And the day following the decision in Washington, the Wall Street Journal opened a front-page article on it with the categorical assertion:
"Creation of a two-price system for gold is only a stopgap solution for the world monetary crisis -- if that. And any attempt to make it a lasting solution could plunge the U.S. dollar into even more trouble than it was in last week."
Why should the two most authoritative American newspapers be so gloomy about the prospects of the central bankers' decision?
In the first place they are under obligation to keep their readers who have considerable interests at stake informed about the realities of the situation. The two-price system is founded on a compromise between governments which none of the contracting parties puts much confi-~ dence in maintaining.
The European nations agreed not to exchange dollars for gold, allowing Washington a respite from its balance-ofpayments problems. For the time being, the contracting parties agreed to settle deficits through reciprocal credit arrangements. This displaces the dollar from its once privileged role as the recognized reserve currency; and at the same time it is supposed to prevent gold from usurping that position. But this ambiguous action conceals rather than solves the difficulty.
By setting up a two-price gold system, the central bankers in fact have partially devalued the dollar, or more exactly, they_have set up a two-price system for the dollar. One price is its fixed exchange rate between central banks. Its other price will be determined by the free market price of gold.
If a wide discrepancy emerges between these two prices, as there is every reason to assume will happen,.this would further undermine confidence in the dollar -- and other currencies along with it. It would provide a strong incentive, as New York Times economist Dale pointed out, for governments to pull out of the agreement and purchase gold.
At the same time it would cast suspicion on trade relations in general, with exporters less and less willing to sell products to nations whose currencies were in doubt. The result would be a potentially disastrous shrinkage of trade, at a time when there is already a decline in the growth of world trade. And this undoubtedly accounts for some of the pessimism in the capitalist press about the two-price gold system.
But this way of dealing with the monetary crisis only scratches the surface of the problem facing the American ruling class. Far more fundamental are the problems of dollar inflation, chronic balanceof-payments deficits and a war that appears prohibitively expensive even if a "victory" could be won.
The deeply critical articles in the daily press want to know what the Johnson administration is planning to do about these major problems. They don't want Johnson to use the temporary agreement on gold as an excuse for ignoring the underlying problems of the economy.
On March 15, the day Britain's banks were forced to close down in face of the onslaught on gold, the New York Times delivered this scathing denunciation of the Johnson administration:
"The current gold rush is a manifestation of much deeper feelings -- rational and irrational. In a real sense, it represents a massive vote of no confidence in the way that the world's most powerful and richest nation is managing its political and economic affairs.
"There is no other explanation for this unprecedented flight from the dollar ....They are seeking protection against a
nation that has squandered much of its vast resources, that has become mired in .an escalating war that they think it cannot win, that appears paralyzed and divided, undisciplined and leaderless."
And what do the editors of the New York Times propose to rescue this nation from paralysis? “If the existing monetary system is to be preserved, it is essential to take the harsh deflationary medicine of a tax increase of major proportions." This is what Britain's labor misleaders are doing to rescue capitalism in that beleaguered island.
When new Chancellor of the Exchequer Jenkins proposed the British budget March 19, the New York Times editors were consumed with enthusiasm: "[It] is much
more austere than even those calling for
austerity had anticipated. Mr. Jenkins
had been expected to ask for authority to
hold down wages as well as to impose an
increase in taxes to curb demand -- and
he did so. But the tax increases, all in-
direct, are about twice as large as had
been predicted....
"Mr. Jenkins may go down as Brit-
ain's iron chancellor."
The U.S. rulers would like to du-
plicate this model on a larger scale.
When President Johnson called for "nation-
al austerity" only a few days following
the gold price decision this is what he
had in mind: depressing wage levels and
living standards to salvage the dollar.
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