The Dollar Will be on the Defensive

Mr. Fertig is a columnist on economic affairs, New York World-Telegram and Sun and other Scripps-Howard newspapers, in which this col­umn first appeared February 2, 1959.

When ten leading nations of Europe extended the area of free­dom by unfreezing currencies earned by foreigners, and making them more freely convertible, the significance of this event was highlighted by a telltale statement of Hugh Gaitskell, leader of the socialist Labor Party of Britain.

Mr. Gaitskell said he was against this move on Britain‘s part because it would restrict her independence of action, and would exert pressure for deflationary ac­tion within Britain. By this state­ment he revealed how national­istic socialism really is—how op­posed to the basic interests of a free world community which must depend upon the free flow of money and goods among all coun­tries.

He was right, of course, in say­ing that Britain would henceforth have less freedom of action to do as she pleased. She would not, for instance, be able to honor the new agreement and at the same time increase welfare state measures, increase subsidies for nationalized industries, create more inflation and higher prices for British goods. If she pursued such poli­cies, the result would be a sinking of the pound in international mar­kets and a substantial loss of gold which she could not afford.

But every other country in the ten-nation group will be subject to the same discipline. They have all thrown away a crutch—the control of their currency earned by nonresidents—in order to achieve much greater benefits. Trade will be stimulated, exports will increase, and the plain citi­zens and business people of every country will get a better break because they will be able to use whatever currency they earn in trade to buy the best value in any country they choose.

It is curious that this move was made possible by the fact that the dollar is no longer the Rock of Gibraltar. It has become consider­ably weaker. It is no longer feared that, given half a chance, every­one will rush to convert into dol­lars every pound or franc or lira he can lay his hands on. A London commentator pointedly said that “the pound now looks down on the dollar.” This is not completely ac­curate because the dollar is freely convertible for all purposes while the pound is not. But, in a way, the pound and the lira and the franc do “look down on” the dol­lar because they are no longer afraid of what the dollar can do to them.

Soft Dollars

The dollar has weakened for two obvious reasons. In the first place we are pricing ourselves out of export markets because our costs are rising too rapidly and so are our prices. The U.S. is losing ex­port trade which is being gained by Germany, Japan, Britain, and others. Thus the demand for dol­lars is not as great as it used to be. Secondly, the dollar has weak­ened because the world is more fearful of continuing inflation in the United States. Many people who formerly held dollars for greater security sell their dollars to get gold.

This country has lost over $2 billion in gold during the last year, and we are still losing it. A continued loss of gold will be a serious matter. This much is cer­tain: We can no longer pursue un­economic policies with impunity. We cannot price ourselves out of markets, engage in continued in­flation, or give away dollars in profligate fashion. If we do, the dollar will weaken, there will be a greater outflow of gold, and dol­lar devaluation will be the only answer.

Restraints on Convertibility

It should be noted that there still remain some great restric­tions on the transfer of curren­cies in practically all of these European countries. Money in­vested in stocks, bonds, real estate—in fact any form of invested capital—still cannot be freely con­verted into other currencies when the capital investments are sold. Like a person who has been fed drugs for many years, these coun­tries are afraid to throw away all their drugs and move at once toward complete freedom of their currencies.

Nevertheless, the limited move they have made toward freedom is highly encouraging and signifi­cant. To make this move required both economic strength and cour­age. Henceforth, these countries can no longer depend upon the European Payments Union for credit when their trade balances become adverse. They must settle their trade payments in gold, since the EPU was abandoned upon the signing of the new agreement. These countries can no longer de­pend upon tight exchange controls to cover up their inflationary policies. If they inflate, they will lose trade and gold. The pressure will be on them to put their economic house in order and keep it so.

In substance the move to un­freeze European currencies will mean freer world trade, will curb their inflationary tendencies, and will give economic strength to the West in the fight against the Soviets. But we must realize that it will put the dollar on the de­fensive and reveal any inflationary weakness here very quickly.