Sterilized Gold

Just before he set sail for South America on his errand of peace & goodwill, President Roosevelt expressed concern over the vast sums of foreign capital seeking safety in the U. S., broadly hinted that something might have to be done to keep what he called this "hot" money from threatening the U. S. financial structure (TIME, Nov. 23). Last week something was done. With Federal Reserve Board Chairman Marriner Stoddard Eccles alert at his side, Secretary of the Treasury Morgenthau read a 93-word statement at a press conference in Washington:

"The Secretary of the Treasury, after conferring with the Board of Governors of the Federal Reserve System, announces that he proposes, whenever it is deemed advisable in the public interest to do so, to take appropriate action with respect to new additional acquisitions or releases of gold by the Treasury Department.

"This will be accomplished by the sale of additional public debt obligations, the proceeds of which will be used for the purchase of gold, and by the purchase or redemption of outstanding obligations in the case of movements in the reserve direction.''

Having delivered themselves of this formula, Messrs. Eccles & Morgenthau then explained : the Treasury was going to keep additional gold, mined in the U. S. or imported from abroad, from getting into the U. S. banking system, where it swells the already swollen credit base. By New Deal law all imported gold and all newly-mined gold has to be sold to the Government, the Treasury paying for the metal with checks drawn on its accounts in the Federal Reserve Banks. Hitherto the Treasury has then replenished its checking accounts by depositing in the Reserve Banks gold certificates against the gold it bought, thus injecting the metal directly into the country's credit system.

Now, instead of issuing gold certificates, the Treasury will reimburse itself for its gold purchases by selling Government bonds to the public. The metal it buys will be simply put in dead storage, with no certificates outstanding against it. In banking parlance such gold will be "sterilized."

Prime reason for sterilizing new gold supplies is to put an end to the steady rise in excess bank reserves. Last summer when the figure for excess reserves was around $3,000,000,000, Chairman Eccles boosted reserve requirements 50%, a move which reduced the total to $1,800,000,000. Since then some $500,000,000 worth of gold has flowed into the U. S., a sum which will show up as excess reserves after the year end. Before the winter is over reserve requirements will probably be upped a second time. The sterilization plan was designed to keep the total of excess reserves, which represent perhaps ten times as much in potential bank credit, within reach of the Reserve Board control. As Chairman Eccles pointed out last week, the figure is still within manageable proportions, even without the aid of sterilization. "But," added the high-strung one-time Utah banker, "we don't want to use up all our powers. We should hold some in reserve."

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