Should the Gold Be Set Free?

How wise or necessary is the U.S. law that requires 25% of all Federal Reserve notes and deposits (85% of all currency in circulation) to be backed by gold? Last week one of the most prominent voices in the financial world declared that the 15-year-old reserve requirement, long considered the soul of economic orthodoxy, has outlived its usefulness. Said Henry Clay Alexander, chairman of the Morgan Guaranty Trust Co., addressing the annual meeting of the Investment Bankers Association in Hollywood Fla.: "Repeal of the 25% gold-backing provision would be a logical step in the further improvement of our international monetary framework." Alexander's proposal came when the flight of gold from the U.S., caused by a worsening balance of U.S. payments, was approaching a crisis. The Treasury Department announced last week that the oss of gold in November was the biggest he U.S. has ever sustained, reached nearly $500 million for the month to raise the years loss to more than $1.5 billion, almost all of it in 1960's second half So serious was the situation that Treasury Secretary Robert Anderson got on the phone to Henry Ford II and offered "suggestions about the advisability of Ford's offer to buy a11 the stock of its British subsidiary (TIME, Nov. 28), which presumably would add some $300 million to the U.S. gold outflow. Ford politely said that the company was going ahead.

Recognizing that the world is waiting to see what the U.S.'s next move will be Alexander added that any change "probably should wait until our balance of payments position shows more clearly the results of our buckling down to the basic Problems. In that favorable setting, repeal the gold reserve requirement will be for what it is--a change to a more realistic statement of the strength of our gold position.

''Gold is still the stern voice of monetary discipline," said Alexander, but its chief function is no-longer to redeem domestic currency (which has not been redeemable in gold for 27 years) but to back the dollar in international settlements. Requiring a notes and reserve of 25% in gold against the notes and deposits of the Federal Reserve banks makes our gold supply for international payments only about one-third of our total gold holdings. Nearly $12 billion worth is set aside as a reserve against something it cannot be used to redeem. Such requirements illogically make a country's domestic money supply a charge against its international reserves."

Influential Backers. Alexander got a quick answer from the Wall Street Journal which snorted that "we hardly think that changing the rules would be a step in the improvement of our monetary framework." But most Washington economists wholeheartedly backed the change, were concerned only with the psychological effects it might have at the present time not with the idea's basic soundness. It already has some influential backers. The International Monetary Fund in 1958 recognized the advantages of reducing or eliminating the gold reserve requirement and Roy Reierson, vice president of Manhattan's Bankers Trust Co., proposed abolition of the requirement last year. The reason for questioning the reserve requirement is that it has not proved necessary. It was set up to guard against wildly inflationary printing-press money, a danger that the Government's prudent money managers have shown themselves capable of preventing without the need for the gold-backing Preventing law. The U.S. is the need world's only major nation with gold-backing requirements, which have actually been reduced over Switzerland and Belgium. The practical impact of the law is lost because the present U.S money supply is backed by 38% in gold instead of 25%. The Federal Reserve Board can suspend the backing indefinately in a real emergency, thereby depriving it of any solid gold status. Yet the reserve provisions leave so little gold left for international settlements--about $6 billion of the nations $18 billion stock-- that when the level drops, foreign bankers get nervous and turn their balances in the U.S. into gold, thus speeding up the outflow.

Where It Counts. The expansion of international trade requires more gold in circulation, yet the U.S. holds half the free world's gold and keeps two-thirds of it tied up by its reserve requirements. Most economists feel that, where gold was once the only solid discipline in an untrustworthy world, the history of responsible monetary policy and the growth of international financial institutions have made the tying of all money to gold archaic. By dropping the reserve requirements, they argue, the U.S. can make its gold available to work where it counts, in the international payments field The U S would not go any farther off the gold standard than at present. It would only stop using its gold to cover the domestic dollar, use it only to back the dollar abroad. Says a Government economist: "The result would be simple arithmetic; we would have another $12 billion free to defend the dollar, and therefore more faith in our ability to do so."

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