Two-Tier Troubles

The Western world owes an immense debt to its close-knit fraternity of central bankers. Within the space of eleven months, their informal collaboration has overcome the turmoil of British devaluation, an upheaval in France and a stampede for gold that culminated in the worst international money crisis since the 1930s. A serious slip at any crucial point along the line could have wrecked the wobbly system of international finance, bringing wholesale currency devaluations and economic chaos. Last week the bankers tried to stave off another incipient crisis almost before the world realized that there was one brewing.

The problem this time was South African gold--an estimated $1 billion worth of newly mined metal that has piled up in 400-oz. bars in a refinery near Johannesburg. That cache has been accumulating since March 17, when the bankers stopped the speculative run on gold by creating today's two-price system. Under that arrangement, the historic $35-per-oz. price continues for official transactions among nations; for speculators, hoarders and industrial users, the price was freed to find its own level in the marketplace. To make the system work, the central banks agreed to buy no newly mined metal. They also agreed to sell no gold whatever to any country that might then succumb to the profitable temptation to unload official gold reserves in the free market, where the price has hovered around $40 per oz.

Bridling at the Setup. As the source of three-fourths of the free world's new gold, South Africa bridled at the new arrangement. Officials figured that if the country turned to the free market for a gold outlet, the price of its largest export would plunge. The U.S., on the other hand, hoped that South Africa would be forced into making free-market sales, thus lowering simultaneously the price of gold and the pressure on the U.S. dollar. The result has been a six-month war of nerves. South Africa has stashed away all but a tiny bit of its mines' output. Meantime, it has done its best to persuade the 111-nation International Monetary Fund to buy some of that metal at $35 per oz.

Despite U.S. objections that this would put a floor under the free-market price and thus reward speculators against the dollar, the idea has gradually won strong backing among European bankers. Many worry that the value of their own hefty gold stocks would be lowered if the free-market price should slip below the official price. The larger South Africa's gold pile grows, the more nervous the bankers get, fearful that the great golden overhang might somehow cause the free-market price to collapse. Some see South African sales to the IMF as a clever way to let European countries increase their own gold reserves without violating the March agreements. Such countries would simply swap their own currencies for IMF gold.

Assurance for Speculators. The issue came to a head when the world's top moneymen gathered in Washington last week for the IMF's annual meeting. Managing Director Pierre-Paul Schweitzer sided with the Europeans in favor of buying South African gold. U.S. Treasury Secretary Henry Fowler stood firm, declaring: "We will not accede to any proposal that puts a floor under the private market, thereby assuring speculators that they may unload at no less than the monetary price." The impasse grew when Nicolaas Diederichs, South Africa's Finance Minister, icily blamed the U.S. and Britain for last year's gold crisis. He lectured the two countries on the need to "live within their means" and contended that the two-tier gold price system aggravates the world's monetary problems.

At week's end the U.S. bowed to European pressure, agreed with nine other key countries on a compromise formula intended to induce South Africa to resume gold sales on the private market. Though full details of the proposal remain secret, in essence the plan gives South Africa assurances of being able to sell gold to the IMF if the private price sinks to $35 per oz. South Africa balked at giving its immediate consent to the scheme, but many bankers felt that in the long run the country had little choice but to go along. As Schweitzer noted at the IMF meeting, "Everyone agrees that the price of gold should be stable." The Washington compromise would powerfully reinforce that objective.

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