SOME QUESTIONS & ANSWERS ABOUT GOLD

Why Is Gold So Important?

Partly because it has been the universal symbol of wealth since before the Lydians invented money. More practically, gold is limited in supply and therefore fairly stable; it is valuable even in small amounts, and thus eminently portable. Unlike paper currencies, it is immune to inflation, loss of value and most other disasters. It is a keystone of the international monetary system, more highly prized than most paper currencies.

What Is the International Monetary System?

It is a series of treaties and gentlemen's agreements among the world's nations about how they will finance their trade with one another. Since there is no truly global paper money, most trade is paid for in gold or in the two internationally accepted "reserve" currencies whose value is backed by gold: dollars and pounds.* This system has led to the creation of such organizations as the International Monetary Fund, which lends reserve currencies to nations with a trade deficit, and the World Bank, which gives underdeveloped nations needed capital.

How Has the System Worked?

Fairly well, considering the task. It was set up in 1944 at Bretton Woods, N.H., by a conference of finance ministers and economists from the allied powers. They aimed to prevent a repetition of the disasters of the 1930s, when there was a chain reaction of devaluation, deflation and depression. The system has not only succeeded in that goal, but has stimulated trade and economic growth. Lately, it has shown signs of age and inadequacy, which have served to place the two reserve currencies under a strain.

Why Are the Dollar and the Pound Reserve Currencies?

Says a U.S. Treasury official: "We didn't plan it that way--it just happened." The strength of a country's currency depends upon its political, military and economic might. After the war, Europe's money was unstable and inconvertible--but the dollar could buy anything, anywhere. Britain's pound also weakened, but continued to be important because of Britain's worldwide banking and trading connections.

What Does the U.S. Get Out of Being a Reserve Currency Country?

Power, prestige--and headaches. Its tourists and businessmen can convert their money around the world at favorable exchange rates, since nearly everybody wants dollars because of their stability and superior buying power. Many foreigners convert their own moneys into more secure dollars, then deposit the dollars in U.S. banks, where U.S. bankers invest them at a profit. On the other hand, the foreigners have the legal right at any time to cash in their dollar holdings for U.S. gold-and the U.S. thus has to maintain a multi-billion-dollar stock of gold, which earns no interest.

Why Is the U.S. Losing Gold?

Because it puts so many dollars into foreign hands in the form of foreign aid, military aid, tourist spending, investment and loans. Last year all these added up to almost $10 billion. Result: despite its healthy $7.2 billion surplus in foreign trade, the U.S. ran a foreign-payments deficit of about $2.65 billion or more.

What Has the U.S. Done to Narrow the Deficit?

In the past few years, it has limited to $100 the amount of goods and souvenirs that tourists can bring back duty-free from abroad, put a tax of up to 15% on purchases of foreign securities, twice increased its central-bank interest rates, stiffened its taxes on the profits of U.S. businesses abroad in order to discourage such investments, and bought more U.S. military supplies at home.

What Is Wrong with the Money System?

The present system has three almost irremedial faults: 1) the threat that Europeans will cash in their dollars for gold can be used as blackmail against the U.S. to achieve political ends; 2) since the dollars that have drained abroad are being used increasingly by foreigners to finance their trade, the elimination of the U.S. payments deficit might leave them dangerously short of reserves; and 3) there are just not enough reserves available to finance the expanding amount of world trade. How Can the System Be Improved? There is rising support for creating a new international money. More than a dozen separate plans, differing widely in details, have been suggested by such men as International Monetary Fund Chief Pierre-Paul Schweitzer and U.S. Economist Robert Triffin. Some of them would give the IMF power to create money and credit, somewhat as Lord Keynes suggested a generation ago. Others would create a pool of money from the world's dozen richest nations, to which each would contribute according to its wealth, thus sharing in both the risks and rewards of reserve-currency countries.

Why Not Just Increase the Price of Gold?

That would increase the value of gold reserves, but it would correspondingly devalue the dollar because more dollars would be required to buy a given quantity of gold. Devaluation would demolish world confidence in the dollar, cause grave losses to friendly countries that had not cashed in their dollars for gold, and probably lead to a collapse of international monetary cooperation. The main beneficiaries would be the two greatest gold producers: South Africa and Russia. But money men are desperately searching for ways to increase the stock of gold, which is now worth $45 billion at the fixed price of $35 an ounce. Just mining more gold does not work, since outside the two chief producing nations, mining an ounce often costs more than $35.

* Called "pound" because it was originally a pound of silver; the pound of silver then became known as "pound sterling" to distinguish it from ordinary units of weight. Now the two names are used interchangeably.

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