“Why We Lose Gold” is the title of Henry Hazlitt’s Newsweek column from December 22, 1958. Here, Hazlitt shows how inflation in the US threatened its Bretton Woods treaty obligations via an outflow of gold. A decade later, the cracks in the system led to a crisis that a few years later led the US to suspend gold redemption. Of course this was proposed as a temporary measure yet is still in force 45 years later.
‘The recent concern about our loss of gold cannot be
dismissed as unwarranted. Between Feb. 19 and Dec.
10, 1958, the United States gold stock declined by $2.2
billion, a drop already exceeding that for any previous
This country, it is true, still holds $20.6 billion,
more than one-half of the free world’s monetary gold.
Yet behind the recent rate of gold loss is a situation that
is more serious. Of our gold reserves of $20 billion on
Dec. 3, $11.7 billion was required as the 25 percent
legal cover for Federal Reserve note and deposit liabilities.
This left “free” gold reserves of only $8.3 billion.
And United States short-term liabilities to foreign
countries on official as well as private account amounted
in August 1958 to $14.2 billion.
The United States, in other words, owes foreigners
more in dollars than it holds in excess gold reserves.
If these foreigners elected to withdraw all their liquid
dollar assets in the form of gold, they would more than
wipe out the “free” gold we now have. It is also worth
keeping in mind that if Congress had not reduced the
gold-reserve requirements in 1945 to only 25 percent,
instead of the previous 35 percent against deposits and
40 percent against notes, the amount of “free” gold
today would be only $2.2 billion.
To Restore Trust
The probability that foreigners would actually seek to
withdraw all their dollar balances in the form of gold is
at the moment low. They can do so only through their
central banks. They prefer, moreover, to keep a certain
amount of dollar balances here because they earn interest,
and because they are needed for working capital. In
addition, foreigners owe American creditors dollars on
But we cannot remain complacent about the situation.
As the First National City Bank of New York
points out in a sober discussion:
“A flight from the dollar—not only by foreigners
but by Americans as well—might well be touched off if
the idea gained ground that conditions were developing
under which a rise in gold price would appear inevitable.
Because of the strategic importance of the United
States and the dollar, foreign bankers, businessmen, and
investors are—understandably—watching how we handle
our monetary and fiscal affairs. What counts is the
determination of the United States Government and
of the Federal Reserve System to safeguard economic
and monetary stability and thus prevent—by deeds, and
not by words alone—spread of doubts concerning the
assured maintenance of dollar stability. The fact that
excess gold reserves are still so far above minimum
requirements gives time—but not indefinite time—to
repair policies that hurt trust in the dollar.”
Five Possible Step s
Here are some of the specific steps we might consider
to keep or restore confidence in the dollar:
1—Let the Federal Reserve definitely abandon
cheap-money policies. Moderately firm interest rates
will not only discourage the withdrawal of foreign balances
but will stop encouragement to credit expansion.
2—Congress could show its own determination to
protect the integrity of the dollar either by restoring the
pre-1945 Federal Reserve gold-cover requirements or by
otherwise limiting further credit expansion.
3—The situation plainly calls for a drastic reduction
in foreign aid. It is absurd to increase inflation here, and
to undermine our own currency unit, by giving away
more dollars to countries that already have deposits or
short-term claims here in excess of our free gold supply.
4—We must immediately put our own fiscal house
in order, drastically reduce our prospective $12 billion
deficit in the current fiscal year, and try to eliminate
any deficit in the next fiscal year. This could be accomplished
by drastic cuts in foreign aid, in farm subsidies
and price supports, and in a score of other directions.
5—Revise the Federal laws that put grossly excessive
bargaining power in the hands of union leaders,
make it all but impossible for employers to prevent
“wage inflation,” and adversely affect our competitive
position and our balance of trade.‘