America's Money Machine

The Not So Golden Years 237
rates for central reserve cities from 26 per cent in 1948 to 16 1/2 per cent,
for reserve city banks from 22 per cent to 16 1/2 per cent, for country
banks from 16 per cent to 12 per cent (with a temporary reduction to 11
per cent from 1958 to 1960), and for time deposits from 71/2 per cent
to 4 per cent.
The effect upon total bank credit is seen in the increase in money
supply, or what is now known as M 1 , that is, bank deposits and currency
in circulation, from $180 billion at the end of 1945 to $300 billion at the
end of 1963. By this time the gold available to meet these obligations was
only 4.7 per cent of total liabilities, compared with 7.4 per cent during
the period just preceding the Great Crash in 1929.
Since 1934, however, no bank depositor or note holder has been able
to demand gold for his note or deposit slip. Thus, the threat to gold did
not arise from domestic demand, but from abroad. By its undertakings
with the International Monetary Fund, the Treasury was committed to
deliver gold to foreign central banks of government members of the
Fund, at the rate of$35 per ounce. Under this assurance, foreign central
banks and international institutions had accumulated some $12 billion of
dollar deposits or short term Treasury bills, which they treated as the
same as gold in their statements of reserve.
In addition other foreign holders had accumulated dollar quick assets
(bank deposits or Treasury bills) to an additional amount of $14 billion
all of which could, through sale to their respective central banks, be
converted into claims for U. S. gold.
Here was the dilemma faced by the Federal Reserve System in the final
days of its fifth decade, its jubilee year. As during the 1920'S, foreign
central banks had erected a tottering structure of bank money upon a
feeble foundation of gold and dollar exchange. Again, they found themselves
caught in an inflationary spiral of rising note volume for which
increasing quantities of coin or metal were required if the parity of the
paper with its stated metal equivalent were to be maintained.* World
gold production was not enough to provide these reserves. Except for
South African production, gold production had been static or declining,
*An over-all statistic for the expansion of money supply is not available, but figures for
a few representative countries are illustrative. Using 1953 as a base of 100, the International
Monetary Fund reported that between 1948 and 1961 (at which date the index base
changed) money supply rose as follows: France, from 47 to 238; Germany, from 49 to 232;
Italy, from 53 to 231; United Kingdom, from 92 to 110; Netherlands, from 85 to 147. For
the U. S. the index of money supply rose from 85 to 113.