America's Money Machine

PART III / DEBACLE OF AN IDEA
because of the rising costs of mining. Moreover, despite widespread
restrictions on the possession of, or trade in gold, increasing amounts
were going into private hands. Ofestimated free world* gold production
in 1963 of39.2 million ounces ($1.37 billion) some 28 1/2 million ounces
($1 billion) went into private hands. Only the circumstances of short
crops and other misfortunes in Soviet Russia, that forced it to sell an
estimated 600 tons of gold in the world's markets, together with the
corresponding balance ofpayments difficulties of the U. S. that required
a transfer of some $465 million to foreigners, enabled the central banks
of Europe to increase their gold reserves as they did. Even so they were
compelled increasingly to rely upon dollar exchange to provide reserves
for their expanding monetary liabilities.
The increment of dollar exchange which they needed had been provided
largely from the U. S. foreign aid program, by creating a net debit
in the U. S. balance of payments. But these increments increased the
strain upon the dollar, and created apprehension in the U. S. and led to
popular agitation for curtailment of the foreign aid program. The practical
effect of this would be deflationary. Foreign central banks would find
it necessary to curtail the credit they had been extending so freely. The
prospect of another depression, triggered by a stoppage of the flow of
U. S. credit abroad, generated widespread consternation.
The frailty of the situation was cloaked under the sophistry of the
"international liquidity problem." Various schemes were advanced-the
Bernstein, the Triffin, the Maudling plans-which space does not warrant
our detailing here. All of them evaded the issue of the inadequacy of the
gold stock to support such an inflated money supply, and offered palliatives.
Meanwhile, such was the decay of confidence in the dollar that the
Treasury, for the first time in its history, was compelled to borrow abroad
in monetary units other than the dollar. That is, foreign governments, or
their central banks, increasingly doubtful ofthe ability ofthe Treasury to
redeem its obligations in gold, quietly but insistently pressed for obligations
payable in currencies in which they had more confidence. Thus it
happened that the government, which during the darkest days ofthe Civil
War never borrowed in any terms but dollars, was compelled in 1961 to
go "hat in hand" to the governments of European powers seeking their
assistance to maintain the integrity ofthe U. S. dollar. By the end of 1963,
the Treasury had incurred debts totaling the equivalent of $760 million
*Free world, i.e., countries not under Communist government.