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March 12, 1935.



The possible consequence of events*

It appears to me that the

position of the Qold Bloc is a highly unstable one*
no recovery, but rather deepening depression*

There has been

In such circumstances

political crises are likely to arise and every crisis will be attended
by uncertainty regarding the maintenance of the gold standard, and a
consequent flight of capital*

The pound is likely to go down rather

than up and every fall intensifies the difficulties of the Gold Bloc*
The Gold Bloc individually or collectively may decide to prohibit the
export of gold to us, or may devaluate to a new and much lower level*
In either event, the pound will probably fall in relation to gold,
and hence in relation to the dollar*

Foreign money will leave England?

she will lose some exports to the Gold Bloc, particularly Belgiumj
and her tourist expenditure on the Continent will increase*

If the

pound falls in terms of dollars, the yen will probably also fall.


How our interests will be affected*

Such evidence as we possess

seems to indicate that, from the point of view of relative price and
income levels, the present relation of the dollar to other currencies
is about right.

The bulk of the gold we have been gaining can be

attributed to an inflow of capital, rather than to a favorable balance
of trade on goods account*

There is a greater likelihood of our

price and income levels rising more rapidly than those of other
countries than contrarywise, and this would mean an unfavorable balance of payments*

We could readily stand this if our income was


increasing rapidly.

The real danger, however, is that our exchange

position will be worsened before our income rises • This would be
definitely deflationary, really and psychologically.

If we do nothing

and the events outlined in (l) occur, we may be confronted with a
situation where the pound is at or below $4*00.


Alternative treurses of action.

Take no action until the Gold Bloc devalues and the pound

falls below $4.50, and then attempt to peg it thei-e. This would be
a difficult thing to do.
large balances in London.

It would be exceedingly risky to build up
The alternative would be to buy gold

but the only gold that would be available would be newly-mined gold,
which might not be sufficient.

If we permitted gold exports, the

England exchange fund and speculators could buy dollars with the
assurance that the sterling rate would not go above the price at
which we were buying sterling, and might go below.
these by turning their dollar balances into gold.
visable for us to prohibit the export of gold.

They could cover
It would be ad-

If the United States

and England engaged in a competitive bidding up of gold, the position
of the Gold Bloc would again become worsened, and a renewed period
of unsettlement would ensue. Moreover, we would again be confronted
with the problems raised by getting more gold than we wanted and of
having larger gold profits, which would be a source of danger in the

It would appear to be in our interest to make some con-

cessions now for the sake of avoiding the possible consequences

in (a).

I should favor therefore the President making the


following proposal informally to the other countries concerned:
If the ®old Bloc devalued by, say, 20-25$ and England gave
assurances that she would peg the pound for a period of a
year at $4*50, we would acquiesce and take no action*


however, foreign rates fell further than this, we would take
action *to defend the dollar11*

England is very reluctant to make any permanent commitments,
both because of the deep-seated belief that the pound is at present
overvalued, and because she fears further depreciation of the yen*
She v/ould not, however, relish a "currency war11*

Therefore she

might be prepared to make a commitment for a period of, say, a year.
If we adopt alternative (b) we should not delay*

Each day

that sterling goes lower weakens our bargaining position, since it
will appear that we are offering England no more than she has
already attained*