Full text of Business Trends : What's Behind the Dollar Rumors

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Prepared by the Research Department of the

FEDERAL RESERVE BANK OF CLEVELAND
Serving the Fourth Federal Reserve District
1

WHAT S BEHIND THE DOLLAR RUMORS?
One of the most grotesque by-products of the
British monetary and economic crisis is the gossiping it has engendered with regard to the
future value of the American dollar.
Most of this across-the-back-fence talk is not
particularly derogatory of the present dollar,
which is sought after by virtually all nations of
the globe, but hinges around the permanence of
the present statutory price of gold-a matter that
is relatively remote from everyday American life.
It is impossible, however, to question the present
established gold price without implicating the
reputation of the dollar, and it is the purpose of
this discussion not only to subject these rumors
to the test of sincerity and objectivity, but also
to examine their plausibility and logic.
The earliest suggestions involving an increase
in the price of gold in the United States originated
abroad and appear to have been motivated by
private considerations not wholly compatible with
world recovery and rehabilitation. Ever since the
end of the war gold-producing industries in such
countries as South Africa, Canada, Australia, and
others, have been campaigning more or less openly
for a higher price for their product, to compensate
for the steady rise in mining and refining costs.
The recent devaluation of the British pound,
followed by a score of similar adjustments in

closely related currencies, has effectively silenced
this specific source of monetary propaganda from
abroad, at least until such time when a further
rise in the general price level in those countries
washes away all or most of this fortuitous gain.
Another proposal of foreign origin has been
equally effectual in inciting a certain degree of
distrust regarding the value of the dollar. Aside
from the understandably selfish but somewhat disguised pleas of the gold mining industry, talk of
dollar tinkering has also been inspired by suggestions from abroad this past summer to the effect
that the burden of Marshall Plan aid could be
made more palatable to American voters and taxpayers by marking up the value of American gold
stocks and by using the resulting gold profit to
finance exports to Europe and other participating
areas. The fact that this would automatically
entail a devaluation of this country's monetary
unit and thereby accentuate inflationary tendencies over here was more or less overlooked or
avoided in this rather naive suggestion.
A third element in the present situation, and
one which h.a s been susceptible to much more misinterpretation, is the price or discount at which
dollars are alleged to have changed hands in a
number of foreign centers, especially in the Near
East and in the Orient. At varying intervals in

Broadcast by Merle Hostetler, Manager, Research Department, Federal Reserve Bank of Cleveland, over
WGAR, Cleveland, with Jim Martin, Morning News Editor, WGAR, Saturday, November 12, at 9:15 a.m.

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Federal Reserve Bank of St. Louis

recent years, unauthenticated reports have been
received and publicized in this country to the
effect that gold was bringing more than $40 an
ounce in the so-called free markets of Europe,
Asia, and even Africa. If such were precisely the
case, then obviously some depreciation in the
dollar had occurred without the general knowledge of the American people.

A fourth and perhaps most elusive cause of
many irrelevant remarks about the stability of
the dollar stems from the sequence of events in
the depths of the Great Depression. It is not
difficult to recall how on that earlier occasion a
change in the value of sterling was followed-within a relatively brief interval by a devalution of
the dollar.

It has been established beyond reasonable doubt,
however, that these random and more or less surreptitious transactions are merely evidence of the
existence of American funds abroad whose legitimacy was a matter of concern to the holders
thereof. Despite the establishment of a highly
effective control over international financial transactions and current movements shortly after the
invasion of France, some American dollars found
their way into the hands of unfriendly or enemy
nationals.

Because that occurred within the lifetime ofnearly all present-day business and professional
men, it is small wonder that popular interest w~s
stimulated by the September devaluations abroad,
and that certain superficial conclusions are being
drawn therefrom. The general public is aware that,
whereas on both occasions the British government
had virtually no choice, here in America devaluation was undertaken as a deliberate policy. It is
utterly impossible, however, to draw any comparison between the present state of economic
activity in this country with that which prevailed
in 1933-34 when the value of the dollar was adjusted to its present dimensions.

The manner in which such purchasing power
was used is not within the purview of this discussion. But it is quite conceivable that a subsequent recipient of such funds, whether in Bombay,
Cairo, or any other cosmopolitan center, might
clearly prefer to sell his dubiously acquired dollars
at a moderate discount, and for unidentifiable and
universally acceptable gold, rather than risk going
through official channels.
Another explanation for some of the bizarre
prices of gold reported from the same general area
is that the quotations are only a reflection of the
artificiality and ineffectiveness of the official exchange rates of the countries involved. When gold

is bought and sold from day to day in Cairo, for
example, the seller usually does not receive American dollars, but takes payment in Egyptian
money. Because of mutual distrust of the domestic
currency, whether justifiable or not, both the
buyer and seller may have agreed on a price that ·
exceeds the legal gold price in that country. Under
such circumstances, which apparently prevail in
many parts of the world, it is wholly and completely misleading to use the official monetary
yardstick to translate the terms of the sale into
dollars and cents, especially when no American
money whatever is involved in the transaction.
The truth of the matter is that such transactions
are eloquent testimony of the relative strength of
the American dollar, by disclosing how much the
foreign currency has depreciated.

Moreover, in view of the fact that inflationary
tendencies in this country appear to be active
scarcely below the surface, and in some instances
are plainly visible again, it is difficult to imagine
the Congress giving any consideration whatever
to dollar devaluation. Such consideration would
not only accentuate the inflationary process at
home but would also tend to nullify the recent
currency realignments which were interpreted in
this country as a necessary prelude to world wide
economic recovery.
One further aspect that must bear considerable
weight in resolving doubts regarding the dollar
is that any kind of an increase in the American
price of gold would represent a proportionate gift
to the Soviet Union. The government of that
country owns a very large stock of gold, and is
also believed to be mining new gold on a substantial scale.
It is exceedingly difficult to visualize the American Congress or any other branch of our Government sanctioning a monetary policy which would
immediately endow the gold stocks of the Soviet
Union with greater power to buy either strategic
materials or political allegiance in the rest of the
world.

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