Evening star., 1945-02-18
Congress Seen Ready
follower Gold Buckinq
Observer Thinks Dollar Problem
Not Necessarily Serious
BIZ Open L. Scott.

By ODen L. Scott.
Two steps now must be taken by Con-
gress that are somewhat disconcerting
In their implications. One Of those steps
will increase the Nations debt limit
to $500, 900 ,000,0 900 which is fantastic
total under any circumstances. The
other step will reduce the gold backing
of the dollar from the present 40 per
cent to Is per cent.
The two steps are related. Debt rep
resents borrowing to pay war bills.
About 40 per cent OF all Government
borrowing is from commercial banks
and that borrowing adds to bank de-
posits which must be backed in part
by gold. Then as bills are paid an
unprecedented amount of currency is
required for payrolls. The flood Of
wartime dollars coupled with scarcity
of goods, adds to black market opera
tions which largely are carried on in
cash, thereby adding further to the
demand for currency. Currency is In
demand, too, by persons carrying on
more and more operations on a cash
basis in an effort to avoid records that
could be traced. These persons often
are seeking to escape high wartime
income taxes.
AS a result of this situation, the
amount of currency outstanding has
risen from $11, 100 100000 in 1941 to
above $25 ,000, 900 900 at this time This
~ sSN1i
backing of S8,400 O00, 900. Then Federal
Reserve Bank deposits have increased
nearly 100000, 900 900 to a total Of $685.
000, ,0O0, 900. These deposits must be sup
ported, in turn, by about SIS, 800 900 900
in gold
There is on hand about s18, $50, ,000, 900
of gold that Is available for use in
supporting currency and bank deposits,
while demands on that gold are around
$4,000 100000 but the resulting margin
is regarded as too narrow in view Of
the prospect that bank deposits and cur
rency in circulation will 90 on increas-
ing so long as wars last. It is for that
reason that lower gold backing for the
dollar is to be asked.
AS a matter of fact there Is much
official opinion in support of the idea
that the dollar should cut loose from
gold altogether. An individual with q
dollar cannot today, convert that dollar
into gold, so that the gold has only
a psychological connection with the dol
lar itself. Most other nations long ago
ended the requirement that currency
have a metal backing 1t is felt here,
however, that the public might not re-
act favorably to move to end all gold
backing for the dollar.
In the pre-New Deal past the dollar
had a value all it's own That dollar
then could be taken to bank or to
the Treasury and could be translated
into actual gold on demand. Except
for purposes of settling balances in for
eign trade, the dollar today is valuable
only for what 1t will buy. 1t is not a
receipt for gold that an individual can
cash in on whenever he desires.
This means that the one measure Of
a dollars value is not in metal but in
groceries, clothing and other things for
which an individual spends his money.
i X
With a supply Of dollars as great as
that now outstanding in currency and
In bank deposits, there always is the
danger that the owners of that money
will become concerned by its future
worth and will try to turn that money
into goods, real estate or securities In
buying rush. The money supply now
is so vast that, if it should start to turn
imitation. Price controls and rationing
during war are check to any effort to
run away from the dollar itself or to
turn dollars into goods in wave OF
buying. In peacetime, the ability of in
dustry to supply goods in quantities
large enough to supply almost any want
is counted upon to serve as brake on
any possible run from the dollar.
The real point, however, is that the
value of the dollar in the future will
not be measured in terms of a fixed
quantity of gold that the owner of the
dollar can obtain on demand, but will
be measured simply in terms of its pur-
chasing power in ordinary markets.
The value on that basis, in turn, will
depend Importantly upon the behavior
of individuals who own the money. II
a run should start away from the dollar,
1t could have serious repercussions.
One official concern Is that the in
crease in debt limit and the lowering
OF gold backing for the dollar may lead
people to question the ability of the
Treasury to redeem all of the war saw
ings bonds that are outstanding, If the
owners Of those bonds suddenly should
demand payment on vast scale. Ac-
tually, there is no need for concern on
the part of bondholders. The reason
is that the bonds themselves are, in
effect, non-negotiable currency. The
Government can supply currency in any
required amount to cover the bonds.
) That is not the big point. The point
is that If bondholders rush to cash and
spend their money they might touch of
an inflationary price rise that would
lower the value of that money in terms
of actual goods that money buys. The
dollar in that way becomes less valu-
able and bondholders lose not through
an inability to obtain dollars represent
ed by the bonds but by lower purchasing
power of the dollars that are given to
them in exchange for the bonds.
Debt and money supply, because of
the possibility that they may generate
fears, are to be continuing problems in
the period ahead. They need not be