ECONOMIC REPORT: Dollars, Gold, and SDRs SEPTEMBER, 1968 TILFORD GAINES Vice President and Economist Manufacturers Hanover Trust HI MANUFACTURERS HANOVER TRUST The international monetary system has been relatively disrupting the orderly development of the world calm this summer, calm at least in contrast with the economy. turbulent disorder of last winter. Perhaps it is over- 4. It should induce the economic adjustments in the stating the case when one currency after another has participating nations needed for stable currency re- come under attack. But with the free gold market be- lationships and assure that these adjustments are having well and the dollar free from unusual pressure, consistent with economic growth rather than being the contrast with the previous six months warrants this obtained through "beggar thy neighbor" deflation- description. ary policies. It might be helpful during this period of relaxed pres- sures to step back to appraise the institutional arrange- The existing system has met these requirements quite ments of the international monetary system, the immedi- well since it was founded at Bretton Woods. Values of ate prospects for the principal currencies, and the direc- convertible currencies have been changed only infre- tions in which the U.S. might wish to attempt to direct quently, there has been an unprecedented growth in world monetary arrangements. A dialogue on this mat- world trade and capital flows, and the total stock of in- ter is appropriate on the eve of elections that will install ternational reserves has grown as needed. a new Administration in January. A change of political While the system has worked well, in the past year it administrations does not imply sweeping readjustments has sometimes seemed to be coming unstuck. Sterling in important institutional arrangements. Still, new lead- devaluation last November touched off uneasiness about ers always have the opportunity to redirect the evolu- other currencies and, as reflected in huge private pur- tion of institutions. The international monetary system chases of gold, about the value of all currencies. In spite requires at this juncture thoughtful planning for future of the uneasy calm of recent months, a number of prob- development. lems still threaten. The U.K.'s harsh austerity program What might we expect of the international monetary has not yet succeeded in restoring a trade surplus, and the system? At least four requirements suggest themselves: pound sterling is still suspect. The disorders in France this 1. It should support the free movement of money, spring and the implications for the French balance of credit, and capital among nations in settlement for payments of the recent inflationary wage settlements the movement of goods and services and the inter- raise the question of the overvaluation of the franc. The national flow of capital. U.S. has benefitted from large capital inflows that have simulated an appearance of strength in our balance of 2. It should be able to generate the growth in interna- payments, but our trade balance has deteriorated and the tional reserve assets needed to prevent a shortage of value of the dollar is still questioned in world markets. reserves from restraining national economies and Finally, Germany's success in controlling inflation has international trade. generated unsustainable trade surpluses and raised the 3. It should assure maximum stability of currency question of whether the mark is not fundamentally under- values to guard against speculative money flows valued. COPYRIGHT 1968 BY MANUFACTURERS HANOVER TRUST COMPANY, 350 PARK AVENUE, NEW YORK, NEW YORK