The recent flurry of speculation on the London gold market has dramatized a problem which is not the product of this campaign, or even of the economic decline of the past year - America's adverse balance of payments. For the rise in the price of gold reflected the hope of a small number of speculators operating in a very thin market that the dollar will one day be devalued. Their hope is that this will be the necessary consequence of a continued shift in the balance of payments against the United States. Since January of 1953, this imbalance has caused a drain of nearly $4 billion on American gold reserves. This year alone more than $800 million has been withdrawn from this country. Although the current rate of loss now exceeds the record loss of 1958, it is clear that the decline in our gold reserves has been in progress for several years.
In addition there has been substantial increase in the claims which foreigners hold against U.S. dollars - claims which are a potential source of further drains on our gold reserves. At the end of l952 the net liquidity position of the United States (that is, gold reserves less foreign dollar holdings) was $11.5 billion. By June of this year our net liquidity position was $3.339 billion. A deterioration of almost $15 billion.
This flow of gold away from the United States and accumulation of claims simply reflects the fact that more dollars are leaving this country than are coming in. This is the balance of payments - the difference between the dollars which America spends abroad, and the dollars which foreigners spend here - a difference which has amounted to more than $10 billion in the past 3 years.
In 1953, the incoming administration inherited a balance of payments which was the strongest in the world. Almost every nation had a dollar shortage, and our gold reserve was at one of the highest points in our history. But between 1953 and 1960 the flow of gold has been reversed, the balance of payments has gone against us, and our reserves have dwindled.
There have been five major reasons for this sharp reversal in our balance-of-payments position.
First, we have heavy commitments abroad for military and economic aid, and for the support of our own oversea military forces. Our exports have not been large enough to cover these outlays when they are added to our import cost and the dollar value of American investment abroad. This failure to step up our exports to a point where the dollar outgo would be balanced or exceeded is due in part to increased competition from other countries, and in part to the steady inflation which has priced us out of many foreign markets. For example, industrial prices alone have risen 30 percent in the last 10 years.
Not only has inflation kept us out of markets abroad, it has priced us out of markets here at home. For example, as the result of the near doubling of steel prices in the last decade, the United States - a nation with the largest steel-producing capacity in the world - has imported substantial quantities of steel and steel products. For it is, in many cases, cheaper to buy steel overseas and ship it here than to buy it from domestic producers.
More than a year ago a high financial official of the Government was quoted in the Wall Street Journal as saying, "the Germans and the Swedes - and even the Japanese - can lay down barbed wire and nails in Duluth at less than the U.S. manufacturers can sell it. And we make steel in Duluth."
Secondly, we have been slow to negotiate the removal of outdated restrictions, in the form of tariffs and quotas, on the import of American goods into foreign countries. These restrictions were originally imposed by nations then suffering from a dollar shortage. But these restrictions have been continued even though the balance of payments has shifted in their favor. By working more vigorously to remove these restrictions we could have increased the volume of American exports, and the flow of dollars to America.
Third, we have failed to negotiate the removal of restrictions on the movement of investment capital to the United States. In many cases foreign governments require that special permission be obtained before their nationals can invest in American enterprise. These restrictions, too, are left over from the days of the dollar shortage. Vigorous action to remove them would have stimulated the flow of dollars to the United States.
Fourth, we have made too little progress in encouraging our allies to assume a larger share of the cost of maintaining our oversea Military Establishment - and a larger part of the burden of military and economic aid to the less developed nations. Thus America alone must bear much of the burden of these enormous oversea expenditures which result in a high dollar outflow and a consequent shift in the balance of payments.
Fifth, by pursuing the "bills only" policy the Federal Reserve has allowed short-term interest rates to drop far more rapidly than the interest rates on long-term obligations. Yet short-term obligations are the primary object of foreign investment in the United States. Thus the drop in short-term rates has encouraged foreign investors to take their money to other countries where the rates are higher, while high long-term rates have continued to stifle the investment which would lead to greater productivity and employment.
All of these factors - operating in varying degrees over the past 8 years have caused a long-term shift in our balance of payments. And this problem was clearly recognized long before the election campaign of 1960.
In 1959 the U.S. Executive Director of the International Monetary Fund warned that "certain deficits of the size the United States is incurring cannot long be sustained."
Alfred Von Klemperer, Assistant to the Secretary of the Treasury, testified before a Senate committee that the balance of payments deficits of 1958 and 1959 were so large that "a continuing deficit of this magnitude would seriously eat into our gold reserves." And at a meeting of the World Bank and International Monetary Fund - more than a year ago - Secretary of the Treasury Anderson warned that we are confronted today not with a dollar shortage but a capital shortage."
Secretary Anderson pointed out that "the excess of exports of U.S. goods over our imports is currently running at the rate of about $3 billion per year. This is not sufficient to meet the three large categories of outpayments: military aid, economic aid, and private investment, which in the aggregate amount to about $7.5 billion per year."
The President himself echoed this alarm. Yet despite these warnings, and the clear trend of the preceding years, we failed to take prompt and vigorous action, and the balance of payments continued to go against us.
What then must we do, what would a new Democratic administration do to reverse, the present downward trend in our balance of payments?
First, we pledge ourselves to maintain the current value of the dollar. If elected President I shall not devalue the dollar from the present rate. Rather I shall defend the present value and its soundness.
Secondly, we will begin immediate and vigorous negotiations to remove artificial barriers to the flow of American goods overseas, as well as restrictions on the flow of foreign capital to this country. We will ask our allies to share the increasing burden of building the military and economic strength of the free world. The nations of Western Europe, whose economies we have helped to restore, should now assume full partnership in the struggle against communism. These measures will be aimed specifically at reversing the current trend in our balance of payments. The remainder of our economic policies will have the broader goals of: (A) stimulating productivity and economic growth - (B) avoiding the periodic recessions which have caused a decline in business, a slowdown in our growth, and contributed to the more than $18 billion budget deficit of the last 8 years - and (C) halting the steady inflation which has brought the cost of living to the highest point in our history. Of course to the extent that anti-inflationary policies are successful they will increase our ability to compete in world markets and thus increase the flow of dollars to the United States.
What will those policies include?
First, we are pledged to maintain a balanced budget except in times of national emergency or severe recession. Furthermore, we will seek to maintain a budget surplus in times of prosperity as a brake on inflationary forces. Through the vigorous use of fiscal policies to help control inflation we will be able to lessen reliance on restrictive monetary policies which hamper growth. As former chairman of the Senate Subcommittee on Government Operations, I handled the legislation recommended by the Hoover Commission - and I am convinced our budgetary economies can be improved particularly in the procurement practices of the Defense Department, as well as the budget and accounting practice of the Government in general.
Second, we will adopt a greater flexibility in the use of interest rates to control inflation. By committing ourselves to monetary policy as the sole means of halting price rises, we have had to maintain interest rates at an artificially high level-stifling investment, expansion, and growth. And despite these high rates, prices have continued to rise. As a result each successive peak and trough in the economy has ended with high interest rates accompanying heavy unemployment, low production and a slack economy. We do not reject monetary policy as an instrument of controlling inflation. And we are also aware that sharp declines in the short-term rate could further aggravate the balance of payments problem, as foreign investors seek better money markets. But we do believe that monetary policy should be only one of many anti-inflationary measures, and that it must be used with full realization of the harmful effect that high interest rates, especially on long-term obligations, can have on economic growth.
Third, we must have a flexible, balanced, and, above all, a coordinated monetary and fiscal policy. We do not, let me make it clear, advocate any changes in the constitution of the Federal Reserve System. It is important to keep the day-to-day operations of the Federal Reserve removed from political pressures, while preserving the President's responsibility for longer range coordination of economic policies.
Fourth, the Federal Government must work closely with labor and management to develop wage and price policies consistent with reasonable price stability. The erratic upward spiral of wages and prices, especially in a few basic industries, is one of the primary causes of the inflation which has impaired purchasing power at home and contributed greatly to the adverse balance of payments with its consequent drain on our gold reserves.
Without resorting to the compulsion of wage and price controls, the President of the United States has a responsibility to exert the leadership of his office and the force of informed public opinion in the pursuit of reasonable price stability.
Fifth, we must stimulate plant modernization programs which are vital both to increased production and to building industrial facilities which can compete successfully with the modern plant of Europe and the Soviet Union. Wherever we are certain that tax revision - including accelerated depreciation - will stimulate investment in new plants and equipment, without damage to our principles of equity, we will proceed with such revision. We will also carefully examine our entire tax structure in order to close loopholes which are unnecessarily depriving the Government of needed tax revenue, and in order to develop tax policies which will stimulate economic growth.
Sixth, we must develop the human and material resources on which the strength of our economy depends.
The increasing complexity of modern industry requires the best talent and skills which America has to offer. The history of American economic growth has, in large measure, been the history of the developing skills of our labor force, and the imagination and creativity of our businessmen and scientists. To assure continued growth we must invest in better school systems, in vocational training programs for unemployed workers, and in scholarship programs which will make higher education available to all young men and women of intellect and ability.
By vigorous pursuit of these policies I believe that we can move toward an economy which is growing without inflation. And if we do, then American industry will also be in a better position to compete on the world market - increasing the volume of our exports, shifting the balance of payments, halting the drain on our gold reserves, and, thus insuring the soundness of the dollar.