SOME YEARS AGO Winston Churchill said that "democracy is the worst form of government except for all those other forms that have been tried from time to time." My thesis is a paraphrase of Sir Winston's statement in that I believe it could be said that the dollar is the worst currency in the world except for every other currency which has ever been invented.

The dollar and all currencies are traded in a vast international foreign exchange market by a group of unsentimental traders, and their day-to-day fluctuations one against the other are a matter of record, gossip and moment. The foreign exchange market represents conflicting hopes and fears of the traders of the world, as well as the hard facts of international finance.

We tend to think that the present price of gold and the relationship of the dollar to other currencies was set in some logical statesmanlike manner. To bring the problem into perspective I would like to quote from the official historian of the New Frontier and the unofficial historian of the New Deal, Arthur Schlesinger, Jr., who describes in his book, "The Coming of the New Deal," how the price of gold was really set.

"Starting on October 25, Henry Morgenthau and Jesse Jones met in the President's bedroom every morning to set the price of gold. Jones was there as head of the RFC, which did the buying; Morgenthau, because of his recent experience in helping maintain wheat prices through a government purchase program ... While Roosevelt ate his eggs and drank his coffee, the group discussed what the day's price was to be ... One day Morgenthau came in, more worried than usual, and suggested an increase from 19 to 22 cents. Roosevelt took one look at Morgenthau's anxious face and proposed twenty-one cents. 'It's a lucky number,' he said with a laugh, 'because it's three times seven' ..."

In thinking about the dollar today we must recognize that both objective and subjective factors play important roles. While the United States has been running a balance of payments deficit for some years, it was really not until October, 1960, when the price of gold in London touched $40 an ounce, that the intense attention of the world was focused upon our monetary problems. In the weeks just past the United States dollar has weathered another storm of even greater intensity than that in 1960. The Cuban crisis touched off large switching from paper money and paper securities into gold-gold coins for the small man and gold bars for the big speculator. On Tuesday and Wednesday following the Cuban crisis gold sales in the London market amounted to some twenty tons each day, exceeding the volume of gold which was sold during the October 1960 crisis. The international mechanism has been perfected in the intervening years to such an extent that this recent flurry escaped broad attention. The secret gold pool operations conducted jointly by the United States and the so-called Basle Club enabled the Bank of England to supply gold freely, thereby averting a sharp rise in the price of gold and indeed so mitigated the swing that only a gentle rise from $35.13 to $35.20 was the maximum movement. While this exercise in international co-operation was a technical success, it should not delude us concerning the basic factors affecting the strength or weakness of the dollar.

The strength of a currency rests ultimately upon the productive capacity of a nation and, in a democracy, upon our penchant for self-discipline in monetary affairs. Mr. Burns recently reminded us of a basic truth when he said: "A nation's economic growth depends ultimately on how much work people do and how efficiently they do it."

The problem of the dollar is a problem of confidence. The United States is banker to the world and, like any bank, would be insolvent if all the depositors wanted their money the same day. If the world has confidence in the management of the bank, there is no run at the teller's window. If that confidence is lacking, nothing can save the bank. The problem of preserving the dollar as a key currency in the last analysis rests upon our ability to persuade the world that our government is capable and able to take steps to return us to fiscal stability. The basic issue involving both fact and emotion is a matter of judgment as to the risk a holder of dollars runs that we will suspend the convertibility of, or devalue the dollar. It must rest also upon the judgment of our neighbors as to whether or not the United States will continue to convert dollars into gold at $35 per ounce, as this commitment is the peg upon which hangs the whole monetary stability of the Western World. This confidence or lack of confidence must rest also upon the United States balance of payments position and the steps we are taking to bring it into equilibrium.

The very words "balance of payments" have an unfamiliar ring to American ears and indeed you would search in vain for mention of this phrase in testimony before our Congress at the time we established the Marshall Plan which represented the greatest outpourings of dollars in the history of our nation. Our first balance of payments deficit in the postwar period was in 1950 and in the eight-year period from the beginning of 1950 to 1957 we incurred an average annual balance of payments deficit of $1.3 billion. These deficits were masked so far as the general public was concerned because they were settled largely through the transfer of liquid dollar assets to foreign ownership with virtually no gold sales. In fact, these deficits tended to be regarded with favor as a means of helping our NATO allies build their international reserves. Our friends abroad who gained these reserves at our expense were willing to hold them in the form of liquid dollar assets, and our own gold reserves remained more or less stable. Indeed from the end of 1950 to the end of 1957 our gold reserves actually increased from $22.8 billion to $22.9 billion.

In 1958, however, this situation changed sharply and in the period through 1961 the United States balance of payments deficit rose to an annual average of $3.4 billion, with a peak deficit of $3.9 billion in 1960. Not only did the figures get larger, but the mentality of our creditors underwent a change. The surplus countries began to display an unwillingness to continue to hold their new found reserves in United States dollars, and almost $6 billion of the total deficit of $13.6 billion incurred in this period had to be settled through the sale of our gold. This sharp drop in our gold holdings, coupled with the rise in our short-term liabilities, spotlighted our basic problem and weakened confidence in the dollar around the world.

During this period we have been treated to a great many lectures on our defects, and our ills have been diagnosed both by eager amateurs and professional money managers. Some of our foreign friends are reminiscent of reformed drunks who lecture their former cronies against taking too much alcohol. Some of them have not devalued their own currencies recently, mostly through their own efforts, but also with our help. In view of the varying explanations for the basic cause of our deficit, it is useful to compare the structure of our balance of payments in the period 1958-61, when gold losses were heavy, with the previous period of 1950-57 when our deficits were of a moderate size. The most striking feature of this comparison shows that in spite of the deterioration in our over-all deficit in the most recent period, our balance on current account has continued strong and has shown remarkable improvement in the past several years when some people were predicting freely that we had priced ourselves out of the world market and were no longer competitive. While our current account deficit averaged only about $100 million per annum for 1950 through 1958, it increased sharply to over $2 billion in 1959 and then shifted to a surplus of $1.5 billion in 1960 and $2.5 billion in 1961. Our leverage is tremendous. Only 4% of our manufacturing companies have ever tried to sell abroad, and if the other 96% were zeroed in on the world market with the same skill and energy that they display at home, our trade surplus will grow even bigger.

This surplus on current account is a bullish factor in the long-run position of the dollar. It means in effect that the proceeds of our gold sales and short-term borrowings of about $3.5 billion per annum in the period 1958-61 have been used for the purchase of income-producing properties abroad rather than the purchase of goods and services to sustain excess domestic consumption and investment levels. Our balance of payments deficit was more than matched by an equivalent improvement in our foreign investment position. The United States improved its foreign investment position, exclusive of foreign short-term liabilities, by a net of about $16 billion.

While it has been popular in some quarters to make American foreign investment the whipping boy of our balance of payments difficulties, this analysis, in my judgment, cannot be sustained as our new investments have produced a steady and dramatic increase in the contribution of investment income to our balance of payments. Indeed, interest and dividends from abroad constitute the second largest income item to this country's international balance of payments. Receipts from abroad have doubled in the last decade. rising from $1.9 billion in 1951 to $3.7 billion in 1961. All but $400 million of this investment income was attributable to private investments with the remainder being earned on government investments. When we net the new private investment abroad with the income which it has produced, the private investment accounts, have been a very favorable factor in the position of the dollar.

We do not live in a static world but one in which the law of compensating force is constantly at work. We Americans have a tendency to measure ourselves against perfection instead of against the real facts of life. Indeed, in areas where competitive market forces are determining factors, the United States balance of payments shows remarkable resilience in spite of an easy money policy which has resulted in a substantial deficit in our capital accounts. Last year, for example, our trade surplus, exclusive of the $22 billion of exports financed by our government in grants and loans, amounted to $2.3 billion. In the services account, exclusive of government payments and receipts, the steady increase in private investment income helped to achieve a surplus of $1.1 billion, making the total current account surplus $3.4 billion. This is not the record of an industrial complex which has lost its skill and priced itself out of markets.

In spite of the remarkable record we have achieved in the private sector in the last few years, there is little question in our neighbor's mind that we can go on incurring deficits of the magnitude which we have sustained in the last four years without seriously undermining the position of the dollar as a reserve currency. The vital question, therefore, remains as to how much progress we are really making towards the restoration of equilibrium in our over-all balance.

Confidence is a delicate thing composed of many factors, and it was obvious to anyone who attended the I.M.F. and World Bank Meetings in Washington recently that the consensus of the Free World monetary and financial authorities was one which reflects increased confidence in the dollar. They point to the relative stability in our wages and prices in the last few years compared to the upward spiral in the Common Market countries. German wages, for example, have increased 30% in the last three years compared with less than 10% in the United States.

The official position of our government points to a reduction in our over-all deficit from approximately $4 billion in 1959 and 1960 to $2.5 billion in 1961 and a seasonally adjusted annual rate of about $1.8 billion in the first nine months of this year. If we are to exclude the volatile short-term capital movements, the so-called basic deficit has been reduced from $4.3 billion in 1959 to just over a half billion in 1961. The full restoration of balance of payments equilibrium, according to official statements, is expected in late 1963.

While I believe that the magnitude of our problem is well within our capacity to solve, it is difficult to share the official optimism concerning the near term outlook for the U.S. dollar. In the first place, the improvement in our over-all balance of payments position has been due to a large extent to happy circumstances rather than to effective corrective measures. Of the $1.4 billion reduction in our over-all deficit in 1961, an examination of the figures reveals that half of this was accounted for by debt prepayments by foreign governments and the remainder largely by European and Japanese prosperity which boosted our exports and lifted the return on our investments abroad. The improvement which is claimed for 1962 has so far failed to materialize, and the Canadian and Japanese crises which benefited us in the early part of the year will work against us in its closing months. The chances are, therefore, that our final balance of payments results for 1962 may not be too unlike those which went into the record book in 1961.

Someone said that predictions are always hazardous, especially when they concern the future. The balance of payments for 1963 is no exception as the situation is clouded by our own budgetary situation. The U.S. economy has failed to reach the targets anticipated by the Kennedy Administration, and it is generally conceded that our budgetary deficit will be between $6 and $8 billion in the current fiscal year as compared with a predicted budget surplus of $500 million. The topping out of the economy may mean a deficit of greater magnitude for fiscal 1963-64 as well.

A budgetary deficit in itself is not necessarily detrimental to the international confidence in the dollar. What matters most is the magnitude and the manner in which the deficit is financed. Our friends around the world who are the principal holders of foreign dollar balances tend to accept the desirability of expansionary fiscal policies to stimulate our economy on the theory that a weak U. S. economy would be even more detrimental than a budgetary deficit. Having said this, however, they feel strongly that the deficit should be financed out of savings and not by short-term notes financed through the Federal Reserve System. There can be no doubt that should we fail to heed this admonition confidence in the dollar would once again be seriously shaken.

If we heed these warnings and finance the deficit out of savings we put an automatic limit on the magnitude of an acceptable budgetary deficit. If the deficit is too large, it will raise fears of the ability of the Federal Reserve to avoid an easy money policy. My discussions with European bankers would suggest that a deficit financed in the manner suggested of somewhere under $10 billion could be sustained without seriously undermining the dollar. There is, however, no magic figure and the tolerance of our friends could be smaller than their outside estimate. Because confidence is a mixture of so many factors, no one should overlook the dangers inherent in any fractional reserve system of miscalculations or a coincidence of events which could lead to a run on the dollar.

Many people have talked about the dollar on the basis of plotting a future curve from our present position. Nothing could be more misleading. The defenses which we have to protect the dollar are impressive and are understood throughout the Free World. The U.S. still has about 40% of the total monetary gold in the Free World, and while it provides only partial cover for short-term claims against U. S. dollars in the hands of foreigners, this is the usual situation with any bank. No bank could pay all of its depositors the same day but it is not called upon to do so if confidence prevails. President Kennedy has assured the world that our total gold stock will be made available, if needed, to support the U.S. dollar, and the Board of Governors of the Federal Reserve System could suspend for a period the requirement that we hold the 25% gold reserve against our currency. Our gold stocks at the end of October are slightly under $16 billion compared with our short-term liabilities to foreigners, exclusive of international institutions, of about $19 billion, which is still a reasonable cover if confidence is maintained. While we believe that it would be folly to draw on the International Monetary Fund, it does not escape the notice of the world that the U.S. has a so-called "gross IMF position" of $5.2 billion, which is the maximum call the U.S. could have upon the Fund in case of need. Additionally, there is the remarkable degree of international monetary cooperation which has been achieved in recent years, and I have little doubt that the Federal Reserve Bank of New York and the Treasury could mobilize $1.5 billion in swap and short-term credit arrangements with the central banks of Europe.

The most important aspect of international cooperation, however, is the mutual dependence of the world on the strength of the U.S. dollar. The so-called Basle Club is vitally aware of the fact that difficulties for. the dollar would spell trouble not only for the U.S. but for the whole Free World. Quite apart from anything else, therefore, the interests of European Central banks, which are the largest holders of U. S. dollars, dictate their cooperation with the U.S. in not pressing too strongly for converting their dollars into gold in times of crisis.

While our position is currently not alarming and while our unused defenses are still massive, at the same time we must admit that there is no room for complacency about the position of the dollar. This is a deadly serious matter since if we were to pick one factor which could bring on a world-wide depression, it would be the breakdown of the international payments system of which the dollar is indeed the key currency. This lays a fearful responsibility upon us to maintain the dollar above suspicion.

Our balance of payments problem is really the mirror of our domestic situation. There is every evidence of ample liquidity in our economy. There is no real lack of funds for mortgage credits, industrial loans, municipal and consumer financing. What is needed are policies to restore business confidence and stimulate private investment. The discipline of the international market place would seem to dictate the cessation of the net buying operations of the Federal Reserve System which, in turn, would mean rising interest rates. With the downward trend of interest rates in Europe, I believe that a very moderate rise in interest rates in the United States would tend to restore our balance of payments equilibrium.

Some years ago the American playwright, Thornton Wilder, had one of the characters in his play, "The Skin of Our Teeth," remark that "Every good and excellent thing in the world stands moment by moment on the razor-edge of danger and must be fought for." This is as true of currency as of anything else. The battle to sustain the dollar will never be won, but it could be lost. Our problem in relationship to the scope of our resources is small and gives confidence that it is well within our capacity to solve.