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Because of its stability, security and superior buying power, the dollar is eagerly sought by foreigners. Last week the Federal Reserve's Martin called "a fact of financial life" the habit foreign nations have of supporting their faltering currencies with dollars. Shopkeepers in many parts of the world give generous discounts to tourists who pay in dollars. Millionaires in Latin America and other developing areas convert their own currencies into dollars—paying a high premium for the privilege—and often deposit the dollars in U.S. banks.
Unfriendly Attack. There is, inevitably, a reverse side to the coin. This vast outflow of dollars—for aid, military assistance, business investment, tourist spending—has for 14 years exceeded the money flowing into the U.S. from its foreign transactions. Result: a chronic deficit in the U.S. balance of payments. What makes the payments deficit so serious is that each deficit dollar is like a check written against the gold supply of the U.S. Treasury, which is pledged to exchange foreign-held dollars for gold upon demand. Largely as a result of its payments deficit, the U.S. has suffered a steady loss of gold to nations holding dollars.
Because foreign central banks have built up—and cashed in—tremendous stocks of dollars, Fort Knox's bullion hoard, which backs the value of the dollar, has plunged in the past seven years from $21 billion to $13.9 billion. Foreigners now hold $27.7 billion in dollars—almost twice the value of the U.S. gold supply—and they can demand gold for them at any time. Though it is highly unlikely that they would ever cash in enough to break Fort Knox or force the U.S. to devalue the dollar, the mere fact that they have the power to do so is a bludgeon and a bother to the U.S.
The most unfriendly attack on the dollar has been pressed by France's Charles de Gaulle, who seeks through economic mischief to gain his own political ends and lessen the U.S.'s influence abroad. In the past year, De Gaulle and Giscard d'Estaing have pushed to upgrade the trading power of gold (of which France has plenty), cashing in $800 million worth of dollars for U.S. bullion. Imitating the French, West Germany, Spain, The Netherlands, Belgium, and Switzerland have also traded in many millions of dollars for Fort Knox's gold.
"Good & Encouraging." To protect the dollar and to bring some discipline to its payments situation, the U.S. has had to adopt some unpleasant moves this year. It has trimmed foreign aid to the lowest point ever, $3.38 billion, cut overseas military spending almost everywhere except in Viet Nam, and pared the value of goods that U.S. tourists can bring back home duty-free. More important, the Government has placed a tax on loans to foreigners by U.S. banks and has asked businessmen to "voluntarily" clamp down on their overseas investments. The drive has been brought home dramatically—and somewhat amusingly—by the President's insistence that U.S. wines rather than