Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

64. Memorandum From the Under Secretary of the Treasury (Bennett) to Secretary of the Treasury Simon¹

Washington, May 9, 1974.

YOUR MEETING WITH MINISTER DUISENBERG

Minister Duisenberg on Monday² will probably urge that we cooperate with him by expressing a willingness to enter into an effort to find a formula which can be agreed both by Europe and by the United States for a change in the present rules with respect to gold. He is likely to say that he believes that, as a result of the new oil price pressure on a number of countries, including Italy, France, Spain and Portugal, it is quite likely that the Europeans will decide to take unilateral action if an agreement cannot be worked out within the next several months with the United States. He will probably, therefore, argue that we should seriously consider accepting arrangements along the lines outlined in the attached translation of the European position agreed in the recent meetings at Zeist in Holland.³

The current European proposal basically has three provisions:

• 1. that governments be permitted to buy gold from one another at a market related price;
• 2. that governments be permitted to buy gold from the market; and
• 3. that some agreement be established among governments to reduce the potential fluctuation in the market price of gold.

In addition, some of the European governments are suggesting that there be an arrangement to require governments collectively to sell over a period as much gold onto the market as governments have bought from the market, but no detailed plan has been developed to apportion the responsibility to sell to particular governments.

My suggestion is that you respond to Duisenberg along the following lines:

1. We are very grateful for your receiving the Treasury representatives in the Hague⁴ and for making the trip to Washington to explain the European thinking to us.

2. We share a common conviction that an agreed multilateral solution would be preferable to unilateral moves by one or more European countries.

3. We share a concern that unilateral current account measures, such as those recently announced by Italy,⁵ will seriously disrupt the fabric of international cooperation and will cause economic damage to us all.

4. At the same time we recognize that the increase in oil prices will more seriously affect particular countries and that it is in our common interest to intensify international financial cooperation, as exemplified in the European and United States credit lines for Italy and the proposed expansion of IMF facilities.⁶

5. We can understand why countries in particularly difficult positions will wish to consider cashing in some of their holdings of gold, but we do not think it realistic to think that any country will find it appropriate to attempt to finance a large share of its imports in this fashion, since it is unlikely that the private market would accept a substantial amount of gold without a significant decline in price.

6. It is understandable that potential sellers of gold would wish the rules to be changed so that foreign governments could be among the potential purchasers, but there is no evidence of any significant desire on the part of other governments at this time to acquire additional gold. If any other governments were, for example, contemplating buying Italian gold largely out of a desire to help Italy, then it would probably be preferable for that assistance to be extended on a loan basis.

7. There are four principal serious dangers which we see in the European proposals as we now understand them:

a. The proposals contain no elements which would clearly signal to the public that governments intend in fact to carry forward their announced intention to phase gold out of its central place in the international monetary system;

b. On the contrary the emphasis in the European proposals upon stabilizing the gold price creates a probability that internal pressures will be developed within the system for further moves toward establishing a single official price for gold. That would be a long step back toward an overly rigid, potentially explosive monetary system;

c. There is also the danger that a sudden write-up in the value of the gold portion of the official reserves of many nations could result in practice in the political process in those nations generating inflationary, overly expansive domestic monetary and fiscal policies; and

d. The sudden large increase in the apparent liquidity of selected developed countries would probably strongly reinforce the demands of the developing countries for preferential arrangements for the provision of liquidity to them. The resulting confrontation could endanger the possibility of reaching a meaningful advance through widespread multilateral agreement at the concluding session of the C–20 ministers.⁷

In the light of these considerations, we will study the European proposals further. In the meantime we hope that the Europeans will also reflect further upon their own proposals with particular reference to the need to insure that any action taken does not turn out to be retrograde but rather constitutes a constructive step in the evolution toward a more serviceable international monetary system. We must be aware of the danger of taking short-sighted steps in the light of a short-term economic situation while unleashing unnecessarily destructive consequences for our common long-term interests.

Having said all this, I suggest that you should imply that we shall wish to talk further with the Europeans but that you do not say at this time specifically at what time and in what group we should talk. My present expectation is that our next discussion should be with the ministers of the group of 5, probably on Monday, June 10, just before the next ministerial meeting. A meeting earlier than that does not look feasible in the light of the political developments in France and Germany,⁸ but in any event it is unlikely that Duisenberg would be included in that meeting.

At this stage, I doubt that you wish to be very forthcoming in suggesting the possibility we will be able to strike a deal, but in fact I think the European initiative does now give us a promising opportunity to make a bargain that would be much better from our point of view than allowing things to continue to drift as they have been. A separate memorandum is being prepared for you on that subject.

Jack F. Bennett

⁹

1. Source: National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 5, The Netherlands (General). Limited Official Use. A copy was sent to Volcker. A handwritten notation on the memorandum reads: “MON. 5/13 12 Noon for 12:30 PM Luncheon Meeting.” No record of this meeting has been found. Telegram 100622 to USEC Brussels, May 15, contains the text of a statement given to the press on the meeting. (Ibid., RG 59, Central Foreign Policy Files) The May 14 New York Times also contains a report of the meeting.
2. May 13.
3. See footnote 2, Document 63. The translation is attached but not printed.
4. According to telegram 2138 from The Hague, April 30, Volcker was scheduled to meet with Duisenberg in The Hague on May 4. (National Archives, RG 59, Central Foreign Policy Files) No memorandum of conversation of this meeting was found.
5. On April 30, the Italian government announced new import deposit regulations on manufactured goods. (The New York Times, May 1, 1974, p. 1)
6. In January 1974, IMF Managing Director Witteveen suggested the establishment of a new IMF lending facility to assist countries experiencing large balance-of-payments deficits caused by the recent sharp increase in oil prices.
7. The C–20 Ministers met for the last time in Washington June 12–13.
8. France held a Presidential election on May 19. In the Federal Republic of Germany, Chancellor Brandt’s surprise May 6 resignation necessitated a parliamentary vote on May 16 to choose a new Chancellor.
9. Printed from a copy that bears Bennett’s typed signature.