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

67. Memorandum by the Chairman of the Council of Economic Advisers (Stein)¹

Washingon, June 3, 1974.

MEMORANDUM FOR

• Secretary Simon
• Counselor Rush
• Chairman Burns
• Secretary Kissinger
• Assistant to the President Flanigan

SUBJECT

• Secretary Simon’s Memorandum of June 1 on U.S. Proposal on Gold²

We are in agreement with paragraphs 4 through 7 of the suggested American proposals but consider it important that paragraphs 1 and 2 should be modified and paragraph 3 should be omitted. We are basically worried about the danger that U.S. acceptance of these items would imply acquiescence in the idea of a supported price for gold, which would lead then in succeeding steps to pegging the price and restoring gold to the center of the international monetary system.

Paragraph 1. In our appraisal the limitation on sales should be omitted from this provision. That limitation would merely have the undesirable effect of lending support to an effort at gold-price maintenance. The argument that the sales limitation would prevent a steepening of inflation abroad and that the U.S. has a particular interest in this we find unconvincing. Those countries which are willing to engage in highly inflationary policies—a seemingly widespread attitude abroad—will do so pretty much regardless of how much gold they are permitted to sell. Quite aside from this, in a world of flexible exchange rates such policies abroad would result in rising dollar rates rather than in a spread of the additional inflation to the U.S. Furthermore the rise in the dollar rates which would be brought about in such circumstances would not weaken our export prospects since it would merely offset the effects of the deterioration of foreign competitive positions resulting from their inflation.

Paragraph 2. In our appraisal the provision should stipulate that the IMF will indeed be selling gold out of its own large stock. We should thereby create an additional source of supply when additional demand will come into play as a result of private American ownership. The alternatives would be (a) to sell part of our own official gold holdings at that time, and (b) to let American residents buy gold from abroad. The disadvantages of (a) would be that we would have less “official” gold at a future time when central banks abroad might well develop arrangements under which important American objectives would require having a large stock for interventions. The disadvantages of (b) would be that it would raise the dollar price of our imports. Any estimate of the future American private demand is so wholly conjectural that we should not build policy on guesses that this demand will be small.

Paragraph 3. In our appraisal this provision for the IMF to act as an agent in the sale of gold, should be omitted, essentially for the same reason why Paragraph 1 should be modified. Paragraph 3 would give institutional support to efforts at gold-price maintenance. We also think that if the IMF has this role in translating gold into a larger amount of reserves than it is now worth, the LDC’s will demand a share of the reserves so generated.

Herbert Stein

1. Source: National Archives, Nixon Presidential Materials, White House Central Files, Staff Member & Office Files, Council of Economic Advisers, Herbert Stein, Box 105, Meetings Files, International Monetary System, May–June 1974. Confidential.
2. Document 66. In a June 1 memorandum to Stein, Fellner noted on the subject of Simon’s memorandum: “I mentioned both of the following suggestions to Bill Simon and I think he was quite receptive but this draft was by then practically finished or even on its way to its recipients. Could we talk about the matter before you answer? As for point 1 of the draft: given the present kind of floating, inflation in other countries need not hurt us, so why should we propose that kind of limitation or even submit to it? As for point 2 of the draft: We should insist on sales by the IMF to create additional supply when we allow additional demand to develop due to American private holdings. This would be far preferable to selling substantial amounts of our official gold, since there may well come a time when the foreign central banks will try to ‘stabilize’ the price of gold (essential in terms of dollars) and it then will be desirable for us to have a lot of gold for interventions.” (National Archives, Nixon Presidential Materials, White House Central Files, Staff Member & Office Files, Council of Economic Advisers, Herbert Stein, Box 105, Meetings Files, International Monetary System, May–June 1974)