Memorandum by the Director of the Office of Financial and Development Policy (Knapp) to the Director of the Office of Far Eastern Affairs (Butterworth)

Attached is a telegram drafted in Treasury for Parker at Shanghai39 informing him of the Treasury’s decision to accede to the request of the Central Bank of China for the purchase of 100,000 ounces of gold. State Department clearance is urgently requested.
I am aware of your serious doubts, which I fully share, as to the wisdom of China’s policy of selling gold internally as a stabilization measure. However, the issue is whether these doubts justify a departure from the firmly established United States policy of selling gold freely to foreign governments and Central Banks upon request. This policy, as you know, is one of the essential elements of our international monetary policy; the United States Government, through its own actions and through the operations of the International Monetary Fund, has consistently sought to maintain the free inter-convertibility of gold and dollars and at a fixed price in order to establish gold beyond question as an international monetary medium. At the same time we have been particularly anxious to maintain a free gold sale policy in order to establish the confidence of foreign countries in dollar balances as a stable and secure form of international reserves.
It would be one thing for the United States Government to intervene in China’s internal gold sale policy through pressure from the ECA—that is to say, through threatening to withhold dollar assistance unless China made more effective use of its own scarce gold and dollar resources. In the present circumstances, of course, we are scarcely in a position to pursue this policy. I believe it would be a mistake, however, for the reasons adduced above, to resort to our alternative instrument of control, namely, refusing to license the sale of gold. Presumably, to be consistent, we should also refuse to license export of gold already held by China at the Federal Reserve Bank of New York. Such radical departures from our established gold policies might prove most unsettling to other foreign countries. In any case, it would mean our arrogating to ourselves a policing responsibility with respect to gold transactions by foreign countries which I do not believe we are prepared to undertake as a general policy.
You will note that the Treasury telegram makes clear to Parker the considerations involved and specifically states that the decision in [Page 752]this case does not imply US endorsement of the advisability of use of Chinese dollar reserves for the purchase of gold for sale to the public.
ECA does not object to the substance of the attached telegram but prefers not to be mentioned in it.
  1. See telegram No. 565, March 31, 2 p. m., p. 752.