Foreign Relations of the United States, 1961–1963, Volume IX, Foreign Economic Policy

48. Memorandum From Secretary of the Treasury Dillon to President Kennedy⁰

Washington, August 31, 1961.

SUBJECT

• Gold flows

I refer to your memorandum on gold, dated August 28, 1961.¹

Our net gold loss this year amounts to $274 million. This may be compared to losses during similar eight-month periods of 1958, 1959 and 1960 that amounted to $1,775 million, $1,013 million and $462 million, respectively. (See table attached.)²

The important trends are as follows. Heavy gold sales began in 1958 and continued through February of this year. The $5.4 billion loss brought our total gold stock down to $17.4 billion. The combined effects of this Administration’s statements with respect to the dollar and our balance of payments, the psychological and real impact of our improved balance of payments, and the cooperative steps taken by the Basle group of central banks, all combined to bring the losses to a halt in March. During July and August, however, we again sustained net losses totaling $72 million. In the absence of the $150 million received from the IMF, the loss would have been greater.

The reappearance of net gold sales is significant, and there are distinct possibilities of some further losses in the months ahead. To some extent, of course, we must expect changing economic positions of various countries to lead to gold movements if gold is going to serve as the base for our international monetary system. But the present and foreseeable period may also show some disturbing strains.

We are taking steps to reduce the possibility of drains from the three major sources of possible gold demand. Some demand may result from further shifts of the funds received by Britain from its drawing on the Monetary Fund. Additional payments of British debts to Switzerland, which is not a member of the Fund, are scheduled and it is likely that those dollar receipts will be converted into gold. Although our understanding with the British is to the effect that its drawing will not be used in a way that would pose a demand for gold from us, nevertheless disposition of the proceeds to other countries may result in such demand. In this connection, we are emphasizing to the British the nature of our understanding, and attempting to assure that any gold loss will be minimized.

Some demand may result from activity in the London gold market. The major part of this week’s gold loss represented sales to the Bank of England to offset its losses in the market. We may have further sales to the Bank of England for this same reason.

I do not feel that the recent increase in demand for gold on the London market indicates an international judgment that the dollar is in a weakened position against other currencies. Rather the activity appears largely to have reflected an upsurge in private hoarding and speculative demand, owing in good measure to the heightened tensions associated with Berlin and other aspects of the world political situation.

However, confidential information indicates that there have been some central bank purchases in that market. By far the largest has been the Bank of Italy. We have sent a representative of the Federal Reserve to Italy to advise them that it would be preferable for them to buy directly from us rather than putting up the price on the London gold market. As a result we now have the assurance that the central bank of Italy will not participate further in the market.

Despite this, continued demand on the London market seems likely for the immediate future, in the absence of a notable improvement in the international political situation. We are in close touch with the British regarding this market in order to assure that no rapid price rise occurs to excite speculation. Moreover, we are careful to avoid any public expression of undue concern over the gold situation inasmuch as such concern might in itself stimulate capital flight.

The third source of potential demand in the near future lies in short-term capital movements. Some flows of funds from the United States to Britain are now being reported in response to interest rate differentials. Other flows of significant amount have taken place from certain European countries to Switzerland. Such flow of funds may at times tend to lodge in those countries which hold a high proportion of their reserves in the form of gold. In view of the high volatility of short-term capital it is essential that our short-term interest rates do not decline. We will also want to continue to pursue vigorously our own foreign exchange operations which can help to minimize speculation and reduce the attractiveness of moving funds because of differentials in interest rates here and abroad. You will recall the numerous authorizations we have sought from you in order to strengthen our activities in this field.

With respect to the balance of payments generally, there has been a deterioration since the first quarter of this year. I do not feel at this point that our gold losses have been related directly to this worsening. However, continuing payments deficits will further increase the liquid dollar holdings of foreign countries. Although private accounts may absorb some portion of such dollar gains, most of the additions are likely to go into official reserves. It is significant that a number of countries have increased the amounts of dollars they are currently willing to hold as a proportion of their total reserves. Nevertheless, further additions may well occasion conversions into gold. In addition, there is always the pervasive influence of such deficits on confidence in the dollar.

I will be discussing the general financial situation at the Vienna meetings of the International Monetary Fund and World Bank in September.³ I am hopeful that the outcome of these meetings will show the determination of the financial representatives of the member governments to cooperate even more and help dampen speculative and hoarding activity. Real progress there toward the plan for standby credit facilities in the International Monetary Fund should help to calm the financial markets.

In view of the above considerations, I do not recommend that the Administration take any new action now. But I continue to feel that we must seek active implementation of the various measures which you have already directed. In particular, we should press forward with our efforts to stimulate and encourage our export trade; it is significant that our trade surplus has declined a bit and the recovery of our economy will add to import demand. We should also press forward to gain a more equitable sharing with our allies of economic and military aid.

I interpret your reference to legislation to refer to our proposals to eliminate tax deferrals or impose changes respecting “tax haven” corporations. I do not think that a public statement indicating that these changes should apply retroactively to the latter part of this year would help our gold position significantly during the next few months. Such a statement, which would be contrary to our general philosophy about retroactivity in tax proposals, might well be considered an expression of undue concern about the gold situation on our part, and might actually run the risk of accelerating our losses. However, it may well be desirable for you to give strong personal and public support to our proposal to tax foreign “tax haven” corporations when it comes up next January before the Ways and Means Committee.

Douglas Dillon

0. Source: Kennedy Library, President’s Office File, Treasury, 1/61-9/61. Confidential. Transmitted under cover of a memorandum from Dillon to the President, September 1, which reads in part: “Our information regarding the actions of other countries and our talks with them is highly confidential. Therefore, the information in this memorandum should be closely held.”
1. Document 47.
2. Not printed.
3. Regarding U.S. participation in these Vienna meetings, see Documents 50 and 51.