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


We must expect further substantial gold losses over the next few months. The certainty of such losses is related mainly to our continuing heavy balance of payments deficit rather than to hoarding and speculation. In fact, the London gold market has been quiescent since November and the central bank consortium has been a net buyer of gold. At best, however, these purchases are not likely to exceed $70-80 million per month, of which the U.S. share would be one-half. Meanwhile, foreign countries that are gaining dollars over and above working balances or normal holdings are planning to take gold from us.

The U.K. and the entire sterling area are in a seasonal period of surplus, which the British expect to total, very roughly, about $400 million in [Page 160] the first six months of 1963. The Federal Reserve has been negotiating for an increase to $250 million (from $50 million) in the mutual swap facility with the Bank of England. If these negotiations are successful, the full credit is likely to be used to absorb the U.K. accruals temporarily, pending a possible seasonal reversal of the payments flow in the fall. The British want the remaining $150 million in gold, however, of which they are taking $50 million today.

France is still running large surpluses, which may total close to $1.2 billion for the year. The French will probably use half this amount for debt prepayments. Of the remainder, about three-fourths will be converted into gold since the French aim at a 75-percent gold ratio in their reserves. If the French do no more than to keep up their regular monthly purchases of $34 million ($204 million in the first six months of the year), their gold ratio will actually decline slightly.

Spain’s rate of reserve gains has slowed, but the Spaniards wish to raise their gold holdings to $600 million from $480 million—i.e., to about one-half the $1.2 billion in reserves they expect to reach by mid-year. Consequently, they have asked for $20 million a month for six months starting in January. The latest Spanish demand is ostensibly related to the fact that the British have withdrawn an exchange guarantee on Spain’s holdings of sterling. Therefore, the Spaniards will convert some of their sterling into dollars to buy the gold so that we will probably lose somewhat less gold to the British than we otherwise might.

An Austrian gold purchase of $50 million was postponed late last year through use of a Federal Reserve swap of that amount with the Austrian National Bank, but since there has been no turnaround in their balance of payments, we must expect them to run off the swap and purchase gold early in 1963. The Austrians have a steady payments surplus and wish to hold 50 percent of their reserves in gold. They are well below that ratio now.

These prospective gold purchases total roughly $525 million for the first half of the year. While we might very optimistically hope to recoup as much as $200 million from the London gold market and other sources over this period, any renewal of uncertainties and fears could greatly reduce this figure. Moreover, the gold demands of the U.K., France, Spain and Austria may be augmented by those of other countries, although we think we have a fairly good basis for gauging the bulk of the first-half-of-1963 demands.

The situation underscores the crucial importance of using as intensively as possible all appropriate methods to curb the balance of payments deficit.

Douglas Dillon
  1. Source: Kennedy Library, President’s Office Files, Treasury, 1/63-3/63. Confidential.