Foreign Relations of the United States, 1964–1968, Volume VIII, International Monetary and Trade Policy

165. Telegram From President Johnson to the President’s Special Assistant (Califano)¹

December 23, 1967, 1900Z.

These are views I should like to have Secretary Fowler and our Cabinet Committee seriously consider.²

Subject: The gold position and balance of payments

Confidence in world currencies demands a system which continues to have good support—particularly with regard to international systems.

The world supply and the world production of gold is insufficient to make the present system workable—particularly as the use of the dollar as a reserve currency is essential to create the required international liquidity to sustain world trade and growth—while, at the same time, our strength is required for so many extraneous situations: Vietnam, world wide defense, German installations, aid to underdeveloped countries, military aid abroad, etc. If all these or even some of them were eliminated, our monetary structure-balance of payments would be as strong as any nation. Dollars held by other countries would return. The risk of loss of gold would evaporate or, in fact, our gold stocks would increase. This would result in a disastrous withdrawal of the reserves which the other countries depend on to sustain their trade and development.

Point I. The point is that our role of world leadership in a political and military sense is the only reason for our current embarrassment in an economic sense on the one hand and on the other the correction of the economic embarrassment under present monetary systems will result in an untenable position economically for our allies.

Point II. The available gold resources must be maintained in the monetary systems and not dissipated by sale to speculators and loaders at prices which are riskless to the buyer. This will result in a 2-price structure but the argument that supports this is world economic necessity.³ The current buyers of gold are not Americans scared of the dollar (they aren’t allowed to anyhow) but people of many countries who have experienced inflation and are afraid of their own currencies which they exchange for dollars so that they can buy gold, as gold is only sold in terms of dollars by the London market which must have the dollars to replace it. In 1941–47–48 the International Monetary Fund took this position and the speculators had to pay premiums which substantially reduced the offtake. I recommend the following four [three] steps:

I. On grounds of international economic necessity, state that if gold resources must be preserved for use in monetary systems and that pending establishment of a system under an international body, no further gold will be supplied by the supporting countries to the London market. I would not even supply at the official price to Arts and Industries who can easily obtain their requirements from newly mined or secondary sources just as they now do in other metals. As in the case of silver, let the consumer pay the free market price.

II. Take the leadership in causing the International Monetary Fund or some suitable agency to establish a system of control which (1) prevents small countries from cheating through cut-off of replacement; (2) encourage with strong pressure those countries, i.e., South Africa, Canada, etc., who produce gold to deliver at least, say, one half into the monetary network. This will still provide more than enough for any legitimate use in art or industry.

III. Take steps to cause a prompt effect on our balance of payments particularly to strengthen our hand at the negotiating table in setting up a broader international system along the lines of the Rio⁴ Conference so that our clear leadership is maintained, because it is our leadership only which in the end will cause sufficient world confidence in the system to make it work. Many steps are possible, among them—

1. Encourage rather than penalize repatriation of capital gain and earnings from abroad—both corporate and individual. This should be same sort of specific moratorium not to go on forever so that it does not inadvertently encourage investment.⁵

2. Provide a more attractive tax result to foreigners investing here.

3. Prohibit the export of capital except under special license to any countries who do not support the U.S. economic [garble—structure by insisting]⁶ on 100 percent conversion of dollar credits into gold. Certainly it would not be unreasonable to expect a friendly country to be willing to hold dollars in the ratio of 3–4 to 1 to their gold withdrawals from U.S.

4. Develop an international monetary system which, while still having gold for support, broadens the base so that the available supply can support a much larger volume of currency, thereby providing international liquidity. This agency should also exert the controls on outside sales of gold if any or newly mined gold and on price or subsidy so as to remove any implication that the strength of the dollar or other currencies would also in any way be affected by the relatively low gold supply.

1. Source: Johnson Library, National Security File, Subject File, 1968 Balance of Payments Programs, Cables [2 of 2], Box 4. Secret; Flash. The source text does not indicate the sending location, but the telegram was probably transmitted from Rome or the Vatican where the President visited the evening of December 23. (Johnson Library, President’s Daily Diary)

2. This introductory paragraph is identical to an undated typed note from President Johnson to Califano, which is attached to an undated paper prepared by Charles W. Engelhard, head of a precious metals company and friend of President Johnson. (Ibid., Subject File, Balance of Payments, Vol. V [2 of 2], Box 3) Except as indicated in footnotes below, the remainder of the telegram is a verbatim text of a December 21 memorandum by Engelhard.

   Engelhard traveled with the President on his December 19–24 trip. This memorandum was one of at least six on the international financial crisis that Engelhard wrote for the President in late December 1967. All are ibid., except for the fifth, dated December 27 (transmitted in telegram CAP 671179 from Rostow to the President and Califano, December 27; ibid., National Security File, Subject File, Balance of Payments, Vol. IV [2 of 2], Box 3), and the sixth, December 30 (transmitted in telegram CAP 671258 from Bromley Smith to Rostow and Jim Jones, December 30; ibid., Vol. IV [1 of 2], Box 3)

3. The italicized words here and below are underlined in Engelhard’s memorandum but not in the source text.
4. “Rio” in the source text corrects the words “Buenos Aires” in Englehard’s memorandum.
5. The word “broader” precedes “investment” in Engelhard’s memorandum.
6. The words inserted here for the garbled text are from Engelhard’s memorandum.