25. Memorandum From Secretary of the Treasury Dillon to President Johnson1


  • The Current Gold Situation and Future Prospects

For the year 1964 total U.S. gold losses amounted to $125 million. Of this, $36 million was lost in transactions with foreigners and $89 million went to meet domestic industrial and artistic needs. This compares with a total loss in 1963 of $461 million, of which $392 million went to foreigners and $69 million was required to meet domestic needs. The fourth quarter showed an overall loss of $172 million, of which $95 million occurred during the month of December. The sterling crisis increased our losses since some of the funds flowing out of London went to countries which traditionally hold their assets primarily in gold, and they thereupon converted these extra dollars into gold. For instance, during the fourth quarter we sold $40 million to Belgium, $60 million to the Netherlands, and $51 million to Switzerland.

The $36 million overall loss to foreigners in 1964 was the net result of very much larger purchases and sales. Total sales amounted to approximately $943 million, which was largely offset by purchases of $907 million.

The immediate prospect for early 1965 is for a substantial acceleration in the gold outflow. This is due to a number of factors, the most [Page 72] important of which relates to decisions about to be taken by the French Government. We have had a number of informal exchanges with the French in which they have indicated that it is their intention to convert their excess dollars into gold by purchase from us. They have told us that they consider their excess dollars to be those above the amount required for a comfortable working balance plus enough to cover their post-war debts to the U.S. and Canada. On this basis they have told us that they would continue to hold about $1,100 million in dollars.

The French now hold about $1,400 million in dollars so we can look forward to conversion of about $300 million. They apparently have not yet decided on the timing of this conversion. They have mentioned a number of possible alternatives, one of the latest of which involves the conversion of $150 million during January.

An AP story from official French sources today indicates that the possibility of some advance debt repayment remains open. However, we cannot count on this. The whole matter has evidently been the subject of controversy within the French Government over the past few weeks. We should know the definite answer this week or next.

In addition to this conversion of existing balances, the French tell us they will convert any 1965 balance of payments surplus to gold on a monthly basis. If their surplus continues next year at the same rate as 1964, their monthly takings would be nearer $50 million than this year’s $34 million.2

In addition to the French purchase, the Spaniards have stated their desire to purchase $210 million of gold over a seven month period. The first $30 million was sold to them during December. This program is designed to restore their gold ratio by July 1 to its former level of approximately 50% from its present 40% level. The Spaniards ran a surplus of over $300 million during 1964 and took no gold at all so that their gold ratio substantially declined. They expect some further surplus during the first part of this year and their purchase program is designed to offset both last year’s accumulations and their expectations for the first part of 1965.

The third unfavorable factor in the situation is the prospect that Soviet sales of gold during 1965 will drop back to their normal annual level of between $200 million and $250 million. Last year their sales totalled approximately $435 million, all during the early months of the year. The year before they ran over $500 million. These extra sales were used to finance the purchase of wheat from Canada and the U.S., and are no longer required. Lower Soviet gold sales will reduce the flow of gold [Page 73] into the London market and hence reduce the gold we might otherwise expect to receive as our share of the operations of the London gold pool.

During 1964 we received $393 million from the operations of the London gold pool, all of it during the first three quarters of the year. During the fourth quarter the U.K. crisis unsettled the gold market, and the entire supply was taken by private sources with nothing available for Central Banks. In fact, there was a deficit of somewhat over $50 million in the operations of the gold pool which was met by reducing the jointly owned “kitty” from $40 million to under $10 million, as well as by some unilateral support from the U.K.

The net of all this is that our likely losses of gold to foreigners will be at least $500 million during 1965. Most of the loss should occur during the early part of the year when the French are expected to convert their excess dollars. This is a conservative estimate. Without substantial improvement in our balance of payments, losses to foreigners could easily reach or exceed the roughly $800 million levels of 1961 and 1962.

Douglas Dillon 3
  1. Source: Johnson Library, Bator Papers, Balance of Payments Message, February 10, 1965, Memos [2 of 2], Box 16. Confidential.
  2. Beginning here and extending down the next two paragraphs are several marginal handwritten numbers and arithmetical calculations.
  3. Printed from a copy that indicates Dillon signed the original.