145. Editorial Note

The gold communique of March 17, 1968, established the two-tier gold market where monetary gold would be exchanged among official authorities at the official price and the free market would determine the price for all other uses. Monetary authorities would no longer buy gold from the private market, including new production. See Foreign Relations, 1964–1968, volume VIII, Documents 187191 for background on the creation of the two-tier gold market.

How gold from South Africa, the largest producer, would be marketed was not settled at the time of the March 1968 communique and was under discussion until resolved in December 1969. In fact, all signatories of the communique and most other members of the IMF eschewed purchases of gold from South Africa but, according to a July 30, 1969, memorandum from T. Page Nelson, Director of the Office of International Gold and Foreign Exchange Operations, to Treasury Under Secretary Volcker, there were at least three exceptions, Portugal, Congo (Kinshasa), and Singapore. Nelson suspected the South Africans had made a vigorous effort to sell gold to monetary authorities and concluded the amount sold, perhaps $80 million, was a very poor showing. This memorandum, documentation on exchanges between Under Secretary Volcker and South African authorities, and a December 9 report to the President from Acting Treasury Secretary Charls Walker entitled “Possible Understanding with South Africa on Handling of Gold” are in the Washington National Records Center, Department of the Treasury, Files of Under Secretaries Deming and Volcker: FRC 56 79 14, Subject Files, South African Gold.

During 1969 there was an active exchange of cables between Washington and the Embassy in Kinshasa with instructions for the Embassy to protest Congolese purchases of South African gold with Congo’s Central Bank Governor Ndele and, on at least one occasion, President Mobutu. This exchange of cables and related memoranda are in the National Archives, RG 59, Central Files 1967-69, FN 19, FN 17, FN 10, and FN 10 IMF. Some of the outgoing messages were drafted in the Treasury Department and forwarded to the State Department for clearance and transmission; others were drafted in State and cleared with Treasury.

Early in the exchange Washington agencies noted, for Ndele’s information, that the purchase by the Congo Central Bank was in violation of the U.S. understanding of Congo’s intentions and was upsetting the international monetary system. In addition, Congolese gold purchases might cause problems elsewhere in the bilateral relationship as [Page 390] Congress, questioning the propriety of a less-developed country holding its reserves in a non-earning asset, had sometimes considered amendments to the Foreign Assistance Act prohibiting aid to countries buying monetary gold. Since Congo had purchased the South African gold at $35 per ounce and the free market was then at $42, the Embassy was instructed to request that Ndele resell that gold in the free market, reap the profit, and be in conformity with the communique. (Telegram 17644 to Kinshasa, February 4, 1969; ibid., FN 19)

In their rebuttal to Ndele’s negative response to the Embassy’s initial demarche, Washington agencies explained on February 19, in telegram 26264 to Kinshasa, that the position on purchase of newly-mined gold was not specifically spelled out in the March 17, 1968, communique because Canada and Switzerland had been unclear about their legal authority to refuse to purchase. Shortly after the two-tier system was established, however, four of the largest gold-producing countries after South Africa (Canada, the United States, Australia, and Japan) took steps to have their new production go into the free market and not into monetary reserves. Washington agencies pointed out that the signatories recognized that the two-tier system could not operate effectively if the world’s largest gold producer could channel its output to either market depending on which would give it the greatest benefit. In support of that point they quoted from an August 1968 speech, which was not further identified, by Bundesbank Director Otmar Emminger:

“At present it seems to be South Africa’s main objective to obtain the right to sell gold at the fixed official price to the IMF at its own discretion. If this privilege were granted to South Africa it could decide at will what share of its newly mined gold to sell on the free market and what share at the fixed official price. As a monopolist it could thus reap the highest possible profit. Much more important, and objectionable from a monetary point of view, would be the possibility for South Africa, by manipulating its sales of gold on the free market in an erratic way, to keep the gold market in a state of constant unrest and thus make the gold price a subject of permanent discussion and speculation.” (Ibid.)

The exchange between the Embassy and Ndele continued amid reports of additional Congolese gold purchases, and at one point it seemed agreement might be reached for Congo to sell its South African gold purchased after March 17, 1968, on the free market and replace that gold with monetary gold from the United States.

On the fringes of the 1969 annual meetings of the IMF and the IBRD in Washington, Ndele met with Under Secretary Paul Volcker and Federal Reserve Board Chairman William McChesney Martin on October 1. According to the report of this meeting, Ndele told Volcker and Martin that he thought he was doing the United States a favor by [Page 391] not asking to buy U.S. gold in view of the pressure France and other governments were applying to U.S. gold reserves. Regarding the U.S. suggestion that Congo sell on the open market gold already purchased from South Africa and then purchase an equal amount from the United States, Ndele said he could not do that because he had given his word to the South Africans. Going back on his word, even to South Africans, would blot his personal integrity in international banking circles. Nonetheless Ndele said that he had no special interest in South Africa and would much prefer dealing with friends as long as he could be assured of having future gold needs met under the same conditions. Volcker said the United States would be happy to consult with Congo about future gold requirements, including buying and selling arrangements, provided Congo agreed to operate within the limits set by the two-tier system with respect to purchases from South Africa. Ndele finally agreed, and following a review of Congolese gold policy, during which Ndele revealed that gold was 40 percent of Congolese reserves, Ndele ended the discussion saying at that point he had no intention of purchasing more gold. (Telegram 170804 to Kinshasa, October 8; ibid., FN 17)

As discussions with South African officials on marketing new production and sales from South African reserves and the dialogue with the Congolese were ongoing during 1969, the free market price of gold declined, causing concern in some official circles that it might fall below the official monetary price of $35 per ounce. In early December 1969 Treasury Secretary Kennedy, accompanied by Under Secretary Volcker, traveled to Europe as part of the U.S. delegation to the December 4-5 NATO Ministerial meeting. They met with Belgian and European Commission officials in Brussels and, on side trips, Finance Ministers and Central Bank Governors in London, Paris, Bonn, The Hague, and Rome (Volcker only). The gold price and the marketing of South African gold featured prominently in their consultations. Memoranda of those conversations are in the Washington National Records Center, Department of the Treasury, Secretary’s Memos/Correspondence: FRC 56 74 7, Memorandum of Conversations—1969.

Volcker met with South African officials in Rome on December 13-14, and the agreement they reached was ratified by the IMF on December 30. In effect, whenever the gold price was above $35, South Africa would market gold on the free market in amounts needed to meet its need for foreign exchange, and any additional production would be added to South African reserves. When the price was at $35 or below, South Africa would market newly-mined gold to the IMF at $35 to meet its foreign exchange needs, and if new production was less than adequate to meet current foreign exchange requirements, South Africa would be permitted to sell the IMF gold accumulated in South African reserves since March 17, 1968. See Margaret de Vries, The International [Page 392] Monetary Fund 1966-1971, Volume I: Narrative, pages 409-415, for the IMF’s history of the resolution of the South African gold problem.

A number of U.S. Government, foreign government, and IMF papers on South African gold are also in the Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30.