153. Paper Prepared in the Department of the Treasury1
U.S. NEGOTIATING POSITION ON GOLD
The official dollar gold price would not change
The United States would make clear at the outset of negotiations that it does not regard any change in the official price of gold as part of the negotiations. This posture will be necessary because the French, with varying degrees of support from countries such as Belgium, Switzerland and certain elements in the United Kingdom, may seek a devaluation of the United States dollar in terms of gold. French private citizens hold large amounts of gold on which they would like to make a profit, and Swiss bankers have substantial holdings for their clients and have been managing South African gold sales and on occasion, trying to stimulate gold speculation by their actions and speeches. Both French and British financial interests hold large blocks of South African gold mining stocks. A rise in the official gold price would help the private holders by raising the private market price and enlarging the scope of that market, in the judgment of the French and Swiss.
Fortunately the Germans and Italians do not favor an increase in the gold price, so that the French are unlikely to achieve a unified position in the European Community. The Germans and Italians hold very large reserves in dollars, on which they would gain no profit if the official gold price rose. Their officials might even incur criticism because other countries had profited by holding a larger share of their reserves in gold. The Japanese and even the Canadians could also be embarrassed.[Page 428]
The French argument
The main argument that the French may make is that the United States as the deficit country should devalue, because we have sinned and should expiate. Other countries (France) have devalued and the United States should behave like other countries and do so. Surplus countries should not have to revalue because the United States does not wish to change the price of gold, particularly since these surplus countries have followed virtuous anti-inflation policies and kept their balances of payments in order.
The French suggest a moderate increase in the official dollar price, while other countries maintain their existing gold prices or raise them to a lesser degree than the United States thus effecting a change in IMF parities (which are stated in gold) that would depreciate the dollar exchange rate in terms of their currencies.
In effect, the French attitude boils down to the suggestion that if the United States does penance and helps the private gold holders to make a bigger capital gain, this would ease the discomfort of appreciating their exchange rate and becoming less competitive with the U.S. in the U.S. market and world markets.
U.S. counter arguments
Against this point of view, the United States would make the following counter arguments:
- The deficit is only partly due to U.S. economic policies. While the United States at some periods has augmented its balance of payments deficits by inflationary policies, our record of price stability was much better than all major countries except Belgium and Germany in 1950-65, and slightly better than these two. U.S. deficits have also been forcefully affected by (a) our heavy external costs for military expenditures to protect Europe and Japan, (b) by trade practices abroad that have cut back the growth trend in our agricultural and other exports, and (c) especially by the undervalued exchange rates which were fixed in the forties and fifties, at a time when foreign productive capacity was abnormally low relative to foreign demand, and which have been jealously preserved for trading advantage. Moreover, the recent large short-term flows have been due to divergent monetary policies in the U.S. and Germany—both needed for their domestic situations.
- Other countries decided to peg to the dollar long ago. Other countries decided long ago to use the dollar as a reserve currency and to peg their currencies to the dollar. By doing so, they took to themselves the responsibility for fixing exchange rates, leaving the U.S. in a passive position, and have prevented their currencies from rising in response to natural market pressures that would have caused these currencies to [Page 429] appreciate. Some have devalued whenever their competitive position was weakened, and this fact raises questions as to whether they could be counted on to maintain their initial appreciation vis-à-vis the dollar under the French scheme.
- A moderate gold price increase would be unstable. A moderate increase in the official gold price would be analogous to the “Munich settlement”; it could quite likely last only a short time—perhaps less than a year. It would establish a strong presumption that the prescription would be repeated if speculative pressures again became strong, and dollar reserves built up abroad again. Because central banks holding gold would have gained a gold profit, while holders of dollars would not, many central bankers would face public criticism for holding dollars. This would be likely to induce substantial requests for conversion of dollars into gold, especially by smaller central banks. U.S. gold reserves could shrink fairly quickly, offsetting or more than offsetting the devaluation gold profit (which itself would be about matched by a write-up in our gold guaranteed liabilities to the IMF and other international agencies). This factor of additional drain on U.S. reserves for conversion arises from the re-emphasis on gold inherent in the change in the U.S. official gold price. It would not be present if exchange rates are adjusted without a change in the dollar price of gold.
- SDRs are better reserves for the future than gold. It is highly desirable to continue the trend toward greater reliance on SDRs than gold for international reserves. The fact that there has been a private commodity market for gold, in competition with monetary use of gold, subjected the monetary system before the two-tier system to speculative drains of gold to private hands, which weakened all currencies. The SDR and the two-tier gold system recognized that gold was no longer satisfactory as a source of reserve growth, and, if so, there is no logic to increasing the official gold price. It would be turning back the clock.
- A gold price increase would be hard on those who have held dollars. An increase in the gold price is discriminatory and inequitable. It enlarges the reserves of those countries that hold gold, while leaving unchanged reserves held in the form of dollars. This is unfair to some of our closest cooperators, and benefits a few large gold holders who do not need reserve writeups.
- It could weaken the two-tier gold system and benefit gold producers and speculators. The psychological reaction of raising the commodity price of gold would benefit Russia, South Africa and other producers as well as private hoarders and speculators. The spread between the official and private price might well widen, and this could make it harder to maintain the two-tier system. The system was regarded as favoring [Page 430] the United States rather than the French gold philosophy, and a gold price rise would sow new doubts.
- Differential rather than a uniform exchange rate adjustment is needed. The Japanese adjustment, for example, might need to be steeper than the European, and all the Europeans might not be the same. To cover this spread the U.S. change in gold price could be undesirably large.
- The U.S. would convert dollars into SDRs instead of gold. With major modifications in exchange rates and other improvements that should make the future drain on U.S. reserves manageable, the U.S. is prepared to resume responsibility for conversion of dollars into international reserve assets, which it alone has carried since 1945. But it would convert official dollars into SDRs or other claims on the Fund, rather than gold. We would use gold as needed to acquire these assets from the IMF. This procedure would continue the gradual evolution of the monetary system toward SDRs as the basic reserve asset, with gold gradually declining as a portion of world reserves. This process has already gone a long way, since gold reserves represented only 40 percent of global reserves at the end of 1970, as compared with 70 percent in 1948. Turning back the clock would be a very serious decision, and would be resisted in many quarters of the academic, banking and Congressional world.
- Congressional opposition could be strong. A number of influential members of Congress (Patman, Widnall, Senator Long, Reuss, Senator Bennett) seem likely to be doubtful or critical. Some don’t like to pay out gold to foreigners. Some want to de-emphasize gold. Many are likely to feel that the Executive should have specific Congressional authority, and a Congressional debate could lead to very serious market uncertainty and speculation. The attached correspondence with Congressman Reuss has been accepted by Congressman Reuss as indicating that action would not be taken without Congressional approval. If this were not the Treasury view, he had indicated that he would submit legislation making this quite specific. (See attached correspondence.)2
- A massive gold price increase would be generally rejected in a worldwide inflationary period. A doubling of the price of gold at one swoop, as recommended by Rueff of France for many years, is probably not likely to be put forward now. We understand Rueff himself no longer puts it forward, as it is too unrealistic. It would be resisted very widely as it [Page 431] would enlarge world reserves by about $40 billion all at once. The 1970 addition to world reserves was $14 billion. Such a large increment to world reserves, even though initially immobilized in central bank reserves, would have a marked inflationary potential. It would probably be resisted by most members of the Fund, and by U.S. public opinion. One danger of a moderate change in the gold price is that by a series of crises, the same result might be approached.
- Source: Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning 1971. Confidential. A typed note at the top of the page reads: “2nd Draft 5:00 p.m.”↩
- Not printed. Attached were a February 6, 1969, letter from Secretary Kennedy to Congressman Reuss reaffirming the position taken in a January 23, 1968, letter from Under Secretary Barr to Reuss, and a copy of Barr’s letter. It was Barr’s view that the $35 per ounce price of gold notified to the IMF could only be changed by Congressional action.↩