22. Memorandum From the President’s Assistant for National Security Affairs (Kissinger) to President Nixon1
- U.S. and South Africa Reach Understanding on Gold
At Tab A is an information memorandum from Treasury, alerting you to the possibility of an early understanding between the United States and South Africa on the marketing of South African gold. Such an understanding has now been reached. Treasury issued a press release this morning announcing “that a basis for a satisfactory mutual understanding may be emerging.” (Tab B)2
The major countries adopted the two-tiered gold system in March 1968 to divorce the monetary and private markets for gold—monetary gold now moves between national authorities at $35 per ounce while all other transations take place in private markets at whatever price develops from supply and demand. This means that monetary authorities no longer sell gold to private parties to hold the price to all comers to $35.
The agreement was a response to the crisis which began with the devaluation of sterling in November 1967 and which bled $3 billion of official gold—most of it from the U.S.—into private hands. It remains of critical importance to the United States because it prevents private purchases of gold from draining U.S. monetary reserves, and we are its primary policemen.
The two-tiered system has worked so well that it now faces a problem opposite to the problem which caused its creation: far from worrying about increases in the gold price, there have recently been sharp price declines. In fact, the free market price has declined precisely to $35—the official price. The decline has occurred because of strengthened confidence in the dollar, the decision to activate Special Drawing Rights as a substitute for gold to augment international liquidity, and the lure of Eurodollar deposits yielding more than 10 percent.[Page 67]
These price declines cause problems for the South Africans, whose major export is gold. They also arouse great concern among some of the European monetary authorities, who fear that the value of their gold reserves will come into question if the free market price drops below the official price. The two-tiered system is indeterminate on what happens at this point.
We therefore came under pressure from both South Africa and the Europeans to agree to an arrangement which will place a $35 floor under the free market. Our interest in doing so was essentially to pacify the Europeans, whose cooperation we need continually in international monetary matters—and who may have to hold a great many dollars next year if our balance of payments turns as sour as most experts expect. In addition, absent a U.S.-South African agreement it was possible that the Europeans would make their own deal with South Africa, or set up a pool among themselves to support the gold price, either of which would lead to disorderly market conditions and a serious departure from our normal monetary cooperation.
Treasury therefore negotiated an understanding with South Africa on the basis of a proposal which we had had on the table since last spring, but which South Africa had heretofore not accepted:
- All newly mined gold to be sold into the free market when the price is above $35.
- Sales to monetary authorities, probably through the IMF, permitted when the free market price drops below $35.
- Sales to monetary authorities permitted when South African balance of payments deficits in a given time period exceed its gold production during that period, after all of that production is sold into the free market.
- Sales to monetary authorities also permitted from a small “kitty” of around $250 million, representing some of South Africa’s gold reserves at the time the two-tiered system was inaugurated.
The understanding assures the maintenance of the two-tiered system and assures that most of South Africa’s gold will go into the free market, holding down the price and therefore promoting confidence in the official price of gold. It does not provide a legal floor for the free market, although it comes close to doing so psychologically.
Any U.S. understanding with South Africa will of course be subject to some political criticism. In addition, some international monetary experts—including Representatives Reuss and Widnall, the most knowledgeable Congressmen in this area—are opposed to any U.S. conces[Page 68]sions on gold. (Reuss’s Joint Economic Subcommittee has just issued a report opposing any settlement with South Africa.)
The U.S. proposal was developed solely on its monetary merits, however, and will be readily justifiable. The understanding will clearly be part of an international endeavor, with the European countries and the IMF, and Treasury’s press release makes this clear. The agreement should not cause any significant foreign or domestic political problems; failure to settle would clearly have caused problems with some of the Europeans, and now was the best time to settle in view of the mechanism of the gold price and hence South Africa’s negotiating position. State was fully involved in the development of the U.S. position and concurs with it.3
- Source: National Archives, Nixon Presidential Materials, NSC Files, Box 744, Country Files, Africa, South Africa, Vol. I. Confidential. Sent for information. A stamped notation on the first page indicates the President saw it. Kissinger wrote on the first page: “see note” (see footnote 3 below).↩
- Tabs A and B are attached but not printed.↩
- In a December 22 memorandum to Kissinger, Bergsten noted: “State in fact helped Treasury draw up the negotiating position for the understanding and fully agreed with it.” (National Archives, Nixon Presidential Materials, NSC Files, Box 744, Country Files, Africa, South Africa, Vol. I) On December 29, Nixon wrote at the bottom of the last page of Kissinger’s memorandum: “I approve—We had better look after our own interests where national security + int’l monetary matters are involved.”↩