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127. Memorandum From Edwin Truman of the Federal Reserve System Board of Governors Staff to the Chairman of the Federal Reserve System Board of Governors (Burns)1

SUBJECT

  • French/U.S. Agreement on the Issue of Gold Purchases

At the International Monetary Group meeting on December 5, Under Secretary Yeo announced that the United States and France had reached an agreement about how to resolve the question of when governments will be allowed to purchase gold from the market or other governments at a price above the official price.2 Following the IMG meeting I had a conversation with Sam Cross in which he briefed me further on this agreement. My understanding of the situation is the following.

1.
De Larosière and Ed Yeo have agreed upon language that might either be used in the January communiqué of the Interim Committee or be used in an IMF decision. Sam Cross read the language at the IMG meeting.

Taking into account the fact that Article IV cannot at present be fully implemented and pending the ratification of the amendment to the Articles, the Fund notes that certain member countries have indicated their intention in order to provide resources for the Trust Fund to reserve the right to acquire at a market price gold paid under Article VII, Section 2(ii).

2.
The points to note about this approach are the following.
a.
The reference to Article IV is a reference to the fact that the exchange-rate (par value) provisions of Article IV have been de facto suspended. As you know, the provisions of Article IV include in Section 2 the restriction on purchases of gold by members at a price above the official price.
b.
The IMF is required only to note the fact that certain members may buy gold at a price above the official price; the IMF is not put in a position of approving such transactions or the technical violation of its Articles.
c.
The agreement to give limited approval to the possible purchase of gold by members at a price above the official price applies only to gold transferred to the Trust Fund (through the replenishment provision of Article VII, Section 2(ii)); it does not apply to other transactions between members or to other purchases from the market.
3.
Now that this language has been worked out with the French, my understanding is that the proposed U.S. approach to this issue is to play a passive role. It is possible that the language will be incorporated in a decision by the Fund (adopted by majority vote); it is now anticipated that the United States would abstain from any vote in the Fund on this question. The objective is to make it clear that the United States will not violate the Articles and will not condone a violation by another member.
4.
The next step is for the French to obtain approval and support for this language and approach from its EEC partners. The language itself, like that of the French/U.S. exchange rate agreement, was closely negotiated and would be difficult to change. We do not know whether or not the Bank of France has been brought into this yet. Nor do we know whether or not the proposed approach will be discussed at the B.I.S. meeting. We do expect that it will be discussed at the meeting of the G–10 Deputies on the 11th and 12th and at the G–10 Ministerial meeting on the 19th.
5.
It is anticipated that the IMF management and staff may raise objections to this approach. It is also possible that some representatives of the LDCs will object. The language will not be shown to the Fund or to countries outside the G–10 until it has been accepted within the G–10. (Some consideration was given to the possibility of postponing the creation of the Trust Fund or its sale of gold until after the IMF Articles are amended; Treasury apparently rejected this approach because it feared that by postponing the Trust Fund we would be opening the Fund up to a number of very undesirable alternative proposals, e.g., extensive borrowing by the Fund or the creation of more special interest subsidy accounts.)
6.
With this latest agreement between France and the United States, the way is now open to resolve all the outstanding issues in Jamaica.
a.
It has apparently been agreed between France and the United States that the Trust Fund proposal will be adopted. The Trust Fund will receive ⅙ of the IMF's gold and will sell it in the market over a period somewhere between the 3 years proposed by the United States [Page 457]and the 8 years proposed by the IMF staff; of course, some of the gold might be purchased by governments at the market price. (I remain somewhat skeptical that all the roadblocks have been cleared away, but it is possible that they have been.)
b.
The effective date for the two-year period envisaged in the August 31, 1975 G–10 Agreement on gold3 presumably will be January 1976.
c.
On the question of immediate "restitution" of the other ⅙ of the IMF's gold to members, Sam Cross thinks that it has been agreed with France that the Fund should adopt the so-called "general deposit" scheme whereby countries are able to count the gold in their reserve while the Fund retains legal claim on it. Priority use of the replenishment mechanism would be reserved to the channeling of gold to the Trust Fund.
7.
In light of these developments, it would appear that we need to anticipate the coming into force of the G–10 agreement on gold at an early date.
  1. Source: Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B63, International Finance—General 1975 (1). Strictly Confidential (FR). Copies were sent to Wallich and Solomon. Attached to a December 8 note from Truman to Burns that reads: "Attached is a memorandum summarizing my understanding of a French/U.S. agreement that attempts to resolve the question of when and under what conditions countries will be able to purchase gold at a price above the official price. I will be leaving Washington on Tuesday evening, December 9, to join Governor Wallich for the meeting of G–10 Deputies on the 11th and 12th. I think that it would be very useful to Governor Wallich and to me if you could give me your reactions to this proposal before I left on Tuesday."
  2. See Document 126.
  3. See Document 101.