55. Memorandum From John Reynolds of the Federal Reserve System Board of Governors Staff to the Chairman of the Federal Reserve System Board of Governors (Burns)1
- Possible Consequences of Seeking a New Agreement on Gold
The question has arisen whether it would be in the U.S. interest to seek at this time to negotiate a termination of the gold agreement of March 17, 1968, together with a reaffirmation of Article 4, Section 2 of the IMF Articles of Agreement which provides that “no member shall buy gold at a price above par value plus the prescribed margin.”2
It appears likely that the several parties would enter such a negotiation with very different objectives. The U.S. objectives would be (1) to permit market sales of gold by central banks at times when this seemed desirable in order to tranquilize foreign exchange markets, (2) [Page 199] to prevent official purchases of gold at premium prices, and hence (3) to reduce further the role of gold as an international monetary asset.
European countries might share the first objective. But their main interest in gold at the moment is to make use of it in intra-European settlements which, as a practical matter, they are prepared to do only at a market-related price, well above the official price. Some of them, in addition, wish to reserve the right to buy gold in the market as well as to sell. In general, they wish to increase the usability of gold as means of international settlement, and thus to enhance or at least preserve the role of gold, rather than to reduce it.
Against this background, any negotiation to reach a new agreement on gold seems likely to be difficult, and to precipitate decisions about gold that it has so far been possible to postpone, and that might be contrary to broader U.S. objectives in C–20 negotiations.
Even if the European countries were to agree to the suggested communiqué, some of them would wish to let it be known that they reserved the right to conduct inter-central bank dealings in gold at negotiated prices. Some countries not party to the new agreement would wish to stress that they would not be bound by it. The result of such statements might well be to enhance the role of gold as a monetary asset, to confirm market expectations of at least a de facto rise in the official gold price, and to exacerbate a dispute about gold between the United States and other countries which might otherwise have been postponed and defused during a later stage of the reform negotiations.
The U.S. interest in permitting central bank sales of gold to the market is now much less acute than it was in July, when the gold price was above $120 an ounce (vs. less than $100 now) and when the dollar was weak because the U.S. balance of payments had not yet shown its recent strength. It has never been clear that official market sales of small amounts of gold would have useful lasting effects. Also, U.S. sales might precipitate Congressional pressure to allow U.S. citizens to purchase gold, which could add substantially to demand for gold.
The EEC interest in undertaking official gold transactions at market-related prices is much stronger now that there are substantial intra-EEC debts to be settled. But such settlements could be postponed further, or made in dollars, or made in gold-related assets with provision for later revaluation in line with later C–20 decisions. There is little logic in the present European position on gold. On the one hand, European officials oppose small additional issues of SDRs as inflationary. On the other hand, they propose to add billions to gold reserves through a de facto increase in the official gold price.
On balance, it seems to me—and to my colleagues on the staff—undesirable to seek a new gold agreement at this time because the result might be contrary to the longer-run U.S. interest in constructing a [Page 200] sound international monetary system. It may be that ultimately we will have to compromise on gold questions, but if so, it would be useful to save that card for a stage in the reform negotiations when we can get something useful in return.
- Source: Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B52, Gold–BIS Meeting, Nov. 1973. Confidential (FR).↩
- Burns had already proposed this idea to Jelle Zijlstra, President of the Netherlands Bank, in an October 26 letter. A handwritten notation on the letter reads: “not actually sent”; however, another handwritten note indicates that Burns’s proposal was “Read to Zijlstra by phone, 10/26/73.” (Ibid.) The full text of Article IV, Section 2 of the IMF Articles of Agreement reads: “The Fund shall prescribe a margin above and below par value for transactions in gold by members, and no member shall buy gold at a price above par value plus the prescribed margin, or sell gold at a price below par value minus the prescribed margin.” (de Vries, The International Monetary Fund, 1966–1971, Volume II, p. 100)↩