65. Letter From Secretary of the Treasury Simon to the Chairman of the Federal Reserve System Board of Governors (Burns)1
I continue to feel that it is imperative that a comprehensive decision be reached this week on the U.S. position regarding gold. Before placing a recommendation before the President on the subject I would appreciate another opportunity to discuss the matter with you, if possible today.
We are in agreement I think on most points, including the desirability of responding constructively to the European proposals in the current economic situation. I may place greater importance on putting forward a comprehensive set of American proposals now to avoid the danger of divisive actions by the European Community countries. I regard the current occasion, when the C–20 negotiations are coming to a conclusion and when we have the two new financially-oriented leaders coming to power in France and Germany,2 as an unusually good opportunity to see agreement on practical steps toward already agreed basic objectives.
At the same time it is my impression that we are in agreement on the dangers implicit in the specific combination of proposals put forward [Page 243]by the Europeans. To combat the tendencies inherent in their proposals toward re-establishment of an official price for gold you have argued forcefully that we should insist, at least for the time being, that the agreement barring government gold purchases in the market should remain in force.
We agree that governmental sales of gold in the market should continue to be permitted, and I would be prepared to accept your suggestion that we require annual limits on governmental sales to reduce the danger of any immediate inflationary impact.
We are in agreement, I think, that governments should continue, without restriction, to be able to borrow from any source on the basis of gold collateral loans.
We may also agree regarding the desirability of changing the rules to permit the IMF to make some sales from its gold stocks in order to acquire additional resources to aid its members.
You have felt, I believe, that we should not agree to a settlement of the gold issue without first obtaining greater European concurrence regarding some of the important points of our proposals in the monetary reform negotiations. Since there is already agreement embodied in the draft outline of reform on the establishment of indicators I doubt that any more is achievable in that area at the moment.3 Possibly we could insist that the outline be changed to incorporate our long-standing contention that no government willing to obey the guidelines for floating should have to obtain permission from the Fund to float, or possibly to incorporate our position that any major government should honor a request not to increase its investments in obligations stated in the currency of a country wishing to limit the further expansion of obligations denominated in its currency.
Our differences up to now have probably been primarily two: firstly, whether to make known our intent to permit U.S. private citizens to hold gold and to make sales from U.S. stocks to satisfy that demand, and secondly, whether to permit transfers of gold among governments at individually-negotiated market-related prices.
On the first of these points it seems clear to me that the Senate vote yesterday4 and the comments I have heard since then from [Page 244]Congressmen on sentiment in their body on this subject make it most unlikely that we could in any event postpone private ownership past year-end. In fact putting prospective private ownership in our package may actually strengthen our hand in delaying the change while at the same time increasing our credibility and bargaining strength vis-à-vis the Europeans.
On the second point I suggest that our best course at the moment is to set aside the question of just how we will put forward our position in the negotiations to see whether we can at least agree on what outcome of the negotiations would be ultimately acceptable to us. My own feeling, both from an economic and political point of view, is that if we got all the other desirable aspects of the package, including tight limits on the amount of governmental sales during the coming few years, we should be willing to accept a package which would either permit intergovernment sales or establish an IMF warehousing facility or both. If we could reach an agreement on this point perhaps we could then reach agreement on the best order in which to present our negotiating position.
I sincerely hope we can make some prompt progress toward an agreed position.
- Source: Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B52, Gold, May 1974. Confidential. In a May 30 memorandum to Burns, Wallich noted: "Jack Bennett tells me that he is drafting a letter from Simon addressed to you," and offered his comments on the issues he expected Simon to raise. (Ibid.)↩
- On May 19, Valéry Giscard d’Estaing was elected President of France. On May 16, Helmut Schmidt was elected Chancellor of the Federal Republic of Germany. Both men had extensive backgrounds in economics, including service as the Minister of Finance for their respective countries.↩
- In March 1973, the C–20 Deputies agreed to draft an Outline of Reform of the international monetary system. By May 1974, the drafting process was nearly complete.↩
- On May 29, the Senate passed legislation approving a $1.5 billion U.S. contribution to the International Development Association. Included in the bill was a provision eliminating the ban on private gold ownership by U.S. citizens as of December 31, 1974. The President, however, retained the authority to eliminate the ban before year’s end if he so chose.↩
- Simon signed "Bill" above his typed signature.↩