75. Letter From the Chairman of the Federal Reserve System Board of Governors (Burns) to Secretary of the Treasury Simon 1
I have been giving careful consideration to your letter of August 22 on gold policy.2 I certainly agree that you have gone a considerable distance towards meeting my views on the details of your proposals. If you are determined to stay on that path, I will not press further my objection to your suggested rule governing official purchases of gold in the private market (point 2b in your letter). I would assume that, since most of the elements of your proposed position require amendment of the IMF Articles of Agreement, actual transactions governed by a new agreement should probably await completion, or near-completion, of the amendment process; but I do not insist on even that.
Having said the foregoing in the interest of resolving our differences, I feel it is my duty, both personally and officially, to point out once again my reasons for questioning the wisdom of pursuing the path you wish to follow.
First of all, there is no pressure now from our European counterparts to reach additional agreements on gold—at least there is no pressure from the central bankers. This, I believe, is largely attributable to the understanding reached in June, and implemented this past weekend by Italy and Germany, on gold-collateralized loans.3 This understanding went a substantial way towards meeting the practical problem that countries in balance-of-payments need might otherwise have had in utilizing their official gold holdings. I am not aware of any other practical problem that requires early action on gold.
Second, and this is a fundamental point, the appropriate role of gold and other reserve assets in the future international monetary system is still obscure. Little progress has been made in reaching [Page 265]agreement on many aspects of the future world monetary system. Your letter refers to "the agreed goal of phasing gold out of the center of the international monetary system" and the desirability of amending the IMF Articles "to make clear that the SDR now stands at the center of the system." As things stand now, however, such statements are largely rhetoric. Until we and other countries have forged much more of a genuine consensus on the desired shape of the monetary system as a whole, we should not, in my view, isolate the gold question and deal with it apart from other critical issues of monetary reform. Such an effort could unnecessarily weaken our over-all bargaining position.
It seems to me and to my colleagues here that an early relaxation of the present restraints on inter-governmental gold transactions and on official purchases from the private market could well release forces and induce actions (for example, balance-sheet revaluations of official gold holdings) that would increase rather than reduce the relative importance of gold in the monetary system. This may or may not be a desirable outcome; in either case let us be on our guard lest we drift into it.
I hope these thoughts will be helpful to you in preparing for our forthcoming Paris meeting.
- Source: Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B52, Gold, Sept.–Dec. 1974. Personal and Confidential.↩
- Document 73.↩
- On August 31, West German Chancellor Schmidt and Italian Prime Minister Moro announced that the Federal Republic of Germany would loan Italy, which was suffering from a large balance-of-payments deficit due in part to the oil crisis, $2 billion. In return, Italy offered a portion of its gold reserves as collateral. In keeping with the June 11 G–10 agreement on gold (see Document 69), the value of the Italian gold reserves for the purposes of this transaction was assessed at a price above the official price of gold; in this case, the assessment price was 80 percent of the 2-month average price of gold on the open market.↩
- Printed from a copy that bears Burns’s typed signature.↩