76. Letter From the Chairman of the Federal Reserve System Board of Governors (Burns) to Secretary of the Treasury Simon 1
In recent days I have been giving further thought to the several aspects of our gold policy that we recently discussed.[Page 266]
I continue to feel that the legislation permitting ownership of gold by private U.S. citizens as of December 31 is ill-timed. Recent press reports and market talk suggest that there may be substantial investment and speculative interest in gold if, as presently required by law, the prohibition is lifted. There is thus a risk of extreme price movement in the gold market, which in turn could excite speculative interest in other markets. Beyond that, if U.S. citizens actually were to buy large amounts of gold, thrift institutions could experience further disinter-mediation, and there would also be downward pressure on the dollar in exchange markets.
We already have more than enough uncertainty and tension in financial markets at the present time without taking on the additional risks that would be associated with private ownership of gold. In my view, therefore, we should seek repeal of the legislation requiring the termination of the prohibition on ownership.
I recognize, of course, that the President may not find it expedient or desirable to seek new legislation. Moreover, even if he were to decide to do so, it is not at all clear that Congress would be receptive to such a request. Hence plans for implementing the existing legislation must go forward.
In the event that private citizens are in fact able to buy and hold gold after December 31, I feel that the market should be virtually free of governmental intervention. In particular, I would be inclined to oppose at this time any effort to maintain an "orderly market" via sales or auctions out of the Treasury gold stock. The primary argument that has been used by proponents of private ownership is that a prohibition on U.S. citizens' purchases and sales is an infringement of their rights and freedoms. Treasury sales of gold could be viewed as undercutting this philosophy. Moreover, once some Treasury sales had been made, it might be difficult to resist pressures for further intervention in the future—either to support the price or to keep it from rising. All in all, it would seem better to let the market find its own level and bear the costs of any speculative excesses that might manifest themselves at the outset.
Given the uncertain state of the international monetary system, there are other reasons to refrain from selling gold out of the Treasury stock. The role of gold and other reserve assets in the future is still obscure. It would be premature, in my opinion, to begin disposing of our reserve assets on a sizable scale prior to having reached a better international understanding of the respective roles of SDRs, gold, and reserve currencies as official reserve assets.
If private ownership is allowed as of December 31, I recognize that an announcement of policy will need to be made well before the end of December. Such an announcement should leave the Treasury with [Page 267]all its options, including the option of selling gold in case that were deemed best at some later date.