79. Memorandum From Henry Wallich, Member of the Federal Reserve System Board of Governors, to the Chairman of the Federal Reserve System Board of Governors (Burns)1
- Note Concerning Gold Discussions at Martinique
From the Reuters report of Bennett’s statement, it appears that a major change of emphasis is planned in our gold policy.2 While we still ask for a transition period during which central banks cannot buy gold in the market or from each other at market-related prices in excess of previous sales, this transition period, which in the past seemed to be the principal rule of policy, now seems to become an exception, with the absence of such restraints after the transition being treated as the significant feature.
The principal objections to such a shift are:
- It should not be negotiated with the French alone, but with other interested countries, some of whose positions on gold have been influenced by our past positions.
- This policy is in conflict with our own action in selling gold. We are reducing our own holdings of a reserve asset while enabling other countries to make more effective use of theirs for monetary purposes.
- The danger of a new and higher official gold price becomes more concrete. It is true that such a price, in order to be made to stick, requires a willingness of one or more central banks to buy all the gold that is offered at that price. I doubt that there is such a central bank today. Thus, there seems no great immediate danger of a return to the Bretton Woods system or the gold standard. But it is probable that gold will have been moved closer to the center of the monetary stage.
One useful purpose served by a policy of freeing the use of gold is that in times like these we may like to see countries have maximum reserves in order to maintain liberal trade policies. I am tempted to argue that the emergency is sufficiently serious to justify postponing our long-term objectives for the world’s monetary system, which involve elimination of gold. But obviously there are means of supplying gold-holding countries with credit that would have the same favorable effect on their trade policies, if the credit terms are made easy enough.
From the briefing paper for the President3 it would appear that Treasury sees a basis for understanding with the French because the French have made what seems to me a semantic concession concerning the treatment of gold as a commodity. This surely is not a change of mind on their part concerning the basic importance of gold. Hence agreements based on this misleading appearance of a common ground are likely to prove disappointing.
- The memorandum to the President does not propose to trade our position on gold for the French position on oil. Apparently there would be no further benefits from making concessions to the French viewpoint on gold.4
- Source: Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B52, Gold, Sept.–Dec. 1974. No classification marking.↩
- Bennett’s statement was not found. However, on December 11, the Los Angeles Times published a Reuters report on comments made by Simon on December 10 about the issue of gold at the U.S.-French meeting at Martinque. The report noted: "The United States is now saying that provided suitable arrangements can be made for a transitional period—from a position where gold still forms a large percentage of official reserves to a situation where it is regarded as a ’commodity’—then central banks should be free to buy and sell. But Simon said that the United States wanted to be sure that any transitional arrangements imposed limits which would not have the effect of placing gold more securely at the center of the financial system."↩
- Document 78.↩
- Solomon and Bryant also had objections. In a December 11 memorandum to Burns, Solomon asserted that to accept Bennett’s proposal would be to concede "the position that the French took throughout the C–20 discussions" and "to promote the role of gold in the future monetary system." Solomon commented: "It seems a shame to decide this one aspect of reform now, especially when none of the other Europeans is pressing the issue. We certainly do not need to make this concession to the French to get them to agree to the U.S. recycling proposal, given France’s balance of payments vulnerability." On December 12, Bryant wrote a memorandum to Burns in which he also warned that the "early relaxation" of the rules on official gold transactions could "increase rather than reduce the relative importance of gold in the monetary system." Bryant continued: "Even if one thought it desirable to push ahead on the gold question, would it be the best course to strike an understanding in bilateral conversations with the French? Does France have enough to give us, even in the area of energy policy, to make it worthwhile playing the gold chip bilaterally with them?" Both memoranda are in the Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B52, Gold, Sept.–Dec. 1974.↩