84. 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
From conversations I have had with Jack Bennett, it is my impression that Treasury wants to shift somewhat their position on inter-central bank gold transactions. Bennett now seems prepared to start his negotiation in Paris with the position that central banks should not deal with each other in conformity with our position. However, he argues strongly that this position is not saleable. I interpret this to mean that if you insist on this position, Bennett would not retreat from it and would have to accept failure of the negotiation. This should be clarified to make sure my understanding is correct.
As a possible basis for getting an agreement, I raised with Bennett, without committing you, the following two-pronged alternative:
- Distinguish between inter-central bank gold sales that reflect an emergency situation for the selling country, such as a sharp drop in reserves or a large prospective deficit, and the use of gold in routine transactions such as intra-snake settlements. The former would be permitted, the second ruled out.
- To balance off this softened position, the ceiling on the world's official gold stock would be lowered over time, along the lines suggested in our luncheon conversation with Witteveen.2 No country would be required to sell gold as the ceiling moved down, but repur-chases of gold previously sold to the market and perhaps also intra-central bank "emergency" sales, would be progressively limited by this descending ceiling.
The descending ceiling might strengthen our position in negotiations with the French. It would be a hint that the U.S. might continue to sell gold. A decline in the price of gold is of course what the French most fear, with regard to their official holdings as well as their large private holdings.
Some further flexibility could be injected into the U.S. bargaining position by being more accommodating on the treatment of the gold [Page 285]held by the IMF. Our main objective would be not to keep this gold completely frozen in the IMF but to use it or dispose of it in some way. My preference would be to let the IMF use it for the benefit of the LDC's, by some such method as the trust fund proposed by the U.S., which is to be partly financed by profits on IMF gold sales. The French want restitution of the Fund's gold to the original contributors at the official price. While an inferior method, this would nevertheless serve to dispose of the fund's gold and get the problem out of the way. The fund's resources can always be increased, if necessary, by quota increases.