Foreign Relations of the United States, 1973–1976
Volume XXXI, Foreign Economic Policy, Document 97
97. Memorandum From the Chairman of the Federal Reserve System Board of Governors (Burns) to President Ford1
Washington, August 28, 1975.In preparing for the international monetary meetings that will start on Saturday, August 30, the Treasury and the Federal Reserve have agreed on practically all aspects of a U.S. position. Unfortunately, disagreement remains on one fundamental aspect of the U.S. position on gold.
The question at issue is to what extent central banks and governments should be free to buy gold from one another at market-related prices. (Market prices have recently been in the range of $160 to $170 per ounce; the official price is $42.22 per ounce.) The Treasury is willing to accept complete freedom for such transactions. The Federal Reserve believes that some restraint on inter-governmental transactions in gold would be wiser policy at present.
There are five basic elements in the Federal Reserve's stand on gold:
First, a large measure of freedom for governments to trade in gold at a market-related price may frustrate efforts to control world liquidity. Such freedom would provide an incentive for governments to revalue their official gold holdings at a market-related price. (France has already done so.) This in turn could result in the addition of up to $150 billion in international official reserves. Liquidity creation of such extraordinary magnitude would endanger, perhaps even frustrate, our efforts and those of other nations to get inflation under reasonable control.
Second, governments may be tempted to spend the paper profits from revaluing their gold holdings, thus increasing overall spending in a politically easy way—but also intensifying inflationary pressures.
Third, removal of all restraints on inter-governmental gold transactions may release forces that would increase the importance of gold in the monetary system. In my judgment there is a significant risk that the Treasury's recommended position would inadvertently foster, or at least permit, an increase in the relative importance of gold in the monetary system. Indeed, it could well stimulate the formation of a gold bloc in Europe, thereby certainly weakening our international political position and, perhaps, worsening our economic position as well.
Fourth, until we and other countries have forged a consensus on the desired shape of the future world monetary system, we should not isolate the gold question and deal with it apart from other critical issues of monetary reform. Moving ahead on gold in the absence of such a consensus may inadvertently and dangerously prejudge the shape of the future monetary system.
Fifth, there is no compelling practical problem that requires early action on gold issues. Sizable borrowing facilities exist to help countries tide over emergency needs for balance-of-payments financing. Countries needing to use their gold holdings can either sell some gold in the market or arrange to use their gold as collateral for loans. In short, there is no clear economic reason at present for being concerned about deferring a resolution of outstanding gold issues.
In our discussions with the Treasury, the Federal Reserve has diligently sought agreement on the gold issue. I have gone a considerable distance in an effort to narrow our differences:
- (1) I have dropped my earlier insistence that an individual country's holdings of gold be subject to a ceiling.
- (2) I have agreed that the limit on the world stock of monetary gold could be defined so as to include the holdings of the International Monetary Fund in addition to the holdings of member governments. (This implies that sales by the IMF would enable individual central banks and governments to increase their gold holdings.)
- (3) I have proposed the important concession that a government may buy gold from another government if the purchase will accommodate an emergency need by the selling government to mobilize its gold holdings; also that a government which had made a sale under emergency conditions could repurchase that amount from another government without involving the emergency provision.
- (4) I have suggested that all the understandings governing gold transactions be reviewed after one year, not after two years as was proposed in June.
The Federal Reserve's recommendation to restrict intergovernmental transactions in gold commands strong support in the United States among those of the financial and academic communities that are sensitive to these issues. In fact, the Treasury's Advisory Committee on Reform of the International Monetary System, which includes among others several former Secretaries of the Treasury, is inclined to go further than the Federal Reserve in restricting inter-governmental transactions in gold.
Let me say, finally, that if we ever do decide to accept the French position on gold (and this in essence is what the Treasury's position amounts to), we ought at least to extract from them a weighty political quid pro quo. And if there is to be a Summit meeting, and if the Federal Reserve's advice is rejected, would it not be wise to postpone our concession to the French on the gold issue until that time, so that we could get something substantial in return?