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d e c l a s s if ie d Authority NARA Date Ms&> CONFIDENTIAL Office Memorandum to : Mr. Volcker from : William B. subject ^ DATE: isMarch 10, 1969 : Limited Gold Convertibility in a Cooperative Framework I have become convinced that gold convertibility of the dollar cannot be maintained indefinitely. One of the reasons is the lack of discipline on surplus countries, and the fact that the medium-term outlook for the U.S. bal ance of payments appears very bleak in the absence of substantial appreciation of the currencies of surplus countries. £ The question is thus when, in what circumstances, and to what purpose the United States will decide to alter the present unlimited full gold con vertibility of the dollar at the initiative of others. I think there is a strong case to be made that this should be done sooner, rather than later. In the right framework, breaking the full-scale link to gold can, in my judgment, have quite limited cost to us and can play a very important role in forcing other countries to recognize the steps that are needed to create adequate reserves for the world and improve the adjustment process. At present we have what I would call "pseudo" gold convertibility of the dollar. We do not formally turn anyone down when he asks for gold, but we make very clear we are unhappy if he asks. One of the reasons I would prefer to alter the existing gold convertibility is that I consider what we have to be a sham. There is a significant— if unquantifiable— cost to the United States in abiding by the letter of the law on gold convertibility when everyone knows that it is impossible for us, or them, to act according to the spirit which the law was intended to capture. I hate to have the United States leaning on legalisms, and other people snickering when we say we "freely" sell gold. We have spoken quite a lot about the circumstances in which the United States might "break the link," but we have hardly considered at all what we would do afterwards. As regards the initial act of altering gold convertibility, __ p. I believe upon reflection, that the atom bomb analogy is not only wrong but j misleading. It is true that breaking the link is an important act. But it 1] L is not necessarily destructive and disruptive. If done with cold logic, and M7\ followed up on the basis of a genuinely cooperative policy, I think it could *** » earn us the respect of the world— in the same way a decision to devalue, or not to devalue f earns admiration when taken in the right conditions# I would like to see us earn the respect and admiration of the world by breaking the link in two ways: 1. Doing it on our own, as the result of a deliberate and states manlike decision for which we would take full responsibility, and not doing it by way of hiding behind some convenient crisis that happened to come up frcm one direction or another; and CONFIDENTIAL DECLASSIFIED Authority M lv f P ^ K NARA Date CONFIDENTIAL - 2. 2- Replacing the existing "free" and "full" convertibility link (which we and everyone else knows is neither really free nor really full) with a conditional convertibility whose substance could be recognized by all as fair and reasonable. It is clear, at least to me, that we must have some rule for limited gold convertibility after we break the link. Sales of gold at our initiative is not a satisfactory rule, unless we are clear under what circumstances we will sell, and when we won*t. In fact, we must assume, as the most reasonable basis for policy, that the dollar will continue to be the reserve and vehicle currency. That implies that we will continue to have a passive market inter vention policy and a passive conversion policy, rather than an active policy on either score. The task for us is to decide when we will convert at other peoples’initiative, and when we won*t. The rules for conversion must be simple, quantitative (rather than qualitative), universally applicable, consistent through time, and such as to be everywhere recognized as sensible and fair, for ourselves, for other countries, and for the system. I would suggest the following rule for gold conversion: The United States would sell gold for dollars at $33 (less charge) to any Fund member in an amount which did not bring that members official gold holdings to a higher percentage of imports than was borne by U.S. gold holdings after the transaction. The import reference would be imports for the most recent 12 months for which statistics were available, provided the data were not more than three months in arrears. In the event of any dispute over the appli cable data, the Managing Director of the Fund would be requested to make a determination, and the United States would accept his determination as final. The attached table gives information on gold holdings and imports of countries. It shows there are eight countries to which the United States tr would not sell gold under the rule I have suggested, the major one being l| Switzerland. \I Under this rule, on the basis of existing data, the maximum theoret ical gold sales by the United States would be in the neighborhood of $7 bil lion— at which point U.S. gold holdings (about $3*8 billion) would be a little less than 10 per cent of U.S. annual imports, and no other country would hold any smaller percentage of its imports in gold. As a practical matter, I believe gold sales under the rule would be quite -unlikely to exceed $2 .5 to $ 3.0 billion at the outside. The proposed rule focuses on gold in relation to imports. It would be better to have such a rule relating gold to total current payments, or even to total gross payments (current and capital), but statistical inade quacies make that out of the question. It is, in any event, preferable to focus on a relationship to imports, as a rough-and-ready indicator of gold reserve adequacy, rather than to base any rule on the percentage of aggregate reserves carried in gold. In this way, some added pressure is placed on CONFIDENTIAL DECLASSIFIED Authority NARA Date V /V o ^ CONFIDENTIAL -3countries with high over-all reserves that want to carry them in gold. It would also avoid the statistical problems of defining reserves and worrying about quasi-reserves. Four other things about the proposed rule are worth mentioning: 1. It does not claim any special dispensation for the United States itself. We would step up and be compared to any and every country on the basis of substantive and exact criteria that can be applied to everyone. This is an important ad vantage in seeking to project the image of being reasonable and fair in breaking the link. 2. The incentives are in the right direction. If we were to restrict imports, the result would be a higher gold/import ratio, and we would be subject to greater gold sales than otherwise. If another country were to restrict imports, it would have a higher gold/import ratio, and would be able to buy less gold from us. 3. The rule is a dynamic one. It could apply to any situation at any time in the future. If our imports rise faster than someone else *s, our gold/import ratio will fall and we will be subject to less gold sales. If someone else's imports rise faster than ours, his gold/import ratio will fall, and he can qualify for a larger purchase of gold from us. The rule could even continue to apply if the official price were to rise at some future time. The rule would be consistent with the position of moving in an evolutionary way from the present dependence on gold as a reserve (especially on the part of the United States) to greater reliance in the future on SDR 1 s. The table shows some interesting things. Particularly interesting are the relative positions on thisbasis of Italy, France (even after large gold sales), Germany, the Netherlands and Belgium. I urge that consideration be given to replacement of the present gold conversion policy by the gold conversion rule I have suggested. In my view, this should be done immediately and in the absence of a crisis atmosphere. It would, in my judgment, set the stage for a more successful cooperative negotiation to improve the international monetary system than any other option presently available to us. Attachment cc: Volcker Group CONFIDENTIAL DECLASSIFIED Authority NARA Date 9 //# f e y Countries Grouped According to December 1968 Gold Holdings as Percentage of Imports (cif), based on Last Quarter of 1968 at Annual Rate 1. 2. 3. 4. 5. 6. 7. 8. Country Gold Imports Uruguay Portugal Burma Lebanon Switzerland Iraq South Africa Saudi Arabia Subtotal 133 856 84 287 2,624 193 1,243 119 5,539 150 1,276 140 500 4,902 409 2,992 400 10/ ?S9 89# 67$ 60# 57# 54# 47$ 42# 30# 51# 10,892 38,005 29# 2,644 11,2 5 0 1,568 16,426 22,124 3,785 634 163 9,943 9,064 6o4 200 656 802 2,147 1,364 1,5 9 1 84,965 27# 26# 26# 24# 22$ 2 1# 19# 18 # 17# 17# 15# 13 # 13 # 12 # 11# 10 # 10 # 2l# A. High Proportion B. United States Co Other Countries with Gold/import Ratios 10 # or above 1. 2. 3. 4. 5. 6. 78. 9. 10 . 11. 12 . 13. 14. 15. 16 . 17. Austria Italy Venezuela France Germany Spain Kuwait Jordan Netherlands Belgium U.A.R. Ecuador Libya Turkey India Greece Iran Subtotal D. All Other Fund Members E. Total - Fund Members plus Switzerland 714 2,923 403 3,877 4,539 785 122 30 1,697 1,524 93 26 85 97 243 140 158 17,456 4,778101,820 38,665 235,450 Per Cent 5# 1 6 .5#
@FedFRASER