Full text of Paul A. Volcker Papers : Gold, Box 28, Item c193
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Collection: Paul A. Volcker Papers
Call Number: MC279
Box 28
Preferred Citation: Gold, 1980-1981; Paul A. Volcker Papers, Box 28; Public Policy Papers,
Department of Rare Books and Special Collections, Princeton University Library
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P
5
Statement by Robert Solomon*
Guest Scholar, The Brookings Institution
before the
Gold Commission
November 12, 1981
I welcome the opportunity to present my views to this Commission,
which is charged with conducting "a study to assess and make recommendations
with regard to the policy of the United States Government concerning the
role of gold in domestic and international monetary systems .
.
my
credentials as a witness are that T have spent more than thirty years as
a professional economist in the fields of domestic and international
monetary economics, that I was on the staff of the Federal Reserve Board
for twenty-eight years closely involved in the formulation of domestic
monetary policy and active in the inter-agency policy process with respect
to the international monetary system.
I spent two years (1972-74) as a
vice-chairman of the Committee on Reform of the International Monetary
System (Committee of Twenty) and have written a widely-read book in the
field:
The International Monetary System, 1945-1976:
An Insider's View
(Harper & Row, 1977).
In this statement I shall first identify what I regard as the major
issues raised by the Commission's assignment and then present some observations
on each of these issues.
*The views expressed are my own and are not necessarily those of the
officers, trustees, or other staff members of the Brookings Institution.
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2
Issues to be Faced
(1) The broadest issue is, what would the United States, and the
rest of the world, gain from giving gold a more important official role,
up to and including a form of gold standard?
(2) What changes, if any, would be made in the exchange-rate system
under which the world is now operating?
That system is a hybrid one, in
which countries have freedom of choice among free floating, pegging to
dnother currency or a basket of currencies, or establishing a regional system
of par values (as in the European Monetary System) where the regional
bloc floats.
In practice, a substantial proportion of world trade --
well over half -- is conducted under floating exchange rates.
If a change
in the role of gold implied a change in existing exchange rate arrangements,
a number of major questions would arise.
(3) Would the U.S. dollar, and other currencies, be interconvertible
with gold domestically?
What effects would this have on monetary policy?
(4) Is it envisioned that the price of gold would be fixed in terms
of dollars?
How would the price be chosen and, equally important, how
would it be maintained in the face of the sorts of political shocks that
have sent the gold price through such wide gyrations in recent years?
What
are the implications for monetary policy of movements in the market price
of gold?
(5) What sort of international convertibility would be established?
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3
In practice, if the answer to the first question under Issue 3 is "yes,"
it would be virtually impossible to prevent foreign holders of dollars from
presenting them for conversion into gold.
What are the implications for
U.S. monetary policy and for the operation of the international monetary
system?
(6) What is the significance of the fact that the U.S. Treasury holds
more than 260 million ounces of gold?
Does this require, as some have
suggested, that a choice has to be made between remonetizing gold and selling
it off?
What is to be Gained from a More Important Role for Gold?
The end of inflation once and for all is the promised goal of most
advocates of linking the dollar to gold.
this objective.
There can be no quarrel with
What is open to question is whether linking the dollar,
and other currencies, to gold will achieve the objective.
There are differences among the various proposals and I do not claim
to have seen all of them.
The most straightforward suggestion is to restore a gold certificate
reserve for the Federal Reserve System.
11
The purpose is to impose a
monetary rule that would limit growth of the money supply.
monetarist approach.
1/
This is the
It is designed to assure that the Federal Reserve
Robert E. Weintraub, "Restoring the Gold Certificate Reserve" in
The Gold Standard:
Its History and Record Against Inflation, A Study prepared
for the use of the Subcommittee on Monetary and Fiscal Policy of the Joint
Economic Committee, Congress of the United States, September 18, 1981.
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4
restrains monetary expansion to a rate consistent with zero inflation.
In effect, this approach imposes a discipline on the central bank.
The
objection to it is that it would deprive the Federal Reserve of all
discretion in its operations, including counter-cyclical policy adaptations.
Furthermore, the present Federal Reserve policy appears to be quite strongly
disciplined.
As Jude Wanniski, a gold advocate, has stated (see below),
"it is not discipline that Paul A. Volcker . .
. needs."
Some advocates of a return to gold reject monetarism (as well as
Eeynesianism).
They believe that the traditional process by which the
Federal Reserve tries to regulate the volume of bank reserves and therefore
the monetary aggregates is doomed to failure.
What they propose is a
mechanism by which the supply of money is determined by the demand for
money.
V
They believe that if the Federal Reserve is required to supply
neither more nor less cash balances than are demanded, inflation will be
banished.
into gold.
The way they would bring this about is to make the dollar convertible
If the public holds more dollars than desired, dollars will be
exchanged for gold and the Federal Reserve will respond by reducing bank
reserves.
If the public wishes to hold additional money, gold will be
converted into dollars at the "gold window" and the Federal Reserve will
increase the supply of bank reserves.
The flaw in this type of proposal, in my view, is that it fails to
distinguish between "money to hold" and "money to use."
2/
Those members
See Lewis E. Lehrman, Monetary Policy, The Federal Reserve System, and Gold,
Morgan Stanley & Co., January 29, 1980; Jude Wanniski, "A Job Only Gold Can Do,"
The New York Times, August 27, 1981, p. A31.
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...II..
•
S
of the public who want more money in order to spend it on goods
and services
will be exercizing a "demand for money" indistinguishable from
the demand
of those who wish to increase their cash balances held on deposit
or in the
form of currency.
Letting the demand for money determine its supply will
not assure a noninflationary economy.
It could have just the opposite
effect.
Another view on ending inflation is that once the dollar is declared
to
be convertible into gold, the public will be confident of the
future value
of money.
The demand for money -- to hold as a cash balance -- will increas
e,
thereby reducing the excess supply of money.
"The real answer is not to try
to manipulate the supply of dollars but to create demand for them.
.
We are not told how convertibility of the dollar into gold would
prevent
excess creation of dollars that might be used for excess spendin
g.
In none of these proposals is the inflation process addressed in a
fundamental way.
Inflation involves an interaction of wages and prices and
occasional external shocks such as large increases in oil prices,
how a
linkage between the dollar and gold would cope with these aspects of inflati
on
is a question that the Commission should expect the gold proponents to answer.
More generally, the belief that there is a simple solution to the
inflation problem, though seductive, is in my opinion misleading.
The
worsening of inflation in the 1970s can in no way be attributed to the breakin
g
of the link between the dollar and gold on August 15, 1971.
3/
That interpretation
Arthur B. Laffer and Charles W. Kadlec, "The Point of Linking the Dollar
to Gold," The Wall Street Journal, October 13, 1981, p. 32.
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5
is a gross distortion of history:
it is easy to show that for many years
before 1971, gold had little if any influence on U.S. monetary
policy.
Just as there is no simple explanation for the acceleration of inflation
,
there is no simple way to bring inflation back down.
We do not have a magic
monetary wand to wave and thereby do away with inflation.
Apart from ending inflation, I am aware of no other benefits that are
supposed to result from returning to a gold standard.
It is significant that
most foreign officials and bankers show no interest in a return to gold. A/
Implications for Exchange Rates
Most of the recent proposals for a return to gold hardly acknowledge
that the United States is part of an international economy.
"blueprint" does state:
Arthur Laffer's
"With the value of the dollar defined in terms of
gold, there would no longer exist any reason for the U.S. government to be
concerned with the foreign exchange value of the dollar.
The official
policy of the U.S. should remain that the dollar would be free to seek its
own level."
This proposal recognizes, if only briefly, that the dollar
is linked to other currencies via exchange rates and it foresees the possibility
of continued floating of those exchange rates.
Whatever judgments the Commission arrives at regarding the role of gold,
it is important, I believe, to avoid pushing the world back to the straitjacket
of fixed exchange rates.
4/
Ample evidence is available to support the proposition
'Foreigners Doubt U.S. Return to Gold," The Wall Street Journal,
September 28, 1981, p. 31.
5/
Arthur B. Laffer, "Reinstatement of the Dollar:
A. B. Laffer Associates, February 29, 1980.
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The Blueprint,"
that the dollar and other major currencies (such as the yen)
or currency
areas (such as the EMS) need scope for variation as is possible
at present.
The present system is far from perfect but an attempt to restore
fixed
exchange rates would surely fail.
Domestic Convertibility
It is possible to imagine the restoration of gold to a
significant
role in the international monetary system without domestic
convertibility,
as in the period after 1933.
But, given that U.S. citizens may now purchase
and hold gold and given the nature of the current proposals for
a gold
standard, it is not likely that anyone will advocate a system in which
only
foreign monetary authorities may convert dollars into gold or gold
into
dollars at the U.S. gold window.
Therefore the impact of domestic convertibility
needs to be examined.
I have pointed out above that there is a flaw in the argument that
the decisions of U.S. citizens to purchase or sell gold against dollars
is
an appropriate guide to monetary policy.
Beyond that, domestic convertibility could raise serious problems if
it were combined with a fixed official price for gold, as is discussed in
the next section.
The Dollar Price of Gold
Most proposals for a return to gold that I have seen are rather vague
on the price at which the dollar would be made inter-convertible with gold.
Yet it is clear from the events of recent years that the market price of gold
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7
can change drastically in response to events that have little to do with
the monetary system.
Furthermore, the increasing use of gold in industry,
together with an inelastic supply, could lead to an upward secular trend in
the market price of gold.
If the market price rises relative to the official
price, gold will be bought from the monetary authority and sold in the
market.
If the market price falls below the official price, the opposite
will happen.
In either case, the impact on gold reserves and therefore
on monetary policy could be destabilizing.
To my knowledge, the Laffer proposal is the only one that recognizes
this problem.
It provides for the possibility of temporary suspensions of
the official dollar price of gold, while the market price moves to a new
level under the impact of "conditions beyond the control of the monetary
authority."
This provision might give greater discretion to "the monetary
authority" than some gold advocates would find acceptable.
One alternative to this type of flexibility would be an attempt to peg
the market price of gold.
Quite apart from the questionable feasib lity
of such an effort -- as was demonstrated when the gold pool was abandoned
in March 1968 -- it would affect monetary policy in an undesirable way.
Imagine a political disturbance in the Middle East and a sharp run-up in
the market price of gold.
Sales of gold by monetary authorities would, under
gold standard rules, require a contraction of bank reserves and a general
tightening of monetary policy even though that might not be at all appropriate
to the condition of the domestic economies.
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8
1
Another option would be to let the official price move with the market
price.
This would eliminate the potential for arbitrage mentioned above.
But it would introduce flexibility into the value of gold reserves.
Presumably the Federal Reserve would not be expected to alter its policy in
response to pure valuation changes in gold reserves.
The guide to monetary
policy would have to be changes in the quantity of gold in the reserves.
While this option might be technically workable, it would not satisfy
those who are seeking to restore the discipline of gold.
If the official
price moved with the market price, gold buyers and sellers would be indifferent
as between using the market and undertaking a transaction with the monetary
authority.
Thus changes in the quantity of gold reserves would be arbitrary
and haphazard.
They would not provide the sort of guidance to monetary policy
that is being sought by gold advocates.
These advocates face a dilemma regarding the official price of gold.
If they use the market price, the discipline of gold disappears.
But it
is not realistic to select an official price that can be maintained indefinitely.
They want to introduce an automatic system uninfluenced by human discretion.
But the need for policy judgment keeps re-asserting itself.
International Convertibility
As noted, if official convertibility were established at home, it would
be almost impossible to deny it to foreign holders of dollars.
And anyone
who wanted to restore (or establish) the classical gold standard would not
wish to deny convertibility to foreign holders of dollars.
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9
Yet it has to be recognized that foreigners, both official and private,
hold substantial amounts of dollars.
Banks located in the United States
have more than $200 billion of liabilities to foreigners.
Branches of
American banks abroad have dollar liabilities to foreigners of $275 billion.
And non-American banks have very large dollar deposit.
Thus potential
claims on the U.S. gold stock, which is worth about $110 billion (at a gold
price of $425 per ounce), are huge.
These claims would be exercized, along
with purchases by Americans, if an official gold price were established and
The market price rose above it.
Concern over potential gold purchases by official holders of dollars
under a reformed international monetary system led, during the deliberations
of the Committee of Twenty, to the proposal for a substitution account that
would exchange outstanding official dollar holdings for SDRs.
It is difficult
to imagine such an exchange of private dollar holdings.
Thus the problems discussed under "The Dollar Price of Gold" above would
be compounded under a system of international convertibility.
What Should We Do with Our Gold?
It is sometimes suggested that since the United States holds such a
large amount of gold, a decision must be made about its role:
either it
should be remonetized or sold off.
In my view this is not a pressing problem.
The U.S. gold stock should
be regarded as part of the national patrimony, worth $110 billion at the
current market price.
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There is no reason to dispose of it just because
10
it does not play an important monetary role.
And there is no reason to
try to invent a monetary role just because we hold the asset.
Government owns many non-monetary assets.
The U.S.
They have different uses.
There
may be occasions when, as in the past, it will support U.S. objectiv
es to
sell gold in the market or to buy it in the market.
does not have to burn a hole in our pockets.
But until then, gold
We are not forced to decide
to do something with our gold assets just because they exist.
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BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM
Date
9/4/81
To
Chairman Volcker
From
Henry C. VVallich
Oa
•••••
••
:.• •
t:
1.
CTfr.
•11.
LAJ
GO
L.L./
•
Cr• )
L._
L.
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THE UNIVERSITY OF MICHIGAN
GRADUATE SCHOOL OF BUSINESS ADMINISTRATION
ANN ARBOR, MICHIGAN 48109
August 26, 1981
Paul W. McCracken
Edmund Ezra Day University Professor
of Business Administration
TO MEMBERS OF THE GOLD COMMISSION
The welter of acerbic communications that has characterized
a good deal of the Commission's activity since its beginning has
already seriously raised questions about whether anything constructive
can came out of these deliberations.
Perhaps high on the agenda of the next meeting should be a sober
discussion of whether we hope to contribute to the course of good economic
policy or whether we hope to provide Washington with a good show. Hopefully it is the fanner. There is a congealing conviction that the management
of economic policy needs to be placed on a shorter leash. We must also
recognize that there is little concensus yet about where to go from here
regarding monetary policy. What we can hope for, therefore, is that our
efforts will move the management of policy in the direction of operating
within a mere explicit framework, recognizing that the report of a diverse
group will inevitably not be what any one of us would write.
If our effort is to be a serious and constructive one, we
obviously must have a reasonable amount of time. My own preference
would be to have the meetings themselves closed to the public simply
because the group discussion and therefore the final report (which, of
course, will be in the public domain) will be better. If, however, there
is to be an audience, that will cause me no problems.
What is essential is that we start focusing in a problem centered way on the substantive issues themselves.
Regards,
- Paul W. McCracken
PWM:dj
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BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
Board of Governors
To
From
Dee
July 24, 1981
Subject:
Joe Coyne
Since three Board members are also members of the Gold Commission,
I thought it might be useful to alert you to the plethora of correspondence
that has plagued the System over the past year on gold.
The correspondence comes primarily from Edward Durell, a retired
Cleveland businessman who now lives in Virginia. He has had a long history
of correspondence with both the Federal Reserve and the Treasury on gold, gold
audits, gold certificates and the like. One of his contentions is that there
isn't as much gold at Ft. Knox as the government says there is, and he is
demanding a complete audit.
Over the last six months or so Durell has written letters to directors
at the Reserve Banks outlining his contentions and demanding responses. Reserve
Bank people say they have been inundated with letters.
Most recently Durell wrote to Senator Byrd who transmitted the letter
to the Board for response. A copy of the Board's response and other background
is attached for your information.
Since the Gold Commission has now been established it is possible
that Durell could begin directing his fire in that direction but individual
members of the Commission may also receive "comments and suggestions" from
Mr. Durell.
Attachments
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uL;Ano or
•
:i0VL;4(1;4
r 14r
FEDERAL RESERVE SYSTEM
wA5141p4GION,
D. C. P0s,.1
July 9, 1981
he lionuiaDle harry F. Byrd,
Jr.
United Z,tdtes Senate
'v;ash„ington, D.C.
20510
Dear Senator Byrd:
:file correspondence that you
forwarded on June 4 from
Capitain Ldward Durell of Berr
yville, Virginia, suggests that
thi: Federal_ Reserve System
should order an audit of the Trea
sury's
gold stoe'rl by outside, inde
pendent auditors.
Capt
ain
Dure
ll
believes that the gold certific
ate account gives the Federal
Res(.rve a claim to the gold and
hence authority to order the
audit.
Thc Gold Reserve Act of 1934
vested in the United States
all right, title, and interest
, and every claim of the Fede
ral
Reserve ;:iystem to gold.
Under the terms of that Act
the Treasury
is aulnoriZed to issue gold
certificates to the Federal Rese
rve
for Lh.! purpose of monetizing
the gold. This, however, does
not
give the Federal Reserve Syst
em any claim or interest in
the gold.
The gold certificate acco
unt is merely an asset account
un our books that serves to
record the amount of dollars
that the
Feueral kserve Banks have
credited to the Treasury in
exchange for
the certificates.
An issuance of certificates
is accomplished
through increase
in the gold certificate acco
unt
and in the
Trea.Aliy'.; general account, the
deposit liability representing
thc Trea.wly's checking acco
unt balance. A reuuction
in certifi(:atk:s is
ffect.ed through a decrease in
Treasuiy's general account
All kl;t11,2:, to thc gob u cert
ificate account are initiated by
'tiesury, as required by law.
statement showing the gold
certificate account in the
as' L; of the Federal Reserve
Bank is given on p(Ige 246 of
the
, nc:losed 1,nnual Rcpurt of
the Board for 1980. Th(‘ gold
stock, an
t of the Tleasury, is show
n on pages 274 thtotwh 276
in
cuLt.- cti(g, with a listing
of factors supplying funds to
bank
The gold stock is stored at
locations dytermined by
This includes Fort Knox,
the Philadelphia and Denv
er
;L.w York and San Francisc
o assay offices, and the
Federal leserve Bank of New York
. The accounting procedur
es
Trea:;uly.
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11,e ilon:Jr.lule 1_lrry P. LJ.yLu,
Jr.
.1%;()
1(.1:
undcr the control of Truc:-;uLy,
;:r%d the gold is
-y Irea:,wLy undt..:r a continuing
progra:L, .L.al)lished by
tnc: LA.crcLary of tnc Treasury.
1.11cere1y,
(Sigi:ce) Dona141.
PT
Donald J.
nn
Assistant to the c;or,:l
Lnk.:10:.;Ulc
PUk:DJ:pjt (OV-162)
occ:
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'• ylnGINIA
0
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'ZCnitcb Ziatcz ,)enaLc
WASHINGTON, O.C. 20510
June 4, 1981
.
s
i10.,̀
10 OF
CF 1Ht:
i
19131 JUH 15 Al 10: 014
RECEIVED
OFFICE OF I iiE CA
My dear Mr. Chairman:
I am enclosing copies of corresponden
ce
between my constituent Captain Edward
Durell, and
Messrs. Timlen, Ring and others relative
to the
"gold certificate account" and other 'que
stions.
Captain Durell raises several interesting questions about the physical
location of
U. S. gold stocks, the accounting
procedures used
by both the Federal Reserve and the
Treasury, and
the question of "ownership" of the
gold as between
the Federal Reserve and the Treasury
Department.
It is my hopc that you will be able
to
respond to the many. questions rais
ed by Captain
Durell.
Cordially,
The Honorable Paul A. Volcker
Chairman
Board of Governors
Federal Reserve System
Washington, D. C. 20551
Enclosures: s
MILTON VALLEY FARM
P. 0. 1OX 586
BERRYVILLE, VIRGINIA
22611
May 29, 1981
'Me Honorable Harry F. Byrd, Jr.
U. S. Senate
Washington, DC 20510
Dear Harry:
I hive sont Col'. Curtis Dall the material enclosed with
my letter
of May 8th to the directors of the 12 regional Federa
l Reserve Banks
(some 108+ in number) and a copy is enclosed for your
files.
I urge you to at least road my letter of May 8th to these
directors.
The research which I have done indicates beyond
any reasonable doubt
that whatever gold is found by an independent invent
ory and assay
does belong to the Federal Reserve System, and
not the U. S. Treasury.
This research of over seven years I believe qualif
ies me to becune a
JitirWr of the Gold Policy Conmission and I vould apprec
iate it if
you vxDuld send the enclosed material to Dr. Beryl Sprin
kel (at Treasury)
with your reconm.ndation that he reconni-md me as one of the
four
miffibers chosen from the private sector to the Gold Polic
y Caimission.
Edward Durell
ED/ks
cc:
Col. Curtis Dall (w/o enclosures)
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•
Federal Reserve Bank of St. Louis
•
THE UNION FORK AND HOE COMPANY
'
P.O. BOX 1940
500 DUBLIN AVENUE. COLUMBUS, OHIO 43216
IMONE
(674) 228-1791
rum: Please address correspondence to: P. 0. Box 586
Berryville, VA 22611
(D*Alkt"OutL
CMAIIIMAN
Of
10.1
10AA0
ray 8, 1981
,
'10:
Directors of the 12 regional Federal Reserve Banks
For your ready reference I am 6nclosing a copy of my lette
r to the
1-r'ad of your regional bank dated 5/7/81 along with the enclo
sures
referred to therein.
I believe this mlterial will help convince you that in
order to
protect the Federal Reserve System and yourself, you
should insist
on an indcp?ndent, indisputable inventory and assay of the alleg
ed
gold Lelonging to the Federal Reserve System and held
in storage by
the U. S. Treasury as collateral for the gold certificat
es listed
on the asset side of your bank's balance sheet.
•
Basod on over 7 years of research and investigation:
I.
II.
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It uould appear that the Federal Reserve System and
the U. S. Treasury
(a)
agree that thore is only one horde of gold.
stored under the custody of the U. S. Treasury;
and
(b)
agree that the alleged horde of gold is wprth
$11.2 billion, figured at the official gold price
of $42.22 per Troy ounce of "fine gold."
Thri Federal Reserve System and the U. S. Treas
ury do
not agree on
(a)
which entity, the Federal Reserve System or the
U. S. Treasury, has exclusive title to the alloyed
gold horde; and
(b)
which entity is responsible for the indisputable
accuracy of the count, weight and fineness of such
.horde.
r15.
•":"'j4.
A.
Directors of the 12 regional
FL.dczal Rrve Rinks
II.
-2-
Nay 8, 1981
Ibth the F(xleral Resenre System and the U. S. Treasury
E....eon to lay claim to the horde (see current balanc
e
sheets of the regional Fedr.,ral Reserve Banks under
the heading "Gold certificate account").
In view of the (-law°, I again suggest that it would be to
the best
interest of your country, your hank and yourself to find out
why
(a) the four rest recent Secretaries of the Treasury (Sinun
, Blumenthal,
Miller and Rogan) and (b) the three nest recent Clviiii
ion of the Federal
Reserve Systm (Burns, Miller and Volckar) have not taken
steps to obtain
a cx.Inplete, indisputable physical inventory and assay
of the alloyed gold
ri..:-;carves by an agency or organization not connected
in any way with the
goveriinvnt.
If this is not done, the dark cloud of conspiracy will contin
ue to lover
over the Foleral Reserve System, the U. S. Treasury
and you; and the credibility of these parties will continue to suffer
in the eyes of the public.
Sincerely,
As
ndiiidul
ID/ks
Ebel.
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
•
•I.1 IIE UNION I=ORK AND I UDE. COMPANY
P.0
lir2iX 1S:40
M.IVE:
500
Pm
IN
VI !WE_ COLUYilt1S. CM0 e;Q16
..mdence to:
Please address corxesp,
ri/ONE (CT4) ;s213•;
P. O. Rox 586
Berryville, VA
22611
ICA•PD [VFW
CHAIPIrni
CI
1.1 !CARD
May 7, 1981
Thomas,M. Timlen
/st Vice President
Federal Pei.erve Rank of New York'
Post Office Station
10045
New York, New York
'Dear Mr. Timlen:
I enclese the following:
(1)
Copy of a lettor from Mr. P. D. Ring, Assistant Director, Board of
Governors, Fe6eral Reserve System to me dated 3/25/81.
(2)
Cc,py of my letter to Mr. Ring dated 5/5/81.
I siw:erely hope that Mr. Ring's response will clear up once and for all
'
(a)
:old alle:;edly a7dDunting to $11.2 billion (figured
Where the (
.
at the official gold price of ;42.22 per Troy ounce) is located.
(b)
1.;hetly-r the (jold certificates allegedly held by the Federal Reserve
Bank of N;!‘‘. York are enfo/ceable certificats uppn the Treasury for
tnouyh gold (at F;42.22 per Troy ounce) to cover the total of the sums
i.
listed as an crset by the 12 regional Federal R,,serve Banks on
tneir Lalance sheets under the heading "Gold certificate account."
(c)
When and by who:n did the Bo:1rd of Goverr,ors check the existence by
physical inventory and assay of the gold allegedly held by the Treasury
as Lacking for said gold certificates.
If you have any correspondence with Ms. Ring, I suygest you ask the following questior.s•
J1)
Did - the Federal Reserve System give the U. S. Treasury aut!ority to
nell, during the operation of the so-called Lon,lon Gold Pool, large
sums of the System's gold at $35 per Troy ounce?
(2)
Did the Federal Reserve System give the U. S. Treasury the authority
to sell partoof the System's gold at public auction 1.seginning 1/6/75?
(3)
In a letter to then Congrel%sman John B. Conlan (R-Az) dated 5/4/76
hen Secretnty of the Treasury William Simon stoted, "...the
I
had !:% -lie net sales to the pool during its 1.pric.3 of operation
totaling'45.2 million ounces." During the same p.eriod, he...aver,
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Federal Reserve Bank of St. Louis
•.
Mr. 71.,_ r.is
X. Timlen
Xdy 7, 1981
c'.r 200 million - ounces of gold left Fort Y;Jox alone from 1961destin.!d for Lhii.Nient to the Nt!., York Ar.say
Office and thl Feeral Pc!', ye Bank of New York for reshipment
to the Bank of England acting as wient for the London Gold Pool
for sale to private persons and corporations abroad. If Simon's
st.at.,21nt is correct that only 45.2 million OUflCCS were used •
in the opi!ration of the Lonlon Gold Fool, what 1.,came of the
-3 1_.5-+ million ounces of yold?
/(,5
Is it Not time for the Federal Reserve System to be full1 audited by outside,
int:ei,enc:ent auditors?
Is it not tir.1,
2 to verify .he r!xistce of the alle(2ed gold claimcbd by the Federal
Reserve Syste.n, by an indeiNdent physical true inventory and essay?
'After you have had time to Consider the enclosed corri-spondence along with this
letter, I would appreciate hcaring from you es'to what steps you will reconllend
to clarify the many questions raised.
Sinr •rely,
Arail
As an individual
ED/smc
Encl.
cc l
All Directors of the 12 regional Federal Reserve nantss
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Federal Reserve Bank of St. Louis
r3Y!.; I F:N.1
v.L..,141`.iiittl 4. 0. C.. .'(I!. ¶I
eirr ••L
el
UV(
r.arch 25, 1981
Durell
rr.
P. O. Fox 586
Eeriyville, Virginia
22611
Dear Nr. Durell:
for any
I appreciate your letter of rarch 20 and apologize
icate
certif
gold
series
1931
the
of
inecnvenience the typewritten.copy
ular
partic
this
that
r,
hoeve
m,
e.ey have eeused you. I wish to confir
gold certificate is the one that you have asked about.
By the Lime the Federal Reserve Banks opened their doors for
had
business un November 16, 1914, eleven series of gold certificates
Leen printed, dating from the first issues in 1870 and 1871 to the issue
series
in 1913. For all of those certificates and for all of the three
1928
1922,
the
(i.e.,
years
that .ere issued in the following nineteen
until
trust
in
gold
the
and 1A series) the Treasury simply held
the gold
der,ended by the owner of the certificate. At all tines, then,
ry.
Treasu
the
in
certifica:es were truly warehouse receipts for gold
or
ss,
busine
a
::hc,e‘er had such celtificates -.- whether an individual,
g
correspondin
a Federal reserve Bank -- was the actual owner of a
ry.
awount of gold stored in the Treasu
response.
This entire arrangement was changed by the Congress in
g
Eankin
ency
Er.erg
the
h
Throug
to the naLional criergency of the 1930's.
gold
redeem
to
ry
Act of rarch 9, 1933, Congress authorized the Treasu
certificetes with paper money, and in legislation enaCted on June 5, 1933,
give
ebrocated in respect to all obligations any provision ruiperting to
by
the obliqce a right to require payment in gold. This was follc....ed
United
the Gold rseserve Act on January 30, 1934, which vested in the
l Reserve
Federa
the
of
claim
every
and
st
States all right, title and intere
ished
establ
or
theref
t
paymen
in
and
System to all gold coin and bullion,
s
credit
these
s,
dollar
in
s
credits in the Treasury in equivalent amount
erred
transf
we
Act
that
of
dale
being peyable in gold certificates. On the
at
s
credit
for
ge
exchan
all of our gold to the United States Treasury in
that
gold
of
s
a;lount
S20.67 an ounce. These credits, includina all other
1934 series gold
in
us
to
e
payabl
made
were
ry,
were due us from Treasu
certificates.
Gold
In addition to eliHnating any claim against gold, the
authority
the
nate
elirii
to
as
so
Peserve Act a;;:ended the Federal Reserve Act
l
Federa
for
eral
collat
for the use of yold (but not gold certificates) as
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Federal Reserve Bank of St. Louis
;;r. Fdt..ald flurell
2
P:sLrve hot .s; to leiuire that the r,d,2mption fund
for tWeral Reserve
noti,s of f.,-1(..h Rccrrye rank raintained on deposit at the
Treasury be in
gold
:Istcod of in gold; and to make deposits of Federa
l
scrve r3h;:s and Feral Reserve Agents with the Trcasury of
the United
States repayable in gold certificates only and not in
gold coin. In
cum, the Gold Reserve Act completely abolished any and
all claims by the
. Federal Reserve to gold.
ihe 1931 series certificate, a copy of which I sent to you on
rarch 4, is the gold certificate that the Treasury printed and
issued to
the Federal r.cserve ranks under the terms of the Gold Rcserve Act. This
is the only series of aold certificates that under the law may be attrib
uted
to the gold stock. ihe older certificates that we held ceased to have any
status and were therefore returned to the Treasury.
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Federal Reserve Bank of St. Louis
Sincerely yours,
P. D. Ring
Assistant Director
•
_
TI-1:: UNION l'ORK AND HOE COMPANY
P O. ;40X 1:140
1:0TE:
C I.•i 1
1
1•(
:+00
I•Vi-.NUE. COI UL!SUS. OHIO 4;1216
Please addrc.:-.s correEtondence to:
(('4)
2:e.;
P. 0. Box 536
Berryville, VA
1: &
May 5, 1981
'CERTIFJFD PIOT,
RETURN Ri-XEIPT REQUESTED
.Mr. P. D. Ring,
Assistrint Director
Board of Governors
Federal Reserve System
Washin3ton, DC 20551
Dear Mr. Ring:
Thank you for your letter of 3/25/81 in resp
onse to
letter of 3/20/81.
For your inforr.ation, on 12/3/7). then Secr
etary of the Treasury William
Simon stted in his tcstiony before Congress
that the title to the
a1lcd gold wi!s in the Federal Reserve
System while possession was in .
the Trr.:mry. He said the transfer of the
gold to the Treasury - constitut7d a "pledi.;e." In addition, the current
consolidated statements of
condition of the Federal Reserve System publ
ished in THE NEW YORK TTMES
and Tii;
JOURNAL, arleng others, carries as an asset "gol
d
stock" of $11.2 billion (figured at the offi
cial gold price of $)42.22
per Troy ounce). The consolidated balance
sheut of the U. S. Trcasury
carries as a 1.abililv an equal amount of $11.
2 billion. Each of the
l2 regional Federal Reserve Banks lists on
he asset side of its
current balance sheet a large sum of money unde
r tne heading "Gold.
• certific?.te account"; and the total of thcs
e 12 private banks' "Gold
.
certifical:e accounts" matches the consolidated
balance deet of the
Fed,:ral R,
.:rerve System as an asset, and further, it
T.ILches the balance
sheet of the U. S. Treasury as a
This
conf
irrs the stent
of Secretary Simon that the transfer of
gold to the Treasury constituted
a "pledge."
In vicw'of the then Treasury Secretary's stat
ement, the Gold Reserve
Act of 1934 which you cite was only a uret
ended 'uransfer of title.
You say that on 1/3/14, the date of the
-6Ofd —ffeserve Act, the Federal
Reserve "transferred" all of its gold to
the Trutsury "in exchange
for dollar credits at $20.67 per ourice
of fine gold." You go on to
say that "those credits, including all
other amounts of gold that were
due us frnm Treasury, were made payable
to us in 1934 series gold
certificates." What you say is precisely
what I contend: The Gold
Reserve Act of 1934 only pretended to
transfer title to Treasury 'cccause the issuance by Treasury of the 1934. series
gold certificates
only ratified, confirmed, and condoned
the situation as it existed
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Federal Reserve Bank of St. Louis
•• •
•
-e-
P. D.
Eay
. rior to the (Inctont. of the Gold ReL:ovve Act of 1/30/3N.
pledge was constituted in place.
5, 1981
Thus, a
As I undc-rnt=ind it, the Gold Reserve Act of 1934 does not preclude the
Federal Reerve from C.Inding the pledged gold it "transferred" to the
fact, Trcsury statements confirm this in addition to what
Preasury;
s:qd aliout the pledge of the alleged gold. Congress
Sinon
7 ecretary
(,
illegally (because it had no authority or jurisdiction over tha Federal
:serve System) gave TI:easurv authority to take dollar payments from
.he Federal Reserve -S-yst.em for its gold. However, Congress had no
riuthority to bind the Federal Reserve System on this, and you cite
lr:hp7c,in_Con.--ress . has Pjw.evated . ths_r:ipht_of_redemoti6n by the
to (io is pay over Lhe
A4 1_ the -F6deca!
v
F66c=r2l
dollar 1ndRI $11.2 billion for the delivery of the gold, if it
exists.
5
of the 1979 Annual Report of the Secretary of the
of the Trcasury, Document No. 327A states that
held by the Federal Reserve and "payable to the Board
of Gov%I.nors of the Federal Reserve System" are oblisations "fully
!;ecured by -old n the Treasury." Therefore, the gold is held as
sz,curitv or coll::teral for the "bearer gold certificates." How can
- 1 of the Federal Reserve go against the financial
you as an OS.2C 1
Treasury? Where are those "bearer gold certificates"
the
of
statc:rents
today?
rn addition, Note
7;seury,
If you -do not want another "snlad oil scandal" on your Lands, I would
strongly re.:.o:7,;:er!d that you do have the aut.hc,rity to !,o bcThind these
gold certificates issued by the Treasury to ve?rilv the existence of .
the alleged gold stock.
Also, why do you allow the Federal Reserve to be gu(.5d in the news media
as owning "gold stock" referred to as an asset in yc.ur weekly stateLents
..-xistence of such
when the Federal Reserve itself has not verified the ,
Banks a:se
Rc!..c,rve
Federal
regional
12
the
that
seem
would
It
gold?
Federal
Reserve
the
certificates
gold
the
that
impression
under the
Reserve
Federal
the
that
fact
The
gold.
in
System holds are redeemable
by a
evidenced
further
is
System is the holder of these certificates
Federal
regional
the
of
letter dated 1/20/81 from one of the presidents
Reserve I-Fir,ns in which he states, "These (gold) certificates are held
at the Federal Reserve Bank of New York..."
Further, I believe the gen.eral public is being led to believe that the
gold certificates are redek:Triable in gold by the currently published
sthte:..ents of the Federal Reserve System and the U. S. Treasury. I
repeat, the Fec:e:.al Ro::.erve System carries on its b?laNce sheet an asset
of $11.2 billion (figured at the official gold price of $42.22 per Troy
ounce). oppesite the heading -"Gold Stock" and the. Treasury carries the
https://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
Mr. P. D. Ring
1.:ay
5, 1981,
naine '''11t, on its balance sheet as a liability under
the heading "Gold
certificate account." Thus, the general.public is led to believe that
the Fe(!eral Rec-rve System has an enforceable claim on gold held by
the Treasury as cus.todian.
Again, I contend that based on the available facts, the Federal Reserve
System does have the authority to go behind these "bearer gold certificates" to (:cr.and an indisputable, independent physical inventory of
the nation's alleged gold, or.to redr_cm the pledLed cold by paying
Tresury $11.2 billion in paper money i'or the alleged gold stock. It
is submitted that if you do neither, then you have allowed the Federal
Reserve to become a party to the Treasury's possible crime of embezzlement of the alle.sed gold. Treasury cannot now contend that it was
Congress which cave it the authority to Lr.%e the gold and give the
Federal Reserve System paper money. The Federal Reserve System is an
independent, private corporation.
To sum this all up:
(a)
The Fr-(loral Reserve System lists as an aet on its
currently published balance sheet $11.2 billion (figured
at the official gold price of $42.22 per Troy ounce)
under the heading "Gold Stock." The U. S. Treasury
lists as a liability on its currently published balance
sheet $11.2 billion (figured at the official gold price
of $2.22 per Troy ounce) under the heading "Gold certificate account."
(b)
Then Chairman of the Federal Reserve System, Arthur Burns,
stated in his letter to then Congrcr-,f,n ---.n John Rarick (D-La)
dated 6/28/7N that "I am confident that. our system of
audits and examinations would quickly disclo:3e any unauthorized transactions in System a3seLs, which, I repeat,
do not include gold." Yet the Federal Reserve System on
its consolidated balance sheet at that time listed an
asset of $11.4 billion under the heading "Gold certificate
account."
(c)* Then Secretary of the Treasury William Simon listed in a
letter to Congressman J. Kenneth Robinson (R-Va) dated
11/h/74, 276.0 million Troy ounces of cold as belonging to
the United States stored at nine different locations.
Figured at the official *gold price of $)12.22 per Troy
ounce, this amou4lts to $11.6 billion.
(d)
Four Secretaries of the Trcasury h;:ve refused to take a
complete, independent physical inventory and assay of the
nation's.alleged gold reserves (A report to Congress by
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Federal Reserve Bank of St. Louis
rt
•
v,3y 5,
Mr. P. D. Ring
198r
C. ,,iroller General, YOD 75-10, B876?0 d Lid 2/]0/75,
)0 (!ly c.xercise at Fort.Knox becinng 9/23/74
on
lcavc.s Nalch to be desired from an accounting point of view).
e)
The blrince sheets of the 12 regional Federal. Reserve Banks
carry large sums of money on the asset side under the heading "Gold certific:ite account," which certainly indicates.
to the 6eneral publIc that there is gold behind the gold
cl!rigiflcLes.
Ciirrent correspondence with the heads of the 12 regional
F0(:(,ra1 Reserve Er,ns indicates that they Telieve there is
gold held as collateral for the gold certjficatcs.
The Bord of Governors of the Federal Rcly:? System have
ioLv'
the existence of gold coin or bullion by an
indendent physical inventory and assay.
We believe yroi will do our country a great good turn by corr.nenting on each
L!:.,.7J2nts. Please send copies of your response to the heads
of LI- e
2 rcc-ioral Federal Reserve Bans and their directors as
9f cac.h
I am sc-ndin/st
copies of your letter of 3/25/81 and this letter.
choir corr:s:ience with me indicates they would welco,e some clarifi;:ati(in C'rcon you.
Respectfully
(CT-1
As an indivi.acal.
ED/ks
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Federal Reserve Bank of St. Louis
BOAR1GOVERNORS OF THE FEDERAL RESERVE SYSTEM
.
N
Date
To
From
7/10/81
Chairman Volcker
Henry C. Wallich
For the meeting at 3 p.m.
this afternoon.
Attachment
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Federal Reserve Bank of St. Louis
bas.
Henry C. Wallich
July 10, 1981
NOTES ON COLD COMMISSION
seems desirable to try to arrive at a few conclusions of
practical usefulness, rather than debate the merits of different types of
gold standards, which might be the result of closely following the Anna
Schwartz' memorandum.
2.
Hopefully the report will not convey the impression that the
United States plans to return to a gold standard or gold convertibility in
any foreseeable future.
If some part of the group wants to say something
like that, there should be an opportunity for others to express a realistic
position.
3.
The positive and constructive elements of the report might
concern themselves with the disposition to be made of the U.S. gold stock.
In my view, policy in this respect should not differ significantly from
past policy.
Gold should not be sold for the sake of eliminating gold from
the world monetary system; it may be sold to defend the dollar in cases of
emergency; sales
riTTI1
not be made in order to make a budgetary contribution;
nor should there be a revaluation of the gold stock to repay public debt;
there ;11ould be no attempt to stabilize the price of gold; there should•be no
effort to bring back gold into active use among central banks except in
emergency situations.
4.
The committee's discussions and the final report should aim
to avoid increasing speculation in gold markets.
5.
Some kind of concessions will have to be made to gold advocates
if a united report is to be rendered.
Among these might be adoption of an
approach that would avoid depressing the price of gold, as a proposal for
gold sales might do.
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Federal Reserve Bank of St. Louis
Woo
-2-
6.
developments.
Some consideration will have to be given to possible price
Anna Schwartz states that once inflation abates, the price
of gold will come down, which may be one reason why the Treasury should sell.
This conclusion is far from certain.
So long as the price of gold is flexible,
it is likely to go to a level from which the price would move gradually so
as to produce the rate of return appropriate for a hedge-type asset, conceivably
a negative one.
7.
In the unlikely event that the price of gold should become fixed,
a positive return could occur only through a fall in the price level.
Under
these conditions, if the price were credible, privately held gold would be
sold to the official authorities.
If the price is fixed at a level widely
regarded as too low, the authorities will lose gold.
The obvious difficulty
of hitting upon the right price and thereafter keeping it "right" is one of
the principal obstacles likely to give pause to the gold advocates.
8.
advocates.
It may turn out that there is no agreement among the gold
Art Laffer apparently wants to fix a price much lower than
recently prevailed.
urges sales.
9.
page
Gold producers presumably want a high price.
Laffer
Producers presumably would be opposed.
In several parts of Anna Schwartz' paper, particularly on
, references are made to behavior or misbehavior of central banks.
On page 12 the Federal Reserve's discretionary powers are mentioned and the
alternative of a rule for money growth imposed by Congress is posed.
It
should be understood that the purpose of the commission is not to reform
the Federal Reserve System.
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Federal Reserve Bank of St. Louis
A
Department of the TREASURY
WASHINGTON, D.C. 20220 TELEPHONE 566-2041
FOR IMMEDIATE RELEASE
June 22, 1981
Regan Establishes Gold Commission
Secretary of the Treasury Donald T. Regan announced today
the establishment of a Congressionally mandated "Gold Commission"
to assess the role of gold in the domestic and international
monetary systems.
The Commission will study U.S. policies related to gold and
will transmit to the Congress a report containing its findings
and recommendations.
Secretary Regan will chair the Commission, which will include
seven members of Congress, three members of the Board of Governors
of the Federal Reserve system, two members of the Council of
Economic Advisors and four distinguished private citizens.
The Commission members are:
Arthur J. Costamagna, Attorney, Mullen and Philippi, Santa
Rosa, Calif.
Herbert J. Coyne, Executive Vice President, J. Aron &
Company, New York, NY
Senator Christopher J. Dodd, Member, Committee on Banking,
Housing and Urban Affairs
Senator Roger W. Jepsen, Vice Chairman, Joint Economic
Committee
Jerry L. Jordan, Member, Council of Economic Advisors
Lewis E. Lehrman, President, Lehrman Corporation, New York, NY
Paul W. McCracken, Edmund Ezra Day University Professor of
Business Administration, University of Michigan, and
former Chairman, Council of Economic Advisors
Congressman Stephen L. Neal, Member, Committee on Banking,
Finance and Urban Affairs
J. Charles Partee, Governor, Federal Reserve Board
Congressman Ronald E. Paul, Member, Committee on Banking,
Finance and Urban Affairs
Congressman Henry S. Reuss, Chairman, Joint E:onomic Committee
Emmett J. Rice, Governor, Federal Reser-.-E, a:Jard
Senator Harrison H. Schmitt, Member, Committee on Banking,
Housing and Urban Affairs
Henry C. Wallich, Governor, Federal Reserve Board
Murray L. Weidenbaum, Chairman, Council of Economic Advisors
Congressman Chalmers P. Wylie, Member, Joint Economic Committee
and is
The Commission will hold its first meeting shortly
monthly basis.
expected to meet subsequently on an approximately
Congress authorized the Commission in P.L. 96-389.
R-245
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Federal Reserve Bank of St. Louis
0 0 c
BOARD OF GOVERNORS OF THE
FEDERAL RESERVE SYSTEM
DIVISION OF INTERNATIONAL FINANCE
DATE 1/23/80
ro
Chairman Volcker
FROM
TED TRUMAN
Here is some more information
on the gold market.
r)
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Federal Reserve Bank of St. Louis
BOARD OF GOVERNORS
OF T ,
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Date January 22, 1980
Governor Wallich
Subject:
Private Stocks of Gold.
From Donald B. Adams
I.
U.K. Gold Volume and World
Sangster's sporadic reports on London turnover at BIS meetings
provide no means of assessing trends in the London market and little firm
ground for estimating normal volume.
Turnover appears to range between
perhaps 8 and 20 million ounces a month, depending on the time of the year.
It might be reasonable to estimate an average month's volume to be in the
range of 12-to-15 million ounces.
That would make it about 10 times as
large as the monthly average of U.K. imports (and exports) of gold.
By comparison, turnover in U.S. futures markets, as shown in
my recent note, is running at a daily average of five million ounces; that
is
about 100 million ounces a month.
For the first eleven months of 1979,
the normal monthly turnover was closer to 80 million ounces.
It is estimated
that about two percent of the contracts executed on U.S. futures exchanges
eventually involve delivery of gold.
II.
Observations about the world's private gold stocks are
necessarily conjectural.
The essence of gold's attraction for some holders
is the anonymity they preserve.
In addition, any estimating technique is
subject to question about how (one's guess about) the substantial stocks
of certain royal personages is to be allocated between public and private
holdings.
Nonetheless, conjectures have been made, and they put private
stocks in the range of 500-to-750 million ounces.
By comparison, free-world
public hoards amount to about 1.1 billion ounces, of which the United
States holds 265 million ounces.
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Federal Reserve Bank of St. Louis
It is estimated that perhaps 40 percent
Governor Wallich
2
of private stocks are held in France and some 25 percent is in India.
Middle Eastern private holdings are thought to comprise about 10 percent
of all private hoards (that is, some 50-to-75 million ounces), but as
noted above that estimate is especially questionable.
cc:
Gold Group, Mr. Smith, Mrs. Brown
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Federal Reserve Bank of St. Louis
F3OARD OF GOVERNORS
CIF T,If:
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Governor Wallich
Date
January 18, 1980
Subject:_ Gold Trading
Froni Donald B. Adams
Attached is a note about margins and trading in U.S. futures
markets.
On the question of volume on the London Metal Exchange, no figures
are made available by those who organize that market.
Attachments
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Federal Reserve Bank of St. Louis
BOARD OF GITVERNORS
OF
TH r:
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Mae January 17
Governor Wallich
1980
Subject: Margins and Trading in U.S.
Froni Donald B. Adams )\1\1
Futures Markets.
You inquired about margin requirements and recent trading volume in
gold futures markets.
The principal markets, of course, are the New York Commodity
Exchange (COMEX) and Chicago's International Monetary Market (INN).
The current COMEX initial requirement is $5,000 per 100-ounce contract.
That amount must be deposited when the transaction is made.
A transactor's holdings
are then "marked to market" at the close of trading each day; that is, their
value is computed at the day's closing price.
If the day's close is higher (lower)
than the purchase (sale) price for a long (short) position, the notional gain is
1
credited to the transactor's account.—/
is deducted from the initial deposit.
If a notional loss is shown, the sum
So long as the transactor's remaining
deposit is at least $3,750, no replenishment of such deductions is required,
but once the remaining deposit falls below $3,750, the transactor must bring
the balance back up to the initial margin requirement of $5,000 if he wishes
to maintain the position.
The $3,750 limit is the COMEX maintenance margin.
The IMM, in contrast to COMEX, distinguishes between customers who
hedge and those who speculate.
For hedgers, the initial margin is $3,000 per
100-ounce contract, and the maintenance margin is $2,000 per contract.
For
speculators, the initial margin is $5,000 per contract, and the maintenance
margin is $3,000 per contract.
The volume of trading on the COMEX and INN during 1979 and 1980 is
shown in the first three columns of the attached table.
It shows that after
1/ Whether such notional gains may be withdrawn from the account depends
on the transactor's agreement with his broker.
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L
Federal Reserve Bank of St. Louis
Gov. Wallich
- 2
averaging about 4 million ounces per day for the first eleven months of 1979,
average daily sales rose to about 5 million ounces in December and January.
It must be remembered that every transaction is counted in these figures, so a
substantial volume of intra-day position taking that washes out by the end of
trading is included.
Nonetheless, the open interest also increased substantially
towards the end of 1979, as shown in the last column of the table.
While open
interest excludes offsetting intra-day transactions, it does not exclude a transactor's offsetting positions in separate months.
Thus a "straddle," involving,
for example, a short position in the December contract and a long position in
the January contract, will inflate open-interest figures by being included twice.
Straddles are popular tax-deferral devices, and they may have been heavily employed
in November and December to shift some 1979 capital gains into 1980.
Attachment
Messrs. Truman, Henry, Gemmill, Shafer, and FM Economists
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Federal Reserve Bank of St. Louis
1979 Volume and Open Interest
in U.S. Gold Futures Markets
(millions of ounces)
Daily Average Volume
End-of-Month Open Interest
COMEX
INN
TOTAL
COMEX
Eng
TOTAL
2.7
1.7
4.4
16.8
7.3
24.1
Feb.
2.7
2.1
4.8
17.3
7.9
25.2
Mar.
1.7
1.2
2.9
16.0
6.9
22.9
Apr.
1.7
1.3
3.0
16.6
7.2
23.8
May
2.5
1.7
4.2
16.3
7.4
23.7
June
2.5
1.4
3.9
14.2
7.4
21.6
July
2.9
1.5
4.4
17.8
7.5
25.3
Aug.
2.6
1.7
4.3
17.4
6.9
24.3
Sept.
3.1
1.3
4.4
17.2
6.1
23.3
Oct.
2.3
1.0
3.3
17.5
6.3
23.8
Nov.
2.6
0.8
3.4
19.6
7.4
27.0
Dec.
3.8
1.2
5.0
24.8
8.1
32.9
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Federal Reserve Bank of St. Louis
,
BOARD OF GOVERNORS
OF THE
FEDERAL RESERVE SYSTEM
Office Correspondence
To
Mr. Henry
From
Donald B. Adams
Date
Subject:
October 4, 1979
How Can One Buy Gold
In the United States, the principal way of buying gold is
through futures contracts. The New York Commodity Exchange (COMEX)
and the International Monetary Market (IMM) are the leading marketplaces, although there are three other gold exchanges in the United
States and one in Canada.
Contracts on COMEX and the IMM are in 100-troy-ounce units
(units about one-third that size can be bought elsewhere). Margin
requirements are set by the exchanges and have been changing rapidly
in recent days. Representative current requirements are $3,000 on
the COMEX or less than ten percent of the value of the contract at
today's prices. Brokerage firms, through which the man-in-the-street
must deal, however, often impose stricter requirements. Moreover, it
is important to note that, unlike in securities markets, there is no
leeway in gold futures trading between the current market price and
the margin-call price. Every day one's position is revalued at closing
prices ("marked to market") and the full difference between that value
and the value when the contract was purchased is either returned to
(if positive) or called in from the customer. These failing to meet calls
may be sold out, with their original margin deposit going to meet any
losses suffered by the broker.
Still, such burden as the initial margin requirements impose
is made somewhat lighter by the provision for margin deposits in the
form of interest-bearing securities (for example, Treasury bills), instead
of cash. Brokerage firms also inspect prospective customers' net worth,
and at least one requires those opening accounts to have wealth of $25,000
if single, $50,000 if married.
Contracts are wi-itten for specific months, depending on the
exchange. For example, on COMEX one can now trade in contracts maturing
this month, in December, and every second month through August 1981.
One can also buy an interest in gold through Citibank. For
$1,000, one secures a specific, but undivided interest in an amount of
gold based on the price at entry. Further increments can be purchased
in $100 lots, and Citibank will repurchase in similar amounts. There
is a small transactions fee, but free storage at Citibank for a year
(unless physical delivery is desired). First National Bank of Chicago
also offers a plan for gold buyers, but I do not know the details.
As for purchase of physical gold here or abroad, I am not well
informed. I understand that gold coins can be bought through coin dealers,
and one can of course bid for bullion at IMF and Treasury auctions (300 or
400-ounce minimums). The Treasury is scheduled to begin selling one-ounce
and half-ounce gold medallions by mail order about the middle of next year.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
World Supply and Demand for Gold
(millions of ounces)
1973
1974
1975
1976
1977
1978
1979
28
8
24
8
23
9
23
8
23
8
23
8
23
8
36
32
31
31
31
31
31
9
0
7
1
5
0
13
3
13
8
13
12
9
17
9
8
5
16
21
25
26
Total Supply and Demand
45
40
36
47
52
56
57
Jewelry & Fabrication Demand
Hoarding & Investment
25
20
14
26
22
13
38
9
39
13
140
16
NA
NA
Mining Production
South Africa
Other Free World
Total
Communist Soles
Official Sales
Total
U.S. Treasury Dept.
September 11, 1979
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