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http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Note: Two books on "gold" borrowed from R & S Library at time of Byrd hearing--returned to Library 2/12/58. The Gold Standard in Theory & Practice by R . G . Hawtrey Gold and the Gold Standard by Edwin W. Kemmerer http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis COPY July 30, 1957 Mr. Marget Information on Gold Standard Experiences in the United States and Britain Samuel I. Katz In response to the request for information on the gold standard experiences in this country and in Britain for Chairman Martin, please find the following attached memoranda: "Summary of United States Experience with the Gold Standard 1873-1933;" by Mr. Rau; and "Summary of Britain's Experience Under the Gold Standard 1633-1931" by Mr. Westebbe. For concise reviews in economic literature, Chapters II and III of "Gold and the Gold Standard" by Edwin W. Kemmerer and Chapters II, III and IV of "The Gold Standard in Theory and Practice" by R. G. Hawtrey may be cited. Attachments 2 http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis COPY Allan F. Rau July 30. 1957 Summary of United States Experience with the Gold Standard, 1879-1933 The United States adopted a gold standard in 1879, during the presidency of Rutherford B. Hayes. At the end of 1861 the United States Government ceased to redeem its monetary issues in specie, and the nation went on an inconvertible paper standard. In the 1872 report of the Secretary of the Treasury, the secretary said: "In renewing the recommendations heretofore made for the passage of the mint bill, 1 suggest such alterations as will prohibit the coinage of silver for circulation in this country.. ." In 1873 a HouseSenate conference committee presented a coinage bill that was so confused in its wording and provisions that even the committee members themselves were bewildered. Both houses promptly passed the measure, and it became the Coinage Law of February 12, 1873. The Law omitted the standard silver dollar from the list of coins. Thus, a return to a specie basis would place the country on a gold standard. The action, however, aroused no public attention as neither the Congress nor the general public had realized the significance of the action. Even if they had, there would not have been much opposition as the owners of silver rarely sold it to the mint. On the llth of February, 1874, as shown in the Congressional Record of that day, Senator Stewart, of Nevada, stated in a speech: "I want the standard gold, and no paper money not redeemable in gold. . . " The Resumption Act of 1875 provided for the future return of the dollar to a specie basis. By 1876 the market value of silver had fallen drastically, and the country was well aware of the monetary revolution worked by the Coinage Law of 1873. The "Do Something for Silver" movement forced concessions for silver. Under the Bland-Allison Act of 1878 the Treasury was require! to purchase silver for monetary use. On January 1, 1879, the provision of the Resumption Act of 1875 requiring the return of the dollar to a specie basis went into effect, and the nation went on the gold standard. Eleven years later, the Sherman Silver Purchase Act of 1890 forced the Government into such extensive purchases of silver that the maintenance of a gold basis for the currency became seriousII endangered. A succession of Presidents, however, were resolved to upholdCthis standard, and the United States remained on the gold standard until 1917. Not until the Gold Standard Act of 1900 and the final defeat of William Jennings Bryan were the silver advocates effectively restrained. " From 1917 to 1919 the United States was on an inconvertible paper standard. In 1919 the United States restored the full redeemability of its money in gold and remained on the gold standard until March 6, 1933. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Richard M. Westebbe •July 30, 1957. Summary of Britain's Experience Under the Gold Standard, 1663-1931 In 1663, a new gold coin, called the guinea, was issued in England. Practically from the first, gold enjoyed a premium over silver and after the recoinage of 1696 to 1699 the value placed on gold in relation to silver in effect changed England's bimetallism to a monetary system dominated by gold. In 1717, a statutory value of 21 shillings was placed on the guinea which at a gold-silver ratio of 15. 2 1 = 1 was higher than in the rest of Europe. In 1774, Parliament placed limitations on the use of silver as legal tender, thus marking the first legal step away from bimetallism in England. From 1797 to 1821, England was in effect on a de facto depreciated paper-money standard. Heavy demands on the Bank of England to make advances to the Government, coupled with the drain of specie to France, caused the suspension of specie payments in the former year. In the Gold Standard Act of 1916, Parliament approved a monometallic gold standard. By 1821, the premium on gold had disappeared and cash payments at parity were resumed. From 1821 through 1914, the payment, free coinage, and movement of gold were maintained without legal restriction. England successfully resisted international pressures to re-establish bimetallism at various times in the nineteenth century. In 1914, England practically alone amongst the belligerents ^maintained the convertibility of paper money into gold. However, the export of gold was, in practice, obstructed because of transport difficulties and official pressure so that the gold standard ceased to function. By 1919, the inflationary pressures of war finance led to a procfemation formally suspending the export of gold. Great Britain returned to gold in 1925 when a gold bullion standard was established at the former gold parity and freedom to export gold was restored. The period was one of continuing depression in England. Establishing the pound at the pre-war parity undoubtedly overvalued British goods on the world market while the action of the Bank of England in successively raising Bank rate from 4 per cent in 1925 to 6-1/2 per cent in 1929 failed to check the outflow of gold, mainly to France, which was acquiring gold to back its growing note issue and deposits. In the Great Depression when prices fell rapidly, England continued to lose enormous amounts bf gold. Credits from New York and Paris failed to stop the flow and the Bank of England was relieved of its obligation to sell gold at the coinage price on September 21. 1931. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Mr. Anthony Harrigan, The News and Courier, Charleston, South Carolina. Dear Mr. Harrigan: This is in reply to your letter of July 30 concerning the amount of gold owned by the United States. m The gold stock of the United States (i.e., Treasury gold plus gold in the Exchange Stabilization Fund) amounted to $22.4 billion on March 31, 1957. The figure of $13 billion referred to in your letter represents the amount of foreign official and private short-term dollar holdings as of that date. Thus, the figure of $9 billion was derived by subtracting these dollar holdings from the gold stock of the United States. However, such a computation is not meaningful. While the United States Treasury is prepared to sell gold to foreign governments and central banks for legitimate monetary purposes, it does not extend this privilege to foreign private holders. Moreover, most of the holdings of foreign individuals and corporations, as well as a significant part of the holdings of foreign governments and central banks, represent working balances, which the holders need to make dollar payments. Foreigners are holding dollar assets because of the general acceptability of the dollar in international transactions. As long as the stability of the value of the dollar is maintained, there is no reason to suppose that foreigners would attempt to convert their dollar holdings into gold on a scale that would involve a disturbance in our economy. Actually, since mid-1955 sales of gold to the United States by foreign monetary authorities have exceeded purchases. At the end of March 1957 gold held under earmark at the Federal Reserve Banks for foreign and international accounts amounted to $6. 3 billion. Gold under earmark is not included in the gold stock of the United States. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely yours, Win. McC. Martin, Jr. June 26, 1957 Chairman Martin Byrd Committee Hearings, Arthur W. Marget Appended hereto is a memorandum, prepared by Mr. Purth, in answer to your request of June 24, also attached hereto. Attachment http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis June 26, 1957 Mr. Marget (Sold J. Herbert Purth 1. The role of gold in our economy today. (i) The main function of gold in our economy today is to act as a residual means of payment in settlement of international balances. The role of gold in the settlement of international balances has been recognized in: The Gold Reserve Act of 1934 (Section 3), which authorizes the Secretary of the Treasury to issue regulations, with the approval of the President, that "prescribe the conditions under which gold may be acquired and held, transported, melted or traded, imported or exported, or earmarked ... by the Federal Reserve banks for the purpose of settling international balances"; The Gold Regulations issued by the U. S. Treasury Department (paragraph 54.28), under which "the Federal Reserve banks may from time to time acquire from the United States ... such amounts of gold bullion as, in the judgment of the Secretary of the Treasury, are necessary to settle international balances"; and in Article IV, Section 4(b) of the Articles of Agreement of the International Monetary Fund, according to which "a member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold within the limits prescribed by the Fund . . . shall be deemed to be fulfilling" its obligation to maintain the par value of its currency. The "residual" role of gold in the settlement of international balances follows from the fact that, in practice, most international transactions today are settled in either U. S. dollars or pounds sterling. However, the U. S. Treasury stands "ready to buy gold at the official price of $35 per fine troy ounce from all legal holders" (Annual Report of the Secretary of the Treasury for 1951, http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget -2- June 26, 1957 p. 54)5 and gold can be freely sold for pounds sterling in the London gold market at a price which has deviated only by negligible fractions from the equivalent of $35 an ounce. Gold is thus a commodity which can be converted into the prevailing international currencies at fixed prices, and is as generally acceptable in international transactions as any internationally acceptable currency. (ii) The second function of gold in our economy today is implicit in the statutory requirement (Federal Reserve Act, Section 16, paragraph 3) that "every Federal Reserve bank shall maintain reserves in gold certificates of not less than 25 per centum against its deposits and reserves in gold certificates of not less than 25 per centum against the Federal Reserve notes in actual circulation.11 This requirement obviously sets an upper limit to the expansion of Federal Reserve liabilities, and therefore to the money-creating power of the System. Actually, however, the combined reserve ratio maintained by the Federal Reserve Banks is at present (as of June 19, 1957) 46.9 per cent of their liabilities. If the Federal Reserve Banks were at this time to expand their liabilities so as to reduce the reserve ratio to the legal minimum of 25 per cent, these liabilities would be expanded by 80 per cent; needless to say, such an expansion would be equivalent to a very serious inflation. The function of gold as a brake upon the expansion of Federal Reserve liabilities is therefore not a factor of immediate economic importance. however, regain such importance at a later time. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It may, To: Mr. Marget -3- June 26, 1957 2. Description of the international gold bullion standard in use in the United States since The international gold bullion standard may be defined as a system under which gold, at a fixed price, is freely used in the settlement of international balances (see above, l.i.), though not in the settlement of domestic transactions. The United States thus adheres to the requirements of an international gold bullion standard "by buying and selling gold freely at a fixed price, $35 an ounce, in transactions with foreign governments and central banks for all legitimate monetary purposes" (statement of the Secretary of the Treasury, October 5, 1949) • The fixed gold price of $35 per fine troy ounce was established by the Presidential Proclamation of January 31, 1934j it has become the basis of the par values of the currencies of all members of the International Monetary Fund by virtue of Article IV, Section l(a) of the Articles of Agreement of the International Monetary Fund, according to which "the par value of the currency of each member shall be expressed in terms of gold as a common denominator or in terms of the U. S. dollar of the weight and fineness in effect on July 1, 1944* ; and it has been given statutory recognition in the United States by the Bretton Woods Agreement Act, Section 5> according to which "unless Congress by law authorizes such action, neither the President nor any person or agency shall on behalf of the United States . . . propose or agree to any change in the par value of the U. S. dollar." http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget -4- June 26, 1957 3. Gold inflow and outflow and adequacy of our present gold supply. (i) At the end of 1946, the total U. S. gold stock (the gold stock of the U. S. Treasury plus gold in the Exchange Stabilization Fund) amounted to $20,706 million. In the following years, there was an inflow totaling $4,065 Million (net after payment in 1947 of $688 million in gold as the U.S. gold subscription to the International Monetary Fund) so that by the end of August 1949 the gold stock reached an all-time peak of $24,771 million. An outflow of |2,844 million reduced the gold stock to $21,927 million by the end of the first quarter of 1951; an inflow of $1,606 million raised it again to $23,533 million at the end of the second quarter of 1952; a renewed outflow of $1,803 million lowered it to |21,730 million by the end of the second quarter of 1955; and a renewed inflow of $996 million brought it to $22,726 million at the end of May 1957. At present, the U. S. gold stock is therefore about $2 billion higher than at the end of 1946, and about $2 billion lower than at the end of August 1949. (ii) The facts with respect to the adequacy of our present gold supply may be stated both in arithmetical and in economic terms. The U. S. gold stock is equal to nearly 60 per cent of the estimated gold reserves of the entire free world. Even if the official dollar holdings of foreign countries (about $7*& billion) are deducted from the U, S. gold stock in view of the willingness of the U. S. Treasury to redeem such balances in gold on demand, the remaining net gold holdings (about $14.9 billion) would represent nearly http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget -5- June 26, 1957 40 per cent of the entire gold holdings of the free world. The ratio between U. S. gold holdings (gross or net) to annual U. S. merchandise imports ($12,7 billion in 1956) is much higher than the ratio between gold holdings and imports of any other major country of the free world. Similarly (as mentioned above, 1. ii.), the ratio of gold to Federal Reserve liabilities is much higher than the statutory ndnimum. From the point of view of economic analysis, however, these arithmetical relationships are not of decisive importance. In the days before the First World War, the United Kingdom acted as banker for virtually the entire world with a gold reserve that amounted to $165 million at the end of 1913. Although such a reserve would be considered woefully inadequate today, the United Kingdom did not then suffer from any balance of payments difficulties because it maintained financial stability and the world had unlimited confidence in the value of the pound sterling. More recently, at the end of 1950, not only did the Federal Republic of Germany have no gold at all, but its foreign exchange holdings of |274 million were exceeded by its foreign exchange liabilities of t432 million, so that its net foreign exchange reserves actually were a negative number. Nevertheless, the country was able to enter into a period of unprecedented expansion of domestic and international economic activity while maintaining financial stability, and by the end of April 1957 it had accumulated $1.8 billion in gold and $2.8 billion in net foreign exchange assets, to achieve http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Karget -6 - June 26, 1957 the highest gold and dollar reserve of any country of the free world other than the United States. Even a small gold and foreign exchange reserve therefore can prove to be adequate if the country maintains financial stability and inspires domestic and international confidence in the maintenance of the value of its currency. On the other hand, the largest gold reserve can be dissipated within a short time if inflation leads to an excessive rise in imports, a sharp decline in exports, and the flight of capital. If the United States continues to be reasonably successful in the struggle against inflationary pressure, and thereby maintains confidence at home and abroad in the value of the dollar, the present U. S. gold stock should be fully adequate for its needs. But if the United States were unsuccessful in its fight against inflation, even a much larger gold stock might well turn out to be inadequate. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis a, COPY f / August 8, 1957. rt ! Mr. Anthony Harrigan, The News and Courier, Charleston, South Carolina. Dear Mr. Harrigan: This is in reply to your letter of July 30 concerning the amount of gold owned by the United States. The gold stock of the United States (i. e. , Treasury gold plus gold in the Exchange Stabilization Fund) amounted to $22.4 billion on March 31, 1957. The figure of $13 billion r e f e r r e d to in your letter represents the amount of foreign official and private short-term dollar holdings as of that date. Thus, the figure of $9 billion was derived by subtracting these dollar holdings from the gold stock of the United States. However, such a computation is not meaningful. While the United States T r e a s u r y is prepared to sell gold to foreign governments and central banks for legitimate monetary purposes, it does not extend this privilege to foreign private holders. Moreover, most of the holdings of foreign individuals and corporations, as well as a significant part of the holdings of foreign governments and central banks, r e p r e s e n t working balances, which the holders need to make dollar payments. Foreigners are holding dollar assets because of the general acceptability of the dollar in international transactions. As long as the stability of the value of the dollar is maintained, there is no reason to suppose that foreigners would attempt to convert their dollar holdings into gold on a scale that would involve a disturbance in our economy. Actually, since mid-1955 sales of gold to the United States by foreign monetary authorities have exceeded purchases. At the end of March 1957 gold held under earmark at the Federal Reserve Banks for foreign and international accounts amounted to $6.3 billion. Gold under earmark is not included in the gold stock of the United States. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely yours, Wm. McC. Martin, Jr. From the desk of WILLIAM McCHESNEY MARTIN. JR. ( August 30 NOTE: Annex A, r e f e r r e d to in this memorandum, returned to Mr. Marget. This is a monthly statement and if Mr. Martin is called again to testify we will get the current statement for his use. mnm http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B O A R D OF G O V E R N O R S OF THE f I F E D E R A L R E S E R V E SYSTEM Office Correspondence To Chairman Martin PVnm Arthur ¥. Marget Date nmnt.6, Subject: Cta the general principle of watching for questions asked in the Senate Finance Committee Hearings that might be repeated to you, I note two items in the questioning of Mr. Burgess by Senator Maione on August 31* "Q. I was in South Africa. I had been hearing this business about gold selling for $60 or 170 an ounce in foreign markets* You have heard that? "A. Yes. I know it is not so." Somebody might pick up the fact that in a country such as India, the price for bar gold has been in fact around $60 an ounce (see the quotation for Bombay in the attached [Annex AJ monthly report of the IMF). It is for this reason that we are careful to phrase our answers to inquiries on the point in such a way as to take care of this. I think that you have seen the letter which I sent to Senator Mansfield on this matter last week; but I am appending a copy in any case [Annex B[. 2. On page £ of our transcript of the testimony on August 3, there appears the following: "Senator Malone ... again asked whether foreigners were able to invest in the U. S. through the medium of Swiss bankers. "Q. Is there enough of that money being moved into American business, is the rate of flow important enough to control certain corporations and businesses in this country? "A. We have tried to make an estimate of that, and it is very baffling. "We do not think the amount is large enough to control any company, unless possibly it were concentrated on some relatively small company. The amounts involved are not big enougho" This is a matter which keeps on popping up. You may want to check on what was said in Governor Balderston!s replies to questions of the Subcommittee on Securities of the Senate Banking and Currency Committee, Questions 6 through 18 (pp. 9£-7 of the printed version of the Subcommittee Hearings, May, 195>7). 3h this connection, http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Chairman Martin -2- August 6, also, you may wish to remind yourself of the substance of Governor Balderston's letter of July 10, 19£6, to Senator Dirksen, which involved the appearance, before a Senate Subcommittee, of Mr. Arthur Bloomfield, of the staff of the Federal Reserve Bank of New York. A copy of Governor Balderston's letter is also appended hereto, as Annex C. Attachments: Please Return Annex A only. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis c 0 p I July 31, 19S7 The Honorable Mike Mansfield, United States Senate, Washington 25, D. C. Dear Senator Mansfield: This is in reply to your letter of July 29, which included a letter addressed to you by Mr. Frank B. Bryant, of Landusky, Montana, in which Mr. Bryant refers to the price of gold in major gold markets* In the world1 s two leading international gold markets (London and Zurich), the price of bar gold at the present time is virtually identical with the price of $35 per ounce paid by the U. S. Treasury. In France, where the gold market is restricted to domestic transactions, the price of bar gold (converted at the free rate of exchange) has been around $36.25 per ounce in recent months. In some Asian countries, particularly India, where gold markets are to a considerable extent isolated from the world market and imports and exports are restricted, the price of bar gold primarily reflects local conditions. The gold prices quoted by Mr. Bryant from the and Mining Journal for Buenos Aires and Paris appear to gold coins and, therefore, are not comparable to the U. gold bullion. Coins customarily command a premium over Engineering be those for S. price for bar gold* In accordance with your request, I am returning Mr. Bryant's letter herewith. Sincerely yours, Arthur W. Mar get, Director, Division of International Finance Enclosure http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis c 0 p T July 10, 19^6 The Honorable Everett McKinley Dirksen, United States Senate, Washington 2$9 D. C. N(y dear Senator: In the absence of Chairman Martin, I wish to thank you for your letters to him, dated June 26 and July 3, with respect to the matters raised in the letter of your correspondent of June 19* The delay in answering the June 26 letter was due to the fact that we wished to have the comments of the Federal Reserve Bank of New York, to which reference was made in your correspondent1 s letter. With respect to the testimony of Mr, Arthur I. Bloomfield, of the Federal Reserve Bank of New York, which your correspondent mentions, we are informed that Mr. Bloomfieldfs name was called to the Subcommittee^ attention by the Securities and Exchange Commission, which referred to Mr. Bloomfield's monograph on Speculative and Flight Movements of Capital in Postwar International Finance (Princeton, 195U).We are further informed that when Mr. Herbert Finzel, the Acting Counsel for the Subcommittee, asked Mr. Bloomfield to come down to Washington to testify on this subject on the basis of his monograph and to submit some statistical tables on total reported foreign assets in the United States, Mr. Bloomfield made it clear that he had no knowledge whatever as to the extent to which Communist money mi^rb be anonymously infiltrating American industry, since such capital inflows by their very nature would not be reported. Nevertheless, he agreed to testify. It is our understanding that the transcript of Mr. Bloomfield 's testimony, along with the subsequent testimony of other witnesses, will be published. In the meantime, you may be interested in Mr. Bloomfield1s own summary of his testimony! tt Although I had prepared no formal statement, I talked for about ten or fifteen minutes from notes which I had brought with me in which I emphasized, among other things, that* I was not a lawyer, tax expert, or practical operator in foreign exchange and that consequently I knew next to nothing about those particular hot money inflows in which the Subcommittee was most interested^ that my purpose in testifying before the Subcommittee was solely to present some comments as an economist on the nature and mechanics of foreign money flows in general to the United States, especially those flows which illegally escape their countries of originj that the United States, except for controls over Chinese and North Korean assets, imposes no controls over the inflow or outflow of capital and that consequently foreign money can come into and out of this country quite freelyj and that, in the absence of such controls, our knowledge of foreign capital http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis The Honorable Everett McKinley Dirksen -2- flows has to be based almost entirely on reporting mechanisms* I then went on to describe briefly the motives for foreign money flows in general to this country — emphasizing that the bulk of the increase in reported foreign dollar assets in the United States in recent years has been on official account and has occurred for perfectly "normal11 reasons. I did point out that an apparently substantial part of the private foreign funds that has come to the United States over the postwar period as a whole has been of a "hot money11 character designed to escape anticipated losses or impairment of capital because of political disturbance and high taxes abroad, etc., or to take advantage of expected devaluations of foreign currencies. I emphasized, however, that during the past four or five years the inflow of hot money has diminished very substantially. I made it clear that it is impossible to say how much "hot money" has come here in view of the facts that our statistics on private foreign capital inflows are obviously not classified by motivation and that a considerable part of these inflows in any case escape our statistical reporting system when the money involved is held in American names. I then summarized briefly some of the devious methods whereby foreigners are able to get money into this country by evading exchange controls abroad, e.g., over-invoicing of imports and under-invoicing of exports, black market deals, private compensation deals, smuggling out of bank notes and securities, etc. I also submitted to the Subcommittee, as requested, three statistical tables giving the aggregate amount of foreign dollar investments and assets by individual countries and by major types of investments and assets*fl Since your correspondent suggests the possibility that the Federal Reserve System might be withholding information in its possession regarding the extent to which Communists and other foreign investors may have acquired shares of American corporations and indeed other dollar assets, I can only assure you that this is not the case. Ch the contrary, such statistical data as the Federal Reserve Banks, acting on behalf of the Treasury Department, collect on foreign assets and security purchases in the United States are regularly published on a monthly basis in the Federal Reserve Bulletin and the Treasury Bulletin. To what extent the funds of individual foreign countries,including Russia, are held or invested in the United States anonymously — through the use of American nominees or banks of third countries — the Federal Reserve Banks would not know. It is clear, however, from the information that is available that the amount of such funds cannot be very large and cannot endanger the financial stability of the United States. With respect to the question raised in your correspondent^ letter regarding the possibility of a conversion of foreign dollar http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 3assets and investments into gold, your attention is invited to an article which appeared in the Federal Reserve Bulletin for March 195>6 (a copy of which is enclosed), entitled "International Gold and Dollar Plows," especially pages 222 and 223* http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Sincerely yours, (Signed) C. C. BALEERSTON C. Canby Balderston, Vice Chairman* International Gold and Dollar Flows FURTHER GROWTH in gold reserves and dollar holdings of foreign countries and international institutions brought the total to $31.4 billion at the end of 1955. The increase of $1.8 billion for the year compared with $2.2 billion in 1954 and $2.6 billion in 1953. The tapering off in the rate of growth reflects a decline in foreigners' net receipts of gold and dollars through transactions with the United States. During the three years 1953-55, foreign monetary authorities applied progressively less of their dollar receipts to the purchase of gold from the United States. In 1955 foreign gold transactions with this country were the smallest in many years, and the United States gold stock changed little. Accumulation of dollar holdings by foreigners averaged more than $1 billion annually during the past three years, but the form in which the added funds were held changed. The 1955 increase in such holdings was primarily in the form of United States Government securities, including—in addition to Treasury bills—unusually large amounts of bonds and notes. Dollars are held by commercial banks and other private organizations and individuals as well as by foreign monetary authorities. Private dollar holdings generally represent business funds related to the current transactions of foreigners with this country. Growth in such holdings in recent years has accompanied expansion of United States trade and financial transactions with the rest of the world. While official dollar holdings are part of monetary reserves, which may be http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis FOREIGN GOLD RESERVES AND DOLLAR HOLDINGS Billions of dollars DOLLAR HOLDINGS: 1949 1953 1954 1955 NOTE.—Year-end data. Includes international institutions. Other securities include primarily Treasury bills. converted into gold through purchases from the United States Treasury, they represent in part active balances maintained for current exchange and other operations. Gradual relaxation of exchange restrictions abroad and the restoration of freer conditions for world trade continued in 1955. This was reflected in a strengthening of exchange markets, as many countries continued to take steps toward broader intermarket relations and freer movement of short-term funds in adjusting the supply of and demand for foreign currencies. FOREIGN TRANSACTIONS WITH THE UNITED STATES Foreign countries and international institutions added $1.3 billion to their gold reserves and dollar holdings in 1955 through transactions with the United States. This compares with an increase of $1.6 billion in 217 • 1951 REPRINTED FROM FEDERAL RESERVE BULLETIN FOR MARCH 1956 218 FEDERAL RESERVE BULLETIN • MARCH 1956 1954 and $2.2 billion in 1953. The lower rate of accumulation in 1955 was accompanied, however, by a reduction in shortand medium-term foreign lending by United States banks. The net outflow of bank funds declined from $585 million in 1954, an unusual amount, to $360 million in 1955. Balance of payments. The surplus in the United States international balance on account of goods, services, and remittances (excluding grant-financed military supplies and services) in 1955 was $1.4 billion, slightlyx larger than in 1954. While both exports and imports increased sharply last year, the trade surplus widened only moderately; this change was offset by increased military expenditures abroad, primarily as a result of disbursements under offshore procurement contracts. Apart from these current account transactions, the outflow of United States Government nonmilitary grants and capital last year was $635 million larger than in 1954. This reflected increases in grant-aid disbursements during the first half of the year, and SELECTED COMPONENTS OF UNITED STATES BALANCE OF PAYMENTS [In millions of dollars] 19 54 Component 19 55 First Second First Second half half half half Surplus on goods, services, and remittances 383 929 711 732 Net outflow of capital and U. S. Govt. grants: U. S. private capital. . . . U. S. Govt. capital and grants 684 937 400 548 648 837 1,293 827 Net transfers of gold and dollars to foreigners. . 706 904 680 NOTE.—Department of Commerce gold and dollars to foreigners, which Grant-financed military supplies and Data for the second half of 1955 are http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 575 data, except transfer of are Federal Reserve data. services are not included. preliminary. in acquisitions of foreign currencies by the United States Government through sale of surplus agricultural commodities over the year. On the other hand, there were small net repayments on medium- and long-term loans held by the Export-Import Bank. The net outflow of private capital, including funds of United States banks, was smaller last year than in 1954. The interest of United States investors in acquiring foreign stocks, primarily European and Canadian, which had appeared in 1954, continued in 1955. Flotations of dollar bonds by Norway and South Africa extended the gradual widening of the foreign bond market in this country that began with Australian and Belgian issues in late 1954. These foreign portfolio investments were offset, to some extent, by net redemptions of Canadian bonds in this country, as interest rates here rose relative to Canadian rates. Private direct investments abroad in 1955 in branches and subsidiaries of domestic corporations continued within the range of $700-$800 million that has prevailed in recent years. Foreign net purchases of United States corporate stocks totaled $130 million, about the same as in 1954. Lending by United States banks. The net outflow of funds of United States banks (including Federal Reserve Banks) to foreigners in 1955 was smaller than in 1954. This coincided with repayments by foreign central banks on short-term Federal Reserve gold loans. Net disbursements on such loans during 1954, principally to Brazil, were $120 million. In late 1954, however, Brazil obtained a medium-term gold loan from United States commercial banks and drew on this loan over the ensuing months to liquidate its indebtedness to the Federal Reserve System. 219 INTERNATIONAL GOLD AND DOLLAR FLOWS Claims on foreigners reported by commercial banks increased $495 million in 1955, slightly more than in the preceding year, partly as a result of the shift in Brazil's indebtedness. Over the past two years commercial banks expanded their purchases of the early maturities of International Bank loans, without the Bank's guarantee, and increased their disbursements on loans guaranteed by the Export-Import Bank. Claims of commercial banks on the United Kingdom declined $65 million in 1955, in contrast with an increase of $100 million the year before. Most of last year's decline occurred in the first quarter, when there was a return flow of funds that had been placed in deposit accounts or shortterm securities in the United Kingdom during December 1954. In December 1955 a similar flow of such bank funds to the United Kingdom amounted to $35 million. GOLD MOVEMENTS Additions to foreign gold holdings have diminished steadily in recent years. Last year foreigners purchased (net) only $68 million of gold from the United States, compared with $327 million the year before and $1.2 billion in 1953, as the accompanying table shows. Meanwhile, additions to foreign gold reserves through net purchases out of new production and from other sources, which amounted to about $420 million in 1953, totaled about $600 million in each of the past two years. Foreign gold production (excluding the U.S.S.R.) last year rose about $50 million to an estimated $900 million, largely because of increased South African output. Most of the South African production was disposed of through the London market. The part of new foreign production not absorbed into official reserves—about one- http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis INCREASE IN FOREIGN GOLD RESERVES AND DOLLAR HOLDINGS, BY SOURCE [In millions of dollars] Source 1953 From the United States: Increase in dollar holdings 1 . . 1,020 1,164 Net gold purchases Net acquisitions of gold from new production and other 417 sources2 Total increase in foreign gold and dollar holdings 2,601 1954 1955 1,283 327 1,187 68 616 590 2,226 1,845 1 Includes 2 principally deposits and U. S. Govt. securities. Estimated. Includes net purchases from private holders and the U. S. S. R. third last year—goes to meet gold requirements in the arts and industry as well as other private demand. Transactions with the United States. In 1955 the only significant gold transactions with the United States were purchases by France ($68 million) and Germany ($10 million) in the first half of the year and a sale by Uruguay ($11 million) in the third quarter. Net purchases from domestic production partly offset sales abroad, and throughout the year the United States gold stock fluctuated close to $21.8 billion. Transactions among foreign countries. In contrast with the decline in foreign gold transactions with this country, gold transactions among foreign monetary authorities (other than purchases of newly produced gold) appear to have increased, in part as a result of the reopening of the London market in 1954 and the relatively favorable gold price in foreign markets. The estimated volume of such transactions exceeded half a billion dollars during 1955. The price of gold in London during the latter part of 1955 fell slightly below the dollar parity of $35 an ounce. This encouraged use of gold rather than dollars in settlement of international obligations. Dur- 220 FEDERAL RESERVE BULLETIN • MARCH 1956 ing that period gold was employed extensively to settle debts with the European Payments Union, and European central banks were reported to have purchased gold in London. Also, some countries used gold to repurchase their own currencies from the International Monetary Fund. of dollars. All other Continental Western European countries, except Austria and Denmark, increased their holdings. The amounts were largest for Italy, Switzerland, and Belgium. REGIONAL DISTRIBUTION OF FOREIGN GOLD RESERVES AND DOLLAR HOLDINGS REGIONAL CHANGES Changes in gold reserves and dollar holdings of individual foreign countries varied in 1955, reflecting transactions with the United States, acquisitions from new gold production, and gold and dollar transfers among foreign countries and international institutions. Continental Western European countries added $1.7 billion to their holdings, about the same as in 1953 and 1954. On the other hand, the sterling area's holdings declined $465 million, in contrast with an increase of $175 million in 1954. Canadian holdings declined $100 million, while Latin American holdings increased $165 million. Aggregate holdings of the nonsterling countries of Asia rose about $400 million, following declines in 1953 and 1954. Within Continental Western Europe, changes varied widely by country. Holdings of France increased nearly $650 million, more than double the 1954 growth, as its position in the European Payments Union improved and there was further improvement in its over-all balance of payments with the United States, which included large dollar receipts from aid, offshore procurement, and military expenditures. The increase in German holdings, $385 million, was about half that of 1954, reflecting primarily increased imports from the dollar area; United States Government military expenditures continued to be a major source http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis NOTE.—End-of-quarter data. Holdings of the United Kingdom, which maintains the central gold and dollar reserve for the sterling area, declined about $530 million in 1955. This compares with a reduction of $642 million in British official reserves—gold and United States and Canadian dollars. Increased private dollar holdings partly offset the decline in reserves. Gold and dollar holdings of other sterling countries rose about $65 million. Among Latin American countries gold and dollar holdings increased in Mexico and Venezuela, by relatively large amounts, and declined in Colombia, Uruguay, and Argentina. Colombia's indebtedness to United States banks increased during the 'first half of the year. Japan and Indonesia, 221 mainly because of improved trade positions, accounted for most of the rise in holdings of other foreign countries. Gold reserves and dollar holdings of international institutions increased nearly $150 million in 1955. Several countries repurchased their own currencies from the International Monetary Fund, with gold or dollars; the largest repurchases were made by France, Japan, and India. Dollar loan repayments and sales out of its portfolio enabled the International Bank to maintain disbursements without issuing new dollar bonds. Additions to foreign dollar holdings were maintained at a high level over the past three years. The increase of $1.2 billion in 1955 was only slightly below that of the preceding year. Last year foreigners invested $530 million of the total in United States Government bonds and notes, as the accompanying chart shows. Practically all of the 1954 net addition was in short-term forms—deposits and short-term Government securities. Also in contrast with 1954, last year's increase was not solely in official accounts; private holdings rose $450 million, with most countries participating in the expansion. Investment in United States Government bonds and notes. Information on the amount and country distribution of foreign holdings of United States Government bonds and notes—defined to include all securities with an original maturity of more than one year —was obtained for the first time last year through a special survey conducted by the Federal Reserve System. Except for partial amounts, Government bonds and notes previously had not been included in published data on foreign gold and dollar holdings. In May 1955 selected banks in the United States reported the amounts of United States Government bonds and notes held for foreign and international accounts. These figures, together with regular monthly statistics on security transactions, provided a basis for estimating outstanding holdings of each foreign country for the period since 1949. The estimates are included in all statistics on dollar holdings shown in this article; in NOTE.—Includes international institutions. Private holdings include Japanese holdings that are reported as private, but are mostly official in character. For some U. S. Govt. bonds and notes, which are not reported by type of holder, a breakdown is estimated. Other holdings include bankers' acceptances and miscellaneous short-term paper. COMPOSITION OF DOLLAR HOLDINGS http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 222 FEDERAL RESERVE BULLETIN • MARCH 1956 the table published regularly, on page 295; and in the special tables on pages 303-305, one showing back figures and the other changes during 1955. The new figures fill an important gap in information on foreign dollar holdings as well as on the ownership of United States Government securities. Foreign and international institution holdings of United States Government bonds and notes were estimated at $1.6 billion on December 31, 1955; this represented more than 10 per cent of their total dollar holdings. The amount held for official institutions was estimated at more than $1 billion, of which about $450 million was purchased during 1955. Foreign holdings of United States Government bonds and notes appear to include for the most part relatively short maturities. Available information indicates that about one-third of these securities will mature within one year and three-fourths within three years. Private holdings. Foreign countries and international institutions maintained $15.2 billion in dollar accounts at the end of 1955, almost half of their total gold and dollar holdings. Of the dollar holdings of foreign countries—$13.0 billion—about three-fifths was for official accounts and the remainder for private accounts. Less than half of official holdings, but more than four-fifths of private holdings, was in the form of deposits. Over recent years private holdings have been affected by relaxation of exchange restrictions and the accompanying broadening of private foreign exchange markets. Private institutions have been permitted to hold larger amounts of foreign exchange in order to accommodate demands of customers and to undertake short-term foreign exchange operations. As a result, private holdings http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis are coming to assume somewhat greater importance relative to official reserves. Private holdings are a supplement to official reserves. Under relatively stable conditions and with free exchange markets, an adverse balance of payments may be reflected in declining private holdings and, similarly, a favorable balance of payments may lead to increased private balances. The adequacy of a country's foreign exchange holdings tends to depend not only on its official reserves but also on the availability of foreign funds in the market. ROLE OF DOLLAR HOLDINGS The net dollar receipts of the rest of the world, which reflect the over-all balance of payments of foreign countries with the United States, may be held in deposit accounts or in securities or may be used to purchase gold from this country. The form in which net dollar receipts are held depends, among other things, on the type of holder, the purpose for which assets are held, and preferences for interest-earning assets. The outstanding amount of foreign-held dollars is a potential claim against goods and services produced in this country, or other assets, as well as against the monetary gold stock of the United States. Of the total United States gold stock of $21.8 billion at the end of last year, $12.0 billion represented required domestic reserves against deposits at Federal Reserve Banks and currency in circulation, while the remaining $9.8 billion was so-called "free" gold. Domestic gold reserve requirements are affected by expansion or contraction of the domestic money supply (bank deposits and currency in circulation), as well as by any changes in reserve requirements against deposits or currency. The level of "free" gold is affected by these factors as well as by gold INTERNATIONAL GOLD AND DOLLAR FLOWS transactions with foreigners and by any net domestic production or consumption of gold. Foreign dollar holdings have grown along with the increased importance of the United States in world trade and finance and with the emergence of the dollar as the leading currency of the world. Thus the greater part of foreign dollar holdings represents funds needed by their holders for carrying out international transactions. Foreign private dollar holdings, which totaled $5.3 billion at the end of last year, by and large represent operating funds of commercial banks and business firms, which need these assets for their normal trade and financial operations with the United States. These groups may not purchase gold from the United States Treasury, although they may dispose of their dollar holdings to foreign monetary authorities. Similarly, international institutions do not have the alternative of converting their dollars into gold. The holdings of these institutions, $2.2 billion on December 31, 1955, may be used only in connection with their operations, which, however, might conceivably add to the dollar holdings of foreign countries. Other foreign dollar holdings—$7.7 billion at the end of 1955—represent assets of monetary authorities, including foreign central banks and governments, which the authorities may freely use to purchase gold from the United States Treasury. These funds, however, include operating balances which these institutions maintain to meet current exchange requirements, to intervene in foreign exchange markets, or to undertake transactions on behalf of their governments. During the postwar period, foreign monetary authorities have at times bought un- http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 223 usually large amounts of gold from the United States. Purchases have been made for the most part with currently accruing dollars. Although the experience of individual countries has varied, at no time in this period have foreign countries as a group reduced their dollar holdings significantly to purchase gold. The extent to which gold has been purchased has depended in large measure on which country was earning dollars, since some countries have shown a high propensity to hold their reserves in gold while others have shown very little or no preference for gold as compared with dollars. The greater part of outstanding official dollar holdings belongs to countries that in the postwar period have converted a relatively small portion of their net dollar receipts into gold. In general, foreign holdings of dollars, in the form of deposits or other liquid assets, contribute to stability of foreign currencies and to the maintenance of high levels of world trade. Because of the general acceptability of the dollar as a means of international settlement, the ready availability of dollar funds helps foreign countries in adjusting to abrupt shifts in their international accounts. Also, the fact that a foreign monetary authority has large dollar balances at its immediate disposal contributes to confidence, and thus tends to mitigate balance-of-payment crises. The dollar liquidity of foreign countries also facilitates international financing. Foreign lending by United States banks has expanded over recent years along with the increase in foreign dollar holdings. The ready availability of dollar funds to foreigners sustains the foreign trade of the United States and the rest of the world. GOLD RESERVES AND DOLLAR HOLDINGS ESTIMATED GOLD RESERVES AND DOLLAR HOLDINGS OF FOREIGN COUNTRIES AND INTERNATIONAL INSTITUTIONS [In millions of dollars] Dec. 31, 1953 Area and country Gold& shortterm dollars Dec. 31, 1954 Mar. 31, 1955 June 30, 1955 Sept. 30, 1955 Dec. 31, 19551* U. S. Gold& U.S. Gold& U.S. Gold& U.S. Gold& U. S. Gold& U.S. Govt. short- Govt. short- Govt. short- Govt. short- Govt. short- Govt. bonds term bonds term bonds term bonds term bonds term bonds & notes dollars & notes dollars & notes dollars & notes dollars & notes dollars & notes Continental Western Europe: Belgium-Luxembourg (and Belgian Congo) . . Finland France (and dependencies) ' Greece Italy Netherlands (and Netherlands West Indies and Surinam) Portugal (and dependencies) Spain (and dependencies) Switzerland Turkey4 Other Total Sterling Area: United Kingdom dependencies India Other Total Canada 238 1,098 127 64 1,049 1,225 112 812 8 9 6 1 158 (33) () 9 329 1,039 102 72 1,328 1,999 124 925 12 10 7 3 161 (33) () 10 331 1,087 100 69 1,362 2,125 141 957 12 9 7 3 161 (33) ( ) 5 325 1,108 85 69 1,397 2,155 138 992 12 10 6 5 160 3 (3) 341 1,146 95 73 1,593 2,250 145 1,105 1,055 171 469 150 335 2,133 157 887 7 5 (3) 1,118 148 560 188 406 2,185 152 947 5 6 (3) 4 1 38 1,089 109 570 209 386 2,149 154 1,016 26 14 (3) 4 1 42 1,072 116 571 225 383 2,170 156 1,242 41 36 (3) 1,074 113 580 237 411 2,197 153 1,273 1 41 4 3 252 11,622 260 11,854 3,009 108 346 214 373 232 5 1 1 3 3,190 103 334 232 381 216 5 1 1 3 4,05ft 242 4,240 2,292 227 2,616 501 40 423 121 236 527 51 65 341 90 104 56 337 595 130 2 1 2 5 53! 32 442 112 308 423 72 62 391 74 118 59 317 597 135 61 184 181 951 304 281 401 10,082 Panama, Republic of Peru El Salvador Other Total Asia: Japan Thailand Other Total 3,617 4 285 12,204 324 12,786 3,137 103 334 236 395 249 5 1 1 3 3,139 102 344 242 405 280 5 1 1 3 226 4,205 259 4,232 93 2,418 182 2,381 P) (3) (3) 1 3 10 523 26 417 118 183 420 75 72 427 79 114 72 308 591 140 3,673 146 (3) (3) 2 8 3 ( ) 6 181 169 851 266 236 520 (3) (3) 2 1 (3) 43 (3) (3) 4 1 (3) 41 53 (3) 10 10> 6 5 151 K <? 1,100 124 600 221 429 2,348 153 857 <? 345 13,204 339 2,593 88 320 265 433 282 12 1 1 4 44 (3) 44 53 a<? 2,800 100 339 251 421 286 12 I 1 3 290 3,911 303 3,699 300 262 2,320 397 2,172 437 (33) () 2 1 (3) 149 3 () 1 3 12 536 26 469 129 184 423 82 70 481 85 124 61 277 662 140 (3) (3) 1 3 11 528 28 442 136 188 431 83 78 419 84 118 79 291 664 138 1 3 14 509 26 466 139 217 389 77 72 556 86 127 52 281 668 124 3,565 172 3,707 174 3,749 194 3,789 195 15 (3) 6 1 4 196 190 884 263 243 601 15 (3) 3 6 1 3 201 174 992 266 235 620 15 (3) 6 (3) 6 179 178 841 264 245 551 6 1 2 255 173 1,029 263 250 643 15 (3) 4 6 1 3 15 Latin America: Bolivia Brazil Chile Colombia Cuba Dominican Republic Guatemala 1 42 12 324 10 1,197 6 91 5 84 161 21,986 5 2,374 185 (3) 1,131 G ] 1 (3) 124 (3) 4 1 (3) 1 (3) 149 (3) 4 1 (3) 4 2 (3) (3> (3) 169 (3) 4 1 (3) (3> <3 (33> () 169 (3) 4 1 (3) 1 3 15 2,302 16 2,223 2,258 29 2,377 28 2,488 27 2,613 29 Eastern Europe 5 306 6 309 6' 309 6 311 7 307 7 308 7 All other: Egypt Other 217 67 1 221 68 (3) 228 72 (3) 224 84 P) 234 87 o1 2-16 77 (3) 2 289 P) 300 (3) 308 (3) 321 1 323 933 25,520 1,085 25,882 317 3,595 Total Total foreign countries 284 22,933 3,331 Grand total 26,264 ( 806 24,972 285 3,510 1,091 28,482 P1Preliminary. Includes gold reserves of Bank of France and French dependencies only. 2 Reflects publication by France of certain previously unpublished French gold reserves, which are included for earlier dates in Continental Western Europe—Other. 34 Less than $500,000. Includes Yugoslavia, Bank for International Settlements (both for its own and European Payments Union account), gold to be distributed by the Tripartite Commission for Restitution of Monetary Gold, and unpublished gold reserves of certain Western European countries. ' Excludes gold reserves of the U. S. S. R. « Includes International Bank for Reconstruction and Development, http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 746 24,909 353 3,557 1,099 28,466 362 3,599 1,295 29,119 1,402 29,477 1,274 26,108 1 1,308 3,689 321 1,594 29,797 1,629 320 International Monetary Fund, and United Nations and other international organizations. NOTE.—This table has been revised to show figures on holdings of U. S. Govt. securities with original maturities of more than one year. Gold and short-term dollars include reported and estimated gold reserves of central banks, governments, and international institutions, and official and private dollar holdings as shown in Short-term Liabilities to Foreigners Reported by Banks in the United States, by Countries (Tables 1 and la-Id of the preceding section). U. S. Govt. bonds and notes represent estimated official and private holdings of such securities with original maturities of more than one year; these estimates are based on a survey of selected U. S. banks and on monthly reports of security transactions. For back figures see pp. 304-05 of this BULLETIN. 303 GOLD RESERVES AND DOLLAR HOLDINGS 1955 [In millions of dollars] Increase or decrease (— ), 1955 Holdings, Dec. 31, 1954 Gold reserves U.S. Gold Short- Govt. term rebonds dollars & notes serves Holdings, Dec. 31, 1955" July-December1" January-June U.S. Gold Short- Govt. term rebonds dollars & notes serves U.S. Short- Govt. Gold term rebonds dollars & notes serves Short- U.S. Govt. term bonds dollars & notes Continental Western Europe: Belgium-Luxembourg (and Belgian Congo) . . Denmark Germany (Federal Republic of) Italy Netherlands (and Netherlands West Indies Portugal (and dependencies) Turkey Others Total Sterling Area: United Kingdom 4 Other Total 56 891 31 31 1596 626 11 346 273 148 71 41 732 1,373 113 579 12 10 7 3 161 2 ( 2) () 10 820 45 458 116 265 1,513 144 616 298 103 102 72 141 672 8 331 5 6 6,565 5,057 2,550 63 132 8 3 290 -54 -32 3 37 -22 13 4 5 260 472 110 2 8 () 4 1 38 247 199 244 640 103 87 33 137 216 5 1 1 3 3,240 1,000 1,080 1,536 371 3 322 42 86 186 12 27 62 35 29 227 403 30 160 29 120 70 222 237 60 35 329 74 83 30 90 194 105 1,835 1,838 81 138 126 9 113 164 100 31 725 257 123 356 °3 6 (2) 6 631 1,592 290 19 -1 -28 -100 Other Total : . . .. 5 92 -1 2 -1 3 36 30 -1 -1 4 64 1 64 13 2 226 -85 77 64 93 32 (2) (2) -3 1 2 () 124 (2) (2) 4 1 16 -267 169 24 -120 8 11 16 12 10 -229 498 -400 -392 29 1 2 25 -50 64 1 -1 -11 13 21 28 4 15 21 32 -5 7 77 15 1 2 15 7 147 6 -1 -6 -3 6 11 304 57 47 139 -2 -33 8 35 3 17 -9 5 4 12 112 3 -1 2 146 61 -6 8 20 26 67 3 1 3 10 4 285 162 -8 49 —1 10 -3 22 Latin America: Bolivia Brazil Chile Colombia Cuba Dominican Republic Guatemala Mexico Panama, Republic of Peru El Salvador -4 6 -17 -3 69 24 14 67 34 66 -3 -156 2 (2) -1 502 15 4 61 1,046 31 35 '881 920 11 346 263 151 60 49 1 , 105 1,454 174 785 10 10 6 5 151 8 (2) 889 45 460 116 276 1,597 144 677 211 79 140 105 153 751 9 180 44 53 () 7,535 5,669 339 2,050 543 88 73 53 179 282 12 1 1 4 2 (2) 44 (2) -146 -14 — 24 23 20 2 7 1 247 212 254 -141 10 2,763 936 300 -238 175 1,141 1,031 437 371 (2) 323 44 86 136 12 27 142 3 35 28 216 40 f 30 138 26 143 95 131 253 65 45 414 86 92 24 65 265 94 -19 2 23 1 29 8 -6 -6 73 •> 9 — 26 1 4 -14 -1 20 -1 (2) (2) 2 (=) (2) 169 (2) 4 1 (2) 1 3 15 5 77 21 1,853 1,936 195 59 — 17 144 -5 8 35 1 1 -3 1 5 -1 7 81 138 128 16 !12 175 174 35 901 247 138 468 15 (2) 4 6 1 3 13 12 224 1 650 1,963 29 289 19 7 Asia: Philippines Thailand Other Total Eastern Europe 5 All other: Egypt Other Total Grand total 2 1 47 64 () 3 16 22 -7 1 174 4 72 73 178 111 o 19 15 1 178 145 1 223 14,409 1 1 , 699 1,308 746 438 110 339 152 436 1,770 353 5 84 -36 63 27 15,559 12,923 1,099 443 194 303 215 463 1,740 P Preliminary. 1 Includes gold reserves of Bank of France and French dependencies only. Figure for end of 1955 reflects publication by France of certain previouslv unpublished French gold reserves, which are included for earlier dates in Continental Western Europe—Other. 23 Less than $500,000. Includes Yugoslavia, Bank for International Settlements (both for its own and European Payments Union account), gold to be distributed by the Tripartite Commission for Restitution of Monetary Gold, and un- http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 3 -3 174 4 13,819 11,153 [ntsrnational 6 (2) 4 1,808 (2) ! 1,881 321 227 16,217 13,580 1,629 published gold reserves of certain Western European countries. 4 Estimated gold holdings of British Exchange Equalization Account, based on the figure for total holdings of gold and of United States and Canadian dollars, as reported by British Government. 5 Excludes gold reserves of the U. S. S. R. 6 Includes International Bank for Reconstruction and Development, International Monetary Fund, and United Nations and other international organizations. See also NOTE on second page following. 304 GOLD RESERVES AND DOLLAR HOLDINGS ESTIMATED GOLD RESERVES AND DOLLAR HOLDINGS OF FOREIGN COUNTRIES AND INTERNATIONAL INSTITUTIONS [in millions of dollars] Dec. 31, 1949 Area and country Continental Western Europe: Belgium-Luxembourg (and Belgian Congo) . . France (and dependencies)! Greece Italy. Netherlands (and Netherlands West Indies and Surinam) Portugal (and dependencies) Sweden Others Total Sterling Area: United Kingdom United Kingdom dependencies India Union of South Africa Other Total Canada Gold & shortterm dollars 92 912 70 31 739 149 36 554 Dec. 31, 1950 June 30, 1951 Dec. 31, 1951 U. S. Gold& U.S. Gold& U.S. Gold & Govt. short- Govt. short- Govt. shortterm bonds term bonds term bonds & notes dollars & notes dollars & notes dollars 5 18 (2) 10 415 120 234 127 160 2,016 164 352 9 7 2 ( ) 6,171 92 848 76 30 834 222 36 571 18 12 4 217 (2) 9 8 43 (2) 4 1 58 3 559 94 257 132 205 2,023 164 689 109 6,832 1,924 103 310 134 255 103 3 2 4 3,557 120 303 241 232 2,726 112 1,365 16! 1 1 5! 94 844 76 43 845 357 43 533 11 1! 4 250 (2) 9 107 898 76 S3 896 434 49 633 June 30, 1952 U.S. Gold& U.S. Gold& U.S. Govt. short- Govt. short- Govt. term term bonds bonds bonds & notes dollars & notes dollars & notes 6 9 4 211 (2) 10 102 969 65 47 906 545 51 613 6 8 4 208 (2) (102) 309 2,218 103 306 159 348 125 5 1 (2) 5 2,318 113 312 194 347 196 5 1 1 3 114 3,134 136 3,284 206 100 2,396 117 2,317 310 I 1 2 1 3 415 47 398 96 138 635 62 65 266 74 103 67 309 503 123 1 2 5 427 45 390 121 194 515 56 61 375 81 107 S5 301 519 132 59 3,301 54 3,379 121 3 1 (2) 9 5,047 1,616 (2) 3 632 48 529 115 125 609 59 57 329 58 100 77 355 449 113 61 3,655 7,642 2,843 100 309 197 324 105 4 1 (2) 134 3,773 497 2,157 2 1 1 518 51 417 99 154 575 58 54 366 68 93 54 306 445 102 56 3,360 132 3 2 (2) 10 4,145 95 327 227 253 4,453 147 1,489 654 518 43 543 120 127 530 47 52 415 59 91 39 311 458 91 (2) 10 8,374 3 302 6,841 (2) 4 7,118 7 4 2 () 4 1 42 15 208 (2) 298 15 401 603 145 342 129 281 2,009 171 664 389 6 6 4 9 10 2 () 4 1 46 7 4 2 ( ) 4 1 43 8 33 (2) 4 1 55 143 1,035 101 55 967 691 57 655 815 160 374 130 275 2,053 151 712 524 150 331 128 224 1,973 165 477 495 110 282 129 228 1,960 162 640 Dec. 31, 1952 5 Latin America: Bolivia Brazil Chile Colombia Cuba Dominican Republic Guatemala Mexico Panama, Republic of Peru F! Salvador Uruguay Venezuela Other Total 417 37 510 101 138 463 39 51 267 74 81 45 236 516 81 3,056 2 ( ) 2 2 3 12 1 1 22 3,444 r-)2 (> 25 2 2 2 15 2 () 11 1 1 (2) (2) 28 2 2 3 15 1 Asia: Iran Japan Philippines Thailand Other Total Eastern Europe4 All other: Egypt Other Total Total foreign countries International s Grand total 194 157 377 298 143 341 1,510 P) 16 18 (2) 6 40 324 160 587 377 166 256 1,870 19 (2) 28 365 165 471 409 181 328 1,919 15 (2) 2 20 (2) 7 421 163 729 337 210 325 44 2,185 2 1 (22) () 28 2 2 4 8 (2) 2 1 2 (2) (2) 28 2 i 5 8 (2) 1 2 2 53 6 296 157 929 324 294 360 2,355 23 2,360 16 6 307 6 307 6 I" ) (2) 19 (2) 6 27 456 159 849 341 240 310 () (2 l 15 (2) P) 1 8 (2) 6 380 2 () 344 2 (> 320 6 309 115 24 (2> 173 28 (2) 232 38 (2) 285 43 (2) 292 38 (2) 1 234 49 139 2 (2) 328 2 330 1 283 3 635 20,304 903 5,347 3,109 18,456 201 446 18,633 162 3,022 608 21,655 1 Includes gold reserves of Bank of France and French dependencies only. 2 Less than $500,000. 3 Includes Yugoslavia, Bank for International Settlements (both for its own and European Payments Union account), gold to be distributed by the Tripartite Commission for Restitution of Monetary Gold, and unpublished gold reserves of certain Western European countries. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (2) 1 (22) () 28 2 2 5 !4 (2) 2 270 1,281 19,668 271 3,053 1,552 22,721 1,138 19,230 295 3,171 1,433 22,401 610 19,465 261 3,150 871 22,615 "'a' 3,277 270 893 23,581 1,173 258 * Excludes gold reserves of the U. S. S. R. 5 Includes International Bank for Reconstruction and Development, International Monetary Fund, and United Nations and other international organizations. See also NOTE on opposite page. 305 GOLD RESERVES AND DOLLAR HOLDINGS ESTIMATED GOLD RESERVES AND DOLLAR HOLDINGS OF FOREIGN COUNTRIES AND INTERNATIONAL INSTITUTIONS—Continued [In millions of dollars] June 30, 1953 Dec. 31, 1953 Continental Western Europe: Austria Belgium-Luxembourg (and Belgian Congo) . Denmark Italy Netherlands (and Netherlands West Indies and Surinam) 166 1,044 102 60 926 893 82 660 6 6 5 208 (22) () 10 267 1,124 133 71 1,040 1,381 123 841 8 9 7 3 153 2 () (2) 9 289 1,055 124 73 1,062 1,503 125 802 11 10 7 3 187 2 ( 2) ( ) 9 335 1,024 107 69 1,094 1,822 105 874 11 10 7 3 187 2 ( 2) () 10 329 1,039 102 72 1,328 1,999 124 925 12 10 7 3 161 (22) ( ) 10 1,055 171 469 150 335 2,133 157 887 7 5 ( ) 3 1 41 1,064 169 499 136 337 2,! 34 153 972 6 5 () 1,125 178 516 142 342 2,105 151 1,004 6 5 () 1,118 177 537 174 399 2,172 150 928 5 5 ( ) 1,118 !48 560 188 406 2,185 1S2 947 5 6 ( ) 4 1 38 290 11,622 260 1 otal 8,913 301 10,082 2,886 109 334 212 369 212 5 1 1 4 Sterling Area: United Kingdom Union of South Africa Other Total . Canada Latin America: Braril. . . Chile Total . . . . . . . . . . . Asia: Philippines Thailand Other Total Total .. . 9 4 ( ) 2 i 45 4 4 2 1 38 5 2 1 36 4 2 1 33 15 2 3 252 10,444 247 10,596 3,009 108 346 214 373 232, 5 1 1 3 3,198 105 329 221 371 250 5 1 1 3 3,536 105 338 225 373 239 5 1 1 3 3,388 104 320 234 371 234 5 1 1 3 3,190 103 334 232 381 216 5 1 1 3 282 11,085 3,910 223 4,050 242 4,224 260 4,577 249 4,417 244 4,240 226 306 2,292 227 2,362 230 2,363 202 2,443 198 2.616 93 519 47 451 129 197 579 59 72 339 97 109 74 311 530 159 2 2 6 (2) P) 4 1 3 5 576 35 413 117 254 477 73 64 315 77 110 54 329 614 147 (2) 2 1 (2) 42 (2> (2) 4 1 (2) 4 1 2 6 548 36 417 103 317 532 68 75 258 88 103 71 335 621 145 (2) 1 2 5 541 35 431 102 247 548 61 80 329 93 109 76 329 562 163 (2) 2 2 3 501 40 423 121 236 527 51 65 341 90 104 56 337 595 130 6 (22) () 4 1 1 8 531 32 442 112 308 423 72 62 391 74 118 59 317 597 135 3,672 52 3,617 61 3,706 63 3,717 102 3,655 129 3,673 146 246 155 1,015 316 311 363 (22) (22) ( ) 6 181 169 851 266 236 520 (22) ( ) 7 (2) 6 168 164 794 318 238 465 (22) () 8 (2) 6 140 172 740 308 243 444 (22) () 8 (2) 6 166 185 800 319 268 451 (22) () 8 (2) 6 184 181 951 304 281 401 2,406 16 2,302 16 2,189 16 2,047 16 2,147 16 2,223 15 306 6 306 6 308 6 309 6 308 6 309 6 229 61 2 2 () 219 70 (2) 221 68 (-) (2) 289 (2) 290 21,560 3,227 24,787 2 (22) () 29 P) 2 ^ 5 2 () () ( ) 217 67 2 284 2 1 (2) 43 (22 ) () 4 1 (2) 2 ( ) 224 74 2 298 2 ( ) 226 67 (2) 293 2 1 (2) 80 (2) 2 1 (2) 104 (2) 7 (2) (2 2> 1 (2) 124 (2) 4 1 (2) 1 3 10 6 (2) 6 289 (2) 906 22,933 806 23,531 822 23,902 857 24,344 883 24,972 746 311 285 285 306 341 3,331 1,217 26,264 For other footnotes see opposite page. NOTE.—Gold and short-term dollars include reported and estimated gold reserves of central banks, governments, and international institutions, and official and private dollar holdings as shown in Short-term Liabilities to Foreigners Reported by Banks in the United States, by http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis 2 2,063 All other: Other Dec. 31, 1954 8 9 6 1 158 2 ( 2) ( ) 9 Switzerland Turkey . Others ... Sept. 30, 1954 238 1,098 127 64 1,049 1,225 112 812 952 164 413 !34 280 2,091 152 794 Uruguay Venezuela Other June 30, 1954 Gold& U.S. Gold& U. S. Gold& U. S. Gold& U. S. Gold& U. S. Gold& U. S. short- Govt. short- Govt. short- Govt. short- Govt. short- Govt. short- Govt. term bonds term bonds term bonds term bonds term bonds term bonds dollars & notes dollars & notes dollars & notes dollars & notes dollars & notes dollars & notes Area and country Cuba Dominican Republic Guatemala Mexico Panama, Republic of Peru Mar. 31, 1954 3,401 1,091 26,932 3,364 1,107 27,266 3,536 1,163 27,880 3,510 353 1,224 28,482 1,099 Countries (Tables 1 and la-Id, pp. 288-289). U. S. Govt. bonds and notes represent estimated official and private holdings of such securities with original maturities of more than one year; these estimates are based on a survey of selected U. S. banks and on monthly reports of security transactions. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis July 26 Mr. Katz -Herewith the information Mr. Martin would like to have re the "gold standard" Thanks very much for your help. For England - he asked only when they went on the single standard--but I think a brief summary of "why" would be helpful. For the United States -1. When did we go on the gold standard (1873?) 2. Who was President at the time? 3. Gist of any public announcements made. 4. Summary of the historical period. 5. A good "reference" to the history of the gold standard period which Mr. Martin could read. And that should do it. 1 am sending along the books the R & S Library sent to me. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Margaret Muehlhaus From the desk of WiLLIAM McCHESNEY MARTIN, JR. JulY 2 ?» 19S7. By Messenger Senator Robertson-Herewith a statement prepared in our International Division which might be of interest to you in connection with our telephone conversation this morning. WMM Attachment http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis Gold inflow and outflow and adequacy of our present gold supply. (1) At the end of 1946, the total U. S. gold stock (the gold stock of the U. S. Treasury plus gold in the Exchange Stabilization Fund) amounted to $20,706 million. In the following years, there was an inflow totaling $4,065 million (net after payment in 1947 of $688 million in gold as the U. S. gold subscription to the International Monetary Fund) so that by the end of August 1949 the gold stock reached an all-time peak of $24, 771 million. An outflow of $2,844 million reduced the gold stock to $21,927 million by the end of the first quarter of 1951; an inflow of $1,606 million raised it again to $23,533 million at the end of the second quarter of 1952; a renewed outflow of $1,803 million lowered it to $21, 730 million by the end of the second quarter of 1955; and a renewed inflow of $996 million brought it to $22, 726 million at the end of May 1957. At present, the U. S. gold stock is therefore about $2 billion higher than at the end of 1946, and about $2 billion lower than at the end of August 1949. (2) The facts with respect to the adequacy of our present gold supply may be stated both in arithmetical and in economic terms. The U . S . gold stock is equal to nearly 60 per cent of the estimated gold reserves of the entire free world. Even if the official dollar holdings of foreign countries (about $7.8 billion) are deducted from the U. S. gold stock in view of the willingness of the U. S. Treasury to redeem such balances in gold on demand, the remaining net gold holdings (about $14.9 billion) http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -2- would represent nearly 40 per cent of the entire gold holdings of the free world. The ratio between U. S. gold holdings (gross or net) to annual U. S. merchandise imports ($12.7 billion in 1956) is much higher than the ratio between gold holdings and imports of any other major country of the free world. Similarly (as mentioned above), the ratio of gold to Federal Reserve liabilities is much higher than the statutory minimum. From the point of view of economic analysis, however, these arithmetical relationships are not of decisive importance. In the days before the First World War, the United Kingdom acted as banker for virtually the entire world with a gold reserve that amounted to $165 million at the end of 1913. Although such a reserve would be considered woefully inadequate today, the United Kingdom did not then suffer from any balance of payments difficulties because it maintained financial stability and the world had unlimited confidence in the value of the pound sterling. More recently, at the end of of 1950, not only did the Federal Republic /Germany have no gold at all, but its foreign exchange holdings of $274 million were exceeded by its foreign exchange liabilities of $432 million, so that its net foreign exchange reserves actually were a negative number. Nevertheless, the country was able to enter into a period of unprecedented expansion of domestic and international economic activity while maintaining financial stability, and by the end of April 1957 it had accumulated $1.8 billion in gold and $2. 8 billion in net foreign exchange assets, to achieve the highest gold and dollar reserve of any country of the free world other than the United States. Even a small gold and foreign exchange http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -3. reserve therefore can prove to be adequate if the country maintains financial stability and inspires domestic and international confidence in the maintenance of the value of its currency. On the other hand, the largest gold reserve can be dissipated within a short time if inflation leads to an excessive rise in imports, a sharp decline in exports, and the flight of capital. If the United States continues to be reasonably successful in the struggle against inflationary pressure, and thereby maintains confidence at home and abroad in the value of the dollar, the present U. S. gold stock should be fully adequate for its needs. But if the United States were unsuccessful in its fight against inflation, even a much larger gold stock might well turn out to be inadequate. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis B O A R D DF G O V E R N O R S DF THE FEDERAL RESERVE SYSTEM Office Correspondence To_ Chairman Martin _ From_ Mr* Shay ^_ Date j*3y n, Subject: Material re price of gold and re silver coinage and currency It is understood that daring Secretary Humphrey's recent appearance before the fyrd Committee, questions were raised concerning the authority of the Secretary of the Treasury to change the price of gold and concerning silver coinage and currency* Attached are memoranda on each of these tuo points* You will note that a Treasury Department press statement is also attached concerning the price of gold. Attachments J http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis _ AUTHORITY TO CHANGE THE PRICE OF GOLD The President was authorized to change the weight of the gold dollar by section h3 of the so-called Thomas Amendment of May 12$ 1933 9 *s amended by section 12 of the Gold Reserve Act of 1931*, The fixed gold price of $35 per fine troy ounce was established under that authority by Presidential Proclamation of January 31* 193U» That authority of the President, however, was ia: effect only for a tempory period and terminated on June 30, 19li3 < Sections 8 and 9 of the Gold Reserve Act of I93k contaia authority under which the Secretary of the Treasury may purchase and sell gold at home or abroad "at such rates and upon such terms and conditions as he may deem most advantageous to the public inter est." In addition, the Secretary is authorized by section 10 of the Gold 11Reserve Act, with the approval of the President, "to deal in gold for the account of the exchange stabilization fund established by that section* These powers of the Secretary, however, are effectively limited by provisions of the Bretton Woods Agreements Act of 19l*5 and the Articles of Agreement of the International Monetary Fund« The Articles of Agreement of the Fund, which the United States has accepted under the Bretton Woods Agreements Act, provide that no member of the Fund shall buy gold at more, or sell gold at less, than par value, plus or minus a margin or charge which the Fund is authorized to prescribe and which has been set at 1/lj. of 1 per cent* Thus, the United States, as a member country, may not purchase gold at a price greater, or sell gold at a price less, than par value in relation to the dollar, plus or minus the prescribed margin* Moreover, the par value of the dollar cannot be changed without the consent of Congress, since section 5 of the Bretton Woods Agreements Act provides that "neither the President nor any person or agency shall on behalf of the United States • • • propose or agree to any change in the par value of the United States dollar" unless such action is authorized by Congress* Under section ll±(a) of the Federal Reserve Act, the Federal Reserve Banks are authorized "to deal in gold" at home or abroad. However, this authority must also be read in connection with the provisions of the Articles of Agreement of the International Monetary Fond and the Bretton Woods Agreements Act mentioned above, as well as the provisions of the Gold Reserve Act of 193iu A further discussion of the authority of the Secretary of the Treasury to deal in gold is contained in his answer of February 12, 1952, to question D-12 of the questionnaire submitted to him by the (Patman) Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report* The matter is discussed also in a memorandum to the press issued by the Secretary of the Treasury on October 5> 19^9, a copy of which is attached* Attachment July 9, 1957 http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TREASURY DEPARTMENT Y/ashington MEMORANDUM FCR THE PRESS The following statement v/as issued in response to inquiries at Secretary Snydor's press conference of Wednesday, October 5, 1949, concerning the legal authority to change the gold content of the dollar and the Treasury>s price for gold. The Secretary again stated that he had no intention of proposing a change in the dollar price of gold. Ho reiterated what he had said on many occasions that he docs not perceive any considerations which would justify such an action. (a) The gold content of the dollar Only an Act of Congress can now altor tho statutory gold content of tho dollar. Tho gold content of the dollar, and hence the statutory monetary value of gold in terms of the United States dollar, was defined by tho Presidential Proclamation of January 31, 1934, issued under authority of Title III, Section 43, of the Act approved May 12, 1933, as amended. Tho weight of the gold dollar was fixed by this Proclamation at 15-5/21 grains of gold 9/10ths fine, that is, 1/35 of a troy ounce of pure gold (technically referred to as gold 1000 parts fine). The monetary or statutory value of gold in the United States is therefore $35 per fine troy ounce. After several extensions the authority of the President by proclamation further to change tho gold content of the dollar expired on June 30, 1943. (b) The price of gold The Secretary of tho Treasury has authority under Sections 8 and 9 of the Gold Reserve Act of 1934, as amended, with tho approval of the President, to purchase and sell gold at such rates and upon such terms and conditions as ho may deem most advantageous to the public interest. Tho authority of tho Secretary of the Treasury in this respect, however, is limited by a number of factors. First is the obligation undertaken by tho United States as a member of the International Monetary Fund. Article IV, Section 2 of the Articles of Agreement of the International Monetary Fund provides : http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "The Fund shall prescribe a margin above and below par value for transactions in gold by members, and no member shall buy gold at a price above par value ftlus tho prescribed margin or sell gold at a price below par value minus the prescribed margin." - 2The Fund has prescribed a margin of 1/4 of 1$ above and below the par value for purchases and sales of gold. Accordingly, the United States has an obligation to the International Monetary Fund not to purchase gold at more or sell gold at less, than s,>35 plus or minus the prescribed margin so long as the par value of the dollar declared to the Fund remains unchanged. The par value of the dollar can be changed only pursuant to the provisions of the Articles of Agreement and the Brctton Woods Agreements Act, which requires the approval of Congress for any such change. Section 5 of that Act provides that noithor the President nor any person or agency shall propose to the International Monetary Fund any change in the par value of the United States dollar or approve any general change in par values unless Congress by law authorizes such action. Even without the legal obligation to the International Monetary Fund there aro important considerations of policy v/hich, in effect, circumscribe the discretion of the Secretary of the Treasury to change the price of gold. The gold policy of the United States has been directed primarily to maintaining a stable relation between gold and tho dollar. Since 1934 the United States has firmly adhered to tho requirements of an international gold bullion standard. Wo have done so by buying and selling gold freely at a fixed price, V35 an ounce, in transactions with foreign governments and central banks for all legitimate monetary purposes. Tho importance which tho United States attributes to the maintenance of a stable dollar price for gold is demonstrated by other legislative provisions. The gold parity statutes contained in tho Gold Standard Act of 1900 and the Act of May 12, 1933, provide that the gold dollar "shall be tho standard unit of value and all forms of money issued or coined by the United States shall be maintained at a parity with this standard and it shall be the duty of the Secretary of tho Treasury to maintain such parity." http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -oOo- SILVER COINAGE AND CURRENCT Under the Acts of July 6, 1939, and July 31, 19U6, the United States mints are required to receive domestically mined silver tendered by the owner within 1 year after the month in which the ore was mined* Since July 1, 19^6, the law has specified that 30 per cent of the monetary value of any such silver shall be retained by the mints as seigniorage (i*e*, the difference between the monetary value and the amount paid to the owner) for the services performed by the Government relative to the silver* Since the monetary value of silver is fixed under law at &U2929/ per fine troy ounce, the net return to the person delivering the silver to the mint amounts to 90*5 cents per fine troy ounce* The Treasury is required by law (the Silver Purchase Act of 193h and the two Acts referred to above) to monetize silver to the extent necessary to pay the person offering it to the Government. Thus, an ounce of silver purchased for 90*5 cents has a monetized value of fl*2929/ when coined into standard silver dollarsj and the Treasury apparently may issue silver certificates against any standard silver dollars or other silver held by the Treasury against which silver certificates are not already outstanding* And, when silver certificates are received in the Treasury on any account (except for redemption in standard silver dollars) they may be reissued. The 30 per cent deducted as seigniorage is required to be retained as bullion, coined into silver dollars or used as other silver belonging to the Treasury^ and it is understood that a principal use has been for subsidiary coinage* It is understood that the 90*5 cents price for domestic silver generally has been higher than the open-market price, so that substantially all domestic silver production has been directed to the Treasury*. It may be noted that the Silver Purchase Act of 1931* declared it to be the policy of the United States that the proportion of silver to gold in the Government^ monetary stocks should be increased with the ultimate objective of having and maintaining onefourth of the monetary value of such stock in silver* In furtherance of this policy and objective, the Treasury was authorized^ if deemed to be in the public interest, to purchase both domestic and foreign silver. Apparently, the ultimate objective of the 193k Act has never been attained* As to domestic purchases, the situation as modified by the 1939 and 19U6 Acts, has been discussed above* As to any purchases of foreign silver, the price which the Treasury may pay seems to be limited only by the monetary value ($l*2929/)s and, apparently such purchases would have to be monetized http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis - 2- through issuance of silver certificates in an amount not less than the cost of the foreign silver purchased. However, foreign silver seems not to have been obtainable with any frequency on terms considered advantageous to the public interest. Further discussions of these matters are contained in the answers of February12, 12f?2, of the Secretary of the Treasury to questions D-12 and D-13 of the questionnaire submitted to him by the (Patman) Subcommittee on General Credit Control and Debt Management of the Joint Committee on the Economic Report, and in the testimony of Treasury Department representatives at the hearings of the (Douglas) Subcommittee of the Senate Committee on Banking and Currency in July 1955> on S. 1U27, which would have repealed the Acts discussed above. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis June 26, 1957 Chairman Martin Byrd Committee Hearings. Arthur W. Marget Appended hereto is a memorandum, prepared by Mr. Purth, in answer to your request of June 24, also attached hereto. Attachment http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis June 26, 1957 Gold Mr. Marget J. Herbert Purth !• The role of gold in our economy today. (i) The main function of gold in our economy today is to act as a residual means of payment in settlement of international balances. The role of gold in the settlement of international balances has been recognized in: The Gold Reserve Act of 1934 (Section 3), which authorizes the Secretary of the Treasury to issue regulations, with the approval of the President, that ^prescribe the conditions under which gold may be acquired and held, transported, melted or traded, imported or exported, or earmarked ... by the Federal Reserve banks for the purpose of settling international balances"; The Gold Regulations issued by the U. S. Treasury Department (paragraph 54»28), under which "the Federal Reserve banks may from time to time acquire from the United States ... such amounts of gold bullion as, in the judgment of the Secretary of the Treasury, are necessary to settle international balances"; and in Article IV, Section 4(b) of the Articles of Agreement of the International Monetary Fund, according to which na member whose monetary authorities, for the settlement of international transactions, in fact freely buy and sell gold within the limits prescribed by the Fond . . . shall be deemed to be fulfilling" its obligation to maintain the par value of its currency. The "residual" role of gold in the settlement of international balances follows from the fact that, in practice, most international transactions today are settled in either U. S. dollars or pounds sterling. However, the U. S. Treasury stands "ready to buy gold at the official price of $35 per fine troy ounce from all legal holders11 (Annual Report of the Secretary of the Treasury for 1951, http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget -2- June 26, 1957 p. 54); and gold can be freely sold for pounds sterling in the London gold market at a price which has deviated only by negligible fractions from the equivalent of $35 an ounce. Gold is thus a commodity which can be converted into the prevailing international currencies at fixed prices, and is as generally acceptable in international transactions as any internationally acceptable currency. (ii) The second function of gold in our economy today is implicit in the statutory requirement (Federal Reserve Act, Section 16, paragraph 3) that wevery Federal Reserve bank shall maintain reserves in gold certificates of not less than 25 per centum against its deposits and reserves in gold certificates of not less than 25 per centum against the Federal Reserve notes in actual circulation.M This requirement obviously sets an upper limit to the expansion of Federal Reserve liabilities, and therefore to the money-creating power of the System. Actually, however, the combined reserve ratio maintained by the Federal Reserve Banks is at present (as of June 19, 1957) 46.9 per cent of their liabilities. If the Federal Reserve Banks were at this time to expand their liabilities so as to reduce the reserve ratio to the legal minimum of 25 per cent, these liabilities would be expanded by 80 per cent; needless to say, such an expansion would be equivalent to a very serious inflation. The function of gold as a brake upon the expansion of Federal Reserve liabilities is therefore not a factor of immediate economic importance. however, regain such importance at a later time. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis It may, To: Mr. Marget -3- June 26, 1957 2. Description of the international gold bullion standard in use in the United States since 1934. The international gold bullion standard may be defined as a system under which gold, at a fixed price, is freely used in the settlement of international balances (see above, l.i.), though not in the settlement of domestic transactions. The United States thus adheres to the requirements of an international gold bullion standard "by buying and selling gold freely at a fixed price, $35 an ounce, in transactions with foreign governments and central banks for all legitimate monetary purposes" (statement of the Secretary of the Treasury, October 5, 1949). The fixed gold price of $35 per fine troy ounce was established by the Presidential Proclamation of January 31, 1934; it has become the basis of the par values of the currencies of all members of the International Monetary Fund by virtue of Article IV, Section l(a) of the Articles of Agreement of the International Monetary Fund, according to which "the par value of the currency of each member shall be expressed in terms of gold as a coaamon denominator or in terms of the U. S. dollar of the weight and fineness in effect on July 1, 1944a; and it has been given statutory recognition in the United States by the Bretton Woods Agreement Act, Section 5, according to which "unless Congress by law authorizes such action, neither the President nor any person or agency shall on behalf of the United States ... propose or agree to any change in the par value of the U. S. dollar." http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget -4- June 26, 1957 3« Gold inflow and outflow and adequacy of our present gold supply, (i) At the end of 1946, the total U. S. gold stock (the gold stock of the U. S. Treasury plus gold in the Exchange Stabilization Fund) amounted to $20,706 million. In the following years, there was an inflow totaling $4,065 million (net after payment in 1947 of $688 million in gold as the U. S. gold subscription to the International Monetary Fund) so that by the end of August 1949 the gold stock reached an all-time peak of $24,771 million. An outflow of $2,844 million reduced the gold stock to $21,927 million by the end of the first quarter of 1951; an inflow of $1,606 million raised it again to $23,533 million at the end of the second quarter of 1952; a renewed outflow of $1,803 million lowered it to $21,730 million by the end of the second quarter of 1955; and a renewed inflow of $996 million brought it to $22,726 million at the end of May 1957. At present, the U. S. gold stock is therefore about $2 billion higher than at the end of 1946, and about $2 billion lower than at the end of August 1949. (ii) The facts with respect to the adequacy of our present gold supply may be stated both in arithmetical and in economic terms. The U. S. ^old stock is equal to nearly 60 per cent of the estimated gold reserves of the entire free world. Even if the official dollar holdings of foreign countries (about $7.8 billion) are deducted from the U. S. gold stock in view of the willingness of the U. S. Treasury to redeem such balances in gold on demand, the remaining net gold holdings (about $14.9 billion) would represent nearly http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget - 5- June 26, 1957 40 per cent of the entire gold holdings of the free world. The ratio between U. S. gold holdings (gross or net) to annual U. S. merchandise imports ($12.7 billion in 1956) is much higher than the ratio between gold holdings and imports of any other major country of the free world. Similarly (as mentioned above, 1. ii.), the ratio of gold to Federal Reserve liabilities is much higher than the statutory minimum. From the point of view of economic analysis, however, these arithmetical relationships are not of decisive importance. In the days before the First World War, the United Kingdom acted as banker for virtually the entire world with a gold reserve that amounted to $165 million at the end of 1913. Although such a reserve would be considered woefully inadequate today, the United Kingdom did not then suffer from any balance of payments difficulties because it maintained financial stability and the world had unlimited confidence in the value of the pound sterling. More recently, at the end of 1950, not only did the Federal Republic of Germany have no gold at all, but its foreign exchange holdings of $274 million were exceeded by its foreign exchange liabilities of $432 million, so that its net foreign exchange reserves actually were a negative number. Nevertheless, the country was able to enter into a period of unprecedented expansion of domestic and international economic activity while maintaining financial stability, and by the end of April 1957 it had accumulated $1.8 billion in gold and $2.8 billion in net foreign exchange assets, to achieve http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis To: Mr. Marget -6- June 26, 1957 the highest gold and dollar reserve of any country of the free world other than the United States. Even a small gold and foreign exchange reserve therefore can prove to be adequate if the country maintains financial stability and inspires domestic and international confidence in the maintenance of the value of its currency. On the other hand, the largest gold reserve can be dissipated within a short time if inflation leads to an excessive rise in imports, a sharp decline in exports, and the flight of capital. If the United States continues to be reasonably successful in the struggle against inflationary pressure, and thereby maintains confidence at home and abroad in the value of the dollar, the present U. S. gold stock should be fully adequate for its needs. But if the United States were unsuccessful in its fight against inflation, even a much larger gold stock might well turn out to be inadequate* http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis June 24. 1957 Mr. Mar get Chairman Martin In connection with the Byrd Committee hearings, will you have someone prepare brief answers to the following questions: http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis (1) Wbat is the role of gold in our economy today? (2) Describe the international gold bullion standard in use in the United States since 1933. (3) Give a brief summary of our gold inflow and outflow over the last 10 years and comment as to the adequacy of our present supply. July H, 19$7 Chairaan Martin Hr« Shay Material re priee of gold and re sllvsr cotaaee and cmrrenejr It is understood that during -eeretary Humphrey's recent appearance before the iyrd Coagaittee, questions were raised concernlag the authority $f the Secretary of toe Treasnsry to change th« price of gold and concerning silver coinage and currency* Att&ned are seworanda on eaeh of t^ae tuo points. lorn nill note that a Treasury Departmeist press statement is also attached comereiBg the ^riee of gold. AttiSSlHStttS 3 http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis AtlfHOKIfl fO fiS Of (SOLD The f*resid«int was authorised to change the weight of the gold dollar by section 1*3 of the so-called Thc«a§ Amendment of May 12, 1933* ** «»«»d«d fey section 12 of the Gold Eeservc Act oaf 193li» *h« fixed gold price of 135 per fine troy ounce was established under that authority by Presidential Proelaai&tlOB of January 31, 193&* 1*hat authority of the I*resMent, however, was is effect only for a tsspory period and terminated on June 30, 19^3* Section* 8 and 9 of the Gold Reserve Act of 1934 contain authority waxier which the Secretary of the Treasury «ay purchase and sell gold at hone or abroad *at such rates and upon such tonw and coaditioRe ac he may deem most advantageous to the public iatereat*9 In addition, the Secretary is authorised by section 10 of the Gold Reserve Act, with the approval of the President* •to deal in gold* for the account of the eocctuujge stabilisation fund established by that section* these powers of the Secretary, howr~ ever, are effectively limited toy provisions of the Bret ton Woods Agreements Act of 19li5 and ttsa Articles of Agre^tent of the laternational Monetary Fund* the Articles of Agreement of the Fund, nhieh the United States has accepted under the Bretton Woods Agreements Act, provide that no aoBber of the Fund si-all btgr gold at more, or sell gold at less, than par value, pirns or minim a imrgin or charge which the Fund is authorised to prescribe and which has been set at 1/li of 1 per cent. Thosf the United States, as a member country, nay not purchase gold at a price greater, or sell gold at a price less, than par valias in relation to the dollar, pins or minus the prescribed smrgin* Moreover, the par value of the dollar cannot be changed without the consent of Congress, sines section $ of the Bretton Woods Agreements Act provides that "neither the President nor any person or agency shall en behalf of the United States * * « proposs or Agree to any change in the par valoe of the United States dollar11 unless such action is authorized by Congress* Under section Hi (a) of the Federal Reserve Act, the Federal Reserve Banks are authorised "to deal in gold" at home or abroad* However, this authority must also be read in connection with the provisions of the Articles of Agrtcnent of the International Monetary Fund and the Bretton Woods Agreements Act Mentioned above, as nell as the provisions of the Oold Keserve Act of 193k* A further discussion of the authority of the Secretary of the treasury to deal in is contained in his answer of Febmary 13, 1952, to question 0-12 of the questionnaire submitted to hix by the (Patsuus) Subcommittee on General Credit Control and Debt Mamgfaent of the Joint Ccmittes on the Econonic Eeport* fhe natter is discussed also in a leworandxaa to the press issued by the Secretary of tbe treasury on October 5* 191$t & copy of which is attached* Attachment J^Sirw July 9m If57 http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis TREASURY DEPARTMENT Y/ashington MEMORANDUM FOR THE PRESS The following statement was issued in response to inquiries at Secretary Snydor's press conference of Wednesday, October 5, 1949, concerning the legal authority to change the gold content of the dollar and the Treasuryfs price for gold. The Secretary again stated that he had no intention of proposing a change in the dollar price of gold. He reiterated what he had said on many occasions that he docs not perceive any considerations which would justify such an action. (a) The gold content of the dollar Only an Act of Congress can now alter tho statutory gold content of tho dollar. Tho gold content of the dollar, and hence the statutory monetary value of gold in terms of the United States dollar, was defined by tho Presidential Proclamation of January 31, 1934, issued under authority of Title III, Section 43, of the Act approved May 12, 1933, as amended. Tho weight of the gold dollar was fixed by this Proclamation at 15-5/21 grains of gold 9/10ths fine, that is, 1/35 of a troy ounce of pure gold (technically referred to as gold 1000 parts fine). The monetary or statutory value of gold in tho United States is therefore $35 per fine troy ounce. After several extensions the authority of the President by proclamation further to change tho gold content of the dollar expired on June 30, 194-3. (b) The price of gold The Secretary of tho Treasury has authority under Sections 8 and 9 of the Gold Reserve Act of 1934, as amended, with tho approval of the President, to purchase and sell gold at such rates and upon such terms and conditions as ho may doom most advantageous to the public interest. The authority of the Secretary of the Treasury in this respect, however, is limited by a number of factors. First is the obligation undertaken by tho United States as a member of the International Monetary Fund. Article IV, Section 2 of the Articles of Agreement of the International Monetary Fund provides : http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis "The Fund shall prescribe a margin above and below par value for transactions in gold by members, and no member shall buy gold at a price above par value frlus tho prescribed margin or sell gold at a price below par value minus the proscribed margin." - 2The Fund has prescribed a margin of 1/4 of 1% above and below the par value for purchases and sales of gold. Accordingly, the United States has an obligation to the International Monetary Fund not to purchase gold at more or sell gold at less, than ^35 plus or minus the prescribed margin so long as the par value of the dollar declared to the Fund remains unchanged. The par value of the dollar can be changed only pursuant to the provisions of the Articles of Agreement and the Brctton Woods Agreements Act, which requires the approval of Congress for any such change. Section 5 of that Act provides that neither the President nor any person or agency shall propose to the International Monetary Fund any change in the par value of the United States dollar or approve any general change in par values unless Congress by law authorizes such action. Even vdthout the legal obligation to the International Monetary Fund there are important considerations of policy which, in effect, circumscribe the discretion of the Secretary of the Treasury to change the price of gold. The gold policy of the United States has been directed primarily to maintaining a stable relation between gold and tho dollar. Since 1934 the United States has firmly adhered to tho requirements of an international gold bullion standard. Wo have done so by buying and soiling gold freely at a fixed price, ^35 an ounce, in transactions with foreign governments and central banks for all legitimate monetary purposes. Tho importance which the United States attributes to the maintenance of a stable dollar price for gold is demonstrated by other legislative provisions. The gold parity statutes contained in tho Gold Standard Act of 1900 and the Act of May 12, 1933, provide that the gold do3.1ar "shall bo tho standard unit of value and all forms of money issued or coined by the United States shall be maintained at a parity with this standard and it shall be the duty of the Secretary of the Treasury to maintain such parity," http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis -oOo~ SWim COIHAGK AID CUB&EBd ^ Uadtar the Acts of 4uly 6, 19599 and «July 31, 1$*6, the United States Mints are required to receive domestically mined silver tendered by the owner within 1 year after the month in which the ore wms mined* Since July 1, 191*6, the lav has specified that 30 per cent of the monetary value of any such silver shall be retailed by the mints as seigniorage (i.e., the difference between the monetary value and the amount paid to the owner) for the services performed by the Government relative to the silver* Since the monetary value of silver is fixed under law at 11.292°^ per f ine troy ounce, the net return to the person delivering the silver to the mint awoimts to 90*5 cents per fine troy ounce* fht treasury is retired by law (the silver Purchase Act of 193h and the two Acts referred to above) to monetize silver to the extent necessary to pay the person offering it to the Governnext* Thus, an ounce of silver purchased for 90*5 cents has * monetized value of H.2929/ when coined into standard silver dollars} and the Treasury apparently nay Issue silver certificates against asy standard silver dollars or other silver held by the Treasury against «hieh silver certificates are sot already outstanding. A.ndf when silver certificates are received in the Treasury on any account (except for redemption in standard silver dollars) they may be reissued* the 30 per cent deducted as seigniorage is required to be retained as bullion, coined into silver dollars or used as other silver belonging to the treasury; and it is understood that a principal use has been for subsidiary coinage* It is understood that the 90,5 eents price for domestic silver generally has been higher than the open-market price, so that substantially all doaestia silver production has been directed to the Treasury. It way be noted that the Silver Purchase Act of 193it dselared it t© be the policy of th© United States that the proportion of silver to gold in the Government's monetary stocks should be inereajKid with the ultimate objective of having and maintaining onefourth of the monetary value of such stock in silver. In furtherance of this policy and objective, the treasury was authorized, If deemed to be in the public interest, to purchase both domestic and foreign silver. Apparently, the ultlaate objective of the 1931* Act has never been attained* As to domestic purchases, the situation as modified by the 1939 and 1946 Acts, has been discussed above* As to any purchases of foreign silver, the price which the treasury may pay seems to be limited only by the monetary value (tl*2f29jO| and, apparently such purchases would have to be monetized http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis through issuance of silver certificates in aa amount isot less tnan the cost of tiie foreign silver purchased. However, foreign silver seeats sot to have been obtainable with any f requency on terms considered advantageous to the public interect* Further discretions of thaee matters are eorstained in t^ie aawiers of F«lirti*rjl2f 1952, of the Hserstary of tbe fr«a«ttry t© question* IW12 and D»13 of the questionnaire aubaittigd to him by the (PatiRfcn) -ubcoaisitte* on G»ner«l Credit Control and Debt Management of tbe Joist Coanlttee oa the Economic Eeport, and in the testimoi^ of Treasury Department representative* at the hearlags of the- (Douglas) rubc<x®iittee of the Senate Committee OB Backing and Currency ia July 1955 on 3. 11*27, which would hate repealed the Acts discussed above. http://fraser.stlouisfed.org Federal Reserve Bank of St. Louis
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