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William McChesney Martin, Jr., Papers
Series IV, Subseries D
Box 18/Folder 10
Gold transactions, 1949
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5th DraftsGAEddy
RevisediCRMoNe ill:cr
January 7, 1949
THE GOLD POLICY OF THE UNITED STATES TREASURY
My subject tonight is "The Gold Policy of the United States Treasury"*
To a considerable degree I shall speak of the geld policy of the Unitod States
Government, especially in my remarks on existing laws,. As Secretary of a department of the Executive Branch of the Government, I cannot presume to speak
for the Legislative or Judicial Branches of the Government.
All three Branches,
however, are harmoniously supporting the same gold policy and, so far as I know,
there is no disagreement among them on this phase of public policy*
Cur present
gold policy is the result of a combination of Acts of Congress, Proclamations and
Orders of the President, court decisions, and Orders and Regulations of the
Secretary of the Treasury*
By these joint and several actions the United States is now on a form of
the gold bullion standard, with gold being held as a monetary reserve and made
available for international settlements.
at 1/35th of a troy ounce of fine gold.
The geld value of the dollar is fixed
All forms of the dollar are firmly
maintained at parity with the gold dollar in all legal exchange transactions
between the United States and foreign countries.
We are on a gold standard by reason of the fact that imported or newly
mined gold can be exchanged for dollars at a fixed price, namely $35 per fine
troy ounce, less small handling charges, and the further fact that dollars can
be exchanged into gold virtually automatically by foreign treasuries and
central banks for all normal purposes„
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- 2Calling ours a gold bullion standard signifies that we sell gold in the
form of bars rather than coin.
The usual United States mint bar weighs about
400 ounces, measures 7" by 3-9/16" by 1-11/16", and is worth about $14,000.
For the large gold transactions of the last decade or two the efficiency and
economy of bars over coin have been almost indispensable.
The unlimited gold bullion standard is modified, however, by two restrictions:
(l) ownership of monetary gold in the United States is confined
to the Treasury; and (2) the Treasury sells gold for monetary purposes only to
foreign governments and central banks and only for legitimate monetary purposes.
The purpose and significance of these provisions will be explained in
a moment.
This policy has been consistently followed since its adoption
15-^ years ago*
Four facts concerning our gold policy seem to be rather widely misunderstood.
In the first place, many people do not realize that even though gold
is sold by the United States Treasury only to foreign treasuries and central
banks, such sales assure the foreign exchange value of all dollar payments made
abroad, whether those payments are made by the United States Government,
American individuals and enterprises, or foreigners who are using dollars.
Virtually every foreign country today stands ready to buy dollars without
limit at a fixed price in terms of its own currency.
They are ready to buy
dollars at approximately the same price which thoy will pay for l/35th of an
ounce of gold.
The United States Treasuryrs readiness to sell gold to foreign
governments and central banks for any accumulation of dollars in their hands
maintains the dollar at parity with l/35th of an ounce of gold in all legal
exchange transactions between the United States and foreign governmentsa
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- 5The dollar would be a strong currency today even if we did not have so
much gold to sell abroad if necessary.
The strength of the dollar is due
largely to this country *s productive capacity and our social and financial
stability.
Nevertheless, our gold standard mechanism serves to keep the dollar
up to its full parity with the currencies of those few foreign countries which
have a surplus in their balance of payments and acquire more dollars than they
spend.
The one exception is Switzerland, which is unwilling to accept gold in
sufficient quantities to settle all payments between Swiss francs and other
currencies at the official gold value of the franc.
r *Y
^ns, -tfoJ \
The second misapprehension wh±ch some people soom to entertain •&•&— %hor%—jaabuy-ing and selling gold the Treasury more or less sends agents to call on gold
producers or foreign central banks actively to solicit gold business, the way
commercial enterprises seek their customers.
On the contrary, bur role in gold
transactions is now primarily a passive one.
During the 1930!s the Treasury's
Stabilization Fund bought and sold gold and foreign exchange in a few leading
financial centers abroad in order to maintain the exchange rate for the dollar
at its gold parity, and there were some special gold transactions during the
war.
But in most of our gold transactions in the 1930Ts, in our transactions
with neutrals and many Allies during the war, and in all transactions since the
war, our purchases and sales have occurred1: on the initiative of the other party.
The other parties write or wire to their financial agents in this country
•fchut they want to sell so much gold to the United States or want to buy so-and-so
mucho
Treasury approval by telephone is virtually automatic.
The only excep-
tions have been proffered sales by a very few countries which had not yet cleared
all their gold from suspicion of being Nazi loot and an occasional purchase which
seemed to be for illegitimate purposes.
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- 4Treasury sales of monetary gold are made at $35 per fine ounce, plus
i of one per cent.
Assay Office.
New York City,
Delivery is usually made to the purchaser at the New York
Most of the purchases arc also carried out on the same basis in
The Federal Reserve Bank of New York generally acts as agent
for the foreign central bank sellers or buyers and also acts as Fiscal Agent
for the United States Treasury.
'The assaying, melting into bars, and storing
is done by the Mint Service, which is part of the Treasury.
Five establishments
of the Mint Service throughout the country are also available, at the option of
the sellers, to carry out purchases of gold on behalf of the United States,
In
addition, they conduct the sales of gold for industrial, professional, or
artistic purposes «,
Nevertheless, licensed dealers and users in the United
States may also and do buy gold from producers, refiners, and dealers.
The
Treasury's readiness to sell gold to authorized buyers at $35 plus -5- of one
per cent is the only way the Treasury affects the price in legal private transactions.
The third common misapprehension about our gold policy which I want to
correct relates to the extent to which we are on "the gold standard" domestically
as well as internationally.
It is not sufficiently appreciated how fully we arc
observing all the rulers of the gold standard. Although private ownership of
refined gold is not permitted in the United States, we maintain a gold reserve
which is required by law to be at least 25 per cent of the quantity of Federal
Reserve notes and Federal Reserve Bank deposits outstanding,
Actually, our
reserve is now about 50 per cent, or twice the legal minimum.
our 25 per cent minimum reserve ratio is the same as is required by the laws
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- 5»** na t
The United States, however, is one of the few
countries in the world which has not suspended the application of legal reserve
requirements to its central bank.
Cur gold holdings serve as a solid "backing
for United States currency*
Ti\e fourth misapprehension about our" gold policy is that the purchases of
v
gold we ma%e under our present form of the gold bullion standard are somehow
more inflationary than they would have been under the old gold coin standard.
After paying forSnewly acquired gold by a check drawn on its account with the
Federal Reserve BanB^ the Treasury normally issues a gold certificate to those
banks in the amount of \he gold purchased, thus replenishing the account.
It
is apparently believed in s\mo quarters that there is something inherently
^L
^^
inflationary about this procedure, aside and apart from the actual purchase of
the gold.
True enough, the net result of the procedure for the Treasury is that
it has taken in a given quantity of gd^d without being deprived of any part of
its working balance at the Federal Reser\\ Banks.
Also^ of course, the gold
certificate reserves of the Federal Reserve ifcmks rise correspondingly, as do
the reserves held by the commercial banks at thNe Federal Reserve (since they
redeposit with the Federal Reserve the checks received, directly or indirectly,
from the Treasury in payment of the newly mined or im$x)rted gold).
Thus, both
the Federal Reserve Banks and the commercial banks are imposition to extend
additional credit on the basis of their increased reserves.
cisely Y/hat happendcd under the former gold standard.
But this is pre-
During the\twcnties,
when the commercial banks could own and deal in gold in the United Spates,
these banks would purchase imported gold, giving the seller a deposit credit
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- 6-
in return.
^"
Thp"banks would then increase their reserves by selling
the Reserve Banks, and this increase in reserves became the
gold to
of a multiple
expansion of bank loans and investments, and consequently- '"bank deposits,
Cur gold stock today is just over |24 billion. As one might readily guess
this is the largest gold holding in the history of this or any other country.
Cur proportion of the known gold held by treasuries, stabilization funds, and
central banks throughout the world, plus the International Monetary Fund, is
now approximately 65 per cent.
Statements are spjtflrbimes heard that ourjbftrge accumulation oiHfold reflects
some perverse desire
like a
S to deliberately j§ercher
^ in all the gol^possible,
^
twentieth ej^fttr
King Midas.
Care also hears that our"' gold accumulation is the
^^^
resulty^f seriously defective monetary policies.
I consider this view to be
^r*
thp-foughly mistaken,
Cur proportion of the world's gold reserves increased during two distinct
periods - the first Vforld War and the rise of Hitlerism in Germany.
seek this gold.
We did not
It came to us partly in payment for American industrial and
agricultural products during war time which the purchasers could not otherwise
have financed and partly as a flight of capital seeking safety in this country.
Hite-tore Jiullhur sought 1101' uiiju^ca our gali'iUjLg-gold H R n rnsult of tVin affllo-
glad if most uJ? Uku g,ulTT had. not come to us«
But our relative strength in
production and finance have been so great that, in spite of our assistance to
foreign governments, ™*> •*•" •»•&- h " d_^t r -n ^ °L n ptL ^o-a* amounij^ of gold
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- 7In December 1913 we had less than 27 per cent of the reported gold reserves
of the world.
40 per cent.
Five years later, at the end of the first World War, we had nearly
A billion dollars of gold came to us during those years as a result
of our having exported goods to the value of nearly $12 billion more than we imported.
The balance was financed chiefly by our extending loans and repatriating
securities formerly owned abroad.
Tflfe/Jrcirfa"generously -on a scale greater than
ever before in history, but our products were in overwhelming demand.
Cur share of the worldTs gold hovered between 30 and 40 per cent throughout the 1920!s and early 1930Ts.
Thejtf in February 1934, began a phenomenal
gold movement that lasted until October 1942.
With the exception of only four
months, our gold stock went up every single month for 8-3/4 years.
Sixteen
billion dollars worth of gold flowed to the United States and our proportion
of the worldTs gold rose to approximately two-thirds.
In February 1934 ouJL-ghanging the dollar pricb, of gold/frbm the old level
/our 1 inking the dollaA firmly to gold at
of $20.67 to $35 an ounce and this new figure," /plus the other recovery measures
A
vfcr?
that were beginning to take effect, established an impregnable position for the
dollar.
All of these factors tended to attract gold to this country.
But it
seems correct to assert that the major force behind the gold movement to this
country was the growing threat of Nazism in Hitlerite Germany.
In the six years before the v<rar broke out, from 1934 through 1939, our
net gold purchases totaled ^10 billion.
Cf this only yl06 billion was due to
the recorded surplus of exports over imports.
Six billion dollars more is
ascribable to the recorded movement of capital to this country and the $2.4
billion unexplained residual in our balance of payments estimates probably
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- 8represented chiefly unrecorded capital movements.
Thus, around $8 billion of the
total gold flow of $10 billion in the six years from 1934 to 1939 was due to
capital movement, and only about $2 billion to the trade balance.
Fear of
totalitarianism and of war and the effects of war, plus the attraction of the
political security and financial soundness of the United States, was, I feel
sure, the principal cause of this enormous and sustained flight of capital.
That
flight, in turn, caused the gold to flow here as payment of the net international
balance.
Until October 1942 our gold stock continued to increase, reaching $22.8
billion, as capital continued to flow here and as the allied countries bought
materials of v\rar from us and neutrals turned to us for goods no longer obtainable
from Europe and the Far East.
Beginning in 1941, however, as the gold reserves
of the British Empire and other Allies neared exhaustion, we undertook to supply
part of their needs under Lend-Lease. We also increased our imports from the
neutral countries and curtailed our exports to them, and made considerable capital
investment in this hemisphere to develop war supplies*
The net balances of dollars
due to the neutrals they partly exchanged into gold. All such requests for gold
were granted.
As a result of all these factors, from a peak of $22,8 billion in
1942, our gold stock decreased $2.8 billion to $20 billion by the end of the war.
The termination of Lend-Lease exports shortly after V-J Day, followed by
the re-opening of civilian markets, started a new tide of gold flowing in our
direction.
Like the consumers residing in the United States, consumers in the
neutral countries had been forced to defer their purchases of United States
products during the fighting, and they rushed to buy as soon as supplies began
to appear again.
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A great deal of the gold we sold during the war has already
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- 9been sold back to us in payment for our net exports.
Cur bombed-out and
war-torn Allies, on the other hand, had not been able to accumulate gold or
dollar balances in most instances and have had to dig deep into their lastditch gold reserves to pay for imports to supplement their own inadequate
production.
So great has been their need for imports which could be purchased
only for dollars that their own reserves, plus a very large program of United
States grants and loans, have proved insufficient.
Those resources have had
to be supplemented by the appropriation for the Economic Cooperation Administration.
As a consequence, partly of the unprecedented foreign demand for our goods
and partly of the unavailability of additional quantities of many goods which
this country would like to import, our net balance of exports reached record
peacetime proportions.
In part payment of this export surplus $700 million of
gold was sold to us in 1946, $2.9 billion in 1947, and01* billion in 1948.
This net inflow of $
billion of gold since V-J Day, less our gold subscription
to the International Monetary Fund, has raised our gold stock to $24 billion.
The rest of the world, excluding Russia, still has official holdings of about
111 billion.
Further details on these international gold transactions and
official reserves are shown in the recent report of the National Advisory Council,
The gold policies of the United States Government are consistent with the
policies of the International Monetary Fund, As a member of that organization
the United States has also agreed to adopt now gold practices and policies only
in accordance with the applicable procedures of the Fund.
At least two major aspects of United States gold policy are closely related
to the policies of the International Monetary Fund.
The Fund has expressed its
concern about international gold transactions taking place in various areas of
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- 10 the world at prices substantially above monetary parity.
Because such premium
price gold transactions may undermine exchange stability and possibly disturb
exchange relationships the Fund has recommended that its members take effective
action to prevent such transactions in gold with other countries or with the
nationals of other countries.
The United States is in complete agreement with
this policy of the International Monetary Fund,
In accordance with the request
of the Fund the United States Government has asked its citizens not to extend
c
the use of their facilities and funds for the carrying out of such transactions.
In addition, the Treasury Department, with the approval of the President, has
amended our Gold Regulations in order to limit the possibilities of gold being
exported from the United States for sale at premium prices.
Consistent with its Articles of Agreement the International Monetary Fund
has also opposed the introduction by member governments of subsidies which amount
to increasing the price paid for domestic gold production.
This Government has
supported the International Monetary Fund in its opposition to gold subsidies.
As the country which consistently has purchased the largest amounts of gold,
the United States has a marked interest in the role which gold subsidies nay
play in the production, movement and price of gold. We have stated that this
Government would not favor any tendency for countries to become dependent on
subsic!i2@d gold production to balance their international accounts.
The United
States believes that where a country has a persistent unfavorable balance of
trade, it requires a more fundamental solution than is embodied in subsidies
to domestic gold producers.
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- 11 I believe I have now presented a fairly comprehensive bird's-eye view of
the Treasury's policies and practices regarding gold.
To recapitulate briefly,
we are on a form of the gold bullion standard which has become widely recognized
as the normal form.
No country in the world in on the old gold coin standard,
and no country is on a more complete and unrestricted form of the gold standard.
The dollar is maintained at its full gold parity in legal foreign exchange
transactions without any United States exchange controls limiting the payments
that may be made to other countries.
The domestic circulation of gold coins and
the hoarding of gold are prohibited, but domestic legal gold reserve requirements
are fully observed.
The gold mechanism seems to be working as smoothly and
effectively as can be expected under present circumstances.
Anyone who expects
gold to accomplish much more than it is now doing appears to me to be deluding
himself and expecting the impossible.
As ought to be the case in a robust democracy, a steady stream of Ictfers,
postal cards, telegrams, publications, and visitors in person come to the
President, the Treasury, the Congress, and others in the Government, making
recoffir.eilCuitions regarding gold.
We are constantly being urged, by different
correspondents, to raise the price of gold to $50, $70, §100, (Ii300 an ounce,
or to lower it, perhaps to the former ^20.67 price; to acquire more gold, or to
give away a good part of what we have, like a poker game winner redistributing
the chips; to put gold coin into circulation again, or to be more restrictive
in our sales; and so on through a long lict of proposals.
Some of the recommendations we receive are completely divorced from, present
facts and from established economic principles,
Others are rational prescriptions
for small sectors of the whole gold policy problem.
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The particular experiences of
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- 12 r
the writers of these letters have evidently focused their attention on some
aspects of the problem but caused them to neglect others.
The Treasury, on the
other hand, has to consider all aspects of gold, for neglect of even minor considerations might prove to have very serious consequences,
From their mutual contradictions
it is clear that only a fraction of the
recommendations for major changes can be right.
The conflicts of interests and
of viewpoints ensure that no policy is going to satisfy everyone.
Nevertheless,
I am encouraged to believe that a majority of responsible opinion recognizes
the essential common sense of the policy which the Treasury has consistently
followed for a number of years,
I should like to use the balance of my time tonight to describe two of the
leading recommendations for change and then to present the main reasons why the
Treasury has not favored their adoption,
"^he two proposals I shall analyze are:
First, that the present $35 monetary Value of gold in the United
States should be raised, for example, to $60 or $70 an ounce; and
Second, that unrestricted convertibility of dollars into gold for
private ownership and trading should be restored.
Raising the monetary value or Mint price of gold means reducing the
quantity of gold in the gold dollar, which may be done only by Act of Congress,
Such action by the United States would probably force other countries to devalue
their currencies in terms of gold at least to an equal degree in order to avoid
an appreciation in the foreign exchange value of their currencies in terms of
the dollar.
Raising the price of gold would also mean that our financial
system would be confronted with many additional billions of dollars of bank
reserves^, which would make possible an enormous expansion of bank credit.
Threatened as we already are with serious inflation, can anyone having regard for
the general welfare of the United States fail to see the dangers of this proposal?
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- 13 The Treasury is most strongly opposed to this suggestion, A reduction in
the weight of the gold dollar would be widely interpreted as a powerful and
deliberate step toward further reducing the purchasing power of the dollar and
toward further inflation of the average cost of living.
At this time every
appropriate measure should be taken to prevent any further substantial rise in
the general price level.
A reduction in the weight of the gold dollar and a
raising of the price of gold would seriously aggravate the threat of higher
prices; it would shake public confidence in the dollar, encourage a flight from
dollars into goods, and endanger Treasury financing as well as all other contracts involving the long-run value of the dollar,
Furthermore, because of the inevitable international repercussions of any
change in the price of gold in terms of United States dollars or other important
currencies, the United States and other countries have pledged themselves in the
Bretton Woods Agreements not to change the gold parities of their currencies
without consultation with the International Monetary Fund and then only to
correct a fundamental disequilibrium. Under present circumstances in international trade the United States cannot claim that its currency is overvaled in
relation to other currencies or that it is in a fundamental disequilibrium such
as might bo cured by raising the price of gold.
It has been suggested that the Secretary of the Treasury might at some time
use his powers tinder the Gold Reserve Act to fix this country's buying and selling
prices of gold at figures higher than $35 an ounce, without any change in the
official $35 parity fixed by Congress,
Apart from the reasons I have just stated,
showing why it would be very unwise for this country to raise its price of gold
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- 14 -
by any method at all, I would like to point out that any action by the Secretary
to exceed the official parity in payments for gold by more than the margin of
f- of one per cent permitted by the International Monetary Fund would be a violation of this country's commitments under the Articles of Agreement of the Fund,
Many of the reasons that I have given, showing why it would be unwise for
this country to raise the price of gold, might also seem to constitute reasons
why we perhaps ought to lower the price of gold to some figure loss than <ji>35 an
ounce.
This would mean raising the gold content of the dollar.
For some foreign
countries whose currencies may now be overvalued in relation to the dollar, such
a change by the United States could help to bring their currencies into a more
appropriate relationship with the dollar.
However, a change would also give rise
to numerous dislocations throughout the world, in gold-mining countries and
elsewhere,
We believe that these dislocations would outweigh the advantages
that this country would derive from the lowering of the price, and for this
reason the Treasury would oppose any change from the present parity,
Either an increase or decrease in our gold price under present circumstances
would run counter to one of the primary objectives of a sound monetary system
which is to maintain substantial stability of purchasing power over a long period
of years.
Unfortunately, such occurrences as wars, crop shortages, and other
major economic adjustments, almost inevitably involve some undesirable degree of
price fluctuations.
It is my conviction, however, that the United States by
wise economic policies can avoid extreme fluctuations of inflation and deflation
without impairing our operation of a private-enterprise, free-market
economy,
Among the essential parts of such a policy is a refusal to devalue the dollar
(or any other currency) in terms of gold when there is no valid monetary reason
for doing so.
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- 15 I hope I leave no doubt in anybody's mind about the undesirability of
raising the Treasury*s buying and selling price for gold, nor about the
TreasuryTs intention to oppose any such change to the limit of its powers.
The second proposal I should like to discuss is that of restoring convertibility of the dollar into gold for private holding.
Particularly during
the last two or three years of high and rising prices sone people have advocated
that the United States return to the gold coin standard, or if not that, then at
least that it redeem dollars in bullion for private ownership.
I am afraid that most of the advocates of this proposal are being deluded
by false hopes.
Their hope that private ownership of gold will cure the existing
high prices is revealed as unfounded by observation of what happended after the
first World War. Individuals were at liberty to exchange their dollars for gold
t
coin throughout the last war and continuously until 1933. In 1920, however,
prices in the United States as measured by the wholesale price index rose to a
level whioh has been equalled and slightly exceeded only in the last few months.
This soer.is convincing evidence that the right to hold gold coin is no panacea
for high prices of goods and services.
The history of the gold coin standard is
a record of periodic inflations and deflations. Accordingly, for reasonable
stabilization of prices we must look to other lines of policy than private
ownership of gold.
"We must use gold for the purposes for which it is genuinely useful, but
we must not expect too much from it.
The purposes for which it has been proved
genuinely useful seem to me to be these:
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- 16 First, as a domestic reserve for the currency and banking system
to prevent excessive expansion of bank credit.
However,
every form of gold standard must be supplemented by additional policies to prevent inflation,,
If the United States
had expanded credit up to the full limit permitted by its
gold reserve either during the 1920fs or during the 1940*3,
Y\re would undoubtedly have had a much greater inflation of
prices than we now have.
Second, gold is useful as a medium for defining the relation of
national currencies to each other, that is, for the computation of parity rates of foreign exchange.
Third, gold is useful as a reserve of international purchasing
power which any country can use to settle balances of
payments with other countries during periods when its
total payments to them are exceeding its receipts from
them.
At present most other countries are selling gold
to the United States because they are buying more goods
and services from us than they are selling to us.
If a country!s gold is centralized and mobilized in the hands of its
government or central bank, the gold is available for the prompt settlement
of payments between different national monetary systems*
Since the dollar is
being maintained at a parity with 1/35th of an ounce of gold in other currencies for legal transactions, individuals in the United States as a group
already enjoy every significant legal advantage they can expect from any gold
reserve system.
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- 17 When left in a centralized reserve, our gold stock gives impregnable
international strength to the dollar.
If our gold stock, on the other hand,
were dissipated in immobilized private holdings in the United States, our
power to maintain the position of the dollar in an emergency might be critically
weakened «
A number of different reasons are offered why gold circulation and full
convertibility of dollars into gold for private ownership should be restored.
Each different reason requires a different appraisal, and it would take far too
much time to cover them all,
I should like to bring these arguments down from
their ivory towers and confront them with a glimpse or two of the real world.
Let us assume that the advocates of restoring unlimited gold convertibility had
had their wish by, say, 1939, and lot us assume further that some time in 1943
or 1944, the enormous task of financing the recent war had caused a good many
people in the United States to fear for the future gold parity of the dollar.
What would these advocates of convertibility have done in the face of a rising
tidal wave of demand for gold for hoarding in the midst of the vra.r?
Would they have favored drafting men but allowing dollars to obtain protection by drawing out our national gold reserves until they were exhausted?
Would they expect the Congress and the Government to have held war expenditures
down to a point where individuals would, be completely free of fear for the
future value of the dollar? Would, they have prevented the Government and
business from borrowing from banks during the war because gold hoarders had
left no excess gold reserves in the banks or Treasury?
That degree of tight-*
money war finance would have been a fairly sure way of losing the war.
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- 18 Would those advocates be in favor of letting the wary first-comers get
what gold they could before the Treasury had to close the doors of its gold
vaults, and then letting these first-comers sell the gold at preniun prices
to those who came too late?
Would these advocates recommend that countries
like Franco, Great Britain, Belgium, Canada, etc., decline to conserve their
gold during the war periods to pay for essential imports but instead pay it
out to individuals hoarders and smugglers ?
I have not heard any advocates of gold convertibility fit their recommendations into a realistic program of either war or postwar finance.
Today
the United States has $24 billion worth of gold of which about half must be
retained as required reserves for outstanding currency and bank credit.
If
individuals and private firms could convert their dollars into gold freely,
the Treasury would face a potential demand for gold from $26 billion of
currency in circulation, $137 billioii of bank deposits, and $150 billion of
Treasury debt outside of banks.
This amounts to a total of s,;213 billion of
potential demand against Sv24 billion of gold and the figure of 0213 billion
does not take into account scores of billions of dollars worth of other sound
assets and securities whose owners might think it a good speculation to convert
into gold.
A gold reserve ratio of 100% in the Treasury and Federal Reserve Banks
would be a very onerous burden to support, but it could easily be entirely
inadequate to meet a run on our gold.
Conversion of less than Q% of the $213
billion of prime liquid assets just enumerated would be enough to bring the
Reserve Banks below their legal minimum reserves.
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Federal Reserve Bank of St. Louis
RESTRICTED
- 19 Convertibility of currency into gold to meet the demands of private hoarding
seems to me an anachronism which most careful students of finance recognize as
"being a thing of the past.
It is apt to exert critical pressure at the most
dangerous and damaging times and to do no good at other times.
It threatened
the foundations of our financial structure during the great depression and it
might have done so again during the war or since, yet it has proven of no use
to prevent inflationary booms at other times.
Certainly no other major country could today think of exposing itself to
the private withdrawal of official gold reserves.
The war and postwar adjust-
ments in the gold parities of the many foreign countries which have had to revalue their currencies would have been drastically hampered and weakened if
larger proportions of th©ir gold had been in private rather than official hands.
Cur economic system and that of other countries as they stand today cannot
function without bank deposits, bank loans, and paper money.
be converted into gold in an emergency.
These cannot all
In peaceful, prosperous, non-emergency
times, on the other hand, no one in this country would be significantly better
off if they could convert paper and bank deposit dollars into gold.
The only
real bSUGfit which people with dollars might obtain from gold convertibility
today would be from selling it at premium prices to black markets abroad where
individuals are hoarding gold or dollars in violation of their countries' laws
while their governments urgently need dollars to finance essential imports.
Does catering to that sort of gold business make good sense?
it does.
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Federal Reserve Bank of St. Louis
j cannot see that
RESTRICTED
- 20 The only other genuine means of individualsT benefitting from private gold
convertibility in this country seems to be the occurrence of a national catastrophe
which would require revaluation of the dollar.
To that my answer is that we must
avoid such catastrophes by adequate economic, political and social policies.
If
by any mischance our policies should prove inadequate, gold convertibility would
not save us. At most, a few individuals might gain some brief advantages over
the rest at the expense of the community as a whole.
I realize that a number of people may have a sentimental longing to give
gold pieces on wedding anniversaries, birthdays, and graduations but I believe
the average citizen will get the best use out of gold if he has it in his watch
chain, on the point of his fountain pen, and in some of the fillings of his
teeth, but leaves his monetary gold in Fort Knox.
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Federal Reserve Bank of St. Louis
2/7/49
TOs
Mr. Willis
FROMs
Charlotte McGuire
SUBJECTS United States gold transactions with foreign countries —
and other recent periods*
January
1949
Purchases by the United States
During January the United States purchased a total of $52 million in gold
fron five foreign countries. The January total compares with a total of $4-9
million in December, Cl69 million in November, $14-5 million in October, and
a
monthly average of $144- million in all of 1948.
South Africa, consistently one of the largest sellers of geld, accounted
for $26 million in January. The Nethlands, Portugal, and Canada sold lesser
amounts. The United Kingdom, the largest seller in 1948, made no sales for
the second consecutive month*
Sales by the United States
Sales of geld by the United States tc foreign countries in January amounted
to approximately $4 million, of which $2,3 million went tc the Bank for International Settlements ( Switzerland). The balance of $2 million represented
another sale of gold sovereigns to Greece, which was offset by a purchase of
$2 nillicn in geld bars frrm that country.
Attached table
The attached table shows the leading sellers of gold on the basis of
monthly average sales from January 1948.
It also shows the leading purchasers
of gold from the United States beginning in January 1948*
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Federal Reserve Bank of St. Louis
United States Gold Transactions with Foreign Countries
January 1949 and Other Recent Periods
(In millions of dollars)
SALES BY UNITED STATES
PURCHASES BY UNITED STATES
Monthly
Avg. 1st
6 mos.
1948
Argentina
$9.5
Belgium
8.7
Canada
.5
.2
Chile
Colombia
2.0
Dominican Republic •Finland
France
Greece
International Bank
Mexico
Netherl-ands
Nicaragua
Norway
Poland
Portugal
Saudi Arabia
Sweden
Monthly
Avg. 3rd
Quarter October
y
1948
Total
Jan.Nov. Dec. Dec.
Jar:.
1948 1948 p 1948 D 1949 P
$10.2
.7
.7
.6
1$114.1
f—
69.8
7.1 2.5
.5
5.4
3.2
.3 15.5
-—
_
„
—
15.8
1.9
9.1
5.4
67.0
4.6
40.7
10.2 -
~i c\ rt
J y£i,o
-
$•26. 5
5.5
.3
3.5
_
..
m
1.2
-.7
4.8
5.1
5.3
- .4
9.4
-
-5.6
-
.7
7.0
.2
.5
_
.9
1.2
-
3.5
.1
_
-
10.5
.4
-
1.2
-•
-
:4
-
-
8.8
-
1.0
1.0
—
-
63.2
2.2
3.0
_
$3.4
-
Mo. Avg.
Jan.June
1948
$-
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Federal Reserve Bank of St. Louis
t
—
-
1.0
1.2
„
- 5
10.
.2
-
_
„
.3
.8
_
.2
«.
-.
2.0
10.
4
-
Mo. Avg. Total
July Jan.Dec.
Dec.
1948
1948
$-
.5
-
--
.7
-
.2
Switzerland
_
Turkey
2.2
.9
—
10.4
Union of So. Africa 36.2
52.0
42.8
56.8 42.4
0
26.
515.3
87,6
United Kingdom
729.. 3
81.2
m
40.7
26.9
_
Uruguajr
6.0
6.0
2.0
8.4
4.8
39.1
Venezuela
8.0
*,8
All Other
•*
1.0 ".1
iTl
12.6
1.4
\A
;
Total
$167.3
C :121.1
$144.7
$18.4
$52.3
.-^ i ,.,-,— j._.u.r $169.3 $49.9 $3,731.1
"' " ' - .
— : » . ^v-i-^., . »
" •"•« t f
'reas-ury Department, Oil ice or International Finance * Less than $50,000
Preliminary
—
30KFIPENTIA:L
.8
_„
m
_
—
10.0
11.2
3.2
Jan .
1949
1-
_
6.0
8.8
5.0
-
2.0
-
1.0
4.1
-
-
5.6
m
m
„,
28.5
108.0
$181.7
$11.9
CAM : 2/7/49
-
_
2.3
_
_
_
• -
$4.3
STAWOAR» 4--0.3M ttO. 64
UNITED STATES GOVERNMENT
TO
: Mr, Martin
FROM
: Q. A. Eddy
DATE:
February 11, 1949
9r
SUBJECT: Treasury Gold Policy and Speech
Here ia the latest reproduced form of the Gold Speech for possible use by
the Secretary which was mentioned in the meeting in your office Thursday on South
African gold. A few rather minor changes agreed on at the last meeting of Treasury
and Federal Reserve staff are not inserted in this copy, but this gives the general
plan of it pretty well*
The last point in the speech seems to me the weaker side of a very controversial
issue* I wrote that part as convincingly as I could to conform to the Treasury
party line. That point is that the Treasury should continue to deny individuals
the right to buy gold if they wish to. I will not labor you now with a full
exposition of the arguments pro and con. A passing birdfs eye view of whAy I feel
we have to do something more than hold on to our present official position is contained
in the following:
"Many aspects of gold are now in a thoroughly unsatisfactory condition;
11
1) There is very wide expectation at home and abroad that the price of gold
will be raised and widespread sentiment around the world that the U. S«
dollar is not really worth 1/35 of an ounce of gold*
"2) There are increasing reports of rather large scale violation of U0 So
gold regulations such as smuggling gold out to foreign markets and
diversion of gold to private hoarding,
"3) The business of marketing gold in its natural state, which is technically
consistent with the U. S. regulations but contrary to their spirit, seems
to be flourishing, with quotations well over $40 per ounce*,
n
4) With varying degrees of possible blame on the Treasury, the dollar is
selling at discounts in terras of gold in many countries.,
"5) The Treasury has a very difficult, though perhaps minor problem on
just what gold coins can be permitted to be held for collection purposes.
W
6) Black markets for and private hoarding of gold are flourishing in many
foreign countries, particularly France, Italy, Belgium, and so forth,
not to mention China and other chronic causes. It is the exchange
controls of the European countries especially which the U* S. is
presumably trying to protect by its own restrictive policies on gold,
yet these countries seem to show no interest in being protected**
!I
7) The HF policy against international sales of gold at premium prices
is being violated by a majority of the members, is admitted by some
staff-members of the Fund to be unenforceable, and by some to have been
wrongly conceived or expressed.
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Federal Reserve Bank of St. Louis
- 2f
'S) There is a growing tendency in foreign countries to subsidise gold
mining.
"9) The U. S. Treasury continues to be the only large-scale buyer of gold
and to receive gold in a volume which strains the control of bank credit.
"ID) Inflation and depreciating paper money are still rampant in many countries,
and there are many opinions that the U. S, should ma'-ce some loans of
monetary gold.
"U) Treasury restrictions on gold for industrial and professional use are
an aggravating burden on the gold industry and gold users, and leading
American dealers complain they are losing their oldest and best foreign
customers because of the onerous Treasury requirements for licenses*
"12) Treasury policies are tantamount to pressure on every other country to
follow the U. S. example of prohibiting circulation and private ownership
of gold, even though several parts of the world seem unable to operate a
satisfactory managed currency with token coins and paper bills.
"Although some of these conditions may well be beyond remedying by U. S.
monetary action, the time seems ripe for a thorough reconsideration of Treasury gold
policy.
"My recommendation has long been that the only real solution for a number of
these difficulties is for the Treasury to offer a good deal of gold at |35»00 an
ounce for private purchase. The proposal should first be referred to the IMF. A
number of variations on the way the general idea is carried out can be devised to
fit the particular requirements.*
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Federal Reserve Bank of St. Louis
I
April 26, 15*4-8
MEMORANDUM
TOj
Mr. Foley
FROM i Mr. Howard
In discussing the pros and cons of increasing the price of gold,
it is necessary to see just what would be accomplished if the price
were increased or, to state it differently, what will happen if the
price is not increased. Further, the question should be broken down
as to its effect domestically and world-wide.
In the first place, domestic producers find themselves in a
position of having a fixed price for their commodity and increasing
production cost. It is obvious that the marginal producer is forced
out of business when the cost increases to a point where no profit is
left. A good many mines have been closed because of this and it is
difficult to explain to such persons that the price of gold should not
fluctuate as costs fluctuates. A man who is losing his mine does not
want to hear about world problems and world effects• He wants to stay
in business and is not interested in anything else. Especially is this
true, when the producers hear of high prices for gold in terms of
dollars throughout the world. Immediately, the question arises as to
whether or not these producers should not be permitted to export gold
to the higher-priced markets. In this connection, there are several
problems involved. In the first place, most countries where the higher
price is obtainable do not want gold but want commodities. Most of
them have laws governing the importation of gold and most of the transactions that take place are black market transactions. Therefore, an
announcement by the United States Government that the domestic gold producers could ship their product to be sold at the higher price in foreign
countries would be an announcement to the effect that we would permit our
nationals to violate the laws of other countries and are not concerned
with their problems. Furthermore, the Monetary Fund has deprecated the
sale of gold at premium prices abroad and has asked all the members not
to indulge in such transactions. Administratively, it would be almost
impossible to distinguish newly-mined gold from other types and we would
expect difficulty from this direction. Finally, no one knows how thick
the market is and the mere announcement might break the price. The
problem of the domestic producer would still be with us.
The next method of increasing the price in order to take care of
the domestic producers is to offer a subsidy. The same arguments for
and against a subsidy can be given as for any other commodity, with the
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Federal Reserve Bank of St. Louis
- 2exception that we have plenty of gold and do not need it as we do other
commodities. The only argument, therefore, for a subsidy would be to
keep the mines going. I do not believe the general public would accept
a subsidy for so few on this basis. A subsidy would benefit all the
producers and not just those on the margin and would merely be a windfall to many. Much gold is produced as a by-product and these producers
are now receiving higher prices for the other metals and do not need help.
It seems harsh to say that the marginal people must go out of business,
but there seems to be no other alternative. At least, there is only a
small group involved.
As for increasing the price of gold on a world-wide basis, the only
persons that would benefit would be the producers and those persons and
countries who now have a gold reserve. In the first place, the United
States has 23 billion dollars in gold and it could be said that we increased
the price after acquiring the large majority of the world's supply of gold
at the lower price. Also, a change in the price of gold at this time would
upset international exchanges to a terrific extent. It would mean a
redefining of par values throughout the world. Very little benefit would
come to those countries that do not produce gold. Their gold holdings are
so small that the increased value would not help them appreciable and would
do more harm than good. Certainly, we do not want to stimulate gold production in the producing countries. It is true that the increase in price
would temporarily create dollars for those countries that have gold and,
in the case of producing countries, would, so long as the price remained
in effect, create more dollars. "We do not wish to create dollar balances
in this manner. There is too much emphasis on the creation of dollars
through the sale of gold. This comes about, no doubt, through the fact
that gold is one of the quickest ways to get dollars. In other words, an
exchange of gold produces dollars immediately. Therefore, there has grown
up a conception which in my opinion is wrong, between the relation of gold
and dollars. The best way to create dollars is through the production of
goods and I believe it should be the policy of the United States to
encourage the production and exchange of goods for dollars instead of the
production of gold.
As for gold bringing higher prices in terms of dollars in such
countries as China, Indo China, India, etc., there is a misconception of
what takes place. In the first place, the gold is sold in terras of local
currency and the local currency must be converted into dollars. This
means that dollars used in this manner can not be used otherwise, that is,
for the purchase of commodities. It can be argued that the local
currency would not be spent for commodities if it were not spent for gold.
The facts still remain that to obtain the dollars to pay for the gold
places a strain upon the exchange of the country. Any large-scale shipment of gold would, in my opinion, break down the ability of a country
to meet its dollar payments. Thus, you would have an enormous price for
gold in terms of local currency with no dollars to buy more gold. Some
people look at this higher price of gold from the point-of-view that
gold has increased in value in terms of dollars. "What has actually
happened it that gold has increased in value due to the depreciation of
local currency. It can be said that gold is a thermometer and its price
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Federal Reserve Bank of St. Louis
- 39
1
indicates to a certain extent how siok the patient is. Eventually, the
exchange rate if free, would change to reflect the actual conditions
in the country.
All gold sold in this manner is for personal hoarding; therefore,
why should this be encouraged? Take China, for example. She is to be
given dollars under the Recovery Plan. Why should these dollars, or
others whose place they will take, be used to purchase gold for private
hoarding?
Another factor against the increase in the price of gold is that
it would be inflationary. It would increase the value, in terms of
dollars, of our present reserve and would cause more gold to flow to the
United States. The flow of commodities has the opposite effect.
In summary, it can be said that the only benefit from an increase
in the price of gold would be to add dollars immediately to those
countries holding stocks of gold. This increase would be temporary and
although small might upset the present EBP plan in that it would throw
dollars into a market that is short of commodities. The SRP plan was
based upon the needs of JSurope, together with what the United States
could spare. It would stimulate the production of gold but there is
serious doubt as to whether or not this is desired. True, it would save
marginal mines and make operations profitable. We want to stimulate the
production of commodities, not the production of gold. There is very
little to be gained by increasing the price of gold. If we do not
increase the price it will mean that certain mines must close. There
appears to be no other alternative. If we try to protect our domestic
mines, we must either let them invade foreign markets or pay them a
subsidy. To let them ship to foreign markets would upset the exchanges
of those markets. Also, it would be difficult to administer such shipments and confine them to newly-mined gold. A subsidy by the United
States may amount to the same thing as changing the price of gold.
The final question that can be asked is what will be the new
price? Is the price to be set so that all marginal miners will make a
profit? What if operating costs continue to increase? Will the price
be changed? There is no basis for fixing the price; therefore, it
must be a guess*
The problem of increasing the price of gold reached the stage in
the middle '20s where Congressional hearings were held. The same
conditions were causing the trouble then as now, that is, high cost of
production and fixed price. The price then was ^20.67 per ounce.
Since that time the price has been changed, incidentally, for an entirely
different reason, to $35 per ounce. iVe still have the same problem and
it is my opinion that an increase in price will not change the situation.
At ^5 per ounce, we will bring in producers who will have trouble later
if costs of production still continue to increase.
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Federal Reserve Bank of St. Louis
Secretary Snyder
.
Frank A. Southard, Jr.
The Case Against Raising the Price of Gold
There is no question that gold producers everywhere are having hard
times. In this country they are about the worst times for gold mines in
U. S. history. Many ndnes are closed. For many other mines still remaining open the outlook for profitable operations is dark unless the price of
gold is raised to catch up with the rising cost of labor and :;taterial8»
On the other handy every monetary consideration is an argument against
raising the price of gold. AS sympathetic as one may be for the gold laining industry, u. S. gold policy roust attach imich greater importance to the
public and monetary aspects of the price of gold. Among these monetary
considerations are:
1. To raise the monetary price of gold above the present $35 per
ounce level means a reduction of the weight of the gold dollar. The gold
dollar is by law the U. S. standard of value, at parity vdth which the
Secretary of the Treasury must maintain all other forms of U. S. money.
For the gold dollar to be reduced in weight vrould very probably be ?ddely
considered as a powerful and deliberate step toward furtner inflation of
commodity prices. It would shake confidence in the dollar, encourage a
flight from dollars into goods, and undermine Treasury financing, including
sales of Savings Bonds.
This is a very important and influential argument; nevertheless it
seems unwise to tie the case against raising the price of gold too firmly
to the desirability of raising or not raising commodity prices. Even in a
business depression, with too low prices, raising the price of gold wouki
be a device to use only if rnore desirable and effective methods of "reflation"
i ere unavailable. However, it is important to recognize that the conditions
interpreted as favoring an increase in the price of gold in 1933-34* are
reversed today. I.e., this country is not faced with too low commodity prices,
nor can the United States be said to be suffering injury due to undue depreciation of other currencies, notably the pound sterling. Today the opposite is nearer the truth — some other currencies may be too high in relation
to the dollar for their own good, and certainly prices are not too low.
2. If the U. S. s ould raise its monetary price of gold above $35
ounce, it would either worsen tie present foreign exchange troubles of the
world, or it would force virtually all other countries to take the sane step
in order to maintain their currencies in the same foreign exchange relationships to the dollar. It would probably s«it off an epidemic of devaluations
that would certainly shake public confidence and upset progress toward
currency stabilization. Even more so than in the United States, devaluations
of other countries1 monetary units in terms of gold would be a sweeping Measure
toward further, .most undesirable inflation of coramodity prices.
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Federal Reserve Bank of St. Louis
Because of these foreign exchange repercussions of any change in the
gold price, the U. S. and other countries have pledged themselves in the
Bretton Woods Agreements not to change the gold parities of their currencies
without consultation ?dth the International Monetary Fund and then only to
correct a fundamental disequilibrium. The U. 3, cannot claim that its currency is too highly valued or that it has a fundamental disequilibrium.
In 1933-34 the dollar was thought to be too high in its foreign exchange
relationships with other currencies. Today the dollar is, if anything, too
low, A good but still incomplete case can be ;nade out in favor of lowering
the price of gold in the U. S. in order to raise the foreign exchange value
of the dollar in relation to other currencies. The Mexican Ambassador, for
example, argues that the U. S. ihould do this in order to save other countries
from the necessity of devaluing their units in relation to gold, but at the
same time to achieve the objective of lowering them in relation to the
dollar. For the U. S. to reduce the weight of the gold dollar would move in
just the opposite direction and worsen the present relative undervaluation
of the dollar.
3, From the point of view of the economy as a whole, it v.ould be
better for U. S. labor and materials to be used to produce commodities other
than go d, because we have an adequate supply of gold but we need more of
most other commodities,
4, The Treasury and Federal Reserve are struggling mth the problem
of paying for gold sold to the U. S. at $35 without adding to the inflation
of currency and bank credit. If the dollar value of the gold coiling to the
Treasury were increased by reason of paying a price higher than $35 per
ounce, this problem would of course be aggravated. Part of the hard-won
budgetary surplus is being nullified by gold purchases. Moreover, if the
dollar value of the existing gold stock of over $23 billion vcere revised
upward to a higher price per ounce, there would be a much greater problem
of avoiding inflation of bank reserves and bank credit.
Although advocates of raising the price of gold argue taat having a
greater dollar value of gold in monetary reserves would stabilize the purchasing power of currencies, this argument is fallacious. Briefly, issuing
dollars against gold does not assure the purchasing power of the d)liars.
Furthermore, if the European countries had had larger gold reserves in 1939*
it ivould have been dissipated during the war or since. Nor would it be of
much benefit to the U. S. and its inflationary problem if European countries
had $20 billion worth of gold to send to us to pay for exports in lieu of
Marshall Plan financing,
5, It makes no sense to try to "base" a system of paper currency
and bank credit on a metal the price of which is going to be raised periodically, because then everyone would be well advised to hoard the "base" and
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Federal Reserve Bank of St. Louis
— 3—
not invest in currency, deposits, or debts denominated in the nominal monetary unit. Furtheriflore, it would be still less sensible to raise the price
of the metal "base* on the ground that prices were so high that it was no
longer profitable to produce the oatal* One of the two main purposes of having a metal base is to prevent prices rising excessively by holding the
quantity of money down to some limited multiple of the raetallic renerve. To
raise the unit price of the inetal because prices have risen excessively is
to upset this basic purpose of having legal requirements for metallic reserves.
GAlimpw: 4/26/48 -
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Federal Reserve Bank of St. Louis
TREASURY D E P A R T M E N T
WASHINGTON 25
OFFICE OF
February 23,
1949.
DIRECTOR OF THE MINT
IN REPLYING QUOTE INITIAI-S
MEMORANDUM
'TO:
Mr. Martin.
FROM:
Mr. Howard.
Concerning our talk this morning about the price of gold,
I attach two memorandums which were prepared last spring for the
Secretary's attention. I was asked to prepare one along the lines
that I discussed with Mr. Foley at the time and Mr. Eddy prepared the
other one addressed to the Secretary by Mr. Southard. I am of the
opinion the.t the Secretary did not see either memo but the two of them
were discussed by Mr. Southard and Mr. Foley with the Secretary.
I spoke to you about the sale of gold in its natural state.
There is a section in our gold regulations which permits dealing in gold
in its natural state under certain conditions, without the necessity
of holding & license. The three main conditions are that the gold
can not be treated in any manner whatsoever, it must be held for domestic
account and can not be exported. This provision was inserted in the
regulations in order that the small miner in remote localities need
not be licensed nor the "ore buyer" who purchased from him. It was to
obviate the hardship upon the miner and the administrative burden upon
the Department. Certain concerns have taken advantage of this and have
tried to use this loophole in the regulations to traffic in gold in its
natural state and to sell it for hoarding purposes. One person had
his picture in News Week with a big article stating that he had orders
for over ten million dollars in this type gold at a premium price of
about $50 per ounce. I have a recent letter from him stating that he
had only made one sale. Bache and Company issued an elaborate brochure
entitled "Gold versus Uncertainty." They advertised and put on quite
a campaign to sell gold in its natural state. On February lf>th we had
a letter from them stating they had sold only 69 hundred ounces. I
might say that they are selling this gold on margin. Others who have
advertised either made no sales or only one or two sales. So far, therefore, in spite of the fact that gold in its natural state is exempt
from license requirements and can be dealt in free^, there is no market for this type gold.
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Federal Reserve Bank of St. Louis
Memorandum to Mr. Martin
Page 2
The question arises, however, as to whether or not the mere
fact that it can be dealt in and the fact that these firms have advertised will create the impression abroad that there is a free market
for gold in the United States at a premium price. I have noticed
some literature from abroad which indicates that this impression may be
gaining headway. As I told you, I think this would be unfortunate at
this time. On the other hand, if we amend our regulations we stir up
the gold Senators and the mining industry and place an administrative
burden upon us and the small miner out west. I understand that the
South Africans are using the argument in connection with the Fund's
criticism of their gold plan that we have a free market here in gold
in its natural state. Maybe a deal could be made with the South Africans that they give up their plan if we eliminate the sale of gold in
its natural state. I think it is a good bargaining point and might
give the South Africans a way out. Of course, the gold problem in
South Africa is a political one and, as in the case of silver here, it
may be impossible to do much about it.
LH/eh
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Federal Reserve Bank of St. Louis
This article is protected by copyright and has been removed.
Article Title:
The American System
Journal Title:
Brookings Bulletin
Date:
March 1949
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Federal Reserve Bank of St. Louis
THE SECRETARY OF THE T R E A S U R Y
W A S H I NGTON
"In order to remove any possible uncertainties here or abroad
concerning the international monetary policies of the United States
Treasury with respect to the purchase and sale of gold Secretary
Snyder, with the approval of the President, today again stated that
he has no intention to change the "buying and selling price of gold
and then made the following statement of Treasury policies which
have been observed for a number of years*
"The Treasury will continue to buy gold Bother than United
States gold coin) at the official parity of $35 per fine ounce, less
1/H of one per cent handling charge and usual mint charges, subject
to the Gold Declaration of February 22, 19^, and the Declaration of
January 5t 19^-3 V certain of the United Hations, both relating to
looted property, and subject to compliance with the Gold Regulations.
Gold released from earmark with the Federal Be serve Bank of ITew York
will be purchased through the Federal Reserve Bank of Few York as
fiscal agent of the United States. Other gold will be purchased
through the United States mints and assay offices.
"The Treasury will also continue to sell gold to central banks
and. governments and to international monetary institutions for
immediate export or earmark for legitimate monetary purposes, including the settlement of international balancos and the strengthening of monetary reserves. All such sales of sgold will be made
through the Federal Reserve Bank of Kew York as fiscal agent of the
United States at $35 Per fine ounce plus 1/H of one per cent handling
charge.
H
Secretary Snyder said that these policies are considered to be
the most advantageous to the public interest with respect to both
domestic and international monetary objectives. He added that any
transaction by the Treasury in gold at a price deviating from the
official parity by more than the margin of 1/U of one per cent permitted by the International Monetary Fund would be a violation of the
obligations of the United States as a member of the Fund*
"This statement supersedes the statements by the Secretary of
the Treasury of January 31 and February 1, 193^ concerning the
purchase of gold, and his statements of October 13 and Hovember 2*4-,
1936 relating to the sale of gold."
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Federal Reserve Bank of St. Louis
THE SECRETARY OF THE T R E A S U R Y
WASHI NGTON
"In order to remove any possible uncertainties here or abroad
concerning the international monetary policies of the United States
Treasury with respect to the purchase and sale of gold Secretary
Snyder, with the approval of the President, today made the following
statement of Treasury policies which have "been observed for a number
of years.
"The Treasury will continue to "buy gold (other than United States
gold coin) at the official parity of $35 per fine ounce, less l/^ of
one per cent handling charge and usual mint charges, subject to the
Sold Declaration of February 22, 19^'-, and the Declaration of January 5,
19^-3 "by certain of the United ITations, both relating to looted property,
and subject to compliance with the Gold Regulations, Gold released
from earmark with the Federal Re serve Bank of Hew York will "be purchased through the federal Reserve Bank of !Tew York as fiscal agent of
the United States, Other gold will be purchased through the United
States mints and assay offices,
"The Treasury will also continue to sell gold to central banks
and -governments and to international monetary institutions for immediate export or earmark for legitimate monetary purposes, including the
settlement of international balances and the strengthening of monetary
reserves. All such sales of gold will be made through the Federal
Reserve Bank of Hew lork as fiscal agent of the United States at $35
per fine ounce plus 1/^4- of one per cent handling charge.
"Secretary Snyder said that these policies are considered to be
the most advantageous to the public interest with respect to both
domestic and international monetary objectives. lie added that any
transaction by the Treasury in gold at a price deviating from the
official parity by more than the margin of 1/ty of one per cent permitted by the International Monetary Fond would be a violation of the
obligations of the United States as a member of the 2?ond.
"This statement supersedes the statements by the Secretary of
the Treasury of January JL and February 1, 193^ concerning the purchase
of gold, and his statements of October 13 and !Tovember 2^, 193^ relating
to the sale of gold."
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*In order to remove any possible uncertainties here or abroad
concerning the international aoaetary policies of the tl»lted States
f reasury with respect to the purchase and Mile of gold Secretary
Snyder, with the approval of the President, today made the following
statement of Treasury policies which hare bee®, observed for a number
of years*
*fhe treasury will continue to bay gold. (other than United States
gold co la) at the official parity of $35 P*r £iae ounce, less l/^ of
one per cent haadllag charge and usual slat charges, subject to the
Declaration of February 22, 19*&, and the Declaration of January 5»
% certain of the %ited lations, both relating to looted property,
and subject to compliance with the Sold Peculations. Gold released
from earmark with the federal lestrve Bank of lew York will be purchased through the federal B» serve Bank of lew fork as fiscal agent of
the Waited States* Other fold will be purchased through the United
States mints and assay offices*
«
*fh* treasury will also continue to sell gold to central banks
and governments and to international ?m>netary institutions for immediate export or earmark for legitimate Monetary purposes, Including the
settlement of international balances aad the strengthening of monetary
reserves* All such sales of gold will be made through the federal
leserve Bank of Hew xork as fiscal agent of the Halted States at $35
fine ounce plus l/^ of ©a« per cent handling charge,
•Secretary %ydcr said that these policies are considered to be
the most advantageous to the public interest with respect to both
domestic and International monetary objectives* He added that any
transaction by the treasury 1ft gold at a price deviating from the
official parity by acre than the margin of l/k of one per ceat permitted by the International Moaetary fand would be a violation of the
obligations of the United States as a member of the
**fhls statement supersedes the statements V ths Secretary of
the freasury ©f January Jl aad February 1, 193^ concerning the purchase
of gold, aad hit statements of October 13 and lovember 2^, 193& relatiag
t© the sale of
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Federal Reserve Bank of St. Louis
mmmam *>mf8»
Uiere It attached a statemeat ifcich, if you agprovft, X propose
to issue about the treasury Departstcnt practices and policies governlag the purchase from, and the tale of gold to, foreign governments,
central banks, aad international ssoneta.ry institutions. ^Purchases
and sales of gold are wade purenant to the authority of sections S,
9 and 10 of the Qeld %serve Act of 193^, Seetioas 8 and 10 require
the approval of the President^
It seems desirable to issue a stateaeat of this kind place the
last public statement of the
freasnvr about the purchase of gald was
n«ade OB. feoroarjr 1, 193^ »a^ *b* !»•* public statement shout the
sale of gsid on loTember ^t 1936* these statements do aot accurate*
ly reflect the practices and
policies t^ich the Treasury has been
following for a aumher of jrears and Bay contribute to some uncertainty
on the part of foreign governments and central "banks ahout our gold
policies* la addition, J Relieve it may he helpful to issue
this
statement at the present time to reaffirm this Soveraaeat1* views as
to the price of ipld.
If you approve, would you please siga the notation at the foot
of this Meiaorandus.
Mar«h
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Federal Reserve Bank of St. Louis
tfr. So*tJ»rd
***** 9»
o. A. ia$r
Tfcroo souad Britioh «tato<sont« cm tho prio* of gold
At tho **«tiog In «r. Martin's offie* on Friday, March 4» I aal4 that I
»ouI4 Mad you lactation* fro» throo artioleo by Brttieh writaro 50 tho
vf gold i»a tho IT, a* buying prioo. Bore they «i*ot
fro* Caaborra whi«b
» ...?bo Atttifelian rrlao ttinlator ha* told * oonforoTO* &t
that tt» CowMmvoolth Owornnoat r«fu»*» to eaboiclso
/ola oroduetion, fit **id that tl^i il. &• was tho war 14 » «
oia bi^/«r a*u* that. If *bo c«a*od btaylogf gold would bo
rirtually valu«loM« If tho II. o. iner«aMd ttso prioo ^f fold, it
wolei uaount to «ub«id!oin^ tho goLd-^roauoing oonatrio*, whleh woro
thoM aw»t
MatAat ^ July 2^. M^| Ml a long artioi* entitlod »Tho Monotary
Puturo af Gold*1. EvwESlf p»fti»oiit ^uot»tioo» Include tho fallowing*
...tb« United Statoo ha« provod to bo tho only eoantry in tho
war and poot-wur porioao in « position to aboorb aay *ab«tantial
of
"It U iAporta^ to uaOorota&d that &:;*rt frooi adding to a
/id atoo^c whieh mi^lit bo ooe«%i«ro4 alroaay aoro tMA taplo to
«oot all po*aibl« oontingoncii*?: » tho ho&ry inflow *f .gold fro*
to of littlo bonofit to tfeo tlniUd StatM. 0» tho oooIt aoeofft\iatoo t'ho dlf f leuitiM '.?f :.>rorontlng Inflation aad
haa tb* dlMdvanta^o of putting 4oll**r« Into tbo fcando of tho
oonatri«« whiob tbo iattor oaa u*o to f inaao* oxport* of
flpon tho Uflitod >tat«§ which haw* «o oomitorpart In ahipnanta
to that country ;f g?ofuiufaablt
^oot otbor oooatrioo ar* iHorw.«tod in buying gold
only an a noane of ultimatoly obtalalug iollami* Thoy caanot
afford to divert port of thoir Departs to pay f«r §»ld for ^floial
rooorwe purposes, still IOM to pay for fold wantod for privato
i^arding purpOfoaf and tharo io no lm] test ion that tboy will bo in
a position to eo so for oo^o Ion.* tin* to cow*, thus, although
thoro is tftill a trc-j»endoa» pont-up c\«Band for fold on priwato
£&*OBnt in OJUEQT pnorta ->f t&o world, «« «vla«ncod by tho prleo* paid
for $o!4 in'th* froo mr<ot«, thoro in ao oortainty that nwwly-*inod
«otal oould bo fro«ly dUp&ood &t at omrrost ricoa OOM Unltod
-,>tat«a buying
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Federal Reserve Bank of St. Louis
..."It it
tbo !?aito4 dtotoo ?ro*i£*» the *ffecti*«
d**Aad, not baomu«t of ite t«tekal«fd eootroi through the lnl*r
tlooal Bofttt*!? Ffcfl^f thet It has tfce &at s*y la the e*ttor of
tfe* worl^l
»Th»
*bows trmt tbt flow of gald te th« Unit* Bt*t*ft
%&* »®rid output «r»n b«for# th«
th» U*/MT period fro% tbo •«! of 1936 to tho end of
, tfc« v^rU9* gold outfit h«i *^po«i«it«d iA T&lw $Uf800
1* §• official rsldi re»*rv* h*«
'la tho ttfht of
3. »• i* being n«M ««la to*
p currant
00011 difficult to fit into
on
tl*rof3r«, if t^o Ualtocl 5Ut«« Imd no
tuloo to go oft o^fini f»24 «t $35 por OBQOO, olio
f tad tb* boJUumoo of «dvm^Mgo boot oorvodl by doi®g oo,
lH^rovort Uioro wotiM* fr^n ftor o»n point of vlow, bo no
In a i a *
0nito4 ^Ut«o afford* t^o anljr otbotontiad outlet for
gold «o loaf *• otl or Oovomaeato witntcln tb«lr poroooat
Ill af the artielAo in the Jtettet oM i^ the PinoaeUl Tiaoo ^f ^oo^ebor &,
aad 11 mro proosbl/ *«rtfe ro«di^|«
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Treasury Department
Office of International Finance
Date
To:
From:
Mr. Martin
194....
THE SECRETARY OF THE T R E A S U R Y
**
WASHINGTON
KWQHAEDOM K)R SEE PESSIIM2
There is attached a statement which, if you approve, I propose
to issue about the Sreasury Department practices and policies governing the purchase from, and the sale of gold to, foreign governments,
central tanks, and international monetary institutions. Purchases
and sales of gold are made pursuant to the authority of sections S,
9 and 10 of the Gold Deserve Act of 193^. Sections 8 and 10 require
the approval of the President.
It seems desirable to issue a statement of this kind since the
last public statement of the Treasury about the purchase of gold was
icade on February 1, 193^- and the last public statement about the
sale of gold on November 2^, 193&. These statements do not accurately reflect the practices and policies which the Treasury has been
following for a number of years and may contribute to some uncertainty
on the part of foreign governments and central banks about our gold
policies. In addition, • believe it may be helpful to issue this
statement at the present time to reaffirm this Government's views as
to the price of gold.
If you approve, would you please sign the notation at the foot
of this memorandum.
TEE TflHITS HOUSE
March
,
Approved;
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Federal Reserve Bank of St. Louis
COPY
HSy dear Senator:
This is in further reply to your letter of January 5, 19499
requesting a statement of the Treasury position on legislation
permitting the sale of gold on the open market by lode gold producers. Because of the importance of this subject and the widespread interest which it has aroused, the answer to your letter
has been delayed until the Treasury finished a re-examination of
the problem.
It appears that the principal purpose of the proposed free
market in gold in the "United States would be to provide a market
for the sale of domestic gold production at a price exceeding the
monetary value of gold of |35 an ounce* The Treasury is strongly
opposed to the development of a market for gold in the United States
in which the price may deviate materially from the official monetary
value of gold* Such a duality of price would conflict with the basic
purposes which lead the Government to buy and sell gold and to use it
as reserves for its banking and currency system. For the Government
to hold a floor under the price of gold but not to fix a ceiling
over it at the same price violates the whole conception of the use
of gold for official monetary reserves and for defining and maintaining the parity value of currency. The Treasury policy of buying all
gold from authorized sources at $35 an ounce in order to keep the
dollar from going to a premium over l/35th of an ounce of gold has
the effect of keeping the price of gold from falling below $35 an
ounce. There would be no valid reason why the Treasury should continue this purchase policy if it were not also to sell gold at the
same price to keep the dollar from going to a discount below l/35th
of an ounce of gold and thereby also preventing the price of gold
from rising above |35 an ounce. The purpose of using gold as the
monetary standard of a currency is to tie the money firmly to the
value of the chosen quantity of gold. In fulfillment of this longstanding United States policy of having a fixed monetary standard,
the Secretary of the Treasury is required by law to maintain all forms
of United States money at parity with the gold dollar.
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Federal Reserve Bank of St. Louis
* 2The Treasury believes that it is of the utmost importance that
it continue to stand ready to sell gold to foreign governments and
central "banks for all legitimate monetary purposes and to United
States residents for all authorized purposes at |35 an ounce. By
this means the dollar is sstintained at a parity with the gold dollar
for all legal transactions at home and abroad, with the minor exception of a limited class of transactions in Switzerland for the
settlement of which the Swiss monetary authorities will not accept
gold. (The United States Government of course cannot undertake the
maintenance of the parity value of the dollar in relation to black market
transactions in gold abroad, or sanction private United States participation in such transactions, since they enable individuals in foreign
countries to evade the exchange control lavrs and regulations of foreign
countries.) If the Treasury should continue its present policy as to
sales of gold while a higher price for gold prevailed in an open market
in the United States, foreign governments and central banks could
maintain their gold stocks by purchase from the United States at $35
an ounce, although their domestic production and private holdings
of gold might flow to the United States for sale at a higher price in
the open market. Similarly, it would be difficult to restrict ^reasury
domestic sales of gold at the official price to legitimate and customary industrial, professional or artistic uses while an open market
existed where gold could be sold at premium prices.
Thus, the existence of two prices for gold would cause monetary
disturbances and would be inconsistent with the Secretary of the
Treasury's duty to maintain the dollar at a value equivalent to l/35th
of an ounce of gold. Such disturbances might contribute to a public
loss of confidence in the dollar and aggravate inflationary pressures.
In critical economic periods the movement of gold into the premium
market would increase the strain upon the banking system. Moreover,
to authorize a legal market in the United States where premium prices
for gold were available might bring about unstable and disorderly
conditions in the foreign exchange market and would be inconsistent
with the principles of the Bretton Woods Agreements,
In order to avoid any misapprehension concerning the Treasury's
attitude on placer gold, it should be noted that the exemption of gold
in its natural state from the licensing procedure of the Gold Regulations
issued under the Gold Reserve Act of 1934 was not intended to foster
unrestricted traffic in or ownership of such gold, ^he exemption was
intended to free the business of prospecting for gold from licensing
requirements and to save the Government the difficult administrative
problem of licensing the operations of prospectors and small mines. It
was not contemplated that private owners would hoard gold in its natural
state.
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Federal Reserve Bank of St. Louis
- 3If a free market for gold also contemplates the free exportation
of gold from the United States, there are other objections. Hie
International Monetary Fund has issued a statement to its members
stating that it ttstrongly deprecates international transactions in
gold at premium prices and recommends that all of its members take
effective action to prevent such transactions in gold with other
countries or with the nationals of other countries." By such transactions, foreign exchange holdings of other countries, which otherwise
might be used for sorely needed imports, tend to be diverted to the
purchase of gold for private hoards. In addition, it would seem
clearly inappropriate for the United States to make it less costly
for nationals of other countries to build up private gold holdings
at a time when their governments are having to borrow money or solicit
grants from the tfiiited States in order to pay for essential imports.
The efforts of these governments to centralize potential foreign
exchange and to prevent their nationals from acquiring gold for hoarding
might be seriously handicapped if a large supply of gold were readily
available in the Iliited States* Accordingly, even if gold were made
freely available within the United States, it would probably be
desirable to prohibit private exports of gold for unauthorized purposes.
These are some of the principal reasons why the Treasury would
oppose unrestricted trading in newly-mined gold* Should you have any
additional questions, please do not hesitate to write again*
Very truly yours,
Acting Secretary of the Treasury
Honorable Warren G» Magnuson
United States Senate
GAEddy:CHMcKeill:cr - 2/28/49
- 3/9/49
copied:cr
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Federal Reserve Bank of St. Louis
STANDARD FORM NO. 64
-«:
Office Memorandum
TO
: Mr. Martin
FROM
: G.A. Eddy
UNITED STATES GOVERNMENT
DATE: March 18, 1949
SUBJECT: Gold Sale to China
I understand that LIr. Walton Butterworth has telephoned you requesting the
Treasury to reconsider its willingness to sell the requested $3<>5 million of
gold to China and that he gave as his reason that it was analogous to the Greek
case* Furthermore, for various reasons, Messrs. Stuart, Arnold, -HymUJig, and
McNeill also now oppose the sale* OFD of the State Department either favors it
or has no objection and believes it a Treasury question.
I definitely favor the sale. If the principles which seem to be implied
in a rejection of this Chinese request were allowed to prevail, Treasury gold
policy would, in my opinion, be gravely and foolishly impaired. It would also
be a violent break from the policy which has been followed under the Gold Reserve
Act of 1934- and been followed by every other country for centuries. Still further,
refusing this request under present circumstances would be an ineffective, futile
gesture.
A cable from Bern last week reported that President Keller of the Swiss
National Bank, in addressing the general meeting of the bank, said that it is
of the utmost importance that the United States dollar, which is the ^universal
currency at the present time, should remain stable in relation to gold. The
economic predominance of the United States and its preeminence in gold holdings,
he continued, impose upon this country an international responsibility which
it has not hitherto had. He went on to elaborate the importance of the stability
of the dollar and the price of gold as a prerequisite for monetary adjustments
throughout the world.
The delay of over two weeks in acting on this Chinese request is regrettable,
and both continuation of the delay and, worse, rejection of the request may well
be grounds for doubt about the convertibility of dollars into gold at the request
of a great many countries.
The standard policy of the Treasury since 1934- in selling monetary gold has
been to sell gold bars to foreign governments and central banks who offered
dollars without any regard to whether or not they were selling gold in their
domestic markets either at premium or parity prices. There have been scores
and scores and probably hundreds and hundreds of such sales since 1934, totalling
over a billion dollars and extending right down to the present. There is only
one case of rejection of such a sale so far as the Treasury staff nov; recalls
and that incident was highly informal, confused, complicated by several extraneous
factors, and decided in a hit-or-miss way.
Neither the fact that the United States is giving some dollar aid to a
country ( which in the case of China is approaching the vanishing point at the
moment) nor the fact that a country may be selling some gold in the domestic open
market, even at premium prices, nor a combination of both of these conditions is,
in my opinion, proper or sufficient grounds for making dollars in the hands of
those countries inconvertible into gold at the United States Treasury.
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- 2Mr. Butterworth has mentioned an analogy to Greece. I am not informed on how
closely he argued there was a parallel. In any case, for reasons stated below that
analogy seems false. There are a number of important differences between the Greek
case and the Chinese. Far worse than that, however, is the apparent corollary that
if China is refused the right to exchange dollars for gold, so should a great many
of the other countries of the world. Among the countries which seem to parellel
Greece and China in one way or another are all ERP countries and perhaps a good many
in Latin America, notably Mexico, Chile, Brazil, etc., which are receiving or
applying for dollar loans. If the suggestion of Messrs. Butterworth, Stuart, Arnold,
and McNeill is adopted and that position is then applied consistently to other
countries, it would seem to involve a drastic narrowing of Treasury gold selling
policy and malting the dollar inconvertible into gold in the U. S. for most of the
leading countries*
Sales of monetary gold bars for dollars to centra}, banks or governments is and
should be both virtually automatic and also administered by the Treasury. Monetary
gold ssJ.es should not be political favors requiring negotiation with State Department political desk personnel, particularly with respect to the general monetary
principles involved.
The established precedent is all in favor of selling the gold
Prior to 1933 there was of course no conception of not selling gold to foreign
countries if they were selling gold to the public. Similarly, in the years 1934-46
the Treasury sold gold without any thought of whether the buying country was selling
gold in its domestic market. In the period from 1934 to 1939 most of the countries
to which the Treasury sold gold were selling gold to their public. In fact many of
the Treasury sales in those years were directly to private buyers abroad. It would
have been regarded as a serious interference with other countries1 sovereignty,
discretion and responsibility for the U. S. to have taken the position that any
country which sold gold to the public would not be allowed to buy gold from the U.S.
It would also have vitiated the main purpose of our buying and selling gold, namely,
to hold the dollar to parity in terms of the par values of other currencies or in
the case of countries with floating exchange rates, hold the dollar up to the floating value of gold in the foreign currencies. There were and are enough countries
and enough people in the world which have entirely different problems regarding gold
and paper money to make it vital to any satisfactory gold policy for the U. S. not to
try to interfere with those countries1 buying gold*
Last year the OEEC recommended that 3 billion dollars worth of gold be furnished to member countries to start reconstituting their monetary systems. Whether
or not the United States complies with that recommendation is an intricate and
delicate matter for U. S. Foreign Aid and Monetary policy to determine. But for us
to go to the opposite extreme and say that if a country is receiving dollar aid or
is selling gold to the public then they will get no gold from us, would, I believe,
be an irresponsible and doctrinaire mistake.
The Treasury rightly has had no compunction against selling gold to Switzerland
or Laexico during the war and postwar years when they were freely selling gold to the
public. Mexico still is and Switzerland has only recently stopped for special reasons.
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- 3During the war the U.S. abetted Chinese gold sales duffing the WOP even to the extent
of ferrying gold over the Hump at enormous cost. More than half of the earnings of
the Stabilization Fund arose from war-time sales of gold in India and the Middle
East directly to the public at high premiums, and assisted the British Government
in their part of the joint program. As a matter of interest though not as proof,
it may be noted that a letter written in 1944 by Ray Mikesell and initialled try
E*M0 Bernstein, Harry White, Harold Glasser and Bill Heffelfinger states, for
example, "Moreover, these gold sales have been beneficial to (Iran) in helping to
combat inflation."
The purpose here is not to argue in favor of public gold sales as a device
against inflation. Much less is it an advocacy of the United States lending or
giving the gold to permit such sales. This paper is entirely non-committal on
those two points. The only contention here is that in the selfish interests of
the United States and in consideration for the rights and responsibilities of other
countries and for the U.S. role regarding gold policy, the Treasury should not refuse
to sell gold to a country offering dollars for gold, if our ohly grounds for doing so
is that they are selling gold to their domestic market. U.S. foreign aid policy
should certainly consider how far it should go in financing or tolerating public gold
sales by Governments receiving aicU The writer happens to believe that the recent
Treasury arguments against all such sales is in some cases superficial and shortsighted. But the point being urged here is that Treasury gold policy should not make
the convertibility of dollars into gold a thoroughly doubtful matter dependent on
uncertain administrative discretion.
The differences between the Greek and Chinese cases
The differences between the Greek case and the Chinese case include the
following:
1, Whereas the United States Government is doing everything in its power to
control Greek finances and to get the Greek Government to follow U. S. advice in all
financial policies, in China the State Department policy for at least several years
has been uniformly to avoid assuming any responsibility for Chinese financial
policies. If we refuse to sell this gold for any reason, the Chinese would rightly
ask us what we want them to do instead and expect us to be responsible for the
success or failure of our alternative program*
2. No request from Greece to buy gold has been refused as yet. There are some
people who have limited responsibility for Greek affairs and who are confortably
living 6,000 miles away who speak with scora of the gold selling program there, despite the fact that every American economist who has worked there for any length of
time in the last two years, plus a majority of the foreign economists, in Greece,
believes it to be unavoidable. If it can be avoided under present conditions in
Greece with any semblance of preventing inflation, it will be because of the huge
import program financed by the U. S., because the U.S. is financing a large part of
their military program, and because the U.S. Mission there really takes over the
management of Greek finances. The first two conditions are not now true of China
to a remotely comparable degree, and the third has already been cited above as being
a sharp distinction.
3* Greece buys gold from us only in the form of sovereigns exclusively for
sale to the public, and could not get sovereigns at the $35 price for gold from any
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Federal Reserve Bank of St. Louis
- 4other source, so far as we know. China, on the other hand, is asking only to buy
standard gold bars. This is what we stand ready to sell to every government and
central bank" for legitimate monetary purposes," We have specifically not declined
to sell gold to a country merely because it is releasing some gold to its internal
market. In this case, the Chinese Central Bank has said that the gold will not be
exported at premium prices. This is not a hollow statement, because the flow of
gold is inward to China and not outward from it»
4. Our refusing to sell this gold to China for dollars may accomplish little
or nothing other than to create a small nuisance, China, if it wanted to, could
sell the dollars in its domestic market and thereby dissipate foreign exchange for
domestic purposes just as fast as by sales of gold to the domestic market. Moreover,
China could buy gold bars at -?35 per ounce from many other sources. Accordingly,
our refusal to sell China this gold for dollars would probably not prevent the
Chinese from carrying out any operation which they choose*
5» w'hereas the U.S. Treasury's sale of British sovereign coins to Greece
beginning in December 1947 was unprecedented, the Chinese representative has made it
quite clear that they know that the United States sells gold virtually automatically
in regular transactions between central banks and governments. There has in fact
been no refusal for a good many years, with the exception of a tentative feeler from
China two years ago during a time of extensive U.S. aid and when they were
systematically selling gold at a specific premium in what may have been then an
illegal market*
Arguments in the Stuart-Arnold Memorandum; 1. The Premium Pr^qe
The spokesman for the Legal Division on gold and Fund matters was in favor of
the sale to China and helped persuade me to favor it until he learned that the
Central Bank of China had amplified its original cabled request for gold "with a
view to replenishing our reserve in gold." The amplification consisted of a cable
to a Chinese official confirming that the Bank sometimes intervened in the now free
and legal market, where gold of course sells above a crossrate -^35 per ounce.
Even though we had had previous reports that the Chinese were doing this, this
legal opinion apparently was reversed when the Chinese told us something more
specific along those lines than the phrase that the gold was to replenish their
reserves.
I believe U. S. Treasury gold policy is going to be in continual danger of
cutting its own throat and permanently injuring the world-wide conception of the
relationship between dollars and gold until the economic policy-makers of the
Treasury assert that a country1s selling gold internally at "premium prices" is
not an act of such iniquity that the U.S. Treasury should commit the far more
important violation of basic gold-policy principles of denying convertibility
into gold bars of dollars held by those foreign governments and central banks.
The International Monetary Fund itself has issued no policy statement of
any kind which would even suggest that the United States should refuse to sell
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- 5gold to China under these circumstances, and it is my confident expectation that
if the Fund Staff or even the Board of Directors were asked whether the United
States should turn down this request, they would say there was no Monetary Fund
reason for the rejection and a general Fund presumption in favor of it.
The contention of the Legal Division spokesman and this memorandum from
Messrs, Stuart and Arnold extends a Monetary Fund dogma into entirely new
territory. The Fund's 194? statement on premium gold transactions does not
touch upon this gold transaction or what China itself proposes to do with its
gold. The Fund statement reads, "For these reasons, the Fund strongly deprecates
international transactions in gold at premium prices and recommends that all of
its members take effective action to prevent such transactions in gold with other
countries or with the nationals of other countries...The Fund has not overlooked
the problems arising in connection with domestic transactions in gold at prices
above parity. The conclusion was reached that the Fund would not object at
this time to such transactions unless they have the effect of establishing new
rates of exchange or undermining existing rates of other members, or unless they
result in a significant weakening of the international financial position of a
member which might affect its utilization of the Fund's resources."
In this case, the international transaction will occur at the U.S. parity
price. The proposed intervention in the Chinese domestic market is excluded
from the Fund's objections. Furthermore, since China has not certified a parity
rate to the Fund, the Fund does not consider that its transactions in gold
domestically are above parity. There is no chance of China's utilizing the
Fund's resources so long as it has not certified a parity.
Although I hesitate to try to prove anything by the Articles of Agreement,
I feel sure that the general implication of the Articles is all in favor of
the United States selling gold to China for dollars at the parity price. Surely
the general purport of the agreement is that members should sell gold to
each other at the parity price. Secondly, the only way by which the United
States qualifies as fulfilling the undertaking of Article IV, Section 4-b to
maintain exchange transactions within the prescribed margins, is by our readiness to "in fact freely buy and sell gold within the limits prescribed by the
Fund." There is certainly no hint that we should not freely sell gold if a
country is selling gold domestically for its own currency at premium prices.
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Thirdly, according to the terms of Article VIII, Section 4, it
would appear that the United States is under obligation to settle this
Chinese dollar holding either in gold or by tendering Chinese money.
The only way that we could refuse to buy back the Chinese holdings of
dollars under that Article, so far as I can see, would be for the United
States to declare that it is not permitting transactions involving
capital exports to be made and that the Chinese holdings of dollars are
the product of capital transactions. V/e could not prove that the dollars
were the result of capital transactions in the first place and, in the
second place, it would be a prohibited form of discrimination to say that
capital transfers to China were not being settled currently, whereas
everybody knows we have no reason to refuse settlement of capital transactions to any other country.
In summary of this point, I believe that the Legal Division has
taken a false interpretation of the Monetary Fund doctrine against
international gold sales at premium prices, and that the Legal Division
has even misapplied its misinterpretation. The Fund would say that
it was more important for us to sell gold at the parity price than to
try to police its policy against premium gold sales by refusing to sell
gold at the parity price, and the Fund would say actually that the proposed Chinese transactions are not in violation of the Fund's international
premium price policy.
As a matter of fact the Chinese authorities might easily be persuaded to sell gold at $35 an ounce for dollars, if that will satisfy
the United States. It would be a mistake to do so in my opinion, but
it would be interesting to learn the Chinese response if this "premium
price" argument is given weight in a Treasury rejection of the request.
2. The position of the Chinese Central Bank
The Stuart-Arnold memo then indicates a second line of defenset
There is something "inexplicable*1 about the Chinese desire to buy this
amount of gold when they nominally have much larger holdings of gold
(3»95 to 6 million ounces as e^ialS^f00,000 ounces requested for purchase in this transaction). The purpose of referring the transaction
to the political desk of the State Department at all was to give the
opportunity to the political officers to assert that the applying bank
was no longer recognized by the United States as an official central
bank of a recognized government. This the political desk did not say
and in all probability will not say, since the United States still recognizes both the National Government and the Central Bank of China
as the Government's central bank, Instead, the political desk replied
with an economic principle which is outside its jurisdiction, subject
to serious dispute on both economic and factual grounds, and an improper
intrusion into Treasury gold policy.
The suggestion that something is awry with the Central Bank of
China would be a valid reason for rejecting this request to purchase
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Federal Reserve Bank of St. Louis
- 7gold mainly if the State Department wishes to reject the right of the
Central Bank of China to carry on any transaction with the United States,
In that case, the receipt of dollars from the Central Bank is as much
an offense as selling gold to it, since the receiver of the dollars
would lay himself open to suit for having accepted assets which the
payer had no right to transfer. Until the State Department political
desk wishes to assert this position formally, they should not be given
a dominant vote in this Treasury matter*
3»
Gold sales as a stabilization measure
The Stuart-Arnold memorandum then mentions a third line of defense:
namely, that the present gold sales program is "unavailing as a price
stabilization measure." The contention of this paper is that that is
not an adequate reason to upset the "basic convertibility of dollars
into gold. The writer has doubts about the accuracy of the assertion
that the gold sales program is as unavailing as Messrs. Stuart and
Arnold assert. The evidence cited, of a large increase in prices, is
irrelevant to the Chinese contention that market intervention keeps
things from going bad faster than they now are going. But it seems
necessary not to let this gold sale argument be diverted into a debate
on the effectiveness of internal gold sales as a stabilization measure.
The Chinese officials, who alone have responsibility for the problem,
assert that they want to carry on such a gold-selling program. It is
an improper intrusion into their sovereignty and responsibility for the
U.S. to make a unique violation of its standard practice on gold in
order to tell the Chinese that there are some people in the U.S. Government who think the Chinese are mistaken about the usefulness of the
program*
References have also been made above to the ease with which the
Chinese can buy gold from other sources and the easy availability of
their selling dollars in the open market.
The sentence in the memorandum which says, H The attitude of this
Government, at least since the middle of 194-7, has been wholly consistent
as regards the possible efficacy of the currency stabilization measures
of the sort which have been proposed or attempted by the Chinese since
that time", is inconclusive on several different counts. In the first
place if this sentence implies that, as a result of this "wholly consistent11 attitude, the U.S. Government refuses to sell gold in exchange
for dollars, the implication is wrong. The Treasury is currently ready
to sell gold freely to countries ¥/hich are selling gold internally as
stabilization measures, Mexico for one, and Switzerland for another
since mid-1947* Secretary Snyder and Mr. Southard, the Treasury and
the rest of the Government have authorized and assisted in the carrying
out of a gold selling program in Greece. The fact that one telegram
has been sent saying that EGA hopes to stop this program beginning a
couple of months from now, does not change the fact that we have filled
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Federal Reserve Bank of St. Louis
- 8all the Greek applications to buy gold since 194? and before*
The sentence quoted at the beginning of the last paragraph about the
Treasury attitude since mid-1947 is really a boast that in the last year
and a quarter the U.5* Treasury has consistently tried to overthrow the
4,000 year old monetary habits of peoples in many parts of the world.
I propose at the earliest opportunity to write another memorandum
attacking the Treasury-State position that on technical grounds no aid
against inflation in China will be availing until the "continued massive
Government deficit" is ended. That assertion amounts to saying that the
United States on technical grounds will be unable to help the Chinese
against inflation until the Chinese stop fighting the Communists. However,
this memorandum is not the proper place to discuss that issue.
Those responsible for deciding on the kind and amount, if any, of
U.S. aid to China can consider whether or not the Chinese should be pressed
to discontinue interference on their open market for gold. The current
program of aid, however, now rapidly drawing to a close, has not
been designed in any way to take notice of whether or not the Chinese are
selling gold internally. If EGA wants to, they can say that they will
cut off even.the remaining program of aid unless China stops such sales.
The attitude of the EGA, however, is that it does not wish to interfere
in China's internal affairs.
Making this gold sale in exchange for dollars carries no implication
regarding a prospective request from the Chinese Government for a loan of
gold or silver.
4. The nominal purpose of the gold purchase
The semi-final argument of the Stuart-Arnold memorandum, "that the
sale is not for the purpose of strengthening monetary reserves," is playing
with words. The authors have in mind some special conception of *what
'strengthening monetary reserves" means. It would seem impossible to deny
as a matter of ordinary English that this gold purchase will strengthen
their monetary reserve, if changing dollars into gold is considered, strengthening. Since Messrs Stuart, Arnold and others oppose such a conversion,
the obvious implication is that it is a strengthening of China1s monetary
reserve. The Treasury has never and could never insist that "strengthening
monetary reserves" means that the country must always keep the gold locked
up. Likewise, it would seem necessary to torture the common meaning of
words to deny that redeeming these dollars in gold is a "settlement of an
international balance." A Chinese holding of dollars is an international
balance, and their getting gold from us for the dollars is the classical
way of settling it.
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Federal Reserve Bank of St. Louis
5. The opinions of the State Department
It is indeed ernbarassing that the political desk of the State Department
has presumably taken some position or other opposed to this gold sale* In
a number of passages above, the opinion has been advanced that the political
deck of the State Departnent is not the proper place to decide a general
economic gold policy* There is no case known to the writer where the
political desk has decided a gold sale question on economic grounds. Every
effort should be made to prevent any such procedure from developing.
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COPY
INCOMING TELEGRAM
DEPARTMENT OF STATE—DIVISION OF COiOUNICATIONS AND RECORDS
Action: DCL
Info:
E
Control 4706
OLI
C/JLA
ITP
OFD
DCS
FROM:
Rome
TO:
Secretary of State
NO:
676, March 11, 6 p*au
RSDSPGRAM3 A-146, March 2 and A-744 December 10.
Italian regulations and policy re import and export
of gold for industrial uses discussed with Director
General Foreign Currency, Ministry Foreign Trade,
Questions raisod in DEPGRAM answered ao follows:
1. Re paragraph 2, Italian Government, as matter of
policy, encourages importation industrial gold into
Italy for fabrication and re~e&port, With respect
importation of gold for industrial uses not for
re~«xportt however, policy is deny licenses for such
imports. Minister Foreign Trade considers there is
ample gold available internally to satisfy demand for
industrial gold. Importation of gold for industrial
uses would jaean in practice opening gates to speculative gold transactions—purchase at official
price of gold and sale at internal free market prices—
in that it is difficult control gold destined for
actual industrial use.
2» Re paragraph 3» import gold for industrial uses
subject regular import license procedure, llonetary
gold, however, can be freely imported into Italy
duty free. All gold exports are prohibited except
for fabricated gold where export licenses required.
Copies of Italian regulations governing gold internal
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and external
TELEPHONE BRANCH
RESTRICTED
2- #6?6f
March 11, 6 p.m., from Rome
and external transactions being forwarded by airmail.
3. Re paragraph 4, gold on consignment to Italian
industrial firms with understanding that such gold to be
fabricated and re-exported can be introduced duty free.
Customs authorities, however, reserve right to require
a guarantee depoist reifahursable upon re-export of the
gold involved. Where industrial gold is imported into
Italy with no re-export commitment, such imports subject
to duty.
Inform Treasury*
DUNN
R3P:ISP
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COPY
HOUSE OF ITALIAN HANDICRAFTS, INC,
21? Sast 49th Street, New York 17, N. Y.
Plaza 9-3190 Cable: CRAFTAID, N.Y.
February 14, 1949
Mr. Tobin,
U,3» Assay Office
32 Old Slip,
Hew York, N.Y.
Dear Mr. Tobin:
I ith reference to my telephone inquiry of the other day concerning the
export of gold from the United States, here are the relevant facts related
to my inquiry.
/
Compagnia Nazionalo Artigiana, a send-public Italian corporation for the
development of handicraft production in Italy, is the beneficiary of a
loan in the amount of $4,625,000 from the Ebcport Import Bank of Washington*
The loan is to be used for the purchase in the United States and export
to Italy of Materials and products indicated in a list which has been
approved by the Export Import Bank* The list Includes an item of $200,000
for the purchase of gold, which is an important material needed by Italian
artisans for the production of jewelry and related products. Gold is also
important to a special category of artisans engaged in the production of
gold leaf.
I shall greatly appreciate it if you will let me have at your earliest
convenience complete information on the formalities which must be complied
with in order to obtain from the appropriate quarters (presumably the U.S.
Treasury and the Department of Commerce) an export license for metallic
gold to Italy as above indicated. I presume that the total purchase of
.* 200, GOO wo uld be split into a number of smaller separate operations and
that the gold in question would be purchased and exported in bars.
Thanking you in advance, I remain,
Yours very truly,
(signed)
Bruno Poa
Bruno Foa
Special Agent for CompaKnia Nazionale Artigiana
American Subsidiary of Coapagnia Nasionale Artigiana-Rooe ... Florence
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Federal Reserve Bank of St. Louis
STANDARD FORM NO.
Office
Memorandum • UNITED STATES GOVERNMENT
TO
:
Mr. Martin
FROM
:
Mr. HoY/ard
SUBJECT:
DATE:
March 29, 1949
Exportation_of gold to Italy.
We have been informed that the Export-Import Bank has
given a loan to Italy which includes approximately $200,000 to
be used for gold. The gold will be for use in industry and the
industrial users vd.ll want gold bars. The Italians have strict
import controls on gold but encourage the importation of industrial gold for fabrication and reexport.
While we have not been exporting fine gold bars
the amended Regulations, there is a provision by which,
using a license on Form TGL-15-B, the export of gold in
form, subject to such conditions as the Director of the
impose, can be authorized.
under
by
any
Mint may
We believe that this exportation should be permitted in
the form of gold bars, but the question arises, will we be
criticized later on and the statement made that we shipped out
gold bars against our established policy.
If you have no objection, we intend to authorize this
shipment, but wanted you to be aware of this transaction.
Enclosures:
Letter from House of Italian Handicrafts, Inc.
Copy of State Department report re Italian Gold Regulations,
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Federal Reserve Bank of St. Louis
,'b
STATiOARO i-0.?M NO. 64
Office Mewiora/ndlMn • UNITED STATES GOVERNMENT
TO
: Mr. Martin
FROM
: G. A. Eddy
DATE:
March 10, 194-9
.,
SUBJECT: Some improvements in Treasury Policy on Industrial Gold for Export
This is to submit in writing several recommendations for Treasury policy
regarding industrial gold for export, as discussed in considerable part at the
meeting in your office on Friday, March 4*
1. After at least informal clearance with the Monetary Fund and perhaps
using it as a foremost channel of publicity, the Treasury should make known its
readiness to sell gold bars of customary monetary finenesses to central banks at
the standard monetary price for their monetary reserves but with the understanding
that the central bank may meet the needs of their domestic gold-using industries,
professions, and arts out of such gold reserves.
2* Again after Fund clearance, the Treasury should agree to grant licenses
for the export of all forms of gold by U0 S, dealers when the buyers are Governments or central banks which are members in good standing of the International
Monetary Fund and other acceptable Governments and central banks. These licenses
should be granted virtually automatically and without the requirement of more
documents than are necessary to prove the orders are genuinely from the Government or central bank.
This point is phrased above to restore the export of non-monetary gold
bars, which is now banned by the Treasury gold regulations issued 16 months ago0
If desired, this form of export could be denied still, while permitting ready
export of non-bar semiprocessed gold. The writer would favor export of bars when
foreign firms (with their central bank's approval) definitely prefer to process
their own gold.
3* With the same provisions as under (2), Treasury licenses should be
granted for the export of all forms of gold sold to private buyers abroad when the
orders have the clear endorsement of the Government or central banko
4« Regardless of action on the above points, the Treasury should not deny
applications merely because gold is available in the country of destination at
black-market prices. To deny such applications forces legitimate buyers into the
black market, since in many countries there is no alternative source where gold
may be obtained by legitimate buyers at.the standard price. In some countries
the U, S. Treasury should expect that it and U. S, dealers will have to supply
oimost all of the gold for industrial, professional, and artistic use, because former
alternative sources of supply at the #35 price have disappeared. Furthermore this
use in some countries may be expected to be several times greater than before the
war, because of the general increase in money incomes and rising standards of living*
ccs Messrs: Willis-Glendinning, Howard, McNeill, F, Smith, Southard, and Tasaa
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Federal Reserve Bank of St. Louis
OTAf iOARO i-0;?M KO. 6*
UNITED STATES GOVERNMENT
Office
TO
:
Mr. Martin
FROM
:
G. A. Eddy
SUBJECT:
DATE:
April 12, 1949
Iron Curtain Country Record on Gold and Dollar Holdings
Merely to call attention to the development none oramit tally and not with the
implication that something seriously significant is involved, the fact should be
noticed that Russia has cut down by at least 70^ the dollar balance which it held
in this country a year ago - from $73 million on March 31, 1948 to $21 million on
December 31, 1948* A further drop In" the first quarter of this year is probable.
The only bank from which a report for March 31> 1949 is now on hand, is the
Federal Reserve Bank in New lork, where the Russian balance has dropped from $8
million at the end of 1948 to ^4 million at the end of March 1949.
It should also be recalled that Russia withdrew its only gold holding in
this country ($4*5 million) a year ago»
Poland is also currently engaged in reducing its gold holdings in this
country* They have sold some to the United States, exported |>3»1 million and
transferred $2*1 million to the account of the BIS in Hew York*
After the Yugoslav gold was released from freezing last summer, they exported
most of it for sale at premium prices through Switzerland,*
Gold holdings of all iron curtain countries as of March 31, 1949 stood at
•155 o 5 million, a reduction of 42$ in the last 12 months. Total dollar balances
aVl^ie end of 1948 declined to 148 million from $104*5 million on March 31, 1948*
Total balances of these countries in the Federal Reserve Bank, which are included
in the foregoing totals, are down to $10 million on March 31, 1949 from s|50 million
a year ago»
Miss McGuire has prepared the attached tables showing the complete movements
of Soviet bloc holdings of gold and dollar balances for the last 3 3A years*
In this general connection it is of interest to receive some additional
confirmation that Russia is minting new sovereigns, using the standard British
designs, old dates, and the proper proportion of gold. They are presumably using
gold in this form for national purposes in order to take advantage of the premium
on it over the price of bar gold. Apparently they are making other kinds of gold
coins too*
CGJ
Messrs. Willis, Southard, Arnold, McNeill, Fields, Dickens, Schaffner.
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Federal Reserve Bank of St. Louis
- 2-
Holdings of Earmarked Gold in the U. S. by Soviet Bloc Countries
(in minions)
Total
Yugo- excluding
C z e cho slova Ida Poland Rumania slavia U.S.S.R.
Dec. 31, 1945
1—
129.4
146.9
$13.1
i*89.4
1—
June 30, 1946
—
29.4
13.1
46.9
89.4
. $89.4
89«4
Dec. 31, 1946
2.1
27.5
13.1
46.9
89.7
4.5
94.1
June 30, 1947
2.0
27.5
13.1
46.9
89.5
4.5
94.0
Dec. 31, 1947
3.7
27.5
13.1
46.9
89.1
4.5
93.6
March 31, 1948
3.7
27.5
13.1
46.9
91.2
4.5
95.8
June 30, 1948
10.6
27.5
13.1
46.9
98.1
98.1
Sept. 30, 1948
10.6
27.5
13.1
17,6
68.8
68.8
Dec. 31, 1948
10.6
26.5
13.1
7.9
58.1
58.1
March 31, 1949
10.6
23.9
13.1
7.9
55.5
55.5
Note: Bulgaria and Hungary held no earmarked gold in the U. S. during this period.
Russia1s holdings of earmarked gold of o4.5 million (imported from Russia in
December 1946) were released for re-exDort to the U.S.S.R. during the second quarter
of 1948.
Yugoslavia's balance of 046.9 million in December 1945 remained unchanged due to
freezing, until the second half of 1948, when it was unfrozen and $39 million was
released for export to Switzerland. This gold is reported to have moved through the
free ports of Switzerland to areas where it could be sold at premium prices.
Czechoslovakia's holdings of earmarked gold increased from $2 million to $3*7
million in the second half of 1947 as a result of an import from Canada for her
account. An allotment of $6.9 million by the Tripartite Commission brought the
total to $10.6 million. There have been no withdrawals.
Poland^ earmarked gold holdings of ^29.4 million at the end of December 1945
were reduced in 1946 to -#27.5 million by a transfer to BIS. In December 1948, &1.0
million of this amount was released for sale to the U. S., bringing the balance to
<,;26.5 million. During the first three months of this year, a total of $2.6 million
in gold was released from earmark and reexported to Poland. So far this month
another shipment of ^.5 million has been reexported to Poland and there has also
been a transfer of .r2.1 million from Poland to the B.I.S. The balance held by the
Federal Reserve Bank of New York for Polish account is now (April 10) 4i>21.3 million.
Rumania's gold holdings of -A3.1 million, as well as her dollar balance of
$251,000, remain frozen.
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HOLDINGS OF DOLLARS IJLFRB OF,,.NY.SYJCERTAIN FOREIGN COUNTRIES
(In millions)
Total
CzechoYugoexcl.
Slovakia
Poland
slavia
U.S.S.R. I/ U.S.S.R.
Dec. 31, 1945
<&
V
.Ot
June 30,1946
.4
Dec. 31, 1946
Q
<j>
& -if
o
•£
<f*
H>
Total I/
$1.6
$8.2
$9.8
*
.9
.2
1.9
27.4
29.3
1.4
.1
.9
.2
2.8
23.0
25.8
June 30,1947
.4
3.1
.7
.2
4.7
24.1
28.7
Dec. 31, 1947
.2
1.9
.3
.2
2.9
40.5
43.3
.1
1.9
.2
.2
2.7
47.6
50.3
.-oh 31, 1948
June 30, 1948
•1
.3
.1
.2
1.0
30.6
31.6
Sept. 30, 1948
.1
.2
2.0
*
8.6
18.3
26.9
Dec. 31, 1948
.1
.2
1.0
6.1
7.7
7.9
15.6
1.6
.2
1.0
2.4
5.5
4.2
9.7
•:arch 31, 1949
* Less than $50,000
I/Totals include $47, 000 for Bulgaria and $251,000 f or Rumania , both of which remained
unchanged over the period.
CR-IGN COUNTRIES»
LIABILITIES OF U.S. BANKING INSTITUTIONS TC
(In millions)
Yugo-
Rumania slavia
Total
OTM-MMMM^-'—
U.S.S.R.
Total
Dec. 31, 1945
.3
$5.7
$15.0
$28.0
$43.0
Dec. 31, 1946
8.9
12.4
21.3
60.5
81.8
Dec. 31, 1947
8.7
12.1
20.8
73.7
94.5
March 31, 1948
7.9
24.0
31.9
72.6
104.5
June 30, 1948
7.5
17.1
24.6
54.1
78.7
Sept. 30, 1948
7.2
10.6
17.8
40.5
58.3
Dec. 31, 1948
7.0
19.9
26.9
21,3
48.2
2/ Sourcet Federal Reserve .bulletin
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Federal Reserve Bank of St. Louis
2/
STANDARD FORM NO. 64
• UNITED STATES GOVERNMENT
TO
: Secretary Snyder
FROM
: George H
DATE:
SUBJECT: Treasury Gold Transactions for the Quarter ended March 31,1949
Changes in the U. S. Gold Stock
The United States gold stock ( "Monetary gold stock1* as shown in the Daily
Statement plus Stabilization Fund gold) increased by $70 million during the
first quarter of 1949 as compared with an increase of $338 million during the
fourth quarter of last year* A summary of transactions is shown in the following
table!
(In millions)
U. S. gold stock, December 31, 1948
(Daily Statement and Stabilization Fund)
Transactions with foreign countriest
Purchases from foreign countries
Estimated allowance for purchases in
process of settlement
$24,398.2
/ $104.3
/
Total
105.5
Sales to foreign countries
Industrial transactions*
Purchases of newly-mined gold
Purchases of scrap, jewelry,etc.
Total
Sales to industry
Net increase for first quarter of 1949
U.S. gold stock, March 31, 1949
(Daily Statement and Stabilization Fund)
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Federal Reserve Bank of St. Louis
1.2
36*3 / 69*2
/
/
8»5
1«5
10.0
9*7 /
»2.
/
69*5
$24,467«7
f ir»i ^Murter of If4f «• *$i$«#«l with «^ iiaRr«i»« *f |||i idJ lion 4MUH
fourth qwrt«r csf l««t >»ar» A »inaBttury «f tr*n«iMEtiefi« if «h«?«s 1» the
**•«&»
, '.rlrc-f:
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Federal Reserve Bank of St. Louis
with
frw
tf
f»r first
J
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
March 31, 19^9
NOTE:
In Press Release No. 71 paragraph 1^, Line 1,
reference is made to a 19i]0 gold production figure
of $1253 million. This figure should be $1283 million,
as will be noted in the table attached thereto.
/
'- 1
INTERNATIONAL MONETARY FUND
PRESS RELEASE NO, 71
FOR IMMEDIATE RELEASE
Thursday., March 31, 1949
World gold production has shown a moderate
« increase over• the past three
years despite a postwar decline in the Union of South Africa, the chief
gold mining country, according to figures published today, by the International
Monetary Fund,
"International Financial Statistics", a monthly publication of the Fund,
incorporated in its March issue the first of what is to be a regular series
of gold production tables compiled from information submitted by the Fundfs
member governmentse
The Fund's estimate that $764 million worth of gold was mined in 1947
represents the most recent annual total for all countries (except Russia)
available in official quarters. The Fund*s gold statistics are also complete
through 194& for most of the principal gold producing countries, including
the Union of South Africa, Canada and the United States.
Gold production tbrought the world reached a peak of $1,253 million
(at $35 an ounce) in 1940, but fell off during the war years to $742 million
in 1945a An upward trend was registered after that by a 1946 world production total of si>756 millions The years since 1945 have been marked by a
resumption of gold activity in Canada and the UeS0 at levels higher than
during the war, although still low compared with gold mining in those
countries from 1937 to 194?e.
The increases in gold production in Canada and the USSP following the
war have more than offset reduced gold mine output in South Africa, where
high levels had been maintained from 1941 to 1945*
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Federal Reserve Bank of St. Louis
(See over)
Production in the three principal gold mining countries for the years
1946, 1947 and 1948 respectively was, for the Union of South Africa,
1417,45 million, $>392a01 million, $405.45; for Canada, $99d4 million,
$107*43 million, $123*33 million and for the U.S. $51*17 million, ^75^79
million, $73.47 million..:-"
The new issue of "International1Financial Statistics" also carries in
summarized form:the most recently published balance of payments statements
of the United States, Denmark, Canada and the United Kingdom.
A table has been added showing prices and yields of foreign dollar
bonds in New York and of foreign ster3.ing bonds in London,, This table,
which will be extended to include other important markets, indicates;the
cost of private borrowing for various governments in the principal international markets„
The new issue features a chart showing the development of central and
commercial bank assets in 16 countries and the related changes in the money
supply of those countries.
The chart shows the assets of banks distributed
by credits to governments, credits to business and individuals, and holdings
of gold and foreign exchange.
The assets of the banking systems of all countries of the world have
increased greatly since 1937 and their composition has changed markedly«, In
the United States and the British commonwealths, and in the countries of
Europe involved in the war, bank assets have increased three-fold or more,
and credits to government have been much the largest factor in the increase.
Sweden and Switzerland have had only a two-fold increase, largely attributable
to loans to business and individuals in Sweden and to the acquisition of
foreign assets in Switzerland, In Latin America the increases have also
been large, but the acquisition of foreign assets and loans to business and
individuals have been relatively more important than in other countries in
bringing about the increase.
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Federal Reserve Bank of St. Louis
This chart is protected by copyright and has been removed.
Article Title:
Gold Production
Journal Title:
International Financial Statistics (IFS)
Volume and
Issue
Number:
II, No. 3
Date:
March 1, 1949
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
INTERNATIONAL MONETARY FUND
OD:
Mr. Martin
Please note
memo on the Rhodesian Gold
Subsidy. I am inclined to
think we can accept this subsidy, but I should like
Treasury and possibly NA.C
advice within the next week.
Copy to: Mr. Willis, Mr. Eddy
Mr. McNeill
Mr. Southard
CONFIDENTIAL
MEMORANDUM TO IE, FILES
Subject: Rhodesian Gold Subsidy
1, Mr, Geoffrey Tansley, the Alternate British Director of the International
Monetary Fund, called on me today to outline briefly the revised gold subsidy scheme
which he is submitting to the Fund staff on behalf of the Rhodesian Government.
2, Trie scheme will now involve a sliding-scale subsidy per ton of laaterial
extracted, increasing in accordance with the yield of gold up to a yield of 3.0 to
ii.O dirts, per ton of extraction and decreasing thereafter, in accordance with the
following table:
Up to 0.75 dirts, per ton extraction
Over 0.75 to 1.25 dwts.
Over 1.25 to 1.75 dwts.
Over 1.75 to 2.UO dwts.
Over 2.UO to 3.0 dwts.
Over 3.0 to U.O dwts.
Decreasing thereafter by Id per 1/Wth of a dwt. to
I/- per ton
2/6 " *
2/6
3/6
h/6 »
5/- "
nothing at 10 dwts.
The purpose of increasing the rate of subsidy as the gold yield increases up to the
3.0 to 4,0 dwt. point is to give greater encouragement to the medium-grade mines as
against the poorest mines. As to the still richer mines, the subsidy is decreased
because it is not judged that they need subsidy as much.
3. This scheme has been devised by the Rhodesians under United Kingdom pressure to avoid a direct link between the subsidy and the price of gold, and to blur
somewhat even the link between gold output and the subsidy. On the other hand, the
Rhodesian gold-niining industry, with its widely-scattered and very small producers,
is not regarded as lending itself to a more elaborate subsidy based on cost of
production.
It. I reminded Mr. Tansley that the united States was particularly opposed to
subsidies designed to expand gold output above the normal average output, with a
view to earning additional dollars as a means of solving balance of payments troubles.
I mentioned that the Canadian and Australian assurance that their subsidies were
designed solely to maintain the gold industry so as to minimize the social, political
and economic shocks of its collapse,had made it easier for us to refrain from objecting to their subsidies. He said lie thought that the Rhodesians would be able to
give the same assurance as to their objective. He also said that the Rhodesians
would argue that the gold-mining prospector was still serving a very real function
in the exploration of Rhode siafs resources. I reminded him, that the Canadians had
used the same argument, but I said it might have more validity in the case of Rhodesia
where economic development was much less advanced.
5. I reserved my position on the above subsidy.
y. A. s
Copy to: Mr. Martin, Mr. Willis, Mr. Eddy, Mr. McNeill, Mr. Knapp, Mr. Sauer,
Mr. Blau, Mr. Dembitz, Mr. McCullough
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Federal Reserve Bank of St. Louis
MAY 4
1949 •
My dear Mr. Chairman:
This is in further reply to your letters of April 25, 1949,
stating that your Committee intends to begin hearings on S. 13 and
S. 286 on May 5 and requesting the report of the Department on these
bills prior to the date of the hearing.
Both bills specifically authorize the acquisition, trading and
export by members of the public of any gold mined in the United States
or imported into the United States after their enactment. S. 286 would
also repeal Sections 3 and 4 of the Gold Reserve Act of 1934.. Since
these sections contain the authority to regulate transactions in gold
in the United States, their repeal would permit a free market for all
gold. In substance, S. 13 would also result in a free market for all
gold since it would not be possible to distinguish newly mined or imported gold from other gold.
The Treasury is strongly opposed to the enactment of these bills.
They would create serious risks to our national monetary and banking
structure and would result in a weakening of the present strong and
stable position of the dollar in its relation to gold. At the same
time, the advantages expected by their advocates appear to be based
on misunderstandings and illusory hopes.
1. Enactment of either S. 13 or S. 286 would, amount to a reversal
of the decision made by the Congress in the Gold Reserve Act of 1934,
that gold should be held by the Government as a monetary reserve and
that it should not be available for private use for other than legitimate
industrial, professional or artistic purposes. Y/e believe that the United
States should continue to "follow the principle that the most important
use of gold is for the domestic and international monetary functions of
the Government and that gold should not be held by private individuals
as a store of wealth.
2. The existence of a free market for gold in the United States
with a fluctuating price determined by private demand and supply would
have exceedingly unfortunate consequences for our domestic economy. In
fact, the Secretary of the Treasury is required by statute to maintain
all forms of United States money at a parity with the gold dollar. Since
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 2the gold dollar contains l/35th of an ounce of gold, this means that
the Treasury should maintain the price of gold at $35 an ounce in legal
gold markets in the United States. Therefore, the Treasury would hardly
have any alternative if the proposed bills were enacted other than to
sell gold to the extent necessary to maintain the market price at $35 an
ounce. Thus, the rise in the price of gold which appears to be contemplated by the proponents of these bills would not take place.
If the Treasury did not take measures to stabilize the market at $35,
the shifting of the price of gold could not fail to confuse and disturb
the public. The common interpretation of such fluctuations would be that
something was wrong with the dollar and that the value of the dollar and
all savings stated in dollars were going up and down with each fluctuation.
Such prices for gold, however, would probably be the result of a
relatively trifling volume of transactions, No significant determination
of the value of the whole world supply of gold could be made with the
United States Treasury, which is the main factor in the gold market,
left out of the balance. Because of popular misconceptions, prices determined by an insignificant volume of transactions would be interpreted
as applying to all gold, including £he 24,3 billion dollars in gold held
by the United States Treasury, Thus, the public misinterpretation of the
quotations in the so-called free market might cause a loss of confidence
in the dollar and be extremely damaging to our economic welfare.
If the Treasury let the price of gold in the United States fluctuate,
it would be defeating the very purposes which have led us to acquire over
24 billion dollars worth of gold, ^he Treasury has paid out those billions
of dollars for gold in order to keep stable the relation between gold and
the dollar. There would be no clear reason why we should havo bought this
gold in the past or should continue in the future to buy gold at &35 an
ounce if we -u'ere not also to be ready to sell it at the same price for any
legitimate purpose in order to maintain that stability*
It would be exceedingly improvident for the United States to sell gold
at H?35 an ounce to foreign governments if such gold or other gold could be
resold in the United States at premium prices. On the other hand, the
Treasury believes it to be of the highest monetary importance to the United
States that it continue to sell gold to foreign governments and central
banks at $35 an ounce whenever the balance of international payments turns
in their favor and they ask for settlement in gold. To refuse to make such
sales at #35 vrould be equivalent to a devaluation of the dollar and an
abandonment of our adherence to a gold standard. Moreover, if the United
States should not continue to buy and sell gold freely for international
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Federal Reserve Bank of St. Louis
- 3-
settlements at <j?35 an ounce, we could not meet our obligations to the
International Monetary Fund without adopting a system of exchange con*'
trols to pre%rent transactions in foreign currencies in the United
States at other than official rates.
It should not bo assumed, however,, that it is at all certain that
the proposed free market in gold would result in a marked rise in the
price of gold for any extended period even if the Treasury should not
stabilize the market at $35. Expectations of substantial increases in
price are based on widespread exaggeration of the significance of various
premium quotations abroad and inadequate appreciation of the degree to
which prices of gold everywhere depend on the readiness of the United
States to buy at $35 virtually all gold which is offered to the Treasury*»
There is also inadequate appreciation of the extent to which gold imports
and trading are restricted in every important country in the world and
the valid reasons for such restrictions,
3. The international monetary relations and obligations of the
United States would also be prejudiced if gold were authorized to be
exported and imported freely.. One of the dangers of permitting exporta—
tions of gold from the United States without restriction is that much of
the gold would flow to black markets abroad. In some countries the gold
markets are illegal; in others,.gold imports or dollar payments for gold
are prohibited*. These restrictions are designed to conserve urgently
needed dollars to finance essential imports. Permitting gold exports to
these markets would work directly against our efforts to restore Europe
to financial solvency through the European Recovery Program.
In this connection, the International Monetary Fund has expressed
its concern that international gold transactions at premium prices tend
to divert gold from central reserves into private hoards». The Fund has
asked its members to take effective action to prevent premium price
transactions in gold with other countries or with the nationals of other
countries», The existence of a free market in the United States with a
fluctuating price for gold,.coupled with the repeal of authority to control the export of gold,.would make it impossible for the United States
to cooperate with the Fund in achieving this objective..
4, Treasury sales of gold to the extent necessary to maintain a
$35 price in a free market created by the enactment of either of these
bills would in effect mean that any holder of dollars or dollar obligations Yfould be able to convert them into gold. While this would be
preferable to an erratic movement in gold prices in the United States,.
it would force this Government to a course of action which might have
extremely serious consequences»
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Federal Reserve Bank of St. Louis
- 4Internal gold convertibility is likely to exert critical pressure
at the most dangerous and damaging times and to do little good at
other times. It threatened the foundations of our financial structure
during the depression and it might have done so again during the last
war, yet it has proven of no use either to prevent inflationary booms
or serve other desirable purposes at other times. I/Then left in a
centralized reserve, our gold stock gives impregnable international
strength to the dollar. If our gold stock, on the other hand, were
dissipated into immobilized private holdings,, our pov.er to maintain the
position of the dollar might be critically weakened.
The problems of financing the last war would have been tremendously magnified if private citizens had been free to draw down our
gold reserves. The prosecution of the war, for example,, wouId have
been critically hampered if government and business borrowing had been
limited because gold hoarders had left no excess reserves in the banking
system.
Even our 24 billion dollars of gold holdings would be completely
inadequate to meet a serious run on gold from the 27 billion dollars
of United States currency in circulation, over 140 billion dollars of
bank deposits, and scores of billions of dollars of government securities, not to mention other relatively liquid assets. Conversion
of around five or six per cent of these government and bank obligations
would be enough to bring the Federal Reserve Banks below their legal
minimum gold reserve.
Even in a letter of this length it is not possible to state all
the considerations which cause the Treasury to oppose these bills*.
We believe, however, that the foregoing will give you a general indication of the difficulties and problems which the Treasury considers
would arise from the enactment of either of them.
The Bureau of the Budget has advised that there would be no objec-*
tion to the submission of this report to your Committee since the
proposed legislation is hot in accord with the program of the President.
Very truly yours,
(Signed) Vfai. McC. Martin, Jr.
Vfau, McC. Martin, Jr.,
Acting Secretary
Honorable Burnet R. Maybank
Chairman, Comiiittoe on Banking and Currency
United States Senate
Washington, D» C.
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Federal Reserve Bank of St. Louis
MY 4 1949
My dear Mr. Chairman:
This is in further reply to your letters of April 25, 1S49,
stating that your Committee intends to begin hearings on S. 13 and
S. 286 on Hay 5 and requesting the report of the Department on these
"bills prior to the date of the hearing.
Both bills specifically authorize the acquisition, trading and
export by members of the public of any gold mined in the United States
or imported into the United States after their enactment. S. 286 would
also repeal Sections 3 and 4 of the Gold Reserve Act of 1934, Since
these sections contain the authority to regulate transactions in gold
in the United States, their repeal -would permit a free market for all
gold. In substance, S, 13 would also result in a free market for all
gold since it would not be possible to distinguish newly mined or imported gold from other gold.
The Treasury is strongly opposed to the enactment of these bills,
They would create serious risks to our national monetary and banking
structure and would result in a weakening of the present strong and
stable position of the dollar in its relation to gold. At the same
time, the advantages expected by their advocates appear to be based
on misunderstandings and illusory hopes,
1. Enactment of either S, 13 or S, 286 would amount to a reversal
of the decision made by the Congress in the Gold Reserve Act of 1934,
that gold should be held by the Government as a monetary reserve and
that it should not be available for private use for other than legitimate
industrial, professional or artistic purposes. We believe that the United
States should continue to follow the principle that the most important
use of gold is for the domestic and international monetary functions of
the Government and that gold should not be held by private individuals
as a store of wealth.
2. The existence of a free market for gold in the United -States
with a fluctuating price determined by private demand and supply would
have exceedingly unfortunate consequences for our domestic economy. In
fact, the Secretary of the Treasury is required by statute to maintain
all forms of United States money at a parity with the gold dollar. Since
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Federal Reserve Bank of St. Louis
***
w
^*
the gold dollar contains l/35th of an ounce of gold, this means that
the Treasury should maintain the price of gold at $35 an ounce in legal
gold markets in the United States. Therefore, the Treasury would hardly
have any alternative if the proposed bills were enacted other than to
sell gold to the extent necessary to maintain the market price at &35 an
ounce. Thus, the rise in the price of gold which appears to be contemplated by the proponents of these bills would not take place»
If the Treasury did not take measures to stabilize the market at $35,
the shifting of the price of gold could not fail to confuse and disturb
the public. The common interpretation of such fluctuations would be that
something was wrong with the dollar and that the value of the dollar and
all savings stated in dollars were going up and down with each fluctuation*
Such prices for gold, however, would probably be the result of a
relatively trifling volume of transactions. No significant determination
of the value of the whole world supply of gold could be made with the
United States Treasury, which is the main factor in the gold market,
left out of the balance. Because of popular misconceptions, prices determined by an insignificant volume of transactions would be interpreted
as applying to all gold, including -the 24,3 billion dollars in gold held
by the United States Treasury, Thus, the public misinterpretation of the
quotations in the so-called free market might cause a loss of confidence
in the dollar and be extremely damaging to our economic welfare.
If the Treasury let the price of gold in the United States fluctuate,
it would be defeating the very purposes which have led us to acquire over
24 billion dollars worth of gold, %e Treasury has paid out those billions
of dollars for gold in order to keep stable the relation between gold and
the dollar. There would be no clear reason why we should havo bought this
gold in the past or should continue in the future to buy gold at #35 an
ounce if we ..were not also to be ready to soil it at the same price for any
legitimate purpose in order to maintain that stability.
It would be exceedingly improvident for the United States to sell gold
at s?35 an ounce to foreign governments if such gold or other gold could be
resold in the United States at premium prices. On the other hand, the
Treasury believes it to be of the highest monetary importance to the United
States that it continue to sell gold to foreign governments and central
banks at $35 an ounce whenever the balance of international payments turns
in their favor and they ask for settlement in gold. To refuse to make such
sales at §35 would be equivalent to a devaluation of the dollar and an
abandonment of our adherence to a gold standard. Moreover, if the United
States should not continue to buy and sell gold freely for international
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 3-
settlements at #35 an ounce, we could not meet our obligations to the
International Monetary Fund without adopting a system of exchange controls to prevent transactions in foreign currencies in the United
States at other than official rates.
It should not be assumed, however, that it is at all certain that
the proposed free market in gold would result in a marked rise in the
price of gold for any extended period even if the Treasury should not
stabilize the market at $35. Expectations of substantial increases in
price are based on widespread exaggeration of the significance of various
premium quotations abroad and inadequate appreciation of the degree to
which prices of gold everywhere depend on the readiness of the United
States to buy at $35 virtually all gold which is offered to the Treasury.
There is also inadequate appreciation of the extent to which gold imports
and trading are restricted in every important country in the world and
the valid reasons for such restrictions*
3. The international monetary relations and obligations of the
United States would also be prejudiced if gold were authorized to be
exported and imported freely. One of the dangers of permitting exportations of gold from the United States without restriction is that much of
the gold would flow to black markets abroad* In some countries the gold
markets are illegal; in others, gold imports or dollar payments for gold
are prohibited, Theso restrictions are designed to conserve urgently
needed dollars to finance essential imports. Permitting gold exports to
these markets would work directly against our efforts to restore Europe
to financial solvency through the European Recovery Program.
In this connection, the International Monetary Fund has expressed
its concern that international gold transactions at premium prices tend
to divert gold from central reserves into private hoards. The Fund has
asked its members to take effective action to prevent premium price
transactions in gold with other countries or with the nationals of other
countries* Tho existence of a free market in the United States with a
fluctuating price for gold, coupled with the repeal of authority to control the export of gold, would make it impossible for the United States
to cooperate with the Fund in achieving this objective.
-.4» Treasury sales of gold to the extent necessary to maintain a
|35 price in a free market created by the enactment of either of these
bills would in effect mean that any holder of dollars or dollar obligations would be able to convert them into gold. VJTiile this would be
preferable to an erratic movement in gold prices in the United States,
it would force this Government to a course of action which might have
extremely serious consequences*
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
- 4Internal gold convertibility is likely to exert critical pressure
at the most dangerous and damaging times and to do little good at
other tirrtcs. It threatened the foundations of our financial structure
during the depression and it might have done so again during the last
war, yet it has proven of no use either to prevent inflation; ry booms
or serve other desirable purposes at other times. When left in a
centralized reserve, our gold stock gives impregnable international
strength to the dollar. If our gold stock, on the other hand, were
dissipated into immobilized private holdings, our pov.er to maintain the
position of the dollar might be critically weakened,
The problems of financing the last war would have been tremendously magnified if private citizens had been free to draw down our
gold reserves. 'The prosecution of the war, for example, would have
been critically hampered if government and business borrowing had been
limited because gold hoarders had left no excess reserves in the banking
system*
Even our 24 billion dollars of gold holdings would be completely
inadequate to meet a serious run on gold from the 27 billion dollars
of United States currency in circulation, over 140 billion dollars of
bank deposits, and scores of billions of dollars of government securities, not to mention other relatively liquid assets. Conversion
of around five or six per cent of these government and bank obligations
would be enough to bring the Federal Reserve Banks below their legal
minimum gold reserve.
Even in a letter of this length it is not possible to state all
the considerations which cause the Treasury to oppose these bills.
We believe, however, that the foregoing will give you a general indication of the difficulties and problems which the Treasury considers
would arise from the enactment of either of them.
The Bureau of the Budget has advised that there would be no objection to the submission of this report to your Committee since the
proposed legislation is not in accord with the program of the President.
Very truly yours,
(Signed)
"Win* McC. Martin, Jr.
%i« McC, Martin, Jr.,
Acting Secretary
Honorable Burnet R. Maybank
Chairman, Comnittee on Banking and Currency
United States Senate
Vfeshington, D. C.
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Federal Reserve Bank of St. Louis
May 13, 19^9
STATEMENT ON ARAMGO SOVEREIGNS
In the hearing of the Senate Committee on Banking and
Currency on S-13 and S-286, according to unofficial reports,
two witnesses referred to the acquisition of gold sovereigns
from Argentina by the Arabian American Oil Company for payment of"royalties to Saudi Arabia. The testimony suggested
the possibility that the U.S. Treasury had assisted the oil
company in obtaining these sovereigns at a premium price, in
excess of the margin of 1/U of 1% above the $35 official price
permitted under the regulations of the International Monetary
Fund.
It is the policy of the Treasury Department to sell
monetary gold only to foreign governments and central banks
and international monetary institutions. Accordingly, as the
testimony before the Committee recognized, the Treasury did
not sell gold to the Arabian American Oil Company or to any
other unofficial purchaser. However, as correctly described
in a statement read, in the testimony of Mr. Fred M. Searles,
the Treasury was willing to give assistance within the limits
of International Monetary Fund policy to the efforts of the
Arabian American Oil Company to acquire British gold sovereigns
for payment of oil royalties. Such payment was called for in
the company's concession contract, entered into in 1933. The
gold sovereign feature was in dispute between the company and
the Government of Saudi Arabia in 19^7-^8 when the company approached the Treasury for assistance. The Treasury recognized
that there was no obligation upon the United States Government
or the oil company vfhich would prevent the latter from acquiring sovereigns from a foreign source and tendering them in
payment to Saudi Arabia. The Treasury further suggested to
representatives of the oil companies concerned in the Arabian
American Oil Company that it might be possible to obtain
sovereigns from Argentina which, according to the Handbook of
Foreign Currencies published by the Department of Commerce in
1936 held 22.3 millions of sovereigns in 1935.
The Treasury had previously given the same information in
response to an inquiry from a large Jewish philanthropic agency
which was seeking to acquire some gold coins.
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Federal Reserve Bank of St. Louis
2.
In the case of the oil company's purchase, the initiative
in the sale was taken by Ar; entina which offered the gold
sovereigns to the U.S. Treasury at the Treasury's usual terms
for gold, namely $35 less 1/U of H per oz. The oil company
was advised and, with the Treasury's approval, instructed a
New York bank to submit an offer of $35 plus 1A of 1%. The
Central Bank of Argentina accepted this offer after receiving
assurances that the transaction was approved by the U.S.
Treasury. The oil company, according to the information available to the Treasury, pays these sovereigns to Saudi Arabia
strictly in accordance with the terms of its concession agreement signed in 1933* The Treasury Department knows of no
premium or other commission paid to the Argentine Central Bank
and has every reason to believe that neither the New York bank
nor the oil company offered one. Even though Argentina is not
a member of the International Monetary Fund, its actions in
this transaction were wholly consistent with the regulations
and policies of the Fund.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
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r*
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Subject:
National Advisory Council
Staff Draft No. 304
June 1, 1949
(Action Sheet)
Sale of Gold Sovereigns to the Greek Government
/ The NAG finds it impossible to measure the over-all
economic effectiveness as an anti-inflationary device of the
sale of gold sovereigns by the Greek Government to its citizens,
but believes that such sales at the most merely alleviate the
effects of underlying inflationary forces and are not an adequate
substitute for thorough going fiscal and financial reform. The
NAC, however, agrees to the continued limited sale of gold
sovereigns to the Greek Government in view of representations
that the psychological and political repercussions of discontinuing
gold sovereign sales would endanger the objectives of the U.S.
Government military and economic program in Greece. The NAG is
of the opinion that every feasible effort should be made to permit
the discontinuance of gold sovereigns sales at the earliest possible
time by financial and—economic policies designed to minimize inflationary influences,.,/ or
it is impossible to assess fully the over-all
economic effectiveness as an anti-inflationary device of the
sale of gold sovereigns by the Greek Government to its citizens,
the NAG believes that such sale? at the most merely alleviate
the effects of underlying inflationary forces and are not an
adequate substitute for thorough going fiscal and financial
reform. The NAG, however, has no objection to the continued
limited sale of gold sovereigns by the U.S. Government to the
Greek Government for resale to Greek citizens in view of representations that have already been made, and as long as such
representations continue, to the effect that the psychological
and political repercussions of discontinuing gold sovereign
sales within Greece would endanger the objectives of the U.S,
Government military and economic program in Greece. The NAG
urges that those U.S. Government agencies directly concerned
with the carrying out of U.S. policy in Greece make every feasible
effort to bring about the discontinuance of gold sovereign sales
at the earliest oossible time by the Greek Government through
financial_and economic policies designed to minimize inflationary
influence.../
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National Advisory Council
Staff Draft No. 30^4
June 1, 19^9
SALE OP GOLD SOVEREIGNS TO THS GREEK GOVERNMENT
1.
PROBLEM
The National Advisory Council is requested to consider the
policy of continued sales of gold sovereigns by this Government to
the Greek Government.
2
«
BACKGROUND.
Kith the German occupation of Greece, considerable quantities
of gold sovereigns were brought into the country by the invaders to
finance the operations of their occupying forces; in the same period,
the British in their aid to resistance activities brought in more.
After liberation, the British continued to supply gold sovereigns
to the Greek Government for sale to the public as a means of checking
inflation.
Following the establishment of the American Mission for Aid to
Greece (AMAG), its officials wore soon faced with the problem of
continuance of gold sovereign sales, when in December 19^7* the
stocks of the Bank of Greece dropped to 200,000 sovereigns (about
$1.7 million). AMAG and the Embassy concluded that gold sovereign
sales had assumed too much importance to abandon the gold market
although they opposed reestablishment of the Greek Government's
policy of daily and unlimited sales and recognized that gold purchases
by Greece was not an efficient use of its meager foreign exchange
resources.
As a result of the request of the American Missions in
Athens, the Departments of State and Treasury authorized AMAG first
to permit the Greek Government to convert 2 million dollars of gold
napoleans into sovereigns and subsequently as its loan from the
Federal Reserve Bank of New York was repaid to purchase sovereigns
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National Advisory Council
Staff Draft No. 30H
- 2~
with earmarked gold held as collateral for the loan; these sovereigns
"being made available to the Bank of Greece for subsequent sale to
Greek citizens.
This procedure has been followed until this spring when the
supply of earmarked gold was virtually exhausted.
Greece possessed
in early March about 10, 3 million free dollars; the EGA Mission gave
a favorable recommendation to a Greek proposal that as a temporary
step to cover the immediate future the use of 2 million dollars of
these balances "be authorised for the purchase of gold sovereigns
over a three month period* This request
was accepted by EGA/
Washington and concurred in by the Department of the Treasury and
other agencies within NAG. This purchase was effected by the Greek
Government in April making a total of $15 million of gold sovereigns
purchased from this Government since the first transaction in
December 19^7»
^e subsequent purchases have taken place. Present
gold stocks of the Bank of Greece are approximately 535fOOO sovereigns
or about 4.5 million dollars and appear reasonably adequate for the
immediate future.
3.
DISCUSSION
It is generally recognized by the EGA and other agencies that
the policy of continuance of gold sales is undesirable and only to
be tolerated as long as no workable substitute is found
and as long
as it is feared that the repercussions of discontinuing the sales
would endanger the broader objectives of United States political,
economic and fiscal policy in Greece.
It is because of this latter
situation that the EGA Mission and United States Embassy in Greece
have recommended the continuance of gold sales and that the problem
is brought before the NAG,
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National Advisory Council
Staff Draft No« 30^
*j. 3 f
a
»
Justification of Gold Sovereign Sales; Psychological and
Political,
The psychological argument for the continuation of gold
sales arises from the unique position attained by gold in such countries
as Greece that have undergone hyper-inflation* The usual distrust
of paper currency and the shift to a confidence in gold and other
commodities that occurs in such inflationary situations vere
accentuated in Greece •» first, by the wiping out of all pre-war
drachma values followed by a currency conversion of 50 "billion drachmae
for one new drachma in 19^, and then by throe drastic devaluations.
The first two devaluations were in June of 19^5» when the drachma
dollar rate was raised from 1^0 to 1 to $00 to 1 and in January 19^6,
when the rate was raised to 5»020 to 1»
The third devaluation was
effected without a change in the official aritta; "by t&e introduction
of exchange certificates resulting in an effective rate of about
10,000 to the U. S. dollar.
These successive collapses of the drachma wiped out every
vestige of long-range confidence in paper currency and it was to
either gold or commodities that the Greeks turned for a store of
value* Of the two, gold in the form of sovereigns became a major
factor in the intrinsic relationships between Greek commodities,
the dollar, the drachma, and the pound sterling because of such
qualities
as its anonymity portability, convertibility, durability,
and hideability. Gold became the medium of a substantial volume
of savings of Greeks, limited by no means to the wealthy only*
/The desire of the Greek individual to retain wealth in this form
is readily understandable in view of the political and military
insecurity of his countryJ
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National Advisory Council
Staff Draft No.
Periods of pessimism have frequently precipitated an increased
demand for gold sovereigns and, unless control is exerted, a rising
gold price , which in the view of many observers leads to such
unfortunate repercussions as increased commodity speculation, hoarding
and increased commodity prices*
However, through gold sales of the
Bank of Greece supervised "by the EGA Mission and the Currency
Committee in Athens which includes an American, and a British member,
control has been exerted on the price of sovereigns.. The demand
for gold, has "become a barometer of crisis, in Greece. Thus, 'the anti~
Communist election victories in Italy and the establishment of EKP
in 19^-8 were paralleled by a fall in sovereign sales. Again in
February of this year, the decrease in sales may be correlated with
the reorganization of the Greek Army and military victories in the
Peloponnesus. Similarly, sovereign sales have racted to unfavorable
developments; thus, increased rebel activity in the Grammes area and
a civil servants strike in Athens over rising costs of living was
paralleled by a jump of sovereign sales in April 19^9 •
Moreover, so deeply has the relationship between the
psychological feeling of security and gold been inbred in Greece
that the inability to continue sovereign sales could mean, in the
eyes of the Greek people, the failure of the Greek Government.
In
view of the fact that the U.S. Government has provided the necessary
sovereigns, refusal of the United States to cooperate in arrangements
for the continuation of gold sales could be interpreted as a
lessening of United States support of the Greek Government,
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National Advisory Council
Staff Draft No, 30^
In the view of the Department of State, such a disturbance
of the present political equilibrium of Greece would not "be in accord
with the overall objectives of United States foreign policy, This
is particularly true in view of the fact that .American policy has
"been to encourage the observance of constitutional practices and progressive improvement of administration in Greece,
The fall of the
present Greek Government, which has been most cooperative and progressive
in outlook, would probably be followed by a governmental solution outside
of the framework of denocratic procedures. This outcome would seriously
impair the carrying out of American policy in Greece and would also
compromise the good repute and prestige of the United States in the
eyes of world opinion*
b,
Justification of Gold Sovereign Sales; Economic,
Considerable difference of opinion has existed with respect
to the economic justification of gold sovereign sales,
The following are the principal economic arguments on behalf
of gold sales;
1,
Gold sovereigns of a given dollar value sold to the
Greek public mop up excessive drachmae purchasing power to a greater
extent, by virtue of the premium drachmae price of sovereigns, than
would be possible from the sale of commodities or dollar instruments
of the same dollar value and thus act in a direct and efficient antiinflationary manner,
2f
Gold sales prevent short-term emergencies suoh as
military reverses, political crises and strikes from causing the rise
in sovereign prices that would otherwise result and to the extent
that commodity prices are quoted in terms of the gold sovereign and
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national Advisory Council
Staff Draft Ho. ^
~ 6~
long-term contracts are entered into on the same basis, gold sales
"by stabilising the price also stabilize the general price level*
3o
By offering the Greek public an acceptable medium
for savings, gold sovereign sales provide an outlet for inflationary
pressures, keep down commodity hoarding and help to stabilize the
long-term price level*
^4-0
Gold sovereign sales represent a form of taxation
which assists the Greek Government in meeting its heavy outlays
incident to the civil war*
The economic arguments against gold sovereign sales are:
1.
While gold sovereign sales result in larger drachmae
proceeds for the Greek Government than would an equivalent dollar
amount of commodity sales, /it is likely that the Greek Government
makes/ or j/it makes it possible for the Greek Government to make/
correspondingly larger budget expenditures and, therefore, reduces
the potentially greater anti-inflationary affect of sovereign sales,
2;
Commodities sold to the Greek public seen more likely
to contribute to recovery than sovereigns, partly because of their
effect on prices and partly because of their contribution to further
production*
3*
There is no conclusive evidence that restricting an
upward tendency in the price of gold through sovereign sales restricts
general commodity price increases,, Rather than higher gold prices
being the cause of higher commodity prices, both developments appear
attributable to more basic factors such as military reverses, political
crises, strikes and business monopolies.
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Sovereign sales reduce the
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national 44visory Council
Staff Draft No, 30U
pressure on the Greek Government to deal directly with the fundamental
causes of inflation and to that extent prolong the period during which
sovereign sales are claimed to be necessary,
In addition to the above arguments against gold sovereign salesf
several comments on Greek Government operations in connection with
such sales are relevant, /If the drachnao proceeds of sovereign sales
were sterlized// or /if it were possible to sterilize the drachmae
proceeds of sovereign salesjj even in part, through a corresponding
reduction in government expenditures, the resulting decline in the
public* s drachmae purchasing power would soon curtail the demand for
sovereigns at the current government sailing price,
At the present price (230,000 drachmae per gold sovereign) the
Greek public is unwilling to sell back to the Government during
relatively settled periods at least in significant amounts the
sovereigns which it purchased from the Government during periods of
alarm. A high enough price for sovereigns would presumably bring
these factors into approximate balance so that the net sales of the
Government would be reduced, While a higher Government selling price
might lead to some increase in the open market price for sovereigns
(and, according to the Mission, a prompt increase in prices of all
commodities not subject to rationing and price control) the magnitude
of the increase in the open market price of sovereigns would probably
to restricted by increased imports of sovereigns from Middle East
markets. In these markets the price of sovereigns is already lower
than in Greece although not so low as the price at which the Greek
Government obtains sovereigns from the United States,
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SiJGBJcJT
c
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i.'atlGi.al Advisory Council
Staff Draft Ho. 30^
Substitutes for Gold. Sovereign. Sales,
Proposals for substitutes have "been put forward, involving
devices such as the use of a dollar instrument to replace the gold
sovereign or. the valorizing of "bank deposits and contracts* Much
study has "been devoted by the EGA Mission in Athens and others to
working out these substitutes*
Appendix B attached to this paper
describes at length a proposal for reconstruction bonds, to be issued
by the Greek Government and to be redeemable at the option of the
holder at maturity date either in drachmae, in dollars, or in gold.
There are obvious practical obstacles in the way of such a "bond
issue, and it is doubtful whether the bonds would be regarded as satisfactory substitutes for gold in private hoards*
In any case, even
if the proposals in Appendix B were acceptable to the financial
authorities concerned hero and the bond issue eventually proved
to be marketable in Greece, many months must necessarily elapse
before such an issue could be effected.
At present, therefore, this
proposal is no alternative to a continuation of gold sovereign sales.
The same reasoning applies to a second proposal which has
been considered in the Mission but which has not yet taken such
definite shape.
This proposal would involve the establishment of a
bank in which Greek nationals resident in Greece could deposit
drachmae valorized as of the date of deposit in terms of dollars,
gold, or other foreign exchangee
Assets of this bank would be held
abroad, ajid in the evant of invasion of Greece would be available
to depositors in other countries.
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SxiO--ji1
intional Advisory Council
Staff Draft Ho. 30^
~ 9 ~
Economic reform, on the need for which there has never been
disagreement, has not "been suggested as a substitute for gold sales
in the same sense as the proposals mentioned above«
Substitutes for
gold sales are offered on the assumption that conditions in Greece require the injection into the economy of a stable measure of value.
Economic reform is offered on the assumption that fundamental corrective
measures could sufficiently reduce inflationary pressures and restore
confidence in the drachma so that at best neither gold sales nor a
substitute would be necessary or at least gold sales would be held to
a minimum. At the time of the first sovereign sales by this Government
to the Greek Government, AMAG conditioned its approval of sovereign sale*
in Greece on the Greek Government's agreement to take steps essential fo:
controlling inflation*
While in the face of emergent crises it has not
been possible to obtain a quid-pro-quo for each gold sale authorization
to the Greek Government, some progress in credit control, paring Government expenditures, improvement of the tax system, etc,, has been made
but more remains to be done and continuing and constant efforts must be
made by the EGA Mission to exact the further necessary reforms from the
Greek Government,, In addition, the SC/A Mission had considered devices
to discourage gold purchases such as recording purchases for tax
information or enforcing a tax on purchases,. The Mission has generally
•*
discarded these schemes because it believes that they would result in
high gold prices on the open market, which in turn would influence
commodity prices.
j/A further alternative, of a completely different nature,
might be urged along the lines of a complete reversal of present
economic policy in Greece involving abandonment of all construction
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SaJG^iJ
national Advisory Council
Staff Draft No* 30^
- 10 ~
programs and use of all available EGA counterpart to deflate the
volume of government debt outstanding, and using all available EGA
aid for a relief program*
The case for pushing capital outlays to
the extent that EGA aid and counterpart funds are available has
already "been accepted as firm EGA policy after consultation with NAG
and been justified not only on economic grounds but also on political
grounds.
Only by capital expenditure can Greece hope eventually to
improve its foreign trade balances*
Only by such expenditures can
we through EGA hold out to the Greeks hope for the future of their
country and give to the population tangible proof that their
participation in the European E covery Program has obvious and tangible
advantages to their nation*/
d.
Conclusion
While there are differences of opinion as to the economic
effectiveness of gold sales in Greece, the agencies directly concerned
with the implementation of our program in Greece are convinced that the
psychological and politica.1 reactions to the discontinuance of gold
sales would imperil the program*
EGA and State both believe that under
more stable political conditions, Greece's dollars could and should be
put to a better use than the financing of gold sovereign purchases by
the Greek Government; but that under present conditions gold sales are
the only practicable method of avoiding still more serious financial
and economic instability in Greece and must continue. They feel that
gold sales represent the least undesirable of presently available
alternatives for dealing with the inflationary problem in Greece.
It is on this conclusion j/pf the two agencies/ that the recommendation
for continued gold sales is based.
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i.ational Advisory Council
Staff Draft No. 30^
0?he recommendation proposed below is not intended to apply
to a situation in which sovereign sales in Greece might increase to
a level considerably in excess of a yearly rate of 10 million dollars
a year.
Within that general limitation, continued U«SC Government
sales of gold sovereigns to the Greek Government are requested without
HAG consideration in each case and _/for as long as EGA and the State
Department are prepared to represent that, all factors considered,
the disadvantages to the Greek economy of terminating gold sales
cutvreigh the advantages*/ or Jmttil such time as the conditions
underlying the present policy cbange_»7
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Page 11
Appendix A: Comment of EGA Mission to Greece
on Problem of Sale of Gold Sovereigns to
the Greek Government.
1. Although sovereign demand at moment relatively quiescent and
Bank of Greece reserves of approximately 535,000 sovereigns appear
reasonably adequate for immediate future, mission considers essential that continuing need for sovereigns be clearly recognized by al
concerned and believes advisable that appropriate policy be established enabling sovereigns to be provided without ad hoc case by
case r§view. It is unanimous opinion of all vho have had to deal
v.ith economic problems in Greece in recent years that sale of sovereigns is most effective and lowest dollar cost device available for:
(A) Satisfying demand of Greek savers for investment media insuring
them to maximum extent against future uncertainties and;
'B) Minimizing unnecessary aggravation of fundamental economic and
political difficulties and temporary setbacks by speculative activities. Experience indicates that provided there is no uncertainty
concerning co?:-tinned availability of sovereigns speculative movements
can be controlled without total sales over time exceeding the basic
demand for hoarding media vhich in turn under existing conditions in
Greece is roughly proportionate to total savings generated within the
economy, approximating sonevhat less than 10 million dollars per
annum. Basic desire to i.oard can be expected to disappear only ^hen
confidence in future political and economic integrity of Greece restored. Savings available for hoarding can be curtailed by maintaining fiscal stability, controlling bank credits, reducing monopoly
profits and taxing remaining profits. Mission ¥ill continue to oxer;
every effort in these deductions but progress will necessarily be sic
and such progress vill be impeded by any drastic change in sovereign
sale program. lieanv;hile if sovereigns not available, hoarders would
shift to holding other commodities with effects so disruptive and unpredictable as to make rational planning impossible.
2. Sovereign sales are peculiarly effective control on speculation
because sovereign has become unofficial currency of account in pract:
ally all commercial transactions in Greece. Merchants calculate
drachma sale prices of inventories in terms of price of sovereigns
into which they convert all cash working capital pending replacement
of inventories', Any upward change in price of sovereigns would be
promptly reflected existing prices of all commodities not subject to
rationing and price control, and withholding of sales of rationed
items until controlled prices vere adjusted upward. Neither Greek
Government nor mission at present can exercise enough force to break
Lhis chain of reactions. Ability Bank Greece to offer sovereigns at
given price, thus controlling price of huge stocks of sovereigns in
private hands, is most effective control over price rises due to
speculation yet devised, though it alone is not sufficient to prevent
gradual rise' in commodity prices such as that during last six months.
To some extent this rise which has taken place without substantial
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Page 12
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Appendix A (cont'd)
change in note issue or bank credits, apparently reflects activities of speculators, hoarders and monopolistic elements in bringing
commodity prices into line with sovereign, which rose- faster than
commodity prices until pegged at present price of 230,000 drachmae.
3^ Availability of sovereigns has tended to prevent speculation
caused by temporary military, political and economic setbacks from
having serious permanent effects through establishment of higher
general price levels. It is possible that uncertainty as to
sovereign availability and price policy has at times accentuated
temporary panics and caused sovereigns to be purchased from bank
••••hich would otherwise have been procured gradually through arbit"•age 'with I'iddle East market ^nere sovereign prices are lower* In
:y instance where run on bank engendered by obviously temporary
political, military or economic setbacks, simple announcement by
bank that sovereign sales Fould be suspended until panic conditions
subsided, but vould then be resumed at unchanged price, might result
in substantial saving in total number of sovereigns sold, since
urge to purchase viun sales resumed vould be considerably less after
temporary nature of setbacks revealed* Manipulations of this type
can only be undertaken •••hen bank is confident of its own position
and speculators know that bank can make good its promise to resume
sales at any price it chooses,
4. Foregoing discussion applies only to controlling price manipulation and offsetting effects of chronic distrust of currency where
basic fiscal situation is sound. Mission would not consider it
feasible or desirable to attempt to hold price level by unlimited
sale of sovereigns in face of substantial quantative monetary inflation... In such circumstances price of sovereigns would have to
be raised gradually to reflect basic change \hile at same time controlling manipulative and psychological excesses.
5» kisslon has considered various devices for discouraging gold
purchases or providing alternatives, i'lans to record purchases of
sovereigns for tax inforrnation purposes, or institute a tax, collected at a time of purchase, graduated according to size of purchase by any one individual over given time period, and other such
schemes have b~cn discarded because with large floating supply of
sovereigns in country any measures tending to restrict purchases
from bank at bank price would immediately lead to establishment
higher price in open market which would continue as accepted measure
Tor prices other commodities under existing conditions of monopoly
distribution and price determination in terms of sovereigns. IVIissio:
also has considered plan for selling bonds for drachmae in Greece,
redeemable either in gold or dollars abroad or invalorized drachmae.
If such bonds vere to be an acceptable substitute for sovereigns in
Greece, the US Government would have to guarantee gold or dollar
payment without risk of confiscation. Dollar cost this method of
providing hoarding media probably no less than cost of sovereigns,
but if method more acceptable in Washington, mission will gladly
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•• f
Page 13.
Appendix A (cont'd)
cooperate in working it out. Plf which at best vould not be full
alternative gold sales, vill undoubtedly take time to effectuate
and become understood by Greek public so decision as to sovereign
availability still necessary.
6. Washington aware of proposal for valorized bank deposits which
is being studied by American and British members currency committee.
It is obvious however that even if accepted this proposal rould not
Destitute in any great measure for gold sales.
7. Mission doubts feasibility substituting further consumer goods
imports for gold. Plain fact is that substantial part of savings
accruing in Greece under present conditions to to those having disposable incomes in excess current consumption needs, i. e., savers
vho vant hoarding media. Providing consumer goods for hoarding
purposes v.ould be relatively ineffective and even more politically
untenable than provision of gold.
8. Any agreement to provide sovereigns should give US Government
through mission and currency committee appropriate control over
sale policy, including timing, quantity and price of sales. Mission
believes by judicious experimentation it may be able to increase
effectiveness of given amount of sovereigns in satisfying basic demand for hoarding media, eliminating to large extent profits which
have accrued to speculators in sovereign market in past. However,
to extent that demand for hoarding media reflects international
and domestic uncertainties beyond mission control and paternal
weaknesses of political and economic structure of Greece which
mission can hope to correct only over considerable period of time,
it should not be expected that mere threats to withhold sovereigns
will be of any value as bargaining weapon to force reforms. Until
reforms can be accomplished by other means, sovereign sales will
be unavoidable arid it is undoubtedly evident to Greeks that we cannot cut off the nose to spite the face. Mission feels that arguments over sovereign policy over past several years have merely
diverted energies of mission, Greek Government and Washington which
might better have been devoted to accomplishing maximum possible
,:-suits in existing circumstances while uncertainty over sovereign
policy has if anything increased rather than decreased quantity of
sovereigns \vhich have had to be supplied. Therefore, mission urges
that all agencies of US Government concerned review sovereign policy
with view to approval sovereign sales as an unavoidable continuing
weapon for coping with situation in Greece.
Greece-Turkcy 3r.5/2 5/%9
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Page 14
APPMDIX B
Memorandum of Mr. D. A. Snider, U. S. Member of
Currency Committee
Subject:
Issue of U.S. Guaranteed Reconstruction
Bonds as a Solution to Gold Problem
1. The Consequences of Past Gold Policy
The Bank of Greece during the 3-year period 1946-48 sold
a total of 3.7 million sovereigns in the open market in
Greece for the purpose of retarding the rapid increase in
the price of the gold sovereign. This amount of sovereigns
represents a dissipation of the foreign exchange reserves
of the Greek Government amounting to more than $30 million.
At the rate of sale of gold sovereigns maintained so far
during the month of January 1949, an additional amount of
approximately 2.5 million sovereigns would be sold during the
current year, representing nearly another $20 million of
foreign exchange.
Despite large gold spies, the average sovereign rate increased from approximately drs.135,000 during 1946 to
approximately drs.225,000 during 1948. Although there are
periods of divergence "between the rate of increase in the
price of the gold sovereign and internal commodity prices,
there is close correlation in the trend of those two series,
2. Forces Responsible for Gold Market
In seeking a solution to the gold problem in Greece, it is
necessary to have a clear idea of the most important factors
which are responsible for the heavy demand for gold. These
factors may be grouped in two categories; (1) purely monetary
and economic considerations and (2) military and political
considerations.
On the first score, the main point is the absence of confidence
in the value of the drachma. This lack of confidence stems
both from historical experience of hyper-inflation, the last
of which ended in loveinber 1944, and from the constant increase in prices which has taken place since. An additional
manifestation of the constantly depreciating drachma is
found in successive devaluations, the official rate of exchange rising fron drs.500 to the dollar, at the beginning
of 1945, to drs.10,000 at the present time (drs.14,000 on
the black market). Moreover, the Greek public does not see
any diminution in the primary factors responsible f or the
price inflation - principally the growing budget deficit
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Appendix B (Cont'd)
SEGKBT
Page 15
of the Government. Despite the importation, with American
aid of huge quantities of foodstuffs, some of which are distributed "by ration, the cost of living has constantly risen,
from 138 times the pre-war level in January 1947, to 246
times in December 1948.
Perhaps more important even than the purely monetary and
economic factors responsible for the lack of confidence in
the drachma, are the psychological factors deriving from the
uncertain military and political situation. The lack of suc~
cess in ending the civil war, the fear of war between the
East and West, with Greece as a "battleground, and the absence
of strong and stable Governments in Greece, all conspire to
encourage the conversion of drachma savings into safe and
portable forms of wealth.
All the above elements encourage a strong inflationary
psychology. The natural consequence of this psychology
is to avoid the holding of drachma beyond minimum periods
of time and to invest all savings, either in commodity
hoards (particularly commodities like olive oil) or in
gold sovereigns or foreign exchange*
The amount of currency in circulation and "bank deposits
are, in real terns, only aft out 10$ of the pre-war circulation,
which is indicative of the extremely high velocity of circulation. Profits of industrial enterprises are only to a very
sma.ll extent reinvested in plant and equipment, but are instead
invested in inventories of finished goods or in gold and foreign
exchange.
3. Possible Solutions
a. The Basic long-Hun Solution
It is evident from the above "brief review of the forces
which have created the gold market in Greece, that no
simple solution is available. Obviously the long-run
and basic solution to the gold problem must lie in the
restoration of confidence in the drachma, which in turn
means elimination of the large "budget deficit, increase
of domestic production, establishment of a stabile Government, termination of the civil war, and renewed confidence
in the international situation. Until these things are
accomplished, it is certain that the demand for some substitute for the drachma will continue unabated.
i
"b» Continuance of Past Policy
On the other hand, it is quite clear that it will not be
possible to continue a virtually unlimited gold-sales
policy into the indefinite future. This vail not "be
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Appendix B (Cont'd)
_SECHBO?
Page 16
possible, "both because the foreign exchange reserves of
the Bank of G-reece will not pemit any further purchases
of gold, and "because it is highly improbable that the
United States Government will "be willing to grant or lend
money for this purpose.
c
«
Closing Down of Gold Market
If the indefinite continuation of the past policy is inpossible, the question arises of what action can "be taken.
One conceivable measure would "be the closing down entirely
of the gold market, making it illegal to possess or to
deal in any manner with gold sovereigns,, There are,
however, two very serious objections to this procedure:
I* It would almost certainly prove to "be unenforceable.
The mere elimination of the legal right to hold, and to
buy and sell gold would not relieve the tremendous
natural desire to do so. Experience with the income
tax and similar measures of control in G-reece is suf~
ficient to demonstrate the near impossibility of
effectively enforcing strict control measures.
2, The second reason why an attempted elimination of
the market by direct means would prove inadvisable is
the repercussion such measure would have on the economy.
Even assuming that direct prohibition of the gold market
could be effectively enforced, the probable result would
be a diversion of the demand for gold to substitute
hoarding media. One of these substitutes would be
black market foreign currencies so that the rates on the
latter would be forced up. A second substitute are
commodities. It is to be noted in this connection
that it is common practice in G-reece for farmers, merchants, industrialists and specula-tors to hold certain
cor.nodities, as well as gold, as a hedge against inflation. A prime example of this is olive oil. Kence,
it could be expected that the elininp/bion of gold from
the market would result in an increased demand for commodities as a hoarding medium,, This result would be
equally disastrous as a rising gold price.
d. Free Market with no Intervention
A second measure which possibly could be taken lies
at the other extreme: namely, allowing the gold market
to fluctuate without the intervention of the Bank of G-reece,
Under current conditions this would mean, of course, a
rapidly rising sovereign price. Like all speculative
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Appendix B (Cont*d)
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Page 17
novenents, the rise would tend to reenforce itself because
of anticipated further rises.
Most Greek observers are convinced that the consequence
of a rising gold price would "be a rising connodity price
level. Theoretically this need not "be so* Unless conditions deteriorate to the point where industry and
agriculture are unwilling to continue production unless
gold sovereigns are available in which profits and savings
can be invested, a rising gold price could be prevented iron
having a direct effect on connodity prices over a period of
tine, provided that there are strict credit controls, stable
wages and an effective rationing-and-price-control systen.
The practical difficulty, however, is that Greece has not
had, and probably will not be able in the near future to
institute, the kind of controls which would have to
accompany a free gold market, if prices were not to follow a rising gold price. Under existing circumstances,
there is no doubt that the psychological repercussions of
a rising sovereign price would be severe and would have
the effect of discouraging production and of increasing
connodity prices,
e.
Controlled Gold Market
A third neasure night be suggested, which lies between
the tv/o extrenes exanincd above: The gold narket could
be allowed to continue, but under nore closely controlled
conditions, Tor exanple, it could be required that all
purchases and sales of gold be made through registered
brokers, wi^h a periodical reporting by the latter of the
narr.es of those engaging in such transactions. It would
then be theoretically possible for the Governnent to investigate large purchasers and sellers of gold fron the
point of view of compliance lith the incone tax law. Other
sinilar control neasures are possible. The difficulty
with all such neasures, however, is that they would be
practically inpossible effectively to enforce, and, if
enforced, would lead to diversion of the der.and into equally
harnful channels.
4. Diversion of Prachna Savings into Reconstruction Bonds.
The conclusion that follows fron the above examination is that
the gold narket can neither be eliminated, closely controlled,
or left free to function without intervention by the Bank of
Greece. It is further evident that because of the linit.ation
of foreign exchange resources the past policy of restricting
the increase in the gold price by sales of gold is likewise
untenable for a nuch longer period of tine.
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Appendix B (CcntM)
SEOSE5E.
Page 18
There is only one possible solution to the gold problem in
Greece, pending the ultimate solution of restoration of
monetary, econonic and military stability. This solution
nust lie in the diversion of drachna savings fron the ^old
market into other channels which are not harmful to the economy.
Admittedly this is not easy to accomplish. The problem is to
find a substitute medium of savings which is equally attractive
as the gold sovereign and the existence of which will not have
adverse repercussions on domestic production and prices.
It is suggested that this substitute nay possibly be found
in an issue by the State of reconstruction bonds, denominated
in gold or in dollars and guaranteed 100$ with gold or dollars
by the United States Government. It is 1felt that there are
three minimum requirements for such an iasue to be accepted
by the Greek public as a substitute for the sovereign.
1. The safety factor. By this it is meant that savings
placed in the bonds will not be taxed away or seized by
the Government and will be protected in the event of
revolution or other internal political disturbances.
In addition, the bonds nust possess the element of
transportability which gold sovereigns possess, so
that in.the event of the necessity to escape fron one
locality to another or from Greece to another country,
the wealth invested in the bonds may be taken along.
The third element in the safety factor is that of
anonymity so that those who place their savings in the
bonds will not be subject to the risk of Government
measures against them.
SLCIiET
APPENDIX B (cont'd)
Page "19
It is felt that all of these safety factors could be
provided in bearer bonds which at maturity would be convertible into gold or dollars under the direct guarantee of
the U.S. Government. It is important to realize that
to the Greek people the guarantee of the Greek State is
virtually worthless. Past experience of repudiation by
the State of bonds denominated in gold has led to this
lack of confidence. Hence, the guarantee must be 100%
and given directly to the holder of the bond by the
United States Government. Further, the bonds must be
redeemable a^th^r^maturi.t^ in the United States by
the Federal Reserve"Bank"or other agency which holds the
guarantee fund as trustee.
(2) The liquidity factor. Those who invest in gold
sovereigns are certain that at any moment of time they
will be able to convert their holdings into drachmae
for the purpose of meeting unexpected expenditures.
Moreover, a great deal of the demand for gold sovereigns
comes from industrialists and merchants, who put not only
their savings in this form, but also their liquid working
capital. With respect to the latter, there are frequent
conversions from drachmae into sovereigns and back into
drachmae.
It is believed that the gold reconstruction bonds
vould be of an equal liquidity so long as they are bearer
bonds and are freely marketable.
(3) Protection against depreciation. On^ of the important reasons for putting drachmae into sovereigns, as
indicated above, is protection against further depreciation of the drachma, both internal and external. The same
protection would, of course, be afforded by virtue of the
fact that the bonds are denominated in gold or dollars
and payable on maturity in gold or dollars in the United
States.
5• Tgrins of Issue
It is not proposed in this memorandum to go into
all the technical details of such an issue. However,
some of the main features of the proposed bonds may be
suggested.
(1) It iv.s already been indicated that one of the
principal features of the bonds would be their 100/5
guarantee direct by the United States Government. It
would be desirable for psychological reasons if there
were established a special gold or dollar fund in, say,
the Federal Reserve Bank of New York, which would contain
the full equivalent of all outstanding tends.
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AIjFENDIX B (cont'd)
Page
20
(2) The bonds would be redeemable at maturity in gold
or dollars in the United States or in drachmae in Greece
at the current gold price or dollar rate in Greece, at
the option of the holder. No bonds would be redeemable
in gold or dollars before the maturity date.
(3) It is proposed that the bonds should have 10-or 12year maturity, in order that they not mature before it is
anticipated that the Greek economy will have accomplished
basic reconstruction and vill have restored economic and
monetary stability.
(4) The bonds would bear interest in the form of sale
on a discount basis. This is for the purpose both of
administrative simplicity and psychological effect, since
a one-sovereign bond would be issued for the equivalent
of some tiling considerably less then one sovereign.
(5)
Interest income on the bonds would be tax exempted.
(6)
The bonds wou] d be bearer and freely marketable.
(7) The bonds would be issued in a range of denominations going down to small ones, in order to attract the
low-income saver.
(8) The bonds would be issued for the purpose? of
reconstruction and so labelled. The proceeds of the
bonds would be specifically allocated for reconstruction
projects and could be used for no other purpose. Wherever
possible it would be desirable to tie in local or regional
bond subscriptions with local or regional reconstruction
projects.
(9) Subscriptions to the bonds would be opened to the
public (Banks vould be prohibited by the Currency Committee from purchasing them) initially for a limited
period of time, and would be issued against drachma paymerit at the current gold price or foreign exchange rate,
discounted for the interest. Additional subscriptions
could be opened from time to time, as circumstances warrant.
6•
Obstacles to Overcome
It is now proposed to consider sor.ie of the difficulties and problems \ hich the program outlined above
\vould involve.
The first requirement, of course, is the agreement
of the United States Government to undertake the obligation
of guaranteeing such loan issue. Presumably the U.S.
guarantee wall require a special loan to the Greek Government, but earmarked for the specific purposes outlined
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APPENDIX 3 (cont'd)
Page
21
above. The presumption is that it would never be necessary
aciually to use any part of the loan. On the other hand,
the obligation actually to make available the gold or
dollars, given in guarantee, would exist.
It is believed that the United States Government
would be a great deal more receptive to the present proposal than to continued requests for grants or loans to
buy gold for internal sale in Greece. The attraction of
the present proposal is that it looks towards a solution
to the gold problem, in contrast to the past policy of
simply giving in to the demand for gold and the consequent
wastage of foreign exchange.
It should be noted, however, that in order to be
effective, the amount of gold, or dollars required would
be considerable. This would be especially the case if
the bonds were denominated in dollars and issued on the
basis of the official 10,000 drachma rate. There are
strong arguments, therefore, for denominating the bonds
in gold and thus take advantage of the high drachma
premium presently commanded by gold in Greece.
Closely connected with the question of the amount
of gold or dollars required as a guarantee by the U.S.
Government is the probable shift of savings currently
made in forms other than gold sovereigns into Reconstruction Bonds. This would be a particularly important problem
with respect to Bank deposits. Unless prohibited, bank
depositors would have a strong tendency to withdraw their
deposits and invest tru-in in the Reconstruction Bonds. To
the extent that this would, occur, of course, there would
be no advantages gained from the issue of the bonds, but
on the contrary \ ould require large additional amounts
of gold or dollars as guarantee.
Initially, it is suggested that this problem be
approached through prohibiting the \ ithdrawal of Public
Body deposits for this purpose and by continuing to compel
such Bodies to place their liquid funds in bank deposits.
This would prevent the investment in the Reconstruction
Bonds of the larger part of bank deposits. It might be
objected, hov.;ever, that this would be discriminatory
against the Public Bodies.. While there is some validity
to this objection, it should be noted that precisely the
same kind of discrimination exists at the present time,
since Public Bodies are not allowed to place their liquid
funds in gold sovereigns.
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SLCRLT
APPENDIX B
Page 22
A more satisfactory solution could be fcund in establishing a valorization scheme for bank deposits as has
been discussed in the past. The valorization could be
along the. same lines as provided for in the loans granted
for reconstruction out of ^CA funds, It would be desirable
that such valorization scheme be introduced simultaneously
with the issue of Reconstruction Bonds, but it vould not be an
indispensable measure.
The issue of the bonds in bearer form vould raise
another problem. Were it not necessary to maintain the
annny-iity of the bond holder in order to make the bonds
acceptable to the Greek public, it vould be very desirable
on other grounds to have the bonds registered. The danger
exists that vith bearer bonds there "oulcl be strong temptations for business firms anc. other to invest in the bonds
vith funds derived from bank credit. This problem must be
met by the exercise of close credit controls by the Currency Committee. The latter would prohibit, of course,
the investment in Reconstruction Bonds by banks themselves. In addition, it -would be necessary to keep close
v»atch over the disposition of credits granted by banks,
either with their own funds or ivith funds advanced by the
Bank of Greece.
Lastly, and perhaps most important of all, there
must be overcome the natural reluctance of the Groek
people to invest their savings in any kind of bond issue.
It is not sufficient to establish the formal guarantees
that have been described above. In addition to those
guarantees, the Greek public must be made fully avare
of the guarantees made and convinced of their validity.
Having becone accustomed to the gold sovereign and fully
confident of its value as a medium for storing wealth,
the Greeks \/ill not easily turn to a strange and untried
substitute.
For those reasons it • ould be extremely important
that the proposed bond issue be put before the public
v;ith a tremendous propaganda campaign, matching the
energy and ingenuity used in tru- American V/ar Bond campaign.
If properly handled, this campaign could have an ^xtren.ely
salutary psychological effect on the Greek people. In the
first place, it " ould represent the first attempt of the
Greek Government to go directly to the people v/ith a program requiring the participation of all groups and specifically designed to aid in the economic rehabilitation of the
country. Participation in the bend issue should be presented as a patriotic action; at the san.e time, investment
in gold sovereigns and in black-market currencies, as -ell
as in commodities such as olive oil, should be held up to
the public as examples ef the v-orst kind of unpatriotic
action. At the same time, of ceurse, it * ould be necessary
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APPENDIX B (cont'd)
Page 23
to make it clear that participation in the bond issue
carries, v;ith it all the material advantages of investment in gold sovereigns.
.To aid in the shift from gold sovereigns to Reconstruction Bonds it might become desirable, after a trial
period, to introduce gradually restrictions on transactions
in gold sovereigns. So long as there is a substitute medium
of investment, such restrictions would not have the adverse
repercussions that otherwise might occur.
7•
Expected Results
It might be useful in concluding to review briefly
some of the substantive results which it is anticipated
would be accomplished by the issue of Reconstruction Bonds,
assuming that the program was reasonably successful.
In the first place it should not be expected that
the demand for gold sovereigns would be entirely diverted
into Reconstruction Bonds. There inevitably \.ould continue to be a demand for sovereigns, particularly by the
poorly-educated groups, v h o do not understand the nature
and advantages of the bonds over sovereigns. Nevertheless,
the prime purpose of the bonds v'ould be accomplished if a
significant portion of the demand for sovereigns were
siphoned off into bonds.
If the bond issue Fere successful and a good market
developed for ther., at a price comparable to tha gold
sovereign price, it might be feasible to develop a method
of obtaining internally^held foreign exchange and gold
sovereigns in return for th-^ bonds. If this could be
done, then a secondary objective of great importance
would be achieved, for exchange ^ould become immediately
available to the Greek Government.
It has been emphasized above that the bonds < ould
be presented to the public not ostensibly as a substitute
for the sovereign, but rather as an instrument for reconstructing the country. .Actually, the uxtent to which reconstruction could be financed through such an issue depends
essentially upon thv. creation of nev savings as a result of
the bond issue. So long as the national income remains at
present low levels, it cannot be expected that a significant
additional amount of nev; savings would be made as a result
of the bond issue. On tho other hand, to the extent that
the bonds replace the necessity to use Greck-ovned foreign
exchange resources, or to divert American funds from imports, for th~ purchase of gold to be sold internally, or
to the extent that internally-held gold and foreign
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APPENDIX E (cont'd)
Page 24
Exchange can be extracted from the economy for immediate
Government use, capital investment may1 be correspondingly increased. It is not anticipate: ., however, that
these sources of financing additional investment will
prove to be very large. In effect, therefore, the
drachma proceeds of sale of the bonds allocated specifically for reconstruction projects must, to a large
extent, simply substitute for reconstruction expenditures out of the EGA drachma fund, the latter to this
extent being sterilized.
Apart from the substantive results of the program,
it is felt that the bonds voulc have a tremendously
salutary psychological effect, which in the Greek economy
under present conditions must be regarded as of equal
importance with substantive economic effects.
Greece-Turkey Br.5/26/49
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SECRET
/ The NA.C finds it impossible to measure the over-all
economic effectiveness as an anti-inflationary device of the
sale of gold sovereigns by the Greek Government to its citizens,
but believes that such sales at the meet merely alleviate the
effects of underlying inflationary forces and are not an adequate
substitute for thorough going fiscal and financial reform* The
NA.C, however, agrees to the continued limited sale of gold
sovereigns to the Greek Government in view of representations
that the psychological and political repercussions of discontinuing
gold sowreign sales would endanger the objectives of the U* S»
Government military and economic program in Greece. The NA.C is
of the opinion that every feasible effort should be made to permit
the discontinuance of gold sovereigns sales at the earliest possible
time by financial and economic policies designed to minimize inflationary influences^
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/ While it is Impossible to assess fully the over-all
/
economic effectiveness as an anti-inflationary device of the
sale of gold sovereigns by the Greek Government to its citizens,
the NAG believes that such sales at the most merely alleviate
the effects of underlying inflationary forces and are not an
adequate substitute for thorough going fiscal and financial
reform.
The NAG, however, has no objection to the continued
limited sale of gold sovereigns by the U. S. Government to the
Greek Government for resale to Greek citizens in view of representations that have already been made, and as long as such
representations continue, to the effect that the psychological
and political repercussions of discontinuing gpld sovereign
sales 7a.thin Greece viould endanger the objectives of tiie U. S«
Government military and economic program in Greece. The NA.C
urges that those U. S. Government agencies directly concerned
•with the carrying out of U. S* policy in Greece make every feasible
effort to bring about the discontinuance of gsld sovereign sales
at the earliest possible time by the Greek Government through
financial and economic policies designed to minimize inflationary
influence,,/
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SECRET
MAY 4
1949
My dear Mr.: Chairman:
This is in further reply to your letters of April 25, 1949,
stating that your Committee intends to begin hearings on S. 13 and
S. 286 on Llay 5 and requesting the report of the Department on these
bills prior to the date of the hearing.
Both bills specifically authorize the acquisition, trading and
export by members of the public of any gold mined in the United States
or imported into the United States after their enactment. S. 286 would
also repeal Sections 3 and 4 of the Gold Reserve Act of 1934, Since
these sections contain the authority to regulate transactions in gold
in the United States, their repeal would permit a free market for all
gold, Iix substance, S. 13 would also result in a free market for all
gold since it would not be possible to distinguish newly mined or imported gold from other gold.
The Treasury is strongly opposed to the enactment of these bills.
They would create serious risks to our national monetary and banking
structure and would result in a weakening of the present strong and
stable position of the dollar in its relation to gold. At the same
time, the advantages expected by their advocates appear to be based
on misunderstandings and illusory hopes,
1, Enactment of either S, 13 or S, 286 would amount to a reversal
of the decision inade by the Congress in the Gold Reserve Act of 1934,
that gold should be held by the Government as a monetary reserve and
that it should not be available for private use for other than legitimate
industrial, professional or artistic purposes, Yfe believe that the United
States should continue to follow the principle that the most important
use of gold is for the domestic and international monetary functions of
the Government and that gold should not be held by private individuals
as a store of wealth,
2^ The existence of a free market for gold in the United States
with a fluctuating price determined by private demand and supply would
have exceedingly unfortunate consequences for our domestic economy. In
fact, the Secretary of the Treasury is required by statute to maintain
all forms of United States money at a parity with the gold dollar. Since
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- 2the gold dollar contains l/35th of an ounce of gold, this means that
the Treasury should maintain the price of gold at |35 an ounce in legal
gold markets in the United States. Therefore, the Treasury would hardly
have any alternative if the proposed bills were enacted other than to
sell gold to the extent necessary to maintain the market price at -£35 an
ounce. Thus, the rise in the price of gold which appears to be contemplated by the proponents of these bills 7/ould not take place*
If the Treasury did not take measures to stabilize the market at $35,.
the shifting of the price of gold could not fail to confuse and disturb
the public. The common interpretation of such fluctuations would be that
something was wrong with the dollar and that the value of the dollar and
all savings stated in dollars were going up and down with each fluctuation.
Such prices for gold, however, would probably be the result of a
relatively trifling volume of transactions. No significant determination
of the value of the whole world supply of gold could be made with the
United States Treasury, which is the main factor in the gold market,
left out of the balance. Because of popular misconceptions, prices determined by an insignificant volume of transactions would be interpreted
as applying to all gold, including £he 24.3 billion dollars in gold held
by the United States Treasury. Thus, the public misinterpretation of the
quotations in the so-called free market might cause a loss of confidence
in the dollar and be extremely damaging to our economic welfare.
If the Treasury let the price of gold in the United States fluctuate,
it would be defeating the very purposes which have led us to acquire over
24 billion dollars worth of gold, ^he Treasury has paid out those billions
of dollars for gold in order to keep stable the relation between gold and
the dollar. There would be no clear reason why we should havo bought this
gold in the past or should continue in the future to buy gold at $35 an
ounce if we were not also to be ready to sell it at the same price for any
legitimate purpose in order to maintain that stability.
It would be exceedingly improvident for the United States to sell gold
at s?35 an ounce to foreign governments if such gold or other gold could be
resold in the United States at premium, prices. On the other hand, the
Treasury believes it to be of the highest monetary importance to the United
States that it continue to sell gold to foreign governments and central
banks at $35 an ounce whenever the balance of international payments turns
in their favor and they ask for settlement in gold.. To refuse to make such
sales at $35 would be equivalent to a devaluation of the dollar and an
abandonment of our adherence to a gold standard. Moreover, if the United
States should not continue to buy and sell gold freely for international
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Federal Reserve Bank of St. Louis
- 3settlements at £>35 an ounce, we could not meet our obligations to the
International Monetary Fund without adopting a system of exchange controls to prevent transactions in foreign currencies in the United
States at other than official rates.
It should not be assumed, however, that it is at all certain that
the proposed free market in gold would result in a marked rise in the
price of gold for any extended period even if the Treasury should not
stabilize the market at $35, Expectations of substantial increases in
price are based on widespread exaggeration of the significance of various
premium quotations abroad and inadequate appreciation of the degree to
which prices of gold everywhere depend on the readiness of the United
States to buy at $35 virtually all gold which is offered to the Treasury*
There is also inadequate appreciation of the extent to which gold imports
and trading are restricted in every important country in the world and
the valid reasons for such restrictions,
3. The international monetary relations and obligations of the
United States would also be prejudiced if gold were authorized to be
exported and imported freely. One of the dangers of permitting exportations of gold from the United States without restriction is that much of
the gold would flow to black markets abroad. In some countries the gold
markets are illegal; in others, gold imports or dollar payments for gold
are prohibited. Thego restrictions are designed to conserve urgently
needed dollars to finance essential imports. Permitting gold exports to
these markets would work directly against our efforts to restore Europe
to financial solvency through the European Recovery Program,
In this connection, the International Monetary Fund has expressed
its .concern that international gold transactions at premium prices tend
to divert gold from central reserves into private hoards>t The Fund has
asked its members to take effective action to prevent premium price
transactions in gold with other countries or with the nationals of other
countries.. The existence of a free market in the United States with a
fluctuating price for gold,, coupled with the repeal of authority to control the export of goldj, would make it impossible for the United States
to cooperate with the Fund in achieving this objective,
4% Treasury sales of gold to the extent necessary to maintain a
|35 price in a free market created by the enactment of either of these
bills would in effect mean that any holder of dollars or dollar obligations would be able to convert them into gold. While this would be
preferable to an erratic movement in gold prices in the United States,
it would force this Government to a course of action which might have
extremely serious consequences^
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Federal Reserve Bank of St. Louis
. 4 Internal gold convertibility is likely to exert critical pressure
at the most dangerous and damaging times and to do little good at
other times« It threatened the foundations of our financial structure
during the depression and it might have done so again during the last
war, yet it has proven of no use cither to prevent inflationary booms
or serve other desirable purposes at other times. V/hen left in a
centralized reserve, our gold stock gives impregnable international
strength to the dollar. If our gold stock, on the other hand, were
dissipated into immobilized private holdings, our power to maintain the
position of the dollar might be critically weakened
The problems of financing the last war would have been tremendously magnified if private citizens had been free to draw down our
gold reserves. The prosecution of the war, for example, would have
been critically hampered if government and business borrowing had been
limited because gold hoarders had left no excess reserves in the banking
system*
Even our 24 billion dollars of gold holdings would be completely
inadequate to meet a serious run on gold from the 27 billion dollars
of United States currency in circulation, over 140 billion dollars of
bank deposits, and scores of billions of dollars of government securities, not to mention other relatively liquid assets. Conversion
of around five or six per cent of these government and bank obligations
would be enough to bring the Federal Reserve Banks below their legal
minimum gold reserve.
Even in a letter of this length it is not possible to state all
the considerations which cause the Treasury to oppose these bills.
We believe, however, that the foregoing will give you a general indication of the difficulties and problems which the Treasury considers
would arise from the enactment of either of them*
The Bureau of the Budget has advised that there would be no objection to the submission of this report to your Committee since the
proposed legislation is not in accord with the program of the President.
Very truly yours,
(Signed)
Vfau McC. Martin, Jr.
TfVnu McC. Martin, Jr,,
Acting Secretary
Honorable Burnet R. Maybank
Chairman, ComrdLttoe on Banking and Currency
United States Senate
"Washington, D. C,
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Federal Reserve Bank of St. Louis
R. P. r».
I«II>O:EWOOE3,
June 10,
Mr. Urn. McC. Martin Jr.
Acting Secretary of the Treasury
Washington, B.C.
Dear Mr. Martin:
I have before me a copy of your letter of May
written to the Honorable Burnet R. Maybank, Chairman, Committee
on Banking and Currency,which copy was forwarded to me by the
Honorable H. Alexander Smith, Senator from New Jersey, in connection with certain letters I had written him on the subject
of gold and suggested repeal of the Gold Reserve Act of 193k»
In my letter to Mr. Smith, I asked him what the prospects were of my being put on the same economic basis as the
average Chinaman and being allowed the freedom to purchase gold
if I so desire.
In your letter to Mr. Maybank you stress the inadvisability of having an absolutely free gold market in the United
States, inasmuch as you - as a representative of the Treasury
Department - fear that there would be a terrific fluctuation
which would redound to the disadvantage of the United States
Government and its people. With this I cannot agree, as I
maintain that, as a free American Citizen, I was entitled to
the right to possess gold if I so desired prior to 1931;, and
this right is now denied me.
If you can show me how my possessing gold is going to
endanger the United States Government, or its people, in any
way, I would appreciate hearing from you accordingly.
Yours v
FJB:EC
P.S. Please bear in mind that I do not advocate revaluation of
the currency or a diminution of the gold behind our dollar - I am
merely interested in being able to buy gold at the present fixed
rate and this is what is being denied me.
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Federal Reserve Bank of St. Louis
Bear Mr. Beyer t
tharik you for your nice letter of Jtine 10 with respect
to the testimony I presented on S» 13 and S. 286 which would
permit a free market for gold in the United States* Like
yourself* I look forward to the tiae when we can do assay with
restrictions generally* However, as expressed in the testimony
presented to the CcnEiittee* I question the wisdom of such
action at teds time*
It was certainly nice of you to take the trouble to
mef and I am sorry we disagree on this matter of judgment with
respect to these two bills*
With all good wishes*
Sincerely yours,
I»* McC. Martin* Jr.
Mr. F* J* Beyer
Road
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Federal Reserve Bank of St. Louis
July 11,
Dear Senator Smith:
In Mr. Martin's absence, I have your request
of July 8 regarding a letter written by Mr. F.J.
Beyer of Ridgewood, New Jersey, to Mr. Martin.
Mr. Beyer's letter was answered under date
of June 30, and on July 7, Mr. Beyer acknowledged
receipt of this reply.
Secretary to Mr. Martin
Honorable H. Alexander Smith
United States Senate
Washington, D«0,
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Federal Reserve Bank of St. Louis
HUBERT D. THOMAS, UTAH, CHAIRMAN
JAMES E. MURRAY, MONT.
ROBERT A. TAFT, OHIO
CLAUDE PEPPER, FLA.
LISTER HILL, ALA.
MATTHEW M. NEELY, W. VA.
GEORGE D. AIKEN, VT.
H. ALEXANDER SMITH, N. J.
WAYNE MORSE, OREG.
PAUL H. DOUGLAS, ILL.
HUBERT H. HUMPHREY, MINN.
FORREST C. DONNELL, MO.
GARRETT L. WITHERS, KY.
EARL B. WIXCEY, CLERK
COMMITTEE ON
LABOR AND PUBLIC WELFARE
July 8, 1949
Dear Mr. Martin:
Under date of June 10th, a letter was sent
to you by Mr. F. J. Beyer of Ridgewood, New Jersey,
and as yet has received no reply.
Mr. Beyer has written to me, urging that I
contact you to see if you would not be kind enough
to answer the inquiries in his letter. I would appreciate any courtesies you may extend to this request.
Always cordially yours,
Mr. William McC. Martin, Jr.
Acting Secretary of the Treasury
Washington, D. C.
HAS:HT
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Federal Reserve Bank of St. Louis
July 7, 19U9<
Mr. Win. McC. Martin Jr.
Assistant Secretary
U.S. Treasury Department
Washington, D.C.
My dear Mr. Martin:
This will acknowledge receipt of your letter of
June 30th.
I am afraid that my previous letter of June 10th
was not quite as clear as it might have been. The fact
that we do not see eye to eye on the subject of a free gold
market in this country is undebatable but what I am trying to
determine is how my possession of gold, if it were permitted,
would be detrimental to the United States and its people.
I must confess that I am not too familiar with
these things and I certainly do not want to do anything to
endanger the country, but I do feel that I am entitled to
an answer to this question if there is someone in Washington
who can give it to me.
With all good wishes, I remain
Sincerely
FJB:EC
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
. artta* I aa «*»
f «fesm ^ f araar
witli r^^eet to
I km* ^djp will be of lnt«erest to l
*UX bring it t© Ms «ttbnnti«tt
to Sr* if atrtln
r.
PHILIP'M.' MCKENNA
National Chairman
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Federal Reserve Bank of St. Louis
GOLD STANDARD LEAGUE
PURPOSES: To provide for research, publication, and dissemination of information on all subjects involved in science of_sound
monetary economics and more particularly to encourage discussions of a gold c o i n standard - $35 per ounce - as a means _of
giving our people the best type of money system and of restoring
to our people control over their public purse.
P.O.
BOX 186,
LATROBE,
PA.
June 23, 1949
Honorable Win. 1,-lcC. Martin, Jr.
Acting Secretary of the Treasury
Washington, D. G.
Subject: The Gold Standard
Sir:
Enclosed is a news release announcing the formation
of The Gold Standard League, which I know will be of
interest to you because of your belief in "Sound Money".
The purposes of this league are stated in the letterhead. A sound currency is perhaps the best single
guarantee a people can have that they will not be led
into a Socialistic or a governmentally-managed economy.
Honest money - that is money redeemable upon demand
in gold or gold coin at $35 per ounce - would restore
confidence in ourselves and our government.
You, as Acting Secretary of the Treasury, are in a
position where your recommendations command the deepest
respect and consideration of our Congressmen. You can
do much to secure the return of the Gold Standard and
with it the right of every citizen freely to trade in
gold and to redeem his paper money in gold or gold coin
at his demand. We have enough gold to do it now! Our
reserves at Fort Know are more than twice as great, both
relatively and comparatively to the 1920fs when we were
on the Gold Standard. The integrity of our government is
at stake. Will you help to defend that integrity?
Respe
rjf
Philip M. McKenna,
National Chairman.
FOR IMMEDIATE RELEASE BY ALL NEWSPAPERS
JUNE 23, 1949
Pennsylvania Business Leader Heads Group
Aided by State Chairmen
Sound Dollar Sought To Encourage Enterprise
And Stop Fiat Money Menace
Formation of the Gold Standard League to inform the public of the need now for
the restoration of the gold coin system at $35 per ounce was started at Latrobe,
Pennsylvania, today under National Chairmanship of Philip M0 McKenna, President of
Kennametai Ineos Latrobe, Pennsylvania,,
He is to be aided by chairmen for ail States in the Union»
Among those who
have already accepted ares- David R B Dunlap, Mobile, Alabama, John B. Khox, Oakland, California, James W. Khox, Hartford, Conn., R. B, Walker, Miami, Florida,
Dean Krotter, Palisade, Nebraska, Philip LeBoutillier, New York, N. Y., J. H0 Frost,
San Antonio, Texas, E. B» Tilton, Milwaukee, Wisconsin, Dr, Walter S0 Spahr,
Executive Vice President of the Economists* National Committee on Monetary Policy
has agreed to serve, ex-officio, as Economics Counsellor to the League, George F«
Bauer, a former Export Manager of the Automobile Manufacturers' Association and
International Vice Chairman, New York Board of Trade, will act on group activities
and coordination,,
*A sound money system*„ Mr0 McKenna sayss *is needed urgently now to stop
further discouragement of private enterprise, to give back to our people control
of private enterprise, to give back to our people control over their public purse
and to halt the menace of printing press money*1*
**The League, through its National, State, District and local leaders8 plans to
familiarize the general public by means of gatherings, forums, radio9 television,
press articles, addresses and other means, with the full significance of a sound
money system and with the needed corrective measures,,*
Issued bys
THS GOLD STANDARD LEAGUE
ONE LLOYD AVENUE
LATROBE, PENNSYLVANIA
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Telephone
Latrobe 1500
Federal Reserve Bank of St. Louis
Page 1
*The League will provide a way by which all
responsible people who desire a
assist each other in study and widespread information on this matter 0
Members of
the League will work together in support of the efforts of the Economists1
National Committee on Monetary Policy which will continue to operate, as it has
for sixteen years, at the technical level and independently of all other organizationso
The League hopes to have the benefits of the advice and counsel of
members of that Committee**
"Both organizations together should provide a nationwide sound currency
movement like that of the Reform Club Sound Currency Association of 1891-1901,
which succeeded in making plain to the people and their representatives the facts
which led to the enactment of the Gold Standard Act of 19000
The central purpose
of the Gold Standard League, like that of the Economists' National Committee On
Monetary Policy is to point out the circumstances which make urgent the enactment
of the Reed Bill H 0 R 0 3262, designed to give the United States a redeemable .
currency defining the dollar as one thirty—fifth of an ounce of gold 0 *
Issued by?
THE GOLD STANDARD LEAGUE
ONE LLOYD AVENUE
LATROBE, PENNSYLVANIA
Telephone
Latrobe 1500
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Federal Reserve Bank of St. Louis
Page 2
laar
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Federal Reserve Bank of St. Louis
7hi« 10 in r»ply to your letter af Ju3y 6» to
Jiwtin, iuHdng flturtiMr Ma 3*tUr to ^m of
In th« abMQO» af Kr» i!«rtSnf It 1* b»U«ir«d that th«
*mi24 mit ndLato to «ftk« a rolanat af this mttriftl
the Ir^asary has oo ai}>6tlon to ^uif quoting the
if you ni«h«
thanli ymi Jtor the co\irt«ay of IrK^iring in thin
v«y truly your**
(Signed) Paul D. Dickeus
Xork 10, !!*»
?/
r t
9
in vtifcMNM to your lottor of ftgr ^9, l%9»
qpaftt: oa *« to wftrthwr 89R-t*dooJ3ftfeliUy of t^« "noa-golct*
dollar In aoasiato** mlth Section 4 of tho Gol<3 Eoaorv* *et
of 1934* I *i.^t oat tti&t tb»
...r
of g^^»
to iMMipi «w«n»wnt« and ««nfe«9& l^ilcs for
to
itaas
an oucteo ^»» h&el tho of f «ct of
pwrlt^f witii tho ^*14 4oUUuf idt
not »i^nlfioaat} fur «£*&$&*, in tbo
of m Xiudted el^s of traas»oti«ma 1m 3»lt««rlAml
tho 3wla* siotwtmrr mtlioyltloo will not aooopt gold. lou no
doubt f«ma» that tfeo ^roa w«?r oaa aot «B»diH»l» to
' th* italic la relation to black
to mir ta^mlo%» the only
aold in. tjs© UnitoiS Hi too
a ito
of ta*
^(SiredJ «»@«f4 as to oxport&tion* f he
00X0 i^l ti^Widpot'tatljwi of until golti by r^cddtffits of
• «et*siptiim was to oi^.ato tho coooo^lty of lioo-^ing
thousands of »g*ll ;»iman@ ar^ th« or0 buyors and •mil aaoiv
ch&nt» la r^aot« Ioot0iti«9 ite fei^ f ttm towi, «ino«, obviously,
bo oxtramly feordonao^e to tt^au Our inf or*
it that tho |:ireaiua E5*i£»t i« %hi* gold i» vsrj lisaiWdf
too inai£nifio«flt to bo ootudctorod its an^ {narnuir as
idth
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Federal Reserve Bank of St. Louis
(SIGNED) WM. McC. MARTIN. Jr
^4w9PppWfc<^P^iwM§*^p ^rf^WpiJ^^P^i^pJf ^
vf
t fork
6/21/49
SJ^w^
v^^V
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
26 1949
Dear ^r
This is to acknowledge receipt of your letter of
June 23, 1949, addressed to the Preaident and encloaing
•> news r«lMtM announcing the fonaation of The Gold
Stendard League, The release has been referred to those
persons in the Treasury Department who are particularly
concerned with sueh a»netary problems*
Your interest lit submitting this infonaatioa Is
appreciated.
Very truly yours,
Paul D. fiekecs
CAM idms 7/25/49
C O N F I D E N T I A L
To:
Mr. Willis
From:
Charlotte McGuire
Subjects
United States Gold Transactions with Foreign Countries July 1949 and other recent periods.
Purchases by the United States
During July the United States purchased a total of $94 million
in gold from three foreign countries, "bringing the total for the first
seven months of the year to $431 million, or an annual rate of $740
million. The July total compares with purchases of $143 million in
June, $73 million in May, $17 million in April, and a monthly average
of $35 million during the first three months of the year. It also
compares with a monthly average of $141 million during 1948.
The United Kingdom sold, a total of $8l million in gold to the
United States during July, bringing the total of its sales of gold to
the United States for the year to date to $243 million. South Africa
sold $10 million in July, bringing her total for the year to date to
$137 million. The only other purchase of gold by the United States
during July was $3»5 million from Portugal.
Sales by the United States
Sales by the United States to foreign countries during July totaled
$28 million, bringing the total for seven months to $214 million. The
July total compares with monthly averages of $16 million during the
second quarter of the year and $15 million during the first quarter.
Sales totaling $25 million were made to Switzerland, $2 million to the
Belgian Congo, and $945,000 to Czechoslovakia for its account with
the International Monetary Fund.
Attached Table
The attached table shows the leading sellers of gold on the basis
of monthly average sales from January 1948.
It also shows the leading
purchasers of gold from the United States beginning in January 1948.
C O N F I D E N T I A L
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Federal Reserve Bank of St. Louis
United States Gold Transactions with-Foreign Countries
July 1949 and Other Recent Periods
(In millions o f dollars)
C O N F I D E N T I A L
PURCHASES BY UNITED STATES
Monthly
Monthly Monthly
Ave rage
Ave rage
Average
Jan . -Ms r . Ap r , -June
1948 r
1949 p
Argentina
Belgium
Canada
Chile
Colombia
Dominican Republic
$ 9*5
5.8
#
$-
$~
<-f
Finland
France
1.3
Greece
.8
International Bank
.1
Mexico
5.6
Nethe rlands
3.4
Nicaragua
.2
Norway
— .1
Poland
Portugal
5.3
Saudi Arabia
— .3
Sweden
Swit ze rland-BNS
—
Switzerland-BIS
— .9
Turkey
Uni©n of S.Africa
41.6
United Kingdom
61.2
Uruguay
3.3
Venezuela
All Other
»fi
Total
$141.©
p-Breliminary
r— Revised
July
1949 p
3.4
~.
7.0
M
1*2
~*
~
.7
1.2
~
—
«-^
— .8
3.5
*
—
2.6
-
—
—
3,5
-.
-
-.
—
K.
<•-•
-
Total
Jan.—
July
1949 p
$-
iP~
1.1
_
ol
1.3
-
1949 p
SALES BY UNITED STATES
—
—
pt»
—
—
-
«•
—
—M
—
—
t~
_
3.5
-
—
—2.0
~
10.2
10.4
.1
w.
—.
14.0
—
-
•m
—
——•
24.0
—
—
—ft
—
9*
—
18.5
54.1
1.0
~
-.1
m
—
--
9.5
—
80.9
*•
—
137.0
243.3
3.0
M
.1
— .4
Monthly Monthly
Average Ave rage
1948
Jan. -June
July
1949
Total
Jan . July
1949
$~
7.3
.$-
$~
43.5
-,
—
—»
_.
„
~
—
——
-
1949
$~
*-*
.1
-
.3
.5
.7
-.
•4
.1
—
—
—.3
«
»
.5
—«
2.4
9.0
.9
.7
~
^.
-«
•—>
_
.^
2.5
3.8
_
-.
—
r— .
1.8
$16.1
$15.2
$94.0 $430.9
* — Less than $50, 000.
million purchased by Belgian Congp, and $945,000 purchased by Czechoslovakia for the IMF,
"CAM :yb: 8/8/49
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
$34.8
$77.5
—
—.
•*•
—.
«
4.1
—
(^
-.
—
P.
»-•
25.0
-.
»->
«-
—
•<•
«
—
-.
—•
^
—•
40.®
22.9
«
~
•-»
•—1
" * !// " *
2,9 13.9
$27.9
$124.3
STANDARD FORM NO. 64
UNITED STATES GOVERNMENT
TO
: Mr. life. HcC. Martin
FROM
: George H. Willis
DATE:
SUBJECT: Gold Loan to France by New York Banks
As you know Mr. Baumgartner has corresponded with Mr. Sproul
of the Federal Reserve Bank of New Tork concerning a possible gold
loan to France by a group of banks headed by the Guaranty Trust
Company. The Federal Reserve Bank has indicated to Mr, Baumgartner
that it would renew to November 23, 1949 the balance of the $75
million loan, due August 23, 1949, provided that $15 million of the
balance were repaid on August 23 and provided that any further
renewals of the loan which might be granted were accompanied by
the repayment of $15 million. Federal Reserve also indicated it
would have no objection to a gold loan from private New York banks
if the U. S* Treasury were willing to issue the licence.
Terms on a private gold loan to France would be 2J- percent
for a five year loan, repayable in equal installments at the end
of the third, fourth, and fifth years, or for a shorter period
at a rate to be discussed. The amount^ apparently contemplated
by the French Government, is in the neighborhood of $100 million.
It is recommended that a licence be issued for a gold loan to
France upon application by the New York banks involved. Informal
discussion with the NAG agencies indicates that none of them would
object to a private bank gold loan to France. The gold collateral
for the loan, if arranged, would be held at the Federal Reserve
Bank under French Government title with a pledge interest held
by the private New York banks involved*
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Federal Reserve Bank of St. Louis
A revaluation of gold in tern* of U* a* dollars eouUi not result
in a planned distribution of f inaneial assistance to the isost
deserving Qowttriss, but wou34 be a windfall to those who are
producers or bo34ers of gold* The ehief benef ieisry would be
aouth Africa, which ban recently given a partieuiarly poor
example of lack of cooperation with the "United Katton* and other
internstiOQal ergsnLsations* to single out 6outh Africa ad t&e
ehisf benoriciary wouM be sio^t demoralising to aosst other
Qountriss*
3*
Or^ir the last thirty year*, the tJ* S# dollsr lias beee built m>
at th* aoet important oorrenoy in the wor!4 and ha* beooae a
atandard of Int^.Tnational values^ The 1933 d^mluation of the
dollar greatly detracted free itc etandiag andt bj- Mndsigiit,
turned out to be much leas uaefal than waa antioij>ated» to
^mlae th© dollv^ now in terms of gold waald detract £roa it*
intern tlo:.al standing ^ favoring thoee who heM gold instead
of dollars* 1 think we should foeter a policy w/ich gives foreign
eentral banks the assurame that it Bakes no dif rerence wtiether
goM or dollars*
3*
A MBfcter so l^ortant for the United States, from the long range
viewpoint, m the stability of the dollar in relation to anytldng
else stseald not be trifled with merely as a tssfjerary expedient,
Jast beeaose we esnrtot think of any other stopgap that
give the SterMfig area a shot in the arm In a hurry*
A very large share of the world's suffering daring the last
thirty years has been due to a laok of undwrst^mdiag of the nature
of soney and debt* llonetary fiinafeSinerit has beome an ejsaet eoi^enoe,
tsfiit t^.oes wl4* k^pi it and i^aotioe it are b®0«t l^r untold diffi^
oulties because of certain age-old preJudioes wrdch they Cannot
ovwoora** The trust in ^ie eternal valme of ^Od is one of tliaa*
If tls® dollar is now devalsind in teras of go!4> this would serve
to strengthen tid@ belief f be a new Incentivs to gold hosrtii»e,
and a boon for deoades to G-MQ to all speoul&tors in gold or
It seams absurd to devalue the doll r in terms of
at a tiae when it is clearly unaorvatasd in t^ms of all foreign
ewrmioies and some ma^or o^asjodiMes and when the domeetio eoonoaio
sUnaUon by no means needs SHOT of the ef f eets whioh were
ously ea^peeted JSrom tlse last dollar
(extract froni letter to Secy Snyder by K. A. Solmssen of Phila. Pa.5
dated August 16, 1949)
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Federal Reserve Bank of St. Louis
CMUT *r*
ia
dolUr
of
that the ?rio*
in
interest in writing to tn»
it
«WNEI^ WM. ft!*. MAWrm.^.
. e€.
04Etd»»
Public Law 1H2 of the 77th Congress fixed the date
of expiration on June 30, 19^3 for the devaluation
powers and also for the stabilization fund.
Public Law H2 of the 78th Congress, enacted April 29,
19^3> extended the Stabilization Fund Powers but did
not do anything about the devaluation powers, so they
were permitted to expire on June 30, 19^3.
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The weight of the United States gold dollar is fixed by the
Presidential Proclamation of January 31, 1934, as 15-5/21 grains of
gold nine-tenths fine, which corresponds to a value of $35 per fine
troy ounce. As Congress permitted the authority of the President
to alter the gold content of the dollar to expire on June 30, 1943,
it would require Congressional action to devalue the dollar.
It has "been the established practice of the Treasury since
January 31, 1934 to sell and buy gold at $35 an ounce (plus or
minus \ of 1%) for authorized purposes. Sections3 and 9 of the
Gold Reserve Act of 1934, however, authorize the Secretary of the
Treasury with the approval of the President to buy and sell gold
at such rates and upon such terms and conditions as he may deem
most advantageous to the public interest. This authority of the
Secretary of the Treasury must be considered in connection with
the Articles of Agreement of the International Monetary Fund which
the United States has subscribed to pursuant to the Bretton Woods
Agreements Act of July 31, 1945,
Article IV, Section 2, provides:
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 plus
the prescribed margin, or sell gold at a price below
par value minus the prescribed margin,
The Fund has prescribed a margin of ^ of !/£•
Accordingly, consistent with its obligations under the Fund,
the United States is limited to purchases and sales of gold at
$35 an ounce plus or minus J of \%»
COPY
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Reprinted from
COMMERCIAL w
FINANCIAL CHRONICLE
Thursday, May 26, 1949
Business Needs Gold Base
And Realistic Exchange Rates
By PHILIP CORTNEY*
President, Coty Inc.
Mr. Corlnev, representing NAM before the United Nations, terms
international gold standard indispensable for free convertibility,
multilateral trade, and high productive employment in free society.
Maintains balancing of budgets together with reduction of government expenditure necessary for monetary order.
The National Association of Manufacturers is vitally interested
in the problem of maintaining a high level of productive employment in a free society. There is apparently no problem of employment in countries like Russia. Other countries, like Great Britain and
Australia,
strictionist practices in internawhich h a v e
tional trade. Exchange controls
socia 1 i s t i c
are not only destructive of interplanned economies, claim
national trade, but are a diabolic
weapon against human freedom.
that they can
plan their
Therefore, as we see it, we should
economies so
make certain that the means recommended to maintain a high
a s t o avoid
level of employment do not deun e m p l o y stroy human freedom and human
m e n t at all
times. It rerights. Furthermore, our free society is not only concerned with
mains to be
seen whether
the maintenance of employment
socialistic
per se but also with the increase
planned econin the standard of living. I agree
omies are
Philip
Cortney
^Statement made by Mr. Cortc o m p a t ib 1 e
ney on behalf of the National
with free societies as understood by the west- Association of Manufacturers beern civilization. It is certain, how- fore the Economic and Employever, that full employment poli- ment Commission of the United
cies as d e v i s e d by socialistic Nations on the problems of mainplanned countries, entail balance taining full employment, May 19,
of payments difficulties and re- 1949.
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with the French delegate that a
free society cannot avoid valleys
and peaks in its economic activity, but it can mitigate the amplitude of business fluctuations, and
we can alleviate human suffering
resulting from the business cycle.
So that we avoid any misunderstanding, I wish to make clear
that by a free society in this context I mean firstly countries
which permit the free emigration
of their citizens. The right to leave
a country is the basis of all other
human rights. A free country, as
we understand it, recognizes the
right of an individual to work or
not to work, and the right to get
the best job he possibly can. In
a free society the consumer is free
to use the product of his work in
purchasing whatever he wants.
II
The United Nations is dedicated
to international cooperation and
the maintenance of peace. We are
convinced that free multilateral
trade is the best economic servant
of peace, and that economic nationalism is the worst enemy of
international cooperation. Hence,
it seems obvious to us that the
solutions to particular national
problems should be sought by
methods compatible with the essential requirements of economic
international solidarity. High levels of productive employment, the
furtherance of progress, and the
maintenance of a country's foreign
payments in a condition of longrun balance are entirely compatible with the preservation of free
international trade.
It is natural that each and every
country should be concerned with
the problems particular to itself.
We submit, however, that international cooperation requires that
each country should have regard
for the effects on other countries
of its domestic policies for maintaining a high level of productive
employment. All countries should
be strongly advised to seek an-
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swers to their particular national
problems within the framework
of an international economic system. Therefore we suggest that
the Economic Council recommend
to all countries that they should
seek to avoid, in domestic policies
for a high level of productive employment, measures which have
the effect of hurting other nations,
or measures which have the effect
of restricting international trade.
Ill
International .Aspects of Full
Employment
In the light of these preliminary
remarks we wish first to make a
few comments on the report of
the Third Session of the SubCommission on Employment and
Economic Stability. My remarks
are related mainly to the international aspects of full employment plans.
The report of the Sub-Commission stresses the following three
points:
(1) Domestic planning for full
employment; it seems to encourage the individual countries to
plan their economic policies independently of each other. We
submit that as a result of such
an approach it will soon become
clear that the national plans of
other countries and foreign economic developments will affect
the domestic plans of each planning country, and create strife
among independent nations.
(2) The second emphasis of the
report of the Sub-Commission is
on balance of payments difficulties. In the name of balance df
payments difficulties most of the
countries express their intention
to have recourse to import restrictions, which are only an alternative for exchange controls. We
doubt that anybody would deny
the fact that full employment policies in accordance with Keynesian principles' will necessarily
create balance of payments difficulties. In this connection, Pro-
fessor Robertson's remarks in an
article published in the "Economic
Journal" in December, 1947 seem
to be particularly pertinent:
"I have been much encouraged
to observe, in the commentaries
of thoughtful persons during the
last few months, a growing emphasis on the connection between
external problems and internal
policy. There has been a growing
tendency to rediscover that what
are politely called 'balance of
payments difficulties' do not necessarily drop like a murrain from
heaven, but that any nation which
gives its mind to it can create
them for itself in half an hour
with the aid of the printing press
and a trade union movement."
(3) The third concern emphasized by the report is the one regarding the dollar problem.
The report of the Sub-Commission expresses its disapproval of
import restrictions while it commends nationalistic policies of
economic planning for full employment. To reconcile economic
planning with requirements of international trade the Sub-Commission recommends that the resources of the International Monetary Fund be increased so as
to be adequate to enable nations
"to proceed through a depression
without resorting to deflation or
import restrictions." On this point
the Sub-Commission seems to me
to be inconsistent. It wants to
eat its cake and have it too. The
Sub-Commission is aware of the
fact that full employment policies
on Keynesian principles, as understood at present, would necessarily bring about balance of payments deficits. Therefore, the
Sub ^Commission apparently argues that in order to avoid import
restrictions which such deficits
would make necessary, the Fund
would be requested to finance
deficits resulting from an excess
of imports over exports. If the
Fund should follow such a policy
it would only perpetuate the dis-
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equilibrium. With the kind of
policy recommended by the SubCommission we fail to see how
balance of payments difficulties
would ever be corrected. We are
of the opinion that if a country,
pursuant to a depression, suffers
a reduction in its exports, such
problem can be solved not by the
economic insulation of such a
country, but by close economic
cooperation with other countries
and by the flexibility of its costprice structure.
We wish to commend the report
submitted to you by the International Monetary Fund included
in Document E/llll. The Fund
was not devised to further nationalistic economic planning. One
of the main purposes of the Fund
is to eliminate persistent balance
of payments -difficulties and to
restore the free convertibility of
currencies. As the report of the
Fund w e l l remarked, "It is
charged with thfe responsibility to
shorten the duration and lessen
the degree of disequilibrium in international balance of payments."
Be it said in passing, Article 21,
and particularly 21,4(b), and Article 6 of the I.T.O. Charter signed
in Havana, undermine this fundamental undertaking of all member countries which are parties in
the Fund.
In summary, we are of the opinion that the recommendations of
the Sub - Commission regarding
the Fund are not sound or realistic because they would perpetuate
the causes of balance of payments
difficulties and would require exorbitant m e a n s of financing,
which is not practical politics.
IV
Free Convertibility
It is apparent that the inflationary phase of the postwar boom
is waning. As we see it, the main
problem confronting us presently
is how to restore monetary order
and reestablish the free convertibility of currencies. We submit
that without the restoration of
free convertibility of currencies
tjiere is no solution to the problem
of maintaining a high level of
productive employment in a free
society, and to the problem of
expansion of international trade.
We further submit that only the
restoration of an international
gold standard with the help - of
the International Monetary Fund
will permit the resumption of the
free convertibility of currencies.
The problem of restoring an international gold standard after a
monetary and price upheaval concomitant to a big war as we just
went through is a difficult and
delicate technical problem. It requires technical skill of the highest order but it can be done. We
must restore an internatiohal gold
standard and make sure that we
avoid a prolonged and deep depression as the one we had after
the crisis of 1929. We can restore
an international gold standard and
avoid the recurrence of a depression of the type we had after 1929,
if we manage properly monetary,
credit and wage policies. We wish
to emphasize the urgency of this
question; it should be tackled
without delay, lest it become too
late or too difficult. I have, however, the impression that the SubCommission is not aware of the
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problems involved in the restoration of free convertibility of currencies. To restore monetary order, it is also necessary not only
to balance the budgets but to .reduce government expenditure at
which this balance is achieved.
Excessive government expenditure is destructive of the flow of
savings at its source, and destroys
the incentives essential to individual enterprise. • To maintain a
high level of employment and improve t h e standard of living
everywhere, we further recommend the elimination of all impediments to international trade
and mainly the removal of quantitative restrictions and discrimination.
As to the dollar problem, we
are convinced that its natural
solution is delayed to a great extent by the maintenance of artificial exchange rates and overvaluation of a number of European currencies in terms of the
dollar. If and when we permit
the exchange rates to be established at realistic rates, we feel
certain that the problem of the
dollar gap will lose much of its
apparent difficulty. A further
step to help solve the dollar problem is that countries in need of
capital should attract and protect
foreign investments.
.•2'
O
A CORRECTED REPRINT
With the Compliments of
ECONOMISTS' NATIONAL COMMITTEE ON MONETARY POLICY
One Madison Avenue, New York 10, N. Y.
The views presented by the author are solely his own and
in no way commit the members of this Committee whose
opinions are expressed only over their respective signatures
Reprinted from The Commercial and Financial Chronicle
Thursday, January 20, 1949
The Question of a Free Gold Market
By WALTER E. SPAHR
Professor of Economics, New York University
Executive Vice-President, Economists' National Committee on
Monetary Policy
Pointing out there are different kinds of gold markets, Dr. Spahr
contends high prices for geld abroad do not demonstrate Treasury's fixed price is artificial or too low. Denies free market for gold
is necessary to determine "true" value of gold, and upholds importance of fixity in nation's standard monetary unit. Denies contention
we should have a free gold market alongside Treasury's fixed gold
price, and sees solution only in return to a fully redeemable gold
currency at $35 per fine ounce.
Different Kinds of Free Gold Markets
The free gold market which is an integral part of a thoroughgoing gold standard is one thing. A free gold market in a country
having an irredeemable paper money system is something else. In the
days prior to 1933, when we were on a gold coin monetary standard,
the Treasury
stood ready to
Such a free gold market at a
buy and sell
fixed price is, of course, a desirgold freely at
able thing; it is necessary if a
the r a t e of
country is to maintain a gold$20.67 per
coin standard and system.
fine ounce of
If, however, a nation has an irgold (ignoring
redeemable paper money system,
small handla free gold market means nothing charges).
ing more than that gold is bought
Anyone could
like any other non-monetary
buy or sell, or
commodity at fluctuating prices.
export or imThe value of the irredeemable
port, gold at
paper money, in terms of gold, is
the price at
measured in the fluctuating prices
which the
of gold. The generally erratic
Treasury, unprices for gold in such a free gold
der the law,
Walter E. Spahr
market transmit themselves to
was required
prices of other goods and to servto buy or sell gold freely.
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Federal Reserve Bank of St. Louis
ices and foreign exchange rates,
all of which become highly chaotic. The lack of a fixed standard
of value makes extremely difficult a measurement and comparison of values. Producers find it
difficult to make commitments
and to produce. Traders find it
difficult to trade. A people, under such conditions, tend increasingly to resort to speculation and
gambling in an effort to protect
themselves, while i n v e s t m e n t ,
production, and trade become
stagnant or die. Such trade as
may exist tends increasingly to be
conducted on the basis of barter.
We had such a free gold market
during the Greenback days of
1862-1878. Some European countries today have gold markets—
black, gray, or partially free—in
which the depreciated values of
their irredeemable paper currencies are measured in terms of
gold. Such monetary arrangements both cause and reflect economic chaos. It is to be hoped that
such a system will not be inflicted
upon the United States.
Current Confusion Regarding
Free Gold Markets
Today, one may observe a high
degree of confusion in current
agitation for "a free gold market."
It is obvious that, in any instances,
the advocates of such a market
have no understanding of the vitally important differences between a free gold market which is
an integral part of a gold standard,
under which the price of gold must
be fixed by Congress and must be
maintained by the Treasury, and
a free gold market under a system of irredeemable paper money.
Some of these people urge a
free gold market under our system of irredeemable currency as a
part of their otherwise laudable
efforts to do what they can to
restore and preserve free markets
in this country. But they unfortunately confuse the desirability
of free markets in non-monetary
goods with the conditions that
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must prevail in respect to gold if
a nation is to have a fixed monetary standard.
It is also obvious that there are
agitators for a free gold market
under our system of irredeemable
paper money who, though they
may understand the basic differ- ..
ences in gold markets under gold I
coin and irredeemable money sys- '
terns, nevertheless, are apparently
willing to subject the United
States to a monetary and price
upheaval in order that producers ^
of, and speculators in, gold may I
obtain a higher price for their f
product in terms of a depreciated
paper money.
Our monetary system, which involves in our international relations a restricted gold bullion
standard and in our domestic affairs an irredeemable p a p e r
money (silver certificates excepted), rests upon a fixed standard
gold unit—the uncoined gold dollar weighing 15 5/21 grains, 9/10 ,
fine, or 13.714+ grains, fine, the I
latter yielding 35 gold dollars per I
fine ounce. Through a system of
indirect conversion at the Treasury and Federal Reserve banks,
and, as it were, by these institutions at our international boundary line, all our dollars are maintained on a parity domestically
with our standard gold dollar.'
This does not mean that all our
dollars—paper, silver, gold—cannot depreciate, and have not depreciated sharply, in terms of
goods and services; what it does
mean is that our domestic currency does not depreciate and has
not depreciated, in terms of gold
domestically since we devalued
our gold dollar and launched our I
present system on Jan. 31, 1934.
Should Congress be sufficiently "
confused or callous regarding the
nation's interests to authorize a
free gold market without at the
same time returning this country
to a gold coin system, the United
States would lose the small proportion of a gold standard it now
has under its restricted international gold bullion standard. We
would be thrown into a thoroughgoing irredeemable monetary
system in which there would be
no fixed monetary standard of
value. We'would be plunged into
the same type of irredeemable
money, without any fixed standard unit, that characterizes the
worst monetary systems in Europe
and the Orient. We would have
what we had during the Greenback days of 1862-1878. We would
be joining, and sharing the chaos
and miseries of, all those countries afflicted with irredeemable
paper money.
Although we have an irredeemable money domestically, we have
some benefits of a fixed standard
unit. Since our domestic irredeemable currency is linked to
this standard unit by a system of
indirect conversion into gold, all
our dollars are exchangeable at
the international boundary line
for one another at the rate of $35
per fine ounce of gold regardless
of whether these dollars be gold,
silver, paper, or deposit currency.
Thus, even though our domestic
irredeemable monetary system
contains far-reaching defects and
evils, the fixity of our monetary
unit in our restricted international
gold bullion provides us with
enough of the basic elements of
a thorough-going gold standard to
make our monetary system much
superior to most of those found
in Europe and elsewhere with
perhaps Switzerland excepted. It
is much superior to what we
would have if, through the adoption of a free gold market along
with our irredeemable money, we
should abandon so much of a gold
standard as we have. Our fixed
gold unit at $35 per fine ounce
of gold contributes much to the
stability and value of our money,
even though the use of this gold
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is unfortunately confined largely
to our international exchanges
with central banks. One result
of this is that foreign trade is
almost completely under the control of central governments and
their banks with consequences
that are serious now and promise
to be more serious with the passage pf time unless we change our
policies in this respect in the near
future. Foreign trade will open
up and expand when individual
traders can get gold and other
good money and go where they
will in their search for profit.
The Gold Producers' Chief
Contention
Owners, officers, and managers
of gold mines (and others) are
contending that, since mining
costs have risen so high that their
mines can no longer make a profit
while they are compelled to sell
their gold to the Treasury at $35
per fine ounce, the price of gold
should be raised. Their "solutions"
to these cost-price problems take
one or all of three principal forms:
They wish to see the dollar devalued again; or they wish to have
a free market for gold which
would, of course, be higher than
the Treasury's fixed price; or they
wish a subsidy. All these "solutions" would be injurious to the
people of the United States.
The gold mine interests are not
willing to face the basic facts that
should be faced and of which a
responsible government of a nation is supposed to be fully aware.
One of these is that if a nation
is to have a good monetary system
it must have a fixed monetary
unit.
Another is that when enterprisers enter the business of gold
mining they are embarking upon
an undertaking that has distinctive characteristics: They are mining a material that is the standard
monetary metal of a nation the
price of which metal must be fixed
if that nation is to have the bene-
fits of a fixed standard monetary
unit.
The gold miners' problems are,
therefore, simple ones basically.
Their undertaking requires that
they keep their costs below the
fixed selling price of $35 per fine
ounce, or close down. Today, they
contend that they cannot keep
their costs below $35 per ounce
and, of course, they do not wish to
close down. As a consequence,
they are employing a variety of
arguments in their efforts to obtain a higher price for gold. None
of them can have validity since
a higher price for gold would impair our monetary standard. Their
agitation, consequently, is creating
a situation which is rapidly becoming a case of the gold mine
interests versus the people of the
United States.
Such impairment of confidence
has far-reaching implications for
a people. Long-time commitments
dwindle or die. Uncertainty replaces confidence. Inclinations to
save are undermined. Economic
and social deterioration sets in
rapidly. Should our. goyernmenl
devalue our dollar again, especially when there is no valid reason known to justify such a catastrophic step, we will then have
joined the company of those people in foreign nations whose governments cannot or will not maintain fixed monetary units and we
will have become voluntary partners in sharing the miseries of
monetary depreciation and the
consequent economic chaos.
The Agitation for a Free Gold
Market Tinder Our Irredeemable Monetary System
This agitation rests upon the
The Gold Producers' Contention valid theory that if we had a free
That the Gold Dollar Should
gold market while we have an
Be Devalued Again
irredeemable paper money the
If a nation has a supply of gold
adequate to support its paper
money and deposits, as we have
if conventional standards of measurement and comparison have any
value, there is no known valid
reason why the size of that nation's standard monetary unit
should be reduced.
Fixity in a nation's standard
monetary unit is the first and
most fundamental requisite of a
good monetary standard, just as
fixity of the unit is the basic
requisite in all other standards of
measurement.
Should Congress be so foolish
as to reduce again the size of our
standard gold dollar after only
15 years of fixity, it seems reasonable to suppose that the confidence of the people of the United
States in the willingness and ability of their government to provide
them with, and to maintain for
them, a fixed monetary unit
would be impaired for generations
to come.
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Federal Reserve Bank of St. Louis
price of gold in such a market
would be well above the Treasury
price of $35 per fine ounce.
So long as our domestic dollars
are linked to gold, by a system of
indirect conversion such as ours,
the price of gold in dollars at our
Treasury and Federal Reserve
banks will be $35 per fine ounce.
Direct redemption w o u l d , of
course, have the same effect in
so far as maintenance of parity
is concerned.
Whenever the fixed link between paper money and gold is
broken, regardless of whether the
link rests upon a direct or indirect process of redeemability, the
value of the irredeemable paper
money in terms of gold will decline and the price of gold in
terms of such paper will rise. This
is simply because paper is paper
and gold is gold. Under such, conditions the paper money price of
gold will be determined by all the
forces of supply and demand affecting both gold and the paper
money.
The Argument that a Free Market
for Gold Is Necessary to Determine "the True" Value
of Gold
The contention is frequently advanced that we should cut our
paper money loose from gold at
the rate of $35 per fine ounce and
have a free gold market in order
to determine the "true value" of
gold after which we could then
stabilize our dollar at "the proper" rate. This is simply an argument to the effect that a country
with a fixed gold unit should
abandon it, let its money run a
course of depreciation in terms of
gold, and then devalue again.
That procedure could be pursued
indefinitely—until the weight of
the standard monetary unit becomes too small to count. It matters not what the size of the unit
may be; if a paper money, linked
directly or indirectly with gold, at
a fixed rate, is cut loose from gold
at that rate the price of gold will
rise.
The Contention that "High"
Prices for Gold Abroad Demonstrate that Our Price Is
Artificial and too Low
A common argument for a free
market and the consequent higher
price for gold under a system of
irredeemable currency is that gold
is selling abroad at prices ranging from, let us say, $50 to $110
per fine ounce, and that this is
proof that our Treasury price of
$35 per fine ounce for gold is arbitrary and too low.
• The reasons for such high prices
for gold in various parts of the
world are many. Those prices are
often, if not generally, merely calculated, not realizable, rates in so
far as our dollar is concerned.
For instance an ounce of gold
may be purchased for any one of
a number of reasons at a high
price in terms of some depreciated
foreign paper money. Then a calculation, at official, not black market, rates is made between the
foreign currency spent for gold
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and the dollar, which ordinarily
is not the paper money being offered for gold. Such computation
reveals the price of gold in terms
of dollars' at this calculated rate,
but that is a very different thing
from the situation that would prevail if the paper dollars were exchangeable for gold at our Treasury or Federal Reserve banks.
There may be reasons why
someone with paper dollars
abroad would spend more than 35
of them for an ounce of gold; but
in all such instances that would
reveal nothing but the fact that
such a buyer did not have access,
immediately, if at all, to our gold
at $35 per fine ounce and that he
was willing for some reason to
pay a premium for it. He is
simply buying gold with what is
for him an irredeemable paper
money. Foreign central banks,
which can exchange their dollars
for our gold at $35 per fine ounce,
may place obstacles in the way of
the redemption of paper dollars
at par in gold at those banks and
thus drive down the dollars in
terms of gold. For example, a
sharp discount in the value of paper dollars in terms of gold has
recently existed in France.
But none of these cases proves
that the Treasury price for gold is
"artificial" or "too low." The fact
is that the various "high" prices
for gold quoted abroad means
nothing in so far as we are concerned—that is, in so far as the
desirability of maintaining a fixed
monetary unit is involved. These
"high" prices for gold are merely
measures of the various degrees
of depreciation of foreign irredeemable paper currencies in
terms of gold in particular markets because of certain circumstances, or of the unwillingness
of foreign central banks to redeem
our paper dollars at par in gold.
All our dollars at our international boundary line—that is, at
our Federal Reserve banks and
Treasury—will exchange for gold
at the rate of $35 per fine ounce.
Proof that the so-called "high"
prices of gold in terms of foreign
depreciated currencies are not too
high is revealed in the fact that
in the face of these "high" prices
for gold abroad and the "arbitrary" and "artificially low" price
for gold in the United States, the
net inflow of gold from Europe to
the United States was $1,866,348,000 for 1947 and $2,311,287,000 for
the year October, 1947-September,
1948.
This relatively heavy net inflow
of gold into the United States illustrates, in part, the importance
of fixity in a nation's monetary
unit.
Importance of Fixity in a Nation's
Standard Monetary Unit
Further illustration of the value
and effect of such fixity is found,
in part, in our experiences in 1933
when our dollar was cut loose
from a fixed monetary unit and
the dollar price of gold rose rapidly—56% between March 6 and
Sept. 20. Beginning, in March,
1933, at which time the price of
gold began to rise, the exports of
gold began to exceed imports, and
this flight of gold continued every
month until February, 1934, at
which time the flow turned toward the United States, the reason
being that on Jan. 31, 1934, our
government stopped raising the
price of gold and fixed it at $35
per fine ounce.
Prior to March, 1933, when the
price of gold was fixed at $20.67
per fine ounce, there was a net
importation of gold for every
month beginning with August,
1932, and continuing through February, 1933, despite the runs on
our banks and all the other difficulties then prevailing.
Still another illustration is
found in our experiences in the
Fall of 1937 when, as a consequence of the business recession
that had set in, it was rumored
that the price of gold would be
raised again as a means of combatting the recession. A conse-
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6
quence was a sharp increase in
the outflow of gold during the last
three months of 1937. When belief in the rumor was ended by
official assurance that the price of
gold would not be raised, the rate
of outflow dropped sharply as
against the rate of inflow.
There are valuable lessons in
these and similar experiences of
nations which should demonstrate
in some degree at least the value
of a fixed monetary unit as contrasted with a changing one—or
the threat to change it.
The Agitation for a Gold Subsidy
The arguments in behalf of a
subsidy are to the general effect
that such subsidies have been
granted in Canada and South
Africa, that we subsidize the silver
interests, the farmers, and others,
and that, therefore, the gold mines
should be subsidized too.
The simple and valid economic
answer to these contentions is that
none of these subsidies is defensible, and that there is no valid
reason why our gold mines should
be subsidized. Every miner entering the gold field is supposed to
know that the price of his product
is of necessity fixed and that his
problem is to keep his costs below
that price. If he cannot do this,
there is no reason why the taxpayer should be compelled to pay
for the gold producer's miscalculation—not unless we are to adopt
the suicidal policy that the taxpayer must subsidize everybody's
mistakes.
The gold producers would do
well to consider the fact that most
other industries often have the
problems of high or rising costs
not merely in the face of a fixed
price for their product but in the
face of falling prices for their
output.
The Contention that We Should
Have a Free Gold Market
Alongside the Treasury's
Price of $35 Per Fine
Ounce
Since our people cannot redeem
their currency in gold at any price
domestically, the proposal that we
have a free gold market "alongside the Treasury's price of $35
per fine ounce" is simply an attempt to reproduce the major
characteristics of the conditions
we had from 1862-1878 when our
Greenbacks and national bank
notes were irredeemable. During
that period the Treasury price for
gold—$20.67 per fine ounce—remained unchanged on our statute
books, but gold was not bought
and sold at that rate by the Treasury. Since gold was otherwise
bought and sold in a free gold
market in terms of an irredeemable paper money, the value of
such money in terms of gold was
measured in the fluctuating open
market.
In its essentials, therefore, the
proposal for a free gold market
alongside our Treasury price, with
the Treasury not participating, is
simply another way of proposing
a free gold market under an irredeemable paper money system.
Chaos in prices, production, and
foreign exchange rates would be
the natural results. Writing of our
experiences in the Greenback period, Wesley Mitchell said: "Seldom has a highly organized business community carried on its
transactions for 17 years on 1the
basis of such unstable prices."
Should Congress authorize the
free gold market recommended
by the gold bloc, it is reasonable
to suppose that in a relatively
short time Congress would be
frantically attempting to curb the
gyrations in prices for gold and
other things after the manner of
the worried Congress of 1863 and
1864 when it attempted (1863) to
control the premiums on gold and
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Federal Reserve Bank of St. Louis
when it repealed (1864) the law2
authorizing a free gold market.
Should our people be authorized
to buy and sell gold freely in
terms of their irredeemable paper
money, the price of gold would
rise. All exporters of gold to us
would sell to the private buyers
at the higher prices prevailing,
not to the Treasury at $35 per
fine ounce. The value of our paper dollar would decline in foreign exchange rates in terms of
gold. The government's legal price
would no longer be effective.
Should the Treasury offer to sell
its gold at $35 per fine ounce to
maintain the value of our dollar
in foreign exchange, foreigners
would, of course, simply buy all
the Treasury gold they could obtain at $35 and promptly sell it
to our non-Treasury buyers at
any existing higher prices. Such
an endless chain of draining our
gold from the Treasury could have
no benefits for anyone except the
favored foreign trader in our gold.
Any such procedure would be the
height of economic folly on our
part. So much of a gold standard
as we now have—that is, a fixed
dollar value of gold in foreign
exchange—would be destroyed.
The Treasury could, of course,
undermine the free gold market
by selling some of its h o l d ings of gold domestically. If it
attempted to get the market price,
that price could be expected to
fall; but, more importantly, the
market price would replace the
1 Gold, Prices, and Wages Under The
Greenback Standard (The University
Press, Berkeley, California, 1908), p. 249.
2 But this did not cure the difficulties.
Said Wesley Mitchell in his A History
of the Greenbacks (The University of
Chicago Press, Chicago, 1903), p. 231:
"Business was so greatly inconvenienced
that a meeting of bankers and merchants
convened on the 22d [of June, 1864]
and appointed a committee to recommend
necessary alterations in the law." On
July 1, the law was repealed, thus restoring a free gold market. The Greenback price of a gold dollar had reached
its peak of $2.85 in July, 1864, and, in
subsequent months of that year, it
fluctuated between $2.335 and $1.89.
Treasury price, and the fixity of 3 and 4 of the Gold Reserve Act
the nation's standard monetary of 1934, provide in Section 54.19
unit would be destroyed.
that gold in its natural state (that
recovered, from natural sources
If the Treasury sold its gold at is,
which has not been melted,
$35 per fine ounce, all currency and
smelted, or refined or otherwise
would automatically become re- treated
by heating or by chemical
deemable in gold at that rate. This or electrical
process) may be acwould be a case of attempting to quired, transported
within the
resume gold payments in the United States, imported,
or held
midst of chaos after creating a in custody for domestic account
period of disturbance which would without the necessity of holding
be just what should not precede a license therefor.
an attempt to restore redemption
at the legal rate without devalua- Under the opening provided by
tion. It is not reasonable to sup- this Section 54.19, the Treasury
pose that such redemption could has permitted the issuance to resiof the Continental United
be successful; on the contrary, it dents
of w a r e h o u s e receipts
is to be expected that redemption States
gold in its natural state.
could take place successfully only against
These receipts, like the gold they
if the standard gold unit were de- represent,
may be freely transvalued to a rate equal to the value mitted, transported,
or transferred
of the paper dollar in terms of throughout the United
States for
gold in the open market.
domestic
account:
Such
receipts
In short, the proposal for a free under certain circumstances
may
gold market alongside the Treas- legally be taken or transmitted
ury price for gold is a proposal for
but acquisition of the refurther devaluation of our dollar abroad,
ceipt
or
the gold represented by
or, at best, for a delayed or post- it by a of
foreign
resident violates
poned stabilization, as from 1875 Treasury regulations
and makes
to 1879, after a period of unneces- the gold subject to seizure
and
sary monetary and price disturb- forfeiture.
ance.
Gold in its natural state may be
The McCarran Bill (S. 2583) in- imported
into the United States
troduced in the Senate on April pursuant
Section 54.19 or Sec28, 1948, by Senator Pat McCarran tion 54.32 to
of the Gold Regulations,
(Dem. Nev.), and discussed by him Under Section
54.19, gold in its
in "The Commercial and Finan- natural state may
be imported
cial Chronicle" of May 6, 1948, is only for domestic account.
an example of the proposal for a Section 54.32 gold in any Under
form
free gold market alongside the may be imported only for refinTreasury price of $35 per fine ing and reexportation. Gold in
ounce. The same bill was intro- its natural state imported into the
duced in the House as K,R. 6366
States for refining and reby Representative Clair Engle United
is not refined by the
(Dem., Calif.). On Jan. 3, 1949, exportation
States but must be refined
Representative Engle reintroduced United
his bill as H. R. 387; Senator Mc- by private refineries.
Carran reintroduced his bill, Jan. There are those who have
shown considerable excitement
5, as S. 13.
over the discovery of these proThe Purchase and Sale of Gold in visions or loopholes in the TreasIts Natural State as the Beury's Gold Regulations. They
ginning of a Free Market
seem to think that the way has
in Gold
been found to establish a free gold
The Regulations of the Treasury market alongside the Treasury's
issued under authority of Sections price of $35 per fine ounce. On
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Federal Reserve Bank of St. Louis
8
Nov. 29, 1948, Bache & Co. of New The Campaign for a Free Gold
York announced that they were
Market
"in a position to sell natural gold
The gold producers have orin 100 ounce lots, for prompt de- ganized, and are still organizing,
livery or on contracts for future a campaign in behalf of a free
delivery. The gold," they stated, market for gold under our irre"will be packed in containers deemable paper money system, a
sealed by a responsible assayer, higher price for gold, and a subwhose assay and weight certifi- sidy for gold producers. The netcates will accompany deliveries work of this organization reaches
of the gold. The price quoted from the Pacific Coast to the Atwill be in dollars per troy ounce lantic and even into England,
of material delivered. . . .
Canada, and South Africa. Of
"Gold contracts for future de- course it reaches into Congress. A
livery may be purchased on mar- reasonably good picture of the acgin. . . . The Treasury's buying tivities of these gold mine and
price for fine gold is $35 per related interests is provided by
ounce. The Treasury's buying the various issues of the "Caliprice (less refining charges, etc.) fornia Mining Journal" (1802 West
is a guaranty of the basis at which Cliff Drive, Santa Cruz, Califorcontracts for natural gold could nia), for example the issues of
be resold."3 Prices are reported to November and December, 1948,
be $38.50 to $39.50 per ounce and that of January, 1949. The
(.850 fine, basis for quotation). program of, and the addresses at,
Before Bache & Co. organized the 1948 Metal Mining Convenits market, some solicitations of tion, Western Division, the Ameribids for gold in its natural state can Mining Congress, San Franhad been made in one or more of cisco, Sept. 20-23, 1948, are also
revealing.
the Western States.
Just what is to be gained by It is very important that the
purchasing this gold in its natu- agitation of this gold bloc and
ral state at a price above $35 is other confused agitators for a free
not clear. The Treasury surely gold market under our system of
could put an end to such a market irredeemable money not be perat any time it chooses simply by mitted to succeed.
revising its Regulations. It seems
reasonable to suppose that this The people of this country have
would be done should such a mar- been fortunate thus far in the
ket become important. It is not fact that Secretary Snyder of the
{ clear why the Treasury should Treasury has repeatedly stated
permit even a small market of that the Treasury has no intenthis sort since, apparently, buyers tion of advocating or supporting
can gain nothing and may in the any move to raise the price of
end be compelled to disgorge their gold. The question arises as to
gold at the Treasury's price, thus whether Congress will uphold the
hands of Secretary Snyder in resuffering a loss.
This sort of "open market" for spect to this matter.
gold solves no basic problems in
Members of the gold bloc would
respect to gold and our system of serve both their country and themirredeemable paper money. Fur- selves best by urging a resumpgold payments at $35 per
thermore, it would not seem to tion of
ounce. A free gold market
be in harmony with the spirit of fine
under these conditions should be
the Gold Reserve Act of 1934 and of inestimable value to both our
of our agreement with the Inter- 3 Gold versus Uncertainty (Bache &
Co., New York, 1948), pp. 1-2.
national Monetary Fund.
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Federal Reserve Bank of St. Louis
people and other peoples of the
world.
The warning of Howard Buffett
needs to be understood and heeded
by the people of this country.
Said he: "The American heritage
of an honest money redeemable
in gold was not given to this generation to squander. It was entrusted to our hands as custodians.
Unless restored, we shall be recorded by history as faithless both
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Federal Reserve Bank of St. Louis
to our ancestors and our posterity.
For the blessings of this land
of liberty, and its unparalleled
achievements, are intimately connected with the right of the individual freely to obtain gold in
exchange for the fruits of his
labors."*
4 "Our Irredeemable Paper Money,"
Human Events (Washington, D. C., July
28, 1948).
10
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Federal Reserve Bank of St. Louis
COPY
THE AMERICAN METAL COMPANY, LIMITED
61 Broadway
New York
HV/MD
July 5, 1949
Director of the Mint
United States Treasury Department
Washington 25, D.C0
Dear Madam:
It is now almost two years since this Company had the
opportunity to make a statement at the hearing held in Washington
in 194-7 in anticipation of the issuance of new regulations under
the Gold Reserve Act of 1934. The following is quoted from that
statement:
"It is our understanding that it is proposed to amend
the regulations under the Gold Reserve Act of 1934 in order
to carry out the policies of the International Monetary Fund1,
and that the purpose of the proposed regulations is to prevent
gold from reaching certain foreign markets where it is selling
at substantial premiums above its monetary value in the United
States and other member countries of the International
Monetary Fund.
"Unilateral action on the part of the United States
Government or action by only some of the other governments
that are members of the International Monetary Fund (hereinafter referred to as the tirund!) would not accomplish this
purpose. The result would merely be a diversion of business
From American smelters, refiners and merchants to foreign
nationalso
"Unless, therefore, the governments of all countries in
the Fund take similar action, Americans would merely find
their interests sacrificed for the benefit of others."
Since the autumn of 1947, when the new regulations
became effective, the activities of this Company, like those of
other Americans, have been severely restricted. It is appreciated
that under the new regulations a measure of protection is accorded
to our industrial enterprise. Your Department has recognized the
need of our maintaining our competitive position in the international markets for gold-bearing raw materials feeding our plant*
Within the powers granted to it under the regulations, your
Department has been most cooperative. We gratefully acknowledge
this cooperation. However, the unavoidable delays under these
regulations, especially at the start when the routine had to be
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Federal Reserve Bank of St. Louis
Director of the Mint
July 5, 1949
established, and the consequent loss of flexibility in transacting our business have resulted in the permanent loss of some
industrial business*
The elimination of marketing operations by us and
similar American enterprises, which has resulted since the issue
of these regulations, has not accomplished or even contributed to
the purpose for which the regulations were designed. Since the
autumn of 194-7, while the refining of fore5.gn gold in the U0S.A0
and the resale and reshipraent thereof abroad has declined, gold
emanating frora all sources has sold at an increasing scale in
the premium markets of the Far-and Near East. Many countries
that are members of the International Monetary Fund have permitted the export of gold either in pure form or, in the guise
of an industrial product, in serai-fabricated or alloywed form.
Despite the less rigid observance by some countries of
the IMF policy, the restrictions on the free movement of the
bulk of newly mined gold have created an artificial scarcity;
this in turn has resulted in high premiums for gold,f thus emphasizing the lack of faith of the Orient in the world s fiat
currencies*
Several months ago the press reported a transaction
between the Government of the Union of South Africa and the leading house of London bullion brokers, Mocatta & Goldsmid, involving the sale of 100,000 ounces of gold for industrial purposes
for resale against dollars. Since that time the press has
reported on discussions between the International Monetary Fund
and the Union Government„ A few days ago Comtelburo (Reuters)
reported as follows:
"The methods by which South Africa is to deal in the
world!s premium gold market, which means that it can sell
gold at more than the official price, were outlined by
C. S. McLean in a Presidential address to the Transvaal
Chamber of Mines today.
"He said one of its first customers would be a newly
formed South African company (Goldware Proprietary Limited)
controlled by a leading London firm of bullion dealers.
Arrangements had been completed to supply this company with
a quantity of gold not exceeding 250,000 ounces at 17/6
($3.50) per ounce above the world monetary prices0 McLean
said South Africa1s participation in the market followed
inquiries from firms all over the world seeking to buy gold.
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Federal Reserve Bank of St. Louis
3. Director of the Mint
July 5, 1949
"McLean said three other transactions covering the
sale of gold for industrial, artistic or professional purposes had been arranged. Declaring that South Africa*s
economy was still, and would probably be for many years yet,
based on gold mining, McLean said that it appeared that the
downward trend in production had at long last been halted.
He warned, however, that the conclusion could not be drawn
that South Africa was now well set for recovery."
In its June 28, 1949 issue, the "Financial Times" of
London publishes a report from Johannesburg in even greater
detail than the above-mentioned Reuter's report. According to
the "Financial Times" article, of which a photostatic copy is
attached hereto, the total quantity which South Africa has
already released, or is contemplating releasing, amounts to
770,000 ouncesc
Under the regulations of your Department, any legitimate consumer of gold abroad can obtain "specific use" gold on
the basis of the $35 gold price. It seems, therefore, strange
that the substantial quantities of gold mentioned by the South
African Government, I.E. 100,000 ounces several months ago and
up to 770,000 ounces mentioned in the above quoted announcements,
should find buyers at a premium of 10$ in competition with
specific use gold available in the United States0
It may be of interest to you that after the announcement covering the first 100,000 ounces was published, the gold
price in the HongKong-Macao market declined by approximately
$2. Since the above-mentioned announcement was published a few
days ago, the market has developed a hesitant tendency and, to
the best of our knowledge, is now between $3. and !|4» below the
price prevailing prior to the announcement„
We have no doubt that the identical gold made available
by the South African Government is intended for industrial or
artistic purposes. Directly or indirectly it may, however, find
its way to the world!s premium markets, either by substitution
or by re-refining or reraelting of the articles produced therefrom,,
There are many other instances of the direct or indirect
participation in the world!s premium markets by countries that
are members of the IMF. In view of the deprivation to which we
have been subjected by the regulations issued in the autumn of
194-7, we thought it appropriate to call this particular matter
to your attention shortly after publication of the announcement
by the press*
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Federal Reserve Bank of St. Louis
Director of the Mint
July 5, 1949
We feel very keenly that, in the absence of action by
all other countries in the Fund similar to the restrictive regulations you adopted in 194-7, the wholehearted cooperation of
the American Government with the International Monetary Fund
through regulating the activities of its nationals has failed
to accomplish the purpose for which it was intended. It has
resulted in the sacrifice of the interest of American nationals
to the profit of others without in any way accomplishing the
objectives of the Fund,
In view of the foregoing, we would respectfully
suggest that the advisability of the 1947 regulations be
re-examinedc
Very truly yours,
THE AMERICAN METAL COMPANY, Limited
H. Vogelstein
Enclosure
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Treasury Department
Office of International Finance
From:
My dear Senator:
This is in further reply to your letter of January 5, 1949* requesting a
statement of the Treasury position on legislation permitting the sale of gold
on the open market by lode gold producers.
A free market in gold from any source implies that the gold is to be used
for hoarding purposes inasmuch as the Treasury stands ready to sell gold for
legitimate industrial, professional and artistic uses. The Gold Reserve Act of
1934 established a policy against the hoarding of gold and I do not see any reason
at this time for changing that policy.
The questinaas to a free market in the sale of gold produced from lode mines
no doubt was raised because there is an impression that a free market at premium
prices exists in gold in its natural state, that is, gold from natural sources
•which has not been melted, smelted or refined or otherwise treated by heating or
by a chemical or electrical process, (a classification in which the production
from lode mines does not fall).
This impression has been created because certain firms have advertised
such gold for sale. The delay in answering your letter was because of the
desire on the part of the Treasury to make a survey of this matter. Our finding
indicates that this market is unimportant. The firms advertising the sale of
such gold have had many inquiries; the actual sales, however, have been negligible,
The provision in the Gold Regulations which permits the sale for domestic
account of gold in its natural state was inserted to facilitate transactions in
this type of gold by the small miner and "ore buyer" in remote localities and
to obviate the administrative difficulties of licensing such persons. Sales
of such gold for hoarding purposes, however, are not within the intent of this
exception.
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Federal Reserve Bank of St. Louis
of «fml^ f,
ywi ii^MS coaderaiiig a
tatiesa of
of a O^atria
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Federal Reserve Bank of St. Louis
tfets aM win
(WCWED) WM. McC. MA&T1N, JP.
,
This document is protected by copyright and has been removed.
Author(s):
Walter E. Spahr
Journal Title:
Monetary Notes
Volume and
Issue Number:
Vol 9, No 8
Date:
August 1, 1949
Page Numbers:
1-8
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Federal Reserve Bank of St. Louis
This document is protected by copyright and has been removed.
Article Title:
Gold and a Free Market, Our Readers Express Their Opinions
Journal Title:
The Wall Street Journal
Date:
Aug 5 1949
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Federal Reserve Bank of St. Louis
Manufacturers and Traders Trust Company
ONE WAUL STREET
NEW YORK 5, N. Y,
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Federal Reserve Bank of St. Louis
9 August
f
Ifcr dear Mr. Secretary:
Your kind letter is much
appreciated.
Here-with is clipping from
the Wall Street Journal. Perhaps you have
one already.
Regards and best rashes.
Sincerel
EP:MT
Hon. John W. Snyder,
Secretary of the Treasury,
Washington, D.C.
End.
J. W. PRQFFITT
Dear Mr. PrdHltt:
Secretary Snyder has turned
over to me the clipping from the Wall
Street Journal you were kind enough
to send to him.
We are glad to have it and I can
sure you that it vill receive attention
here in the Office of International Finance.
Sincerely yours,
McG. Martin, Jr
Mr. Edward J.W. Proffitt
Manufacturers and Traders Trust Co.
One Wall Street
New York, N.Y.
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Federal Reserve Bank of St. Louis
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
TO
Mr* Frank A* Southard
FROM William MeC. Martin
Subject: Enforcement of the 80-percent rule on gold exports.
In connection with the inquiry of South Africa and Mr, Parsons'
request for information concerning this subject, it is suggested
that the South Africans mi^it be advised as follows:
Under the United States Gold Regulations fabricated gold may be
exported without the necessity of obtaining a Treasury license*
Fabricated gold is defined as "gold which has, in good faith and
not for the purpose of evading, or enabling others to evade, the
provisions of the act or of the regulations, **+ been processed or
manufactured for some one or more specific and customary industrial,
professional* or artistic uses, Provided, That not more than SO
percent of the total domestic value of the processed or manufactured
gold is attributable
to the gold content thereof; but the term
'fabricated gold1 does not Include gold coin or scrap gold*" The
Treasury Department has ruled that the term domestic value as contained in this definition means, in general, the cost to the exporter,
which in the case of the manufacturer would be the manufacturing cost
and in the case of a domestic purchaser the purchase price* The
term domestic value does not mean market value, foreign value or
foreign price. Such items as profits, shipping charges, etc., may
not be included in the computation of the costs.
Although the exportation of fabricated gold is not licensed,
exporters of such gold are required to file with the customs authorities
of the United States export declarations which must indicate the weight
and carat content of the gold being shipped and must contain a statement by the shipper that the net value of the gold content does not
exceed SO percent of the total domestic value* These export declarations afford the basis for detecting violations through normal customs
procedures* Audits and investigations of manufacturers of gold articles
and refiners which operate pursuant to Treasury Department licenses are
also relied upon for enforcement.
Persons and enterprises detected violating these provisions of the
Regulations are subject to severe penalties. Under the Gold Reserve Act
of 193^ the gold which is the subject of a violation may be forfeited
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Federal Reserve Bank of St. Louis
- 2to the United States and the exporter is liable to a penalty equal to
twice the value of the gold. The licenses of manufacturers of gold
articles and refiners who are detected violating these provisions are
subject to revocation. The making of false statements and declarations
to United States Government authorities in connection with the exportation of gold is a crime under various sections of the United States
Penal Code rendering the offender, upon conviction, subject to severe
fines and terms of imprisonment.
Enforcement procedures pursued by the United States in controlling
the exportation of gold are subject to adjustment as the need arises*
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Federal Reserve Bank of St. Louis
P. 9/2255A
Treasury,
Pretoria
BY AIRMAIL.
Dear Mr. Parsons,
I write on behalf of Dr. Holloway, who is at
present overseas, to acknowledge receipt of your letter
of the 2nd August, 1949, and to thank you for furnishing
us with a list of countries grouped according to the method
of control exercised over the importation of gold.
In accordance with the undertaking given by Dr.
Holloway we only authorise the sale of semi-processed gold
to bona fide manufacturers and we satisfy ourselves on the
standing of each applicant before approving of the export
of semi-processed gold. However, the list which you have
submitted is very helpful in that it gives us some idea of
the extent of the control exercised by the various countries.
lou may be interested to learn that in addition to
the transactions of which we advised you, we have also
received a number of other applications which we refused
either on the ground that we considered the conditions
prevailing in the countries concerned unsatisfactory (e.g.
Lebanon and Macao) or that we were not satisfied with the
standing of the prospective importer. We do not therefore
automatically authorise the export of semi-processed gold
merely on the strength of affidavits and covering import
licences.
In regard to gold practices in the Union our
control rests on Exchange Control Regulation 2 which
prohibits dealings in unwrought gold without Treasury permission and regulation 3(1) which prohibits the export of
gold in any form without Treasury permission.
As Dr. Holloway explained to you, all gold fabrication in the Union is subject to Police inspection owing to
the necessity of preventing illicit gold buying. There is,
. Ho Parsons, Esq.
Director,
Operations Department,
International Monetary Fund,
WASHINGTON, D. G.
U.S.A.
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Federal Reserve Bank of St. Louis
2/
o ••« •
- 2therefore, close co-operation between the Treasury and
the Police Authorities and no factory can obtain any gold
except under a Police permit. Each factory is required to
keep such books and records as would enable the Police to
check the use to which every ounce supplied to the factory
has been put. This applies to all factories irrespective
of whether they manufacture semi-processed or completely
finished articles or whether they cater for the internal or
the export market.
As far as the export of semi-processed gold is
concerned, a Treasury export permit is required for every
consignment that leaves the Union and we strictly observe
the rules outlined in Mr. Havenga's statement to Parliament
on the llth May, 1949, copy of which was handed to Mr. Gutt.
In the case of manufactured articles, the export
permits are issued by the banks which submit returns,
indicating the value and gold content of each consignment,
to the S.A. Reserve Bank so as to enable the latter bank to
check each factory's exports with the amount of gold
supplied to it.
Furthermore, the Police Authorities inspect and
seal all consignments of both fabricated and semi-processed
gold and the Customs Authorities will not allow the export
of any gold articles unless the parcel bears the Police seal.
This is very important, particularly in the case of fabricated gold as it enables the Police to ensure that every
single article included in the parcel is a fully fabricated
article. Without this additional safeguard the 80 per cent, test
would be meaningless for it is quite conceivable that
a manufacturer, by inflating his costs could produce a very
crude article which would still qualify as "fabricated gold"
under the 80 per cent. rule. Under our arrangements the
Police would remove such a crude article from a parcel even
though it meets the 80 per cent, test and I should be glad
to learn what steps the United States Authorities have
taken to ensure:—
(a) that every gold article exported from the United
States complies with the 80 per cent, test, and
(b) that manufacturers do not inflate their costs, for
example by paying excessive salaries and wages
to their employees.
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Federal Reserve Bank of St. Louis
-3.
Ify- own candid opinion is that the 80 per cent,
rule by itself tends to operate as a premium on inefficiency
and offers no satisfactory safeguard against abuse.
I do not think it was Dr. Holloway!s intention to
apply the 80 per cent, test to the selling price. Nowhere
in his correspondence with the parties concerned did he
refer to selling price and I can only conclude that the
reference to "f.o.b, price" in his letter of the 16th
February, 1949, was an error.
As the gold is sold to manufacturers at a premium
we found it necessary to change the American formula by
laying down that at least 25 per cent, of the cost of the
gold, valued at the monetary price, must be added to the
value of the gold in the form of labour and overheads,
(excluding profit and the premium).In other words, the
cost of manufacturing a finished gold article containing
one ounce fine of gold must be at least L2.3.1-J-. (i.e.
25 per cent, of £8.12.6). The effect is, therefore,
exactly the same as the American 80 per cent, formula.
We shall certainly make use of your kind offer of
assistance in connection with any oroblems that we may be
faced with in our gold export arrangements.
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Federal Reserve Bank of St. Louis
Yours sincerely,
/sgd/ D. H, Skeyn
L—• SECRETARY FOR FINANCE
Office Memorandum
TO
:
Mr. Martin
FROM
:
Mr. Southard (J r
SUBJECT :
DATE:
October 11,
Enforcement of the 80-percent rule on gold exports.
1* I attach hereto a memorandum which I have received from
the Director of Operations of the Fund, Mr. Parsons, asking for
certain information respecting the enforcement of the 60-percent
rule as outlined in the U. S. Bureau of the Mint definition of
fabricated and semi-processed gold issued on June 23 9
2* If this should have been transmitted to the Bureau of
the Mint rather than to you, I should appreciate it if you would
forward it.
3. Mr. Parsons explained that very probably his files contain this information but that he would not be sure whether it
was in a form which we would wish transmitted to the Government
of South Africa. He also asked if we -would do what we could to
provide the information as soon as possible*
Attachment.
v
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Federal Reserve Bank of St. Louis
-^^Ttr.
jjm Office
«
Memorandum
*SB^
T0
FROM
. Mr. Frank A. Southard, Jr.
Executive Director for the United States
M.
H. Parsons
:
DATE-.
October 11, 19A9
SUBJECT : Enforcement of the 80 per cent rule as outlined in the U. S. Bureau
of the Mint definition of fabricated and semi-processed gold issued
on June 23, 194-9.
I attach a copy of a letter from the South African Treasury
outlining the safeguards taken by that country with regard to the
export of fabricated and semi-processed gold.
You will observe that the South African officials would be glad
to learn what steps the United States authorities have taken to
ensure:
(a) that every gold article exported from the United States
complies with the 80 per cent test; and
(b) that manufacturers do not inflate their costs, for
example by paying excessive salaries and wages to their
employees.
It would be appreciated if you would be kind enough to furnish
me at your earliest convenience with information on these two points
to be included in my reply to the Union of South Africa.
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Treasury Department
Office of International Finance
Date
This document is protected by copyright and has been removed.
Author(s):
Mikhalevski, F.I.
Article Title:
The Price of Gold and the Gold Policy of the USA
Journal Title:
Proceedings of the Academy of Sciences of the USSR
Volume and
Issue Number:
Number 1
Date:
1949
Page Numbers:
58-59
URL:
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Federal Reserve Bank of St. Louis
STANDARD i'O.lM NO. 64
UNITED STATES GOVERNMENT
TO
FROM
:Mr. Martin
:
DATE:
i:L
»
1949
a. A. Eddy;
c
SUBJECT: Public Notice of Treasury Attention to Bache Sales of Natural Gold
Dr. Howard told me this afternoon that the Columnist Bobert
Allen had just told him that some unnamed newsletter out today
reported that the Treasury had requested the SEC to investigate
Bache & Company*s sales of gold in its natural state, "because the
Treasury was trying to make such sales illegal.
It may "be that the incident will die down with little or no
public notice* However, for your information m?y I report that
a friend of Dr. Howard came to him with the story that a Bache
salesman had assured him there was a secret agreement that the
Treasury would devalue the dollar "by Thanksgiving (apparently
the story from the Norborg letter) and that the salesman had given
him the impression that Bache gold cost $39#50 an ounce. (Since
that is for gold 85$ fine, the real Bache price comparable to the
United States $35. price is $46*47). I telephoned that information
to Walter tachheira, and two gentlemen of the SEC came over and saw
myself, Dr. Howard and Fred Smith. We have not heard about their
further activities since that time.
We do not know whether this newsletter report about the Treasury^
activity was released by Bache or obtained through some reporter
independently.
It would seem desirable not to have the story spread that the
Treasury is using this semi-police method to administer gold policy
rather than use a direct amendment of the regulations about natural
gold. It was only the misrepresentations of the Bache salesman and
certain misleading statements in the Bache folder describing "Gold
versus Uncertainty11 which led us to ask the SEC if such misrepresentations contravened their regulations.
Iven though it may have been Bache that put out the false
statement about the Treasury motives, it would appear undesirable
for the Treasury to damage Bache!s reputation by giving any publicity
to its questionable activities. If we object, I believe we should do
so directly and privately to Bache & Company.
This note is written at the suggestion of Mr. Arnold*
cc: Messrs.Willis, Howard, Arnold, Smith, Sailor and Lang*
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Federal Reserve Bank of St. Louis
had
ma •*&! th*t 39* gift of 337 torn uf ft***
to t^V« ^ p&?*ttai:ur n«mip«|^r
ttf-r» in not ftvuilnbln In the ?imaani^^f JKJ
i^MAfr^ii*
n. m;% oaly t4
^i*!U ,
vitA
.
1/4 af 1 |^wr
,
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Federal Reserve Bank of St. Louis
aorve
an
laullltm
of
t*
WM. McC. MART*;-*.
, ..
This document is protected by copyright and has been removed.
Article Title:
U.S. Losing Some of Its Gold: Plenty Left to Cover Dollar
Journal Title:
U.S. News & World Report
Date:
October 13, 1950
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Treasury Department
Office of International F:
Finance
Date...
:
li....l94..?
Mr. Martin
From:
0. A. Eddy
These are the gold and silver
questions you requested for the
Secretary,
9. "What would be the principal advantage^and disadvantage^ of reestablishing
a gold coin standard in this country? Do you believe that such a standard should
be reestablished?"
48^£*Ctf^rtf!*3j&r this important question did not reach the Treasury until
October
, although it bears arainneographeddate of August 19A9. The
requested answer date of October 15 allowed inadequate time to prepare and
consider an extended discussion, of the topic*
The Treasury believes that at the present time the disadvantages of
reestablishing a gold coin standard in the United States outweigh the advantages.
The only important advantage of reestablishing a gold coin standard in
this country at this time is, in the opinion of the Treasury, that it would put
an end to rather widespread public confus^o n and misunderstanding regarding
the value of gold and the gold value of the dollar. The numerous other advantages
sometimes claimed for the reestablishment of a gold coin standard in the United
States aDpear to be misapprehensions.
Among the disadvantages of reestablishing a gold coin standard are the
following:
a. Restoration of unrestricted availability of gold for private ownership
in the United States would presumably carry with it a restoration of the unlimited, unrestricted right to export such gold. Most countries of the world,
however, have laws and/or regulations against importations of gold for private
ownership. The reestablishment of a gold coin standard in the United States
would accordingly lead, in all probability, to very widespread smuggling of
a*-
gold into other countries obtained from the United States SM& other sources*
It seems doubtful that the United States Government would wish to set the
stage for wholesale smuggling and illegal transactions in foreign countries by
residents of the United States or through the cooperation of such residents.
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Federal Reserve Bank of St. Louis
- 2b. The unrestricted availability of gold in the United States might
easily lead to a heavy increase in the importation of gold by foreign countries,^
which are now desDerately short of dollar and other hard currency foreign exchange
resources.
If this should occur,more of the'I^SifeT earnings of those countries
would be devoted to paying for imports of gold for private hoarding than is now
the case, and less dollar earnings and resources would be available to pay for
essential imports of industrial commodities and services.
The result would be
that the need for financial assistance from the United States Government to
maintain the economies of foreign countries would become more acute,,
Before the United States embarked on a reestablishment of a gold coin
standard, it would seem advisable to confer most carefully with a number of
other governments to see whether such a step by the United States would promote
aeral monetary reconstruction or obstruct it0 A step which seems to o^fer
very modest domestic advantages should not be allowed to cause grave peril to
the United States1 efforts to ]£g£s0s&hau£ economic and financial soundness in
•
foreign countries.
•I i <"•
c^jejuc/^
c. It would ootobliDh a risk within the United States that the commitment
undertaken by the government .to convert all dollars into gold coin on demand
could not always be lived up to.
No country has been able to maintain gold convertibility for very long
periods.
In the United Kingdom, where the experience with gold convertibility
extended for over 200 years before it was abandoned in 1931, "there was a prolonged
period of monetary disorder during the eighteenth century «ad extended inconvertibility during the Napoleonic wars, and in the following century, gold convertibility
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Federal Reserve Bank of St. Louis
A.<?The
*
English Banking Act of 1844., which provided for
- 3gold convertibility, had to be suspended during several crises. There was
period of inconvertibility and depreciation of the pound after the first
World War.
It is commonly believed that the British effort to restore the gold
bullion standard in 1925 caused an unwise decree of strain upon the sterling
A
economy. The traditional gold parity of sterling had to be abandoned again in
1931 and has not been resumed.
In the United States the record of gold convertibility was one of recurrent
difficulties. It was found impossible to finance the Civil War on a basis of
gold convertibility.
Convertibility was not restored until 1879.
The following
decades were also ones of recurrent monetary crises. Even after the Dassage
of the Gold Standard Act of 1900, there were several periods of monetary
difficulty, before v&d&*i«&fo**&&#&^i^
t>e ^ederal Reserve
System, established in 1913, was in effective operation,
The efforts of the monetary authorities to resist the business and banking
slump which began in 1929 were consistently and most seriously embarrassed by
the fear of gold withdrawals. At a time when it would have been desirable on
other grounds to establish conditions of abundant bank reserves through open
market purchases of government securities by the Reserve Banks, they felt
constrained to limit their relaxation of bank credit owing to the danger that
an excessive amount of capital transfers to foreign countries and domestic
withdrawals of gold might cause the country's gold reserve to fall below the
required minimum. Any monetary change which opens the door to repatition of
the financial paralyiis and rapid economic deterioration of 1930-1933 would
appear to be condemned beyond dispute.
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Federal Reserve Bank of St. Louis
- 4Even though the United States now holds over two-thirds of the reported
official gold reserves of the world and has a reserve of gold approximately
equal to the amount of currency outside of banks, even that reserve could
easily prove insufficient to withstand a gold panic.
Hardly any gold reserve
of a size which could be obtained and supported economically, would be adequate
to withstand the maximum conceivable gold demand. So Ion? as all bank deposits
and all government securities, as well as other types of highly liquid assets,
could conceivably be converted into a demand for gold, it seems
•eonolndc t>" t thqjrwould always Ywr* fr* be some conditions under which it would
be impossible to maintain convertibility.
In fact, a relatively small percentage
of conversion of such assets into gold', in t^e vicinity of 5 or 6 percent, would
reduce the Reserve Banks1 reserves of gold certificates to less than the required
minimum.
No monetary and banking system involving credit, such as bank loans to
business and bank investments ir any types of securities, can be converted' to a
very large extent into gold.
The chief danger o^ ^"M convertibility for our domestic economy is that
the si-^e of the demand for gold can never be foretold and that whenever the gold
reserve%nproach^4/ the legal minimum, there would be a -tendency for demands
/^
to accumulate inH
•, and for the public to become alarmed, no matter how
./ovwJJc<a^«--
t.he 1&&&C Demand might have beenc
It seems impossible to forecast with certainty the demand which would
develop for gold from the official monetary stock of the United States if the
opportunity were offered, to convert dollars into gold coin.
Moreover, even if
the initial demand should be moderate and well within the surplus gold now
carried in the reserves, there would be no way whatever of foretelling the demand
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Federal Reserve Bank of St. Louis
- 5 •
^C-vv
txJ5^Aj£, £sistsi£,\Jt£^CAJi4 .
which might arise &Bdfwcx/>ap'fed2''XP^
It is by no means certain
that if gold convertibility had been restored during the late 1930!s, it could
have been maintained while the second world war was financed, including an
increase of the public debt to nearly $300 billion.
No demonstrable realistic advantages of reestablishing the gold coin
standard would appear to outweigh the possible disadvantages of making difficult
the financing of a future war or the avoidance of adl recovery from a serious
business depression such as that of the early 1930!s«
d. If, contrary to all present considerations, conditions should arise
which made it necessary or desirable to devalue the gold dollar, it would appear
highly inequitable to allow hoarders of gold to benefit from the increase in
j^
dollar value. t*£ »^&y
aJtU. ifa Au^^uLwr^t ^ a «y^-t*t^ ^Zxi^vX^v^i
If a time should come when a decrease in the weight of the
gold dollar were necessary, some citizens would havB hoarded part of their wealth
A
in the form of gold coin. The withdrawal of gold from the monetary and banking
reserves by those hoarders would have helped to cfceate the need to devalue. It
A
seems doubtful that a responsible ^jl/Nsj^OU^i^ government of the United States
could allow such individuals to profit from the increase in the price of gold
while other citizens who patriotically loaned their savings to the government in
exchange for government bonds, or left their savings in bank deposits, in
insurance policies, etc., obtained only the disadvantages of the devaluation of
the dollar. Accordingly, so long as the United States remains a financially
powerful nation, there would seem every reason to believe that it will do its
utmost to prevent the private hoarding of gold from becoming a source of profit
for those who indulge in it to the detriment of the general welfare.
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Federal Reserve Bank of St. Louis
- 6e\ Apart from the opportunities of very recent years tox^figage in
•
J>^
illegal sades abroad, either directly or through certain free markets which
\
cater to illegal
sales, there woiild have beeri^Hfo^^
benefit to residents of the
United States t\ heard gold in this country at a-y time during our history
as a nation, with T^ie single
;ion of some of the gold sold during the so-
called "greenback11 period
Lod ^Hring and following the Civil War. Gold held in
1933 was required to )& delivered to the Government at the former standard
value, $20,67 per ounce of f^oe gold or, in the case of gold coins, at their
face valued/With the exceptionsSJust noted, any persons who have acquired gold
S
x
and h^rd it have only lost potentialNlncome from the interest they could have
irned by investing in sound securities,'
f, NThere are virtually no other countries in the world which couljpHat
this time consider making their currencies convertible into gold. .Xuountries
X.
I/
which are so short of dollars and other hard currency that t&ey cannot pay for
x
/
their essential imports are i-n no position to allow th^fr wealthy citizens to
apply dollars and other harA currency resources ty? increase private hoarding of
gold. Before the U.S. sets an e^jnple by reestablishing a gold coin standard
which most other countries cannot now^itnitate, it would seem to be prudent to
consider whether such a step by t#e UnitedN^tates would be to the general interest
of the Western world and oth^r democracies or mst. On the whole, most foreign
countries are so poor IX'their foreign exchange earhdngs that they cannot afford,
X,
for the foreseeable'future, to build up substantial ^ol^kreserves.
Before the
\
point where t£€y could build up substantial reserves could oKreached, they would
have to a^Jnieve such an improvement in their international paymertt^s position that
they'woald not only be able to do without United States Government aid, but
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Federal Reserve Bank of St. Louis
- 7would alsbsjbe able to dispense
flight of capital by
!><
repayments to^^rffe Unii
sound without giving
foreign loans and restrictions upon
r citizens and also be able to make substantial
States on loans already made.
The dollar is sufficiently
jerfluous feature of being convertible on demand
gold coin,
g.
The minting of billions of dollars worth of gold coins would be
a costly and time consuming process.
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Federal Reserve Bank of St. Louis
10. "Under what conditions and for what purposes, if any, should the price
of gold be altered?
'#hat consideration should be given to the volume of
gold production and the profits of gold mining? What effects would an
increase in the price of gold have on the effectiveness of general monetary
and credit policies?
On the division of power over monetary and credit
conditions between the Federal Reserve and the Treasury?"
Under what conditions and for what purposes, if any, should the price of
pold be altered?
The conditions and purposes for which the U.S. dollar price of gold should
be changed seem so remote and unlikely that the Treasury believes it would do
more harm than rood to attempt to conceive the possible hypothetical circumstances.
The Treasury does not believe that for a country in the key position of the
United States, changes in the price of gold should be regarded as within the
normal scope of monetary policy.
What consideration should be given to the volume of rold production and the.
profits of p"old mining?
Although every reasonable and legitimate consideration should be shown
for the welfare of the gold mining industry, the unioue monetary demand for
unlimited quantity at a fixed price which is accorded to gold also involves the
condition that that price should remain fixed in terms of strong and stable
currencies. The monetary position of gold and its role as a standard of value
transcend the conditions which apply to other, non-monetary commodities. The Treasury
knows or no consideration regarding "the desirable volume of gold production which-voic
justify deviation from the policy of maintaining a fixed dollar price fpr gold.
ylThat effects would an increase n the TV*ice of gold have on the effectiveness of
general monetary and credit policies? On t v e division of power over monetary
and credit conditions between the Federal Reserve and the Treasury?
An increase in the dollar price of gold would tend to impair general monetary
and credit controls by creating a large volume of inflexible and intractable bank
reserve funds in the form of deposits based upon additional gold certificate
credits.
GAEddy :h jl: 10/19/4-9
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11* "What changes, if any, should "be made in our monetary policy relativf
to silver? What would be the advantages of any such changes?11
The present U.S. monetary policy relative to silver is laid down
in three Acts of Congress, namely the Silver Purchase Act of 1934*
Section 4 of the Act of July 6, 1939» which has been largely superseded by the Act of July 31» 194-6. Under the last Act, domestic silver
mined since July 1, 194-6, may be delivered, at the owner's option,
to United States mints for a return of 90*5^ per ounce* As stated in
the answer to a previous question on silver, the Treasury has no discretion under this legislative provision. Since this price is contetet^ 71*W7*d
3iderably higher than the open market price (now a-ppreximatoly 73? 1?er
ounce), the effect of this Act is to divert to the United States
Treasury at the 90«5# price substantially all of the current production
of silver of the United States. On previous occasions the Treasury
has stated that it would interpose no objection if Congress wished to
repeal all the provisions relating to acquisitions of silver of the
above-named Acts.
The principal advantage of a change in the above legislative provisions regarding newly-mined domestic silver would be that it would
relieve the Treasury of an annual expenditure which amounted to nearly
$33 million in the fiscal year 194-9* This expenditure was financed
by the issue of silver certificates and therefore did not appear among
the budget |(£ expenditures of the government* That method of financing
the purchase of silver makes unobtrusive but does not essentially change
the burden of the expenditure.
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Federal Reserve Bank of St. Louis
The market value of the silver in each silver dollar or backing
•
each dollar of silver certificates outstanding, is now approximately 57#«
The issue of silver certificates resembles in some of its monetary aspects
the issue of gold certificates. In the case of the gold acquired by the
government, however, some is being resold continually to other buyers
at the same price paid by the Treasury (plus 1/2 of 1% handling charge).
Furthermore, readiness to accept gold without limit at the $35 per ounce
price, as well as readiness to sell it, is an integral part of a recognized and monetary policy, namely,, the international gold bullion
standard. In the case of silver purchases, on the other hand, there is
little reason to expect that any of the silver being acquired by the
Treasury will be resold at the price paid* No country is ready to buy
silver at the equivalent of 90 «5£ an ounce, and the few which occasionally
buy it at the market price, do so only in limited amounts* No country
in the world is on a silver standard*
As explained in a previous section of the Treasury's replies to this
questionnaire, silver may be sold by the Treasury for domestic industrial
purposes at 90*5^ per ounce, but almost no silver has been sold, because
silver is now purchasable in the market at less than 750 per ounce. The
Treasury is authorized to sell silver for monetary purposes of foreign
governments only at a price of $1*29 plus per fine ounce. None has been
sold at that price since prior to 1873*
**** •
*
- » - -
-
.
^
The issue of silver certificates by the Treasury adds to the total
amount of bank reserves outstanding. At any time when it is important to
*
limit expansionary pressures by controlling the total amount of bank
reserves outstanding, the Treasury and Federal Reserve Banks are required
CiuX
respectively to retire government debt through budgetary surpluses or to
carry out open market sales of government securities, which reduce the
holdings of such securities by the Reserve Banks* Both these contractive
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Federal Reserve Bank of St. Louis
operations just described are a financial burden on the Government. The
i
Reserve Banks now pay to the Treasury their residual earnings, most of
which are obtained from interest on U.S. Government securities, so that
a reduction of the Reserve Banks holdings of government securities or othei?
earning assets reduces the earnings they can pay to the Treasury.
Accordingly, if approximately a billion and a half dollars had not been
U/frl&k-
t*S*U
expended by the Treasury since 1934- for acquisitions of silver &B&~
the Mix^t^}
financed by the issue of silver certificatesj/t^te^M^contracting operations
necessary to achieve a given degree of credit restraint, would tend to be
lower, more or less by the same amount as the amount of silver certificates
issued*
A second advantage of the repeal of the present provisions regarding
newly-mined domestic silver is that consumers of silver would presumably
pay lower prices for articles containing silver, or the production costs of
industries using silver would be lower. The Treasury's costs for producing
silver coin would also decline and larger seigniorage profits would be
earned thereon.
The principal disadvantages of changing the provisions governing
the acceptance of domestic silver \AA7^§A^MV a**®*
a* That producers of silver in the United States would presumably
receive a lower return for their output of silver.
b* Foreign producers of silver would also probably receive a lov/er
return, because the open market price would tend to^
lower than it otherwise
Vi£*-nJt> •
~{%L
would be, once the supply on ^kst market is increased by the amount of U.S.
domestic production now being absorbed by the Treasury.
(Legal Division to add paragraphs describing the advantages and
disadvantages of changing the Silver Purchase Act.)
GAEddy ryb:10/19/49
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Federal Reserve Bank of St. Louis
\
\
This press release is protected by copyright and has been removed.
Author(s):
Economists’ National Committee On Monetary Policy
Article Title:
Press Release of 47 Committee Members Calling For
Convertibility of Dollars Into Gold at $35 an Ounce to Reduce
World Monetary Chaos.
Date:
Oct 21 1949
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Federal Reserve Bank of St. Louis
JUH31M9
To s
The Secretary of the Treasury
The Birector of the Mint
A situation has arisen in connection with the administration of the
Regulations which I present to you for consideration from the policy point
of view.,
The Gold Regulations proTide that no license is -required to export fabricated gold*, Fabricated gold is defined as gold which has, in good faith, been processed for legitimate industrial and professional use, and of which not mo~e than
80$ of its total domestic value is attributable to its gold eontento The phrase
"total domestic value" for the purposes of the gold regulations has been established
by Treasury interpretation as being the actual cost on the books of the owner.,
Because of the premium prices for gold in certain areas, it is profitable
fo^ an article which meets the 80$ rule as to domestic value, with the gold content
computed at $35 an ounce, to be sold abroad for the value of its gold content „
(The tuning point is $43o?6) In addition, straw purchases can be made to run up
the domestic cost0 Recently on the East Coast, we ran into many cases which were
on the borderline - whe^e the value of the gold was 78$ or 79$ of the total valuta
Being convinced that these shipments were fo^ the sake of the gold content and
not for the article, we hMre hampered exportation by delaying and annoying tactics.
It now appeals that many of the same shippers are sending their gold out from the
West Coasto We are now actively engaged in an effort to thwart that maneuver0
When an article qualifies under the 80$ rule, the only way in which we
can atop its export is to apply the "good faith" test0 In view of the fact that
the Gold Eeserve Act is regarded as a penal statute, reqnir^Bg a high degree of
proof of intent, and that lack of good faith is obviously a <Uffi<rulil thing to
this provision, so far, his proved to be of little practical assistance*
Because of this situation, do you think the 80$ rule should be amended?
If it we^e changed to 60$, the black market p*-ice would have to be at least $58
to make the shipment of an article for its gold content profitable,,
Such an amendment would force more firms to operate under Treasury Gold
licenaea« More articles that are now being shipped by legitimate concerns as
fabricated without licenses would "be brought under license control,, It would
re stilt in hardships on legitimate manufacturers,, In this connection, I point out
that South Africa is soliciting trade in the same type of gold that we would be
restraining f^ora
The Hint' Bureau is now placed in the position of undertaking to administer
the regulations with a handicap. Our present resort to delaying and other such
tactics does not seem to be sound practice^ If, however, the shipments go forward ,
it may subject us to criticism by other Governments and by the International
Monetary Fuad0 The question is whether, as a matter of policy, you desire that
exportation of gold to premium markets be strictly prohibited,, If you wish a change
in the Beguiations, to be made, we will be glad to suggest auch as, In our judgmente
would facilitate enforcement.
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Federal Reserve Bank of St. Louis
August 3,
MEMORANDUM
T0«
The Secretary of the Treasury
FROMj
The Director of the Mint
Further in reference to my irsmorandum of July 13* develop**
ments since that time show thats if we are to control effectively
the exportation of goldg and prevent its entranoe into premium mar<~
kets,, the Gold Regulations must be amendedo
Indications having been received of lively activities on
the Pacific coast paralleling those on the Atlantic coastD the Chief
of our Gold Division and Mint auditors, were sent promptly to Los
Angeles and San Francisco to investigate« They found that millions
in value were involved in questionable gold transactions. Large lots
of gold had begun to arrive at these two ports, for shipment to the
Far East, particularly Hong Kong. The gold was in the form of crudely
cast jewelry and medallions^ obviously intended for premium markets*
Sufficient evidence of violations of the existing Gold
Regulations was obtained on the shipments detained by Los Angeles
Customs to justify seizure of the gold, and the United States Attorney is taking appropriate action* However, the exporters .shipping
through the port of San Francisco, in concert with manufacturers,
had manipulated their transactions so as to place themselves in tech«
nical compliance with the Regulationso Accordingly* initial shipments
involving about $2QOfiOQO in gold were released by San Francisco Customs last week; and reports are being received daily of further substantial exportso
There is very little demand domestically at the present time
for gold jewelryo Consequently* established manufacturers have announced
that they intend to take advantage of the opportunity afforded by the
existing regulations to enter the export markets*
We have been informed of unlimited credits being established
in the United States to purchase gold in "fabricated" form* As an
example^, Sir Victor Sag-soon,, a British financier with offices in
Calcutta^ Singapore^, Saigon and Hong Kong, has approached one of the
largest medal making companies in the United Statest through Bache
and CompanyP to manufacture gold medallions for export« The manufacturer's
cost on these, if honestly calculated, must be very smallc However, by
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Federal Reserve Bank of St. Louis
The Secretary of the Treasury
-2-
August $6 19U9
the addition of a profit and by a sale to an intermediary, such
gold can be exported without a Treasury export license* (Bache
and Company, you will recall, is also endeavoring to sell gold
in its natural state on the domestic market at premium prices9)
Conditions have become untenable as they now are& We are
placed in the position of trying to forestall or curb activities
that clearly are in conflict with the spirit of the Regulations,
but which technically are permissible under them<> Exporters are
frankly asserting that we are helpless under the Regulations to
control their activities0
We have given much study to this subject in my office and
have arrived at the conclusion that export licenses should be required for the shipment of fabricated gold as are now required
for the shipment of semi~processedo If you concur in the recommendation here made that this policy be adopted, I will initiate
proceedings.
The public interest involved is such that amendments could
probably be made immediately effective without the formalities
normally observed under the Administrative Procedure Acto
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Federal Reserve Bank of St. Louis
October 25, 1949
MEMORANDUM
' "
In connection with the attached memorandum from Mr. Martin
to Mr. Southard relative to the enforcement of the 80$ rule on gold
exports, I realize that the Treasury must take a stand such as the
one in the memorandum indicating that we are rigorously enforcing
the 80$ rule. I realize that we cannot afford to do otherwise.
The initialling of this memorandum, however, would place me
in a contradictory position in view of the memorandums (copies of
which are attached) that we have written in the past several months
pointing out that the fabricated rule was being used to get gold
out of the country for its bullion value. The Mint has recommended
and requested changes in the Regulations which would permit the enforcement of our basic policy of strict control of gold. Others in
the Department have been of the opinion that no change was necessary;
that we should continue to go along as is, even though we well know
that the gold that is being shipped as fabricated is really being
exported for its bullion content. We on the enforcement line cannot
close our eyes as to what is happening:- such things as unlimited
letters of credit; orders from all parts of the world which state
t!
Please send me so many ounces of your best fabricated gold at $1.65
per pennyweight.l!; increased sales from the Assay Office and increased
exportations of gold evidence evasion of the purpose of the fabricated rule. We on the enforcement end see the gold leaving the
country while others are dealing in the realm of world prices and
drawing the conclusion that it is not profitable to ship gold*
The brutal fact is that we are doing just what we didn!t want
the South Africans to do. We are guilty and there is no way to deny
it other than by a statement similar to the one we are sending to
Mr. Southard. South Africa is aware of these shipments. They are
aware of world market conditions and the methods used to build up
prices and that is why they requested the Fund to ask us about our
policy. It was predicted by the Mint several months ago that South
Africa would question us on our enforcement. It is embarassing to
keep telling someone you are doing something when you know you are
not*
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Federal Reserve Bank of St. Louis
IX4LIAH 3DLD FUEL
Interest in tills incident se^as a good opportunity to Indirectly
and convincingly Indicate that our price of gold is going; to re«aa.;.
at 435 aad that ne are ready t, sell billions of dollaxa'uoce
of goldf as in the Italian purchase*
The facts about the Italian porcliase have already
within the limits of the Treasury* 3 long-steading practice ?
publicity on such transact;!
arcs* Just as a bank will not
1
amount of its customers bank balances and taNuasactiaia» c&£tr&l batiks
and Treasuries for :r.any decades ha-.
.JxAlly teept OCR;
.^1
the indiYidnal sales of gold to ot. i ,. Tim report oi* &* i I .J*
months hoae© will
i to Italy and other eotmtrias*
as irell as mxr gold piyrcha-r...
In this case the name of the toiler became kriomi proc.?'because a high official of the
^venmeiit «nuounced \n the Italian
Parliament that. Italy had purchased gold j&ois. the -Jnited State. .
The ftwuRiiy Jvis confirmed tl^ fact that an aa^oun^ to «soe»s oi"
million of ,^old at |35 an otmoe isas reoently sold to Ita3y*
1±ee amomt was
aa« a3y announced a soaewlmt
larger iKCMtttf u
«1y indue..
frca othar ?
some months- ago.
to the Treasury it tAs a routine transact Ioaf handled la the
normal tray (through tlM s-tabilisat:
:
;deral Eesenm --E.
of Hsw York as f absoal ag^at of the (Mi *d
s* } Similar sale© or :;<ol-;
are mad© continually to foreign goremmaj^s and central &&iiks, wiien^veTe
they have dollar balaaees ^ich th^r wiMi to cotti«Birt into gold for legitimate
oonstary purposes*
the raoart slgnif leant' as-po-ct of Ute tztnupaotion na«
it was the first large-sise instaii
•iroptaa oountigrj vMda^
a position ^tere
i
"satm** l!ie S'reavuxsr
that during the next few years there will 1» aai^' O'tlas-r £ral^i
runH
-veral billions of dollars* H» ^fjpeaimry is
to assist such monetary rec
.d jjwf o£ftcJU
reserves at cwr stefeitor\
; lus 3/^/or 1 percc
i,
:
the •
.:.lowever,
i
. urofeaee does »ot mgasz that —v
308 are in the i
. . Italy's, gold reserve
the -war had almost reached the vanishing point*
the
^vsta»ti4ljx>14 rej
dollars aid other hard curreneii • .
^;«*n. eoti»x • ;|
d reserves
of gold and dollars «hidi are at or belf,ol©rable miniaajas* It will
take ^©ars before' thoy caa Mild uu to a Iswl wtdeh is Mtisfactory for
" rim*
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Federal Reserve Bank of St. Louis
<MA^»
*tv»**^*..
J. t._il.i, JUiU
M WifiJUHKj
fir*T .f-TTrl IVrTTtc'
V/4.
!;
«>.'J.U.*
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Federal Reserve Bank of St. Louis
Memo from Mr. Ha.as re questionnaire
from Douglas Com,itt.ee incorporating
questions 8, 9 and 10 from the
questionaire given to Mr. Glendinning
Nov. g,
INCORPORATED
1C FLOOR KENTUCKY HOME LIFE BUILDING
LOUISVILLE 2, KY.
OFFICE OF
November 15, 19^9
THOMAS GRAHAM
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Federal Reserve Bank of St. Louis
Mr. Win. McChesney Martin, Jr.
Assistant Secretary of the Treasury,
Washington, D. C.
Dear Mr. Martin:
I thought you would be interested in
the enclosed clipping regarding
With best regards, I am
TG:CN
..
This article is protected by copyright and has been removed.
Author(s):
Sol Schulman
Article Title:
Bankers Bond Co. Plans To Buy and Sell Gold Dust
Journal Title:
Louisville Courier Journal
Date:
November 15, 1949
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
Treasury Department
Office of International Finance
Date..Jfoy....23i,
i
To:
Mr. Ma/t^
From:
G A
« « Eddy
194..9.
22, 1949
PAJPSl TO FRGMOfS TMaSGBI B23CU3SI03 00 Till DESIRABLE LOHG-iWH GOLD POLICt
Of THE U.S. AM) Z.I.F.
The current public argoaesta la favor of "Making the dollar convertible
into gold11 ecca highly dubiousi
a) fo let the soneyed
piblic dominate Congress by means of runs on
the Treaaury1* g»M reaerre* whererer they didn't like aoac
policy appear* to be the chief objective of the public advocate*
of convertibility* Unless thit result could be avoidedy it would
by itaelf seed to be mifficient grouada to aake convertibility
cleeerve rejection.
») Profcuaor SfahrU intendaable reiteration that the preaent dollar
currency is diahotieat and a defaulted proa is e aeem untrue* there
la no pro*ise to pay gold so far aa the writer knows* Dor currency
now aeeaia a prcadse to pay paper ooly, though tlw paper ia backed
by gold aad given foreign exchange value by gold if aeceaaary*
s) Although moat irredeemable paper.currencies in the past have come
to a bad and, it is not necessarily necessary to have gold convertibility to prevent the dollar from going the same way. Our
ability to do better ia not proven yet, but the record is not
too bad up till now. It is very doubtful that gold convertibility
over the past 10 years would have improved the record.
d) Permitting tf«S. traders to pay for imports with gold would not
significantly and directly benefit world trade, despite the naive
claims that it would solve almost every international financial1
problem, these claimants seem to assume that foreign countries
exchange controls will disappear, and the need for them disappear
too, at the glint of & private gold payment. Such payments have
not been used in world trade for many decades.
s) the gold minors are not now being unjustly treated even in the
0,3., and convertibility would not appear to benefit them, since
gold convertibility would neither raise the 135 price of gold nor
lower to any assured degree the level of prices and wages.
Each of the three main arguments against making gold available for private
hoarding seems to have more validity th&n all the arguments just cited combineds
i) It is anomalous to favor or facilitate the export of
gold to private
markets abroad while the 8.5. is donating
tax-payers1 dollars to finance the essential imports of
countries which would import gold*
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Federal Reserve Bank of St. Louis
there ia a chance of a substantial run on gold by people
with dollars or dollar assets, and the consequences of a
serious gold drain would be perplexing for U.S. monetary
authorities.
*2 •
111) The miHttl tT flint of the former gold 0tandard~
regulation of doraeatle credit policy In accordance
wltli international gold flow0—is dead beyond
00 fax* &0 the 0.3. 10 concerned.
On the other band, the alternativee to restoring the right of private U.S.
oitlsea0 to hoard gold have plenty of dlsattractlona also, as follow0t
It
The present situation with respect to private gold ownership seems wore
than • conscientious adminiitrator can regard a* satisfactory, and there seea*
no realistic hope »f carrying th* present policy to a satisfactory stage.
Preaii&t gold markets are flourishing in a^st of the countries the reserves of
which the 9*S« i0 trying to protect (under (i) above), and there is BO prospect
of suppressing thea. So long as those preaiaas continue, nothing will convince
the public at home and abroad that the dollar is not at ft discount, Such pi
will BO doubt continue to arouse £$ar» about further depreciation of the dollar*
The Fund gold policy is being violated by acre countries than are enforcing it*
The extent to which the (!•£** Canada, and South Africa force their miners to
adhere to the policy only increases the presiuaa enjoyed by the violators* Iron
in the 0.S. the prmtom MoNeet seeas to be outdistancing the Treasury's enforce*
aent efforta. Circuastanees are malcinf "suckers* fmt of those who live up te the
policy of the Fund, the U.S. regulations* and the treasurer-Federal Reserve joint
statement. Furthermore, the following 5 points are also liiesly to reiaain sere
points.
Apparently «any citisens want Hhf..ffti|^ to hold gold, if only as ft matter rt
principle. After thousands of years of history in which ownership of gold was ft
noreel, universal, and honorable right, it should he denied only if there is an
overwhelming reason for doing so. the historic eocaoples where gold could not be
owned by certain lower classes only strengthen the protests against the present
denial.
Apparently soae eitisen* want to own so«e physical gold, for a variety of
reasons, and since it seems (rightly or wrongly) entirely possible to satisfy
this want without doing an offsetting injury to any other group, the natural
presumption is in favor of the Oovernaent's not interfering with the satisfaction
of th&t private want. Th* writer believes that the Federal Heserve spokesaen have
recently exaggerated the dangers of convertibility, and that Secretary Korgenthau
and Fresident Itoosevelt usually did also.
There are some places in the world which cannot operate a satisfactory paper
money system, la such places circulation or hoarding of gold is see of the best
ways of perfanting the functions of sound aeney. Oonditions in some countries
have been iapaired by the ban on geld by the Western countries. It
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Federal Reserve Bank of St. Louis
- 3raprahaaaibla for tha advanced countries to injure tha primitive onas
byproduct of enforcing tha policies the former adopt for themselves.
Thera aeeaa to be no preoe&ent of * aueeee«ful attempt to keep a owwodity
«ngr froa would-be buyera for a long run of pe*oe~tiae years, partioulftrly whaa
that •OMiQdity has ao aa«y a0u*ea* of potential supply aa gold has, la 00 aaajr
to transport and trada in9 haa aueb wldaapraad daoand, haa a deap-rooted, paapaetabla
hiatory, and la laharantly ao harralea*. la tha laat two raapaeta at lease, §*M
diffara froa narootioat yat It la being treated aa if it wera injoriooa*
Tha Monetary Fuad opposition to international transactions ia gold at
preaiua prices initially contained « basic confusion, ia that exports of gold
to private buyers in dollar-abort countries would be equally undesirable at
parity prices* furthermore, the policy listed as l(i) above (opposing making
gold available to the public in the Halted States oa tha ground that that will
facilitate purchases of gold by private buyers ia countries receiving dollar aid)
is guilty of straining at, say, a chicken but swallowing a lot of rabbits* That
policy argues for the United9 States to deny gold to its citizens in order to
assist European govaraments efforts to deny gold to their citizens. But tha
9*3* amices ao effort to police the denial to Europeans jf dollars, Swiss francs,
hard currency securities, commodities, or other assets. The "loss* of foreign
exchange resources through those aedia aay well exceed the additloaai aaouat that
would escape official controls through gold if it were readily available in the
IT.S.
Furthermore, that policy make* small recognition of tha incompleteness of
the denial of gold* Suropeans are now etting gold ia fairly large volume,
aad tha premium ia entrepot markets is not so high as to seem «uch wore effective
a discouragement of Kuropaan purchases thaa would exist if gold ware available
ia the U.S. at Iff* subject to export prohibitions. Moreover, it is hard to
argue that having gold purchasable ia Beirut or Tangiers at 145 or 150 an ounce
is so math batter thaa having it available there at 136 or $37 (assuming
availability in tha U*£« would ana la such a modest premium overseas) that It is
worth determining the geld policy within the 0«S* mainly in order to keep tha
premium abroad fairly high. It is argued strongly by some that a fall in tha
premium quotations for gold will reduce tha public's demand for gold aad dollars
and possibly even induce diahoardiag.
It should also be remembered that the whole case for our policing gold sales)
to iuropeaas wham wa danH police sales of dollars, etc*, rests on the European
hoarders* assumed preference for gold rather thaa dollars, Swiss francs, ate*
It seams a highly tenuous argument to try to convince Amerlaaas that they
shouldn't waat to own gold, because dollars are really just aa good as gold,
and because making gold available to individuals
for hoarding ia tarn 0.3. would
increase tha leakage to foreigners who dOBftthink that dollars arm as good an
gold*
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Federal Reserve Bank of St. Louis
1* Xo "solution11 exists which does not involve a number of disadvantages*
a. Success in tightening up the anti-premium gold policy by Fund members
probably won't go much beyond additional action by the B*S*
3* Any suecess obtained in cutting off gold from premium channels will
only increase the premiums and hanee the gains of the violators, including
Russia.
4* It may well be that the effecting of such stringency that gold goes to
much higher premiums will cause sueh dissatisfaction at home and abroad that
relaxation will prove desirable*
5* Practically every me in the Government, federal Reserve System aad
probably the Fund, who deals with gold policy is opposed to any relaxation at
this tiae*
4* the writer is apparently alone la thinking that there is a net balance
of the factors on both sides of the question in favor of a program such as the
followingi
a. Permit purchase and ownership of gold in the U.S.,
osly by natural persons, net oorporations, banksf partnerships*
assooiationsf or eharities*
b. Continue to avoid 9*3, coinage of gold* Treasury sales of gold
would be as** at 135 ^ charges, but only in bars (stampled by B.S.
Haft or Assay Offioe if desired)* in various sises down to quite
s« Prohibit exportation of gold (subject to seisure if detected)
to any ootzntries which do not authorise the importation of gold by
private persons* Consider prohibition of exports to the known entrepot* from which gold is reexported, and if a orepondermnoe of Fund
asBbers would oppose private iiaports of gold, consider prohibiting
all exports ®f gold, except to foreign gaverosieats aad central banks
or orders (including sesd*»prooessed and fabricated gold) approved
by the government or central bank of the importing country,
Tfc* one positive important advantage In tha program 1* to pat tha quiatua
on a fantastic aasa of mistaken mablio f«ars and «i«glvi!^» about th« dollar
being at a diseooat froe its full gold definition*
It is tho writer *s expectation that the public demand would be satisfied
by sales of a or 3 billion dollars worth from Treasury stocks plus offerings
of newly-mined and foreign gold*
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Federal Reserve Bank of St. Louis
- 5Keeping geld sales confined to bara, instead of U.S* geld coin, is
intended to increase the inccmv«aiettoe of holding and dealing in gold and
thereby discourage individual purchases.
If demand should threaten to reach $10 billion, then the treasury should
confer with Congressional leaders whether they will grant legislation to per**
•it sales to continue down to less than the 25% minimum reserve requirement.
If they will not grant such legislation, then the treasury should probably
just stop selling gold except to governments and central banks* as now*
The writer has heard a number of statements that both of the possible outesmis meat lotted in the last paragraph would be catastrophic—i.o., either selling
gold below 25% or 30$ reserves with the possibility of going down to sero, or
stopping treasury sales and letting the private market go to a premium if it will*
Bone of the recoils fro® those possibilities has seemed an adequate conclusion to
the problem. Both of the possibilities) see* to thw writer to be very unlikely
but nevertheless entirely workable* Hie opposition •seat to stem either from an
expectation that the dollar will be devalued in terns of fold sooner or later yr
fram undue concern for new but quite livable monetary arrangement* and a misinterpretation of monetary difficulties of the past*
there seems nothing for the ff.S. really to be afraid of In connection with
a gold drain in view of our balance of payments.
Letting at least the American public buy gold if It wants to, seems the
best way to carry outM the policy *to maintain all forms ®f the dollar at parity
with the gold dollar. If the dollar is really equal to the standard gold
dollar, then the Treasury cannot consistently fear that private demand will a*
strongly prefer gold to dollars that the Treasury's gold reserves will be engulfed* On the other hand, it is a shabby and phony aort of parity that is
maintained if individuals are not allowed to buy gold. The actual economics of 1
gold see© less important thai) its importance as a symbol of the U.S. Government *
resolve to live up to the public's misguided test of the value of the dollar, up
to the limit of Us ability to do so*
7. The balance of advantages for either the policy just stated or the apparent
majority view of maintaiaint the status cjoo is unprovaHe and probably small*
Argument is not likely to change the inclinations that individuals thoroughly
familiar with the subject already have*
6* In view of the recent inquiry into gold by the Joint Committee on the
ScoBooic Bepert, the Treasury should obtain the views of the Committee In some
way before finally determining the U.S. position on gold for the Fund discussion.
9. If the Treasury and the Fund decide to pursue the pr**ent policy further, it
will probably be decided to tighten up the present leakages if possible. The
0.3. will presumably change the 80$ rule on fabrication and try harder to atop
violations of the regulation* The Fund may be able to induce
a few members to
tighten up some of their policies. All exports from members9 territory to known
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Federal Reserve Bank of St. Louis
- 6entrepot markets like Beirut, fangiers, Bawait, ami South Saet Aiia, and all
ahipaent* to in-transit deatin&tloiis alfht be esbargoed. Perhapa the U.S.
can remedy the eituation in soa« Central Amerlean oountriea where the 9*3,
learea regalation to the Ideal governments and the local goreranwit* are told
by the A«erio&n eonpanies (sometl»e» with aunport fr^s the 0.S. diplomatic
that they oanaot be interfered with because they are Aaerican,
If the opea market supply should really be out dowaf to the point that
prealniui lnor^aae aifnifioantly, eonaideration should be given to whether such
inereaaes were working out to the general interest.
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Federal Reserve Bank of St. Louis
...» is in ftertktr rtply to jre-ur latter to £*orwtfcry
jfovimlMMr lfc f IMS, «uol»tic u % l«r<..tar
mad * hofcostftt *o
of
la
from t;*» oity
IB M
*.t the
to
ef Artiel« IV§ $^etl«& ?
uRif^rm eimt&g»« ic par mlu*s«
it not 0cm«arr*4 in by
•null unifcm eb»84« 1m p»r v«lu«< raald
of the 4hEdt«
eaaaot
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Federal Reserve Bank of St. Louis
If th«r« t*
:'urni*fi in this aattor,
may
tfc»
^
th«
th*
«^«auni««-t« with E«
(&ONED) WM. Mc«, MARTIN,
11/28/49
*«3h
»
-.
-,•-..
2/
I ftpp^iN^t^e sr^w ' i '
etn^ldir th«i^ ear*- .5»
*i«ro s
^irlBg mur nvlm o
• -
•',•?« rse.
,
- ,c*« af yolrf nn^* t^ a i-wtaro to 1?
a «x?ar«?^^ *if s^*r
-
'
J
,
.
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Federal Reserve Bank of St. Louis
. *
ni
