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William McChesney Martin, Jr., Papers
Series IV, Subseries D
Box 18/Folder 11
Gold transactions, 1950
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\,'
Chart on Gold and Dollar Holdings of the
United^King^om
can be obtained from Mr. Blazer - No date,
but must have been after December.
(Mr. Martin requested it on January 31, It was returned to
Blazer)
li^
9* "ihat would bo tho priaeipal advantage aad disadvantage of
reestablishing a gold ooia standard ii this counter? Do you believe
/
fho Treasury J*parts»at believes tat disadYaatage* of reeitablishiag a gold eoia itaadard la tho United States efttweigh tho rolatlvoly
minor pootiblo ad-raatagot.
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la §ub»taaoo, tho Dopartaoat ooasldot^d t'hi* proposal ia eoaaoo-
tioa with a roport to tho Soaato BaaklM *&& Curro^ioy Ooaoiittoo oa
**^~ t****
bills 8* 18 aad S. IS6 ia tho last oos«ioa olToea^rost. fho roport oa
thooo bills is oaolosod* fho Troa§ia*y*i priaoipal roasoas for objootiag
to iatoraal ooarortibility oro giiroa aador Point 4 of that roport*
Siaoo tho rostoratloa of a gold ooia standard would prosunably earry
wi«i it tho rlsfct to oxport gold, tho roasoas giton ia foiat I of that
roport also appoar applioablo to tho rostoratioa of a gold ooia
standard.
Tho oao possiblo advaata^o from tho roostabiishasat of a gold eoia
standard ia tho Uaitod Statos might bo that it would tad somo public
ooafasioa aad mi«iad«rstandiag rogardiag tho valuo of gold aad tho gold
of tho dollar* fho amorous othor adtantagos soaotimos olaiaod
for tho roostablishaoat of a gold ooia^otaafiard appoar to bo misapprs(
/'
v
hoasioas*
x
*V ,
Aocordiaglyt tho treasury Bopartmont Jis ^irsOy of tho viow that a
gold ooia standard should not bo roostablishod In tho Unitod Statos*
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10. "leader what oonditions and for what purposes, if any, should the price
%
of gold be altered? Yihat 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? Ch the division of power over monetary and credit
conditions between the Federal Be serve and the treasury f
Under what conditions aad for what purposes, if any, sheuld the price of
gold be alteredT*
Ihe freasury does not believe that fer a country in the key position
of the United States, changes in the price of gold should be regarded as
within the nonaal scope of monetary policy. Accordingly, the Treasury does
not believe it is desirable to attempt to conceive of hypothetical circt
stances so unusual as to warrant an exception to that principle.
What consideration should be given to the volume of gold production and the
profits of gold
~
Gold is now accorded the advantage of an unique monetary demand for
unlimited quantities at a fixed price. She reasons for this demand also
require that the price of gold should remain fixed in terms of strong and
•table currencies. Accordingly, although every reasonable and legitin&te
consideration should be shown for the welfare of the gold mining industry,
the monetary position of gold and its role as a standard of value transcend
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the condition* which apply to other, non-nonetary oomaodities .
Treasury knows of no consideration regarding the desirable volume of
gold production or the profite of gold mining which irould justify
deviation from the polioy of maintaining a fixed dollar price for gold.
What effects would an increase in the price of gold have on the effectiveness oJT^QneralTmonQtaryana credit mHoiQaT CfeTtha division
over monetary anei credit conditions between the gederal. ^serve aad the
Treasury J
In 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 font of deposits based upon additional
gold certificate credits*
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11 • "What changes, if any, should be made in our monetary policy
relative to silver? What would be the advantages of any such changes?11
2ie present U.S. monetary policy relative to silver is laid down
in throe Acts of Congress, namely the Silver Purohs.se Act of 1934,
Section 4 of the Aot of Ally 6, 1939. and the Act of July 31, 1946,
which has largely superseded the 1939 Aot* tinder the third Act, domestie
silver mined since July 1, 1946, may be delivered, at the owner's option,
to Ibited 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 eon*
sideraly higher than the open inarket price (now between 73 and 74^ per
ounce), the effect of this Aot is to divert to tho United ftates Treasury
at the 90. 5/ price substantially all of the current production of silver
in the United States. OB 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 in the above named Acts*
The principal advantage of a change in the above legislative pro*
visions regarding newly-mined domestic silver would bo that it would
relieve the Treasury of an annual expenditure which amounted to nearly
|33 million in the fiscal year 1949* 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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The market value of the silver in each silver dollar or backing
each dollar of silver certificates outstanding, ia now approximately
6?X«
32re issue of silver certificates resembles in some of its jncnetary
aspects the issue of gold certificates.
In the case of the gold acquired
by the goveraaaent, however, sod© is being resold continually to other
buyers at the same price paid by th© Treasury (plus ^ 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 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,
Mo 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.
lib 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 laarket at less tijfta 75^ per
ounce.
The Treasury is authoriaod to sell silver for monetary purposes
of foreign govenaaeiits only at a price of |1.29
has been sold at that price since prior to 1875*
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plus per fine ounce*
Hone
The issue of silver certificates by the Treasury adds to the total
amount of bank reserves outstanding. At any tJbne v/hen it is important
to limit expansionary pressures "by controlling the total amount of bank
reserves outstanding, the treasury and Ibderal Reserve Banks are re<3uir*d respectively to retire government debt through budgetary oash
surpluses or to carry out open mrket sales of government securities,
whioh reduce the holdings of such securities by the Heserve Banks,
Both these contractive operations Just described are a financial burden
on the Government. Accordingly, if approximately a billion and a half
dollars had not been expended ty the treasury since 19S4 for acquisitions
of silver, whioh was financed try the issue of silver certificates, the
reserve 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. In addition, the Beserve
Banks new pay to the 'treasury their residual earnings, most of which art
obtained frcta interest on U«S. Government securities, so that a reduction
of the Beserve Banks* holdings of government securities or other earning
assets reduces the earnings they can pay to the treasury*
Repeal of the present provisions regarding newly-mined dcnestie
silver would probably result in lower production costs for industries
using silver and possibly purchasers of silver articles would pay l©ss«
Ihe treasury's costs for producing silver coin would also decline and
larger seigniorage profits would be earned thereon*
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The principal disadvantage* of changing the provision* governing
the acceptance of domestie silver arei
a,
that producers of silver in th* United States would
prestaaably receive a loner return for their output of silver*
b* Foreign producers of silver would also probably receive
a lower return because the open irnrket price would tend to be lower
onoe the supply on the zaarket ma increased by the amount of U.S.
domestic production now being absorbed by the treasury*
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Tho Silver Purchase Act of 1934 declares it to bo the policy of
tho United States to increase th« proportion of silver to gold la tho
monetary stocks of tho United State* with tho ultimate objective of
maintaining oao-fourth of tho monetary value of such stocks la silver.
Until this objective is attained tho Secretary Of the Treasury is
authorised and directed to purchase silver at hone or abroad at such
rates, at such times and upon such terms and condition* as ho may doom
reasonable and most advantageous to tho public interest*
Other provisions of the Act authorise the sale of treasury silver
whenever tho Monetary value of the stocks of silver is greater than
25 per oont of tho monetary value of the stocks of geld and silver or
whenever tho market price of silver exceeds its Market value of $1.29.
The Aot also authorises the regulation of tho acquisition, importation,
exportation or transportation of silver, tho nationalisation of silver
and imposes a tax on profits resulting from transfers of silver bullion*
Although substantial purchases of silver wore made in tho 1930's,
tho proportion of silver is the monetary stock never exceeded 16 per cent.
Duo primarily to substantial acquisitions of gold since that time tho
present proportion of silver has boos reduced to 1H.I per cent. There
appears to bo no present prospect of attaining tho objective sot forth
in the Act.
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fhe authority of th* Silver Purchase Aot to purchase silver has
been used in recent years only to consummate a few bookkeeping transactions between the Treasury and other agencies of the United States*
Sinoe 1941 the Secretary of the treasury has not otherwise determined
that the terms and conditions upon which silver could he acquired have
been reasonable and most advantageous to the public interest.
The conditions authoriting sale of silver have never boon set
and the treasury now has authority to sell "free11 silver at a price
not less than 90.6^. tJnder present conditions it does not appear
necessary to retain the authority to control the aoquisition, importation, exportation of silver or the authority to nationalise silver*
In view of the foregoing, although the operations of the Treasury
have not been transferred by the Silver Purchase Aot, the Congress
has been advised that the treasury would not object to a repeal of the
Aot subject to a few provisions necessary to clarify certain technical
questions which might arise in connection with the administration of
the laws relating to silver.
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COJFIDEI^IAL
—
January 25,
Memorandum to the Files
Subjecti Conversation with Mr. Murray H. de Koch on Gold Problems
1. Mr. Murray H. de Koch, of the South African Reserve Bank, called
on me today and in the course of his visit discussed some current gold
problems•
2* As to the pending ARAMGG gold sovereign matter, de Koch said that
South. Africa would have to obtain the Royal assent in order to mint the
gold sovereigns and that he had not been very much encouraged by the attitude expressed by the Bank of England while he was in London* The British
talked about their reluctance to see gold sovereigns supplied in the Middle
East for reasons of policy but were not at all clear in explaining what
these policy considerations were. In any case, even if the Fund approves,
this British hurdle will have to be cleared. I mentioned our worries
arising out of broad considerations of the premium gold policy but de Koch
did not press me for the U.S. view. I asked whether the South Africans
could mint their own sovereigns, assuming that ARAMCO could use them. He
said that also would require the Royal assent if the King »s head were to
be used on the sovereigns.
3. I told Mr. de Koch that we had been rather earnestly discussing
the premium gold policy in an informal way within the U.S. Treasury and
that one aspect of the matter which particularly troubled us was to know
where the legal marl® ts were which would be available were the Fund to relax its policy. I said that we rather believed that most countries today
had exchange controls which did not admit gold or gold objects as a legal
import for private account. I was interested to note that de Koch did not
directly answer this question. Instead he embarked on a long explanation
of the South African hope that, if the Fund were to abandon its premium
gold policy, legal free gold markets might open up in many countries, including London and Paris and, even, New York. It would be this broad new
legal status for gold which the South Africans would offer as the basis
for gold trade were the Fund to relax its policies.
k. Mr. de Koch said that he had asked Mr. Gutt if the Fund report on
premium gold was going to cover the fsubject of the price of gold which was
so dear to Finance Minister Havenga s heart. He got the impression from
Mr. Gutt that the Staff had not covered this matter and he said that the
report would be most disappointing to Mr. Havenga and, he thought, to some
other countries, if the Fund Board also failed to cover this phase of the
gold problem. Finally, he said that he thought that Mr. Havenga's understanding with Secretary Snyder was to the effect that the price of gold
would be included. I said I could not state exactly what passed between
Secretary Snyder and Finance Minister Havenga since no one was present at
one of their meetings. But I had been called in at the end of a meeting
and told by Secretary Snyder in the presence of Mr. Havenga that he had
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agreed on the version of the resolution which was finally adopted and that
Secretary Snyder assured Mr. Havenga that we would facilitate a prompt consideration in the Pond of all necessary aspects of the problem. Ihen the
laatter 12i@n came up for preliminary review in the Board in October I argued
that the Staff should begin its study with the premium gold problem but
that I had no objection to the inclusion of any relevant aspect of the gold
problem and that the U.S. had hot in the past and would not now oppose a
discussion of the price of gold in the Fund. I then stated that the U.S.
view was unchanged on the substantive issue, which meant that the U.S. Government continues to perceive no justification for an increase in the price
of gold. I elaborated briefly on this position. Mr. de Koch then said
that he himself in the first two years after the war, when the price of
gold was not a political issue in South Africa and he could write and speak
freely about it, had said on several occasions and in his annual reports
that only if the U.S. was struggling with strong deflationary pressures
did it seem likely that an increase in the price of gold would be appealing.
He had not been able to speak his mind on the subject more recently. But
he would say that as long as the U.S. was following a firm policy on holding down inflation at every practical point, there would be no justification
for increasing the price of gold. Now, however, that the U.S. is engaging
in deficit financing on a large scale, he wondered if it could still be said
that an increase in the price of gold would interfere with our policies.
In fact, he wondered if it wouldn*t be better to finance some of the deficit
by writing up the gold stock rather than through bank credit. If this were
true, he would think we could afford to give some heed to the wishes of other
countries who did see some reason for increasing the price of gold. He
argued this line at some length, but my only comment was that even though
the Governaent was at the moment engaged in deficit financing, I thought it
clear that the Government wished to handle that financing in the way best
designed to radu.ce inflationary pressures.
Frank A. Southard, Jr
cct Secretary Snyder
Mr. Martin
Mr. Willis
Mr. Eddy
Mr. Arnold - Mr. McNeill
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FEB6
My dear Senator:
This is in further reply to your letter of January 25, 1950,
requesting replies to the questions raised by Mr. George S. Barton
of Eugene, Oregon, in his letters to you dated December 22, 1949,
and January 7, 1950.
These questions relate to the establishment
of a free market for gold, the purposes and functions of the International Monetary Fund, and the role of the ^ederal Reserve Banks
in the issuance of Federal Deserve notes.
Mr. Barton has inquired: "Why should we not have a free world
market for gold?" A full reply to this question as raised on another
occasion was sent by the Acting Secretary of the Treasury to the
Chairman of the Senate Committee on Banking and Currency on May 4, 1949.
This letter explains why the Treasury is opposed to legislation creating a free market for gold within the United States. Two copies of
this letter are enclosed for your information. A copy of this letter
was also sent to Mr. Barton by the Bureau of the Mint in reply to a
letter to the Bureau dated January 7, 1950.
A second question raised by Mr. Barton relates to the sale of
gold by the Treasury to the Bank of Italy. This transaction was not
a loan in any sense but a sale of gold for dollars, it is the firm
policy of the United States to sell gold to foreign governments and
central banks for all legitimate monetary purposes at the statutory
price of gold, i.e., $35 per fine troy ounce (plus 1/4 of 1 percent
handling charge). 'The Treasury stands ready to purchase gold from
foreign authorities at the same price of $35 less 1/4 of 1 percent
handling charge. Such a policy is essential to the maintenance of a
gold bullion standard such as the United States hes maintained under
the provisions of the Gold Reserve Act of 1934- The transaction with
the Bank of Italy, the official central bank of Italy, is merely one
of many such instances of transactions between the Treasury and the
central banks and monetary authorities of foreign countries.
Mr. Barton's third question relates to the functions of the
Federal Reserve Banks in the issuance of Federal Reserve notes.
Federal Reserve notes are secured by certain types of collateral and
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COPY
- 2each Federal .Reserve Bank must maintain a reserve in gold certificates
of not less than 25 percent against its Federal Reserve notes in actual
circulation. The Treasury issues gold certificates to the Federal
Reserve Banks in accordance with the (/old Reserve /ct of 1934. There
is enclosed a copy of the latest Circulation Statement of United States
money, which has in the lower right-hand corner a note on currency reserve requirements. This note probably wi 11 answer Mr. Barton's question
to his satisfaction,
His letter also requests information about the purposes and functions
of the International Monetary Fund and the reasons for United States
membership therein. The Fund was established to promote international
cooperation in foreign exchange and related financial matters. Its
purposes and methods are set forth fully in its Articles of Agreement,
a copy of which is enclosed. There is also enclosed the National Advisory
Council's First Special Report on the International Monetary Fund and
the International Bank for Reconstruction and Development, made in
accordance with the Bretton Woods Agreements Act, which explains in
considerable detail the activities of the Fund and the United States
policy with regard thereto.
The above information and the enclosures 'rill, I trust, answer
Mr. Barton's inquiries to you. If additional information is needed,
please do not hesitate to call on me. Mr. Barton's letters are returned,
as requested,
Very truly yours,
tertin.
Wm. McC. Martin, Jr.
Honorable Guy Cordon
United States Senate
Room 333, Senate Office Building
Washington, D. C.
Enclosures as stated
CAMSG:HJB:es
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2/3/50
FORM NO. 64
• UNITED STATES GOVERNMENT
Office
T0
:
Messrso Martin and Willis
FROM
:
G. A. Eddy
SUBJECT:
DATE:
January 26, 1950
Q&£~
progresg (^) Report ^a Schedule on Gold Policy,,
Following a talk between Mr. Southard and Mr0 Coe, it is reported that
the Fund*s staff will come out with a recommendation that the present policy
against international sales at premium prices should be abandoned* However,
both Messrs. Southard and Coe have some misgivings about taking this position
without qualification (as I have also) in view of the fact that there seem to
be really no important countries ready to allow gold to be imported for private
purchase* The only markets are the smuggling centers like Beirut, Tangier and
so forth, which do not absorb and hold much gold but merely pass it on through
illegal channels into other countries*
It is possible that some new position which recognizes that there are
no real, legal markets for gold might win general approval*
Mr. Southard agreed that the following schedule would seem satisfactory:
le We will wait until the Fund!s study comes out, which is now expected
early next week, though still subject to some last minute delay,
2. After reading the Fund!s study, we will write up brief statements of
alternative positions for the U.S.
3* The Fund board will allow about a week for the members to read the
study and probably have one or two discussions of it during the week of
February 6,
4o Mr. Southard suggests another U.S. discussion during that week*
$• There will then be a period while the directors consult their governments. It appears that few or no Governments except the U« K. and South
Africa have made up their minds yet,
6. The conclusive discussions should begin, it is hoped, around the end
of February or March* Mr. Hooker will be the U. S. representative during
Mr. Southard's planned vacation in the two weeks of February 11 to 25*
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Federal Reserve Bank of St. Louis
INTERNATIONAL MONETARY FUND
March 7 ,
TO:
Mr. Martin
I attach hereto five copies
of a memorandum -which I am today
sending to the Secretary. I am
giving it no other distribution.
If you and he see no objection, I
would appreciate if the four extra copies might be sent to Messrs
Howard, Willis, Eddy, and ArnoldMcNeill.
Mr. Southard
CONFIDENTIAL
Secretary Snyder
«*** 7,
Jfir. Southard |jnitialed) F.A.S.
Policy on Premium Gold transactions
In accordance with your suggestion I am outlining in this memorandum the pros and cons respecting the maintenance of the Fund's policy
on premium gold transactions.
2. those who favor maintaining the Fund's policy argue thatt
(a) !Phe premium gold policy promotes exchange stability by reducing the amount of gold traded at prices other than the official price.
Hy reply ia that premium gold transactions are symptomatic of
unbalance and lack of confidence and cannot effectively be dealt with by
restrictions, from the viewpoint of sound international financial policy,
the U.S. has little or no more reason to urge the imposition of restrictions
on international private transactions in gold at a premium than to insist
on restrictions on private transactions in bank notes or foreign exchange*
Hy reply also is that premium gold transactions are a very
minor element in current balance of payments difficulties*
(b) The premium gold policy aids countries which are trying to
prevent private iamorts of gold for hoarding or speculative purposes*
This is an admissible argument, which will be strongly pressed
by countries such as the United Kingdom and India* However, I do not believe it is important enough to be the determinant of Pond policy* igr
reasons for this conclusion aret (1) The assistance provided to these countries by the Fund policy is probably small* (3) It does not appear likely
that the total value of gold transactions at premium prices would be materially increased were the Fund policy to be modified* Incidentally, these
same countries could argue that tiiey would be assisted if the $.S» were to
impose restrictions on private trading in $.S. and foreign paper currencies
and exchange at unofficial ratesj but I doubt if we would wish to do so*
(c) Gold should so far as possible be channeled into official
reserves, and the Fund's premium gold policy encourages this*
It is a wise practice for countries to assure that all surplus
gold will move info official reserves, rather than into private hoards.
But it does not necessarily follow that countries must insist that all gold
(especially new production) be sold to the central bank if legal foreign
markets are available. If it is important to build up reserves, the exchange
(usually dollars) resulting from such foreign sales could be captured by the
central bank in the exporting country*
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Federal Reserve Bank of St. Louis
•" 2 ***
(d) the Fund1 s premium gold policy is of assistance to the E.S.
in the enforcement of our own gold policy.
X realise that it is convenient to have reference to the Fund
policy as an additional justification of our restrictions on private go!4
ea^orts. However, I have not so far been persuaded that me wouM have uadue difficulty in reverting to the status mio ante !$*?, if the Fund policy
were relaxed* As to the speculative reaction to a relaxation of the Fond
policy, there asy be «** immediate flurry of speculative ntsiatsrpretatioa,
bat I do not believe that would be important.
3. On balance, I conclude that the Fund*s presdua gold policy should
be modified. Following are additional reasons for modification which appeal
(*} If additional amounts of gold reach legal markets, they
tend further to reduce premium prices.
{b) fhe Fund is not able effectively to enforce the present policy.
Host smaller gold-producing countries, and South Africa, do not support the
policy* Moreover, many gold-iiaporting countries, especially in the Middle
and Far last, neither understand nor support the policy,
(c) It is a cardinal element of the U.S. gold policy to sell gold
freely for monetary purposes to all friendly countries. However, since, as
was said above, aany gold-producing countries are not supporting the premium
gold policy, the U.S. finds itself confronted with two alternatives. We say
cling to our basic policy, and continue tft sell gold to countries such as
Syria and Saudi Arabia, even though we know that they are centers for the
preasiuffi gold trade. Or we a&y refuse to sell gold to the central banks and
treasuries of these countries, thus in effect putting them on a black list*
Heither of these alternatives is satisfactory*
(d) Under present difficult conditions, some American coiapanies
operating abroad need gold for legitimate operations, particularly in the
Middle and Far last. Maintenance of the Fund policy will laake it virtually
impossible for them to obtain gold coin.
k. fhe aodifieation of policy which I favor would, in brief, involve
the following i
(a) the Fund would minimise premium gold transactions as an element
is exchange stability under current conditions and would point to substantial reductions in premium prices.
(b) Accordingly, the Fund would conclude #sat it could be left to
meaber countries to regulate gold transactions, having due regard for the
desire of »any countries to prevent private iispert of gold*
(e) Use Fund could urge aeaber countries to channel production
into official reserves and could emphasize that isembers should avoid offl~
cial transact ions at prices other than tfee official price.
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February 10, 1950
Dear Eds
I called you on the phone a couple of times to
explain the situation with respect to your request for
advice on your problem with gold sovereigns, but each
time you have been away.
I also have your letter to the Secretary, copy of
which you sent me previously, and want you to know we
did what we could to expedite the matter but were unable to do so because of the study of this problem that
is now going on in the Monetary Fund*
With all good wishes,
Sincerely yours,
(SIGNED) WRmx
Ifca. McC« Martin, Jr.
Mr. E« A. Locke, Jr.
President
Saudi Arabian Industries Corp.
122 East 64th Street
New York, N.Y.
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WONEO) WM. McC. MARTIN, J».
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CONFIDENTIAL
DRAFT FUW Sm3SMBira Oil INIERMTIQHAL GOLD THAJJSACTIQNS
AT PREMIUM PRICES
The Executive Directors of the International Monetary Fund have
reviewed the Fund policy on international transactions in gold at
premium prices* This review has reaffirmed the position of the Fund
that the most important function of gold is its use by governments
and central banks for the settlement of international balances.
Private transactions in gold, particularly at premium prices, divert
foreign exchange resources from higher priority uses and channel gold
away from official holdings to private hands where it is less available for the settlement of international balances* Such transactions
thus interfere with the effective use of gold for international payments, a matter of particular concern when the importing country is
receiving aid from other countries or is using the resources of the
Fund,
The Fund has noted, however, that prices for gold in the premium
markets have declined substantially. The Fund's study also indicates
that the volume of gold entering private markets is small in terms of
the world's economy, and does not contribute materially to the bala.nce
of payments problems of member countries. The Fund has concluded,
therefore, that there is no serious danger at the present time that
private international gold transactions will undermine the structure
of exchange rates.
In the light of these considerations and developments the Fund
has concluded that it can leave to each member country the conduct
of gold transactions so as adequately to meet its own needs and
accomplish the objectives of the Fund. It is expected at the same
time that each member would administer its gold export regulations
so as to cooperate to the maximum extent possible with other member
countries who wish to confine all gold imports to official or licensed
channels.
The Fund's facilities for consultation and technical assistance
will be available to all member countries to assist in devising
effective means to prevent the dissipation of exchange resources
through the importation of gold for private hoarding. If the gold
policies or practices of any member are judged by the Fund to be
contributing to exchange instability or undermining the exchange
rates or the international financial position of other members, the
Fund will, of course, seek the collaboration of the members concerned
to reach more satisfactory arrangements.
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CONFIDENTIAL
Subject:
National Advisory Council
Staff Draft No« "
February
, 1950
(Action Sheet)
International Ivbnetary Fund Policy on External Transactions
in Gold at Premium Prices
Recommended Action
The Ifetional Advisory Council advises the United States Sxecutive
Director on the International Monetary Fund that in connection with the
review by the Fund Board of the policy on international transactions in
gold at premium prices, he should support a conclusion that: (l) the
Fund continues to believe that the use of gold by governments and central
banks for the settlement of international balances constitutes the most
important function for gold and that private gold transactions, particularly at premium prices, tend to divert gold from its effective use for
this purpose; (2) the Fund has concluded, however, that there is no
serious danger at the present time that private international transactions in gold will undermine the structure of exchange rates in view
of (a) the decline of prices for gold in the premium markets and (b) the
relatively small amount of gold entering private markets in terms of the
world economy; (3) the Fund believes that each member country may now be
left to determine its own gold policies and practices in the light of the
objectives of the Fund; and (&) the Fund will make available its facilities
for consultation and technical assistance to member countries desiring
assistance in preventing the dissipation of exchange resources through the
importation of gold for private hoarding and will review any future cases in
which the Fund determines that the gold practices of a member are
endangering exchange stability or undermining the exchange rates of other
members.
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lfe,tional Advisory Council
Staff Draft No.
February
, 1950
To:
National Advisory Council
.From:
National Advisory Council Staff Comniittee
SUBJECTS
International Monetary Fund Policy on External Transactions
in Gold at.premium Prices
PROBLEM
At the Fourth Annual Isfeeting of the Board of Governors of the
Fund a proposed resolution of the Governor of the Union of South Africa
which would authorize each member country to sell up to 50^o of its
newly mined domestic gold at premium prices was referred to the
Executive Directors of the Fund "for study of all relevant considerations and report to the Board of Governors." The Staff of the Fund
has now submitted a report to the Executive Directors (Special No« 133).
The conclusion of the Staff is set forth verbatim in Appendix A. In
brief, it is to revise the Fund's policy stated in June 1947 deprecating
international gold transactions at premium prices, and instead to:
(A) leave to the exporting countries substantial freedom
of action regarding gold, subject to various general
respons ibilities;
(B) give technical assistance; and
(C) stand ready to secure collaboration if members
request help regarding gold practices«
The Executive Board is now reviewing the Fund report* The Executive
Director of the United States has requested the advice of the National
Advisory Council as to the position he should support in the Monetary Fund.
Discussiai
A summary of the major findings of the Fund Staff Report (a document
which will run some 137 pages when typed single space) appears as
Appendix 3. The paramount points are that diversion of foreign exchange
resources into buying gold for private hoards is still highly undesirable,
but private gold sales are only a very small part of total exchange
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- 2transactions; the T7.S. dollar premium prices are now at a lower level
than formerly and would probably go lower if additional gold were
offered on the market; and an effort of the Fund to obtain compliance
with the present Fund gold policy, when most members are not complying very seriously, if at all, would waste the Fund's resources
of moral suasion.
In the two and one-half years since the gold policy of the Fund
was adopted the record of cooperation by member countries has not
been satisfactory* A relatively small number of countries appear to
have made a sincere effort to comply with the request of the Fund*
Moreover, the Fund has been faced with increasingly difficult decisions in attempting to enforce the policy. In the case of South
Africa determinations have to be made %Thether particular exports of
semi-processed and fabricated gold are being sufficiently safeguarded
to insure that the gold is being used for legitimate purposes. In
other cases the Fund has had to differentiate between an internal and
external premium market and to decide whether'the internal market will
will lead to international premium transactions in violation of the
policy. It should be noted that in this period the Fund has not received a single complaint from an importing country that the policies
and practices of another country are prejudicing its import controls
or endangering its exchange rate.
The United States has also been confronted with some difficulties
in correlating United States gold policy with the Fund policy. Should
the United States continue to buy from and sell gold to a country which
is not complying with the policy of the Fund? Should we sell gold to a
country for sale on an internal premium market, recognizing that some
amount of this gold will flow into international premium transactions?
Should such sales be made on the basis of whether the internal market
is a primary or incidental source of gold in international markets?
Should the United States disapprove of efforts of American companies
to obtain gold for use in countries where private holding of gold is
fully recognized but from which gold flows into international markets
at premium prices ?
From experience in the Fund it appears unlikely that more effective,
uniform cooperation from member governments can be expected even if a
decision were made to attempt more rigorous enforcement of the Fund's
policy. It is doubtful if the benefits to be gained would warrant such
increased efforts by the Fund and those members which are likely to
comply conscientiously.
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- 3Since there are no significant countries which permit "both the
private import of gdld and constitute important final buying places
for gold, a limitation of the Fund policy might appear to condone the
violation of the regulations of member countries. On the other hand,
it is doubtful if the existence of the Fund policy has materially
helped importing countries in controlling illegal imports of gold.
A continuation of the present policy would lend the support of
the Fund to members wishing to prevent gold imports and would buttress
the efforts of other countries like the Uhited States which control
the private holding and exportation of gold. It would leave the Fund
in the unsatisfactory position, however, of avowing a policy which
does not have the support of most members and attempting to police
a program which has proved to be unenforceable.
A reaffirmation of Fund policy objectives accompanied by a
determination that it is now appropriate for each member country to
conduct and control its gold transactions so as to adequately meet
its own needs and accomplish the objectives of the Fund would relieve
the Fund of many of the difficulties of enforcement. It would also
simplify U.S. consideration of its gold transactions which do not
directly involve a premium price but might be considered to be inconsistent with the policy of the Fund. It is probable that such a
determination by the Fund would minimize the dollar premium for gold
in international markets and thereby discourage some speculation
about an increase in the dollar price of gold which has been one
element of exchange instability*
Such a modification would weaken one support for our domestic
gold policy and thereby might make it more difficult to maintain a
monetary program which appears to serve the best interests of the
United States. Although a reaffirmation of the Fund policy objectives as suggested above might minimize this danger, it must be
weighed in determining whether the maintenance of the present Fund
policy* unsatisfactory as it is in some respects,
is preferable
to modification*
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-- r
/
litDRAFT*GAfiddyihjlJ3/21/50
To:
Mr. Willi«
From:
G. A« Bldy
Subjects Firming up U.S. position on Fund Gold Policy—*
including a new draft suggestion for the U.S. and Fund positionc
Mr0 Southard tells me that he believes the U.S. should arrive at a
firm position on IMF gold policy before further serious discussions are
undertaken in the Fund Board of Directors0 He does not feel that it would
be useful to wait until the South African position is stated, since that
can now be anticipated well enough. T his paper is to offer some further
discussion of the question for the consideration of the Treasury group,
along with a draft of a possible new and more constructive U.S. position*
Also presented herewith are a brief report of the last meeting with U0Ko
and Canadian representatives, and if time permits, an academic analysis of
a recent paper on gold by Mr. Southarde
Discussion
1. One paramount point of general gold policy both for the U.S. and
the Fund on which Treasury and other U0S. officials seem to agree, is that
there should be no change in the $35 U,SC price of gold0
2o Probably the one most beneficial result which could be expected
from any IMF action on gold now—«and possibly the only beneficial result
which may be obtained from it—is some evidence or demonstration which will
strengthen the impression on the public at home and abroad that the $35
official price of gold will not be raised,
3«
There seems to be a difference of opinion on the U.S. side about
what Fund treatment of the South African resolution would be most convincing
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IstDraft *GAE:hjl$3/21/50
- 2to the public that the dollar price of gold is not going to be raised*
One view is reported to hold that acceding to the South African proposal
(viz0, to let some newly-produced gold be sold in any markets at premium
prices) will encourage the public to believe that South Africa will also
succeed in its hope of having the official price of gold raised periodically
This view believes that the Fund should maintain its anti-premiura-gold-sale
policy if only to cast doubt on South Africa1s recommendation on uniform
official increases in the price of gold*
4. Opposing this is another view that a lowering of prices for gold
in open, unrestricted markets, which lowering is expected to result from
relaxation of the Fund's gold policy, would be strong evidence that the $35
price is likely to remain. Further, the act of official relaxation might
also be interpreted as evidence that the member governments, particularly
the U.So, have no secret intention to raise the price. The U«S0 originally
called in gold from public circulation in order to raise the price without
letting private hoarders benefit from the appreciation TJie main reason
given in 1934 and thereafter for continuing the ban on private ownership
was to keep the Treasury1s and President's hands free to raise the price
again on 24 hours notice* Accordingly, denial of private ownership everywhere and the policy of confining ownership of gold to central banks and
treasuries, are reasonably associated in the publicfs mind with leaving
the door open for further devaluation of the dollar and other currencies*
5* For the Fund in effect to change a red light on premium gold
traffic (however disregarded by some of the travelling public) to a green
one, does not commend itself as a very inspiring improvement* It would
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IstDraft sGABddy Jhjlt3/21/50
J
thereby withdraw any Fund objection to letting gold producers exert their
highest ingenuity in evading countries1 import and exchange control regulations and to their offering gold without limit to Beirut, Tangier, BBangkok,
Saigon, etc,
6. The impression that the British position is one of determined
insistence on continuing the present Fund policy, and that any different
U0S. position would involve a serious disagreement with the British in the
Fund, has perhaps been one factor influencing U«S, officials toward acceptance
of the same position. However, it has been reliably reported that the
British position so far is only the instructions of Sir George Bolton, who is
known to have some strange views on monetary matters, and that if the U0S«
expressed a contrary viewf consideration would be givea in London by a larger
group, probably with different results from Sir George1s«
7»
In spite of the general interpretation that South Africa is driving
implacably for an increase in the dollar price of gold, I noted some room at
the Shoreham for believing that their minimum demands might be considerably
more modesto For example, in reply to Secretary Snyderfs statement that the
U»S. could not agree to a change in the gold parity of the dollar, Mr0 Havenga
said something to the effect that he would not ask any country to change its
gold price if it did not wish to. He seemed to leave the door wide open to
the UcSo keeping the $35 price. Also, now that the currencies of many members,
and especially the UeK., have been devalued, it may be that South Africa will
refrain from demanding more*
8« The Fund13 voluminous report on premium gold sales does not seem to
address more than Mr0 Havenga!s resolution on selling up to half of nwr
production in premium markets. Lost somewherj in the shuffle either of the
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IstDraf t sGAEddy :h jl s 3/21/50
annual meeting at the Shoreham or the Fund's action on the resolution is
Mr. Havenga's point that thai z&v*Wtftofa was only a temporary stop-gap but
that the basic, more important solution was for the Fund to create a uniform
A
increase in the official prices of gold whenever it was left behind in a rise
of commodity pricesc
However, little public attention Mr. Havengafs speech
had, the absence of any Fund statement on this general idea may oause more
serious public expectations of an increase in the dollar price of gold than
any verbal response to Mr. Havenga's interim resolution on premium sales of
newly mined gold* Even though the public may have forgotten all about it,
is it advisable to let Mr. Havengafs interpretation of the Articles go
unrefuted, either publicly or in private*
9«
There is some evidence that U0S« gold miners are preparing to bring
suit against the Treasury over being deprived of the full value of their gold
as measured by the available premium prices for gold ^abroad*
10. My personal conclusion after the U.S.-U.K. -Canada meeting was that
everyone was as far away as ever from a satisfactory escape from the dilfltea
of choosing between l) hollow repetition of the present unenf orced policy,
2) the difficulties of effective enforcement, and 3) relaxation by the Fund
in favor of letting members do their individual best or worst, which is sure
to mean rather chaotic and bitter confusion with a continuation of the
present premi\»n on hypocrisyc
The British preference for numer l) seemed to
be quite unacceptable to Canada.
U« The attached draft suggests a somewhat different attempt to make the
most out of the several difficulties cited above*
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IstDraf t :GAEddy sh jl :3/21/50
DRAFT
U0S0 Position to be submitted for adoption by the IMF Executive Directors
The last annual meeting of the Governors of the International Monetary
Fund received proposals regarding gold from the Governor for South Africa,
which were "referred to the Executive Directors of the Fund for the consideration of all relevant considerations and report to the Board of
Governorso" One of the proposals, submitted as an interim measure, was to
allow members to sell up to 50$ of their "newly-mined gold in any market at
such premium prices as may be ruling in that market.11
So far as the Fund now know* there are no substantial markets available
to members where bar gold may be sold at premium prices except in transactions, or in markets, which sooner or later, directly or indirectly,
depend upon smuggling or other violations of various countries1 laws and
regulationse
The Fund cannot give its approval to such traffic* Member countries
have the right to expect the reasonable cooperation of the Fund and of
other members in securing respect for their laws and regulationso
Accordingly, the Fund believes that its purposes of promoting orderly
exchange arrangements call for continued respect for the policies, laws,
and regulations of other countries to be shown by all countries in their
international gold transactions, either official or unofficial*
In this regard, the Fund notes with satisfaction that the United States
as principal holder of gold in the world and the only member ^/This is a
question of fact which I have assumed without checking* GA.g7 which under
Article IV, 4, (b) has certified to the Fund that it is both buying and
selling gold freely within the limits prescribed by the Fund, stands ready to
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IstDraftJGASJhjl$3/21/50
- 2~
selliag gold freely at its official parity price, $35 per fine ounce, plus
the prescribed margin of •£ of 1$, to all central banks and governments.
Among the purposes for which such sales will be made are the settling of
international balances, the building up of official reserves, or, if the
buying countries so desire, the control of their strictly domestic private
demands for gold, H_pwever, in most cases, the Fund questions the wisdom
of this last purpose, believing that monetary gold is primarily useful as
an official reserve rather than for private hoarding*
The United States (and Canada?) also stand willing to license international sales of gold for industrial, professional, and artistic use, without
further investigation on their part, provided only that the importers have
obtained a specific license or certification therefor from their own central
bank, Treasury, or other officially designated monetary author0ty» Such sales
will be expected to take place at the official price mentioned above plus such
charges for processing as bona fide, competitive dealers normally charge. In
the case of sales by the United States, the U,S, Treasury will sell gold only
in bars of standard monetary size and fineness, and sales of all other forms
of gold under the conditions and for the purposes just described, will be
carried out by recognized dealers under specific licenses for each transaction.
In the case of Canada?..«•
Another proposal submitted to the Annual Meeting by the Governor for
South Africa was an interpretation of the Articles of Agreement to the
effect that they contained an implied undertaking by all members to make
uniform increases in their parity prices for gold under certain conditions*
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lstDRAFTjGAEshjl*3/21/50
- 3~
The Board of Directors does not accept that interpretation of the
Articles* N o member has undertaken to deralue its currency in terms of
gold unless it chooses to, and there is no implied undertaking to carry
out uniform increases in the price of gold under any conditions0
The Executive Board believes that the arrangements described above
concerning international gold transactions are those most consistent with
the general monetary purposes and objectives of the Fund under existing
circumstanceso
It therefore calls upon all members to make their gold
transactions and policies conform to these principles, for the advantage
both of themselves and of other members.
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^ -
lstDraft:GAEddyshjl:3/2l/50
Summary and critical comment on U.So-U.K.-Canada Meeting
March 6, 1950, Mr. Martin's Offiee
Present: Rowe-Dutton, Caine, Crick; Rasminsky, Bryee, Parkinson;
Martin, Southard, Hooker, Willis, Arnold, Eddy.
Mr. Crick, speaking from a written paper, gave the U.K. position,
as follows:
1) Gold pars are the king pin of the Bretton Woods System, all
currencies being referred to gold as a standard.
2) Transactions in gold at non-par prices set up new exchange rates*
3) Gold should be put into central reserves, because it is needed there
to finance international trade. Otherwise a slump is probable like that of
1870-90, which was due to shortage of gold0
A) Between a) maintaining the present policy, b) abandoning it, and
c) taking the intermediate position favored in the Fund Staff's report, the
U.Ke unreservedly chose the first. For the Fund to abandon the policy would
^r^M.
be a dereliction of duty, inviting the Band to hoard, encouraging distrust
in currencies, and discouraging the channeling of gold into central banks.
5) They do not think the dollar premium would disappear0 Instead
demand would be encouraged and countries1 restrictions would be dropped.
6) Two quotations for the dollar would develop, one the official rate
and the other at a 5 or 10$ premium. Thus, the dollar, which is the sheet
anchor of the world's exchange system, would slipc
7) There would be most grave results for sterling. More sterling would
be offered for gold, which would adversely affect the rate. There would be
more opportunity for Latin America et al. to acquire cheap sterling. The
U.K. would have to take drastic steps to protect sterling by sorting out
premium gold transactions.
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lstDraft:GAEddyjhjls3/21/50
~ 28) The U0K. will consider any policy to discourage hoarding and
promote confidence.
In reply to a question Mr. Arnold said there seemed not much that
was possible to enforce the Fund policy.
Mr. Rasminsky said that although the availability of a large additional
amount of gold at a lower premium would be damaging to some members, through
increased hoarding, the Fund could not maintain the present inequity. The
South African miners were getting a benefit being denied to Canadian and D.S.
miners. The Fund should be satisfied with less than 100$ enforcement—perhaps
a $50 million fringe from Latin America was tolerable*. But South Africa was
pivotal.
Actually, South Africa would gain nothing from the low premium
which would follow abandonment*,
Mr. Southard reviewed his conversations with Mr. de Kock and added that
there were sizable areas of the world where the policy meant nothing—that
it is an Anglo-American policy.
Sir Ernest Rowe-Dutton suggested that the problem might parallel the
League of Nation1 s case against drugs—that if the Fund keeps saying
"private hoarding of gold is wrong, gradually other countries may follow. We
should not worry about lack of sanctions.
Mr. Rasminsky said the status quo was not possible, but Sir Sydney
Gaine said he did not agree.
It was pointed out that South Africa now claimed
that she alone is engaging in premium sales with the Fund's approval.
The conclusion seemrto be that some unspecified group would speak to
South Africa to see if they will conform better to the policy.
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lstDraft:GAEddyshjl53/21/50
. 3 -
Personal comments The U.K. case is a series of fallacious arguments,
each one being only a clutching at a shadow. Expressing pars in terms of
gold is for all countries except the U.S. and possibly Mexico and one or two
others, a pure formality.
Their exchange rates are set directly by their
official buying and selling rates for dollars and other currencies and have
no necessary organic relation to any gold prices. Open market gold sales have
no relation to the official rates. The idea that relaxation of the Fund
policy would create two rates for the U.S. dollar seems fairly described as
impenetrable muddle-headedness«> Still less is there any reason to suppose
that relaxation would increase the demand and premiums for golde
T he sally into history by citing the slump of 1870-90 as a reason for
channeling all gold into central reserves in 1947-50, when almost all countries
except the U0S« (which has a superfluity of gold) are suffering from repressed
inflation reveals a deep misunderstanding of both periods0
The U.Sw\ failed to take any notice of the hollowness of the present
policy and did not even mention the problem of trying to enforce it<>
Much of the British argument seemed to revdlve around a failure to
recognize the importance of putting a limit to the drawings by Egypt, India,
et al on their sterling balances*
No progress was made at reconciling within the present Fund policy
Canada's desire to obtain any benefits obtained by South Africa and South
Africa1s presumed determination to continue its present saleso
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Go A. Eddy
First Draft, GAEddy:lrm, 3/21/50
To:
Mr. Frank A* Southard, Jr»
From:
George A, Eddy
Subject: Critique of Your Paper on Fund Gold Policy, to the Secretary, dated March 7.
Because I know your solid interest in efforts at searching "academic11 analysis
(in the best sense) of all important policy questions, I volunteer the following
critical comments on your two-page memorandum to the Secretary dated March ?• That
paper is close to the position I, myself, have been holding and I still hope that its
general effect will prevail, though for different reasons. Nevertheless, I herewith
submit our mutual position to merciless scrutiny in 1he hope that the exercise may
help to bring us to a satisfactory solution.
!• The first page and a quarter of your paper seems to cast effective doubt on
the main current arguments in favor of the Fund!s maintaining its present gold policy,
but the paper as a whole seems shy on strong positiA/fr arguments for abandonment or
substantial "modification".
The same seems true of our recent Treasury discussions
of the subject (by Charlie McNeill, myself, and other advocates of modification). We
are recoiling from a position •which we know is unsatisfactory, but on careful review,
we seem to be backing into an alternative -which is little or no better, judging by
the criteria we are using.
2* Your sentence numbered 3-a appears to come closest to a positive argument for
relaxation,—i.e., that additional amounts of gold would reduce premium prices in legal
markets. That argument, however, seems to have the following holes in it:
a) You have argued earlier in your paper in 2-b-2 that nodification of
the Fund policy is not likely to materially increase premium gold transactions
(splitting of infinitive supplied). This seems inconsistent with the reasoning
in 3-&, just mentioned, to the effect that benefit will come from additional offerings
of gold* Perhaps minute analysis would find that the apparent inconsistency—of
arguing that there will not be an appreciable increase in gold sold to private buyers
and then that there will be a beneficial increase—is not inconsistent after all.
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- 2-
But either wqy, if the argument is so delicately balanced, it obesn f t seem strongly
in favor of either side. Furthermore, the fact that it is so easy to assert the
point either way suggests the conclusion that we really don't know ehether modification
of the Fund policy would or -would not mean a significant increase in private gold
absorption. We can only guess what additional new production would be offered to
private buyers, and we have no firm tests for deciding whether that amount of additional
gold is Significant* in the whole foreign exchange problem or noto Furthermore, for
various complicated reasons, it may well be that price changes in the premium markets
will occur for reasons other than mere changes in the quantities going into the private
market from new production. Speculators1 expectations and peasants' reactions may be
strongly affected by a variety of rumors and misapprehensions, so that we can hardly
do more than guess blindly at the outcome*
b) It is doubtful whether there are any genuine legal markets suc3i as your
statement in 3-a refers to, unless one seeks refuge from intractable problems and
facts by classifying Tangier, Beirut, Bangkok, and other smuggling entrepots as "legal
markets"• This is to use the phrase in an ambiguous way.
c) The truth of the assertion that additional amounts will reduce the
premiums in legal markets is in general above dispute as a classical economic theorem.
But to be a complete syllogistic argument, the assertion would also have to cover the
effect on premium prices in illegal markets and the volume of illegal traffic, and in
addition weigh the disadvantages of foreign exctenge resources being used to pay for
the additional amounts of gold going into both legal and illegal markets* The Bank of
England view, and apparently Mr, Rasminsky's view, is that the premium, on private
purchases should be as high as possible in both legal and illegal markets, because the
public will widely prefer gold to dollars if the former is available close to $35«
Even though I disagree with this view rather strongly, I must recognize the incompleteness of the contrary assertion, by itself, that modification of the Fund
policies will reduce the premiums in legal markets.
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IstDraftsGAEddyJhjls 3/21/50
- 3It may be that deciding whether we want the free and black market gold
premiums in dollars to be high or low is the most practical point from which to
approach the whole issue*
d) In estimating the effects of modifying the policy, it seems important
to distinguish between premiums in dollars and premiums in local currencies0 It
is quite conceivable that easier availability of gold will reduce the former more
than the latter. In any case, to make a valid case seems to require more detailed
analysis of the results0
e) You do not say that further reduction from the present $38 - $40 level
for bar gold would be desirable and that therefore further relaxation of the
Fund1s policy (in addition to the existing relaxation from non-enforcement) is
desirable. Yet that contention seems required by the logic of the case«
In summary of points a) to e) above, these four or five holes seem so large
that there does not appear to be much of a positive argument left in your 3-a
statement as it stands. Other supporting arguments, which you perhaps regarded
as already implied, seem necessary to make a whole case. To me the most important
and persuasive of these is the argument that re-creation of substantial dollar
premiums on gold in the existing gold markets of any hue would seriously tend to
damage public confidence in many national currencies0 This is an assertion of the
opposite of the Bank of England-Rasminsky view. I don!t know how to prove it to
those believing the opposite, but I gather it is generally held in Latin, Greek
and Arab countries. Nor am I favorably impressed by Mr0 Rasminsky's assuming
that other countries are so different from his own, where Canadians do not have
or need any legal barriers or high premiums to keep them from hoarding gold in
preference to dollars*
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IstDraf t sGABddy :h jl J3/21/50
-4 -
3« The fact that "the Pond is not able effectively to enforce the present
policy* (as you state in 3-b) seems likewise an incomplete argument for abandoning
it. I agree that the political cost of enforcing it might be excessive, but unenforceability is not nesessarily a sufficient reason for abandonment* If it were,
I wonder how much of the Fund articles would be left, and how much would be left
of a number of other U.S. treaties, laws, and policies. For example, should the
fact that so many European countries have free markets for foreign currencies lead
the Fund to abandon Article IV-4-b, which requires members to allow spot foreign
exchange transactions within their territories only within the permitted 1% range
above and below par. Similarly, is the Fundfs gold policy worse off than U0S0
anti-trust policy, or the goals of "government economy" and the "merit system" for
civil servants? Other pros and cons must be weighed to see whether it is worth
prolonging the struggle for any complex, far-reaching principle, however unenforceable or unrealistic at the moment. (My personal opinion is that a number of
other aspects of the Fund deserve abandonment fully as much as its premium gold
policy, even though I have opposed the latter from the first minute George Luthringer
expounded it to Harold Glasser in early 1947, on the false grounds still upheld by
Mr. Crick and others, that a premium gold sale peculiarly undermines exchange rates*
Actually, exchange rates are today set directly by the exchange authorities, largely
independent of gold pars and gold transactions.
Premium gold sales have no more
effect on exchange rates than off-par settlements for unlicensed imports of
Cadillacs and nylon stockings or unauthorized acquisitions of dollars to escape
from national monetary mismanagement.)
40 For the Fund to duck the troublesome hair-splitting decisions and
definitions about industrial gold, etc0, would only pass the same decisions to the
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- 5-
member countries. In the case of gold-producing members like South Africa, Mexico,
Peru, etc., there seems little question how most of the embarrassing questions would
be answered—*riz., in favor of diluting the policy* The situation might soon reach
the point (in fact, it nay have reached it long since) of there being so nany corners
cut that there is little left to the original principle. If the Fund (or any other
administrative agency) were to avoid all difficult hair-splitting decisions in a
field vital to its responsibilities, it might easily reduce itself to meaninglessness.
5o Abandonment of the Fund policy would not appear to solve the U. S, dilemma
stated in your 3-c,~that of having to choose between either selling gold to Syria
and Saudi Arabia even though they are centers of premium gold trade, or refusing to
sell gold to them. The U. S. Treasury would still have to make that choice if the
Fundfs premium gold policy were relaxed , unless one assumes that there will be no
dollar premium on gold in open markets, so that such buyers would lose interest in
buying from the Treasury.
Incidentally, the Fund's present policies seem to cause no difficulties for the
U. S. decision, which has been to sell gold to Syria. All the infoimal Fund opinions
so far obtained have seemed oitirely in favor of selling gold freely to governments
and central banks. Furthermore, for the Fund to make detailed SJB cific decisions or
to lay down general principles on difficult subjects like gold sales to industry or
to questionable governments may weH save conscientious members like us months of
unhappy wrestling with ourselves, the way we have struggled over ARAMCO sovereigns.
After all, our best Treasury answer to that question was to pass the buck to the Fund.
The fact that the issue has come back to us again through the Fund seems at most no
more than neutral as an argument in favor of the Fund abdicating in the gold field.
6. Possible II. S* sales of gold to Syria and Saudi Arabia (as distinct from
ARAKJO) seem actually to be much less of a problem for Fund or U. S. gold policy than
gold sales by South Africa, Mexico, Peru, and other Latin American producers.
Saudi
Arabia isn't asking for gold, and at least Lebanon seems to be holding its gold
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-6-
purchases in official reserves (however little sense such purchases have made).
Lebanonfs apparent example is some implication that Syria may likewise not be
feeding the gold into the open market—at least for the present*
7. After two years of intense study of the requests of "American companies
operating abroad (^ftiich) need gold for legitimate operations" (your argument in
3-d), I do not know of any such cases which are valid. There was a reasonable
argument for helping ARAMCO get sovereigns in early 1943, but those circumstances
have now changed materially. The American companies' arguments have now turned
into disguised (and possibly not entirely ingenuous) efforts to profit from the
existing premium on gold sovereigns over their $35 parity, or a complicated form
of higgling over the level of royalties.
8. In summary of my points 1 to 7 above, I find that your points 3-a to 3-d
do not really hold water in the last analysis, even though they have considerable
superficial attraction.
Likewise, even -though I tove been -voting for it, I am afraid there are enough
serious holes in the modified policy you recommend in your 4-a-b-c to present its
being any genuine improvement.
a)
The 'minljTiizing of premium gold transactions as an element in exchange
instability1 which you suggest appears to be mere words that gloss over the issue
but not change the basic facts at all (whatever they are).
At best the suggested
announcement would seem to say that the 1947 gold policy isn't very important any
more. But it only evades the question of whether the policy was important or correct
when it was adopted in 1947, and the further question of whether the principle might
become important if private demand for gpld increased. Also, pointing to the reductions in present premiums as justification for relaxing the^f policy is indeed a
wry gesture, since it mainly indicates only the wholesale disregard of the policy.
Moreover, the premiums on gold bars now are only a little lower than they were
before the Fund's policy (and intensified speculation over devaluation in 1949) put
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premiums up.
- 7-
b) To return the problem to member countries also seems rather selfdeceiving verbalizing* It really means the greatest possible flouting of goldimporting countries' prohibitions by a majority of the goldr-producing countries,
with the U* S,, Canada, and Australia in a pitiful dilemma of whether to be suckers
for a doubtful and ineffective principle or to let their gold miners get their
share of any premiums along with the rest* It seems abundantly clear that those
controlling the sale of most of the "world's new gold production will have no serious
"regard for the desire of many countries to prevent private import of gold11*
c) This third point likewise seems a pretty empty though pious hope to
urge channeling gold into official reserves and to avoid official transactions at
non-par prices.
In short, I am not surprised that we have not won adherents to a position which
is so confined to phrases which only scrape "by unsolved problems*
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Secretary Sigrder
Assistant Secretary Martin
O"7
Kr, Southard (f^
0.3. Position on the Premium Gold Policy
I have been informed today by the Alternate Director
for South Africa on the Pond (who is, of course, an Australian)
that Dr. Holloway and one assistant are arriving in Hew York
about Karen 28, to proceed to Washington to participate in
discussions on gold policy in the Fund. The South Africans are
being urged to minimise the is$>ortanee of this visit and to
make any reference to gold discussions very casual, nevertheless there will inevitably be some publicity when he arrives.
I hope that prior to his arrival the United States position on the above subject can be fairly firm. I also assume
that consideration will be given as to the nature of any
informal conversations which Dr. Holloway may wish to have
with U.S. officials other than syself.
cci Mr.
Mr* Arnold
Mr. Eddy
Mr* Southard
March 29, 1950
Q. A. Mdy
Dr. Buaschau's arguments for U.S. paying a higher price for gold.
According to a State Department cable, the reason why Dr. Busaohau is
accompanying Mr. Holloway from South Africa to Washington is because a Government gold expert was not available. He is an economist and accountant,
apparently working as consultant to a gold wining company, Consolidated Gold
Fields, and one of the editors of the South /frioan Journal of Economics.
However, it seems probable that Dr. Busschau needed no special urging, since
he has b*ea writing the strongest sort of exhortation11 to the U.S.A. to take
action on gold. His recent book *fhe Measure of Gold elaborates an article
in the March 1949 issue of the South African Journal of Economics, called "The
Case for Increasing the Price of Gold in terms of all Currencies." this memo is
based mainly on the latter.
i)r, Bussehau argues hard for an increase in the price of gold on the order
of 100$ or more, especially in terns of the tJ.S. dollar, but at a time not entirely
set. The devaluations last September did iot at all satisfy his ideas*
The only reason he seems to offer for advocating a general upward valuation
of gold is the need to increase international financial liquidity. He says that
a higher ratio of gold to total money supply is urgently needed to free the world
from restrictions >f international trade and finance and to avoid a deflation like
that of the 1920*s and early 1930'i, which was the result of inadequate gold ratios,
More gold value is needed, he says, to support existing superstructures of credit*
Me (Bakes a special appeal to the U.S. to recognize and live up to its great
responsibilities by raising the price of gold. The last two sections of his
March article were titled "The Responsibility of the United States" and "The
Challenge to America.* He may be coming as a stan with a vital mission, a plan
whose adoption he thinks will do enormous good for the world.
Critical Comment
He writes in a technically trained idion with apparent sincerity, calmness,
and public interest, ftit in my opinion his argument is a network of errors and
oversights from beginning to end. His confidence in his solution seems so naive
and oblivious to familiar difficulties that it is hard to accept as completely
genuine*
His whole argument starts with the idea that gold is the only real^ money,
the only final settlement of credit obligations, and the only source of banking
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- 2liquidity* That initial idea is, I should gay, about 95$ wrong, even though ft
Majority of economic professors and textbooks might agree with Dr. Busschau.
The conclusions based upon that concept are vitiated if the concept is faulty,
as I believe it is. The rest of his mistakes are mostly failures to see the
difficulties aad inadequacies of his cure-all, the general increase in prices of
gold in terns of national moneys.
Modern national monetary units do not consist of gold any longer or eren of
promises to pay gold. They have a reality and existence that is independent of
gold, the pound sterling particularly is alaost entirely separable from gold,
despite the formality of the parity certified to the E^6. The 0.S. dollar, also,
is aostly independent of gold, despite our gold reserve and the la* still on the
books which says that the gold dollar is oar standard unit of value and that the
secretary aust ataintala all forms of U.S. ai»aay at parity with that standard. Sven
that law given implied recognition to U.S. aoney*s existing apart fro» gold and to
its being quite capable of varying from gold in value* At the risk of stating a
metaphysical point too briefly, it seems correct to say tint all modern moneys are
fiat moneys, including gold, aad that gold now has the value it has because the
U.S. is willing to exchange unllnited aaounts of it into fiat dollars at a rate of
per ounce.
Dr. flussehau gives a scientific tone to his conclusions by references to
changes in the ratio of gold to $oa*y supply running back far several decades.
But his statistical proof that the ratio of gold to money is now dangerously low,
even in the U.S., is suspect, beeau»e he takes If38 as a base. That period bed
most exceptional gold/money ratios, because gold had been written up aad credit
deflated. However, it would be fruitless to take the tiae to argue about
Dr. Busschau1 s statistics.4^ His idea that the U.S. needs nor* gold reserves in
to allow external investment on a large scale is aluost breath-taking in its
Mis article makes no mention whatever about the possibility that dollars
serve as reserves for foreign countries Just as well as gold. The problem of
whether there is ^enough gold*1 for aenetary reserves is perhaps a real and surely
a respectable one which deserves so*e study-smy, by tine federal Reserve* I aa
satisfied that th&particular question will pretty well look after itself, by
foreign countries holding dollars as well as gold, provided they can ever reach
the stage where they get aad keep the dollars.
Dr. flhssnasu show* no slightest concern over the usefulness in our accepting
and paying for gold for purposes of reserves if its value can be written up a
hundred percent or more whenever this and other governments desire.
He gives almost no recognition to the inflation problem for the U.S. if
foreign countries could unload their domestic inflations onto the U.S. by
exporting huge additional amounts of gold to us to buy goods without effective
limit.
Be seems oblivious to the prospect of gold-and-dollar-poor countries quickly
using up the windfall reserves they would gain by our doubling the price tag oa
gold bars*
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- 3JSven the managing editor of th* South African Economic Journal, though
hiaself believing that the eventual revaluation of gold is necessary and inevitable, felt obliged to insert a concent right after Dr. Bussehau'a article
pointing oat some of the shortcomings of his nostrum. He cites, among other
things, the vide range of appreciation of gold needed to restore gold/money
ratios to their 1938 level—12^ for Switzerland, IU.% for U.S., 300-40G£ of several
European countries, 933^ for France, 10Sl£ for Netherlands, and 3271# for Sweden.
Of course all the ratios would be altered completely if dollars (and transferable
sterling et al.) were counted as reserves along with gold,
Dr. Busschau refers repeatedly to gold as "global money* and gives elaborate
accounting analyses in tersts of national and international liquidity. The
temptation to drop the *«* and the space, leaving globaloaey, is both irresistible
and descriptive.
In suaaary, I'd say that Dr. Buaschau's analysis &t the world's monetary
problems la lamentably superficial aad mistakenly doctrinaire.
GaEddy:hJl:3/29/5C
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3,
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STANDARD FORM NO. 64
J^
UNITED STATES GOVERNMENT
Office
TO
:
Mr. Martin
:
G. A.
SUBJECT:
DATE:
April 14, 1950
y^e interrelated problems of our minting coins for Arab countries,
Aramco sovereigns, and the Fund Gold Policy
If it will not seem an intrusive burden on your attention, I should like to
submit a summary of the main pieces of the jigsaw puzzle which I see as having to
be fitted together currently in your decision on the three aspects of our gold
policy mentioned in the title.
1, The Arab countries are feeling that they are being discriminated against
and are quick to notice if we do for others what we decline to do for them. E.g.,
Syria quickly complained to our legation in Damascus that we refused them what we
were doing for Saudi Arabia. A high degree of uniformity of treatment, as well as
helpfulness, would be especially desirable in this aspect of U*3e foreign policy,
2. The State Department man An the Iraq-Syria-Lebanon-Jordan desk and his
economic adviser (Messrs. Harlan Clark and Norman Burns) called me Thursday just
after our long meeting on gold, to say that the Arabs were feeling particularly
suspicious and resentful of us just now; Syria seemed to take our refusal to mint
their gold coins after long negotiations quite hard; and that, while asking no
special favors, they in State would be glad if we could assist Syria, without having
to violate any firmly-entrenched general Treasury policy,,
3* Syria1 s assertion that we were minting coins for Saudi Arabia is a partial
misapprehension, but only a minor error. The Treasury with full clearance and
formality through official State Department channels volunteered to Saudi Arabia in
December 194-7, (at a time when the Mint had just accepted an order for more gold
discs) that we were ready to mint gold coins of their own design for them, or gold
discs, or we would sell them British sovereigns within certain limits. Saudi
Arab5.a cancelled that order for discs and instead ordered two lots of sovereigns
totalling §4 million at par. We had minted them some gold discs earlier in 194-7;
we helped Aramco get $82 million worth of sovereigns; we still sell sovereigns to
Greece; we have never raised any question about our offer to mint Saudi Arabian
gold coins. Thus, Syria is right that we have helped Saudi Arabia on gold coins*
Furthermore, we have an open, specific commitment to Saudi Arabia, to make them
gold coins, which is just what the Syrians are askingo
4. On the other hand, our offer to Saudi Arabia clearly contained a reference
to our support of the Fund!s gold policy against premium gold sales* If we wish to
say that that policy now prevents our making them gold coins, we could do so with
some consistency, in view of the demonstrated international resale at premiums of
gold going into Saudi Arabia. The text of our 1947 offer is attached0
5. There is a good chance that a more or less specific request will arrive any
day from Jidda to mint up to $10 million of new Saudi Arab coins. Such a monetary
plan seems strongly favored at the moment and is the best monetary plan now under
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- 2consideration for them. The gold coins are being thought of for internal use,
but I believe that heavy exports are likely* An informal U.S. Embassy inquiry
on whether Treasury would mint and sell suoh coins has to be answered as soon
as possible,
6. Syria has not recently had gold coins as the major circulating medium,
the way Saudi Arabia has, but this was due primarily, I suspect, to the force
majeure of the French mandate authorities rather than the wishes of the people.
They were^ake^ ^through the French devaluations from the 190 franc down to the
2<b franc,Tw&«irthey became independent. The assets behind their eurrency^consist
mostly of frozen franc balancesc The Syrian public are probably not much less
primitive and given to hoarding gold than the Saudi Arabs are* Gold coins may
well be a desirable element in the money of both countries for some decades to
come*
7. So far as the Fund!s gold policy is concerned, most gold coins delivered
to Saudi Arabia are sure to be exported and sold for the best premiums obtainable,
unless the supply is held to the very small proportion which might go into semipermanent savings. The Syrian request, on the other hand, is from every evidence
sincerely intended to go into the central bank!s reserves against the paper currency,
Just why they need, coins rather than bars, except for vague prestige reasons is not
clear. Of course there is no guarantee the coins will always stay in the bank, but
gold reserves are not meant to be buried forever. The Syrians do not seem to be
reselling their gold acquisitions currently to get the possible profit on gold
bought at $35*
/
rJ-
S. I take it there is no quootion of our selling gold bars to Syria. We do
not refuse to sell gold bars to any country which is selling gold internally. A
number of countries could be cited. Some sell coins made in their own mints or elsewhere.
9. Syria and Saudi Arabia can presumably get minting done at a number of
places. Selling them gold at $35 is a rarer privilege than minting coins for them
would be. The only reasons I know why Syria wants to have the coins made here are:
(a) the top reputation of the U.S. Mintj (b) the speed, low cost, and technical
quality of UCS. Mint work; (c) the prestige of being able to say that they ordered
the coins from us; and (d) the fact that.they have already (prematurely) announced
publicly that they were getting the coins made in the U.S. They were misled by the
fact that the Mint gave them quotations for minting and the Mint assumed the only
question might be over our selling gold for the minting job0
10. I for one doubt whether there will be any serious domestic repercussions
of complaint that we will do for foreigners what we deny our own citizens. That
intention was clearly in the Gold Reserve Act of. 1934, which banned future UCS«
gold coins but said the Mintfs authorization to make foreign coinage was unchanged.
Our having made gold discs for Saudi Arabia in 1947 received as much official
publication as the Syrian job would—a line in a table deep in the Annual Report
of the Mint, which in the Syrian case would be issued in the spring of 1951 or 1952
(depending on whether the order is completed by June 30, 1950 or not.) Our exports
and sales of sovereigns to Greece and Saudi Arabia have raised no trouble of a sort
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- 3that would suggest refusing new coinage orders, so far as I have ever heard,,
Professor Spahr!s Monetary Notes may or may not have mentioned the Greek sale,
because the Times had several Athens stories on them, but I know of no other
adverse references,, Even the. Aramco sovereigns (not the sovereigns we sold
direct to Saudi Arabia) v*?&nv*A some Garbled publicity bat didn't seem to
generate any important public complain-Cs. (Skillful handling of reporters no
doubt helped head off the chance of embarrassment.)
11, The Arabs would probably learn and resent it if the U.S.- Mint makes
gold coins for any other country at any time in the next few yearse Hence a
negative decision now would tend to require refusal of all similar orders for
some years to come.
12. On the other hand, our making coins for either Syria or Saudi Arabia
would make more difficult any withholding of approval for South Africa to make
sovereigns for Aramco. Differentiation against the South African proposal, if
we should wish to oppose it, would apparently have to be based on the following
grounds, all of which would seem to be more or less questionable and far from
likely to satisfy South Africa:
(a) the Syrian coins are apparently going into bank reserves and not public
circulation;
/
(b) the Saudi coin's which may be ordered from the U0S. could be made in a
quantity limited to domestic needs— if we should insist on it, though this is
only an option and still to be worked out;
(c) the Syrian and Saudi orders are for sovereign governments directly and
not for a private company;
(d) the Syrian and Saudi orders involve no premium price, whereas the
South African one may (or may not).
13o If Syria and/or Saudi Arabia get gold coins either from us or South Africa
it is likely that other countries - e.g., Egypt, Lebanon, Iran, Israel, Jordan,
Ethiopia, French Somaliland (which now has the Jibuti franc backed 100$ in dollars),
Tunisia, Morocco, etc. - will also "want in." Egypt is now asking for bids for a
mint capable of making all sorts of coins, including some of gold, and Iran already
has a competent mint. Needless to say, if two or three such countries get in the*
business of circulating coins made from gold bought at -$35, all effectiveness of the
Fund1 s restrictive gold policy will be lost. Even one country may be enough to
satisfy all premium-price demand.
L4. Our minting coins at cost for Syria and Saudi Arabia et al. may be one
good answer to South Africa's deciding (if they do) to sell gold indiscriminately
at any available premiums.
15. Our refusing to mint coins for anyone may drive them to place the order
with South Africa, possibly at premium prices. There is the other possibility,
however, of their getting the gold at $35 and having the minting done elsewhere,
or even of getting both the gold and the minting at parity price at some other
government mint.
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-4 16. The British Mint announced some months ago that they were going to
make a quantity of sovereigns in order not to lose the skill of making them.
The U.S. Mints are losing the handed-down special technic needed for gold coins,
s
Decisions pending
Open questions on which Treasury answers are awaited are as followss
1. Gabled request for reconsideration of refusal to mint Syrian
coins.
2. Cabled request from U.S. Snbassy inquiring whether we would mint
coins for Saudi Arabia.
3. If (2) is refused, should we try to reduce Arabian disappointment
by withdrawing our open offer of December 1947, on the ground
(if true) that we have decided to mint gold coins for noone.
4. Fund approval of Aramco-South African sovereign deal, not immediately
up for action but involved in current Fund gold discussions.
Mr. Southard has asked a Treasury decision.
A decision favoring any gold coins for the area will probably make the British
unhappy, since they apparently want to fix the sterling balance problem in that
part of the world by preventing the existence there of any commodity capable of
serving as a reliable store of value, which the public might wish to purchase
with sterling or any other currency.
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Draft of Aide Memoire to be handed to the Saudi Arabian Minister by a
State Department Representative
The recent order of the Saudi Arabian Government for approximately
|2 aillion of gold pieces was carried out in the form of discs bearing
the stamp of the U.S. Mint and a statement of the gold content after
assurances had been received from the Saudi Arabian Legation that these
discs were the form of gold piece most desired for that particular order*
Being anxious to expedite the handling of future orders and to assure
the provision of gold in the fora most suited to the monetary require*
nents of 3audl Arabia, the Treasury has requested the State Department
to advise the Saudi Arabian Government as followst
For future orders insofar as they are consistent with the established principles of the policy of the United States with regard to sales
of gold, the Treasury is prepared to sell to the Saudi Arabian Government
either gold bars, gold pieces such as are now being minted, any gold
coins of Saudi Arabian design, or, because of their role in the monetary
systea of Saudi Arabia, British sovereigns. The last are subject to the
Halts of the supplies which have recently been received or which may be
received in the future. All these forms of gold are sold on a weight
basis of $35 per fine troy ounce plus 1/4 of "& handling charge and any
other minting and handling charges which apply to the particular order*
In general the Treasury sells monetary gold only to foreign governments and central banks and only for legitimate eonetary purposes, including the settlement of any balances of dollars owing to the foreign
country. Furthermore, the Treasury is anxious to carry out all policies
of the International Monetary Fund, Including those of discouraging
international sales of gold at premium prices and sales to private Individuals which aiay undermine the foreign exchange stability of other countries.
GAIfdmhJhjl
12/17/47
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jEi^^jj*^j**'^^f'^y^2^5?5
Saoratary Snydar
Mr. Southard
SiaeuaaioBa OB Gold Policy with tha South Afrlcaaa
1. Sogioalag oa April 3 and ronaiag throughout thla »oak Hook*r and
I «ro participating in infer**! o*»tiag» with Haaara* Boiloway and Baaachau
of South Africa. Haartnawy and Bryoa (tha latter froa tha Canadian Traaaviry)
aro participating lor Canada* Crick, tha Hritiah Alternate Director on tho
Fund, is pnaaoating tha 8.X. polat of iriawj aad KeFarlaad and Garland
(Axwtrallana) ara attaaditig ia tholr capacity aa Dlractora for South Africa
but ha*a thua far *ald notJdiie at tha »«atinga.
Oatanaibl^f thoaa maaiiaga aro to Inf cjm y» Sooth Afrioana what
tha U.s.f Caaadiaa^ aad H»IT* Dirootora iataod to taka in tha fund
oa tha praaiu* gold poli<gr, aad to diaonaa any aapaeta of interest to tha
South African** ggaa^ar^ two aain at&jocta hava aaargadt (a) Prcbabla
iauth Afrioar* attituda oa pra^bam gold policy* oa tha aaauaptlon that policy
will bo oontinuad by tha ffcad* (b) Viaaa on tha prioa of go!4* In thia
aaaoiana^Mi X atralll aadaavor briofly to aumariao tha aaia polata of
mice oa thaaa two iaaaaa at tha aad of thr*o long aaaaiona*
3. fba South Africasa now knew that tha T!«5.f tho U»K*f aad Canada
have included that tha fund1* policy wldoh oppoaoa axtomal aalaa of
at preal^Bi priooa ahould bo ooatlmwi* It la *y pyaff oa tha baaia of
i a011ottay*a aoaaaata* that tha Soutii African attitodo «ill ba about aa
follow* i
(a) Scmth Afrioa dai^ra that tha Fuad haa tha l*gal povar to forbid eountrioa to onga^o in private axtaraal aalaa of gold at preniua prloaa
aad if tha Pood paraiata in aaaorUng auah lagal pP»ar> South Africa will
protoat by j aatfrlug all roatraiata oa auoh axtaraal aalaa.
(b) If tha Fund baaaa ita ooatiaaad policy oa a broad appeal to
ccuatriea to rofraia froa aueh aalaa ia tha iataroat of oooporating with
ethor euuatrioa mo havo balaaco of paymofits dii'ficultioaf «tc., South
Africa will probably accopt tha policy, «t*a t^iough diaagraaing with ita
officacy or doslrabiUty.
(o) So^tth ATrica wiii continuo Ita praaaat praotioa of paraittiaa;
Dr. Kolloway inaiata tliat tba OoYornaant anforoea propor ffftpurff oa aaah
aalaa*
It* tba South Afriean viow« oa tha prioa of gold aay ba aaaaafiaad aa
(a) Coanodity prioaa having inoraaaad in raeaat yaara, the
tioa of tha $J5 prioa for gold aaa inaraaaatf tfea burdaa or drain oa
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Federal Reserve Bank of St. Louis
reserve*. This increases ths aeessaity for coimtria* outsi&s of the
dollar area to eassarvs rassrvt* % reducing dollar imports. I&LSSS seas
relief is found, ulUas,taly worldwide deflation «U1 be the eo&sequsocs*
(b) Aeeoriliflgly gold should b« revalued la tarsa of all paper
, tha wwmlsiatJloii Yve^iaf gensrally ie accordance *lth pries
level changes, although othsr factor* such as war-tiia* dislocation of
axport capacity would enter late the calculation of relative adjustasata.
It si^ht bs said tiiat His dsvsluatUns of last Saptaabar in gsasxml rsersatsd a fropsr pattara of axehang* raUe, saeb IB rslatlen to others, but
tlmt tte relation of all currsncie* to g©ld rsnalas to bs
(c) The direct b«aafielal consequences of an increase In tbs
of gold would be taa write-<ip In tlis talus of gold rsssnrsa> aad
inarsass 1m val^i (and probably qpa&tlty} of goM output wMoli weald bs
fad into warld raaarrsa* Alao# csatral ba^s and trsaeurlsa would bs abls
mm effectively to compete t» gold with prlvats goM Marketa (legal and
(d) tfea Swtli Afrlsaas sasttarissd tbsir visws i& saying that tfesy
not claim that an iaorsass in ths pries of gold would, by itself, sol-rs
sush problaaa as sterling oocvertibi 11 1^—cle&rly ths ¥»T* and fsstsra
Karope nu»t take other MSASWSS io addltlom* 1st Uftsy profssssd to ass a
^•o^rssaivsly deflationary preamars sricij^ froa tfcs out-of-linene** of ths
offieial gold pries*
$* At ssvsrsl paints in tlis courss of tbsss di»cu*slona I siunarissd
trte 9«S* vlsws about as follows*
(a) «s ars q^its aware tliat SB Imrsass ia tiis pries of gold
would increase tlis value of g0M reserves* B*at, wdsss other ^aasurss ars
taltfsn In ths direction of juotematlonal balafios, this iaprowoMttit in rs•erve pc^tio^i woold be ahortr-livod, Moreover, sv«a t!w tsaporary effect
la «a^r oountries aigbt bs perverse. In aany L&Ua A^Msrioan countries,
for example, a decrease im gold aad dollar fsssrvss toi«und tits daagsr |>oint
asserts ths'nsst sffseUvs presmire for at»»iag to grips with iatsraal infXatioa md othsr cause* of ths iiistatdUty which rssmlts la balaocs of
troubles*
(t>) te &lao rseo^oi»e Utat an incrsass la ths pries of gold no^ld
ths valtt® (and probaaly ths qps^titr) of naw gold aad that tills
bs a ootitin^ilng advaatags to aany so^itrlss*
(c) However, us fail to sss 1ft thsse two conasqusness soy enduring si* laportant oontribetion to the basic problam of ittternational
aace mileh is ths anabsr ©us ia«us*
(d) Aeooraingly us fssl justified la elvi«^ d««daaiics ts ths
rea«€ii» for k«^p4ag ths prios of sold unchanged, *bleh ariss out of
o*tr tim situa-Ucii is ths Halted States* 1 elaboratad the aors important
of tl-'*0»« rsasoas*
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-36* 8r* Bollcway at out peiat said b* wa* rwccncil&d to tht U.S.
tofc©Mtfct prtet of gold whtrt It le* Howwvtr* at asothar
point fcoth Itelleasay and Buaachau tagg»tted that condition* and attitiidea
1« tb« H*S* «wm a lit tit &H7« fatorabl* than «v^i a year ago te a r»c<«itia«ratioo of the £pa®tim* I do not b&tiftire to* Scuth Africafie &avt any
idea th*t the tj»s, of fie;lal pceiUcm will bt ehangtd in th« mar futort*
UoHow^'s eoiphaais <m the t«mporary aoatyraa b«t% taken If So«Ui Africa
to deal with tht coottqutnett to it of th* pi«®«it geld priet supports
this conclusion. liowaver, it it probablt that th$y b«liwe timt time- aad
ev«»tt ar« ruasiiig lit tliair favor and that ultimately the prlet of gold
will tot out of th* aati-deflatlcmary noaaures i^i^s tht 11 *S* will tuppcrt.
In tht attutlat thty will do wtiat ^tor eta it ktap a firt goiag*
ott Mr* «Lllia
itr*
Cc :
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Federal Reserve Bank of St. Louis
This document is protected by copyright and has been removed.
Author:
Wanders, George
Article Title:
The Week in Finance
Journal Title:
New York Herald Tribune
Date:
April 30, 1950
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Federal Reserve Bank of St. Louis
Mr. Southard
March 30,
1950
Q. A. sady
Heaarfcs Begardiag British QeM Policy Contained la a Haricot itepesheet
Interesting coaaents on British gold policy aro contained la a nine-page
aiaeograph report advertised for 13 by "Reports on International Finance and
Currenolos Steplre State Building*. I quote below the aost interesting paragraphs
regard lag the British and will send you the whole report aftor I have gotten It
baok from a quick Treasury circulation. Tfaore aro also SOBO interesting paragraphs
about oil company gold transactions*
If thoBO reports about Baak of England collaboration with South Africa aro
reliable (I have no idea of their reliability), the Bank1* interest la maintaining the XKF baft on international preaiu* sales would soosj to bo a screen and a
device for increasing their receipts fro* sales to the private market• they would
in keeping U.S. and Canada sales free competing for the available premiums.
"The Ittaodlato future of the internetioitfcl gold market will depend
largely on the outcome of the conflict between American aod British
•onetary policy Makers, they aro now following opposite policies,
without aueh publicity.
'British Beltfi&ii ami DBtttb tiuthoritids authorities &re libertilisiai
sejf to bmr fre> ^r^it\ gold f. o. b. London. Eottfyfja fy Aat*«rp. ^
•At th« «&•« t*a«» re»trietian8 ar* t%ht«tt«d la the United State*.
Interested firms hare been actTlned aocordliigly. Brea experts of unrefined geld have been aade subject to rigid controls (expert licenses.)
''International gold policies cannot bo decided la iashlagtoa, either
by Hlo 0. S. Treasury or by the International Monetary Fund, if a powerful
bloc (Great I&rltala-Qaion of South Africa) follows its own rules, or ao
rules at all. Bat Interested Aaerican companies will bo at a disadvantage
IB international gold competition.
"It will be very difficult for the 1. M. F. or its Committee oa Gold
toteatcerecommendations m which Araeric&n and British representatives eaa
agree. le should not bo surprised if the gold report will not be reported
at all—off icially.
I/ AlLunderlinings are quoted from the original report.
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Federal Reserve Bank of St. Louis
-2
fa* collapse nf tfco fold siarkat in
China 1* only a aupploaieittar/ factor.
*...S«v«rml gorcrmumta hava entered tb* highly profitable boslnoas
of alatlag a*w *oH eoiaa.* No OR* k»ow» tew aaay a*w gold coin* have
, how Many ar« olrcui*ting....
(Ov*r a pag* ^ eoryiMaratloa about tba Hongr iaag aarie*t indicate* «Kt«fi«iv*
ictirity there, with ao ref*r*fic« to official restraints. Gold can b*
at baatai)
"SINGAPORE
»,
t
Africa supplie0 bar gold via Loodon.
>thar sonrea* ar* tm*d too. I-arg« ammatta 0f tbij gold raappoar la
Haareastera banka. ?b« fold la raaold n^alast dollar
starling la
to finance imports?.
half of th« gold paid as ail royalties la ra**ld to
(about K>H to illan, sbaet 10^ to Paris, about 10^ to araaaol*). That*
itarcotft will bo fr^tljr af f eetod by pajwoat af bar gold inatoad of coina
to Arabia.
Sato* for oovereigoa flootnato aoro than la Boropo.
«or« tbaa Mapolooast la r*y»r*ai »f tb* troad la Trance. 10 to
isarglaa
for dollar qtiotatioas af Sororol^aa in Istanbul aad Aloxandria
ara not umiaual.
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Federal Reserve Bank of St. Louis
•3
• ••
"Official oxparts sorlously coasidor rointrodueiog freo circulation
of gold colas mad ooaploto ronoval of restrict ions. &*eh a nor*
appoar as & way of uafrooting firlfmto fo34 heard •.
tho gol4 aarlcot !• o»ao§oA oy ttoo Gor«rtM«nt, which «o,ko« llboral
of tho tor» 'indwstrial goidl,' Is closo oooporatlon witb tho Bank of
ttllMWi
Britain1* «haro In Sooth Africa 1 * 1950 geM
will
;*robafei,r bo elooo to 5@$«
Hffct BO* v«rjr largo mines aro bo ing
rapidly derelopod, f ITO «oro oqaaHjr *bij cinos aro noil advancod la tho
plaaaing stage, and thoro lo tJio poseibilitj of furthorttJjMWIs tho vicin
ty at a lator stago* total oa*t of tho 11 ainaa, iaeliKliiig sorrieos mod
aaoaitios, will b« up to i 2€50 oiUioa.* TIM Flaaiwo Houaoa* O.F.B.
capital roqulrottoata aro tho sale roason for tho prooont stagaatlon la tho
sorbet &f kaff Ir
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Federal Reserve Bank of St. Louis
Mr. George Haas
April 20, 1950
Mr. Wm. MoC. Martin, Jr.
Letter to Senator Thomas
I would be inclined to leave out the last two sentences in
the fourth paragraph as too controversial to be useful in this
type of debate and addinr very little to the substantive argument.
Otherwise, I think the letter is very r;ood, although, if you wish
to be ultraconservative, it mi^ht be wise to put a period after
the word "today" in the sixth line of the second paragraph and
let the record you refer to in the third paragraph of the unhappy
experiences in the twenties and thirties, by inferences, bear the
brunt of the argument.
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Federal Reserve Bank of St. Louis
nW
«gf a^*»
'4W**r TT^^*
' flliS Jmaar
o O ra
l
ffeit it in reply to your latter of April ?* 1»SO trfcnswl'-tint a letter
dated April St 1^60 fron Mr. 4. ttn^ert t«ithf Saaratary af the fhoeal*
Catmail ef the ^ritor» ^a\li Mine Opeimtort
raaervea of the %ltad £tata«»
the gold reaerwa <tf the United Statea, *iiieh tnaMat te ««* 1/4 billicm,
vt&il* &m reported official r»oor»»* of th» ro»t of tit* world total only
•OMI 111 MlUoa § api^ftr to lie More th*a e^NK|u»te for owr eee4«» FxArthonwr*
aothia^ ttofct B»«»ift h&« done or emu 4e iqr •eiiii of ^eld with fwepeet te» the
ruble e*a •»!» It *u^rior to ^se doli^r or ft thre*t to it«
At of po««ible i»t*r«*t te your oonetituent there i« eneloce^ the
CireuUtiom Stftteaent of United gtfctee Mooey . «l^«fe «hownt
hin^i, lie reeerve* re^^.re4 to be held agRinct aaah type of
aad the anoimt of tb> ^tioa*s gold reeerve,
ap%aar» to ea anaar the Uppetoitm that Congr»«* in
rettmat t*e $o!4 oostent of the dollar to i*S? graiaa or a earreapoadiag
mine of I&6 per ooaoe nhioh i*e Fvaaideait ha» failed ta put into of foot.
thia QapartMHBt 1« not aware of any avail aetiou Jy Co^raaa* % a Fraola*
aatiom of Canary 81§ lf»aa iaMiad under the authority of the *et &f
May 12* W3t tlw Freaident redneed tho rold eentent of the dollar from
IS** £*ai&» 9A® f li» to IS 8/%l gvaina &A^ fl»»» »*• reatilt «e» ma ineraaaa in the Monetary valno af cold In term of H*i* dollar* froa ltO«6T
per ounce to lii par auaaa» 2ha authority af the Fraaidamt to amlet esy
further ahaii^a« 1» tl» gold eon-tent of tlia dollar ty proolaaatioii expired
am <li«a iOt i94St and there it ao Coof.ro si r-r*! »«thorlratioa for a re*
4tt«tloa i» the goM ooetent of the dollar otttata^diag at the preaant
tiaa*
It ia hoped that the afeova inforwtion wiU answer aatiafaatoriiy
the eoa9mai.oa%len nhi«h haa lieem addreaaad to you* if additional inforaafeioti ia neadedy plaaee da aot hesitate to write ae a^a. Mr*
letter ia retunaad herewith* aa reo^aeeted*
Vary truly yotur««
(SIGNED) WM. McC. WARTIN, Jr,
Ite, He€«
l$i Semta Offiaa
«aahingtom0 I>* c.
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Federal Reserve Bank of St. Louis
GAltCAMtds 4/19/50
COHFIDSHTIAL
Secretary Snyder
Secretary Martin
April 1?, 1950
Mr.
Fund Decision on Gold Policy
1.
the Fund
external
attended
In the course of six meetings last week, the Executive Board of
discussed th« resolution of the Board of Governors respecting
sales of gold at premium prices. Messrs. Holloway and Busscliau
all meetings to represent South Africa.
2. After long discussion, th© Board voted to reject the South African
proposal to allow countries to seH half of their newly-sdned gold at any
price on any legal njarket. Five Directors (United States, United Kingdom,
Canada, India, and Yugoslavia) were opposed, two Directors (Belgium and
Australia) were in favor, and the refining seven Directors abstained. Tliis
is the largest number of abstentions in ^y experience in the Fund. The
Directors who voted against this proposal argued that it could result in
less rather than more gold entering official reserves! and also that it would
destroy the distinction between private transactions in monetary gold and in
non-monetary gold, which is the basic rationale of the Fund's policy.
3« By this point in the discussion it was apparent that a majority of
the Directors favored continuing the Fund's policy prohibiting external monetary transactions in gold at premium prices. Accordingly, before a vote was
taken, Br. Holloway complained again that only a few aajor gold producers
were cooperating and warned that the burden on South Africa was becoming intolerable, particularly since South Africa had not been able to obtain any
assistance in meeting its balance of payments problem. If the Fund, nevertheless, held to this discredited policy rather than accepting alternatives,
the Soutli African Government would be faced with a aajor issue—rrfiether to
continue supporting the policy in an altruistic spirit of international
cooperation, or to seek its own interest with respectf to gold transactions,
concluding that no one is interested in South Africa s problems. Pending
his Government's decision, he wished to reserve all of his Government's
rights.
Following this statement, the Executive Board voted to continue
tli© present premium gold policy. The vote was as follows: In favor, 66
percent (United States, United Kingdom, Yugoslavia, Canada, Egypt, India,
and Italy) | opposed, 18 percent (France, Belgium, Netherlands, and Australia
One Latin Araerican Director asked for delay and the other was absent; the
Chinese Director abstained. Tne Australian Director explained that h» was
voting to support South Africa, although the Australian Government favored
continuing the present policy,
li. The Executive Board also discussed the South African proposal that
a uniform change in par values should be studied and appropriate recoaaaandation made to the Board of Governors. Dr. Holloway argued that the Fund, as
an international organ! gation, should consider this matter even though the
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
- 2-
United States views were a foregone conclusion- If the Executive Board
were to recoinmend a uniform change in par values to the Board of Governors,
it would then be up to the United States (and the United Kingdom) to decide
whether to block the will of the majority (assuming a majority could be commanded) or, acting more democratically, simply to keep the gold parity of
the dollar unchanged. I replied that it was not a matter of democratic
behavior. The United States has the adiaitted right to declare its own gold
parity, and, since there is no intention to change this parity, all discussion of a uniform change in par values in the Executive Board and in the
Board of Governors must take account of the fact that what would really be
involved would be a further (although uniform) depreciation against the
dollar. I agreed that it would be possible for the United States Governor
to recognize the wishes of a majority of the members and obtain Congressional
authority to acquiesce (though holding the gold parity of the dollar unchanged 51 but I warned that no one should predict that the United States
Governor would act in this way. Moreover, in ^y own view, in the light of
the provisions of the Bretton Woods Agreements Act, the uniform change
section of the Articles of Agreement is unworkable*
On the substantive issue of the desirability of a uniform change
in par values (including the United States dollar) the Director of Research,
Mr. Bernstein, elaborated the Staff views. For the same reasons (but in
greater detail) as those I had used in private conversation with Dr. Holloway
(see isy memorandum to you of April 7, 195>0), the Staff doss not favor a uniform change in par values. I spoke again, endorsing these Staff vieirs. Only
the South African and the French Director argued in favor.
5« The Chairman did not seek the sense of the meeting on the question
of a uniform change in par values because the Executive Board has not decided
how this question should be dealt uith. The Canadian Director argued that*
since the resolution of the Board of Directors does not explicitly mention
this issue, the Executive Board need not take action on it even though it has
been considered a ^relevant consideration* in the course of Board discussions
of the premium gold policy* I said that this might be an acceptable procedure
but that I would like to consider the alternative of a clear-cut vote by the
Executive Board in order to Minimise any risk of rumor that a uniform change
in par values was an open issue.
Undoubtedly a nuiaber of Directors would like to avoid a vote on
this subject. I am sure that, isrBre it put to a vote, a majority of the Board
would support a decision not to recoisaend a unifom change in par values to
the Governors, since the United Kingdom Director has promised to support the
United States if the issue comes to a vote. However, a number of Directors
might abstain and at least a few would vote in favor of a uniform change in
par values*
6. I recoiaaend that we accept the Canadian proposal that no formal vote
be taken, provided that the minutes will indicate that the Staff ms opposed
to a uniform change in par values and that no Director proposed a vote on the
subject. If this procedure is followed, the report to the Governors on premium gold policy will contain no reference to a uniform change in par values.
Mr. Willis
Mr. Sddy
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Federal Reserve Bank of St. Louis
N T E R N A T I O N A L M O N E T A R Y FUND
W A S H I N G T O N 25, D.C.
ALTERNATE
CABLE A D D R E S S
INTERFUND
EXECUTIVE DIRECTOR
April 21,
Dear Bill:
I would appreciate it if you could have the enclosed copy of an
article on gold delivered to Mr, Norton to whom I had promised it.
I have also taken the liberty of enclosing a short memorandum
on myself to enable you to write the letter to the River Club in
New York to second the recommendation sponsored by Eugene Black for
membership as non-residents. This personal favor would be greatly
appreciated.
Thanking you for your kindness and regretting to cause you all
this trouble, I am,
Cordial
G. Cifuiana-Piazza
Hon. William McC. Martin Jr.
Assistant Secretary of Treasury
Main Treasury Building
Washington 2§, D.C.
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Federal Reserve Bank of St. Louis
MEMORANDUM
NAME:
Mr. Giorgio Cigliana-Piazza (and Mrs.)
POSITIONS
HELD: Alternate Governor of the International Bank for Reconstruction
and Development 5
Alternate Executive Director of the International Monetary Fund;
Representative in the U.S. of the Italian Foreign Exchange
Office.
MEMBERSHIP Bankers' Club of America, New York
IN OTHER University Club, New Tork
CLUBS: Metropolitan Club, Washington
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
Office
• UNITED STATES GOVERNMENT
TO
:
FROM
: Wm. McC. Martin, Jr.
SUBJECT-.
Secretary Snyder
DATE: May 1, 1950
Treasury Gold Transactions for the Quarter ended March 31, 1950
Changes in the U.S. Sold Stock
The United States gold stock ("Monetary gold stock" as shown in the
Daily Statement plus Stabilization Fund gold) decreased "by $304 million
during the first quarter of 1950 as compared with a decrease of $165 million
during the last quarter of 1949. A summary of transactions is shown in the
following table?
(la millions)
U.S. gold stock, December 31, 1949
(Daily Statement and Stabilization Fond)
Transactions with foreign countries:
Purchases from foreign countries
Estimated allowance for purchases in
process of settlement
Total
Sales to foreign countries
Industrial transactions:
Purchases of newly-mined gold
Purchases of scrap, jewelry, etc.
Total
Sales to industry
Net decrease for first quarter of 1950
U.S. gold stock, March 31, 1950
(Daily Statement and Stabilization Fond)
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Federal Reserve Bank of St. Louis
$24,562.8
/ 7,8
^ 2.6
10.4
-210,2
-199.8
/ 11*9
/ 1.9
13.8
- 17.5
- 3.7
203.5
Kr* Ifertin and Mr. Willis
April 27, 1950
0* A* Bddy and C* R* MolulU
Bepdles to Burker for aaudl Arabia and to %rla on JJ* 3* Oold Policy
Ho understand that consideration ty the IMP aoeeutive Board of tho
South Afrloan-Arftiaoo sovereign question has boon postponed until fihy 8
or later, this further postponement was at tho instance of tho Halted
UngdoB, whioh would like to have Sir Goorgo Bolton participate in tho
Fund discussions after his arrival on ifcy 8. Wo understand, also, that
tho paper on tho question by the Fund Staff will bo Indecisive and leave
the question up to tho Kxooutlvt Board*
It seeeis questionable that tho U* S, treasury replies to cables
from %-ria and Saudi Arabia should be delayed until tho second week of
Itey or later* the cable
from rttrbsr from Jidda, dated April 18, aafced
for a reply "soonest*1 on whether the freasury would sell gold to tho
Saudi Arabian Goveranent for coining, either abroad or In tho Ooited
States, as oallod for In a aonetary plan under urgent o<«slderation
&vm-m*m no inferfjatlon on Jusfe wkon Ikrfeor wlsbss bo 1*0is 3aps.tiently e»alting froasuryfs
A tologras from Eaaasou*, dated April 6, asJced treasury to reoonsider
its decision of Ifcroh 33 not to slut gold coins for %ria or any other
country, evwn though they are to bo kept la Central Bank reserves rather
than to be put into open circulation*
Our rooonoondatlons, herewith submitted for your ooasidemtioa in
tho hope that decisions say bo zaade without Halting for a Fond decision
on Aramoo sovereigns, are as follows s
1* fell tyria that the U. S. Mint will aanufaeture tho gold coins
which they have
a telegram to Ifertcjer alonf* tho linos of tho attached*
the sale of gold coins for tho Central Bank of Syria (whore tho
gold coins are an irrational symbol of their national independence
dating back to before the French tfendate whioh began about 1021) does
not soon to be In any ooafllot with the Monetary Fund** anti-premium
.old policy* fho %-rian lesr awthorieing the coins says that they are
to bo kept In the Central Bank reserve* 3uoh coinage Is consistent
with our legislation since tho section of tho Oold Roserve Act whioh
prohibits the aaldng of D* 3* gold cola specifically authorizes coinage
for foreign countries* She atate Uepartaont Is Interested In doing a
favor for %ria if It is not la violation of our general gold policy,
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Federal Reserve Bank of St. Louis
•» E •»
policy lailaatod la tht eabl* to Bfcrktr with r*sp*ct to
OT*«wiy
«alo» of cold to Saudi Arabia i* also laado to confani to
f
tbo F^a fi doolfildn om awwlgasfor Amoaoo* A* draftodf It
aA &fftm*tlv* anav/»r to (l)
Tb» K*a«ml tM^ciiiy policy iritli i»sj»ot to sales of cold coin
bars vsa&erlyliag these l^o rtoanaBndy^d dacislon* la t3» on« out*
lliwd la Mr. McliiUa** aiMoimaflm to Ifrasrs. Ifttrtlo and
GAlddytor - 4/27/^0
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Federal Reserve Bank of St. Louis
Secretary Snyder
April 25, 1950
Mr. Southard (initialed) I'.A.S.
Report to the Board of Governors on the Gold Resolution
1. The Executive Board of the Fund yesterday agreed on the
report to the Board of Governors on the South African resolution.
The first
portion of the report will reproduce a portion of the
Fund1* gold statement of June 19k7 and the text of the resolution
adopted by the Board of Governors* The remainder of the report
will be substantially in the form attached hereto. The Governors
will officially receive copies of the report in the next few days
and tiie Executive Board wiil release it publicly on May 3, 1>95>Q»
2. The statement contains three stain decisions!
a) The existing Fund policy respecting external sales
of gold at premium prices should not be changed.
b) The South African proposal to allow half of newlymined gold to go to premium aarkets should not be accepted.
c) There is no economic justification for recommending
a uniform change in the par values of all currencies.
3. In accordance with the procedure I recommended in lay memorandum of April 1?t 1950, and approved by you and Mr. Martin, I
concurred in the Canadian proposal to omit reference to a uniform
change in par values, provided that no Director insisted on the
inclusion of such reference and provided also that the minutes
showed botli the Staff and iay own opposition to a uniform change in
par values. However, the South African Director was under firm
instructions from Dr. Holloway to press for some reference to a
uniform change in par values. Accordingly I agreed to the language
in the next to the last paragraph of the attachment.
cct » r . Martin
Gov. Szymcsak
Mr. HiiUs
Ifr. Eddy
Mr. Arnold
FAStmeh
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Federal Reserve Bank of St. Louis
The Executive Board has given thorough consideration to the
South African resolution and has reviewed the Fundfs policy as
expressed in the statement of June 18, 19k7t on external transactions
in gold at premium prices. The staff of the Fund studied at length
the various problems involved and the Executive Board carefully considered the findings of the staff and the arguments for and against
a change in the present policy. After full discussion the Sxecutive
Board concluded that a change in the present policy is not desirable.
In considering all economic aspects of the present policy, the
Executive Board noted that comparatively large quantities of gold have
continued to go into private hoards. The Executive Board also took
note of arguments that a relaxation of the FuruMs gold policy would
increase only to a siaall degree if at all the flow of geld now going
into private hoards and would have the beneficial effect of eliminating the premium on gold in terms oi dollars and reducing to some
extent the premium in terms of inconvertible currencies.
The Executive Board took the view, however, that in present
circumstances the freer movement of gold into private hoards in certain countries in the Middle East, the Far East and other regions,
could absorb substantially more of the current foreign exchange receipts of these countries and further impair their monetary reserves.
At a time when isany countries have large deficits in their international payments which must be »et by inter-governmental grants and
credits, and when severe exchange and import restrictions are maintained to avoid a breakdown in international payments, large external
transactions in gold at premium prices must increase the difficulty
of restoring international balance and the severity of the exchange
and import restrictions that are maintained.
Furthermore, it is inevitable that external transactions in gold
at pread.ua prices will directly or indirectly give rise to exchange
transactions at depreciated rates. These exchange transactions are
often in violation of the laws of the countries concerned and, in *jny
case, encourage evasion of the requirements that export proceeds be
sold at the official exchange rate. Such exchange transactions at a
discount from official rates may affect adversely ajid unfairly the
trade of other countries.
In the nearly three years since the Fond*s policy ¥*as announced,
meabers have endeavored to conform to it as closely as practicable.
The Fund lias been in active consultation with them to minimize the flow
of gold into premium markets. Although a sizeable quantity of gold
has continued to flow into these markets, the amount has been less than
it would have been if Fond members and sosae non-members had not been
concerned to Make the Fund's policy effective*
The South African proposal to modify the present policy to allow
half of the newly-nsdned gold to go to premium markets would result in
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Federal Reserve Bank of St. Louis
an increase in the flow of gold to premium markets and add to the
loss of current exchange receipts and reserves by gold absorbing
countries. Moreover, this proposal would destroy the basic distinction between the supply of gold for monetary purposes and the supply
for non-monetary purposes. It should be noted that since the South
African resolution was proposed the change in exchange rates has
materially improved the position of many gold-producing countries.
The Sxecutive Board has also studied, together with many other
relevant factors, the question of whether there should be a uniform
change in the par value of all currencies. In their view there is no
economic justification for recommending sueh a change to the Board
of Governors?*
The Sxecutive Board, therefore, recommends that the Board of
Governors do not adopt the resolution of the Governor for South
Africa. They have also decided that there is no reason to change
the policy they have expressed in the Fund's Statement on External
Gold Transactions at Premium Prices on June 17, !$*?• They trust
that raeabers will continue to collaborate with the Fund in giving
effect to the policy outlined in the Pund*s statement.
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Federal Reserve Bank of St. Louis
April 24, 1950
Dear ~>aryi
Herewith a memorandum on gold which Giorgio Cigliana
wanted me to forward to you as a result of a eonyersation
he had with you at dinner. I tried to pet him to send it
to you direct but, for some good reason, he thinks it more
appropriate for ise to forward it.
With all good wishes.
Sincerely yours.
i. McC. Martin, Jr.
The Honorable Garrison Norton
1225 Kineteenth Street, N.W.
Washington, D. C.
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Federal Reserve Bank of St. Louis
STANDARD FORM NO. &'.
UNITED STATES GOVERNMENT
TO
:
Mr. Martin
FROM
:
Mr. Howard
SUBJECT:
DATE:
Requirements of Germany for Industrial Gold
You may be interested in the fact that Germany's industrial
gold import program calls for an annual expenditure of approximately $1.6 millions. Approximately $1 million has already been
authorized for this purpose by EGA and an additional allotment
is expected by German authorities.
Approximately one third of the gold imported by Germany
will be used for internal consumption, principally for dental
purposes; the balance will be used for ceramics and gold ware
manufactured for export.
So far this year the Mint has authorized private refineries
in the United States to export gold to Degussa at Frankfurt and
Heraeus at Hanau valued at approximately a half million dollars.
These two metal processors will make distribution of the gold to
industrial users.
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Federal Reserve Bank of St. Louis
//'I
Crif< oJT TiflaiTwftiiHBa'l FJnarmi1 for tho awMtaty v&luaa
of attvar dtori**4 f*o» tho alliror ooat«f*a of tfeo forottfR eolra aiutod
out of l«&4~l«i$9* sit¥»ir d iri»& lorl£ l«r II for th* onlor of Ui« foreign
oowstri**, in oaftft i *Une« sal&«» tho *tr*t ailvor eoins sdntei for
tholr otder folJUt^itf ttoo fiwit l«id-l«*a* tm«wf«r of «U*«r, «*£ tut
«fflei«l MMfaiiiqi wt« »t t?mt ti^«. In to
ttntfliontdl bel^^j iillvor oo4iif AM ootMiidhMPOdl to bo tolMA coins*
tilt Yoliaotion risurc* ^lir«n wMtt that out ounce of fla« »il%or «oal! b*vo
**d* «»ttMNiisIof forolgn coin «qai^«l*nt ir, vnl*j* »t t&e official r»t«
of omhoft^o to o 001*1*1 n iolJUr fIgara. ffei* dollaar ftfttro NOOMO> Urgor
vtaftft tbo pivpoftlo* of sll^or to otaor aotol la tao «oi» i* «a»ll, Tbo
a* t)io oooo of
ing *168a flao onaooo of *iii»or aad billing *« oxchaog* value* at tbo
official Aaatfftliaii vatet af •163,9* f^at 1* tqalvaloob to
f lt>o omiee of ellvor
la tlia caa« of iaXgliamt our rooor<to «o not afeon that aay
0in« IMMPO wiKtod olth«i» t» tha Inttod tat«« car In Bolgi-wt until
tao y*ar in waieb to* ailv«r oriei^i^X l*»*-loaaod to
rotnr»o4« mor 4o troaaury wwoni* latHoato that Hoi^Lan tilvor
wor® aB4o olaow^aro aotamoii 194$* «*wi tfe» Ion4»loaao tra&efor of ailvor
to W^inai vaa aado* aa^l 1948*
coavaqpafaUy it **<a<i nat aj^aar ti«t aa$
fiitgr«fra.nc all¥«r «ola ^intoc it* if4$t at tfl« off Ibtal OBebai*£O rat* for
taa fwim, ia^totod a v«luatloa of 13*55 oar fiao <mne« of 01 Tver.
1* tao
and if*f tUth a fiaaftaaa of *iOO anA ooataiidug .lim f iao awatoa of
•liver. Tao forolpi aattiaftiia tralao «hioa prawailoil for tba %i»lopiaa
half dollar tm 1*44-40 1« oaami^ and aa oxaot valao oaa INI ei* t»a with
la 1944 • thlojjdan half 4»Uara war* £iv«n aa officl*! parltgr
y«fio»at of aafvomlaa^oly t«90* At toat T«lno tha
« i Ivor in i>*« 1944 . thiof^Ua aalf aollaro «aa ^iton a valnatiom of l.U
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Federal Reserve Bank of St. Louis
!• tha aaaa of tkHa
ill fllanda ahUUL&tfa v^vo sLnfead IA
,161s fin* ounces of iilw, «Bi«tt vtre givon an «fftelftl
axehango rato fey the Fiji m**te&? a&ti&rliiaa in ters» of U«a* dollar*
of $,18175 • At that off lei »l rate tha valuta placed «pon ail?** In tbo
Fiji shilling of 1943 I»M ^l.ll p«r flm
I* %ho «M>O of CitMt iirlUi% nil^wp coliw woro uliitod in
in 1943 and %H«r«*f%or i^iob iwr« »$OD f is*, f it* shiUlag
tmintd *0909 fino o«no«» of eilir«r aadl «M gliron en official
^•luo o^ tho iiritiaa «>n^ei7 authorUi«« of I«2KE5. Tlmt it
to a M&f* or eoinagd valuo of 12*22 por fine ommo of ailvor*
In %lit o«o« of Intiia, Tro»»u*3r rocorda do not ahov that »ilvar eoiat
varo wnia in India or t^o United %«io« foll«wir:« tha firat land-Xoaao
tramfor of ailvor in 194 J* Howovor, s^tawlard njpoa ooiiw that* ir*
lation in India bad a f iMnaaa of •5->*> «o^ * f iao aUvor eontant of
f ina oumaa. At tfea official mchanga rata of ttoo rupoa of l-*303» tbo
i» t^a rtpoa «M givam a valuation of tl*& par fine ounce.
In tha aaao of tHa HotborUma, aUvor eoiM «U*o4 in 1944*4$ oo»»
d *aH5 flna ovnaoa of silvar par piildar. At tha official a*eha*ga
rato of $.3774 i»or gall t«r, llui ailvor iB tiia aeint
of $1,6$ oar fiat
4imMa, riyal ooiw «oro «lntod
Is tHo oaaa of
At t&* nowinal iral^a of tbo riyal of i,|0f
,14375 fina ouncas of
wtiioh «aa mood for oortaln tranaactions daring tlw var yoara and afta*tha ailirar IB ttia ri>al m* givan a adat taluatiaa of 1*87 par
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Federal Reserve Bank of St. Louis
ia feopod tfcai tba alaovo inf oraatioR will Bioot too pwpoaaa of
Vary truly
(WQIJEDa WH. VeC. HABTiK. Jr
. i i •-
of
.
ifooao Jfrloo
. .
:es
, UN
,<tS .RD FORM NO. 01
Office
Memorandum • UNITED STATES GOVERNMENT
T0
' Mr. Martin
FROM
:
DATE:
Ma
^ 3. 1990
Mr
SUBJECT: EXPORTATION^!1 GOLD !TO EGYPT POE IHDUSTRIAL USE
Recently the Mint has received several applications from United States
refiners requesting authority to ship gold to Egypt for industrial use. We
have referred the inquiries to our Embassy in Cairo for information as to the
consignees and also to ascertain the degree of control which would "be exercised
"by the Egyptian G-overnment in licensing the import of gold for industrial use.
The enclosed Report of March 6, 1950* from Cairo contains information which
may "be of interest to you. You will note that Abdel Waned Freres, which desires
to purchase large amounts of gold regularly for industrial use, stated to the
Snbassy "that they thought that South Africa would sell them gold against
sterling pounds "but since they are requiring United States dollars they prefer
to "buy their requirements in the United States".
Based upon the discussion had "between the Treasury Attache in Cairo and the
Egyptian Controller of Exchange, and the special arrangement effected for close
liaison in matters relating to the importation of gold for industrial use, purchased in the United States, the Mint has approved a shipment of gold to Abdel
Wahed SYeres, valued at approximately $200,000.
We propose to authorize further shipments of gold, for industrial use to Egypt,
to such individuals or firms and in such amounts as may "be favorably recommended
by the Embassy.
Enclosure
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Federal Reserve Bank of St. Louis
COPY
AIR POUCH
RESTRICTED
TO: Department of State
FROM:
CAIRO 14.31
March 6, 1950
REF: Departments Airgram A-69
SUBJECT:
1+7^.119/3-650
of
3 Enclosures
February 17, 1950.
Request of Abdel Wahed Freres, Cairo, to Buy Gold in the United States,
Reference is made to the Department's airgram A-69 °^ February
17, 1950» requesting information on the firm of Abdel Wahed Freres,
Sagha, Cairo, which is applying to the Bureau of the Mint, Treasury
Department, for a license to import from the United States 8533
fine troy ounces of gold.
A World Trade Directory Report giving complete information on
the firm of Abdel Wahed Freres has just "been submitted to the
Department, copy of which is enclosed for easy reference.
Abdel Wahed Freres is a large firm of good reputation engaged
in the Jewelry manufacture from imported gold and silver. The firm
states that at the present rate of demand its "business can absorb
approximately S,000 fine troy ounces of gold per month.
Questions 5 and 6 of reference airgram raise questions of
Treasury gold policy, and the enclosed memorandum was prepared by
Mr. Judd Polk, U. S. Treasury Attache at Cairo, after his discussion
of the problem with Dr. Nanny of the Egyptian Exchange Control, Cairo.
As of possible interest, there is enclosed copy of a letter
Abdel Wahed Freres received from the Union of South Africa Treasury,
under date of January 25, 1950» th* original of which was seen by a
representative of the Embassy. Abdel Wahed Freres state that they
thought that South Africa would sell them gold against sterling pounds
but since they are requiring U. S. dollars they pre£«r to buy their
requirements in the United States. At present most of their requirements
of gold are purchased from the Netherlands.
JEFFERSON CAFFERY
Enclosures:
1. W.T.D.R. on Abdel Wahed Freres, Cairo.
2. Memorandum from J. Polk, U. S. Treasury Attache, Cairo.
3. Copy of letter from Union of South Africa Treasury.
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Federal Reserve Bank of St. Louis
RESTRICTED
Enclosure No. 2 to Cairo Despatch No.
MEMORANDUM
February 28, 1950
Subjects
Application for gold export license
From:
Judd Polk
Refi
Dept's A-69, Feb. 17, 1950
It is extremely difficult to judge the extent to which industrially
processed gold feeds the premium gold market. The Treasury Attache
discussed Egypt's handling of industrial gold in detail with Dr. A.
Abdel Hamid Bey, Controller of Exchange. It is known that
reputable Egyptian processors to some extent make only a very slight
change in the condition of the original metal, e.g., stamping of
simple ornamental coins. The Economist recently charged that some gold
was leaving the country in the form of simple ash trays. This sort of
problem seems inherent in the industrial use of gold for ornamental
purposes.
The Egyptian Government does not license the exportation of gold.
The reexportation of gold, however, is permitted with the requirement
that the profits of the processing operation be repatriated in hard
currency.
At present, the Egyptian Government does not require an import
license for industrial gold. The importation is controlled by Egyptian
Customs to whom the prospective importer must give suitable assurances
with respect to the intended industrial use and, in the case of reexportation, full reference is made to the import records. Very
commonly, the Egyptian processor does not finance the initial payment
for the gold metal and his only financial interest in the transaction
arises from the increase in the value of the gold on its reexportation.
Consequently, in these cases the Exchange Control has no knowledge of
the transaction until the processor applies for an export license and
is required to give the above commitment on repatriation of profits.
Occasionally exchange applications are received by the Exchange
Control requesting permission to export Egyptian cotton to Europe
against a parallel importation of industrial gold purchased at the
prevailing market rate in Europe. The Exchange Control approves such
applications in moderation, provided no foreign exchange is required.
Occasionally the transaction is financed in sterling, within the framework of existing sterling regulations.
The Treasury Attache pointed out to the Controller of Exchange
that under this rather weak structure of control it would be almost
impossible for an Egyptian importer of industrial gold from the United
States to give adequate assurances as to the ultimate use of the gold.
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Federal Reserve Bank of St. Louis
RESTRICTED
RESTRICTED
Page Two of Enclosure No. 2 to Cairo Despatch No. [4.3!
In fact it would be quite possible for a Dutch supplier of industrial
gold to supply, at open market rates, gold which actually had been
obtained from the United States at the Washington par, and that this
type of operation would presumably be facilitated if the United
States Mint were to supply industrial gold to an Egyptian firm on
the basis of the sort of application indicated in Washington's A-69«
At the same time, a legitimate user of gold should have the benefit
of the parity price.
Recommendation;
The Egyptian Exchange Control recognizes, as we do, the possible
abuses in the use of gold for "industrial11 purposes. The Controller
of Exchange has issued specific instructions that industrial gold may
be imported from the United States hereafter, only if the importer
obtains an import license from the Egyptian Ministry of Finance. Any
such application will be carefully scrutinized. The Controller of
Exchange requests that in reply to the application of Abdul Wahed
Freres, the United States Treasury requests evidence of his having
obtained such an import license.
It is recommended that Egyptian applications received by the Mint
be given favorable consideration if accompanied by an Egyptian import
license.
In order to give every possible assurance that industrial gold
will be used only for legitimate purposes, the Exchange Control requests
that it be informed through the office of the U. S. Treasury Attache of
Egyptian applications received and granted by the United States Treasury.
On its part, the Exchange Control will provide the Treasury Attache with
full information as to the use of the gold and facts of any reexportation. If the volume of such importation appears to increase unduly,
the control system should be reviewed. In this connection, the Exchange
Control would appreciate being informed of Egyptian applications, if
any, which the Treasury has granted in recent years.
The Exchange Control would also appreciate knowing how the United
States Treasury currently defines legitimate industrial use. It is
recommended that this information be provided to the Egyptian Government
in the interest of preventing undesirable uses of gold.
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Federal Reserve Bank of St. Louis
RESTRICTED
RESTRICTED
Enclosure No. 3 to Cairo Despatch No
UNION OF SOUTH AFRICA TREASURY
CAPE TOWN
25th January 1950
Abdel "Wahed Freres,
Cairo.
Gentlemen:
In reply to your letter of the 12th January 195^, I have pleasure
in informing you that the Treasury has advised the Gold Producers'
Committee on the Transvaal Chamber of Mines as follows:
a. The Treasury will authorize the Gold Producers' Committee to
sell to you a quantity of semi processed gold not exceeding the equivalent
of 30,000 ounces of fine gold, to be delivered at a rate not exceeding
10,000 ounces a month.
b. The price and other conditions of sale must be arranged between
your representative in the Union and the Gold Producers' Committee.
c. The gold must be processed in the Union to a fineness not
exceeding 22 carats.
d. Payment must be made by your company by deposit from time to
time of the requisite amount in U. S» dollars in the Federal Reserve Bank
of New York for credit of the South African Reserve Bank. On receipt of
advice from the Federal Reserve Bank that such deposit has been made,
the South African Reserve Bank will authorize the Gold Producers'
Committee to export the relative quantity of semi processed gold and
issue a license for export of the gold to Egypt in terms of the
Exchange Control Regulations
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Federal Reserve Bank of St. Louis
Signed/ Secretary for Finance
RESTRICTED
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Federal Reserve Bank of St. Louis
Treasury Department
Office of International Finance
TREASURY DEPARTMENT
INTER OFFICE COMMUNICATION
DATE
May 19, 1950
TO
Messrs. Martin and Willis
FROM
G. A.
Subjects Decision on Minting Gold Coins, especially for Syria
The request of the Syrian Government through the U0S* Legation at
Damascus for reconsideration of the U,S, Treasury decision not to mint gold
coins for it, first cabled on April 6, still remains to be answered. An
affirmative decision has also been urged in a cable from Paul Parker from
Damascus on May 7 and a letter from the State Department signed by Mr. Thorp*
I believe it is also true that all the Treasury staff members below the
level of Mr. Willis who are concerned with the question, are in favor of
going ahead with the minting, Mr. McNeill has already written a statement
in favor of the minting. In the interest of speed, however, I am making this
a personal memorandum without trying either to obtain any other initials or
to state the reasons other people may have for advocating that the U.S, Mints
make the coins.
First of all, I would not want to exaggerate the importance of granting
Syria's request, I believe I could explain the possible U.S, position, including a refusal to mint gold coins, to the Second Secretary of the Syrian
Legation, with whom I (with John Ghiardi) have discussed the question hitherto
after clearing the proposal to do so with State Department, in such a way
that the Syrian Government will understand the generally helpful intentions
of the U.S. and not especially resent the one point to be denied. Furthermore, the decision is a minor one in U.S. gold policy. Maintenance of the
^>5 price and our virtually unrestricted selling of bar gold to governments
and central banks are of course the really important parts of our international
gold policy.
Reasons for favoring the Mint1 a doing the .lob
My reasons for believing that the U.S. would, be better advised to proceed
with the minting are as followsi
1« Avoiding making sudden reversals in policy which leave the staff confused
and unsure when any other established precedents will be reversed
If any widely understood and firmly set policy is suddenly reversed when
there is no change in circumstances, the idea spreads through the administrative
staff that any precedent is subject to unexplained and arbitrary reversal*
The natural tendency is for the staff to make fewer and fewer decisions without
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Federal Reserve Bank of St. Louis
- 2-
complete ''clearance11 of each instance. In the case of the U.S. Mints1
readiness to make any kind of coins, including gold ones, on order for
foreign governments, such readiness has been unquestioned for decades,
until suddenly reversed on March 23 > 1950, by the meeting in Mr." Martin's
office,
a) The authorization to mint coins for foreign governments as during
the previous 60 years was an express provision of the Gold Reserve Act of
1934, in the same short section which banned U.S. gold coin.
b) There are no known instances of refusal to mint gold coins prior
to this one, and those concerned with the matter in OIF*, the General Counsel's
office, and the Mint, have always assumed the readiness to make gold coins
continued.
c) Gold pieces were made for Saudi Arabia in 1946-47. They were not
full coins only because Saudi Arabia used the obsolete gold coin of another
country, the U.K., and did not have the right to order such coins* In fact,
the U.K. had refused to release the dies to make sovereigns in the U.S. Mints.
So the U.S. Mint made gold discs equal to sovereigns but with the U.S. Assay
Office stamp, the gold content, etc. The wish was often expressed informally
that Saudi Arabia would adopt a gold coin of its own design so that the U.S.
Mint could make something other than the '•discs."
d) In December 1947 the U.S., after approval by Mr. Southard and
Secretary Snyder, formally told Saudi Arabia that the Treasury stood ready
to make gold coins of their own design and to sell the gold therefor, within
Treasury policies regarding gold sales. No time or other limit was mentioned
on the coining job, the only qualification being on the possible sales of gold,
e) Discussions about minting a gold coin for Panama covered a number of
points and came out with a negative decision, but I believe no question was
raised about the Mints' readiness to strike the coins if the proposition was
otherwise acceptable*
f) In the summer of 1949, the Mint's giving Syria cost quotations for
its making Syrian gold coins was fuHy cleared by OIF, Legal, and Mr. Southard
(especially for the IMF aspects of the deal), who in turn discussed it with
Mr. Parsons and made a memorandum of it. The clear implication of the long
negotiations between the Mint and Syria following that clearance was that
the U.S. would mint the coins if requested to, but the Treasury's selling the
gold for that purpose was stated to be undecided, (Unfortunately the
initialed file copy of the OIF written clearance was destroyed, only the
ribbon copy being kept. I shall be glad to give the available details of
the incident to anyone interested.)
In summary yif the above record is to be reversed, Treasury staff members
such as myself will feel the need (i) to regard all supposedly established
but not actively used Treasury policies as subject to reversal and (ii) to
obtain fresh clearances on isolated instances under broad policies*
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Federal Reserve Bank of St. Louis
I
- 3-
t
2. Except for powerful reasons for change, the U.S. Government and
especially the Treasury should stick by its word
The U.S. after full consideration made a written offer to Saudi Arabia
and an implied offer (to mint coins, not to sell the gold therefor) to Syria.
To all countries, but particularly to Arabs, who put great store on keeping
faith with their word and who are now suspicious of U.S. good faith, we should
keep our word. I know of no change of conditions between December 1947 or
the summer of 1949 and the present bearing on U.S. domestic gold policies
which justifies our backing down on the offers made in those recent months0
For the U.S. to abruptly and unilaterally withdraw from a standing policy
also adds to the atmosphere of uncertainty and insecurity which is affecting
the world*
3» T he grounds for refusing to mint gold coins for foreign countries such
as Saudi Arabia and Syria seem to approach an undesirable degree of timidity
a) If the Treasury starts to run for cover from fear of giving Prof. Spahr
a possible trifling grounds for making one more silly complaint about the lack
of U.S. gold coins, and if the Treasury similarly quails at the shadow of
other muddle-headed cranks, Treasury policies will be stultified0 Even though
I personally think U.S. domestic gold policy on private ownership of gold is
a slightly mistaken balancing of the relevant valid considerations, I feel no
need whatever for the U.S. to be ashamed of its policy of denying gold ownership to American citizens. We have the strongest monetary system in the world
without private ownership of gold in any form and don!t need gold coins at all.
(Even I would oppose them.) The Treasury recognizes, however, that some other
countries, such as Saudi Arabia, still need gold coin. Syria could have a
case for it too, though the current request seems more a matter of prestige
and "psychology11 than of definite economic utility. With such abundant grounds
for differentiating between the monetary needs of Saudi Arabia and Syria on
the one hand and the U.S. on the other, it seems excessively unconfident of
its general policy for the Treasury to fear that its making a paltry amount of
gold coins for the former countries will lead to irresistible demands for gold
coins in the U.S.
b) There seems no genuine danger that the precedent of making gold coins
for Saudi Arabia and Syria will be followed by any significant number of other
countries. In the first place, most large countries have their own mints and
would not ask the U.S. to make gold coins for them even if they wanted them.
And many countries without mints have close ties with countries other than
the U.S« (e.g; the empires of European countries) and would have their coins
made elsewhere. In the second place, very few countries which might turn to
the U.S. Mints are likely to want to have gold coins. Mexico, Switzerland,
and Iran have mints of their own. Egypt is trying to get one* Beside a
couple of other potential candidates for U.S. minting from the Middle East,
all small and poor, there seem only a couple of faint possibilities from Latin
America. In the third and last place, the Treasury could well be more
restricted in minting gold coin than in selling bars, so that any broad
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precedent could be prevented. For example, we could be willing to sell bars
to Saudi Arabia for minting elsewhere (as we have just cabled we would, within
limits) even if they have no means for keeping the coins at home5 but we could
still be willing to mint gold coins only for countries which have fairly
effective arrangements to keep them at home* Syria seems to intend to qualify
in the latter class. Thus, we could mint for Syria but refuse to sell gold to
Saudi Arabia for minting in the U.S. unless it makes some reforms not yet in
prospect*
c) The public notice about U.S. minting for Syria seems likely to be
negligible. A line in the Mint Annual Report appearing in 1952, plus a small
news item from Syria this fall may well be the total publicity* It would
almost certainly be less than the past news articles about U.S. sales of
sovereigns to Greece and the recent blast by Mr. Havenga about Treasury
initiative on $80 million of gold coins for an American oil company, which
blast seems to have stirred no echoes.
4. Minting coins for a country, particularly gold coins, is a friendly bond
and a likely prelude to further friendly relations« technical assistance,
and establishment of U.S. leadership
Syria and Saudi Arabia are key countries in a sensitive area where the
U.S. is trying very hard to increase its prestige and popularity. Making gold
coins for them under suitable conditions seems an excellent catalyst to bring
about further good relations. The chance seems an opportunity that should not
be wasted. Even if these countries should take steps regarding gold coins
which would make us call a halt to our further combined selling and minting,
those situations if skillfully handled would seem to be good stepping stones
to assisting them in desirable monetary advancement*
Note. The above references to the decision at the meeting of March 23 are
not intended to convey any blame on that meeting. Most of the history cited
in (l) above was not presented to that meeting. The writer was present and
went along with the decision without raising any objection. The arguments
above are his reconsideration of the question.
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TREASURY DEPARTMENT
INTER
OFFICE
COMMUNICATION
DATE
TO
$ Messrs. Martin and Willis
FROM
- G. A. Eddy
May 23, 1950
04&
Subjects
New message from Paul Parker regarding Syrian gold coinsu
A letter from Paul from Cairo, dated May 10, arrived this morning. It is
the latest word from him and contains the following section regarding Syrian
gold pounds*
"I feel strongly that Treasury should search diligently for a
basis on which the minting of Syrian gold coins could be approved,.
If there were any reservations at all on Syria1 s use of gold, it
would seem to me they should have been expressed in the decision to
sell goldo
11
1 have examined with interest the background documents which
seem fairly complete. I wish I*d had them earlier. I can appreciate
the technical policy grounds on which the decision was taken, but I
think it should not be too difficult to work out a theoretical
justification for the minting operation. Given the present tense
political situation in Damascus, our refusal to mint might have
serious effects and I donft think the act of minting for Syria would
be a serious breach in the Treasury and IMF gold policy. Incidentally,
Mexico is in process of delivering a very substantial quantity of
silver coins to Syria which the Damascus press is proclaiming as being
minted locally."
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£
SAMUEL
M O N T A G U &. C
GENERAL
PARTNERS:
4, OLD B R O A D S T R E E T ,
S.E. F R A N K L I N .
L O R D S W A Y T H L I N G , O.B.E.
C.M.E. FRANKLIN.
D.KESWICK.C.MG.
L. F R A N C K , C.B.E.r'sei-SMA/y
LON D O N , E.C.2.
cR
asaka!istwwr wi
E^-L,. FRAN KLIN-.
T E L E P H O N E : LONDON WALL 64-e-4-.
CABLE ADDRESS: MONTAGU, LON DON .
d July,1950.
Dear Sirs,
QUARTERLY BULLION LETTER
Cr 0 L D
The amount of gold held in the Issue Department of the
Bank of England was unaltered at £356,823*
The Bank ^of England's buying price for gold remained
unchanged at 248s/0d. per fine ounce, at which figure the above
amount was c a.l c ulat e cl»
The gold output of the Transvaal for the months of March,
April and May,1950 is shown "below , together with figures for the
corresponding months of 1949 for the purpose of comparison;—
1949
1,003,170 fine ounces
985j316 fine ounces
- 947;204 "
"
956,103
"
"
978,908 "
"
1,012,599 "
"
It was learnt in May that the Executive Board of the
International Monetary Fund had recommended the rejection of
South Africa's proposal to increase the price of gold, at present
$35 per ounce* The Board also recommended the rejection of South
Africa's proposal to allow gold producing countries to sell half
their gold output at whatever price could be obtained above the
pegged rate,- The recommendations of the Executive Board were
made.to the Fund's Board of Governors, who represent each of the
organisation's 47 r-ieribbrs.
Fund officials said the recommendations would probably be studied at the Fund's next annual
conference in Paris next September.
In the course of*his presidential address to the Transvaal
Chamber of Mines in Juno, Mr, Kenneth Richardson disclosed that
in the 11 months to the end of May,1950, the South African gold
industry disposed of 1,453,000 ounces of gold on the free markets.
of the world.
March
April
May
1LJLJLZJLS
During the second quarter of the year , the official
price showed only one movement;- this was on May 5th when there
was an advance of -jVcl, from 63£», at which the quotation had ruled
since March 31ct, to 63 "ad. per ounce ,999 fine, for both cash and
two monthsf delivery * The price was marked up following the rise
in the ITcv/ York quotation on May 4th from 7lf to 72-f cents per
no further change in either the London or New
ounce * The:
,-p the period under review
York quotations to
for silver for essential
In the
industries was. fairly good curing April , but eased somewhat in
owing months and has latterly been rather
the course of
connection were mostly offset by sales
small. Purcha
from official
market fcr "free exportable" silver-there was
In
some general business t negotiated prices but here, too, conditions have "been quiet, Dcvclopmonts in Korea had no effect, save
perhaps in the isolated Bombay market where some hardening of
prices was attributed t thi'3 particular factor. .
Yours faithfully,
SAMUEL MONTAGU & CO.
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Federal Reserve Bank of St. Louis
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C O N F I D E N T : A i,
Reference is made to niy cable dated January 11, 1950, which was in partial
reply to your letter of December 15, 1949.
IVe have studied
to the South African
gold sovereigns from
gold for the purpose
the proposal contained in your letter, which has been made
Treasury by the -^re.bian -American Oil Company to purchase
the Union to the equivalent of 1,300,000 fine ounces of
of paying oil royalties to the King of Saudi Arabia.
The Fund wishes to comment as follows about certain of the charges in the
transaction you have outlined, with particular reference to the amount thereof*
The handling charge of one-fourth of one per cent raises no question, but the
remaining charges have caused us some concern.
1.
It may, perhaps, be possible to justify a charge for the cost of conversion into good delivery bars as applied to this particular transaction, but
not e charge as high as that indicated in your letter. From the information
available it would appear thst the Arabian American Oil (Company would be buying
gold from the South African Reserve Bank which holds gold in the form of fine
gold bars (.995 fine or better) wMch would of necessity have to be converted
into coin bars prior to the minting operation. The cost of such conversion,
however, would normally be much lower than the charge indicated.
2.
Even on the basis of a computed cost, the amount stated in your letter
as the cost of transport to t v e normal center for dealing in gold appears
unusually high, being in excess of the cost of transporting gold from the Union
of South Africa to New York.
3.
The cost of minting the sovereigns cannot be reconciled by the Fund
with the costs applicable to the minting of similar coins in other monetary
centers. Even taking into consideration possibly increased costs in recent
years, the Fund is of the opinion thp.t the minting charge is considerably in
excess of what one might normally expect.
In considering the charges listed above the Fund was guided by those
listed in Rule F-4 of the Fund's Rules and Regulations, and the Fund can
visualize no other charges applicable in the case at hand, "."e trust that
you will take the above comments into account in your further consideration
of the proposed transaction.
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Federal Reserve Bank of St. Louis
trtwi
I*
(SIGNED) WM. McC. MARTl^, Vr.
*
»
'
^
•»
STANDARD FORM NO. 64
Office
TO
:
IS/i&mOfandum
• UNITED STATES GOVERNMENT
Messrs. Martin and Willis
DATE: June 30, 1950
S E C R E T
FROM
:
SUBJECT:
G. A. Eddy
Possible Uo S. actions regarding gold during an emergency
In the report on "Mobilization Planning in the Field of Foreign Economic
Operations" dated May 10, 1949, for the National Security Resources Board^
the summary conclusion regarding controls over gold was as followsJ
"Controls over gold similar to those used during World War II
would not be effective at the present time and should not be instituted except in the event of war or an over-all government effort
to obstruct to the greatest degree possible all trade and financial
relationships with the Russian area,, It is not believed, moreover,
that efforts to restrict the sale of Russian gold would produce substantial results, at least in the absence of a general revision of
international opinion on the status of neutral trade."
In general, the negative conclusions just quoted and those elaborated in
the body of that report still seem valid. There probably isnft much that can
be done by controls over gold that won!t also be accomplished by more direct
controls.
Discussion
10 Gold would be useful to Russia in a war with the U.S. primarily as a
means of (l) paying for imports for use in ways desired by the Russians, and
(2) paying for services—especially subversive activities of all sorts. Gold
would not be the only means of paying for those goods and services, since
Russia would also be able to pay for them with (a) existing balances of money
and other foreign exchange assets, including those obtained in territory
which is overrun, (b) the proceeds of exports other than gold, (c) contributions, earnings, etc., from sympathizers overseas, (d) counterfeit money, etc.
Nevertheless, accepting the assumption that Russia is a big gold producer and
has a sizable stock of gold, gold might be a very important part of Russia's
capacity to make payments abroad during/war.
2. The export of goods from U.S. and Allied territory to fill Russian
orders will presumably be stopped by direct trade controls. Indirect shipments
via neutral territory would also be controlled, of course. The U.S. and Allied
governments will presumably not be offered gold officially by the Russian bloc,
and presumably every direct control over import trade and incoming travellers
will be applied to seize shipments of everything Russian. There will also be
extensive efforts to prevent subversive activity. Accordingly, with exports
of U.S. and allied goods, imports of Russian goods, and enemy agents all under
the best control available, there do not seem to be any steps which can usefully be taken regarding gold to guard against the three kinds of activity just
listed. Of course we wonft buy Russian gold or allow its import, but to make
any announcement about it would be a very hollow gesture.
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Federal Reserve Bank of St. Louis
- 23. The case of allied territory which may be overrun, and the case of
neutral countries raise somewhat different problems. So long as allied
remain free of Russian control, they will presumably act as the U. S. would
under (2). However, in order to reduce the amount of gold which Russia might
obtain for its own purposes, as well as to protect the gold for the benefit of
the allied governments now owning it, gold holdings should probably be shipped
out of places likely to be overrun to places of greatest safety. Whether siich
shipments would be politically feasible, and what the places of relative
danger and safety are, are questions which will not be answered here.
4. U.S. policy regarding gold in the case of neutral countries requires
lengthier analysis, but at the moment it is hard to see what can usefully be
done,
a. For goods which the neutral countries might sell to Russia,
the U.S. and its allies would presumably do whatever they could to prevent
shipments from the neutrals—by preclusive buying, by bargaining with goods
we will sell them only if they cut off trade with the Russian bloc, by bullying,
etc.
b. As the report of May 10, 1949, says, it is doubtful whether we
could tell the neutrals they must not accept payments of Russian gold, since,
unlike much of Nazi gold, the Russians presumably have a large stock which they
came by honestly. If they obtain some by "looting" overrun countries, this
position might change.
c. U.S. and allied country threats not to buy gold from the neutral
countries if they accept gold from the Russian bloc, might or might not be
permissible under the "laws" concerning treatment of neutrals, but in most
cases it seems likely that we would be more likely to be paying gold to each
individual neutral than to be buying gold from them, because our balances of
payments with them will turn against the U.S.^in most cases. Hence, IT. S.aw. «£&*<<,
threats not to buy gold from the neutrals would be apt to be another meaningless
gesture. It might even boomerang against the U.S., by somehow making the
neutrals unwilling to accept U.S. gold in settlement of payments.
d. The U. S. and allies will no doubt refuse to carry Russian gold
to neutrals on allied planes, ships, and trains, and will prohibit such shipments across territory they control. But again this is likely not to be
requested by the Russians or neutrals. Furthermore, the Russian bloc is likely
to have direct access- by its own planes to neutral territories from which they
would want to import goods and to which they might want to ship gold.—Potential
neutrals include Sweden, Switzerland, (Spain), India, Syria and other Middle
East, Burma and other Southeast Asia, etc., which are all close to Russiancontrolled territory.
e. Any effort to drive down the price of gold in neutral countries
by flooding the market with U.S. gold offerings, in order to make it impossible
for Russia to get the equivalent of even $35 per ounce, or |20, or flO, is a
possibility to be considered in the light of specific circumstances, but the
chances of achieving much broad, long-lasting success are not too encouraging,
particularly if the U.S. and allies will be wanting to sell gold to those same
neutral countries for their goods and local currencies.
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Federal Reserve Bank of St. Louis
SECRET
- 3f• Success in preventing Russian gold from being smuggled into
neutral countries would appear remote. Even if the governments of the Middle
East and Asia tried to do so, Russia could probably get enough past the controls
to finance all the subversive activity they wanted to.
g. It seems doubtful that threats to do something after the war about
Russian gold accepted by neutrals during the war would be both sufficient^ legal
and effective.
h. The origin and identity of gold is so easily obscured, and the
private demand for gold for jewelry and hoarding is so large that any official
attempt to discriminate against Russian gold in the long run would seem futile.
Particularly if Russia should pit gold in the form of familiar European gold
coins, which they can do very skilfully and may be doing to an unknown extent,
the chance of depreciating Russian gold without affecting all gold seems very
slight.
5. If nothing much can be done about gold to weaken the Russians, what
can be done with gold to strengthen the U.S. and allies? In World War II, the
U.S. made net sales of $2.8 billion of gold. It also sold about $100 million
worth in the Middle Eastern markets at premium prices in order to obtain local
currencies. The extent to which gold can effectively be sold in allied or
neutral countries as an anti-inflation measure is a highly controversial subject which will not be broached here.
6. The extent to which gold mining should be cut down in a war is another
controversial subject. To shut down our gold mines and let South Africa1s
expand would be a delicate political problem.
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Secretary Snyder
*•* HoC* aartitt, Jr.
OoM transactions for the smarter ended June 30, 1950.
The United States gold stock: (*Monetary gold stock" as shown in the
Bail/ Statement plus Stabilisation Fund geM) decreased %y $29 »illion
during the second quarter of 1950 as compared with a decrease of £204 million
during the first quarter of the year* A soomry of transactions is shows in
the following tablet
(In Billions)
U.S. goM stock, Iterch 51, 1950
(Bally Statement and Stabilisation Fond)
Transactions with foreign countriess
Purchases fro* foreign countries
Estimated allowance for purchase* la
process of settlement
Total
Sales to foreign countries
$24,359.3
^20.5
i
,4
20.9
- 31-9
- 31.0
Tots!
Seles te industry
lot decrease for second quarter of 1950
U.S. gold stock, June 30, 1950
(Dally Statement and Stabilisation Fund)
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CAIIoQalrothjlj8/a/50
$24»330.4
I
Hr» Mwtin
July 26, 1950
John 3. deSeers
Reported Interest in Selling llsxican Gold
1. The story given to Assistant Secretary Graham "fcgr Congressman
lyle on July 25 does not make much sense. If, as the Congressman suggested, Mexicans want to sell 600,000 ounces of gold in sheets to the
U« S. Treasury, they should be aware of the fact that our buying price
1« $35 an ounce minus cottaissions and costs, provided that the seller
has good title to the gold. Sales at this price, however, are not of
interest to private operators in the international gold market. Perhaps
the mn who cane in to see Congressman fyle did not mean to say that he
wanted to offer the gold to the Treasury, tut rather that he wanted a
Treasury license in connection with his gold operation. Jbviously no
ouBMarii can b9 laade on this possibility unless a good deal more information is submitted.
2. In the past there have been numerous ruiaors on gold transactions
eiaanatiag fro® Mexico. Of particular interest is one fantastic story
of international operations allegedly involving 1,000,000 ounces of
gold in private hoards of Mexican Government officials. That proposed
deal is said to have fallen through because the supposed purchasers
could not put up the money. This was reported by the American Embassy
in Mexico in despatch Ho. 1191 of April 24, 19501 a susnary of the
despatch prepared by Hr. Howard is attached hereto.
I find it hard to believe that as such as $20 million or $35 rolllion in gold is held privately in Mexico by any sraall group of persons.
With interest rates in the neighborhood of 10 per cent, it simply niould
not pay to hold gold. The Sbnk of Mexico currently holds about 2,000,000
ounces of goM, wieh of which, however, is in Hcrw York. The Sank sells
gold freely at a slight premium for internal hoarding; in the past eight
years it disposed of over $100 million of gold in this way. Ostensibly
this gold is not permitted to be exported, but it is quite possible that
the Bank of Bfexteo and the ifexiean Government wink at enforcement of this
requirement.
Attachment
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Federal Reserve Bank of St. Louis
July 26, 1950.
MBJQRAKSOM OH GQLP
In reference to the telephone «*n recelveu by Mr. Graham,
concerning the sale of gold from Mexico, there is a long story involved which 1 will try to summarise briefly.
In the Mint Bureau files there is a report that a Mr. Sigfried 0. Saiauelsson, an American, called at tee Mexican jab^ssy in
connection with the purchase of one million ounces of Mexican gold,
Samuelsson was born in w&shiugton, 0. C., but educated in Sweden.
During the war he was employee; as a civilian consultant to the Air
Transport Command an- travelled extensively throughout/ the- United States
and the Burma-China-India theater ss a trouble shooter. He got a job
&xico early in 1950 as publicity director of an engineering
magazine and in less than © racnth was discharges from ti»e company for
embezzlement of funds. He was not prosecuted because he told his
Superior thet he was working with t-=e Bussi&n Bsbassy in Mexico City
and that something woul
en to him (the superior) if he didn't
keep his month shut. Saaiuelsson tola the Bnbassy that he had been
directed to them by m Mr. Viilson W. Brown, an unscrupulous adventurer,
long an associete of clandestine groups engaged in fomenting var and
revolution throughout Latin America. Saiauelsson said that he was
interested in purchasing and exporting froa Mexico one million ounces
of gold ana that the following individuals were to furnish gala to
him, namely, Dr. Ignaelo Vygard, and t r. ..eorge B. Hayes. .Dr. Vy-•j, in explaining his part to the Embassy, said that AT* Hayes had
come to him anc said he was in a position to furnish one million
ounces of gold for export under certain conditions* Mr. Hayes,told
Vygara that he was in Mexico City on business with President Alem&n
a:nd Ramon Beteta, Minister of Finance, and showed him a letter of
introduction from Beteta to Carlos Novoa, Director General of the Bank
of Mexico, with instructions that he EaaK.e available tc Mr. Hayes the
services of r:oarigo Games, sub-director of the Benk. JJr* Wygard said
that Hayes not only knew the people he said he did but produced
evidence to prove it. For example, President Aleaian put at his disposal a car from the Preeidencia ana furnished hia with a bodyguard,
yes tola Dr. Vygard tlmt he had held a conference with President Alesaan an^ Beteta, at which time it was agreed that th^would
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Federal Reserve Bank of St. Louis
»ft*
Bake available ont million ounces of golu for sale in the international
free market* Incidentally, Mr. Hayes said that he hud discussed the
sale at some length vith officials of the .American Government in
¥ashington end that tney lied offered no objection to the transaction,
In the early part of Hayes1 visit to Mexico, he established
cont&et with the Banco Necional but this contact soon cooled off and
t;,e Banco de Cohere to stepped in to replace the Banco Naeional in the
picture. It was Vygard'a personal opinion that the Banco de Cofliereio
had been desigaated by Beteta to act as a front and ttist the gold was
not to come from the Bank of Mexico reserves but rather fros private
sources, undoubtedly tae top- flight "politicos." fhe Babassy stated
that it was common knowledge that Beteta has, in the past, used the
Banco de Comercio for similar purposes.
From the text of the fiabassy report it appears that one
million ounce* of gold was available for sale auii that the gold v&g to
be supplied by high government officials, asttiatd to be from their own
private hoardg. The deal fell through because t'-,e purchasers could not
raise the ^onev, and apparently the purchasers vere led by Ss^uelsson
and others who were not too reliable, i'sayes met Ssauelsson and made a
firm offer of six hundred owices, wt'ereupon Samuelseon said that the
bid was for one ailiic-n ounces9 nothirtg less* After several telei>?ione
calls, tiayes aaae & firm offer tc deliver one million ouncee of gold
against a letter of credit at $41*50 an ounce. According to Dr. Vygara,
three hundred, tncuissma ounces of this was to be furnishea through the
Banco Interaaclonal, the ba.lance by or tbrough the Baaeo de Comercio.
Apparentlyf in the latter gta^es of the negotiations, Sa,ir,ueleeon cleimed
he was acting on behalf of the Fuss Ian Embassy in Kexico City and so
informed Hayes* when no funds came to cover Hayes1 expenses, and when
•wuelsson failea to make a firs* offer, Hayes left Mexico the first
week of April, Iv;<u. The following are the observations and conclusions
draim from the fetbassy's report?
1, Mr. Geor^f- 3. iiayea is apparently an intern
..I l&wyer possessed
of considerable ability and integrity vith excellent political and professional connections In the united States and Mexico.
2. Hayee could have prouuced 1 million ounces of gold providing the
purchf.-.ser supplied pi-oof of his ability to pay.
3» Hie gold in catstion represents tLe personal hoiain^s of several
higher-ups in the Aleaan Ministration ana not the reserves of the
Bank of Mexico.
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Federal Reserve Bank of St. Louis
- 34* The Banco da Corns re io undoubtedly ig the channel u»ed by tha
Aleman Administration to handle this type of transaction.
5. Badar and Bell ere opportunists, vfco found out that gold wa»
available in Kexico and tried to create a market for it,
6» Sarautlsaon is & mall-time crook, do-wn on his luck, who like
Bader heard of the gola teen proceeded to vire offers to all the international clack markets in an effort to find & buyer *
7. fiaffluelggon deliberately -lives the impression of beiiv a Faiseian
t for the simple reason that fev persone are apt to a0k the
whether h^ is iu thair amploy or not.
1« Certfelii members of th* llaaan AdBinis tret ion hoia 0ubet&ntial
amounts of goii which taejr dia not convert to pesos even when cuch
action might heve averted devalue ticn of the national currency in
2« The gold w»s held both for ite security -value an- the hope that
an upvarct revision in the world price from 1-35 to |50 might take place*
3* The collapse of the internet ioiiai black market of gola g.nd the
gubseouent unfsvorsblt reaction in the Mexic&n aiarket poi.xted out the
loss to th* tu:-j.cers of the yellov metal through lack of return on
th* ir iavegtsients *
4, George E. ifeyes enjoys the personal confiuence of Alaaan, B«t*t«,
Novoa and other political hi^her-up* for idnom he actt at a financial
trouble shooter in the United
Mr. Majes ha.g foun<« in the r,)un barton O&ke or other international
a^recnent a legal loophole by means of which Mexico couio
sell gola in tht free market aivj still obaerre tr.e letter if not the
spirit of t:ieir intent* tiontl contract*
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Federal Reserve Bank of St. Louis
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Federal Reserve Bank of St. Louis
TREASURY DEPARTMENT
Date.
^
Mr. dc Beers
Mr. Martin would like you to check
this with Mr. Howard and Mr. Eddy.
WM. McC. Martin, Jr.
Assistant Secretary
IP? <F TBUBPBCW wmwaaUtom aram COIMIESSIMI mm
. GRAIitil, AS
(TEXAS)
It,
5* 1950 - 10*35 a. ..
!t 2 hfcvs got too sia?aa00st stosy that bes
to m@ aa a congroseaan^ md though I liatod to bother yoaf but I
fait I shoald pacs it on»
1SU mfflMt
I m sura it Biwt bo «9ttethinif ConpeeMi* if nith
all of --CMP QKperienoo - «— —t
It sounds tetartte* ta* MB «m to eee ne - a
"
••HI a rfwponfSiCXLG wim, *• ana 0suja. wv MQCCLOHNMI • 3Ji w o uovorzxai
^ hi^d ectitaetod him isad mnt@d to •ntudt to the Spoasaxy of
. Gtatos for sal© soae 600,000 am* of gold in sheets - pave
_.«~
M
< i«i«« in
inffYI i
MMM
»> I '•
««^,7
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M .--*««•>--«
«t»»
4-
«
r
•! M^MI
t
CSUIIAMt fyX^jpOQ oyi^so© Of gOflUU
COMnmH LlXl;* lie ©aid 1&i titto ims good, amid bo oortiflad
the IfKEioan 00T9a-aaait| it ie all aboro board, had aot boaa
'"LO*
bJwT'SB?® ftoans ofit PJKSII a v*sLi>iJi[4 L cuoKi w
kaow ifhsthor tte
Govwiaacsit
0vtir
bought foM - tas irrtorceted in gold* fbo
fu^rtim is ^r/14 is theto^^?na@iitof l^^deo didn't negotiate* Ife
hs didn H know about thatt tlmt ma the
It does
to cortLfy the
stpffiip that if tho lioodoon Oov^raamit 10
.<|BSMiA2I Z2Qi6: What 1 th±al^
Mrt.«5o and tiithoot
floctic»i ujpdn thoog thia?© aaw t@^ Mndb of p5ts$l® in Hged«>t sddi and
poor. S« ridi sro in tho (kpfwonmty ths IHJOP are out*
)
So far ao I fencnrt that*© ^s© utofy
it co to r^« I oanH tall ^tm tl»
t^ss
he wouM b@ gpted to xovmL the
, this am nho talked to sao is a ros^onsible oanf ho la not
>ss of scilinc c«W o^ ^nsrWag elsa, Iswfc h« is a
lot ctf MaK"
ia it ia to
of en
. OAlUMt So the pMmptlaa ii - h» !• the Intdtoadiaiy
and not '^MblT' in on tho
lie is
^ ho had no intes^rt in it tJhatovor, but
to bolp some Laoodcm £rio^aa -
On soiithinc ro^'q»3ntea to MB as a logitdbmta
, Gongri«ard^it I «vprociate jrma* passing tho thing on to 3» c; .
.-ill ^iop around here to see if tao twm pickod up aw ifisaors or if
t (Mill, cortajuily call you ba-." »
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Federal Reserve Bank of St. Louis
i II !•!• IIMil II XXUBi
It is such a fantastic
JKt ORAHAHl Xt eortainl^ ID* 600tOOO omcea ie a lot of
,•11 £X&Bt ®&t*0 tsKSitr a^XUcsi
Kill -balm a look at it*
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Federal Reserve Bank of St. Louis
f
1 oorbeltO^ iQ3p?eciato
D FORM NO. 64
RESTRICTED
Office Memorandum • UNITED STATES GOVERNMENT
:
FROM
:
SUBJECT:
Mr. Martin
DATE:
September 19, 1950
G. A. Eddy
QaL.
Q
Report on Treasury Gold Sales*
September 18, 1950, marked the end of one year during which the Treasury's
gold stock was making a modest reversal of the trend of the preceding post-war
years and the trend of the 1930's.
Following the devaluation of the British pound sterling on September 18,
1949, a number of countries have converted part of their official reserves of
U. S, dollars into holdings of gold bars. As always, the Treasury has virtually
automatically complied with requests of foreign governments and central banks to
buy gold. Such sales involve a payment of U* S, dollars by the foreign purchasers,
at the price of $35 per fine troy ounce of gold, plus 1/4 of 2% handling charge,
and a delivery of gold bars from the U. S. Treasury stock of gold. The bars are
made available in New York City and may be exported or held under earmark in the
vaults of the Federal Reserve Bank of New York, at the option of the foreign
purchasere
Today the Treasury's gold stock stands at something over $23^ billion dollars
worth of gold, valued at $35 per fine ounce. The United States thus owns approximately two-thirds of the world's official reported gold reserves, as reported by
the International Monetary Fund* These U. S* gold reserves are greatly in excess
of the amounts needed as backing for Federal Reserve notes and other legal gold
reserve requirements.
In the year since devaluation of the pound, the Treasury has made sales of
monetary gold totalling $1,130 million in excess of its purchases of monetary gold.
Over half of this net total, or $650 million, has been sold since the attack in
Korea in late June 1950,
Of the $650 million which the Treasury has been requested to sell since
June, $500 million has been purchased by a single country, the United Kingdom,
That country had purchased a further $80 million earlier this year, making $580
million so far in 1950. In the preceding three years, the United Kingdom had sold
gold to the Treasury totalling $1,588 million. The British Treasury periodically
reports the size of its official reserves of gold and dollars and has reported a
substantial increase during the past year. However, its total reserves are still
below the levels of 1946-47* Whether a country keeps its official reserves of
gold and dollars in the form of deposit balances in banks, in investments in
securities, or in gold, is a technical matter which each country must decide for
itself.
Most of the other purchasers of monetary gold from the Treasury during the
past year have also been countries which the United States is assisting to improve
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Federal Reserve Bank of St. Louis
- 2their positions in international trade and finance. Among the other larger
purchasers of gold from the Treasury during the last year have been: Italy,
Switzerland, Bank of International Settlements, Belgium, Mexico, Uruguay,
Venezuela, Argentina, Netherlands, France and a number of others. Detailed
amounts of sales, as well as purchases, are reported periodically in the reports
of the National Advisory Council. Of the countries just listed only three have
rebought more than they previously sold to the U. S. since the war. The Treasury
has been asked so far to resell only about one quarter of the gold which flowed to
the Treasury during the difficult postwar years and only a very small fraction of
the gold which fled from other parts of the world to the United States during the
1930's.
The gold purchases of some countries have been largely a switching from
dollar balances into gold. Substantial gold holdings shown in the financial statements of central banks are one means of building up public confidence in national
currencies. In many cases, however, there has been during the last year a net
increase in foreign countries1 holdings of gold and dollar balances combined. In
virtually all cases this reflects an improvement in their earnings from international trade*
European holdings of gold and short-term dollar balances (which are also considered as reserves by most countries) dropped from $11.2 billion on Jane 30, 1945
to $8.5 billion at the end of 1949. In the last year there has been some reconstruction of reserves on the part of a number of countries. This reconstruction has not
yet progressed to the point where most countries have reestablished reserves equal to
those normally maintained*
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Federal Reserve Bank of St. Louis
«y dear Senator*
thin i* 1m further reply to yssir lotto* of Sef&eaber II,
Inquiring c oncoming the nature of the regent reduction* In the
•Oftetary gold atoek of the United States*
I appreciate the opportunity to explain that the reduction*
IB the gold *tock *hovn la the */ally Treasury atateteot afid ri
in the pro**, AT* all the result of salsa of gold at the *tat«tary
prlo«,—435 p«r f ia« tr^y ounc* plus 4 of 1$ handling charge. ?b*
•alM 4urlai th« 7«ar 1990 to dat* ar» a ^ontlimatlott of a
aaat which bagaft iiw«ii«tely aft«r th» d*fnlw&tlcm of tha
3«pt«sb«r 18, 1949f th« raqui«t« aa4* to th« Traiumry ^r
f orelgn g<yyaranota and e«f5tr&l haaic» to bygr fo!4 at th* official
. ,. prie» ha** «xoe«d«d %gr $1,110 ptUioa lit smlas af aonttary
gold to th« Trmisury. Ikith «tl«» and 4iroha««a of gold by ttea 0* §*
ara ^ad« axolttglTaly ag&ln«t paymant In diollara. Foreign oountrlaa
hold dollmrs along wttfe gold A« part ^f tholr off ieiai pon«t&ry
r«s«rraa, what portion of it* r«8*r*aa a country <««pa la gold ami
what portion te dollara cst» what shiftg It «alta« from mm to th* athar
i* a taglifileal aattar *hiob ^eh emustry <iecld«w for itself.
tt*t f aralgn purchagea, vbieh w»r* rnadt by «a^y foreign
count rios, waro a mod««t r«r«ntal of tha gold «*i«a mad* to the
0Blte4 tftten during tb» jraaro iimwdlat«1^ prooadlng. Mat purchase*
of llt13C miUlon by foreign cimatFiM aro only OIMI qqartar of tho
jialao lay the reat »f the world to the United States during tno
preceding four y««r*. To the extent powlble, ether countrlee are
eertooely trying to rebalM their official fo!4 reaerraa, whloh had
been depleted to «bn?xraatl3y lew level* during the #&r and post-war
period*.
lour report st a 17 aiillioa ehlpoont of gold to Feneooa «ay
rotor to a shipaest aado in 4ngia*t 1949 of that aacwnt of gold wfcieh
hed boon pureha*ed fro® the Treaaury la April 1049 by the Sank of
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Federal Reserve Bank of St. Louis
China, the Bank paid for the gold with 0, $. dollars, held It
for a tiae under sarsMrlr at the Fad ere 1 eeerre Bank af -few
and th«j ord«r«d Its ihip®«nt to ForwdMi In
If th#r* i» any furt))«r I^f oimttoa r^gmrdi^j this subject
you would wish to >btai« fro* th» Treasury > plaass do not
hesitate to inquire again.
Wffl. McC. Martin, Jr*
Martin, Jr.
Assistant Seoretary
Honorable Mehard B.
United States Setmte
HOOJI 410, 3enate Off Ice Building
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Federal Reserve Bank of St. Louis
>. C,
.
a
tfc(b)
i ti>^a r4'
Im^ ^n^t ^a«K MMWfr
I
j* fs?ir 1fti»
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«Pt'flMBp«^l^^lP*
http://fraser.stlouisfed.org
Federal Reserve Bank of St. Louis
the
• Jr.
•
'V
% teftr SMfcors
IM* i* is lurt.iwr vtn^r to
.
* a*li of 9%rt agrti^ ttoMif ^ad
L
It l
ocuuao t^w f&ets ciiMil 4o oot
talite ito
it^llmr ?Mil»naHi
(which
Ann $1U2 bllHott on 3vm Jn
l'^5 %a i ;%5 bill
not (Mi p^ jjWUjji'Hiawfc! to
^
of mtt b&2^nc*» In
,
I
:.l lion* tlw rnlt«d SlAllHI l»lti» a^pNMEiBfttftty
^chi or tii» mjrT
p*i4*4 jolrf rinoi'PMi* ThM
baoklng for
.
Hw not ^3j»c
"or^l^i counlriea t
ir
thir
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Federal Reserve Bank of St. Louis
aa «.«-,*•
c*>"int.
.uPe^uMMKt by tho TJnitod 3t*t*9
*a«d.ina four y««r»»
I* la teip*i tb*t t>» itev* inf^a^iaa wW
irlU b
(SiCNED) WM. McC. MART:::, jr.
Hi. McC^ ^wrtlr*t Jr.
ROD* 1527 .-tm t«
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Federal Reserve Bank of St. Louis
•*
•
STANDARD FORM NO. 64
Office
TO
: Secretary Snyder
FROM
: "Win. McG. Martin, Jr
UNITED STATES GOVERNMENT
DATE: October 30, 1950
SUBJECT: Treasury Gold Transactions for the Quarter ended September 30, 1950.
Changes in the U.S. Gold Stock
The United States gold stock ("Monetary gold stock" as shown in the
Daily Statement plus Stabilization Fund gold) decreased by $740 million
during the third quarter of 1950 as compared with a decrease of $29 million
during the second quarter of the year, A summary of transactions is shown in
the following table:
(In millions)
U.S. gold, stock, June 30, 1950
(Daily Statement and Stabilization Fund)
Transactions with foreign countries:
Purchases from foreign countries
Estimated allowance for purchases in
process of settlement
Total
les to foreign countries
Industrial transactions:
Purchases of newly-rained gold
Purchases of scrap, jewelry, etc.
Total
Sales to industry
Net decrease for third quarter of 1950
U.S. gold stock, September 30, 1950
(Daily Statement and Stabilization Fund)
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Federal Reserve Bank of St. Louis
^24,330.4
/ 17e7
-749.5 -740.5
/ 23.9
/ 1.5
- 24*6
.8
739.7
$23,590.7
STANDARD i-Oi^M NO. 64
UNITED STATES GOVERNMENT
Office
TO
:
FROM
:
SUBJECT:
Secretary Snyder
DATE: January 17, 1951
» McC. Martin, Jr.
Treasury Gold Transactions for the Quarter ended December 31, 1950e
Changes in the U. So Gold Stock
The United States gold stock ("Monetary gold stock" as shown in the
Daily Statement plus Stabilization Fund gold) decreased by $771 million
during the fourth quarter of 1950 as compared with a decrease of |740 million
during the third quarter of the year, A summary of transactions is shown in
the follovring table:
(in millions)
U.S. gold stock, September 30,1950
(Daily Statement and Stabilization Fund)
Transactions with foreign countries:
Purchases from foreign countries
Estimated allowance for purchases in
process of settlement
Total
Sales to foreign countries
Industrial transactions:
Purchases of newly-mined gold
Purchases of scrap, jewelry, etc.
Total
Ties to industry
Net decrease for fourth quarter of 1950
. gold stock, December 31, 1950
(Daily Statement and Stabilization Fund)
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Federal Reserve Bank of St. Louis
$23,590,7
/ $ 22*2
/
9.6
/ 31.-8
- 785*6 - $753*8
/
/
/
-
7*1
1.8
3.9
26^3 -
17«4
-
771C2
February 16, 1951
MEMORANDUM
Re: Some analytical points regarding the Canadian premium gold plan
1* It is important to note the exact motive for the Canadian Governments
planning to follow the South African example regarding "industrial" gold for
export at premium prices. The motive is not to save the score or more of
Canadian towns now depending on gold mines which can no longer break even,
even with the present subsidy* If there were no premium market for gold, or
if the South Africans were not getting rich advantages from selling to that
market, the Canadian Government would apparently not extend aid to save those
mining towns. They cut down the subsidy to gold mines just a few months ago
and are unwilling to reverse that decision. It is only that the Canadian
Government has no satisfying argument to answer the gold mining interest
demand for the chance to imitate South Africa, that makes the Canadian Government advance the present plan. They will drop this plan apparently and let
the mining towns go on the rocks if (a) the premium market should be removed
in one way or another, or (b) if South Africa is prevented from enjoying the
forbidden fruit, or (c) if the Canadian Government can find any adequate
answer with which to deny the gold miners1 request. If the Monetary Fund
did no more than publicly disapprove of South Africa's present behavior, that
alone ??ould, according to Mr. Rasminsky, cause the Canadian Government to
reexamine their plan*
2. It is possible that something more can be done to prevent the
Canadian Government from proceeding with this plan by further developing
a point of ethics, namely, that the Canadian Government may not wish, even
for political reasons, to become involved in a scheme which will make people
in the Monetary Fund and some other Governments regard the statements of the
Canadian Government as being as dishonest and worthless as statements of the
South African Government. The South African Government, in its agreement
with the Monetary Fund, undertook to "scrutinize all sales and, in addition
to the foregoing safeguards,...exercise discretion having in mind the quantities
and the direction of the sales. In cases where countries did not require
import licenses, special care would be exercised as to the personality of
the importer and the quantity of gold sold." The Fund should certainly make
the language even tighter before it acquiesces in any Canadian scheme,so
that the Canadian Government would be able to claim that it was licensing
exports for "legitimate industrial use" in volume even approaching the South
African volume only if it were willing to indulge in substantial dishonesty.
The South African volume has reached its recent level only by selling gold
with virtually no limits to agents in Switzerland and other countries who
promptly export the semi-processed gold for melting back into bars in other
countries. Even a minor degree of conscientiousness would reveal to South
Africa or Canada that such sales do not live up to the Fund agreement on
industrial gold.
3. We know of no reliable figures indicating the final purchasers of open
market gold. Our best guess is that most of it is ending up in Europe and in
India, ihe former has been receiving large amounts of U. S. aid, and India
is about to receive aid more directly. At a guess the gold going into these
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Federal Reserve Bank of St. Louis
- 2-
areas may be running at a rate of between $100 and $200 million a year, and
perhaps more if Russia is also feeding gold into those areas. As a source of
heavy aid to them, the United States should be greatly concerned. If it fails
to shut off the supply of gold available as it certainly has failed to keep
South Africa from selling three million ounces between July 1, 1949 and
September 30, 1950 (areas of destination not known), the United States
can try harder to make the gold importing countries tighten up their barriers
in order to prevent dissipation of dollar resources. The French Government
as well as the governments of the Netherlands, Belgium and Italy are fairly
obviously not trying hard to keep gold out.
4. Although the British may talk very pure in their meetings in Washington,
the British Government does nothing to hamper the very large world-wide
gold activities of their bullion firms, particularly Samuel Montagu, which is
believed to be the one most active firm in the premium gold markets throughout
the world*
5. If the United States is seriously interested in cutting off the premium gold business, it should begin by refusing to allow the re-export of
gold refined here from imported oroao ores. It should also let Latin American
Governments take action (so far as the writer knows, action was contemplated
by only one country) against American companies raining gold in their territory
and selling it in premium markets abroad. If necessary, we should let
American refineries lose the business and let it go elsewhere, if the companies
in Latin America, Saudi Arabia, etc. so decide. We should also find means
to prevent American companies and their subsidiary and affiliates from
violating the general policy. If we do not do this to American Metal, American
Smelting, Cerro de Pasco, etc., we cannot expect the British to bring Samuel
Montagu, et al into line. So long as the American gold export statistics
weekly show most shipments going to places like the Philippines, Hong Kong,
Tangier, Kuwait, Saigon, etc., we can't expect other countries to take a very
strict line with their own gold production.
6« At the hsartfj, our difficulties in finding a sensible line for our
and the Fund's gold policies to follow^lie the following unresolved^ inconsistencies in our attitude toward gold:
a. In one sentence we regard gold as so valuable that we
cannot permit American citizens to hold it no matter how much
they want to and we cannot tolerate seeing foreign countries'
gold go any place except into their official reserves. But
in the next sentence we regard gold mining as such a low
priority, unessential industry that we wish to cut down its
production so that man can go mining copper and zinc. And"speak
of gold mines being "uneconomic*1 even though they can perfectly
well find buyers who are delighted to pay them prices high
enough to make their operations quite profitable.
b* Although we are ready to preach about the inequity
of letting gold reach private hands in Europe and elsewhere, we
have no answer whatever to those who point to the fact that
people who put their trust in paper money and obligations
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Federal Reserve Bank of St. Louis
- 3expressed in paper money have lost all their wealth in Greece,
almost all their wealth in France, Italy, Belgium,etc., and
most of their purchasing power in countries of the sterling
area. Furthermore, we are so far unable to achieve monetary
policies in many European countries which manage to maintain
the value of the paper money of even three years ago. Consequently in telling the populations of those countries that
they should get along without gold, we are telling them to accept
paper money when in all the evidence the paper money is not bo be
trusted for any lengthy period of time. Paper currencies seem
particularly inadequate for those who fear that their territories
will be overrun by the Russian army.
c. The Anglo-Saxons in the Monetary Fund have put a lot
of tifil« and effort into sealing off the premium gold market, on
the alleged grounds that that will build up the strength of
paper currencies. They have no answer to the Latin school and
others who say that if the Fund policies were effectively enforced at a time of fright like the present, gold would go to
high premiums in black markets and add to the distrust of currencies.
They likewise have no answer to the vie?? that successful enforcement
of the premium gold ban is really impossible.
7. Any gold miners have a pretty good case in arguing that it is rough
justice if they are denied the prices which jewelers and other dealers abroad
are ready to pay for even legitimate industrial gold, while the U. S.,
Canadian and some other Mints license a limited number of exports of semiprocessed gold, which will sell at prices close to $35, when obtaining gold
at that price will create a large windfall profit for the dealers obtaining
such shipments. The general markets for gold jewelry, dental gold, etc,,
in European countries are certainly at a level based upon the open market price
of gold there—now at least $42 an ounce in most countries. Only a small
minority of dealers, if any, get shipments from the U. S. and Canada, etc.,
at close to the official price. They undoubtedly resell such gold at going
prices in those markets, which will be at $42 an ounce or higher. It is -ery
hard to think of any reason why the foreign dealers should get that $7 windrfall profit rather than the sellers of the gold from the U. S. and Canada.
8. We are just playing with double definitions of words if we say that the
U. S., Canada and other "legitimate" sellers are meeting all the "legitimate"
demand for industrial gold abroad at close to $35* We are clearly not meeting
all the legitimate demand, for one reason or another, as appears immediately
from the fact that such sales are going to only a small minority of foreign
countries. There is certainly some legitimate demand for industrial gold in
every country, and very few of them have effective access to gold at the official
price. This statement is no reflection whatever on the licensing staff of the
Canadian and U. S. Mints. It is impossible to define or distinguish the legitimate
demand in most countries» In countries such as Egypt lor example, one poor people
buy gold for a mixture of hoarding and ornament which just cannot be fitted into
the Monetary Fund-U.S. definitions of legitimate and illegitimate. Furthermore,
even the most reputable firm of jewelers and gold dealers are not likely to resist
the pressure if powerful, wealthy people come in and demand large amounts of gold.
In selling little or no gold to such firms or countries, the Mints are forced to
refuse to meet the "legitimate" along with the "illegitimate " demand*
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Federal Reserve Bank of St. Louis
-49» If the United States is tnable to enforce its gold regulations against
leaks into illegitimate use sufficiently tightly to prevent a leakage how
estimated at somewhere around $50 million a year, (with no reflection whatever upon
the enforcement agencies, since they have no agents to speak of for this very
difficult work), it is idle to expect that foreign countries where the
tradition of private holding of gold is deep-rooted and the governments
relatively weak, to be able to keep official gold transactions at the $35 price
from leaking into illegitimate channels.
10. During the 1930's U.S. gold policy was willing to deny the right to
hold gold to its citizens when that right was denied in hardly any other
country in the world except Germany, Italy and Russia. The gold bloc of
Europe was still on a gold coin basis until 1936 and until the war gold could
be bought and held privately at the official price in London, Paris and virtually
all other countries. If today the U.S. is going to take the attitude that
it cannot countenance allowing, e.g., French, Mexican, Syrian, or other
citizens to buy gold while that right is denied to U.S. citizens, it is
going to get itself into a position that will have to explode in some direction
or other. Many countries of the world are just not at a stage of development
where they can get along well on paper money only and where they can cut
off the age old habits of the public to buy gold. This incipient U.S.
policy would go further than the Monetary Fund anti-premium gold policy,
since the latter deprecates only international sales at premium prices,
but not domestic sales at premium prices or international sales (even to
private hoarders) at the parity price.
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Federal Reserve Bank of St. Louis
•k®5
Canadian Decision to Adopt South Africa ffype
Plan to Export Gold to Premium Markets
Mr. Basminsky, Canadian Executive Director on the Fund, has
advised us and the British that Canada has decided to adopt a procedure
like the South Africans for the sale of its gold production in the
premium markets. He will discuss the plan informally with the top
Fund staff today (February l6) and will probably seek formal Fund
action within a week.
Briefly, the plan contemplates establishment by the Canadian gold
industry of an agency to market gold in the premium markets abroad.
The Canadian mint would buy domestic gold production and sell to the
agency at the parity price of $35 an ounce such gold as it needed to
fill foreign orders. Licenses would be required for the export of the
gold and only gold sold by, or for the account of, the agency would be
licensed for export. The exporter would be required to produce affidavits that the foreign importer is a bona fide manufacturing concern
and that the importation into the country of destination is authorized
or licensed. Sales of gold would be made only against payment in
United States dollars,
The profits of the agency would be distributed among the gold mines
in proportion to their production of gold. Only "straight11 gold mines,
i.e., those mines eligible for assistance under the Canadian subsidy
act, would receive the profits, and those mines which produce gold as a
by-product of other operations would not share in the benefits.
The Canadians say that they have come to this decision solely because of the domestic political necessity of doing something to relieve
the plight of the gold mines resulting from higher costs of operation.
They find themselves unable to resist the pressures resulting from the
high premiums abroad and the fact that Sough African producers, with the
acquiescence of the Monetary Fund, are allowed to sell in the premium
market. Canada does not wish to continue to assume a responsibility
for supporting the gold industry by subsidy and in any event feels that,
regardless of the subsidy, the pressure will still remain as long as the
present high premiums exist. However, it appears that the minimum
subsidy now in effect will be continued as a floor for the protection
of the gold producers.
In the course of the discussions of the plan, Mr. Easminsky made
the following significant statement: "The Canadian Government will
cooperate in any policy with regard to premium gold sales which obtains
general compliance. It hasnft changed its views regarding the desirability
of retaining gold for monetary purposes and the undesirability of premium
gold sales11. He elaborated that Canada would probably withdraw the plan
if South Africa were induced to withdraw from the premium market, and
would not be concerned about premium sales by minor producers such as
South American countries.
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In joint discussions with Mr. Easminsky and the British, the
United States set forth its views which may be summarised as follows:
(1) Adoption of the Canadian plan would cause increased pressure
"both in the United States and Canada for the private domestic holding
of gold for hoarding.
(2) It would also result in the withdrawal from the monetary stocks
of the world of another substantial portion of the world's gold production intensifying the loss of total gold reserves and foreign exchange
earnings of many other countries.
(3) farther moves in the direction of recognizing the growing
market for gold at higher prices would tend to increase distrust in
national currencies, which would "be particularly undesirable in the
present "twilight" period.
The Canadian plan would operate to maintain existing marginal
gold production and possibly create new marginal mines at a time when
the two countries may need the manpower and equipment used for higher
priority purposes such as production of strategic minerals,
(5) The United States would much prefer to see Canada adopt the
alternative of increasing the existing subsidies to gold producers.
Such action, while not adding to the monetary problems of the world
would have the additional advantages for Canada of (a) avoiding the
dependence of the mines upon an uncertain world market; and (b) establishing a more flexible means of providing each mine with the amount
needed, withholding aid from uneconomic mines, and timing the aid to
the period when most needed. The United States pointed out that Canada
would probably have to resort to subsidies in any event if the premium
market collapsed*
The British view as stated in the discussions closely paralleled
that of the United States and the British expressed a distinct preference
for subsidies pointing out that this device had been used to deal with
similar Commonwealth problems such as that of Southern Ehodesia.
The adoption of the Canadian plan will create very real domestic
problems for the United States. It will make it increasingly more difficult to resist the pressures by American gold producers to be allowed to
sell in the premium markets. Just as the Canadians have found it difficult to answer their gold producers when they demand to have the same
privileges as South African producers, so the United States will find
it even more difficult to answer its gold producers and their representatives in the Congress. The Canadian plan will also undoubtedly engender
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Federal Reserve Bank of St. Louis
-3considerable public and congressional discussion of our gold policy
and increase speculation about the price of gold. The United States
could not adopt a gold export plan paralleling that of Canada without
creating additional domestic difficulties, the most important of which
would be justifying to the American people the prohibitions against the
domestic hoarding of gold and resisting the proponents of a return to
the gold standard. It will be recalled that for the last several sessions
of Congress, there have been introduced a number of bills providing for
the free export of gold, the establishment of a free market for gold in
the United States, and the return to a gold coin standard. In recent
sessions there has appeared to be some slight increase in the congressional support for these measures. The Treasury has consistently opposed
enactment of these measures for reasons of fundamental monetary policy
and also for reasons related to the current world and domestic situation
at the time. It would appear to be difficult now for the Government to
rationalize to Congress a change of view with respect to the sale of
gold in the premium markets*
The statement of Mr. Basminsky quoted ahove indicates there is
some possibility of preventing the Canadian action depending, however,
upon the degree to which the United States and Great Britain are willing,
taking into account overall political and strategic considerations, to
face an issue wi'th South Africa in the Fond. In this connection, the
Fund staff released just yesterday a report on South African gold sales.
This report indicates a tremendous increase in the so-called "industrial11
sales of gold by South Africa in the period following the commencement
of the Korean invasion. Sales of gold in July, August and September,
1950» were 75$ of total sales during the preceding 12 months. It will
be recalled that in May 19^9 when the South African proposal was under
consideration, that Government's representatives claimed that there
was a legitimate need for industrial gold which was not being filled.
The lund while not approving the scheme, acquiesced in it on the definite understanding, however, that South Africa would carefully scrutinize
its gold sales and would exercise discretion having in mind the quantities
and the direction of sales. It was part of the understanding that the
Fund would make a review of the results of the plan and reserved the
right to reopen the question if the sales appeared to be excessive.
It is clear that it could reasonably be concluded from the report of the
Fund staff that South Africa has not been scrutinizing its gold sales
with sufficient care and that its sales have been excessive within the
meaning of the understanding with the Fund. Thus, the Fund report
provides an adequate basis for the Jund Board, if it should so desire,
to find that South Africa has not lived up to its understanding with
the Fond, that the plan has not worked out as expected and the Fund
therefore withdraws its acquiescence in the continuance of the plan.
On the other hand, South Africa will undoubtedly claim that its sales
have not been excessive within the meaning of the understanding, and that
it has gotten the affidavits, required licenses and done everything
required by the lund understanding. In view of the circumstances
surrounding the understanding the South African case is not entirely
implausible.
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Federal Reserve Bank of St. Louis
-lilt is clear also that the Pond report on the South African sales
will "be discussed in the near future in the Fond Board, either as an
agenda item in itself, or certainly in connection with the consideration of the Canadian plan*
It therefore "becomes necessary for the United States to decide how
far it is willing to go in opposing South Africa in order to prevent
the Canadians from adopting their plan. All those familiar with the
situation and involved in past dealings with the South Africans on
the question, feel certain that any effort by the Fund to enforce a
stoppage of gold sales "by South Africa would not "be likely to succeed.
It is felt that South Africa attaches sufficient importance to its gold
sales to withdraw from the lund if necessary rather than submit to such
enforcement* In the discussions yesterday neither the United States
or the United Kingdom was of the opinion that their Governments would
go so far as to recommend attempts by the Fond to enforce a stoppage
of gold sales by South Africa.
One member of the British delegation suggested, as a possibility^
an effort by the Fund to get South Africa to tighten its requirements
so as to effectively reduce the quantity of gold sold in the premium
markets. This suggestion was not viewed with any degree of approval by
most of those present since it was felt that South Africa was not likely
to agree even to such a limitation. Also there was no indication that
such action by the 3und would be sufficient to deter the Canadians
from going ahead with their plan.
The only other possibility, and the one considered most likely of
success, was a decision by the lund deprecating the South African op*erations and calling off the understanding with South Africa but not
accompanied by any efforts by the Fund to enforce a stoppage of sales
by South Africa. It was felt that the South Africans could live with
such an action. Mr. Rasminsky was questioned as to whether such action
by the lund would be sufficient to make Canada reconsider its plan.
He replied that he was unable to answer that question bat that it would
certainly confront the Canadian Government with a different situation
from the one which now exists and the Canadian Government would certainly
want to consider this new factor.
He inquired as to whether we contemplated an action by the lund
which would be made public or only one which would be incorporated in
a private letter to the South Africans. The implication to be gained
from his remarks was that if the Fund should take such action and should
publicly announce it, it might be sufficient to deter Canada from its
plan, but that such action accompanied only by a letter to South Africa
from the Fund which was not made public would probably not be effective.
It would seem therefore that the way is open for the United States and
the United Kin-gdcm to advise Canada that they are prepared when consideration of the report on South African gold sales takes place in
the lund Board, to press for an action by the lund deprecating South
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African gold sales and calling off the understanding with South
Africa, if Canada will agree not to adopt and present to the Fund
its plan for external gold sales.
In considering the extent to -which the United States is willing
to pursue action of this type, it should "be noted that when the
question of the South African loan was "before the N.A..C., (a loan
incidentally to finance development programs having the effect of
increasing South African gold production) a representative of the
Atomic Energy Commission appeared "before the Council and made very
strong representations in favor of approval of the loan stating in
effect that arrangements "being worked out with South Africa of a
highly strategic nature would "be jeopardized "by any action which
might antagonize South Africa. This would lead to the "belief that
the United States may not have any great area in which to operate with
respect to action "by the Rind criticizing South African gold operations.
On the other hand, it is "believed that the domestic and international
financial problems resulting from adoption of the Canadian proposal
are also of very serious concern to the United States, It therefore
appears to "be a question of weighing the importance of these two
considerations in determining what course of action should "be
followed.
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Federal Reserve Bank of St. Louis
SECRET
TREASURY DEPARTMENT
Washington
ASSISTANT SECRETARY
February 17, 1951
MEMORANDUM TO THE SECRETARY
Subject:
Implications of Current Gold Losses
1. Since the outbreak of war in Korea the United States has been
losing gold and dollars abroad at a rate of nearly $ii billion a year
as shown in Chart I attached. Our gold stock — vast though it may
seem — is not great enough to sustain for long a deficit of this
magnitude. Although we have about $22 billion in gold, half of this
is held as currency reserve requirements and only about $11 billion
is available to meet demands from foreigners.
2. Although not all foreign countries are at present insisting on
exchanging their dollar earnings into gold, most of them are; and the
tendency is increasing. Furthermore, we have to worry about demands
for gold, not only for the dollars these countries are earning currently, but also for the |8 billion foreigners have previously accumulated in dollars. These could become a demand on our gold stock at
any time. ¥e must also anticipate an increase in our currency circulation which will force us to set aside more gold as currency reserves
and leave less to meet our deficits abroad.
3. If we lost our free gold we would have to seek legislation to
reduce our currency reserve requirements. This would damage foreign
confidence in the U. S. dollar quite severely and we would probably
find it very difficult to obtain imports against dollar payment. "We
do not want to cut down on our imports — we need all the goods we
can get from abroad for our defense effort and to curb inflation here
at home. However, we want to get these goods with the minimum loss of
gold and with the minimum export of essential goods.
U» Two of the major factors causing these gold and dollar losses are
our foreign aid programs and the tremendous increases in the prices of
foreign goods. (See Charts II and III.) In the last six months of
19^0 more than 80 percent of the gold and dollar losses were to countries who were receiving aid from this country. Paying higher prices
for our imports tends to exhaust our gold holdings more quickly and
also tends to disturb our domestic financial stability. \fe have
price control domestically, but if the prices of our imports are not
reduced, we may have to resort to government subsidies to keep our
domestic price controls from breaking down. Yet the magnitude of
the subsidies which would be required would put an intolerable burden
on our already overtaxed budget.
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Federal Reserve Bank of St. Louis
SECR
- 25>. We do not, of course, know whether the current trends will
continue. They might not. However, in this critical international
situation with an indefinite period of intensified rearmament facing
us and global warfare a real possibility, we cannot afford, to base
our policies on the hope that these losses will not continue. Our
financial stability is vital to the defense of the non-communist
world. Consequently, I believe we must watch our position very carefully and see to what extent we can correct this situation by
adaptation of our international financial and economic policies* In
many ways the position of the United States today is reminiscent of
the position of the United Kingdom in 19UO, but we have no rich "uncle"
to which to turn for help»
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Federal Reserve Bank of St. Louis
u McC. Martin
U.S NET GOLD & DOLLAR LOSSES
TO FOREIGN COUNTRIES
ANNUAL RATES
BILLIONS OF DOLLARS
1951
Source:
Treasury Department*
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Federal Reserve Bank of St. Louis
BILLIONS
1949
1950
RESTRICTED
OF DOLLARS
GOLD 5 DOLLAR ASSETS OF
COUNTRIES RECEIVING £ NOT RECEIVING
U. S. FOREIGN AID
BILLIONS OF DOLLARS
All Foreign Countries
Sources: Treasury and Commerce Departments*
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Federal Reserve Bank of St. Louis
Unit Values of U. S.
Exports and Imports
Sources: Department of Commerce and
International Monetary fund
RESTRICTED
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
Canadian Decision to Adopt South African-Type Plan to Sell Gold in
Premium Markets
Canada has officially advised the U.S. that it plans to adopt a
procedure like that of South Africa for the sale of gold in the
premium markets. Its decision results from the fact that it feels
unable any longer to resist the pressures from its gold producers
for the same benefits as South African producers, in the face of
constantly rising costs. It intends to seek formal Fund acquiescence
in its plan on Friday, February 23rd.
Adoption of the Canadian plan would cause serious domestic
problems for the U»S. In addition to increased pressure from
American producers to be granted the same privileges, it would also
reopen public and congressional discussion and debate concerning a
free market for gold in the U.S., return to the gold standard, and
an increase in the price of gold. In addition, substantial new
accretions of gold going into the premium markets would increase
the difficulties of those countries attempting to husband their gold
and foreign exchange resources.
In preliminary discussions the U.S. and the U.K. have expressed
their disapproval of the plan and indicated a distinct preference
for an increase by Canada of existing subsidies to the gold mines as
an alternative. Canada is apparently unwilling to do this. It has,
however, restated its fundamental belief that gold should be
reserved for monetary purposes and indicated that its plan might be
withdrawn if the International Monetary Fund took public action
deprecating the practices of South Africa and terminating the
understanding under which South Africa is new selling gold0
A Fund Staff Report, just out, shows a tremendous increase
since the Korean invasion in sales by South Africa of so-called
"industrial11 gold. It is clear from the Report that South African
sales have been far in excess of legitimate industrial needs. The
Report could form the basis for a decision to terminate the understanding between the Fund and South Africa which by its terms was
subject to review.
Unless we are willing to make a public issue in the Fund with
South Africa by pressing for the removal of the Fund's acquiescence
in South Africa's gold operations, the Canadian plan will be adopted
and the Fund policy on premium gold sales will be for all practical
purposes interred. It therefore becomes a question of whether
other political and strategic considerations involved in our
present relations with South Africa are of such importance as to
outweigh the obvious desirability of doing something to forestall
the Canadian plan* In the recent NAG consideration of an IBRD loan
to South Africa, a representative of the Atomic Energy Commission
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Federal Reserve Bank of St. Louis
- 2-
CONFIDENTIAL
supported the loan strongly in order to facilitate ore processing in the
new gold mines and also urged generally that the harmonious relations
between the Commission and South Africa not be disturbed, with the
result that the loan was approved despite questions as to the need for
dollar loans to finance the contemplated development*,
If the Canadian plan goes into effect, there appear to be four
general lines of action open to the U.S. Government:
1. It can permit domestic gold producers in the U.S. to sell
current production abroad at premium prices;
2. It can continue its present practice and refuse to permit
UeS. producers to share in the market on grounds of U.S.
policy, despite practical collapse of Fund policy against
premium sales;
3. It can participate in the Fund in some attempt to agree
upon permitting a regulated portion of current output of all
producers to move into the non-monetary market; and
lu The U.S. can relax its own restrictions in order to permit
a larger outflow of gold from our reserves into the private
market abroad with a view to bringing down the price abroad.
Of these alternatives, the first two require unilateral action
by the U.S. without extensive Fund discussion. The third, would
provide for a period of negotiations in the Fund and elsewhere and
give a continuing responsibility of a serai-administrative character
to the Fund in this field.
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CONFIDENTIAL
COPY
Alternative I
Public announcement by the International Monetary Fund that it
is terminating the understanding it has had with South Africa
pursuant to which South Africa has been selling gold in the
premium markets,, It is believed that the UoS. would not wish to
pursue this alternative unless it were able to obtain in advance a
commitment from Canada that Canada would not propose to permit its
gold production to be sold in the premium markets for an extended
period of time. The U«S, also would probably not wish to pursue
this alternative without learning in advance the views of the
U.K.8
"In May I9h9 the Government of South Africa
consulted with the International Monetary Rind concerning its proposal to authorize sales of semiprocessed gold abroad for industrial uses at prices
in excess of monetary parity. It under took to
scrutnize all sales and, in addition, to exercise
discretion having in mind the quantities and the
direction of the sales,,
"Several members of the Fund expressed misgivings or reservations as to the volume and price
involved in the proposal, as to whether there existed
a large legitimate demand for serai-grocessed and
fabricated gold not then satisfied at non-premium
prices and as to the difficulties that might result
for gold consuming-countries«
However, it was
decided that if, after consideration of such misgivings
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Federal Reserve Bank of St. Louis
and reservations, South Africa should insist
- 2on going forward with itsproposals, the Rind could not
object.
The Government of South Africa was advised,
however, that the Rind would watch the amounts of sales
of non-monetary gold by South Africa and reserved the
right to reopen the discussion of the arrangement if the
amounts appeared to be excessive.
"The Staff of the Rind has recently completed a
study of the sales of gold by South Africa pursuant to
the plan put into operation in May I9k9»
"After consideration of the Report of the Rind
Staff and discussion thereof, the Executive Board of the
Fund has concluded that the sales of gold by South Africa
have been substantially in excess of requirements for industrial use and that a substantial proportion of the gold
sold has in fact been purchased for non-industrial use, i.e0,
for hoarding and speculation. International sales of gold
for the latter purposes are contrary to the policy of the
Monetary Rind adopted in June 19U7 and reaffirmed on
. Accordingly, the Executive Board has
determined that the South African procedure placed
into effect in May I9k9 has not worked out in operation
in the manner that was expected and hoped for by South Africa
and the Rind, and that the sales of gold by South Africa
have in fact been excessive within the meaning of the
understanding reached at that time* Accordingly, the
Executive Board has decided, in accordance with the
reservation it made at that time, to terminate its understanding with South Africa pursuant to which the Fund did
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Federal Reserve Bank of St. Louis
- 3not object to the sale by South Africa of serai-processed
gold at premium prices,,11
FBStem 2/17/51
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Federal Reserve Bank of St. Louis
COPY
Alternative II
This would be a private letter from the Managing Director of
the IMF to South Africa, advising of the termination of the understanding of May 19)4.9 «
It is believed that the text of the letter could
incorporate substantially the same language as proposed for the
public statement in Alternative I«
On the basis of remarks by
Mr» Rasminsky it appears that action by the Fund of a non-public
nature such as this would not be sufficient to deter Canada from
adopting its premium gold plan*
Since the U0S<> might later be forced
to permit its gold producers to sell gold at premium prices it is
doubtful whether under the circumstances the U*S0 would wishthe Fund
to make a further official record of its opposition to such sales0
For this reason it is considered unlikely that we would want to
adopt Alternative II,
FBSsem 2/17/51
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Federal Reserve Bank of St. Louis
COPT
Alternative III
This would be a. public announcement by the International
Monetary Fond rescinding as gracefully as possible its announced
policy with respect to international gold transactions at premium
prices«
If the Canadians cannot be deterred from their intention
to adopt a South African-type gold export plan the Fund policy will
be dead for all practical purposes„
There seems to be little
reason^: therefore, for recording another pronouncement under which
the Fund again reaffirms its policy in opposition to premium transactions but states that it does not object to the Canadian plan*
Accordingly, in the eventuality that Canada does not withdraw its
plan, it is believed desirable to terminate the Sund policy and
thus eliminate once and for all what has been, and could be in the
future, a matter of constantly recurring embarrassment to the Fund.
Action of this type would also leave the way open for the U.S. if
it found it necessary to permit its gold producers to sell in the
premium markets, to do so, without subjecting itself to criticism
in the Monetary fund:
"In June 19U7 the International Monetary Rind
adopted and announced a policy deprecating international transactions in gold at premium prices and
recommended that all of its members take effective
action to prevent such transactions in gold with other
countries or with the nationals of other countries.
It
seemed to the Members a desirable step at that time to
conserve gold for monetary purposes*
It has, however,
become apparent that notwithstanding the desirable motivation
behind the Fund policy, which was fully in accord with
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Federal Reserve Bank of St. Louis
- 2~
COPY
the objectives of the Fund, the policy has not accomplished in practice the immediate purpose for which it
was adopted, namely, a curtailment of the flow of gold
into the international premium markets*
"Accordingly, the Executive Board of the International Monetary Fund has decided to leave to the individual members, subject to their obligations under the
Articles of Agreement of the Fund, questions concerning
gold transactions at premium prices.
The Fund Board,
however, urges individual members to take all measures
within their competence to support the'objectives of
achieving exchange stability and not to take any actions
which would jeopardize the stability of the currencies
of other countries.11
FBSsem
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Federal Reserve Bank of St. Louis
2/17/51
ORANDUM
- 1 9 1951
To:
Mr. Foley
From: Mr. Leland Howard
I had
Budget hearings this morning on the Hill
T
and didn t have an opportunity to attend some important
meetings on the Canadian gold problem in the Office
of International Finance.
I find that the Canadians are putting that gold
matter we have discussed, on the agenda in the Fund
tomorrow morning for discussion on Friday. The
Canadian Cabinet is meeting Wednesday, February 21st.
It is obvious that once it goes on the Fund agenda
the Cabinet isnft going to do anything about it.
Also, once
on the Fund agenda it will back South
1
Africa s position.
George Willis had given up on the matter and said
the Canadians were going through with their plan. I
impressed George that I thought it was a very serious
thing and that it would put both the Secretary and the
President in an untenable position if the Canadians go
through with the plan.
After my conversation with Mr. Willis he said he
wanted me to talk to Mr. Martin at 9:30 in the morning
for the purpose of letting me bring my views to Mr.
Martin. My position is that this matter is so important
that you or someone of similar rank should talk to
Mr. Abbott about it.
LH:ko
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Federal Reserve Bank of St. Louis
Asst. Secy Martin
Jfebruary 21,
MT.
«iu.
CONFIDENTIAL
Canadian Gold Problem
Wo had inconclusive discussions with the British this afternoon.
The British state that they have no instructions from London* They
have authorized us to explore with Hasrainsky the situation on the
assumption that we support the Fund staff paper, which recommends withdrawal of the fund's approval from South Africa.
Allan Christelow and our people will meet with Mr* Basadnsky
tonight at his room in the Shoreham at 8 o'clock. e do not anticipate
very great progress.
The ?und staff paper is now scheduled for consideration Wednesday, but we think it possible that the South African Director may
request deferment. We presume we should agree with deferment unless
the Canadians or others insist on consideration at the Fund board*
Such a request would very likely be followed by some move towards
consultation with the South Africans and perhaps a calling of a
South African representative to Washington, tfe are disturbed about
such consultation because of the publicity aspects, but do not see
how we can avoid it if the South African Director requests time to
arrange something of that sort.
At sons point before very long, it may be necessary to make
clear the U« S. position of supporting the Fund staff and withdrawing
the Fund's approval for the present South African procedure, before
the British or Canadians commit themselves. We have explored the
possible threat of South African withdrawal from the Fund, which
threat has been made before, but Hooker does not believe this threat
need be taken seriously. He points out that withdrawal from the Fund
would nullify the recent bank loan unless the bank board by 3/b vote
approved continuation of the bank loan.
My authorization from other agencies to support the Fund staff
runs in terms of a position of support if the British and Canadians
also support the staff. It appears probable that the British and
Canadians will not commit themselves in advance to do so, and that
one or both might take no firm position in the Fund. If this is the
case, the burden may fall on the D. S. to support the Fund staff.
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Federal Reserve Bank of St. Louis
1951
- 2If you with me to take this position, it is possible that there may
be some objections from State or elsewhere that we have gone too far,
and I would like to be sure that we are prepared to go this far without definite commitments of support by the U. K. and Canada. At
present we are relying upon the staff level clearance of other agencies to go this far in conjunction with the two other countries, and
we will need to discuss with you the position to be taken if we cannot
get an understanding with them.
We have some reason to believe that the Canadian gold mining
industry has obtained a general eowmitment from the Canadian Government. Representatives of the U. B. industry have indicated informally
that they believe the Canadians have a coaaaitaent and that they
will be pressing us vigorously if the Canadians take action0
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Federal Reserve Bank of St. Louis
2/21/51
— S"f*ANDARD FORM NO. 64
Office Memorandum • UNITED STATES GOVERNMENT
TO
FROM
:
:
Asst. Secy Martin
DATE.- February 21, l°5l
Mr0 Willis
SUBJECT:
J
Canadian Gold Problem
We had inconclusive discussions with the British this afternoon.
The British state that they have no instructions from London. They
have authorized us to explore with Rasminsky the situation on the
assumption that we support the Fund staff paper, which recommends withdrawal of the fund's approval from South Africa.
Allan Ghristelow and our people will meet with Mr. Rasminsky
tonight at his room in the Shoreham at 8 o'clock. We do not anticipate
very great progress.
The Pund staff paper is now scheduled for consideration Wednesday, but we think it possible that the South African Director may
request deferment. We presume we should agree with deferment unless
the Canadians or others insist on consideration at the Fund board*
Such a request would very likely be followed by some move towards
consultation with the South Africans and perhaps a calling of a
South African representative to Washington. We are disturbed about
such consultation because of the publicity aspects, but do not see
how we can avoid it if the South African Director requests time to
arrange something of that sort.
At some point before very long, it may be necessary to make
clear the U« S. position of supporting the Fund staff and withdrawing
the Fund's approval for the present South African procedure, before
the British or Canadians commit themselves. We have explored the
possible threat of South African withdrawal from the Fund, which
threat has been made before, but Hooker does not believe this threat
need be taken seriously. He points out that withdrawal from the Fund
would nullify the recent bank loan unless the bank board by 3/U vote
approved continuation of the bank loan.
My authorization from other agencies to support the Fund staff
runs in terms of a position of support if the British and Canadians
also support the staff. It appears probable that the British and
Canadians will not commit themselves in advance to do so, and that
one or both might take no firm position in the Fond. If this is the
case, the burden may fall on the U. S, to support the Fund staff.
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- 2If you wish me to take this position, it is possible that there may
be some objections from State or elsewhere that we have gone too far,
and I would like to be sure that we are prepared to go this far without definite commtments of support by the U. K. and Canada. At
present we are relying upon the staff level clearance of other agencies to go this far in conjunction with the two other countries, and
we will need to discuss with you the position to be taken if we cannot
get an understanding with them.
We have some reason to believe that the Canadian gold mining
industry has obtained a general commitment from the Canadian Government. Representatives of the U. S. industry have indicated informally
that they believe the Canadians have a commitment and that they
will be pressing us vigorously if the Canadians take action.
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Note for the Press Conference
(Background information for consideration concerning gold losses by U,Se)
The U. S» gold reserves declined about $1.7 billion in the calendar
year 19^0 and have been reduced by another $6f>0 million to date in 19^1«»
Our gold stock amounted to $22*8 billion at the end of the year, and
currently stands at $22,2 billion. Our gold reserves have been declining since August 19U9> and have now been reduced by about $2§ billion
since that date. The total, however, is at about,the same level as in
October 19U7. Thus it may be said that we gained about $2j billions
in gold in the two years preceding the exchange adjustments of September
19ii9> while a corresponding reduction has been recorded since that date.
The attached table indicates monthly decreases in the gold stock
during 19^0, and during the first two months of 19!?1*
Until September 19U9> the requirements of foreign countries for
U, S, goods and services were met in part by the sale to us of some of
their gold reserves. The reversal of this trend since September 19U9>
has been in large part due to the improved position of the sterling area
since that date in its transactions with the dollar area. More recently,
there have been improvements in the position of other countries which
supply foods and raw materials to the United States.
If any questions are raised concerning the significance of these
gold losses, it may be advisable to offer no comment.
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U. S. Decrease in Gold Stock 19f?0
(Millions of .$)
January
£6»3
February
5>1»2
March
9602
April
9*2
May
10t»7
June
9*0
July
91el
August
k9k*k
September
l£3»9
October
2U2.^
November
19^.2
December
33ii*0
Total, 1950
1,7U3.7
January 19^1
3^803
February
(incomplete)
297.9
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2/20/51
1. The Monetary Fund says they do not like
countries or their citizens to sell gold to other countries higher than f35> an ounce.
2. South Africa has been playing hob with it by
pretending that they are selling gold for jewelry and
other industrial purposes, dressed up a little bit the
gold sheets and wire and little balls and selling it at
higher prices in big quantities to anybody that paid for
it and then those people just melt the gold back into
bars and they sell it to hoarders who will pay premium
prices.
3. Canada now says if the South African miners
are getting *1|0 or $ii2 an ounce by selling gold that way
we have to let our miners get the same kind of gain.
Memorandum to the Files
CONF/DEJVT7ALFebruary 21,
Subject: Canadian Gold Problem
Following our discussion with Mr. Rasminsky and the British on
Friday afternoon, February 16, an NAG Staff discussion was held on
Monday afternoon, February 19. At that meeting four alternatives
were discussed:
1. Withdrawal of Fund approval for the South African procedure, with some public notice*
2. Withdrawal of Fund approvalwithout public notice.
3. Allowing the Canadians to follow the South African precedent with a minimum of discussion in the Fund and elsewhere.
U. Amendment of the Fund policy cleared away for South Africa,
Canada, and possibly the United States to sell current productions in the free market.
It was felt that we probably should have the support of the
Canadians and British if we adopted the first alternative. Representatives of State, Eximbank, and the, Federal Reserve indicated willingness
to consider this alternative. b6n*^res^expressed doubts on the score
of unwillingness to antagonize South Africa, citing the recent discussion of the South African loan, and the considerations involved* EGA
also had some question about this alternative.
Not much distinction was drawn between the first and second
ternatives, as everyone believed the matter would become public.
third alternative was given general approval, as the best course
we are not preparing to make an issue of the matter in the Fund.
one felt it advisable to go as far as the fourth alternative.
alThe
if
No
Subsequent to this discussion, we were advised that the Fund. Staff
intended to place the South African matter on the agenda, and to recommend withdrawal of the Fund' s approval for existing procedures, but
without urging any sanctions with respect to South Africa. I advised
the NAG Staff members who had participated in the previous discussion.
I indicated that this course of action led us to the belief that we
should support the Fund Staff, and that it should not be the U.S. which
questioned the Fund Staff position, on behalf of those who wish to
stress the interpretation of the Fund1 s policy. Mr. Marget expressed
this view. State Department representatives indicated that they had
discussed the matter with Mr. Thorp, and had obtained his approval for
alternative 1, if the U.S. and Canada would join with us. This had
been done before they had been apprised of the Fund Staff report. The
other agencies indicated that they would give further consideration to
the matter but they felt that their principi&As would ^efer to the
Secretary of the Treasury1s views in this matter.
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- 2We subsequently arranged for discussions with Mr. Rasminsky on
February 21 at 3:00 p.m. upon his return from Ottawa, in which the
U.S. Treasury and the British Treasury would participate. Prior to
this discussion we met with representatives of the British at k o'clock.
They informed us that they had as yet no instructions from London, but
agreed that we should discuss the question with Mr. Rasminsky on the
assumption that both governments would support the Fund Staff. It was
agreed that it would be desirable to determine whether the Canadians
would be responsive to a withdrawal of the Fund1s approval or whether
they would feel that they must go ahead with their plan so long as the
South Africans continued their practice with or without Fund approval.
In previous discussion with Sir Sidney Gaine I had indicated that
we were leaning towards the view that it would be desirable for all
three governments to support the Fund Staff. He had advised me that he
feared that the Canadians would not really be impressed by our withdrawal
of the Fund's approval, but would go forward with their program unless
the South African sales were effectively restrained. There is general
agreement that the Fund cannot accomplish such policing action. He also
advised me that the British Commonwealth producers were becoming restive
and it was very doubtful if they could be held in line if the Canadians
proceeded along this line.
George K. Willis
cc: Mr.
Mr.
Mr.
Mr.
Mr.
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Hooker
Eddy
F.B.Smith
Arnold
Dickens
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Mr. Tillis sent this in to be passed on to you —
he has asked seversl of the staff to stand by in
the event you can meet with Mr. Rasminsky tonite —
if you can't, X±KXXS can you do it tomorrow? —
Mr. Willis must know as soon as possible to let the
men know tonite.
THE MESSENGER IS STANDING BY FOR YOUR ANSWER
Mr. Rasminsky is disturbed that the discussions and some preliminary
votes in the Fund on gold question indicate no enthusiastic support of the
US-UK-Canadian policy, Sed^ the Egyptian Director, maneuvered a vote on
A
an alternative proposal which isolated the US-UK and Canada as opponents
with two other abstentions.
The Canadian Government is disturbed at the
impression that the Canadians are exacting thismove as a price for
A5»m«)^
withholding action and has called Mr. R back to Ottawa postponing discussions
in the Fund until next Tuesday* He has been instructed to see Mr, Martin
before returning. He would like to see Mr. Martin this evening and if not
then before 12 noon tomorrow.
Can I arrange an appointment for him with you this evening?
He has indicated that he has no objection to my being present.
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CONFIDENTIAL
.ilNHQUNOD
(
February 23,
MEMORANDUM FOR THE FILES
Subject:
South African and Canadian Sales of Industrial Gold
Meeting held in Mr. Rasminsky1 s room, Shorehara Hotel, 8 P.M.
February 21:
Present for Canada:
Mr, Rasminsfcy
Mr. Keith
for U.K.
Mr. Christelow
for U. S.
Mr. Willis
Mr. Howard
Mr. Eddy
Mr. Smith
Mr. Rasminsky reviewed the developments on the Canadian side and
indicated that the Canadians had acceded to Mr. Overby*s request to
postpone placing their program on the Agenda of the Fund. They
understood that the Fund Staff had prepared a paper critical of the
South African sales of gold for non-monetary purposes, and that this
paper was to be put on the Agenda of the Fund for the following
Wednesday. They were much concerned, however, with reaching a
definite decision in the Fund, and could not subject themselves to a
long series of technical delays and deferments in the Fund.
Mr. Willis indicated that the U. S. had also been informed of the
action taken by the Fund Staff. Although no final decision had been
taken, among other things because the Fund paper was not itself available
and because the British Government was not in a position to speak with
authority, the present U. S. thinking was that it would be helpful if the
U. S., the U. K., nnd Canada supported the Fund Staff. However, the
U. S. was particularly interested in determining whether the action
dissociating the Fund compliance with South African procedure would be
of substantive benefit in the Canadian situation. Mr. Hooker pointed
out that the Fund had not taken action previously on South Africa
because no one believed that this would cause a change in the South
African procedure. What we were now considering doing resulted from
the fact that action by the Fund might be of substantial political value
in dealing with the Canadian problem.
Mr. Rasminsky objected to this line of approach, and felt that the
Canadian Government could not be put in a trading position. However,
he stated that the Canadian Government was and always had been concerned
to follow the international morality in this matter. In one recent
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'
CONFIDENTIAL -2occasion they had been unable to comply with the basic philosophy
of the Fund, in their view, but they felt this was due to exceptional
circumstanceso Wherever possible they desired to collaborate with
the Fund* In this case, however, since the Fund had not set up a
standard of international morality but was tolerating the South
African procedure, and in fact agreeing to it, the Canadian Government
did not feel that it could adopt a standard of morality in gold dealings
which differed from that set by the international body. If that
situation were to change, the Canadian Government would review the
situation and those present would have to draw their own conclusions
from Canada1 s general status and policies, and from its previous behavior, as
to the extent of its collaboration with the Fund*
Mr. Christelow stated that they were as yet without instructions
from London, but that the matter was understood to be before Cabinet
members. At the moment their instructions were simply not to take
sides. Their previous representations to Mr. Rasminsky, they said,
must therefore he regarded as personal rather than official views.
Mr. Rasminsky inquired as to whether the U. S. views were personal
or official. Mr. Willis stated that they could be regarded as official
views o
Mr. Howard stressed his concern with the importance of Canada's
maintaining the existing policy. He alluded to the recent visits of
US gold producers, who seemed to feel that action in Canada was approaching, and indicated that they would press the U. Sc strongly for corresponding
approval to sell their gold abroad at premium prices.
Mr. Willis then turned the discussion to the problem of positions
to be taken in the Fund on Wednesday, and indicated that the U. S. would
attach significance to the Canadian position, at that time* If it
developed that the Canadian position was not a positive one at that time,
it might be symbolic of future problems for the Fund not only with South
Africa but with Canada. A failure on the part of any of us to support
the Fund Staff would in effect be departing from our previous positions
and arguing the South African case.
The meeting then discussed various problems associated with the
attempts to screen transactions in non-monetary gold; Mr. Rasminsky
complained that one of the difficulties of the situation was that
legitimate sales were not clearly defined, and different countries
followed different interpretations. We had been strict, the South
Africans less strict* He offered for consideration the possibility that
the Fund undertake to satisfy all legitimate demands at $35> per ounce*
He also suggested a second possibility that the Fund undertake to establish
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CONFIDENTIAL
•3reasonable quotas which producing countries might sell for non-»
monetary purposes. Both alternatives were discussed and the
difficulties of each pointed out* No attempt to take positions
or reach decisions on them was made0
George H0 Willis
-^]\
CONFIDENTIAL
CC: Messrs, Martin, Dickens, Hebbard,Glendinning, Arnold, Smith, Eddy, Howard
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Bjeaoranduii for the Fi>»e—^
Subjects Premium Sales of Gold by South Africa.
Meetings in the Treasury Department, Saturday, February 2ii,
»
»
"
«
»
« O.K#s Sir Sidney Caine, Messrs. Rowe-Dutton,
Cristobal, Lesle Crick.
» « afternoon
*
*
* 0,Se? Messrs. Willis, Sadth, Polk, Hooker.
* »
»
*
«
« U.IC.j Sir Sidney Caine, Mr. Crick.
»
»
"
* Canada?
«
Mr. Rashminsky, Mr. Keith.
In the laoraing meeting the British explained that their instructions made
official their earlier views in support of the maintenance of the Fund's gold
policy and their concern that Canadian abandonment of the policy would be the
final blow to this policy. Particularly at the present time, ttaai they were
concerned with the disappearance of gold production into private channels.
Their instructions were somewhat ambiguous, and they could not give a
eoamitwent that they would support the recommendations of the Fund Staff.
These instructions talked In terms of an appeal being made to South Africa,
and apparently hoped for such an appeal before a decision by the Executive
Board as to whether South African action was in conflict with the Fond1 a
policy. They thought it should be possible to obtain definite instructions
which would authorize them to support Fund Staff, however, and though we
should have further discussions with Canada on this assumption.
However, they suggested that an opportunity must be given to South Africa
to send a special representative to the Fund Board to be present at the discussion of this matter. On checking the time-tables, they felt that thia
would not be possible during the following week, and that some overlap into
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Federal Reserve Bank of St. Louis
- 2the next week might be necessary. Planes leave South Africa on Sunday,
Tuesday and Thursday, and the trip requires about two days, if there are no
delays* A provision in the Fund regulations was cited, which requires that
a member who does not appoint an Executive Director has the right to have a
special representative present when matters of concern to it are discussed
by the Executive Board*
In the afternoon meeting the British opened by explaining their instructions to the Canadians and indicated that London had reiterated its support
of the Fund's gold policy and its concern with the consequences of the
Canadian participation in premium gold sales* They mentioned the suggestions
for an appeal to South Africa, and indicated their realization that the tiat
schedule did not persiit this. They said that they had communicated further
with London and oped to have instractions Monday which would permit them to
give a firm commitment to join with the United States in support of the Fund
Staff's recoaBBendations* They suggested that we proceed on the assuaptioa that
this would be the case*
The matter of allowing time for a South African representative to be
present was explored at length* Mr. Rashiainsky agreed to discuss with Ottawa
the possibility of allowing the Executive doard to postpone final decision
until Monday, March 5th, to allow the South African representative to be
present. The possibility was also to be mentioned that if the plane did not
arrive on time the Fund Board consideration might be further delayed, but no
later than Wednesday, March 7th,
Mr. Hashwinsky then indicated that since the major objective was to
provide the Canadian Minister with an appropriate basis for resistance to
the Canadian producers, it would be necessary to issue a public statersent*
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Federal Reserve Bank of St. Louis
- 3He thought this would be eabarrassing to Canada if issued in Ottawa rather
than in Washington* It was provisionally agreed that the Fond would, as
it has in the past, release the Executive Board decision to the press in
Washington*
the second point made by Mr. Rashminsky was that it would also be
helpful if the Canadians *ould not have to vote on the specific question
of compliance by South Africa with the fund policy, although they would be
prepared to vote for a general reaffirroation of Pond policy. This also was
reserved for consideration by the principal, parties*
The form o r the Executive Board decision was then discussed. It was
agreed that it would cover the following major pointst
1« A reaffinnation of Fund policy in the original terms of the 191*7
statement*
2» A deterwdnation that existing practices of South Africa were not
in accordance with the policy and an invitation to South Africa
to modify its policies in order to conform,
3* An authorisation to the Managing Director to consult with members
on a greater degree of cosspliance with the Fund policy.
U» A general appeal to lumbers to support the Fund's policy,
It was agreed that this statement would be provisionally drafted by
Mr. Smith and that it would be reviewed by Sir Sidney Cain* for the United
Kingdom and Wr. Rashminskycf Canada at 2sl5 p*»*» Monday, February 26,
in Mr. Hooker's Office, Sir Sidney undertook to cable to London but stated
that he would ask for a discretion fro® London and that w* did not need to
wait for London approval before going ahoad on the basis of the statement,
to consult with other directors*
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-lilt was agreed that the British would undertake to consult with Mr*
Melville, the Director for South Africa and Australia, and would attempt
to ascertain whatever Information might be available concerning South
Africa*a desire to send a special representative. In the weantime, consultation would begin with other Directors in the Pond with a view to
ascertaining the supporters of the position. A quick check indicated that
the support might be limited to the 0,3., the 0,C., India and China as a
relatively firm corps. To this might be added souje nore doubtful members
such as Italy, the fiddle East, Yugoslavia, It was felt thmt *ost of the
Europeans -night not wish to go along*
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N&Jcct* Gold Salaa at arasAiaa frioaa
A aaetiag vaa hold at fcaJQ in Mr. ioofe*r*E efflcft, iateraatiooal
feaatary Frad. Sir Sidney Cain* tod XT. Crick ra$raairat*d til* Britiah,
IT. aaaniiisky and Mr* Kftith nar« th«re for Canada. *r. Hooker, !&r»
Mr. ffelk ami Mr. ML* conaUt^Uri tha S.8. ^legation.
tba groap re*i**eti tha propoaad draft resolution to be
tha Wmtf. IxrotUv* Board. Ihe British rapraa^taUvn sufewittad
textual ehaagaa nhica n»r« acca»tadf of a minor character.
dftlatlaa at t&e siatan^mt that South African aiOsa iiara
lot ceaaiataat nith tto ?Ma gol4 poUcy* Canada Iadieate4 that would
and th« iriti«h «iid not pr««» the aatter.
it M&S than agraad tost tha raprasantativaa of all threa governaaatu womld aupncrt ti» atalaaaedt ia full at th« ex*cuUve board oat tLag aai that aoa* of the throa ^ver&Mmta wsvlii agraa to aay eli&aga
>r wnendaent IB Uta atatajM^t wiUtoat prisar oawarwtatKiia^ that *xich
:haag« vaa aeeaptabla to all thraa*
Tha Caoayiaaa tteas .iadieaUc' ia specific i«ords attachea hereto
position «m tfee baais of Ihis aa^rstaiicin^. 'jSiay mad* two
>a*ic poifita. First, ti?«y raaerwKi tfee right td as« for »oat favorod
traatno&t in an/ autiwri**Uoii givaa fey ti» Kiwct to aay otter
to e«*i tii tilt isramitim aarnat* Sacoaat tbay also raasrvad
riglit, v.l thin a roaaoaable pariod of U»«f to ravi^« l^a EituaUon
Lf ttoa FuRd»s v-oiicy aid iiafe 4«*1 vith th* ambataaUv* probieaa affaeoa tbin statet«ent, Kr. *ia«».ina<y iauic&tad tbat ha
Bought of a "raaaonabie period of ti^e11 as biting «aaani'€*,: in
»Bd not Bsoatha. He aaidl that tMa wosld not a§an that tft«
^ovara»aRt wouL- . ^Of^aa to a&tar tha 9raa4«i narkat at that
?hay taigfet, for exam?!** oowa to tha ffcai with a propoaal to axtand
subaidiaa vndar thosa ^oadltlo^a. this was aaraly a daaira on thair
>art to na^e axpHeit that thay «ara mot baing aowMitfcad for any loog
seriod of ti»© not to r@exasda«r tha situation. In th« »»atttl«a thay
^mld not e^s« to HM Ftturt for any propoaal for auhsidiaa* Their foa
tioa would be that ao sub*idi*» would ha giwa fr<» January 1, bat it
«»tlii b« understood that any «ub»idi«» aatoMKpaatly aaaetad would ba
ratroactiva to Jsjiaarf lf 1951. ia oihar words, tha matter of thair
taaistaneti to gold prodacara «feuld ba left IB smaoamaa to aae how tha
x>licy da¥eiopad on th« baaia of fttwi conwlUUoa* or other
Hr* Hooker and Wr. Willis indieatcu that thara «as r&al doubt a*
bo tha affactivaneaa of a«eo«plisa«fc'«ts a^ing a parioci so abort as a
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
-1«
fow woeka And roiteratad tho f «S. riow taat wo would hopo u»
would conoido? tho tt&aidioa apiar&priato to lioal i&tfe tao problea of
^yiY^ bo doao was to roly oa tb't roiiunililoiioiii aad good oaaaa of t3^
Caaadlaa Oovernment ia not oacpoisUag airaol«a fro« tha Ited* fte
Britiaa iadicatad taoy wow aatiafiatii that tin
abla poaltidn oa this aattar*
the diacu»»iort aa to w&at nigitt bo
Mr« ^illi« indicAt«4 that mm* thought riAC too«a gives OB otar sicte
to uliotlaor It aifHt not H*** b*«B o«fartim»to to «ator into
•eat at * frlo* la OXOOM of $3$ por OOMOO And |s«rha^ tfeo first
to Indicate ^.iwatUf Action with t^lo oxporlaomt and not
tdo «iphA»ie on South Africa** failur* to eonfont to tho Arrtr^emcnt,
indicate that our ooacor» waa bro«iort and toue^d tbo desirability
taltan tb* Yiov that tha Fttnd m)T<r thoalo haT« a&tored iato
at oramliM pria««f «md tiiat ^r» ^iUia* surges Uoa iraa vary
aloai? tlio Urn* of th«lr thi^dag a» to what «lgfet oo <toa*« ift
thio aigat bo coupled wittt MMO rolazaUon of aaloa for iaduatrial «ao at 4J$ by th» e<mplyiag countries, is orcitr to flXr«ncth«n
th« oaoa tfeat t^ro wa» ne XogitljAto d^eafsd not boiag «atiafie4 at
official prl«o« i»o aight Acc»pt MEMO uligtit iaoriNaoo in
aales <sa OOJT part to noat to* ariUMcat that tfe» iagitlnitto atrjcot
boiaj ^tooootf boeauaa of Sifwr^oa iato hoard*, fba 9riti«h off«r«4
on tbi*
Hr» Hook«r foport«Nl taat
q«A«tion«, laei^diftg U*»
iasno atatttaoata to tao proao
that tfcay h*a ao iatoatioa of
SM^ Afriea iatftfutod to raiaa aU tao
official prieo of goUt, aad iataado*! to
la Soatli A£rlea« Hwjr also netild say
e&«pl|lag *ith tte Fnad policy, it vaa
Kr« fcaaaiaaiqr, Nwawr, iadicAto<a tfeat no ooald aatieipat* taat
aajr pafeiieity from Caaada *o«l<l bo of aa offoot cbarACter aad
U>« policy of the
ilium
Wfioa
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Jtt tfe* atetl&i la Mr, Sooitar's offle* an fc&e afternoon
of February 2?9 1£>1, attaaded 117 x«pr«*eatati?*a of th*
Uaitod -t*U», t^« Iteiiftd Xiagtei 4»<i C«uKi«f H
sUled ilfait Can»d« »gr»*d to ite fibraft <J*ei§ion
to fftpport «aeh dacisioa la the di»cu»sion la Hie Faad Board,
the wadftrataodlag that a »eriou» attempt waalo «rg«ntly
t» d«TOlo?? an
to aaH
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I, that Canada r«a«r«a« the ri^ht to do what !• ulUpondttMl by tlia fvni to a»y nt«b«rj and
If after a r»asonaole |>eridd that Fmadi h«u§ oot
<to^alopo<l an *ffccUve policy that »oot« «ltb
atantlal co^>iia»caf tHon Canada ra*«rvo« tha right
to rec>n«ld«r
Proposed resolution to be supported In >jcecutiT« Board of the
Fund a* agreed between the y.S., U.&. and Canada
International Transactions in Gold at hreadua Prices
International Monetary Fund's policy on international premium
gold transactions was established in June, 19k?* At that time the Fund
found that such transactions tended to underline exchange stability and to
involve an undesirable loss to aonetary reserves by diversion to hoards*
The Funrf statement of policy issued at that tiae strongly deprecated
international transactions in gold at prenlum prices and reeoastended
that all of its leenbers ta*e effective action to prevent such transactions
In fold with oth^r countri s or with ths nationals of other countries.
The Fond policy was reviewed and reaffirmed by the executive Board in
April, le^Q.
It is the fir» belief of the &»cutive ioard that in the present
conditions of world uncertainty t&ere is even greater need to conserve
gold for official monetary reserve*, therefore, the Ifoad appeals to
all aeaibera to cooperate in the pursuit of the objectives of the policy
in June, 191*7*
The u»etttive Board of th* International *onet*ry ?tod ha«
a review of international gold treissactions. It has been
determined that in the laat year, particular! In the second half of
>, there has been a large increase in th® volme of international
in gold at presiium prices and a related decline In th© net
it of world gold production entering into official monetary reserves.
In view of thin the Mswigiaf Director of the Fund Is tMtjiriisd to
consult urgently with nember coaatries with a vl&w to making the Fund*s
policy »ore effective.
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Federal Reserve Bank of St. Louis
- 2IB this connection it will be recalled that la Hay,
sale of seal •processed gold abroad for industrial ana artistic uses at-.
>>
pri
parity,
jc exercised with respect to the quantities aa4 Erection of such
The Funct at the tiaie reserved the right to reopen discussion of
this setter if the amounts involved appeared to be excessive.
According to recent information sales of fold by South Africa at
premium tariees in the latter months of 1°$0 aoount to beineew i*Q> and
of its new gold B reduction* the Board considers that sales on this
scale clearly exceed what is required for the arts and industries sad
can mo longer bo regarded as 'being "within the spirit and purpose of
the understanding reached by the Funo with outh Africa in ^ay, I.9k99
or as'being consonant with the 'Fund's gold policy. la those circumstances the Fund regrets that it can ae leager maintain the attitude
tnat it took to the South .4fTican arrasgemlailia" Hay/191^. tfeo
xecutivo Board acccrdingly roqueaU Use ^snaging Erector to consult
with ^outh Jtfrice in accardance with the general direction to eater
into consultations with member countii &s in ^iragraph 3 of this
resolution.
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<^-^
CONFIDENTIAL
February 27, 19!?1
MEMORANDUM FOR THE FILES
Subject: Gold Sales at Premium Prices
A meeting was held at U:30 in Mr. Hooker's office, International
Monetary Fund. Sir Sidney Caine and Mr. Crick represented the British.
Mr. Rasminsky and Mr. Keith were there for Canada. Mr. Hooker, Mr.
Willis, Mr. Polk and Mr. Smith constituted the U.S. delegation.
The group reviewed the proposed draft resolution to be supported
in the Fund Executive Board. The British representative submitted
several textual changes which were accepted, of a minor character.
They proposed deletion of the statement that South African sales were
not consistent with the Fund gold policy. Canada indicated that would
be unacceptable, and the British did not press the matter.
It was then agreed that the representatives of all three governments would support the statement in full at the executive board meeting and that none of the three governments would agree to any change
or amendment in the statement without prior understanding that such
change was acceptable to all three.
The Canadians then indicated in specific words attached hereto
their position on the basis of this understanding. They made two
basic points. First, they reserved the right to ask for most favored
nation treatment in any authorization given by the Fund to any other
country to deal in the premium market. Second, they also reserved
the right, within a reasonable period of time, to review the situation
if the Fund's policy did not deal with the substantive problems effectively.
Elaborating on this statement, Mr. Rasrainsky indicated that he
thought of a "reasonable period of time" as being measured in weeks
and not months. He said that this would not mean that the Canadian
Government would propose to enter the premium market at that time.
They might, for example, come to the Fund with a proposal to extend
subsidies under those conditions. This was merely a desire on their
part to make explicit that they were not being committed for any long
period of time not to reexamine the situation. In the meantime they
would not come to the Fund for any proposal for subsidies. Their position would be that no subsidies would be given from January 1, but it
would be understood that any subsidies subsequently enacted would be
retroactive to January 1, 1951• In other words, the matter of their
assistance to gold producers would be left in suspense to see how the
policy developed on the basis of Fund consultations or other action.
Mr. Hooker and Mr. Willis indicated that there was real doubt as
to the effectiveness of accomplishments during a period so short as a
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
- 2few weeks and reiterated the U.S. view that we would hope the Canadians
would consider the subsidies appropriate to deal with the problem of
their producers* Mr. Rasminsky indicated that he thought that all that
could be done was to rely on the reasonableness and good sense of the
Canadian Government in not expecting miracles from the Fund. The
British indicated they were satisfied that the Canadians had a reasonable position on this matter0
Continuing the discussion as to what might be done subs tantively,
Mr. Willis indicated that some thought had been given on our side as
to whether it might not have been unfortunate to enter into any arrangement at a price in excess of |35 per ounce and perhaps the first stage
was to indicate dissatisfaction with this experiment and not become
involved in any new arrangements involving premium prices. He suggested
that an approach along this line might also take some of the onus from
the emphasis on South Africa's failure to conform to the arrangement,
and indicate that our concern was broader, and touched the desirability
of the arrangement itself. Mr. Rasminsky indicated that Canada had consistently taken the view that the Fund never should have entered into
arrangements at premium prices, and that Mr. Willis1 suggestion was very
much along the lines of their thinking as to what might be done. He
thought this might be coupled with some relaxation of sales for industrial use at $35> by the complying countries, in order to strengthen
the case that there was no legitimate demand not being satisfied at
the official price. We might accept some slight increase in undesirable
sales on our part to meet the argument that the legitimate market was
being pressed because of diversion into hoards. The British offered no
comment on this subject.
Mr. Hooker reported that South Africa intended to raise all the
gold questions, including the official price of gold, and intended to
issue statements to the press in South Africa. They also would say
that they had no intention of complying with the Fund policy. It was
agreed that this was not unanticipated.
Mr. Rasminsky, however, indicated that we could anticipate that
any publicity from Canada would be of an offset character and would
support the policy of the Fund.
G. H. Willis
cc: Messrs. Martin, Hooker, Howard, Dickens, Hebbard, Polk, Smith,
Eddy, Blaser, Arnold
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Federal Reserve Bank of St. Louis
Attachment A
February 28,
At the meeting in Mr, Hooker!s office on the afternoon
of February 27 > 195>1> attended by representatives of the
United States, the United Kingdom and Canada, Mr. Rasminsky
stated that Canada agreed to the draft decision and agreed
to support such decision in the discussion in the Fund Board,
"on the understanding that a serious attempt would urgently
be made to develop an effective Fund policy, generally
adhered to and subject to the following conditions:
10
That Canada reserves the right to do what is ultimately permitted by the Fund to any member; and
2. If after a reasonable period the Fund has not
developed an effective policy that meets with substantial compliance, then Canada reserves the right
to reconsider its position."
Attachment B
Proposed resolution to be supported in Executive Board of the
Fund as agreed between the U.S., U.Ko and Canada
International Transactions in Gold at Premium Prices
The International Monetary Fund's policy on international premium
gold transactions was established in June, 19U7» At that time the Fund
found that such transactions tended to undermine exchange stability and to
involve an undesirable loss to monetary reserves by diversion to hoards,,
The Fund statement of policy issued at that time strongly deprecated
international transactions in gold at premium prices and recommended
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 policy was reviewed and reaffirmed by the Executive Board in
April, 1950.
It is the firm belief of the Executive Board that in the present
conditions of world uncertainty there is even greater need to conserve
gold for official monetary reserves.
Therefore, the Fund appeals to
all members to cooperate in the pursuit of the objectives of the policy
announced in June, 19U7.
The Executive Board of the, International Monetary Fund has
completed a review of international gold transactions.
It has been
determined that in the last year, particularly in the second half of
1950, there has been a large increase in the volume of international
transactions in gold at premium prices and a related decline in the net
amount of world gold production entering into official monetary reserves.
In view of this the Managing Director of the Fund is authorized to
consult urgently with member countries with a view to making the Fund's
policy more effective0
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Federal Reserve Bank of St. Louis
~ 2-
In this connection it will be recalled that in May, 19U9* the
Fund, decided to raise no objection to proposals by South Africa for the
sale of semi-processed gold abroad for industrial and artistic uses at
prices in excess of monetary parity, it being understood that discretion
would be exercised with respect to the quantities and direction of such
sales. The Fund at the time reserved the right to reopen discussion of
this matter if the amounts involved appeared to be excessive.
According to recent information sales of gold by South Africa at
premium prices in the latter months of 1950 amount to between hO% and 50$
of its new gold production. The Board considers that sales on this
scale clearly exceed what is required for the arts and industries and
can no longer be regarded as being within the spirit and purpose of
the understanding reached by the Fund with South Africa in Hay, 19U9>
or as being consonant with the Fund's gold policy*
In these circum-
stances the Fund regrets that it can no longer maintain the attitude
that it took to the South African arrangements in May, 19U9. The
Executive Board accordingly requests the Managing Director to consult
with South Africa in accordance with the general direction to enter
into consultations with member countries in Paragraph 3 of this
resolution.
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Federal Reserve Bank of St. Louis
CONFIDENTIAL
February 28, 1951
MEMORANDUM FOR THE FILES
Subject: Premium Gold Sales Problem
On Friday, February 23, Mr. Rasminsky called at about U:00 P.M.
He advised me that the Fund Staff paper would constitute, in the
minds of the Canadian Government, a determination that the South
African procedure was not in accord with the policy of the Fund.
This would be the case if the Executive Board adopted the recommendations of the Fund Staff. I interpreted his remarks to mean that
the adoption of the Staff report by the Executive Board would lead
Canada to at least reconsider its proposal to adopt the South African
practice.
Mr. Rasminsky made two other points. He made it clear that the
Canadian Government would not be able to postpone its own proposal if
the Fund became involved in a long series of technical delays, and
did not reach a prompt decision. In fact, he stated that the Canadians
expected the Fund to reach a decision before the end of next week.
He went on to say that the Canadians did not believe it was
desirable or necessary to attempt any censure of the South Africans.
The Fund paper which merely indicated that in the judgment of the
Fund the procedures South Africa is following were not consistent
with its policy or with the Agreement between the Fund and South Africa
was sufficient. I agreed with him, indicating that it was not desirable to arouse emotions or attempt sanctions. I indicated that if the
consideration of the matter should become heated, it should be only at
the initiative of the South Africans, and the Fund should take no
initiative in censuring the South Africans.
Prior to Mr. Rasminsky's call, I had been advised by Sir Sidney
Caine that the British had received instructions from London, which
they wished to discuss among themselves before communicating with us.
They suggested that they would like to meet with the U.S. side before
we met with the Canadians. We arranged to meet at 11:00 o'clock on
Saturday.
Mr. Rasminsky, in his conversation with me, had indicated that
he had transmitted his views on the Fund's Staff paper to the British.
He said that he also understood that they had received instructions
which were more optimistic than he had anticipated.
Following these conversations, I advised Mr. Tamagna of the
Federal Reserve System and Mr. Corbett of State Department of the
situation. I indicated to them that I had stated that the U.S. was
of the view that it would be desirable for the three governments to
support the Fund Staff paper. I said that I had not committed the U.S.
to such support without regard to the position of the other two countries concerned. I advised that I would inform them on Monday of
further developments*
«»
G. H. Willis
cc: Messrs. Martin, Hooker, Howard, Dickens, Hebbard, Polk, Smith,
Blaser, Arnold
Eddy,
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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, 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. 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
- 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 the 2fi.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 have 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 sp35 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 fee 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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* 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. 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 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
- 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. 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 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 hot in accord with the program of the President.
Very truly yours,
(Signed) Wm,. McC. Martin, Jr,
Wm .. .Me C .. Mart in, Jr .,
Acting Secretary
Honorable Burnet R. Maybank
Chairman, Committee on Banking and Currency
United States Senate
Vfashington, D« C.
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la in further' ?«r*ly to
,
X*tter fiW
price ehancec tavfciiaeia f**£ gating %b*t *tfe**re ie grave
deeM that we e«s Xi«k the*. 1« a s«p*fca4y wer— unlett INI elae give
e«r enrreasy redee«»Mli%y 1* ^U*f
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tm «Cr, UlXyfe letter* ^e retried «m%* In «iui
of eenegaftr g^ii l«el«<llBg Iveftd sod «M«% ney
repreee^l e reel iwiwsfit to ttspi^n eromuttem,
**r« tilly'e refere**** ^es «&% wwelne Hie etbeolute Xevele at
prieeet hew riigit th« r>rXc«« ei* *fter tbe re«ltt«tiotaif In terse
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imeele* Neither aoet It cever tie %i«eti«3ti *f bse widely
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within
Xetter i*
WM. McC. MARTIN
larrati .
Waited Stataa -f. *
imlaanre
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3/9/5X
EASURY DEPARTMENT
Information Service
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Federal Reserve Bank of St. Louis
WASHINGTON, D.C
.'
IMMEDIATE RELEASE,
Thursday, March 1, 1951.
S-2610
The Treasury Department today made
public a report of gold seles to foreign
countries by the
TT
nited States for the
calendar- year 1950.
At ^he same time
it was announced that publication of
figures of gold sales and purchases
will be made quarterly.
The table showing the 1950 sales is
attached.
oOo
United States Sales of Gold, to Foreign. Countries I/
Calendar Year 1950
Country
(In millions of dollars at $35 per ounce)
.
1st Quarter 2nd Quarter 3rd Quarter lith Quarter
§.
3-1.0
A
$
20.0
China (Nationalist)
aT>
1950
$ 3.0
si> 3.0
100.0
100.0
Ii.2
55-o
h.2
--
10.0
27.0
——
Total -
~i 1
1.0
__
10.0
j4),#g
56.3
8^.8
O
28.5
2.1
12.3
10.0
15*8
Uo.5
Netherlands ........
30.0
20.0
61.9
79.8
118.2
79.8
h.o
Ii.0
^ o
*> • -^
-• —
-j £
1*5
•MM»
^ —
3.0
16*0
i5.c
15.0
3.0
3*3
6.0
3.3
h.O
23.0
38.0
\
65.2
2.2
13.0
Switzerland - Bank
for International
Settlements .......
12.8
1.1
12.5
.7
80.0
p
12.0
580.0
p.
360.0
26.9
2.'5
1.020.0
1
70.8
2.5
.1
.^9.5
$785.6 / $1,797.3
All Othnr
1
TOTAL
,21Q 2
,
-
Mote: Ficrures i;ill not necessarily add to totals because of rounding.
I/ During 1950 the United States purchased a total of $68 million in
£old from foreign countries. Of the countries shown to which sales
of pold were made, the only ones from which the United States also
purchased gold were Uruguay ($6 million) and Nationalist China
($300,000).
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Federal Reserve Bank of St. Louis
THE SECRETARY OF THE TREASURY
Washington
October 31, 19^9
My dear Mr. Chairman:
This is in reply to your letter dated August 22, 19^9, in which
you enclosed a questionnaire which you asked me to answer in connection with a comprehensive study relating to the effectiveness and
coordination of monetary, credit, and fiscal policies, which has been
undertaken by the Joint Committee on the Economic Report, by direction
of Congress.
The subject matter of the questions falls into several main categories. All of the questions are answered; but, since much of the
material would be repetitive if each question were answered separately,
I have taken the liberty of answering the questions by groups rather
than question-by-question.
The first eight questions relate to the monetary and debt-management
policies of the Treasury and their coordination with the policies of the
Federal Reserve System. The questions are as follows:
1. What are the principal guides and objectives of
the Treasury in formulating its monetary and debt management policies'? What attention is paid to the interest
costs on the Federal debt? To the prices of outstanding
Government obligations? To the state of employment and
production? To the behavior of price levels in general?
To other factors?
2. To what extent and by what means are the monetary and debt management policies of the Treasury
coordinated with those of the Federal Reserve? Describe
in detail the procedures followed for these purposes,
3. What were the principal reasons for the particular structure of interest rates maintained during the
war and the early postwar period?
kf To what extent, if at all, would a monetary and
debt management policy which would have produced higher
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Federal Reserve Bank of St. Louis
Senator Douglas - 2
interest rates during the period from January 19^6 to
late 19^8 have lessened inflationary pressures?
5. When there are differences of opinion between
the Secretary of the Treasury and the Federal Reserve
authorities as to desirable support prices and yields
on Government securities, whose judgment generally
prevails?
6. What, if anything, should be done to increase
the degree of coordination of Federal Reserve and
Treasury policies in the field of money, credit, and
debt management?
7« What would be the advantages and disadvantages
of providing that the Secretary of the Treasury should be
a member of the Federal Reserve Board? On balance, would
you favor such a provision?
8,, What are the advantages and disadvantages of
offering for continuous sale Savings Bonds of the E1^ F,
and G- series with their present yields, maturities, and
limitations on the annual amount to be purchased by each
buyer? Does this policy lessen the supply of private
savings for equity capital and riskier private loans?
What are the advantages and disadvantages of promoting
the sale of these securities during periods of recession?
Should the terms of these securities and the amount that
each buyer may purchase be varied with changes in
economic conditions?
The primary concern of the Treasury in formulating its monetary
and debt-management policies is to promote sound economic conditions
in the country* When I took office as Secretary of the Treasury, the
country had only started the tremendous task of converting the economy
from a wartime to a peacetime basis. Federal expenditures, which had
raised the output of the United States to the highest levels on record
during the war years, had been cut back sharply as soon as the war
ended. In the fiscal year 19^5, Federal expenditures had been just
under $100 billion, and had accounted for nearly one-half of the gross
national product; in the fiscal year ending June 30, 19^6, they dropped
to a little over $60 billion. This prompt cut in Federal expenditures
after the close of the war was necessary and desirable; but it left
the Uation facing the problem of replacing the production which had
gone for war purposes with civilian production as rapidly as possible.
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Senator Douglas - 3
There were many who felt that the
after the country had experienced
economic dislocation. Government
all worried about many factors on
reconversion could "be achieved only
serious unemployment and severe
and "business, farmers and labor, were
the economic scene.
Not the least of the economic factors which were causing concern
was the size of the public debt — which had increased more than fivefold during the v/ar years« It was difficult at the time to forecast
how so large a debt might be handled. The size was unprecedented,
both in terms of the dollar amount involved and of the debt's relation
to the economy of the country. On February 28, 19^6, at its postwar
peak, the Federal public debt stood at nearly $280 billion. It constituted over 60 percent of all outstanding debt, public and private.
At the end of 1939, before the United States started its defense and
war finance program, the total public debt had stood at $Ug billion —
this was only 23 percent of the entire debt of the country.
At the end of the war, the public debt was widely held. This
broad ownership made it possible for the debt to play its part in the
flexible fiscal policy which was necessary to promote economic stability
in the postwar period. The particular composition of the debt was
the result of conscious planning by the Treasury as a part of its
policy of fitting Government securities to the needs of various types
of investors. Practically all of the securities sold to commercial
banks, for example, have been short-term, in order that the portfolios
of banks would be kept highly liquid,, This was essential if banks
were to be in a position to finance reconversion needs. Business
corporations likewise have been provided with short-term securities
for the temporary investment of their reserve funds. Insurance
companies and savings banks, on the other hand, have held longer-term
securities — largely with maturities over ten years. Savings bonds
have been, of course,t&sprincipal type of Government security held
by individuals. At the same time, however, that broad ownership of
the debt contributed to easing the problems of postwar debt management,
it made good debt management particularly vital, since every segment
of the economy was affected.
When I became Secretary of the Treasury, total Government security
holdings of individuals, including marketable as well as nonmarketable
issues, amounted to $6U billion — a significant change from the situation prior to the war, when they owned only about $10 billion of Government securities. Over $^3 billion of the Government securities held
by individuals were savings bonds0 Other nonbank investors also
held large amounts of Government securities,, Financial institutions
had a substantial proportion of their assets invested in the public
debt issues of the Federal Government, For mutual savings banks, it
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Senator Douglas - 4
amounted to $11-1/2 "billion — about 6U percent of their total assets.
All insurance companies — life, fire, casualty, and marine — held
$25-1/2 billion of Government securities. Life insurance companies
alone had holdings of $22 billion — over 46 percent of their total
assets. Federal agencies and trust funds, which are by law required to
invest their accumulated funds in Government securities, held $29 billion. Other nonbank investors, which include business corporations,
State and local governments^ and other small groups of investors, held
$32 billion.
The commercial banking system held $108 billion of Government
securities,, Commercial banks held $84-1/2 billion of the total* This
comprised 71 percent of their earning assets*. The balance, $23-1/2 billion, was held by the Federal Reserve Banks,
It was obvious that the decisions which had to be made with respect
to a public debt which was so large, and which was interwoven in the
financial structure of the entire economy,, would significantly affect
the economic and financial welfare of the country* It was essential,
under these circumstances, that debt management be directed toward
promoting and maintaining a stable and smoothly functioning economy.
In the nature of things, the Federal Government must exercise firm
control of debt management as long as the debt remains so large and
so important^ In the course of formulating debt-management policies,
I have consulted with advisory committees representing a cross-section
of American business, for an exchange of views and information. These
consultations have been helpful in determining the soundest possible
debt-management policies; but, in the final analysis, the responsibility
for these policies belongs to the Secretary of the Treasury and under
the law cannot be delegated,
As I have said, the overriding consideration in debt-management
policy is the economic welfare of the country. The Secretary of the
Treasury has many responsibilities; but his primary one is that of
maintaining confidence in the credit of the United States Government
In addition, in prosperous years such as we have enjoyed since the end
of the war, it is important to reduce the total amount of the public
debt and to reduce bank ownership of Federal securities and widen the
distribution of the debte Accordingly, these have been the principal
objectives of the Treasury's debt-management program during the postwar
periodo
10 To maintain confidence in the credit of the United States
Government.—It is for this reason that stability in the Government bond
market has been a continuing policy during the postwar period,. Stability
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Senator Douglas - 5
in the Government "bond market during the transition period has been of
tremendous importance to the country. It contributed to the underlying
strength of the country's financial system and eased reconversion, not
only for the Covernmentj "but also for industrial and business enterprises.
This is in marked contrast to the situation after the First World War,
when the severe decline in the prices of Government securities contributed
to the business collapse that occurred within two years after the war's
end*
The particular structure of interest rates maintained during
World War II was, with only minor variations, the one which existed at
the time we began our defense and war finance program. It was apparent
almost from the beginning of this program that it would require a
large increase in the public debt; and an important consideration was
the cost of the borrowed funds. It was especially fortunate, therefore,
that interest rates were at a relatively low level, It made it possible
to finance the war cheaply without disrupting the financial structure
of the country«>
Stability in the Government bond market since the end of the war
has been achieved through the cooperative efforts of the Federal Reserve
System and the Treasury Department* Some of the stabilizing measures —
notably, of course, the operations of the Federal Open Market Committee •—
have been primarily the responsibility of the Federal Reserve System,
Others have been primarily the responsibility of the Treasury Department,
In maintaining stability in the Government bond market, flexibility
in adapting policies to changing economic conditions has been essential*
It has been necessary at times to take steps to prevent too sharp a
rise in Government security prices; and, at other times, declining prices
have been halted*
Beginning in the Spring of 19^7, tk© Federal Reserve and the
Treasury took action to control an incipient boom in the Government bond
market* Long-term bonds were sold from some of the Government investment accounts, the Investment Series of bonds was offered to institutional
investors, and interest rates on short-term Government securities were
increasedc All of these operations combined to take upward pressure
off the market* When conditions changed, and a downward pressure on
bond prices developed, the market was stabilized through purchases of
long-term bonds. Short-term interest rates —- which had been permitted
to rise beginning in mid-19^7 — were held steady from the Fall of
19^8 until this Summer, Then, in mid-September of this year, they were
reduced.
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All of these actions have been taken with a view toward promoting
confidence in the Nation1s business and financial structure and the
attainment of a high level of employment and production in the economy,
2. To reduce the amount of the debt,—-In the statement which I
made when I took office as Secretary of the Treasury in June 19^-6, I
said:
M
« * . It is the responsibility of the Government to
reduce its expenditures in every possible way, to maintain
adequate tax rates during this transition period, and to
achieve a balanced budget — or better — for l$Uj.n
During the first two fiscal years after I took office, the Federal
Government operated with a budget surplus * In the fiscal year 19^8,
the surplus was, in fact, the largest in the history of the country*
Starting in March 19^6, the large cash balances that had remained at
the end of the Victory Loan were applied to the reduction of the public
debto These balances were largely expended during the calendar year
19^6, and subsequent debt reduction was effected through pay-offs from
the budget surpluses of the fiscal years 19^7 and. 19^8e At its postwar
peak on February 28, 19^6, the public debt stood at $279,8 billion; on
June 27 of this year, it reached a postwar low of $251o3 billion.
There is no longer a budget surplus, however, largely because of
the tax reductions enacted by Congress in 19^8, over the President's
veto. As a result, the debt has been rising steadily in recent months;
and at the end of September, it stood at $25607 billion., Both President
Truman and I have stressed the importance of continuing debt reduction
in years of prosperity such as we have enjoyed since the end of the war*
This was one of the reasons why the President on three occasions vetoed
measures reducing taxes at a time when the economic condition of the
country permitted continued retirement of the debtc
3° To reduce bank ownership of Federal securities and widen the
distribution of the debto—Strong inflationary pressures existed during
most of the postwar period^ In order that debt reduction would have
the greatest possible anti-inflationary effect, under these circumstances, it was concentrated on debt held by the commercial banking
system* The concentration of debt reduction in bank holdings was facilitated by the Treasury's policy of fitting the debt to the needs of
investors, which had placed a large volume of short-term debt in the
hands of the banking system. The reduction in the public debt held by
the commercial banking system has been actually greater than the reduction in the total debt,,
The total public debt was reduced $28.5 billion from its postwar
peak of $279e8 billion to the postwar low of $251.3 billion. During
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Senator Douglas ~ 7
the same period, "bank-held de"bt was reduced "by approximately $3^ "billion* This came about "because the Treasury was a"ble to increase the
Government security holdings of nonbank investors. Funds from the
sale of savings bonds and other nonmarketable issues to nonbank
investors were available for the retirement of maturing issues of
bank-held debt, in addition to the budget surpluses of the fiscal
years 19^7 and 19^8, There has been an increase of $5«^ billion in
the debt, however, since the low point was reached in June of this
year; and at the end of September, the total amount of debt outstanding
was $256.7 billion. Bank holdings have increased approximately $2 billion since the end of June, so that the net reduction in these holdings
from February 19^-6 to the end of September totals $32 billion.
Because of the social and economic benefits of broad ownership of
public debt securities, the maintenance of the widespread distribution
of the debt has been an essential part of the Treasury*s postwar debtmanagement policies. It has been one of the principal objectives in
the continued promotion of savings bond sales* Broad ownership of the
public debt is good for the purchasers of Government securities and it
is good for the country. It gives to the people a greater sense of
economic security and an enhanced feeling of personal dignity. It
causes them to take an increased interest in national issues. It gives
them a direct stake in the finances of the United States,
Another postwar objective of savings bond sales was to combat
inflationary pressures, The sale of savings bonds was a two-edged
weapon against inflation. It took purchasing power directly out of
the hands of consumers; and the funds obtained from the sale of savings
bonds were available for the retirement of bank-held debt, thereby
reducing the money supply to that extent.
We have continued actively to promote the sale of savings bonds to
encourage thrift on the part of Americans* Thrift is a vital factor in
our present-day life e
The total amount of savings bonds outstanding at the end of September was OYor $56-*l/2 billion, en increase of nearly $8-1/2 billion
since the end of 19^5« ^e success of the postwar savings bond program
is especially notable since it was generally expected that a flood of
savings bond redemptions would be one of the major debt-management
problems as soon as the war ended,,
Actually,, the savings bond redemption experience has been better
than the turnover rate on other comparable forms of savings. For example,
during 19^9, average monthly redemptions of Series E bonds have amounted
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Senator Douglas - 8
to 0.91 percent of the total of Series E "bonds outstanding. For other
forms of savings the ratios of withdrawals to total deposits have been
as follows: Postal Savings accounts, 3-57 percent; savings banks (in
New York State), 2»32 percent; insured savings and loan associations
2.30 percent; savings accounts in commercial banks., U,86 percent (19^8
figure). Moreover, the trend of savings bond redemptions when related
to the total amount outstanding has been downward since the end of
the war, whereas the percentage trend of withdrawals in most other forms
of savings has been upward.
The sale of savings bonds has not, however, been at the expense
of other types of savings,, During the period in which we were using
the savings bond program as an anti^inflationary weapon, the whole tone
of our advertising was to encourage personal savings in any practical
form — not just to encourage the sale of savings bonds. Individuals
have increased their holdings of savings bonds by 13 percent since
the end of 19^5* But, in this same period, individuals increased
their shareholdings in savings and loan associations by over 60 percent;
their life insurance by 30 percent; their deposits in mutual savings
banks by 25 percent; their savings accounts in commercial banks by
15 percent; their checking accounts by about 10 percent; and their
Postal Savings accounts by about 10 percent* Of the various forms of
liquid savings, only currency holdings in the hands of individuals
declined.
The reasons for offering Series E savings bonds are, of course,
not the same as those for offering Series F and G bonds. A "small11
savings bond program was instituted in 1935 for t*16 purpose of providing
a risk-free investment for small investors. When it was decided early
in the war to sell as large a portion as possible of the wartime security
offerings of the Federal Government to nonbank investors, and especially
to individuals, Series E savings bonds became the keystone of that
policy* This was done in order to prevent a repetition of the post-World
War I experience* After the war, the prices of Government bonds dropped
precipitously -« one of the Liberty Bond issues sold below 82 — and
small investors, inexperienced in the operations of security markets,
were the greatest losers. Series F and G bonds, which are intended for
larger investors than those reached by the Series E bonds, were introduced
early in 19^1 as a part of the Treasury policy of shaping offerings of
Government securities to meet the needs of various investor classes.
The savings bond program, like other parts of the debt-management
policies of the Treasury Department, has been adapted to changing
conditions in the economy. You asked whether the terms of savings
bonds and limitations on purchases should be varied with economic
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Senator Douglas ~ 9
conditions. We have done this to the extent that seemed necessary,
On March 18, 19^8, the limitation on holdings of Series B savings
"bonds purchased in any one calendar year was raised from $5,000
(maturity value) for each individual to $10,000 (maturity value), effective "beginning in the calendar year 19^8, In the Fall of 19^7,
the Treasury offered the Investment Series "bond -*- a savings "bond type
of issue ~~ to certain institutional investors. Again in order to
meet the needs of these investors, we raised the limitation on purchases
of Series F and G- bonds, for the period from July 1, 19^8 through
July 15,
Achievement of the debt -management objectives of the Treasury
Department requires day-to-day attention to debt operationsP Decisions
are made continuously,,
There is, for example, the matter of refunding maturing is sues *
This is one of the constantly recurring duties of the Department,
There is a Treasury bill maturity each week. There are frequent
maturities of certificates of indebtedness; and, in the postwar years,
there have been several note and bond maturities each year<5 In addition, there are savings bond and savings note maturities ~- and
redemptions of these issues before maturitye The volume of refunding
carried through each year has amounted to approximately $50 billion —
in itself a task of considerable magnitudee It exceeds the total of
all security refunding engaged in by all other borrowers in the country
during the past twenty-five yearse
The interest cost of the debt to taxpayers is another of the many
considerations which must be taken into account in debt-management
policies. It is estimated that the interest charge on the public debt
during the fiscal year 1950 will be $5,^50 million. This item represents
over 13 percent of the Federal budget for the yearc The interest cost
is likely to grow over a period of time •— in the absence of substantial
debt reduction -~ because the rate of interest on savings bonds increases
as the bonds are held to maturity, and because an increasingly la.rge
proportion of the debt represents the accumulation of trust funds invested at rates set forth in the law which are higher than the present
average interest rate on the debt,
A general rise in interest rates would bring about a further rise
in the budget charge for interest payments. An increase of as little
as 1/2 of 1 percent in the average interest paid on the debt would add
about $1-1/U billion to this charge,, The Treasury was able to finance
the last war at an average borrowing cost of less than one-half the
borrowing cost of World War I» If this had not been done, the interest
charge at the present time would be more than $10 billion a year instead
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Senator Douglas ** 10
of $5 "billion a year. It is clearly evident that this $5 billion
annual saving in the taxpayers1 money is a highly important factor in
the "budget picture of the Federal Government.
It. has "been argued that if the Government had permitted higher
interest rates on its long-term securities at the end of the war ~~
that is, had permitted Government "bond prices to drop below par -—
inflationary pressures would have been lessened.
Fiscal ^monetary weapons have only limited effectiveness in
combating inflationary pressures0 They operate against inflation in
an over-all fashion0 They can be used to cut down the total spending
power of the economy and so are effective — and, in fact, indispensable
in periods of general price rise. Any curtailment of general spending
power drastic enough, however, to bring special price situations into
line, might set off a severe deflationary spiral? High prices in
special areas are most effectively dealt with by specific measures ap<*
plied directly to those areas; and it was with this in mind that
President Truman repeatedly asked Congress to enact appropriate legislation to deal with special areas of inflationary pressures.
The Government's fiscal policy from January 19^6 to la,te
did, however, have a direct counter-inflationary effect. Federal
Government expenditures were cut rapidly and sharply from their wartime peak, while revenues were maintained at high levels, I have
mentioned that President Truman on three occasions vetoed tax measures
designed to cut revenues because he recognized the urgency of reducing
the debt during this period. Debt reduction by the use of a surplus
of receipts over expenditures was, in fact, the most potent antiinflationary fiscal measure available to the Government. A surplus of
Federal receipts over expenditures takes purchasing power directly out
of the hands of consumers; and by using this surplus to reduce bankheld debt, the Treasury to a large extent offset the increase in the
money supply due to other factors. I have already noted also the
promotion of savings bond sales as an anti-inflationary measure; and
that short-term interest rates were permitted to rise, starting in the
Summer of
The policy of stabilizing the Government bond market in itself
made a substantial contribution to economic stability. I do not agree
with those who believe that if the support prices of Government securities
had been lowered below par, sales of these securities to the Federal
Reserve would have been stopped and inflationary pressures would have
been lessened,. It seemed to me that under the circumstances which
existedj we would have taken the risk of impairing confidence in the
Government *s credit if the prices of Government bonds had been permitted
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Senator Douglas —-11
to go "below par* and that as a result the Federal Reserve might have
had to purchase more "bonds below par than at a par-support level* This,
of course, would have increased bank reserves and to that extent would
have been inflationary, rather than anti-inflationary,.
Daring the postwar period, the country has enjoyed a level of
prosperity never before achieved in peacetime e Personal income has
reached the highest level on record, and has remained near that level.
Civilian employment likewise attained the highest peak in our history,
and today there are nearly 60 million persons employed,. There is no
doubt that the successful management of the public debt and the
maintenance of a continued period of stability in the Government bond
market have contributed materially to the economic well-being of the
country during this period.
In the execution of its monetary and debt-management policies,
the Treasury consults with the Federal Reserve0 The Chairman of the
Board of Governors of the Federal Reserve System and I discuss policy
matters thoroughly and arrive at decisions which are mutually satisfactory. It does not seem to me that statutory directives to increase
the degree of coordination of Federal Reserve and Treasury policies are
needed* In ray opinion, such policies can best be coordinated as they
are at the present time, by discussions between the Secretary of the
Treasury and the Chai-rraan of the Board of Governors of the Federal
Reserve System c
Neither would there be any particular advantage in providing that
the Secretary of the Treasury should be a member of the Federal Reserve
Board. The Secretary of the Treasury did serve as a member of the
Federal Reserve Board from its inception until February 1, 193&* There
is no evidence that the coordination of Federal Reserve and Treasury
policies was carried out any more effectively during that period than
it has been subsequently.
The Secretary of the Treasury is the chief fiscal officer of the
Government. It seems to me that any proposal to make him a member of
the Board of Governors of the Federal Reserve System for the express
purpose of bringing about better coordination of Federal Reserve and
Treasury policies would appear to subordinate the responsibility of
the Treasury Department in fiscal-monetary matters. .In the final
analysis, the principal responsibility in the fiscal-monetary area
must rest with the President and his fiscal officers, who are accountable to the electorate for their actions.
Questions 9, 10; and 11 are concerned with the monetary system
of the United States* The questions are as follows;
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9. What would "be the principal advantages and disadvantages of re-establishing a gold-coin standard in
this country? Do you believe that such a standard should
be re-established?
10. Under what conditions and for what purposes,
if any, should the price of gold be altered? What 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?
11» What changes, if any, should be made in our
monetary policy relative to silver? What would be the
advantages of any such changes?
I do not think that conditions require an alteration in the
monetary system. As the Committee undoubtedly knows, I am on record
as being opposed to any change in the price of gold; and the Treasury
Department is firmly of the view that a gold-coin standard should not
be re-established in the United States,
The Department has considered the latter proposal in connection
with a number of bills which have been introduced in the Congress. For
example, in the last session of Congress, we submitted a report to the
Senate Banking and Currency Committee on bills S. 13 and S. 286. A
copy of our report on those bills is attached*
The present monetary policy of the United States relative to silver
is laid down in three Acts of Congress; namely, the Silver Purchase Act
of 193*1, Section ij- of the Act of July 6, 1939, and the Act of July 31)
19^6, which has largely superseded the 1939 Act. Under the third Act,
domestic silver mined since July 1, 19^6, may be delivered, at the
owner1s option, to United States mints for a return of 90«5 cents per
ounce* The Treasury has no discretion under this legislative provision.
Since this price is considerably higher than the open market price (now
between 73 cents and 7^ cents per ounce), the effect of this Act is to
divert to the United States Treasury at the 90,5 cent price substantially
all of the current production of silver in 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 in the above-named Actst
Question 12 relates to the coordination of the lending and loan
insuring and guaranteeing policies of the various Government agencies*
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The question is as follows:
12, To what extent and by what methods does the
Treasury coordinate the activities of the various
Government agencies that lend and insure loans to
private borrowers? In what ways, if at all, should
the Treasury1s powers in this field be altered?
The Treasury does not, of course, have statutory authority to
coordinate the activities of the various Government agencies that lend
and insure loans to private borrowers, The Department has been instrumental,
however, in furthering consultations between the heads of these agencies,
with a view to coordinating lending, insuring, and guaranteeing policies.
In the final analysis, it seems to me that this voluntary type of consultation is perhaps the best method of coordinating these policies.
The heads of the lending, insuring, and guaranteeing agencies are
responsible to the President; and the decisions which they make must be
made in accordance with his policies. Furthermore, the policies and
operations of these agencies are subject to annual review by the Congress
in connection with their annual budgets.
Such limited authority as the Treasury has with respect to the
lending, insuring, and guaranteeing policies of Government agencies is
restricted almost entirely to the methods employed by the agencies in
borrowing funds which they, in turn, are authorized to lend to private
borrowers. For example, under the Government Corporation Control Act,
"All bonds, notes, debentures, and other similar obligations which
are . , . issued by any wholly owned or mixed-ownership Government
corporation and offered to the public shall be in such forms and denominations, shall have such maturities, shall bear such rates of interest, shall be subject to such terms and conditions, shall be issued in
such manner and at such times and sold at such prices as have been or
as may be approved by the Secretary of the Treasury11 except that any
mixed-ownership Government corporation from which Government capital has
been entirely withdrawn is exempt from this provision during the period
it remains without Government capital. In addition, the Federal
Intermediate Credit Banks, the Production Credit Corporations, the Central
Bank for Cooperatives, the Regional Banks for Cooperatives, and the
Federal Land Banks are specifically exempted from this provision, but
are required to consult with the Secretary of the Treasury prior to
issuing securities; and, in the event an agreement is not reached on the
terms of the securities, the Secretary of the Treasury may make a report
in writing to the corporation involved, to the President, and to the
Congress stating the grounds for his disagreement.
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Senator Douglas There are only a few cases in which the Treasury has any direct
control over lending operations of Government agencies. Reconstruction
Finance Corporation loans on the nonassessable preferred stock of insurance companies can "be made only upon certification "by the Secretary of
the Treasury of the necessity for such loans to increase the capital
funds of the companies concerned. Also, under Section 103 of Public
Law 901» SOth Congress, the Administrator of Veterans Affairs has the
authority, with the approval of the Secretary of the Treasury, to raise
the permissible rate of interest on loans guaranteed or insured under
Title III of the Servicemen's Readjustment Act of 19^-, from the rate
specified in the law, namely U percent, to a maximum of U-l/2 percent.
In addition, the Secretary of the Treasury, or an officer of the Treasury
designated by him, is a member of the Board of Directors of the Federal
Farm Mortgage Corporation.
In the field of foreign loans, there is in existence a coordinating
and policy determining agency. The Secretary of the Treasury is
Chairman of the National Advisory Council on International Monetary and
Financial Problems, established by the Congress in the Bretton Woods
Agreements Act, approved July 3^» 19^5• Among other things, the statute
directs the Council to coordinate the policies and operations of the
representatives of the United States on the International Monetary Fund
and the International Bank for Reconstruction and Development, the
Export-Import Bank of Washington, and all other agencies of the Government
"to the extent that they make or participate in the making of foreign
loans or engage in foreign financial, exchange or monetary transactions."
Question 13 asks my opinion on the Hoover Commission proposal that
supervision of the Federal Deposit Insurance Corporation be vested in
the Secretary of the Treasury. The question is as follows:
13. What would be the advantages and disadvantages
of adopting the Hoover Commission proposal that supervision
of the operations of the FDIC be vested in the Secretary of
the Treasury? On balance, do you favor this proposal?
The recommendation that the supervision of the operations of the
FDIC be vested in the Secretary of the Treasury has been carefully considered. There is much to be said for the independent status which this
agency now enjoys. Its policies are, in many cases, governmental policies
which have been set after consultation with the President and other
Cabinet members; and the agency can, therefore, function independently.
However, it could also function as a part of the Treasury.
Question lU asks my opinion with respect to the establishment of a
National Monetary and Credit Council of the type proposed by the Hoover
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Senator Douglas - 15
Commission.
The question is as follows:
lU. What would "be the advantages and disadvantages
of establishing a National Monetary and Credit Council of
the type proposed by the Hoov«r Commission? On balance,
do you favor the establishment of such a body? If such
a council were established, what provisions relative to
its composition, powers, and procedures would make it
function most satisfactorily?
I am not opposed to the establishment of a National Monetary and
Credit Council of the type proposed by the Hoover Commission. The
establishment of such a council would not of itself, however, solve
any fundamental problem. But, if such a council were established, the
Treasury Department would be happy to contribute the accumulated knowledge
and earnest efforts of its various staff groups.
Questions 15 and 16 relate to Federal budget policy.
are as follows:
The questions
15» What, in your opinion, should be the guiding
principles in determining, for any given period, whether
the Federal budget should be balanced, should show a
surplus, or should show a deficit? What principles should
guide in determining the size of any surplus or deficit?
l6. Do you believe it is possible and desirable to
formulate automatic guides for the G-overnment r s over-all
taxing- spending policy? If so, what types of guides would
you recommend? What are the principal obstacles to the
successful formulation and use of such guides?
The general economic welfare of the country should be the guiding
principle in determining for any given period whether the Federal budget
should be balanced, should show a surplus, or should show a deficit;
and in determining the size of any surplus or deficit.
Since I took office as Secretary of the Treasury in June
have continuously urged a Federal budget that would permit debt retirement. Both President Truman and I have stated on a number of occasions
that it is essential to reduce the public debt in years of prosperity,
such as we have enjoyed since the end of the war. This was one of the
reasons why the President on three occasions vetoed tax-reduction
measures. This has also been a major reason why the President has
constantly limited budget expenditures to the minimum amount necessary
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Senator Douglas - l6
to carry out the defense program and other essential domestic and
international programs.
I do not "believe that it is feasible to attempt to formulate
automatic guides for the Government's over-all taxing-spending policy.
The economic and social variants which should determine the policy in
any given period are so numerous and for different periods are present
in such different combinations that taxing-spending policy can be determined only after the most careful consideration of the situation existing
at any given time. Budget receipts and expenditures for each fiscal
period must be examined item by item with due regard to their relative
need and public service* This is a responsibility which can be discharged properly only by Congress.
One of the most frequently mentioned possibilities along these
lines is that automatic guides can be established based on levels of
national income. It obviously is not possible to say that under all
circumstances the budget should be balanced when the national income
is at any particular level; and it is not possible to provide by
statute exemptions to cover all the cases when exemptions would be
necessary. In my opinion, policy formulation and action must, of
necessity, be left to the responsible authorities to be made in accordance with their best judgment in view of economic developments as
they occur.
Questions 17, 18, and 19 are concerned with the commercial banking
system. The Questions are as follows:
17. What were the aggregate amounts of interest
payments by the Treasury to the commercial banking system
during each year since 19^0?
18. What changes, if any, should be made in the
ownership of the Federal Reserve banks? In the dividend
rates on the stocks of the Federal Reserve banks?
19* What changes, if any, should be made in the laws
relating to the disposal of Federal Reserve profits in
excess of their dividend requirements?
The following table shows the estimated distribution of interest
payments on the public debt, by class of recipient, for the calendar
years 19^0 through
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Federal Reserve Bank of St. Louis
Senator Douglas - 17
Calendar Total
interest
year
U
•»
Banks
Nonbank investors
*•
:
:Federal
Total s Commercial
:
•
banks
Deserve
: Banks
•
•
•
•
:
!
TT
e;
*
•
T ^. 4 ^ nGovernment.
* : Other
Total .Individ-.
: uals J investment :vestors
,» accounts .•
•
(Billions oi' dollars)
19*40
19Ul
19^2
1,1
1.1
1.5
2.2
19W
3.0
•3
•3
.5
.8
1.1
-3
.3
'.5.7
1.0
.1
.1
.1
19^5
19^6
19^7
191*8
fc.l
l.U
1.3
,1
1.5
1.4
lA
1.2
.1
.2
i.U
1.1
.3
5.0
5.0
5^
*
.8
.8
1.0
I.1*
Ie9
.3
.I
.4
.5
.7
.2
.2
<3
.3
.4
.3
.3
-3
.6
.8
2.7
3.5
3*6
3-9
l.i
i.1*
1.5
1.6
.5
»7
.7
i.o
i.l
1.5
i.U
i.U
Note: Figures will not necessarily add to totals, due to rounding,
* Less than $50 million*
Actual payments on the basis of daily Treasury statements.
Interest payments to commercial "banks amounted to approximately
27 percent of the total interest paid on the debt in 19**0, but amounted
to only 20 percent in 191*8. Payments to the entire commercial banking
system, that is, to commercial banks and Federal Reserve Banks — which
amounted to about $350 million in 19^*0 and $1,^50 million in igUg —
similarly showed a decline as a percentage of total interest payments
during this period.
Interest earnings on Federal Reserve Bank holdings of Government
securities increased from $1*2 million in 19^*0 to $299 million in 19^*8,
as a result of the wartime credit and currency needs of the country.
The Board of Governors of.the Federal Reserve System took the initiative
in turning over a part of the Reserve Banks' relatively high earnings
to the Federal Government, by invoking its authority to levy an interest
charge on Federal Reserve notes issued by the Banks, In its announcement on April 2l*, 19**7, the Board stated that the purpose of the charge
was to pay into the Treasury approximately 90 percent of the net earnings
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Federal Reserve Bank of St. Louis
Senator Douglas -12
of the Federal Reserve Banks in excess of their dividend requirements.
Payments to the Treasury as a result of this action amounted to $75 million in 19^7 and $167 million in
If Congress wishes, it can, of course, set forth specific statutory
directives for the disposal of Federal Reserve Bank profits in excess
of their dividend requirements.
With respect to the matter of stock ownership of the Federal
Reserve Banks and the dividend rate on this stock, I do not believe
that there is any urgent need to deal with these questions at this time.
Very truly yours,
(Signed) John W, Snyder
Secretary of the Treasury
Honorable Paul H. Douglas, Chairman
Subcommittee on Monetary, Credit and
Fiscal Policy of the Joint Committee
on the Economic Report
United States Senate
Room 109, Senate Office Building
Washington 25, D. C.
Attachment
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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. 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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- 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 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. The 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 have 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 $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
- 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 y35 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. 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 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 an«l 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 ether 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 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 hot in accord with the program of the President.
Very truly yours,
(Signed)
Wm« McC. Martin, Jr.
Wm. McC. Martin, Jr.,
Acting Secretary
Honorable Burnet R. Maybank
Chairman, Committee on Banking and Currency
United States Senate
Washington, D. C.
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Public Lav/ lU2 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 La.v M-2 of the 7Sth 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,
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Federal Reserve Bank of St. Louis
The weight of the United States gold dollar
is fixed by the Presidential Proclamation of January 31,
193^, as 15-5/21 grains of gold, nine-tenths fine, which
corresponds to a value of $35 per fine troy ounce. As
Congress permitted the authority of the President to
alter the gold content of the dollar to expire on
June 30, 19^3, it would require Congressional action
to devalue the dollar.
It has been the established practice of the Treasury
since January 31, 193^ to sell and buy gold at §35 an
ounce (plus or minus i of 1%} for authorized purposes.
Sections B and 9 of the Gold Reserve Act of 193^-, however,
authorize the Secretary of the Treasury with the approval
of the President to buy and sell gold at such rates and
upon such terms and conditions as he may deem most advantageous to the public interest. This authority of
the Secretary of the Treasury must be considered in connection with the Articles of Agreement of the International Monetary Fund which the United States has subscribed to pursuant to the Bretton Woods Agreements Act
of July 31,
Article IV, Section 2, provides:
The Fund shall prescribe a margin above and
below par value for transactions in gold by members,
and no member shall buy gold at a price above par
value plus the prescribed margin, or sell gold at
a price below par value minus 'the prescribed margin.
The Fund has prescribed a margin of £ of 1$.
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 £ of 1%.
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Federal Reserve Bank of St. Louis
Public Law V * jf the 77€K '"Congress fixed ttiM^jj»« of expiration on ^ne 30, 1943 for the devaluation powers and
also for the stabilization fund.
Public Law 42 of the 73th Congress, enacted April 29, 1943*
extended the Stabilization Fund Powers but did not do anything about the devaluation powers, so they were permitted
to expire on June 30, 1943*
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Federal Reserve Bank of St. Louis
The weight of the United States gold dollar is
fixed by the Presidential 'Proclamation of January 31*
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 4o*alter the gold
content of the dollar to expire on June 30, 19^3, it would
require Congressional action to devalue the dollar.
It has been, the established practice of the Treasury
since January 31 > 193^ to sell and buy gold at $35 an ounce
(plus or minus £ of 1%) for authorized purposes. Sections S
and 9 of the Gold Reserve Act of 193^, 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,
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 i of 1%.
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 •£ of 1%.
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