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9>u-«<i A c 7 T ii-^u:
CHAIRMAN O F THE BOARD O F G O VE R NO RS
FEDERAL R ESER VE SYSTEM
W A S H IN G T O N . D. C. 20551

Ju n e 3,

1975

M EM ORANDUM FO R ALAN G REEN SPA N
FRO M :

ARTHUR

I am

F.

BURNS

e n c lo s in g a m e m o r a n d u m on th e g old i s s u e w h ich

re q u ir e s im m e d ia te atten tio n ,

s in c e B ill S im o n and I - - w ho

d if fe r on th e g o ld i s s u e - - w ill b e s e e in g th e P r e s i d e n t on
T h u rsd ay,




Ju n e 5,

1975 at 9 :0 0 A M .

S' ^ cr ejk—

G
^
VW .

_— L iy- m
*- , -I G ^ \ ^

(S’ S_rp<^h~s
\t^
d cL
p r TcC. ^ ^

£

CHAIRMAN O F THE BOARD O F G O V E R N O R S
FEDERAL R ESER V E SY ST E M
W A S H IN G T O N . 0 . C . 2 0 5 5 1

J u n e 3, 1975

S T R I C T L Y C O N F I D E N T I A L (FR)
M E M O R A N D U M FOR THE PRESIDENT
FROM:

A r t h u r F. B u r n s

In p r e p a r i n g for the J u n e 10-11 m e e t i n g of the International
M o n e t a r y F u n d ' s I n t e r i m C o m m i t t e e , the T r e a s u r y a n d F e d e r a l
R e s e r v e h a v e a g r e e d o n all aspects of a U. S. position e x c e p t for
o n e point.

B u t that on e point is of f u n d a m e n t a l i m p o r t a n c e .

The

m a n n e r in w h i c h it is r e s o l v e d m a y well d e t e r m i n e the s h a p e of
the wo r l d ' s m o n e t a r y a r r a n g e m e n t s , a n d t h e r e f o r e affect our
e c o n o m i c a n d political interests o v e r the n e x t generation.
T h e b r o a d question at issue is w h e t h e r central b a n k s a n d
g o v e r n m e n t s should be free to b u y gold, f r o m o n e a n o t h e r or f r o m
the private m a r k e t , at m a r k e t - r e l a t e d pr i c e s .

( M a r k e t pri c e s

h a v e recently b e e n in the r a n g e of $ 1 6 0 to $ 1 7 5 p e r ounce; the
official p rice is $42. 22 p e r ounce. ) T h e T r e a s u r y is willing to
acc e p t a large m e a s u r e of f r e e d o m for s u c h transactions.
F e d e r a l R e s e r v e is opposed.




The




-2-

T h e s p e c i f i c p o in t o f c o n t r o v e r s y i s w h e t h e r to a l l o w
in d iv id u al g o v e r n m e n ts
sp e cifie d ce ilin g
1 9 75).

to i n c r e a s e t h e i r g o l d h o ld in g s a b o v e a

(fo r e x a m p le ,

a c tu a l h o ld in g s a s of M a y 1,

T h e T r e a s u r y i s w illin g to a g r e e

s t r o n g l y b y th e F r e n c h

G o v e rn m e n t,

to th e p o s itio n ,

th at th e r e

i ---------

sh o u ld b e no

c e i l in g on th e g o ld h o ld in g s o f a n in d iv id u a l g o v e r n m e n t .

The

F e d e r a l R e s e r v e b e lie v e s th a t in d iv id u al c o u n tr y c e ilin g s a r e
e sse n tia l,

\
\

a n d t h a t th e U n i te d S t a t e s s h o u ld n o t a g r e e to a n y n e w

\

in te r n a tio n a l a r r a n g e m e n t s o n g old u n le s s th e y i n c o r p o r a t e s u c h

j

ce ilin g s.
The Jan u ary
F u n d 's

In te rim

1 9 7 5 co m m u n iq u e of th e In te rn a tio n a l M o n e ta ry

C o m m itte e ,

an in te rn a tio n a lly a g re e d d o cu m e n t,

s t a t e d th a t f r e e d o m f o r n a tio n a l m o n e t a r y a u t h o r i t i e s to e n t e r in to
g old t r a n s a c t i o n s

sh o u ld " e n s u r e th a t th e r o l e of g o ld in th e

in te rn a tio n a l m o n e ta ry s y s te m

w ou ld b e g r a d u a l l y r e d u c e d . "

In d iv id u a l c o u n tr y c e i l i n g s o n g o ld h o ld in g s ,
R eserv e fav ors,
p o sitio n ,

w ou ld c o n t r i b u t e to th i s o b j e c t i v e .

o n th e o th e r h a n d ,

w ith d ra w a l f r o m
T h ere a re
sta n d on g o ld :

-w h ich t h e F e d e r a l
T h e T r e a s u r y 's

w ill b e i n t e r p r e t e d b y m a n y a s a

th e J a n u a r y u n d e r s t a n d i n g .
fou r b a s ic

e l e m e n t s in t h e F e d e r a l R e s e r v e ' s

-3-

F irst,
re q u ire s

t h e r e is no c o m p e llin g p r a c t i c a l p r o b l e m

e a r l y a c tio n on g o ld i s s u e s .

e x i s t to h e lp c o u n t r i e s
p a y m e n ts fin an cin g .

th at

S iz a b le b o rro w in g f a c ilitie s

tid e o v e r e m e r g e n c y n e e d s f o r b a l a n c e - o f -

C o u n t r i e s n e e d in g to u s e t h e i r g o ld h o l d in g s

c a n e i t h e r s e l l s o m e g o ld in th e m a r k e t o r a r r a n g e to u s e t h e i r
g old a s c o l l a t e r a l fo r lo a n s .

H ence,

t h e r e is no e c o n o m ic

reason

f o r b e in g c o n c e r n e d ab o u t d e f e r r i n g a re s o lu tio n of o u ts ta n d in g
gold i s s u e s .
Second,

u n til w e an d o th e r c o u n tr i e s h a v e f o r g e d a g en u in e

c o n s e n s u s on th e d e s i r e d s h a p e of th e f u tu r e w o r ld m o n e t a r y
sy stem ,

w e s h o u ld n o t i s o l a t e th e g o ld q u e s tio n a n d d e a l w ith it

ap art fro m

o th e r c r itic a l is s u e s

of m o n e ta r y r e f o r m .

M o vin g a h e a d

o n g o ld in th e a b s e n c e o f s u c h a c o n s e n s u s m a y i n a d v e r t e n t l y a n d
d a n g e r o u s l y p r e j u d g e th e s h a p e of th e f u tu r e m o n e t a r y s y s t e m .
T h ird ,

e a r l y r e m o v a l of th e p r e s e n t r e s t r a i n t s

on in te r ­

g o v e r n m e n ta l g old t r a n s a c t i o n s an d on o ffic ia l p u r c h a s e s f r o m

th e

j p r i v a t e m a r k e t co u ld w e ll r e l e a s e f o r c e s and in d u ce a c tio n s th at
'
w o u l d i n c r e a s e t h e r e l a t i v e i m p o r t a n c e o f g old in th e m o n e t a r y
sy stem .
|

w ith s o m e

In f a c t ,

su p p ort fro m

su ch an o u tco m e.




th e r e a r e r e a s o n s fo r b eliev in g th a t th e F r e n c h ,
o n e o r tw o s m a l l e r c o u n t r i e s ,

C o u n trie s

are

seek in g

s u c h a s F r a n c e t h a t a r e o p p o s e d to

c e i l in g s on th e ir in d iv id u a l g old h o ld in g s u n d o u b te d ly w a n t th e
freed o m

to b u y in th e p r i v a t e g o ld m a r k e t s o a s to s u p p o r t th e

m ark et p rice .

It is a n o p en s e c r e t a m o n g c e n t r a l b a n k e r s th a t,

at a la te r d a te ,

th e F r e n c h a n d s o m e o t h e r s m a y w e l l w a n t to

s t a b i l i z e th e m a r k e t p r i c e w ith in s o m e r a n g e .
th e re fo re ,

In m y j u d g m e n t ,

t h e r e is a s i g n if ic a n t r i s k th a t th e T r e a s u r y 's

m e n d e d p o s itio n w o u ld in a d v e r t e n t l y f o s t e r ,

recom -

c/ %

or at least p e rm it,

prv&jjip’

a n i n c r e a s e in th e r e l a t i v e i m p o r t a n c e o f g o ld in th e m o n e t a r y

(S'U. t*]

system
.
F o u rth ,

^

T[u*

oZAj:-^
a l a r g e m e a s u r e of f r e e d o m fo r g o v e r n m e n ts to

t r a d e in g o ld a t a m a r k e t - r e l a t e d p r i c e m a y e a s i l y f r u s t r a t e

[) a Z Z ^ ' -

effo rts

ET

B
to c o n t r o l w o r l d liq u id ity .

F o r e xam p le,

su c h f r e e d o m w ou ld p r o ­

v i d e a n i n c e n t i v e f o r g o v e r n m e n t s to r e v a l u e t h e i r o f f i c i a l g o ld
h o ld in g s a t a m a r k e t - r e l a t e d p r i c e .

(F ra n c e has a lre a d y done so. )

T h i s in t u r n c o u l d r e s u l t in th e a d d it i o n of up to $ 1 5 0 b i l l i o n to
th e n o m in a l v a lu e of c o u n tr ie s ' r e s e r v e s .

t
^

L iq u id ity c r e a t i o n of

s u c h e x t r a o r d i n a r y m a g n itu d e w ou ld s e r i o u s l y e n d a n g e r ,

p erh ap s

t y jr
even fru stra te ,

o u r e f f o r t s an d th o s e of o th e r p ru d e n t n a tio n s to

->

g
i
g e t in fla tio n u n d e r r e a s o n a b le c o n tr o l.
c o n c e r n to M r .
fin an ciers.




W itte v e e n ,

T h i s is a m a t t e r o f g r e a t

th e h e a d of th e IM F ,

an d to m a n y o th e r

*

-5-

As our g o v e r n m e n t ’s policy^ on gold has evolved,* the

'

F e d e r a l R e s e r v e has sought to avoid taking a r i g i d position,
I have gone so m e d i s ta n c e to try to conciliate the: F r e n c h view:
F i r s t , I have reluctantl y a g r e e d to a pa rt ia l re t u r n
of the International M on et ary Fu n d 's gold holdings to
m e m b e r cou ntri es; this action, strongly d e s i r e d by
F r a n c e , would augment the gold stocks of F r a n c e and
other c ou ntrie s, but would weaken the I M F itself.

|
|

Second, I have p r o p o s e d the important c o n c e ss io n that
f a gove rnm ent m a y buy gold f r o m another gove rnment,
j i r r e s p e c t i v e of its e s t a b li s h e d ceiling, if the p u r c h a s e
1 will a c c o m m o d a t e an e m e r g e n c y need by the sellin g
government to m o b i l iz e its gold holdings; a l s o that a
government which had m ade a s a l e under e m e r g e n c y
conditions could r e p u r c h a s e that amount fr o m another
gove rnm ent without involving the e m e rge n c y p ro v is io n .

\
I
j
|

Third, in view of a d e s i r e to come c lo s e r to the F r e n c h
view, I have s u g g e s t e d som e lifting of the ceiling that
would apply to an individual cou ntry ’ s gold holdings
(e. g. , f r o m 100 per cent to 105 per cent of the actu al
holdings a s of May 1, 1975).
Indeed, I have even been willing to go fu rth er.

I have

consulted Henry K i s s i n g e r a s to whether there i s som e po lit ica l
quid pro quo we might want to e x t r a c t f r o m the F r e n c h in exchange
for acced in g to s o m e part or all of their d e s i r e d position on gold.
But Henry t e l l s m e th e re is none at this time.

Re so lution of gold

i s s u e s in their p r e f e r r e d manne r is v e r y important to the F r e n c h ,
and they will probably be willing to pay a lot to get their way.

If

we do eve r a cc ed e to F r e n c h views on gold, we should at l e a s t u s e
our ba rgain ing l e v e r a g e to achieve som e m a jo r political advantage.




If the United State s took a stand on the gold question that .
faile d to s a t i s f y the F r e n c h in c u r r e n t international ne gotiations,
would the re be a d v e rse ; eco no mic or political c o n s e q u e n c e s ?
doubt it, for two r e a s o n s .

I.

F i r s t , s o m e other E uro pe an countrie s

(m ost importantly, the G e r m a n s and the B r i t i s h ) a r e unlikely to
pa rt ic ipate with the F r e n c h in a Eu ro pe an, g o - i t - a l o n e policy on
gold.

I have a s e c r e t understanding in writing with the Bundesbank --

c o n c u r re d in by M r. Schmidt -- that G e r m a n y will not buy gold,
either f r o m the m a r k e t or f ro m another government, at a p r i c e
above the o fficia l pri ce of $42. 22 per ounce.

Second, t here is in

my judgment a r e a s o n a b l y good chance o f a ’’s u c c e s s f u l ’1 negotiation
in P a r i s next week, even if it p r o v e s i m p o s s i b l e to win F r e n c h
a cc e p ta n c e of individual country gold c eili n g s and other a s p e c t s
of the U . S . position on gold i s s u e s .

The po lit ica l p r e s s u r e s to

r e a c h a g r e e m e n t on i n c r e a s e s in IM F quotas a r e g r e a t .

A pack ag e

that included these quota i n c r e a s e s and s o m e other r e la t i v e l y unc o n t r o v e r s i a l m a t t e r s , but did not include a g r e e m e n t on gold, s e e m s
f e a s i b l e and should be an a c c e p ta b l e outcom e for the United S t a t e s .
All in all, I a m convinced that by f a r the b e s t position for
us to take at this time i s to r e s i s t a r r a n g e m e n t s that provide wide *




-7-

latitude for c e n t r a l b a n k s a n d g o v e r n m e n t s to p u r c h a s e gold at
a m a r k e t - r e l a t e d price.

It is m y u n d e r s t a n d i n g that this position

is s u p p o r t e d b y Japan, the U nited K i n g d o m , b y s o m e other d e v e l o p e d
countries, a n d b y m o s t if not all developing countries.

T h i s position

also c o m m a n d s strong support in ou r o w n c o u n t r y a m o n g those of
the financial a n d a c a d e m i c c o m m u n i t i e s that a r e sensitive to these
issues.

S e v e r e criticism o n the part of p r o m i n e n t a n d influential

financiers w o u l d inevitably follow if the T r e a s u r y ' s p r e s e n t position
prevailed.
Finally, I m u s t point out that the T r e a s u r y ' s position o n
gold will h a v e to b e aired in C o n g r e s s i o n a l H e a r i n g s w h e n c h a n g e s
in the I M F Articles of A g r e e m e n t c o m e u p for approval.

In m y

j u d g m e n t , M r . R e u s s , w h o is a leader o n issues of this type, will
d e n o u n c e the T r e a s u r y ' s position o n gold o n c e h e u n d e r s t a n d s it.
Thi s is o n e m o r e r e a s o n w h y y o u should p o n d e r the gold issue
v e r y carefully.

C o p y to:
Secretary S i m o n
Secretary Kissinger
Mr. Greenspan
Mr. Lynn
Mr. Seidman





Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102