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V
A Gold Agreement Proposal

1. The Problem
The gold problem is that foreign central banks hold &10. f billion
t
in dollars which can, at their discretion, be turned in to the U. S.
Treasury for gold. These dollars are only one step removed from our
gold stock. Removed only one step m :
o

•- -

jp of foreign
.n

private holdings of dollars, which can be sold to foreign central
banks for their currencies. Finally, both these stocks of potential
claims on U. S. gold can be augmented by further U. S. balance of
payments deficits or by disbursements of international organizations
holding dollars.
Foreign central banks vary widely in their practice and tradition
regarding the shares cf gold and dollars in their international re­
serves. Some, like the U.K., Switzerland, Holland, and Belgium, hold
a high proportion of their reserves as gold. Others, life Germany,
Japan, and Sweden, hold a substantial share of their reserves in
dollars.

This variation is a threat to the U. S. gold stock in tvo

related respects. First, a shift of funds from a high-gold-ratio
country to a low-gold-ratio country drains away 0. S. gold. Second,
the example of the others puts continuing pressure on the low-gold
. ratio countries to raise the gold proportion of their own reserves.
2. The Direct Solution
The direct solution is to obtain an agreement of the important
countries to maintain the gold proportion of their reserves at or below
p/ a prescribed ratio. The effects of such an agreement would be:




(a) to immobilize outstanding official dollar holdings,
removing them a ; a threat to the U. S. gold stock;
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-2 (b) to limit the impact on U. S. gold stocks of future
acquisitions cf dollars by foreign central banks, either from
present private holdings or from future U. S. deficits, to a
prescribed fraction of such acquisitions.
In return for these substantial advantages the United States
would have to:
(a) extend our current policy of holding foreign currency
as a part of our reserves to the point that our ratio of gold to
.total reserves is governed by the same rules to which the other
countries agreej
(b) guarantee the official dollar holdings against devalua­
tion, in conjunction with a similar guarantee by other countries
of our reserves held in their currencies.
An agreement of this kind would have great advantages to both sides. For
the United States, it vould substantially remove the dangers of a run on
gold. It vould not eliminate the necessity of correcting our balance of
pajraants, but it would permit us to do so in deliberate and orderly ways
which do not inperil our domestic economic groath, our foreign commit­
ments, or world trade and prosperity. For our European creditors, the
agreensent would eliminate the unequally distributed risks they now attach
to holding dollars and introduce real reciprocity in the treatment of
their currencies. For all parties, it would provide stability in the
international monetary environment.
The United States would have to repeal the 25 percent gold cover
requirement on the Federal Reserve, or revise it to permit other forms




OFFICIAL USE OSXX

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