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THE PEDIGREED GOMjjßYSTEM:
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REPORT
OF THE

SUBCOMMITTEE ON INTERNATIONAL
EXCHANGE AND PAYMENTS
OF THE

JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES

D ECEM B ER 1969

Printed for the use of the Joint Economic Committee

U.S. GOVERNMENT PRINTING OFFICE
38-131 O

WASHINGTON : 1969

For sale by the Superintendent of Documents, U.S. Government Printing Office
Washington, D*C. 20402 - Price 10 cents




JOINT ECONO M IC C O M M IT T E E
[Created pursuant to sec. 5(a) of Public Law 304, 79th Cong.]
WRIGHT PATMAN, Texas, Chairman
WILLIAM PROXMIRE, Wisconsin, Vice Chairman
HOUSE OF REPRESENTATIVES

SENATE

RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
H E N R Y S. REUSS, Wisconsin
MARTHA W. GRIFFITHS, Michigan
WILLIAM S. MOORHEAD, Pennsylvania
WILLIAM B. WIDNALL, New Jersey
W. E. BROCK 3d, Tennessee
BARBER B. CONABLE, Jr ., New York
CLARENCE J. BROWN, Ohio
Jo h n
Ja m e s

W.

R.
K

JOHN SPARKMAN, Alabama
J. W. FULBRIGHT, Arkansas
HERMAN E. TALMADGE, Georgia
STUART SYMINGTON, Missouri
ABRAHAM RIBICOFF, Connecticut
JACOB K. JAVITS, New York
JACK MILLER, Iowa
LEN B. JORDAN, Idaho
CHARLES H. PERCY, Illinois

St ar k ,

n ow les,

Executive Director
Director of Research

E c o n o m is t s
L a u g h l i n F . M cH

OHN R . K a r l i k

ugh

R ic h a r d F . K a u fm a n

C o u r t e n a y M . Sl a t e r

Minority;

G eorge

D o u g la s C . F r e c h tlin g

D.

K

rumbhaar

S u b c o m m itte e on I n t e r n a t i o n a l E x c h a n g e an d P a y m e n ts
HENRY S. REUSS, Wisconsin, Chairman
HOUSE OF REPRESENTATIVES
RICHARD BOLLING, Missouri
HALE BOGGS, Louisiana
WILLIAM S. MOORHEAD, Pennsylvania
WILLIAM B. WIDNALL, New Jersey
W. E. BROCK 3d, Tennessee




SENATE
WILLIAM PROXMIRE, Wisconsin
STUART SYMINGTON, Missouri
JACOB K. JAVITS, New York
CHARLES H. PERCY, Illinois

(II)

LETTERS OF TRANSMITTAL

D ecem ber

12, 1969.

To the Members of the Joint Economic Committee:

Transmitted herewith for the use of the members of the Joint Eco­
nomic Committee and other Members of Congress is a report of the
Subcommittee on International Exchange and Payments entitled “The
Pedigreed Gold System: A Good System—Why Spoil It ?”
The views expressed in this subcommittee report do not necessarily
represent the views of other members of the committee who have not
participated in the hearings of the subcommittee or in the drafting
of this report.
Sincerely,
W r ig h t P a t m a n ,
Chairman, Joint Economic Committee.
D ecem ber

Hon.

W

r ig h t

11, 1969.

Pa t m a n ,

Chairman, Joint Economic Committee,
Congress of the United States, 'Washington, D.C .
D ear M r . C h a i r m a n : Transmitted herewith is a report of the Sub­
committee on International Exchange and Payments entitled “ The
Pedigreed Gold System: A Good System—Why Spoil It?” This re­
port has been approved by a majority of the members of the subcom­
mittee and without dissent.
The subcommittee wishes to express its gratitude and appreciation
for the guidance it has received from the administration officials and
the international monetary experts who appeared before it as wit­
nesses.
Sincerely,
H e n r y S. R e u s s ,
Chairman, Subcommittee on
International Exchange and Payments.




(in )

CONTENTS
Page

Letters of transmittal______________________________________________________
Introduction________________________________________________________________
1. No support of free market gold price__________________________________
2. Guarantee value of gold reserves extant in March 1968________________
3. “ Mitigation” contingencies_____________________________________________
4. Amend IM F Articles of Agreement_____________________________________

in
1
1
8
9
10

TABLES
1. The South African balance of payments________________________________
2. Quarterly South African gold production and sales since March 31,
1968___________________________________________________________________
3. IM F drawings in rand, March 1968 to December 1969_________________
4. Estimates of possible U.S. gold loss resulting from IM F quota increase. _




(IV)

4
5
6
10

THE PEDIGREED GOLD SYSTEM: A GOOD SYSTEM—WHY
SPOIL IT? 1
Introduction
A number of recent developments—the proposed IMF quota in­
crease, the decline in the free market price of gold, and reports that
the March 1968 two-tier gold marketing agreement was being or was
about to be circumvented—prompted the Subcommittee on International Exchange and Payments to schedule hearings on November 13
and 14,1969, to examine the implications of these developments. At the
1969 annual meeting of the International Monetary Fund, the Gov­
ernors adopted a resolution instructing the Executive Directors to
submit by the end of the year a recommendation specifying an appro­
priate increase in Fund quotas. A quota increase could affect the U.S.
reserve position because, m the past, other countries without sufficient
gold to make the required subscription payments have purchased the
needed gold from the United States. Reports that the provisions of
the March 1968 two-tier agreement were in some cases not being ob­
served, and a marked decline in the free market price of gold also sug­
gested a re-examination of the usefulness and vitality of this agree­
ment. The following presents the subcommittee’s conclusions derived
from its hearings.
1. The March 1968 two-tier gold marketing agreement has suc­
ceeded beyond initial expectations and should be maintained in
its present form. The United States could gain nothing from any
“compromise” with South Africa producing a resumption of
official gold purchases from that country. Consequently, the
U.S. Treasury should under no foreseeable circumstances agree to
support—either directly, through the IMF, or by sanctioning the
purchases of other industrial countries—the free market price of
gold.
The separation between official and private gold markets was estab­
lished as a means of ending the heavy gold losses that the nations par­
ticipating in the London gold pool were suffering in early 1968. These
countries had far several years intervened in the London gold market
in order to maintain the price at which gold was traded there within a
narrow range of the official value of $35 per ounce. However, as the
consequence of a surge in speculative demand for gold following re­
peated exchange crises, the gold pool members found themselves in
early 1968 supplying intolerably large amounts of gold to private
hoarders and speculators. Since the United States had assumed the
1 Representative Richard Bolling states: “ Since other responsibilities prevented my par­
ticipating in the hearings on which this report was based or evaluating the arguments pre­
sented therein, I am unable to take a position on this report.”
Senator Stuart Symington states: “ I support recommendations 1 and 2, but withhold
judgment and take no position on recommendations 3 and 4.”
Senator Charles H. Percy states: “ I support recommendations 1 and 2. However, I be­
lieve that recommendations 3 and 4 raise questions about the nature of monetary reserves
which I believe were not adequately covered in the hearings, and thus I reserve judgment
on these recommendations.”




(i)

2
largest proportionate share of the burden in transactions conducted
by the gold pool, these official gold losses fell most heavily upon the
United States.
On March 16, 1968, representatives of the monetary authorities of
the nations then actively contributing to the gold pool—Belgium, Ger­
many, Italy, the Netherlands, Switzerland, tne United Kingdom, and
the United States—met in Washington to discuss techniques for deal­
ing with the crisis. The following day they announced their agreement
in a communique which stated in part, “tnat henceforth officially held
gold should be used only to effect transfers among monetary authori­
ties and, therefore, they decided no longer to supply gold to the London
gold market or any other gold market. Moreover, as the existing stock
of monetary gold is sufficient in view of the prospective establishment
of the facility for special drawing rights, they no longer feel it neces­
sary to buy gold from the market. Finally, they agreed that henceforth
they will not sell gold to monetary authorities to replace gold sold in
private markets.”
Following the announcement to reorganize the international gold
market on a two-tier basis splitting official from private transactions,
a test of wills ensued between the United States and South Africa. The
agreement was reached primarily to conserve the U.S. gold stock—an
important psychological bulwark in protecting the international reserve-asset value of the dollar. By contrast, South Africa, as the largest
producer of gold and supplier of the metal to Western European mar­
kets, had consistently urged an increase in the official value of gold
and a corresponding decrease in the reserve-asset value of the dollar
relative to gold. After the introduction of the two-tier gold marketing
system, South Africa continued to work for this objective. The chief
tactic of that country in attempting to bring about an increase in the
official value of gold was to withhold current production from Western
European markets and therefore to increase the differential between
the higher private market price and the official value. In March 1969
the price of gold in both the London and Zurich private markets
reached a peak of nearly $44 per ounce.
With the passage of time, it is becoming increasingly evident that
this conflict is being resolved in favor of maintaining the reserve-asset
value of the dollar and of international monetary stability. The U.S.
gold stock fell to its postwar low in May 1968 and since that time has
increased by over $700 million worth. The dollar remained strong in
exchange markets throughout the repeated crises centering around
the French franc and the German mark from May 1968 through to the
eventual devaluation of the franc and upward revaluation of the mark.
More importantly, the agreement has succeeded in obliging South
Africa to sell the bulk of her gold output in the private market and
thus reduce the differential between the private and official price. Most
members of the International Monetary Fund have agreed voluntarily
to abide by the March 1968 accord; consequently, official purchases of
South African gold have been minimal since the establishment of the
two-tier marketing arrangement.




3
Examination of the structure of South Africa’s balance of pay­
ments immediately reveals that country’s inability to suspend gold
sales for any extended period. Excluding gold sales, South Africa
typically has a deficit on current account (line 5, Table 1) that has in
recent years been only partially offset by private and official capital
inflows (line 8). In fact, it is only since 1965 that the capital account
has registered annual surpluses, rather than deficits. The consequent
deficits on current and capital accounts together (line 9) are reduced
by gold sales (line 10). But even with the benefit of gold exports, net
surpluses and deficits (line 11) tend to be small. Moreover, the net
position—including gold sales—has shifted from surplus to deficit, or
vice versa, every year or two.







TABLE 1.— THE SOUTH AFRICAN BALANCE OF PAYMENTS
[In millions of South African rand]
1969
1960
1.
2.
3.
4.

Merchandise exports, free on board...................................................................................................
Merchandise im ports, free on board........................................................................................................
N et service payments ( —) ...............................................................................................................................
Transfers (n et receipts + ) ............. ..................................................................................................................

5.

Balance on current account, excluding gold sales...................................................

6 . Private capital m ovements, including errors and unrecorded transactions___
7 . Central government and banking capital.............................................................................................

1961

1962

1963

1964

1965

1966

1967

1968

1

II

879
931
- 1 ,1 2 7
- 1 ,0 2 2
-2 8 2
-2 5 6
-5 .

952
- 1 ,0 4 8
-2 4 7
19

1 ,0 1 7
- 1 ,3 0 2
-2 8 1
26

1,0 8 3
- 1 ,5 9 5
-3 14
34

1,0 6 4
- 1 ,8 2 3
-3 5 1
41

1 ,1 9 9
- 1 ,6 7 8
-3 6 7
65

1 ,2 9 8
- 1 ,9 7 4
-3 6 0
77

1 ,4 9 5
- 1 ,9 3 0
-3 5 7
113

388
-4 7 9
-7 5
23

353
-5 3 7
-1 0 9
25

- 1 ,0 6 9

-7 8 1

-9 5 9

-6 7 9

-1 4 3

-2 6 8

160
-1 1

235
-6 6

372
74

22
11

-2
39

-5 0 9

-3 73

-3 2 4

-5 4 0

-7 9 2

-1 6 5
12

-8 3
-1 3

-6 4
-5 6

-7 4
13

-4 1
8

162
96

Balance on capital account (n e t inflow + ) ................. - ................................ ................

-15 3

-9 6

-1 2 0

-6 1

-3 3

258

149

169

446

33

37

9.
Balance on current and capital accounts, excluding gold sales_______
10 . Gold sales.................................................................................................................................................. ........................

-6 6 2
573

-4 6 9
490

-4 4 4
491

-6 0 1
595

-8 2 5
775

-8 1 1
881

-6 3 2
618

-7 9 0
811

-2 3 3
301

-1 1 0
129

-2 3 1
263

11.
Surplus or deficit on above transactions, including gold sales_______
1 2 . New ly produced gold absorbed in re s e rv e s ..................................................... ........................

-8 9
-4 3

21
86

47
141

-6
93

-5 0
-3 9

70
-1 0 6

-1 4
150

21
-3 8

68
468

19
87

32
-7 3

-1 3 2

107

188

87

-8 9

-3 6

136

-1 7

536

106

-4 1

8.

13 .

Change in total reserves________________ _____________________

N o te : Conversion of the above data from South African rand to U .S . dollars would enlarge all
figures by 40 percent.

Source: South African Reserve Bank “ Quarterly B u lle tin ," Septem ber 1969.

5
Introduction of the two-tier gold marketing system produced a
decline in South African gold sales during 1968 to less than half of the
previous level. The quantity of newly produced gold absorbed by the
government as part of South African reserves (line 12) conse­
quently jumped in 1968 to three times the greatest previous annual
increase. In the second quarter of 1969, however, gold sales returned
to the previous rate—about 800 million rand or $1,100 million an­
nually. (See Table 2 for quarterly amounts in dollars.) In both the
second and third quarters of this year, South Africa has sold all of its
newly produced gold and, in addition, substantial amounts from its
existing reserve holdings. Sales in the second quarter totaled $369 mil­
lion. Gold sales in the third quarter are estimated at approximately
$440 million. Thus, South African gold sales in the third quarter of
this year were apparently larger than throughout all of 1968.
T A B L E 2 .— Q U A R T E R L Y S O U T H A F R I C A N G O L D P R O D U C T IO N A N D S A L E S S I N C E M A R C H 3 1 , 1968
[In millions of dollars]
1968

1969

1
1.
2.
3.
4.

Level o f South African gold re se rve s ..
N e t South African gold production______
Change in gold reserves........................................
S ale s= Prod u ction —Change in re­
serves........................ ........................................... .................
5. Cum ulative sales since M ar. 3 1 ,1 9 6 8 -------

II

III

IV

1

II

III

742

974
276
232

1,0 6 9
273
95

1 ,2 4 3
279
174

1 ,3 6 7
302
124

1 ,2 6 4
266
-1 0 3

1,0 9 3
«2 75
-1 7 1

44
44

178
222

105
327

178
505

369
8 74

446
1 ,3 2 0

• Assum ed.
Source for lines 1 , 2, and 3: South African Reserve B ank “ Quarterly B u lle tin ," Septem ber 1969, and “ Internationa
Financial Statistics,” November 1969.

The marked rise in South African gold exports during the second and
third quarters of 1969 reflects, at least to some extent, that country’s
inability to suspend gold sales indefinitely. With net external expendi­
tures in the absence of gold sales normally ranging each year from $700
to $1,100 million and with foreign exchange reserves worth from $150
to $300 million, South Africa could permanently suspend gold sales
only at the expense of massive deflation and domestic industrial
dislocation.
O f the approximately $1.3 billion worth of gold sold by South Africa
from April 1968 through September of this year, about $1 billion worth
has apparently been to private purchasers. During this period, member
nations making drawings from the IMF purchased slightly more than
$100 million worth of gold from South Africa. (See Table 3.) This
gold was obtained with South African rand included in the packages of
various currencies lent by the Fund.




6
T A B L E 3.— IM F D R A W IN G S IN R A N D , M A R C H 19 6 8 -D E C EM B E R 1969
[Millions of dollars equivalent]
Drawing country

A m oun t

1968:
A p ril....................................................................
.....................................
Ju n e ........................................................................................................................ France..................................................................................... ................ .....................
Ju n e .........................................................................................................................United Kingdom ............................................................. .....................................
N ovem ber...................................................... .............................................. ... Peru.............................................................................................................................
1969:
M arch.................................................................
............. ........................
S eptem ber..................................................... ................................................. France..................................................................................... ......................................
Septem ber.............. ..........................................................................................United Kingdom ....................................................
.....................................

6
24
10

Subtotal.....................................................
...................................
Novem ber_______ __________ .................................................West Germ any..........................
..................................
Decem ber.......................................................________ _________West Germ any................................................................. .....................................

102
25
20

T o ta l....................... ......................................

.....................................

10
23
19
10

14 7

Source: U .S . Treasury D epa rtm en t.

Nations in balance-of-payments difficulties need dollars with which
to buy their own domestic currencies and support them in exchange
markets. Thus, when such countries borrow money from the Fund, they
typically exchange all other currencies for dollars with the monetary
authorities issuing these other currencies. As it is permitted to do under
the convertibility provisions of the IMF Articles of Agreement, South
Africa opts to oner gold instead of dollars for any rand offered for con­
version by foreign monetary authorities. Consequently, rand lent by
the IMF to countries making drawings are subsequently used to buy
gold from the South A.frican Reserve Bank.
In addition to these gold purchases resulting from the loan of South
African rand by the IMF, the monetary authorities of some smaller
countries have perhaps also purchased gold directly from South Africa.
Apparently the nation of this type purchasing the largest amounts is
Portugal; acquisitions by that country since March 1968 would now
appear to total approximately $160 million worth of gold. Total official
gold purchases from South Africa since the introduction of the two-tier
system and through September 1969 may therefore amount to slightly
more than $300 million.1
The temporary period during which South Africa was able to with­
hold gold from the private market has expired, and the resumption of
South African gold sales at about the previous rate—reinforced by a
long-awaited realinement of exchange rates in Western Europe—has
brought the private market price of gold down until it is once again
virtually the same as the official value. The intended objectives of the
two-tier gold marketing agreement have therefore been realized. The
United States could gain nothing from any kind of compromise with
South Africa to modify the March 1968 accord and sanction the re­
sumption of even limited official gold purchases from that country.
The United States would, in fact, lose substantial ground and pay
a stiff price for any compromise with South Africa. For example, reintroduction of a fixed floor under the private market value of gold
could divert South African supplies into official coffers and would as­
sure speculators that the price of gold would not be permitted to slip
below a stated minimum. Both of these factors would tend to encourage
1 Including the $50 million of gold paid by South Africa to the IMF as partial reimburse­
ment for that country’s gold tranche drawing earlier this year.




7
a resumption of speculation and a renewed upward trend in the pri­
vate market price of gold. The higher is the private market price of
gold above the official value, the greater is the temptation for foreign
monetary institutions to rush to the U.S. Treasury and demand conver­
sion of their dollar reserves into gold. With liquid liabilities to foreign­
ers totaling approximately $39 billion and U.S. gold reserves of slightly
more than $11 billion, the United States could hardly withstand such
an attack without substantial modification of the international mone­
tary role of the dollar.
Supporting the private gold price could become a political embar­
rassment and undoubtedly would constitute a serious economic waste.
We would be supporting the price of a good that is the primary export
commodity of South Africa and the chief store of value of the Soviet
Union. The United States has failed to enter into agreements effec­
tively stabilizing the prices of the primary products that are the chief
source of export revenues for poor nations; to extend a similar kind of
aid to South Africa and the Soviet Union would constitute a political
absurdity.
A decision to support the private market price of gold could delay
complete acceptance of the SDR facility as a permanent feature of
the international monetary system, since gold acquisitions might to
some extent substitute for SDR distributions. Moreover, continued
expansion of gold reserves would forgo the economic savings derived
from the newly established ability of the IMF to create internationally
acceptable fiduciary reserve assets in the form of special drawing
rights. Instead, we would be expending real resources to dig goldbearing ores deep from the earth, to refine these ores, to ship the re­
fined metal around the world, and finally to bury it again in bank
vaults. The resources devoted to such activities could, for example,
much more reasonably be employed to help speed economic growth
in developing countries.
Finally, the Secretary of the Treasury is not compelled by law to
purchase gold from U.S. residents or foreigners at $35 per ounce or
any other specific price. The Gold Reserve Act of 1934, as amended,
states “With the approval of the President, the Secretary of the
Treasury may purchase gold in any amounts, at home or abroad, . . .
at such rates and upon such terms and conditions as he may deem most
advantageous to the public interest; any provision of law relating to
the maintenance of parity . . . to the contrary notwithstanding.”
Supporting the private market price of gold would not be in the
public interest and would entail budgetary expenditures or economic
policy consequences requiring the approval of the Congress. Any
budgetary expenditure would obviously require congressional consent,
but even if Treasury gold purchases were monetized through resale
to the Federal Reserve System, the consequences of such transactions
would necessarily come under congressional review.
Given the existence of the SDR facility, monetization by the Federal
Reserve of gold purchased to support the private market price would
involve the creation of money to benefit special interests—South
Africa, the Soviet Union, and gold speculators—rather than to assure
general international monetary stability. Any such use of the power
of the central bank to create money to benefit special interests—rather
than to maintain general economic stability—would require, as in the
past, the explicit authorization of the Congress.




8
The same G o ld Reserve Act of 1934, referred to above, permitting
the Secretary of the Treasury to “purchase g o ld in any amounts, at
home or abroad, . . . at such rates and upon such terms and conditions
as he may deem most advantageous to the public interest,” could be
availed of as a conscience-pricker for any foreign central bank that
felt tempted to violate the spirit of the March 1968 two-tier agreement
by purchasing gold on the private market—particularly if the price
fell below $35 per ounce. The Secretary of the Treasury could condi­
tion his purchase of g o ld from a foreign monetary authority on the
latter’s assurance that it had not obtained “bootleg” g o ld , whether
newly mined or hoarded, from the private market. This Treasury “con­
dition” w o u ld be intended to, and in all lik e lih o o d w o u ld in fact, dis­
courage foreign official purchases of “bootleg” g o ld because of the
k n o w le d g e that to do so Avould cause the w it h d r a w a l of any U.S.financed floor.
The rationale behind such a refusal to let U.S. gold purchases en­
compass our own destruction was well set forth by Senator Jacob K.
Javits and Representative William B. Widnall as endorsers of the
1962 Joint Economic Committee Annual Report :
One step which might be considered to help stem the outflow of
gold would be for the United States to terminate its guarantee to
buy gold from foreigners at $35 per ounce or at any other pre­
determined price. At the same time, we believe that the United
State must avoid devaluation by continuing to sell gold to for­
eigners at $35 an ounce.
The guarantee to buy gold at a fixed price encourages specula­
tion in gold against the dollar. The belief that the United States,
facing balance-of-payments difficulties, may devalue the dollar in
terms of gold, leads speculators to sell dollars for gold in the free
gold markets overseas. They hold the gold in the hope of selling it
to the U.S. Treasury after devaluation, thus reaping a large
profit should devaluation occur. If the dollar is not devalued, their
loss is negligible, since almost all risk has been removed by the
U.S. guarantee to buy the gold at $35 an ounce. Eliminating this
guarantee to buy gold at a fixed price would dampen speculative
fevers by introducing a new element of heavy risk in speculative
operations.
There is considerable reason to feel that some of the U.S. gold
loss in recent years has been to replace gold that the Bank of
England has been paying out to speculators for the purposes out­
lined. We think termination of the guarantee to buy at a fixed
price would be likely to sharply reduce such speculation and, at the
same time, stimulate a return of sizable amounts of gold to the
United States.
2. The member nations of the IMF should be urged in trans­
actions with monetary authorities to guarantee collectively at
$35 per ounce the value of all gold held as legitimate monetary
reserves on March 31, 1968.
The recent decline in the private market price of gold has raised the
possibility of a further drop in the private price to below the $35 per
ounce official level. In this event, some foreign monetary authorities
might request the réintroduction of a minimum price in the free mar­
ket to assure that there could be no misunderstanding about the value
of their own gold reserves. Rather than agree once again to “make a




9
market” for gold sold by South Africa or dumped by speculators
whose expectations have turned sour, the United States should urge
the member nations of the IMF to guarantee formally under the aegis
of that organization the $35 per ounce official value of gold legitimately
held as monetary reserves at the introduction of the two-tier system.
Given such a guarantee, there would be no question about the con­
tinuing value of these gold reserves. Any ostensible need to intervene
in the private market to assure the stated value of official assets would
be avoided.
3.
In the event that “mitigation” arrangements cannot be de­
vised to furnish nations without gold the quantities they require
to meet their subscription obligations under the proposed IMF
quota increase, the U.S. should allocate gold from its own stock
rather than agree to a renewal of official purchases from South
Africa.
When the 10 major industrial powers agreed in July 1969 on the
amount and rate of an initial SDR distribution, the same countries—
including the United States—agreed also to consider favorably an in­
crease in IMF quotas. Consequently, during the last IMF-World Bank
annual meeting, from September 29 through October 3, the Governors
of the Fund instructed the Executive Directors to submit by the end
of 1969 a proposal on an appropriate set of quota increases. The Execu­
tive Directors must submit a recommendation not only on the size of
a general expansion in Fund quotas, but also on whether the growth
rates of some countries have been sufficiently faster than the average
to warrant especially large increases for these exceptional performers.
Since each country’s proportionate voting strength in the IMF is
closely tied to the size of its quota, and also since SDR’s will be dis­
tributed in proportion to quotas, a number of countries have applied
for special increases. To the extent that special increases are granted,
the nations receiving them will acquire greater powers to determine
the activities of the Fund and will obtain greater proportional amounts
of the new reserves that will soon be distributed.
Under the IMF Articles of Agreement, each country is obligated to
make gold subscriptions to the Fund equivalent to 25 percent of its
quota. The remaining 75 percent of its subscription is paid in its own
currency. Current expectations are for a 33 to 37 percent general
increase in Fund quotas, or a $7 or $8 billion absolute expansion. Con­
sequently, gross member gold subscriptions consistent with a quota
increase of this size would range from $1.75 to $2 billion.
Each time the members of the IMF have agreed to a general increase
in quotas, a few of them—generally less-developed countries—have not
held sufficient gold reserves to make the required gold subscription
payments. Such members were then obligated to purchase gold from
some other country and then turn it over to the Fund. In former years,
these gold purchases for the purpose of meeting subscription obliga­
tions were usually made from the United States. But when the last
general quota increase was approved in 1966, mitigation procedures
were devised, to enable Fund members to meet t'heir gold subscription
obligations and also to curtail U.S. gold losses.
Under a mitigation arrangement described by Under Secretary of
the Treasury Paul A. Volcker in his testimony, a nation needing gold
purchases it from another Fund member whose currency is in demand
by the IMF. The purchaser then remits the gold to the Fund. The IMF




10
i n t u r n uses t h e g o l d t o p u rc h a s e a n a d d it io n a l a m o u n t o f t h e c u r r e n c y
is s u e d b y t h e i n i t i a l s e lle r o f g o ld . T h e n e t e ffe c t is t o e n a b le g o ld scarce n a tio n s t o s a t i s f y t h e i r s u b s c r ip tio n o b lig a t io n s a n d t o p e r m it
t h e F u n d t o a c q u ir e m o r e o f th o s e c u rre n c ie s d e s ire d b y b o r r o w e r s .
T h e r e is n o n e t c h a n g e in th e o w n e r s h ip o f g o ld .

Depending upon the extent to which mitigation procedures are
applied when gold subscriptions are paid in compliance with the forth­
coming quota increase, U.S. gold sales to other countries for subsequent
payment to the IMF might total no more than $60 million, or might
range as high as nearly $800 million (see Table 4). Other industrial
countries, with the exception of Japan, are apparently willing to make
their gold subscription payments from existing stocks and without pur­
chasing additional amounts from the United States. The Japanese gold
subscription, which presumably will be obtained from the United
States, may amount to no more than $60 or $70 million. Thus, the bulk
of mitigated gold payments would be to enable nonindustrialized coun­
tries to meet their gold subscription obligations, which would total an
aggregate of some $600 or $700 million.
TABLE 4 .-E S T IM A T E S OF POSSIBLE U.S. GOLD LOSS RESULTING FROM IM F QUOTA INCREASE
[In millions of dollars!
Low
Total anticipated quota increase______________________________________________________________________
Total gold subscription required______________________________________________________________________
Estimated maximum U.S. gold outlay (no “ mitigation” ):
Gold subscription payments of other industrial nations * (36.1 percent of total)_______________________
U.S. subscription (24.3 percent of total)__________________________________________________________
U.S. sales to other countries for payment to IM F _________________________________________________
U.S. outlay______________________________________________________________________________________
Estimated minimum U.S. gold outlay ( “ mitigation” applied for all nonindustrial countries):
Gold subscription payments of other industrial nations * (36.1 percent of total)_____________________
“ M itigation” _____________________________________________________________________________________
U.S. subscription (24.3 percent of total)__________________________________________________________
U.S. gold sales to Japan (3.4 percent of total)____________________________________________________
U.S. outlay______________________________________________________________________________________

High

7,000
1,750

8,000
2,000

632
425
693
1,118

722
486
792
1,278

632
633
425
60
485

722
724
486
68
554

i The 13 member nations the IM F designates as industrial, excluding Japan and of course the United States: Austria,
Belgium, Canada, Denmark, France, Germany, Italy, the Netherlands, Norway, Sweden, and the United Kingdom. Other
industrial members, with the exception of Japan, are apparently willing to make gold subscription payments without
purchasing additional amounts from the United States.
Note.— The above calculations assume no special quota increases. Such special increases, if approved, would not sub­
stantially change the estimates.

Although mitigation procedures are certain to be applied to some
extent, it is unclear at this time what will be the total amount of miti­
gation. In his testimony before the subcommittee, Under Secretary
Volcker stated, “ In the end, the Fund will be adequately supplied with
usable currencies, or perhaps SDR’s, without impairing the reserve
position of any country.” This statement implies that the U.S. gold
stock will decline as a result of the Fund quota increase by little, if
any, more than the amount of this country’s own gold subscription.
Regardless of whether the amount of mitigation is relatively modest
or such arrangements cover virtually all gold subscription payments
by nonindustrial countries, the United States should be prepared to
offer to other countries the gold they need to meet subscription obli­
gations and which cannot be obtained through mitigation arrange­
ments. Sales by the United States are preferable to modification of the
two-tier gold marketing arrangement because of the undesirability of
renewed official gold purchases from South Africa and because the
United States is likely to be able to easily afford such gold sales.




11
The U.S. gold subscription cannot be considered a reserve loss re­
sulting from an IMF quota increase because any such U.S. gold pay­
ment to the Fund increases our automatic borrowing privileges by the
same amount. Given even a very modest application of mitigation ar­
rangements, U.S. gold sales to other countries for subsequent payment
to the IMF would be less than the $700 million of additional gold re­
serves acquired since the May 1968 low. Thus, there is virtually no
likelihood that the U.S. reserve position could deteriorate to the j)oint
it reached last year when the dollar was in a more tenuous position
than it is currently. The United States has nothing to fear from any
decline in its gold stock resulting from quota increases and should not
hesitate to offer gold to other countries needing it to meet their sub­
scription obligations. To do otherwise would encourage the resumption
of official gold purchases from South Africa.
4. The splitting of official from private transactions in gold is
consistent with the unanimous views of witnesses before the sub­
committee that the dependence of the world monetary system
upon gold will lessen significantly over time. This fact calls into
question the requirement in Article III: 4 of the IMF Articles of
Agreement that 25 percent of quota increases be paid in gold. The
United States should therefore propose an amendment to the
Articles of Agreement permitting gold subscription obligations
also to be paid in SDK’s or currencies specified by the Fund.
This proposal reflects realistically the increased international role of
major currencies in addition to the dollar, the guarantees which IMF
members have extended to assure the value of SDK’s, and the relatively
declining importance of gold as a reserve asset. This suggested reform
would also eliminate the fiction that presently exists, through mitiga­
tion procedures, whereby the 25 percent gold contribution requirement
is bypassed.
The figure of 25 percent for the gold contribution was not entirely
arbitrary in 1945. The gold contribution in the initial subscriptions plus
the U.S. dollar subscription was equivalent to approximately half the
total initial quotas, and Dr. Bernstein informed the subcommittee that
this initial composition of Fund assets was intentional. At that time,
however, the dollar was the only major currency that was freely con­
vertible. Members wishing to make repurchases from the Fund did
so with dollars.
The reinstitution of external convertibility for the European curren­
cies at the end of 1958 made it possible—if not necessarily advisable at
that time—to consider whether in the long run the Fund should con­
tinue to adhere rigidly to the 25 percent gold subscription formula
under future quota increases. This question is even more appropriate
now, when strong currencies are exchanged freely in world trade.
Repurchases from the Fund to date, for example, have been made with
14 currencies other than the United States dollar, including Mexican
pesos and Australian dollars.
One of the mitigation procedures adopted in 1966 illustrates
the increased maturity of the world monetary system and the
need for a new look at the 25 percent gold contribution. Under the miti­
gation procedure, borrowings which were used to purchase gold were to
be paid back in part in currencies acceptable to the Fund, i.e., not gold.




12

In effect the gold contribution was lowered in certain instances in addi­
tion to the very limited ones spelled out in Article I I I : 4. A country
making its gold contribution in this manner could theoretically obtain
a “gold tranche” borrowing privilege—that is, a virtually automatic
drawing right—without contributing gold. But this fact was not
recognized in the IMF charter itself. The International Monetary
Fund should accept this reality and eschew thef fiction that what is not
gold, really is gold.
This reform could be accomplished by allowing “gold” subscriptions
to be paid in SDR's or currencies acceptable to the Fund in addition to
gold. An amendment to this effect would get around the complicated
accounting which was used in the mitigation procedure, but would
have the same mitigatory effect.
Since this reform would entail amendment of the IMF Articles of
Agreement, it should not affect negotiations currently underway on
IMF quota increases. Adjustment of the 25 percent gold subscription
requirement should be discussed without the pressure of deadlines prior
to the next quota increase. At that time the world should be prepared to
effect further constructive developments in the world monetary system.




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