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H.R. 14743

JANUARY 23, 25, 30, 31; FEBRUARY 1, 1968

Printed for the use of the Committee on Banking and Currency



WILLIAM A. BARRETT, Pennsylvania
HENRY S. REUSS, Wisconsin
RICHARD T. HANNA, California
TOM S. GETTYS, 'South Carolina
THOMAS M. REES, California


PAUL A. FINO, New York
W . E. (BILL) BROCK, Tennessee
DEL CLAWSON, California
ALBERT W . JOHNSON, Pennsylvania

P a u l N e lso n . Clerk and Staff Director
A lv in Leh M orse , Counsel
C u r tis A . P rin s, Chief Investigator
Bbnbt D . G e llm a n , Investigative Counsel
Orman S. F in e , Minority Staff Member



Text of H.R. 14743..................- ....................................................................
Treasury Department position on H.R. 14743, as reported in letter to the
Speaker of the House, January 22, 1968____________________________


Barr, Hon. Joseph W., Under Secretary of the Treasury (resumed)_____
Danielian, N. R., president, International Economic Policy Association,
accompanied by William Moran, executive director and vice president,
Fowler, Hon. Henry H., Secretary of the Treasury, accompanied by Hon.
Joseph W. Barr, Under Secretary__________________________________
Hicks, W. B., executive secretary, Liberty Lobby, accompanied by Michael
Jaffee, general counsel____________________________________________
Martin, Hon. William McC., Chairman, Board of Governors, Federal
Reserve System, accompanied by Hon. J. L. Robertson, Vice Chairman of
the Board_______________________________________________________
Olsen, Leif H., senior vice president and economist, First National City
Bank of New York_______________________________________________
Peacock, Leslie C., senior vice president and economist, Crocker-Citizens
National Bank, San Francisco, Calif_______________________________
Piquet, Howard S., Senior Specialist in International Economics, Legislative
Reference Service, Library of Congress_____________________________
Polk, Judd, international economist__________________________________
Reierson, Roy L., senior vice president and chief economist, Bankers Trust
Co., New York___________________, ______________________________
Robertson, Hon. J. L., Vice Chairman, Board of Governors, Federal
Reserve System (resumed)________________________________________
Stewart, Eugene L., general counsel, Trade Relations Council of the
United States____ _________________ _____________________________
Weil, Charles A_______________________________________________ _____
Whalen, Hon. Charles W., Jr., Representative in Congress from the Third
Congressional District of Ohio-------------------------------------------------------ADDITIONAL INFORMATION SUBMITTED FOR
Barr, Hon. Joseph W.:
Directions of trade—Vietnam—imports (financed by Vietnam’s own
foreign exchange earnings) (table)_____________________________
Effect of IET on American transactions in foreign securities and long­
term bank loan commitments to foreigners______________________
Gold losses and debt repayment—-repayment of World Wars I and
II debt______________________________________________________
Gold reserve practices of other countries__________________________
Holdings of long-term U.S. Government securities by governments
and central banks of foreign countries, end years 1959-66 and
November 1967 (table)_______________________________________
Nonmarketable U.S. Treasury bonds and notes issued to official
institutions of foreign countries (table)_________________________
Presidential directive sent to heads of executive departments and
establishments on reduction of overseas personnel and official travel.
Recent trends in unit labor costs in manufactures (table)___________
Removal of gold cover—European reaction to President's balance-ofpayments program___________________________________________
Reply to question of Congressman Brock concerning effect of copper
strike on balance of payments_________________________________





Barr, Hon. Joseph W.—Continued
Summary by countries of estimated holdings of U.S. Government
bonds and notes (table)______________________________________
Treasury Department reply to statement of Mr. Danielian regarding
authority to raise price of gold_________________________________
Vietnamese commercial imports from the United States____________
Barrett, Hon. William A.: “ The Dollar Is Stronger Than Gold, Insists
Banking and Currency Committee Chairman Wright Patman,” article
from the Congressional Record, May 25, 1967_______________________
Danielian, N. R.:
Gold, new supplies and use, 1956-67 (table)_______________________
Letter to Chairman Wright Patman in reply to question of legal
requirement of United States to redeem currency with gold, Feb­
ruary 1, 1968________________________________________________
Memorandum on how to reduce the balance-of-payments impact of
military expenditures in Europe and Asia_______________________
Redistribution of free world gold reserves, 1958-66 (table)__________
Statement summarizing actions by the Department of Defense serv­
ing to reduce the net foreign exchange costs of Defense activities
during the period fiscal year 1961-fiscal year 1967_____________
U.S. balance of payments with United Kingdom and Western Europe,
1965-66 (table).____ _________________________________________
Fowler, Hon. Henry H.:
Changes in gold holdings—1967__________________________________
“ Maintaining the Strength of the U.S. Dollar in a Strong Free World
Economy,” excerpt from Treasury Department report___________
Presidents message to the Nation on the balance of payments______
State Department statement onH.R. 14743______________________
Moorhead, Hon. William S.: “Your Money’s Worth—More of Gold and
the Dollar,” article by Sylvia Porter from the Washington Evening
Star, January 24, 1968___________________________________________
Patman, Hon. Wright:
“ Permanent Cure Held Needed for Dollar Ills,” article from the
Washington Post, January 23, 1968, quoting remarks of Alfred
Hayes, president, Federal Reserve Bank of New York, endorsing
H.R. 14743__________________________________________________
Statement of—
American Bankers Association_______________________________
Rockefeller, David, president, Chase Manhattan Bank, New
York, N.Y., in support of H.R. 14743____________________
Piquet, Howard S.:
“ Some Consequences of Dollar Speculation in Gold” ______________
“ The U.S. Balance-of Payments Deficit: Ailment or Symptom?” __
“ United States Gold Policy: The Case for Change” -----------------------Polk, Judd: Policy considerations for the United States in international
Reierson, Roy L.:
Balance of payments—liquidity basis (table)------------------------------International reserve position of the United States (table)__________
Reuss, Hon. Henry S.: Exchange of letters between Congressman Reuss
and Under Secretary of the Treasury Joseph W. Barr, concerning legal
intricacies of changing the price of gold_____________________________
Stewart, Eugene L.: Basic data of U.S. manufacturing industries with
chronic trade deficits, 1958-60 (average), compared with 1966 (table)--




Patman, Hon. Wright:
Letter from—
Barr, Hon. Joseph W., Under Secretary of the Treasury, enclosing
replies to 10 questions brought up by the minority__________
Eddy, George A., Alexandria, Va____________________________
Faucett, Robert L., Orange, Calif___________________________
Retallick, William B., West Chester, Pa., enclosing copy of letter
sent to the Treasury Department opposing the removal of the
gold cover______________________________________________
Weil, Charles A., New York, N.Y., extending remarks made in
presentation of statement and enclosing pamphlet, “ South
Vietnam's Indispensable Beachhead” ______________________
Welman, Joseph C., chairman, Bank of Kennett, Kennett, M o ..
Statement of—
AFL-CIO as submitted by Andrew J. Biemiller, director, depart­
ment of legislation_______________________________________
Baring, Hon. Walter S., Congressman at Large from Nevada___
Graham, Donald M., vice chairman, Continental Illinois National
Bank & Trust Co. of Chicago_____________________________
Independent Bankers Association of America_________________
McLaughlin, Donald H., chairman of the board, Homestake
Mining Co., on behalf of the American Mining Congress_____
Peterson, R. A., president, Bank of America__________________
Reierson, Roy L .: Reply to question of Congressman Rees on whether the
use of SDR's will take pressure off the dollar in role of reserve currencyWeil, Charles A.: “ South Vietnam's Indispensable Beachhead” _______ I .



TUESDAY, JA N U ARY 23, 1968
H ouse op R epresentatives ,
C o m m it t e e o n B a n k i n g a n d C u r r en c y ,

Washington, D.C.
The committee met, pursuant to notice, at 9:30 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
Present: Representatives Patman, Barrett, Sullivan, Reuss, Moor­
head, Stephens, St Germain, Minish, Gettys, Annunzio, Rees, Bing­
ham, Galifianakis, Bevill, Widnall, Fino, Halpern, Brock, Clawson,
Johnson, Stanton, Mize, Lloyd, Blackburn, Brown, Williams, and
Chairman P a t m a n . The committee will please come to order.
This morning the committee begins consideration of H.R. 14743, a
bill to eliminate the reserve requirements for Federal Reserve notes
and for U.S. notes and Treasury notes of 1890.
Secretary Fowler and Chairman Martin are here this morning to
begin the testimony on this legislation. Due to the fact that they have
a previous commitment to appear before the Ways and Means Com­
mittee, I will forgo making my usual opening remarks so that the
Secretary and Chairman Martin may have as much time as possible to
present their statements.
I do not know how long these hearings will continue. Certainly
there is no desire to undulynasten them. Notification was given to the
press last week. Yesterday I announced on the floor that the hearings
would begin today and invited anyone who wished to testify to contact
the Banking and Currency Committee. We will, of course, hear from
any legitimate witness or organization. This does not mean to say,
however, we will entertain any move to delay necessary and expedi­
tious consideration of this legislation.
(The text of H.R. 14743 and Treasury Department report on the
proposed legislation f ollow:)
[H.R. 14743,90th Cong., second sess.]
A BILL To eliminate the reserve requirements for Federal Reserve notes and for United
States notes and Treasury notes of 1890

Be it enacted ty the Senate and House of Representatives of the United States
of America in Congress assembled,
S e c tio n 1. Subsection (c) of section 11 of the Federal Reserve Act (12 U .S.O .
2 48(c)) is amended by striking both provisos, and toy striking the last sentence,
in such subsection.
Sec. 2. The first sentence of section 15 of the Federal Reserve Act (12 U.S.O.
391) is amended toy striking “and the funds provided in this act for the redemp­
tion of Federal Reserve notes”.



Sec. 3. That part of the third paragraph of section 16 of the Federal Reserve*
Act (12 U.S.C. 413) which precedes the last two sentences of such paragraph
is amended to read: “Federal Reserve notes shall bear upon their faces a distinc­
tive letter and serial number which shall be assigned by the Board of Governors
of the Federal Reserve System to each Federal Reserve bank.”
Sec. 4. (a) The first sentence of the fourth paragraph of section 16 of the
Federal Reserve Act (12 U.S.C. 414) is repealed.
(b) The sentence which, prior to the repeal made by this section, was the
second sentence of such paragraph is amended by inserting immediately after
“ The Board’' the following: “of Governors of the Federal Reserve System” .
Sec. 5. The sixth paragraph of section 16 of the Federal Reserve Act (12
U.S.C. 415) is repealed.
/Sec. 6. The fourth sentence of the paragraph which, prior to the amendments
made by this Act, was the seventh paragraph of section 16 of the Federal
Reserve Act (12 U.S.C. 416) is repealed.
Sec. 7. The paragraph which, prior to the amendments made by this Act, was
the eighteenth paragraph of section 16 of the Federal Reserve Act (12 U.S.C. 467)
is repealed.
Sec. 8. Section 6 of the Gold Reserve Act of 1934 (31 U.S.C. 408a) is amended
by striking in the second proviso the phrases “the reserve for United States notes
and for Treasury notes of 1890, and” and “, and the reserve for Federal Reserve
notes shall be maintained in gold certificates, or in credits payable in gold cer­
tificates maintained with the Treasurer of the United States under section 16 of
the Federal Reserve Act, as heretofore and by this Act amended”.
Sec. 9. There are hereby repealed the sentences of subsection (a) of section
43 of the Act of May 12, 1933 (48 Stat. 31, 52; 31 U.S.C. 821(a)), which read:
“No suspension of reserve requirements of the Federal Reserve banks, under the
terms of section 11(c) of the Federal Reserve Act necessitated by reason of
operations under this section, shall require the imposition of the graduated
tax upon any deficiency in reserves as provided in said section 11(c). Nor shall
it require any automatic increase in the rates of interest or discount charged by
any Federal Reserve bank, as otherwise specified in that section.”
'Sec. 10. Section 2 of the Act of July 14, 1890 (26 Stat. 289), as amended (31
U.S.C. 408), is hereby repealed.
ISec. 11. Section 7 of the Act of January 30,1934 (48 Stat. 341, 31 U.S.C. 408b),
is amended by striking the phrase “and as a reserve for any United States notes
and for Treasury notes of 1890” and also by striking the phrase “as a reserve for
any United States notes and for Treasury notes of 1890, and”.
Sec. 12. Section 14(c) of the Act of January 30, 1934 (48 Stat. 344, 31 U.S.C.
405b), is amended by striking from the first sentence “except the gold fund held
as a reserve for any United States notes and Treasury notes of 1890.”

T h e S e c r e ta r y o f t h e T r e a s u r y ,

Washington, B.C., January 22,1968.
Hon. J o h n W. M cCorm ack,
Speaker of the House of Representatives,
Washington, D.C.
D e a r M r. S p e a k e r: There is transmitted herewith a draft of a proposed bill,
“To eliminate the reserve requirements for Federal Reserve notes and for United
States notes and Treasury notes of 1890.”
The proposed legislation, which is designed to implement the recommendation
made by President Johnson in his State of the Union Message, would eliminate
the present requirement that each Federal Reserve bank shall maintain reserves
In gold certificates of not less than 25 per centum against its Federal Reserve
notes in actual circulation. In addition, it is proposed that the gold reserve
against United States notes and Treasury notes issued under the Act of July 14,
1890, be eliminated.
This legislation is being proposed for two basic reasons:
1. Prospective normal increases in holdings of Federal Reserve notes by the
public will require a larger reserve requirement in the future. If the reserve
requirement is not removed, it will inhibit the further normal expansion of the
currency component of our money supply—growth that is necessary because
of the growth of our economy.



2. It is necessary that there be no doubt about our assurance to the world
that America’s full gold stock stands behind our commitment to maintain the
price of gold at $35 an ounce.
A gold reserve of $10.7 billion is now required as backing for Federal Reserve
notes, United States notes, and Treasury notes. The U.S. gold stock now totals
about $12 billion, thus leaving about $1.3 billion in gold not required as cover. By
the end of this year, the normal increase in the economy’s need for circulating cur­
rency will result in the absorption of another $500 million of our gold to meet the
cover requirements against Federal Reserve notes. Moreover, industrial consump­
tion of gold resulted in a net drain of gold from the Treasury’s stock of about
$160 million in 1967. Sales of gold to industrial users should be about the same
or slightly higher this year. It is apparent that quite apart from any international
considerations the normal growth in our money supply would soon bring us
against the gold cover requirements and result in a restriction in our ability
to supply our economy with the currency it needs. Thus, removal of the gold cover
is necessary for domestic economic considerations alone.
It is equally important from the viewpoint of the smooth functioning of the
international monetary system. The President said in his State of the Union
“And we must also strengthen the international monetary system. And we
have assured the world that America’s full gold stock stands behind our com­
mitment to maintain the price of gold at $35 an ounce. We must back up this
commitment by legislating now to free our gold reserves.”
The legislation now submitted to the Congress would give explicit and un­
mistakable assurance that our gold will be available for use for the fundamental
and essential purpose for which it is now needed in the international monetary
system. Enactment of legislation to remove the gold cover also would reinforce
the balance of payments measures in the President’s action program of January
1st, help to strengthen confidence in the dollar, and dispel any uncertainties that
may have led to the recent outburst of speculation in gold in foreign markets.
believe it is also essential to stress that the value of the dollar does not
depend upon the gold cover legislation. The past 30 years amply demonstrate
that the strength of the dollar depends upon the strength of the United States
economy rather than upon a legal reserve requirement, and it is clearly ap­
propriate for this fact to be recognized now in legislation.
It would be appreciated if you would lay the proposed bill before the House
of Representatives. An identical bill has been transmitted to the President of
the Senate.
The Department has been advised by the Bureau of the Budget that the
enactment of the proposed legislation would be in accord with the program of
the President
Sincerely yours,
H e n r y H . F ow ler .

Chairman P a t m a n . Following Secretary Fowler’s and Chairman
Martin’s testimony, we will then hear from Under Secretary Barr and
Vice Chairman of the Federal Reserve Board, Mr. J. L. Robertson.
If the committee so desires, we will have Secretary Fowler and
Chairman Martin back at a mutually convenient time.
Mr. Secretary, you may proceed.
Mr. W i d n a l l . It was my desire to also make some preliminary re­
marks, and I will delay those until Mr. Patman has made his.
We understand your problem this morning and we also understand
that there will be further opportunity to question you at a later period.
Do I understand there will also be opportunity tor us to furnish you
the names of proposed witnesses ?
Chairman P a t m a n * Yes, sir; you may do that and considerable con­
sideration will be given to asking any witness to appear that you
desire. Very likely we will ask them because we have never refused in
the past.
Secretary Fowler ?




Secretary F owler. Thank you, Mr. Chairman and members of the
I am grateful to you for the opportunity to appear promptly to
support the President’s recommendation for removal of the gold cover.
On December 15, 1967, the Honorable Wilbur Mills, chairman of
the Ways and Means Committee, announced that his committee would
reconvene on January 22 to continue its consideration of the President’s
surcharge proposals. Chairman Martin and I were alerted to stand by
to appear before the committee on that date, and we accepted the in­
vitation of Chairman Mills.
The committee will convene at 10 o’clock this morning, to resume
questioning following yesterday’s session, and Chairman Martin and
I must be there at that time. With the committee’s permission, we will
both read our statements for the record and then ask Under Secretary
Barr and Governor Eobertson, Vice Chairman of the Federal Reserve
Board, to answer your questions.
As the chairman has indicated, in the event the committee feels it
would be desirable, after this morning’s session, to question Chairman
Martin and me directly, then we will be available to come back to this
committee at a mutually convenient time.
The legislation before you would eliminate the 25-percent gold re­
serve requirement from Federal Reserve notes and the $156 million
reserve held against U.S. notes and Treasury notes of 1890.
The administration believes that prompt action to remove the cover
requirement is necessary for three principal reasons: First, the prospec­
tive normal increases m currency holdings, which take the form of
Federal Reserve notes, by the public will “lock up” more and more o f
our free gold and soon reach a point inhibiting further expansion of
our pocket cash. And obviously we cannot tolerate such a situation.
Second, there should be no doubt whatsoever that our total gold
stock is available to insure the free international convertibility between
the dollar and gold at the fixed price of $35 an ounce.
Third, the world knows as a fact that the strength of the dollar de­
pends upon the strength of U.S. economy rather than upon a legal
25-percent reserve requirement against Federal Reserve notes, and it
is clearly appropriate for this fact now to be recognized in legislation.
Despite these facts, the gold reserve requirement against Federal
Reserve notes, instituted at a time when gold circulated freely in the
domestic economy, is still part of our law. It should be removed.
The need for prompt removal is apparent from a look at the simple
arithmetic of the problem.
The U.S. gold stock is now at $12 billion—the cover requirement is
approximately $10.7 billion—the balance remaining is $1.3 billion.
The normal increase in notes will absorb over $500 million annually
and a further $150 million or more will be absorbed each year for
domestic artistic and industrial purposes. These two factors taken
together mean that about $700 million a year of our free gold will
be absorbed for domestic reasons. There is thus but 2 years’ grace at



most even if one assumes that no gold at all will be needed in that peri­
od for international purposes. Clearly we cannot proceed on sucn an
Since the passage of the Federal Reserve Act more than a half
century ago, the function of gold in our monetary system has un­
dergone a fundamental transformation. Gold no longer circulates
freely as domestic currency in any major country in the world. We
Americans have not used gold as domestic currency since 1934. Gold
belongs in a nation’s international reserves. The dollar serves as a
reserve currency to the world; the U.S. gold supply is available to
convert dollars held by national monetary authorities at a fixed price.
As such, it is one cornerstone—and a very main cornerstone—of
our international monetary system.
Today, the strength^of the dollar is not a function of this legal tie
to gold—a tie which is only applicable to one portion of our total
money supply, Federal Reserve notes. The value of the dollar—
whether it be in the form of a bank balance, a coin, or folding money—
is dependent on the quantity and quality of goods and services which
it can purchase. It is the strength and soundness of the American econ­
omy which stands behind the dollar. Balanced growth at home and
a strong competitive position internationally give the dollar we use
as everyday pocket money its strength.
An expanding U.S. economy, of course, needs an expanding sup­
ply of currency. Our main form of currency is Federal Reserve notes.
In the years ahead, we can expect increases in Federal Reserve note
circulation of about $2 billion a year. This growth is a normal re­
sponse to the public’s demand for cash in a growing economy. It is
basically a trend development, reflecting a growing population, a
growing economy, and a growing number of transactions.
Not to move on the cover requirement at this time would only mean
putting off the inevitable. We cannot afford to permit an outmoded
provision of our law to impinge on the Nation’s supply of pocket
Removal of this requirement is also of key importance from the
viewpoint of the role of the dollar and of gold in the international
monetary system.
Mr. Cnairman, rather than develop that point at great length, be­
cause most of the members of the committee, I think, are fully versed
in this area, I would refer to the fact that there has been recently a
full and more extensive development of this particular point, the role
of the dollar in the international monetary system, in chapter 1 of a
Treasury report which was issued last week, called “Maintaining the
Strength of the U.S. Dollar in a Strong Free World Economy.”
Chairman P a t m a n . Would you like to have this in the record ?
Secretary F o w le r . I would like to have a reference to it here. I
think the members of the committee have all been furnished copies
of this report.
Chairman P a t m a n . Suppose we leave it to you to take the part you
want and attach it to your testimony.
Secretary F ow ler . I think roughly pages 15 to 24.
Chairman P a t m a n . Then, without objection, it will be inserted at
this point.



(The material referred to follows:)
{Excerpt from Treasury Department report, “ Maintaining the Strength of the United States
Dollar in a Strong Free World Economy” ]
I . I n t e r n a t io n a l M o n e t a r y S y s t e m



d ju s t m e n t of



I m balances

The problem of the U.S. balance of payments can be understood and analyzed
only against the background of an understanding of the present international
monetary system. This paper therefore begins with a description of the complex
institutional framework within which world trade and payments are carried out.
A second chapter discusses the current problems facing the present system. Sub­
sequent chapters then proceed to analyze the key elements of the U.S. balance of
payments problem in detail, the measures previously employed, and the Presi­
dent’s new program.

An international monetary system provides means and methods of payments in
order to facilitate international trade, capital and other transactions. In a world
composed of various countries, each with its own currency, trade and capital
movements across national borders have not only to be paid for as they are within
any country, but have to be provided with a mechanism to convert one currency
into another.
The American exporter to Italy usually wants to be paid in dollars—his cur­
rency. The Italian importer has lire. Some mechanism has to be provided to con­
vert the lire into dollars to pay the American exporter. And if credit is involved,
there needs to be a financing mechanism that crosses the frontier.
The requirements for handling international payments smoothly are:
The various currencies should be convertible easily into each other.
There needs to be confidence in the stability of the exchange rates of the
major currencies against each other.
The various countries need to have international reserves of unques­
tioned value so that if for a time their outpayments exceed their inpay­
ments they can finance the difference by using these reserves.
The system works more smoothly if owned reserves as supplemented by
credit facilities to tide nations over periods of imbalance.
In a strict sense, the international monetary system is not a system at all.
It is a series of arrangements, procedures, customs and institutions which have
evolved over time and which are laced together by a network of formal and in­
formal agreements. It has been partially codified as to objectives, principles and
procedures by the Articles of Agreement of the International Monetary Fund
(IMF). It has been aided by international cooperation on the part of the im­
portant central banks of the world—most notably through the so-called “ swap
network.” It works partly through correspondent relationships of the major
commercial banks of the world. Money and capital markets in the United States
and Europe are important factors in making the system work. In recent years
it has been strengthened by a series of consultative arrangements undertaken
under the auspices of the Organization for Economic Cooperation and Develop­
ment (OECD).
The system rests on five pillars:
a dollar convertible into gold at $35 per ounce;
other major currencies convertible into dollars at stated rates of ex­
change—under IMF rules they may vary plus or minus 1 percent from
adequate international reserves and credit facilities designed to support
these relationships;
a general presumption that a country will over time be in equilibrium in
its international position—that surpluses will be offset by deficits on the
in seeking to adjust from deficit to surplus, or vice versa, a country will
take into account the consequences of its actions on the world community.

In practice, all member countries of the IMF which have convertible currencies
operate through their central banks or monetary authorities to keep their cur­
rencies in an established relationship to the dollar. For example, the exchange



parity of the. D-mark is 4 to the dollar, or $0.25. The IMF intervention limits are
$0.2475 and $0.2525. In practice, the German Federal Bank intervenes within
somewhat narrower limits. When the dollar is strong against the D-mark, the
dollar price of the D-mark falls toward $0.2475. The Bundesbank supplies dol­
lars from its reserves to buy up the excess D-marks. When the D-mark is strong
against the dollar, its dollar price rises toward $0.2525. Then the Bundesbank
supplies marks and buys dollars.
Each monetary authority acts essentially in the same way—intervening in
its own markets to maintain the price of its currency vis-a-vis the dollar within
the narrow band of plus or minus 1 percent from its parity.
The United States does not have to carry on operations like this. It fulfills its
IMF parity obligations by freely buying and selling gold for dollars—only with
monetary authorities and for legitimate monetary purposes, of course—at $35
per ounce.
The point is that virtually every country does its market interventions by
buying or selling dollars. It does so because the dollar is the major transactions
or vehicle currency and is widely used in the payment and receipt transactions
of international trade and capital flows. It does so because the dollar is a reserve
currency and most countries hold dollars in their international reserves.
The dollar is both a reserve currency and a vehicle currency because:
it is strong, being backed by a strong economy;
it can be invested profitably because there exists a big money and capital
market in the U.S.;
it is known and is acceptable as a store of value—that is, it holds its pur­
chasing power better than most other currencies;
it is in sufficient supply so that there are dollars that can be used or
borrowed for transactions; and
it is convertible by monetary authorities into gold so that they are willing
to hold it.
The U.S. did not deliberately make the dollar a reserve currency or a transac­
tions currency. The dollar evolved as such out of its basic strength.
But this strength can be called into question in two ways:
If the supply of dollars in foreign hands becomes greater than the amount
foreign central banks and private holders want to hold, either because of
their basic needs or for other reasons.
If declines in the U.S. gold reserve and consequent unfavorable effects on
the relationship between U.S. gold and the U.S. dollar liabilities raise ques­
tions as ot the ability of the U.S. freely to convert outstanding dollars into
gold at $35 per ounce.
It is to prevent 'such developments that the U.fS. must achieve sustainable
equilibrium in its payments position. Unless it does so, its liabilities to foreigners
increase and its gold reserves decrease, and the monetary system becomes more
vulnerable to a shrinkage in overall liquidity that can cause iserious financial
and business disruption through an international credit ssqueeze.
Foreign central banks and other official institutions hold some $16 billion of
liquid dollar assets. Private foreigners hold another $16 billion.
The official holdings are reserves for the rest of the world and constitute
nearly 30 percent of such reserves. But so long as they are not withdrawn in
the form of gold, they have not reduced our reserves. Thus, our balance of
payments deficit, unlike those of a nonreserve currency country, has been only
partially reflected in a decline of gold reserves or in our reserve position in the
IMF. A conisideraJble part of our balance of payments deficit has been covered
by an increase in our liabilities rather than by a reduction in our reserve assets.
While it is not necessary for a commercial bank to maintain liquid assets to
cover all or even a major part of its liquid liabilities, the U.S. as a reserve center
is a bank in a ratfher special sense, and needs to maintain a substantial reserve
against its liabilities. It is important that our reserves be adequate to meet
demands for conversion, and to maintain confidence in the bank on the part of
the official and private dollar holders abroad.
Rising dollar liabilities which constitute reserves for other countries have
permitted the world as a whole to build up its reserves more rapidly than would
otherwise 'have been the case. A return of the United States to equilibrium would
cut off this growth of reserves for these countries. It has become increasingly
clear, therefore, that some other means of providing for the future growth in
world reserves will be required. To this end, the members of the International
Monetary Fund have now agreed on a plan for the deliberate creation of reserves
through multilateral action. When this plan is in effect, the world would no



longer be dependent upon gold and the deficits of the United States to provide for
the expansion in world reserves which will be needed in the future.
Thus the role of the dollar as a reserve currency has been intertwined with
the problem of our balance of payments and has also been related to the general
problem of expanding world reserves. Through a multilateral system of reserve
creation, we can relieve the dollar of its responsibility to provide for a growth in
world reserves, and permit concentration on the balance of payments problem.
The following sections of this chapter set forth the elements of the interna­
tional monetary system.

One of the distinguishing features of the present international monetary sys­
tem is the relative stability of exchange rates. Under the Articles of Agreement
of the International Monetary Fund—which since their adoption at Bretton
Woods, New Hampshire, in 1944 have embodied the formal principles and proce­
dures which underly the present system—countries undertake to maintain
exchange rates for transactions in their currencies within a margin of one percent
of a declared par value. This par value may be changed, with the approval of
the IMF, in the event of a “fundamental disequilibrium” in a country’s balance
of payments. For the most part, however, all the members of the IMF have
shown a strong preference for stable exchange rates that are changed only
In order to maintain their currencies within a margin of one percent of the
declared par value, the monetary authorities of almost all countries other than
the United States intervene when necessary in their exchange markets, buying
or selling dollars against their own currency. There are a few exceptions to this
method of official exchange-market intervention (notably in the sterling area),
but for the most part the entire pattern of stable exchange rates is maintained by
virtue of the fact that countries “peg” their exchange rates to the dollar.
!Since most other countries peg their currencies to the dollar, the United 'States
itself does not need to intervene in the exchange markets to maintain the value
of the dollar in terms of other currencies. Although it may at times find it
advantageous to do so in order to assure more orderly markets and more efficient
and economical use of its reserves, the United States basically maintains its
obligations regarding exchange stability in a very different manner: by freely
buying and selling gold in transactions with monetary authorities (primarily
central banks of other countries) at the price of $35 an ounce. No country other
than the United States freely buys and sells gold. The whole exchange-rate
system is therefore pegged to gold only through the commitment of the U.S.
monetary authorities to buy and sell gold freely at the $35 price.

In order to weather periods of deficit in a system of stable exchange rates,
monetary authorities must hold reserves of internationally-acceptable liquid
assets. If a central bank had no reserves with which to purchase its own cur­
rency at times when its currency was in excess market supply, it would have no
choice but to ask the IMF to approve a change in its par value.
Reserves are held primarily in the form of gold and dollar claims on the
United 'States. Because dollars are held so widely in countries’ reserves, the
dollar is the main “reserve currency” of the international monetary system.
Countries in the sterling and franc areas hold part of their reserves in sterling or
French francs, and thus—to a much lesser extent—the pound and the franc also
function as reserve currencies. Gold and reserve currencies are supplemented
by reserve credit available from the International Monetary Fund (see below).
After an initial accrual of dollars resulting from market intervention, the
country can either retain its reserve gain in the form of dollars or choose to con­
vert the dollars into another reserve asset, usually gold. Conversely, a country
necessarily experiences a reserve loss by the act of selling dollars in its exchange
market, thereby reducing its dollar holdings. In order to stand ready to intervene
in the market, central banks have to hold at least a working balance in dollars.
This working balance can be replenished as necessary either by selling other
reserve assets (such as dollar securities, time deposits, or gold) held by the mone­
tary authorities or by drawing on the IMF or other credit facilities.
Many diverse factors enter into the decisions of central banks when they de­
termine the proportions of their reserves to hold in gold, dollars, and other
assets. Some central banks have traditionally held their reserves primarily in



gold except for foreign-exchange working balances. Others have historically
invested almost all their reserves in dollar or sterling assets. There are many
different patterns of -behavior in between these two extremes. Moreover, many
countries have changed their reserve-composition policies over time.
One important motive for holding dollars is that they can be invested at in­
terest. Gold does not earn any interest and actually costs something to store
It has already been pointed out that the United States maintains its exchange
stability obligations in a unique manner. It is equally true that the United States
must of necessity have a unique policy with respect to its reserves. Whereas
other countries use their reserves by buying or selling dollars in their exchange
markets, the United States uses its reserves only to redeem excess dollars ac­
quired by the monetary authorities of other countries.
This structural feature of the international monetary system has another
important implication; when the United States does use its reserve assets to re­
deem outstanding dollar liabilities, this redemption—both in amount and tim­
ing—is determined by the reserve-asset preferences of foreign monetary author­
ities. The amount and timing of U.S. use of reserve assets is therefore not directly
subject either to U.S. desires or to U.S. official policy actions. The United States
can influence the rate at which it gains or loses reserves only by influencing the
attitudes and asset preferences of foreign monetary authorities. One of the major
factors influencing foreign official attitudes, of course, is the prevailing appraisal
of the strength or weakness of the U.S. balance of payments and reserve positions.
Just as the United States uses reserves in a unique manner, it must hold its
reserves subject to considerations that are unique. Whereas other countries have
a range of assets from which to choose that includes gold, dollars, other cur­
rencies, and reserve positions in the IMF, the United States has a much more
restricted field of choice. It must hold assets which are acceptable to other coun­
tries when they call upon the United States to redeem our outstanding reservecurrency liabilities. While there is some scope for holding other countries* cur­
rencies in our reserves, it is clear that in the present system the United States
must hold most of its reserves in gold.
Given the wide extent to which the dollar is used as the “intervention cur­
rency” and as a reserve currency, it is clear that the stability of the entire inter­
national monetary system is intimately bomd up with the behavior of U.S. re­
serves. If a widespread feeling were to develop that U.S. reserve assets might be
inadequate in comparison with the size of outstanding reserve-currency liabilities,
or especially if U.S. reserve assets threatened to continue to decline simultane­
ously with a further large expansion of U.S. reserve-currency liabilities, dollar
assets might be viewed with increasing distrust by individuals and governments
all around the world. Tne U.S. Government fully appreciates the significance of
the fact that the stability of the entire monetary system is interdependent with
U.S. reserve and balance of payments policy. This fact and the desire to act
responsibly in the face of it have been one of the primary considerations under­
lying U.S. balance of payments policy since the large payments deficits of 1958-60,
accompanied by heavy gold losses, first underscored the existence of a problem.

In addition to the gold and reserve currencies which countries hold in their
reserve outright (sometimes referred to as “unconditional” liquidity since they
are usable without any outside institution or government placing conditions on
their availability), countries have access to a pool of currencies in the Interna­
tional Monetary Fund. The amount of resources a country may draw from the
Fund is governed by its quota, which reflects its economic size and importance
relative to other countries. When initially paying in its quota subscription, each
country subscribes 25 percent in gold and 75 percent in terms of its own currency.
In return for agreeing that the 75 percent balance of its own currency may be
drawn upon in case of need to finance other countries’ drawings from the cur­
rency pool, countries obtain the right to draw the currencies of others from the
Fund themselves under certain stipulated conditions.
The right of a country to draw on its gold subscription (“gold tranche” ) is
essentially beyond challenge; so also is its right to draw on any credit balance
it acquired as a result of other countries having drawn its currency. These two
.amounts together are described as the country’s “reserve position in the Fund
it is also a form of unconditional liquidity. Most countries, including the United
States, regard their reserve positions in the Fund as an asset fully liquid and



usable in case of balance of payments need, and accordingly include the Fund’
reserve position in their published reserves.
Under circumstances which involve increasingly stringent analysis and dis­
cussion of a country’s economic policies, members of the Fund may draw success
sive further amounts from the Fund up to 100 percent of their quotas. These
further borrowings in a country’s “credit tranches” are not comparable to re­
serves. They are conditional credit facilities (hence sometimes referred to as
“conditional” liquidity). They carry specific repayment obligations and interest
The role of the International Monetary Fund in supplying conditional liquidity
to governments for the purpose of maintaining stability in exchange rates and
the adjustment of payments imbalances has expanded greatly since the inaugura­
tion of the Bretton Woods system. The aggregate quotas of all members of the
IMF are now some $21 billion. The appropriateness of quotas is reviewed every
five years; the last round of general quota increases became effective in 1960.
In addition to expanding the general level of quotas and selectively increasing
the quotas of certain countries, the IMF was also strengthened in 1962 by an
agreement among the ten main industrial countries (the “Group of Ten” ) known
as the General Arrangements to Borrow (GAB). The GAB is an undertaking by
these countries to lend the Fund specified amounts of their currencies (aggregat­
ing to the equivalent of about $6 billion) if the Fund decides that supplementary
resources are needed to forestall or cope with an impairment of the international
monetary system. The GAB arrangements have been activated several times in
connection with large U.K. drawings from the Fund.
The U.S. quota in the IMF is $5.2 billion, out of total Fund quotas of about
$21 billion. As of the end of 1967, the United States had approximately $400
million of its “gold tranche” and the full $5.2 billion of credit tranches available*

In 1961, the new U.S. Administration began to foster the development of a
new system of international short-term credits in the form of the “swap net­
work” of the Federal Reserve System, and also introduced the so-called “Roosa
bonds.” Both of these provide a type of exchange protection to the lending coun­
try. That is, the lending country is repaid in a constant value in its own currency,
and is thereby protected against an exchange adjustment by the borrowing
country. The United States, at the center of the swap network, can borrow for­
eign currencies and sell them in the market in lieu of making gold sales, in the
expectation that a subsequent reversal of part of the outflow will reduce the
eventual drain on its reserves. In the meantime the swap partner holds dollars
with a form of exchange protection. Similarly, the United States has, itself, been
able to extend credit and acquire foreign currency with exchange protection
when, for example, Italy or Canada or the United Kingdom had an outflow of
funds. This network of short-term reciprocal borrowing of reserves, frequently
called “a first line of monetary defense,” now totals about $7.1 billion. It has
helped to avoid gold losses resulting from short-term flows that were later re­
versed. When the United States has been drawn upon, other countries have been
provided with dollars to hold their exchange rates stable.
Roosa bonds were designed to provide a longer-term instrument for the invest­
ment of dollars accumulated by foreign monetary authorities. Most of them have
been denominated in the foreign country’s currency as an added attraction to
the purchasing country. A total of about $1.5 billion of these bonds was outstand­
ing as of November 30,1967.
Since its reopening in 1954, the free market for gold in London has re-emerged
as the largest and most important center in the world for free-market gold
transactions. During most of the period since that time the flow of gold to the
London market, from new production and Russian sales, have exceeded the vari­
ous demands on it. Accordingly, the residual supply of gold was absorbed by
central bank purchases and by the U.S. Treasury at prices varying fairly closely
around the U.S. fixed price at $35 per ounce. For short periods, sudden outbreaks
of speculative demand for gold substantially exceeded the supply available to
the market. Such a situation occurred in October 1960 when the market price
rose to around $40 and aroused widespread anxieties concerning the interna­
tional monetary system. The U.S. monetary authorities supported the Bank o f
England in intervening in the London market to stabilize the price within an
acceptable range.



In the following year, after a similar but milder strain on the London market,,
the U.S. authorities suggested that, in view of the mutuality of interest among the
monetary authorities of the major industrial countries in maintaining orderly
conditions in the gold and exchange markets, an informal gold selling arrange­
ment be arranged among the group of central banks that are members of the BIS
or are associated with it. Under the arrangement, each member of the group
(Belgium, France, Germany, Italy, The Netherlands, Switzerland, the United
Kingdom and the United States) undertook to supply an agreed proportion of
such net gold sales to stabilize the market as the Bank of England, as agent for
the group, determined to be appropriate. The U.S. share was 50 percent. This
informal arrangement has essentially been continued (without French partici­
pation since midyear 1967 and with the U.S. share at 59 percent since then), both
as to purchasing net gold acquisitions as well as supplying net market demand.
Representatives of the central banks participating in the “pool” meet periodically
at Basle to discuss all aspects of the gold and foreign exchange markets, pro­
viding a means thereby to coordinate exchange operating policies as well as to
keep fully informed of developments in the London and other gold markets.

In addition to its role as the international monetary system’s major reserve
currency, the dollar is also the primary international means of payment and a
major medium for the international investment of short-term funds. This “trans­
actions demand” for dollars has grown greatly over the whole postwar period.
In recent years the growing importance of the Euro-dollar market has provided
further illustrations of the central versatile role played by the dollar in private
international financial transactions.1


tlMM* SftTtMin

Chart I, entitled “Liquid Liabilities to Foreigners,” gives some indication of
how rapidly U.S. liquid liabilities to nonofficial foreigners have grown in the
recent past. Liquid liabilities to “other foreigners”—foreign commercial banks
(including the foreign branches of U.S. banks) and other private foreigners—
1 Euro-dollars are deposits in banks outside the United States, principally in European
financial centers, that are denominated in U.S. dollars.





increased over the period 1957 to 1967 from approximately $6 billion to about
$16 billion. These liquid dollar assets of foreigners held in the United States
are invested in demand and time deposits and money market paper. The secular
growth in foreign private dollar holdings can be expected to continue in the
future pari passu with continued expansion in world trade and other interna­
tional transactions.
The existence of very large outstanding dollar liabilities, not only to foreign
official institutions ( “reserve-currency” balances), but also to private foreign
individuals and organizations (“transactions-currency” balances) underlies the
importance of maintaining confidence in the dollar and, more generally, in the
international monetary system itself. The following chapter of this paper, which
deals with current problems facing the international monetary system, returns
to this important point

When a country consistently loses reserves, it is in a balance of payments
“deficit.” Conversely, if a country consistently gains reserves, it has a “ surplus”
in its balance of payments.
Strictly speaking, the matter is more complicated than that “ Surplus” and
"deficit” are analytical concepts with a variety of possible definitions. For ex­
ample, it may be appropriate in some circumstances to take into account changes
in the foreign assets and/or liabilities of the country's commercial banking sys­
tem—as well as changes in official reserves—in measuring a deficit
The measurement of the U.S. balance of payments deficit is more complex
than for other countries because of the unique position of the U.S. dollar, and
was examined by a special review committee.2 Following this report, the con­
clusion was reached that no single indicator of surplus or deficit was suitable
for all purposes. The primary measure used in this paper is the balance on the
“ liquidity” basis, although for some purposes reference is made to the balance on
the “official reserve transactions” basis.®
Balance of payments surpluses and deficits sometimes are desired. This was
the case in the early 1950’s, for example, when (on the definitions of surplus and
deficit then in use) the European countries undergoing reconstruction had sur­
pluses and the United States had deficits. These deficits and surpluses enabled
the European countries to build up their reserves; the declines in the swollen
U.S. gold reserves and the increases in our reserve-currency liabilities—repre­
senting as they did a redistribution and augmentation of the world’s stock of
reserve assets^—were universally welcomed as such.
On the other hand, large and persistent payments imbalances, either surplus
or deficit, are not sustainable and can give rise to instability in the international
monetary system. There is an obvious limit to imbalances of the deficit type:
countries can support their exchange rates with their reserves and credit fa­
cilities only so long as they have reserves or can arrange further credit. In the
•case of a reserve-currency country, there are limits to the willingness of private
and official holders abroad to accumulate that currency. The limits on the ability
of countries to run large and persistent surpluses are much less clear. What is
clear, however, is that large and persistent surpluses impose strains on the inter­
national monetary system as great as those resulting from large and persistent

Each individual country has its own multiple economic and social objectives.
These include full employment and a satisfactory rate of growth, reasonable
price stability, an equitable distribution of income, and balanced regional and
sectoral development While seeking to attain these objectives, as already noted,
countries must also avoid large and persistent imbalances in their external ac­
counts. It is also widely agreed (in the words of the Convention setting up the
Organization for Economic Co-operation and Development) that countries should
“ promote policies designed to contribute to the expansion of world trade on a
multilateral, nondiscriminatory basis in accordance with international obliga­
2 See The Balance of Payments Statistics of the United States: A Review and Appraisal,
Report of the Review Committee for Balance of Payments Statistics to the Bureau of tie
Budget (E. M. Bernstein, Chairman), U.S. Government Printing Office, April 1965.
» For the differences between these two alternative measures of the balance, see Chart VII
in Chapter III.



The international monetary system set up at Bretton Woods and based on a
pattern of stable exchange rates was then and is now believed by its participants
to be the most appropriate system designed to foster these objectives. The sys­
tem has evolved over time to meet changing needs and problems. It is once again
going through a key evolutionary stage, as the work on proposed amendments to
the IMF Articles of Agreement reaches completion, to establish a facility for
deliberate reserve creation (see below) and to improve certain rules and prac­
tices of the Fund.
The simultaneous achievement of all the economic and social objectives de­
scribed above, even for an individual country, is far from easy. Governments
have only a limited number of policy tools at their disposal. They have not always
been able or willing to use these tools in appropriate combinations. Governments
in different countries attach different priorities to achievement of various inter­
nal and external aims. The nature of imbalances in payments, as well as the
appropriate range and mix of instruments required to deal with them, can vary
substantially from country to country in line with wide differences in economic
and financial structure and in the nature of political institutions.
These difficulties have important implications for the speed and effectiveness
with which the adjustment of payments imbalances can be attained. The adjust­
ment process may work somewhat imperfectly, and in any case is apt to be
gradual. In a few difficult cases, adjustment of payments imbalances may not
take place at all, or will take place only with the costly sacrifice of some of the
basic objectives that the system is intended to advance, unless a large measure
of multilateral cooperation is brought to bear on the problem.

The need for multilateral cooperation in achieving and maintaining balance
of payments equilibrium has become increasingly widely recognized in the last
few’ years. An understanding of this need has been particularly advanced by an
international working group formed under the auspices of the Organization for
Economic Co-operation and Development (OECD). The Economic Policy Com­
mittee of the OE0D established a Working Party in 1961 for the specific pur­
pose of promoting better international payments equilibrium. This group, con­
sisting of senior officials from Ministries of Finance and other key government
agencies and Central Banks concerned with balance of payments questions, has
met together at approximately six-to-eight week intervals ever since. In 1964, the
Ministers and Governors of the ten countries participating in the General Ar­
rangements to Borrow suggested that this OECD working party, known as
Working Party 3, make a study of the balance of payments adjustment process
with a view toward improving the process of continuing international con­
sultation and cooperation.
The Working Party’s report on this subject was issued in August 1966. In
addition to endorsing the commonly agreed view that prolonged Imbalance in
either direction is in general undesirable, the Working Party also noted that
“the objectives of international consultation are broader and more general
than the mere avoidance of imbalance. The purpose of consultation regarding
adjustment policies is to ensure that the policies pursued by individual countries
do not hinder others in the pursuit of the general aims of economic policy; more
positively, the object is to ensure that as far as possible countries, while avoid­
ing imbalance, collectively support each other in their policies.”
The Working Party’s report does not fail to point out that there are often
inherent difficulties in managing an economy in a way which is consistent with
domestic objectives, with the aims of its trading partners, with stable exchange
rates, and with the general health of the world economy. But it also recognizes
that there is clear room for improvement and that improvement is an urgent
order of business. The report describes appropriate methods of dealing with these
problems in different circumstances. It refers specifically to the need for clearer
formulation of balance of payments aims; early identification and better diag­
nosis of payments problems; new and more selective instruments of economic
policy; more timely action to correct inappropriate demand levels, competitive
positions and capital flows; and a further strengthening of the processes of
international consultation.
The U.S. Government has strongly supported the Working Party’s report and
its recommendations. At the recent meeting, November 30 to December 1, of the
Ministers of the countries belonging to the OECD, for example, the United States
representative, Under Secretary of State Eugene V. Rostow, said:



“We have no doubt that the Atlantic countries can resolve this problem; if
they deal with it together, in ways which fortify the world monetary system and
permit an early and assured return to growth patterns closer to our full employ­
ment objectives. All I am suggesting today is that we recognize that some aspects
of the adjustment process require cooperative solutions and that we set about
promptly to find them. Cooperation in handling the adjustment process, I suggest,
is the next major step after Rio [see below for a discussion of the agreement
reached in Rio de Janeiro in September 1967] for us to take in improving our
machinery for managing the monetary system.”

For any country to reduce its deficit or move into surplus, it is generally
necessary for other countries to reduce surpluses or increase deficits. This is
simply a statement of what must happen mechanically and statistically if pay­
ments imbalances are to be adjusted at all.
This inescapable interdependence of surpluses and deficits makes it very clear
that countries must have compatible balance of payments aims if the whole'
system is not to be working at cross purposes. If all the countries in the systemi
that are in surplus set their policies in such a way as to have continued sur­
pluses, while deficit countries take active measures to eliminate their deficits,
then either the deficit countries will still find themselves running deficits or else
surplus countries will find that they have not been able to attain their targeted
surpluses. All countries together cannot possibly achieve these inconsistent aims ;
someone is bound to be disappointed.
Virtually all countries take it as their balance of payments objective to be in
surplus (and so to have growing reserves) over time. Few if any countries have
indicated either a policy or a willingness to have their reserves fluctuate around
a fixed level rather than around an upward trend.
It is understandable why countries tend to have this preference for surpluses.
The volume of trade and other international transactions has a strong upward
trend. It is a reasonable presumption that, because of this trend, the absolute
size of imbalances will also increase over time. These facts alone suggest that
reserves should likewise have an upward trend if they are to continue to be
adequate to support the fixed exchange rate against balance of payments swings.
Another factor leading countries not to attempt to reduce their surpluses may be
a propensity to discount an existing surplus as partly or wholly “te m p o ra ry it
is natural and prudent to conduct affairs so as to prepare for “rainy weather”
in the future, and not to presume that current good fortune will continue. Even
to the extent that countries aim at a long-run objective of a zero surplus over time,
which they tend not to do, they still probably react more quickly to a deficit situa­
tion that when they are in surplus (if only because countries in surplus are under
much less urgent and intense pressures to act to reduce the imbalance).
Given the set of prevailing attitudes which makes an upward trend in reserves
(balance of payments surplus) the targeted long-run “norm” for each country
taken individually, the obvious question suggests itself: when, if at all, can the
international monetary system as a whole be in equilibrium? Given that it is
difficult enough to bring about adjustment of payments imbalances even under
ideal conditions where deficit countries take actions to reduce deficits and surplus
countries willingly take cooperative actions to reduce their surpluses, how can the
system possibly function smoothly when countries in surplus by and large do not
want to see their surpluses reduced ?
Happily, there is a solution to this dilemma. It is not the case that for every
dollar of surplus in the system there must be an exactly offsetting dollar of
deficit. When the gross deficits and gross surpluses (consistently defined) of all
countries are offset against each other, the sum of the surpluses can exceed the
sum of the deficits by the amount of new reserves being added to the system
which are not at the same time the liability of a particular country. The key
point of this relationship is that if new reserves of the appropriate kind are
flowing into the system, it is possible for some countries to satisfy their pref­
erences for reserve increases without necessitating that other countries be in
corresponding deficit.
Up to the present time, the only “new reserves” which have allowed this
margin to exist have been increases in countries’ monetary gold stocks. When
newly-mined gold is sold to a monetary authority, that government has a reserve
gain without any other country having experienced a deficit. When the dollar



component of world reserves increases, on the other hand, this increase in
reserves does not allow the system as a whole to have a margin of surpluses
exceeding deficits. When the rest of the world adds to its dollar reserves, these
new assets are also an increase in U.S. reserve-currency liabilities, and there is
therefore a U.S. deficit corresponding to the surplus of the rest of the world.
However, gold is not the only reserve asset that is capable of permitting the sys­
tem to have a situation in which the sum of surpluses exceeds the sum of deficits.
Deliberately created new reserve assets, such as the proposed Special Drawing
Rights (SDR) described in the next chapter, will serve this function equally
Equilibrium for the system as a whole thus requires that new reserves—gold
or new reserve assets such as SDR—be added to the system at such a rate that
the sum of surpluses can exceed the sum of deficits by a reasonable margin. This
condition for “equilibrium” of the system should be thought of as a necessary,
but not sufficient, condition. Other considerations, such as the degree to which
the system is promoting the achievement of its basic objectives, also need to be
taken into account.
Only under these conditions is there a good chance of making countries, balance
of payments aims mutually compatible; only then is there a plausible hope
of attaining the objectives the system is intended to promote, including relative
freedom from trade and payments restrictions while still getting the adjustment
of payments imbalances to proceed smoothly.
What is a “reasonable” margin by which surpluses should exceed deficits?
The answer to this question is not fully clear to the financial experts and
economists who have studied this question. Broadly speaking, the rate at which
new reserves should be added to the system should probably bear some rela­
tionship to the rate at which international transactions are expanding (though
the two rates need not be the same and there is no necessity for a precise re­
lationship). The margin should not be too small, and certainly should not
be negative. Nor should the margin be an excessive one. At either of these
two extremes, one would have to say that the system as a whole was in
It is important to be clear on the fact that the above condition for equilibrium
of the system, if satisfied, in no way reduces the need for countries to avoid
large and persistent imbalances in their external payments. It is still imperative
for countries in large or prolonged deficit to reduce their imbalance. And it
is just as important as ever for countries with large and persistent surpluses
to reduce these surpluses to the point where they are moderate and broadly
consonant with the rate at which reserves are growing in the system as a whole.
The need for adjustment is not removed. The margin by which surpluses ex­
ceed deficits only means that, for each country individually and for the system
as a whole, adjustment takes place around an upward trend in reserves rather
than around a constant level.

Secretary F owler. Today, the international monetary system relies
primarily on gold and dollars and the interchangeability of gold and
the dollar at $35 an ounce is the fulcrum of the system—and we hope
that at a very early date these two factors will get help as they need
help from a third, the new international reserve asset to be created
under multilateral agreement in the International Monetary Fund, by
an amendment of the articles of agreement of that Fund, which article
amendment we hope will be before the Congress some time in the
spring. But gold and dollars will continue to play a very vital role in
the international monetary system.
I f this system, which has served the entire free world so admirably
in the past 20 years, is to continue to facilitate the growth of world
trade and prosperity, we must assure that confidence in the system and
in the strength of the dollar is maintained. And this requires action
on four fronts:
First, we must continue the longstanding U.S. policy of maintain­
ing the gold-dollar relationship at $35 an ounce. This must not be
open to question, and the best way to make continuation of that policy
crystal clear is to free our entire gold stock for that purpose.



Second, we must assure that the U.S. economy grows in an environment of cost and price stability through enactment of the anti-infla­
tion tax and through expenditure controls and appropriate monetary^
Third, we must achieve sustained equilibrium in our balance of pay­
ments; and
Fourth, we and the rest of the free world must put into place the plan,
for the creation of a new reserve asset agreed upon in Rio last Sep­
tember, at the meeting of the International Monetary Fund.
Our policy of maintaining the fixed relationship between gold and
the dollar at $35 an ounce for legitimate monetary purposes is one o f
the reasons why virtually all countries hold dollars in their reserves
and why many of them hold very large amounts of dollars. In addition,,
of course, countries hold dollars because, unlike gold, they can invest
them in interest-earning assets.
The monetary authorities of most of the major industrialized coun­
tries understand full well that the link between gold and domestic cur­
rencies is no longer a pertinent and relevant fact and that gold is an
international asset. Only three major countries still maintain some link
between their domestic currencies and gold. While foreign authorities
are aware of the fact that the Federal Reserve can suspend the cover
requirement, they find it difficult to understand why the United States,
the world’s major reserve currency country, still maintains this legal
impediment to the free international use of gold.
Thus, legislative action on the cover requirement, by making it clear
to the world that the Congress as well as the executive branch are
committing our total gold stock -to international use, is necessary to
maintain confidence in the dollar.
Removal of the gold cover will not solve the U.S. balance-of-pay­
ments problem nor is it a substitute for the solution of that problem.
The need to achieve sustained equilibrium in our international pay­
ments position is essential to confidence in the dollar and the future
stability of the international monetary system. The series of measures
announced by the President on January 1, with which you are all
familiar, are designed to bring us to, or close to, equilibrium this year*
It is vital that they be successful. I ask, Mr. Chairman, that the Presi­
dent’s message be made a part of the record of these hearings. That is
January 1.
Chairman P a t m a n . Without objection, it is so ordered.
Secretary F ow ler . In conclusion, I urge the committee to consider
and act promptly on the gold cover legislation before you in order
that, domestically, we can continue to be assured that the Federal Re­
serve will be able to supply appropriate amounts of currency to meet
the needs of our growing economy for cash and in order that our
policy of maintaining the gold-dollar relationship—one of the major
elements of confidence in the dollar and the international monetary
system—will not be open to question.
Mr. Chairman, that concludes my statement. But the Secretary of
State has asked me to submit to the committee a brief statement of
his views concerning the removal of the gold cover, and I should like
also to submit that.
Chairman P a t m a n . That may be inserted at this point in the record.



(The material referred to follows:)
P r e s id e n t ’ s M e s s a g e

to t h e

N a t io n



B alance


P aym ents


I want to discuss with the American people a subject of vital concern to the
economic health and well-being of this Nation and the Free World.
It is our international balance of payments position.
The strength of our dollar depends on the strength of that position.
The soundness of the Free World monetary system, which rests largely on
the dollar, also depends on the strength of that position.
To the average citizen, the balance of payments, and the strength of the dollar
and of the international monetary system, are meaningless phrases. They seem
to have little relevance to our daily lives. Yet their consequences touch us all—
consumer and captain of industry, worker, farmer, and financier.
More than ever before, the economy of each nation is today deeply intertwined
with that of every other. A vast network of world trade and financial transac­
tions ties us all together. The prosperity of every economy rests on that of every
More than ever before, this is one world—in economic affairs as in every other
Your job, the prosperity of your farm or business, depends directly or in*
directly on what happens in Europe, Asia, Latin America, or Africa.
The health of the international economic system rests on a sound international
money in the same way as the health of our domestic economy rests on a sound
domestic money. Today, our domestic money—the U.S. dollar—is also the money
most used in international transactions. That money can be sound at home—as
it surely is—yet can be in trouble abroad—as it now threatens to become.
In the final analysis its strength abroad depends on our earning abroad about
as many dollars as we send abroad.
U.S. dollars flow from these shores for many reasons—to pay for imports and
travel, to finance loans and investments and to maintain our lines of defense
around the world.
When that outflow is greater than our earnings and credits from foreign
nations, a deficit results in our international accounts.
For 17 of the last 18 years we have had such deficits. For a time those deficits
were needed to help the world recover from the ravages of World War II. They
could be tolerated by the United States and welcomed by the rest of the world.
They distributed more equitably the world’s monetary gold reserves and supple­
mented them with dollars.
Once recovery was assured, however, large deficits were no longer needed and
indeed began to threaten the strength of the dollar. Since 1961 your government
has worked to reduce that deficit.
By the middle of the decade, we could see signs of success. Our annual deficit
had been reduced two-thirds—from $3.9 billion in 1960 to $1.3 billion in 1965.
In 1966, because of our increased responsibility to arm and supply our men in
Southeast Asia, progress was interrupted, with the deficit remaining at the same
level as 1965—about $1.3 billion.
In 1967, progress was reversed for a number of reasons:
Our costs for Vietnam increased further.
Private loans and investments abroad increased.
Our trade surplus, although larger than 1966, did not rise as much as
we had expected.
Americans spent more on travel abroad.
Added to these factors was the uncertainty and unrest surrounding the de­
valuation of the British pound. This event strained the international monetary
system. It sharply increased our balance of payments deficit and our gold sales
in the last quarter of 1967.

Preliminary reports indicate that these conditions may result in a 1967 bal­
ance of payments deficit in the area of $3.5 to $4 billion—the highest since 1960.
Although some factors affecting our deficit will be more favorable in 1968, my
advisors and I are convinced that we must act to bring about a decisive improve­



We cannot tolerate a deficit that could threaten the stability of the interna­
tional monetary system—of which the U.S. dollar is the bulwark.
We cannot tolerate a deficit that could endanger the strength of the entire
Free World economy, and thereby threaten our uprecodented prosperity at home.

The time has now come for decisive action designed to bring our balance of
payments to—or close to—equilibrium in the year ahead.
The need for action is a national and international responsibility of the highest
I am proposing a program which will meet this critical need, and at the same
time satisfy four essential conditions:
Sustain the growth, strength and prosperity of our own economy.
Allow us to continue to meet our international responsibilities in defense
of freedom, in promoting world trade, and in encouraging economic growth
in the developing countries.
Engage the cooi>eration of other free nations, whose stake in a sound in­
ternational monetary system is no less compelling than our own.
Recognize the special obligation of those nations with balance of pay­
ments surpluses, to bring their payments into equilibrium.

The first line of defense of the dollar is the strength of the American economy.
Xo business before the returning Congress will be more urgent than this:
To enact the anti-inflation tax which I have sought for almost a year. Coupled
with our expenditure controls and appropriate monetary policy, this will help
to stem the inflationary pressures which now threaten our economic prosperity
and our trade surplus.
Xo challenge before business and labor is more urgent than this: To exercise
the utmost responsibility in their wnge-price decisions, which affect so directly
our competitive position at home and in world markets.
I have directed the Secretaries of Commerce and Labor, and the Chairman
of the Council of Economic Advisers to work ivith leaders of business and labor
to make more effective onr voluntary program of v:age-price restraint.
I have also instructed the Secretaries of Commerce and Labor to work with
unions and companies to prevent onr exports from being reduced or our imports
increased by crippling work stoppages in the year ahead.
A sure way to instill confidence in our dollar—both here and broad—is through
these actions.

But we must go beyond this, and take action to deal directly with the balance
of payments deficit.
Some of the elements in the program I propose will have a temporary but
immediate effect. Others will be of longer range.
All are necessary to assure confidence in the American dollar.
1. Direct investment
Over the past three years. American business has cooperated with the govern­
ment in a voluntary program to moderate the flow of U.S. dollars into foreign
investments. Business lenders who have participated so wholeheartedly de­
serve the appreciation of their country.
But the savings now required in foreign investment outlays are clearly beyond
the reach of any voluntary program. This is the unanimous view of all my
economic and financial advisers and the Chairman of the Federal Reserve Board.
To reduce our balance of payments deficit by at least $1 billion in 1968 from
the estimated 1967 level, I am invoking my authority under the Banking Laws
to establish a mandatory program that will restrain direct investment abroad.
This program will be effective immediately. It will insure success and guaran­
tee fairness among American business firms with overseas investments.
The program will be administered by the Department of Commerce, and will
operate as follows:
As in the voluntary program, over-all and individual company targets
will be set. Authorizations to exceed these targets will be issued only in
exceptional circumstances.



New direct investment outflows to countries in continental western Eu­
rope and other developed nations not heavily dependent on our capital will
be stopped in 1968. Problems arising from work already in process or com­
mitments undter binding contracts will receive special consideration.
New net investments in other developed countries will be limited to 65%
of the 1065-66 average.
New net investments in the developing countries will be limited to 110%
of the 1965-66 average.
This program also requires businesses to continue to bring back foreign
earnings to the United States in line with their own 1964-66 practices.
In addition, I have directed the Secretary of the Treasury to explore with
the Chairmen of the House Ways and Means Committee and Senate Finance
Committee legislative proposals to induce or encourage the repatriation o f
accumulated earnings by U.S.-owned foreign businesses.
2. Lending by financial institutions
Toreduce the balance of payments deficit by at least another $500 million} 1
have requested and authorized the Federal Reserve Board to tighten its program
restraimng foreign lending by banks and other financial institutions.
Chairman Martin has assured me that this reduction can be achieved:
without harming the financing of our exports;
primarily out of credits to developed countries without jeopardizing the
availability of funds to the rest of the world.
Chairman Martin believes that this objective can be met through continued
cooperation by the financial community. At the request of the Chairman, however,
I have given the Federal Reserve Board standby authority to invoke mandatory
controls, should such controls become desirable or necessary.
S. Travel abroad
Our travel deficit this year will exceed $2 billion. To reduce this deficit ,by
$500 million:
I am asking the American people to defer for the next two years all nonessential travel outside the Western Hemisphere.
I am asking the Secretary of the Treasury to explore with the appropriate
Congressional committees legislation to help achieve this objective.
4. Government expenditures overseas
We cannot forgo our essential commitments abroad, on which America’?security and survival depend.
Nevertheless, we must take every step to reduce their impact on our balance
of payments without endangering our security.
Recently, we have reached important agreements with some of our NATO
partners to lessen the balance of payments cost of deploying American forces
on the Continent—troops necessarily stationed there for the common defense
of all.
Over the past three years, a stringent program has saved billions of dollars
in foreign exchange.
I am convinced that much more can be done. I believe we should set as our
target avoiding a drain of another $500 million on our balance of payments.
To this end, I am taking three steps.
First, I have directed the Secretary of State to initiate prompt negotiations
with our NATO allies to minimize the foreign exchange costs of keeping our
troops in Europe. Our allies can help in a number of ways, including:
The purchase in the U.S. of more of their defense needs.
Investments in long-term United States securities.
I have also directed the Secretaries of State, Treasury and Defense to find
similar ways of dealing with this problem in other parts of the world.
Second, I have instructed the Director of the Budget to find ways of reducing
the numbers of American civilians working overseas.
Third, I have instructed the Secretary of Defense to find ways to reduce
further the foreign exchange impact of personal spending by U.S. forces and
their dependents in Europe.

5. Export increases
American exports provide an important source of earnings for our businessmen
and jOjbs for our workers.
They are the cornerstone of our balance of payments position.



Last year we sold abroad $30 billion worth of American goods.
What we now need is a long-range systematic program to stimulate the flow
of the products of our factories and farms into overseas markets.
We must begin now.
Some of the steps require legislation:
I shall ash the Congress to support an intensified five year, $200 million
Commerce Department program to promote the sale of American goods overseas.
I shall also ask the Congress to earmark $500 million of th e'Export-Import
Bank authorization to:
Provide better export insurance.
Expand guarantees for export financing.
Broaden the scope of Government financing of our exports.
Other measures require no legislation.
I have today directed the Secretary of Commerce to begin a Joint Export
Association program. Through these Associations, we will provide direct financial
support to American corporations joining together to sell abroad.
And finally, the Export-Import Bank—through a more liberal rediscount
system—will encourage banks across the Nation to help firms increase their
-6. Nontariff "barriers
In the Kennedy Round, we climaxed three decades of intensive effort to achieve
the greatest reduction in tariff barriers in all the history of trade negotiations.
Trade liberalization remains the basic policy of the United States.
We must now look beyond the great success of the Kennedy Round to the
problems of nontariff barriers that pose a continued threat to the growth of
world trade and to our competitive position.
American commerce is at a disadvantage because of the tax systems of some
o f our trading partners. Some nations give across-the-board tax rebates on exports
which leave their ports and impose special border tax charges on our goods
entering their country.
International rules govern these special taxes under the General Agreement on
Tariffs and Trade. These rules must be adjusted to expand international trade
In keeping with the principles of cooperation and consultation on common
problems, I have initiated discussions at a high level with our friends abroad
on these critical matters—particularly those nations with balance of payments
These discussions will examine proposals for prompt cooperative action among
all parties to minimize the disadvantages to our trade which arise from differ­
ences among national tax systems.
We are also preparing legislative measures in this area whose scope and
nature will depend upon the outcome of these conditions.
Through these means we are determined to achieve a substantial improvement
in our trade surplus over the coming years. In the year immediately ahead, we
expect to realize an improvement of $500 million.
7. Foreign investment and travel in U.S.
We can encourage the flow of foreign funds to our shores in two other ways:
First, by an intensified program to attract greater foreign investment in
U.S. Corporate securities, carrying out the principles of the Foreign Investors
Tax Act of 1966.
Second, by a program to attract more visito<rs to this land. A Special Task
Force headed by Robert McKinney of Santa Fe, New Mexico, is already at
work on measures to accomplish this. I have directed the Task Force to
report within 45 days on the immediate measures that can be taken, and to
make its long-term recommendations within 90 days.

Our movement toward balance will curb the flow of dollars into international
reserves. It will therefore be vital to speed up plans for the creation of new
reserves—the Special Drawing Rights—in the International Monetary Fund.
These new reserves will be a welcome companion to gold and dollars, and will
strengthen the gold exchange standard. The dollar will remain convertible into
gold at $35 an ounce, and our full gold stock will back that commitment.




The program I have outlined is a program of action.
It is a program which will preserve confidence in the dollar, both at home
and abroad.
The U.S. dollar has wrought the greatest economic miracles of modem times.
It stimulated the resurgence of a war-ruined Europe.
It has helped to bring new strength and life to the developing world.
It has underwritten unprecedented prosperity for the American people, who
are now in the 83d month of sustained economic growth.
A strong dollar protects and preserves the prosperity of businessman and
banker, worker and farmer—here and overseas.
The action program I have outlined in this message will keep the dollar strong.
It will fulfill our responsibilities to the American people and to the Free World.
I appeal to all of our citizens to join me in this very necessary and laudable
effort to preserve our country's financial strength.

T h e S egretart of S tate
St a t e m e n t

I welcome the opportunity to comment on the proposal to remove the require­
ment that Federal Reserve banks maintain a 25% reserve in gold certificates
against the bank notes which they have in circulation.
Confidence in the United States dollar is an important factor in the continuing
efforts of the United States Government to assure that international relations
evolve along lines compatible with the aspirations and requirements of the Amer­
ican people. Confidence in the dollar is an essential element of a healthy, expand­
ing world economy. This growth is vital to the well being of the other countries
o f the world and to the security and prosperity of the United States itself. Prompt
enactment of legislation removing the “gold cover” requirement will demonstrate
to the world the determination of the United States Government to keep the
dollar strong.
This action is especially timely now following the recent changes in the value
o f other currencies and the accompanying speculative flurries in world gold
markets. I believe that explicitly freeing our entire gold stock to be available to
buttress the international position of the dollar will materially reinforce the
world's confidence in the dollar, and will support the efforts Americans are being
asked to make in the new balance of payments program.
I hope that the Congress will, by eliminating the “gold cover” requirement,
contribute significantly to our strength and effectiveness throughout the world.
D ean R u s e .

Chairman P a t m a n . Just one question that I want to ask you. All
Federal Reserve notes and U.S. notes will be on a parity, as they have
teeninthe past?
Secretary F owler . Yes, sir.
Chairman P a t m a n . There will be no change and there will be no
effort made to discontinue the printing of U.S. notes ?
Secretary F owler . No.
Chairman P a t m a n . You will continue to print them as they are
needed, as you have in the past ?
Secretary F owler. Yes, sir.
Chairman P a t m a n . Mr. Martin, we are delighted to have you.
You may proceed in your own way.



M r . M a r t in . The Board of Governors of the Federal Reserve Sys­
tem recommends prompt enactment of legislation to repeal the stat­
utory provisions that now require each Federal Reserve bank to
maintain reserves in gold certificates of not less than 25 percent of its
Federal Reserve notes in circulation. Some change in this requirement
this year or next will be unavoidable as the volume of our currency
grows in response to the demands of a growing economy. Its repeal
now would help to make absolutely clear that the U.S. gold stock is
fully available to serve its primary purpose as an international mone­
tary reserve.
I want to emphasize that elimination of the cover requirement would
in any event be needed in the relatively near future even if there were
no further net sales of gold to foreigners. Federal Reserve notes in
circulation increase each year with growth in our economy. The in­
crease in 1967 was more than $2 billion, and this alone added more than
$500 million to the amount of gold required under present law to be
held as cover for Federal Reserve notes. Moreover, our domestic in­
dustrial and artistic uses of gold, over and above domestic production,
amounted to $160 million last year, and such uses can be expected to be
at least that large in the future. These two factors together would re­
duce our free gold—the amount of gold over and above that required
as cover for notes—by about $700 million a year. At that rate, our
free gold, currently $1.3 billion, would be absorbed in less than 2 years,,
even in the absence of further sales of gold to foreigners. And it
would be unrealistic, of course, not to allow for some additional foreign
purchases. Thus, it is clear that a change in the cover requirement is
unavoidable, and cannot be postponed for long.
It is true that Congress has given the Federal Reserve Board au­
thority to suspend the gold cover requirement for a period of up
to 30 days and to renew such suspension for 15-day periods thereafter.
But this authority, granted at a time when Federal Reserve notes were
convertible into gold domestically, was not designed to deal with present-day conditions. With growth in the economy the attendant need
for steadily increasingly currency in circulation will certainly con­
tinue. To provide the additional currency requires a permanent change
in the law, rather than Board action every 15 days.
The primary function performed by gold today is not as a reserve
against domestic currency but as a monetary reserve for use interna­
tionally. The major part of the U.S. international monetary reserve
is in gold. Since midyear, our gold stock has declined by more than



$1 billion, and it now amounts to about $12 billion. In order to arrest
this decline, we must achieve a major improvement in our balance of
payments. That is the objective of the program announced by the Pres­
ident on J anuary 1.
But while we are taking the fundamental steps needed to bring our
international payments into equilibrium and stop the drain on our
gold reserves, we should make it absolutely clear that all of our gold
stock is available to serve its primary purpose, and thus discourage
market speculation against the dollar or anticipatory takings of gold
by central banks. Speculation against the dollar might be encouraged
if the gold cover requirement were regarded as immobilizing part of
our reserves; the labeling of only part of our gold reserves as “ free”
might seem to imply that the rest of our reserves are somehow unavail­
able to perform their primary function of maintaining the converti­
bility of the dollar. Any possible misunderstandings on this point
should be put at rest. This legislation would do that.
Removal of this requirement would in no way reduce our determi­
nation to preserve the soundness of the dollar. To achieve our goals
both domestically and internationally we must pursue sound and
equitable fiscal and monetary policies.
Convertibility of the dollar into gold at a fixed price—$35 an
ounce—is a keystone of the international monetary system and is a
fundamental reason why foreign monetary authorities are willing to
hold dollar reserves. The role of the dollar as the major international
reserve currency, together with the readiness of private foreign resi­
dents to hold dollar assets, places the dollar in a unique position in
international commerce and finance. Prompt enactment of legislation
to remove the gold cover requirement would reaffirm to the world the
convertibility of the dollar. At the same time it would meet the longrun requirements for an expansion in note circulation commensurate
with steady growth in the economy.
Thank you.
Chairman P a t m a n . Thank you very much, Mr. Martin.
Mr. Widnall wanted to make a request for the filing of informa­
tion, since obviously we will not have time to interrogate you gentle­
men this morning.
Mr. W id n a l l . Thank you, Mr. Chairman; with the complete under­
standing that it will be subject to call later after you have testified
before the Ways and Means Committee.
I would just ask one question now. Would you provide for the
record the amount of gold that was bought and sold last year through­
out the world, what nations absorbed that production, and I think
that is all to start.
M r . M a r t in . Yes, sir.
Secretary F o w ler . Congressman Widnall, we will supply that. I
don’t know whether it is available here now, but we will try to get it
.as complete as possible before the end of the day.



(The information requested follows:)

in G o ld H o ld in g s —1967

Fall data on changes in gold reserves for 1967 are not yet available. For the
first three quarters of the year the picture is as follows:
[In millions of dollars]

Changes in gold reserves of—
United States___________________________________________________—163
United Kingdom-------------------------------------------------------------------------- —109
Industrial Europe----------------------------------------------------------------------- —35
Canada_______________________________________________________ +53
Other developed areas___________________________________________ —109
of which—
South A frica ___________________________________________ —109
Portugal----------------------------------------------------------------------- 4-47
Latin America----------------------------------------------------------------------------


of which—


Middle Bast___________________________________________________
Other areas____________________________________________________
A frica --------------------------------------------------------------------------------------


Total, all countries____________________________________________—290
IMF _________________________________________________________ +27
EPU__________________________________________________________ - 1 4
B I S --------------------------------------------------------------------------------------------+60*
Total, loss monetary gold_______________________________________ —225
Plus new production (estimated)-------------------------------------------------- 1,050
T o ta l_______________________________________________________ 1,275
N ote. —The

above data indicate that private sources absorbed all of new production and
about $225,000,000 additional from monetary stocks in the first 3 quarters of 1967. Of the
private use in this same period it is estimated that about $540,000,000 was for industrial
(including artistic) use.

Mr. W i d n a l l . I think there is something to b e answered on page 4 of
your statement, where you say “gold belongs in a nation’s international
Secretary F o w l e r . I think it is a reference to the most important
functional purpose rather than a definition of the title thereto.
Chairman P a t m a n . Thank you, gentlemen, very much. With the
thanks of the committee, we will release you for the present.
Mr. R euss . I ask that there be inserted in the record at this point
an exchange of letters between myself and the Treasury, to the effect
that the Congress, and only the Congress, has the power to change the
price of gold.
Chairman P a t m a n . Without objection, so ordered. And without ob­
jection, I would like to insert in the record at this point a statement by
the American Bankers Association approving the bill; a newspaper
article quoting remarks of Mr. Alfred Hayes, president of the Federal
Reserve Bank of New York, approving the bill; and a statement by
Mr. David Rockefelelr, of the Chase-Manhattan Bank, approving the



(The material referred to follows:)
Jan u ary

22, 1908.

H on . H e n r y H . F o w ler ,

Secretary of the Treasury,
Department of the Treasury, Washington, D.C.
D e a r M r. S e c r e ta r y : I wish to ask you a question concerning the legal intri­
cacies of changing the price of gold. M y impression is that when one considers
the various laws relating to this subject, including the Gold Reserve Act of
1934, the Bretton Woods Agreements Act of 1945, the Articles of Agreement o f
the international Monetary Fund, and our commitments thereunder, it becomes
clear that the power to change the price of gold is placed in the Congress of
the United States.
I hope that you can confirm to me that my impression that only Congress can
change the price of gold is correct. I would add that it is my determination—
one that I believe is widely shared in the Congress—never to authorize an
increase in the present price of gold, since to do so would not only break the
faith with those who have expressed confidence in the dollar, but would unjustly
reward those speculators who might seek to undermine confidence in the dollar.
H e n r y S. R e u ss,
Member of Congress.
T h e U nder S ecretary of t h e T r easu ry ,

Washington, D.C., January 23, 1968..
Hon. H e n r y S. R e u s s ,
Home of Representatives,
Washington, D.C.
D e a r M r. R e u s s : This is in reply to your letter of January 22,1968, in which
you state that when one considers the various laws and international obliga­
tions relating to gold, it becomes clear that the power to change the price of
gold is placed in the Congress of the United States.
The use and price of gold in the International Monetary System is governed
by a complex of provisions of United States laws and international obligations.
These include the Gold Reserve Act of 1934, the Bretton Woods Agreements
Act of 1945, the Articles of Agreement of the International Monetary Fund, and.
our commitments thereunder. The basic fact is that the United States has com­
municated to the Fund a par value of $35 per fine troy ounce of gold. This
par value may not be changed without legislation by the Congress, and it is
the par value of the dollar which effectively fixes the price at which the United
States may buy and sell gold. While the Gold Reserve Act of 1934 authorized
the Secretary of the Treasury to buy and sell gold on terms and conditions he
deems advantageous, as a practical matter he cannot do so at a price other than
$35 because of our commitments under the Fund Articles which have been
approved by the Congress and which cannot be changed without Congressional
I am pleased to note that it is your view, and that of otfce^s in the Congress,,
that we must maintain the price of gold at $35 per ounce. As you know, this
Administration has reiterated time and time again our determination to main­
tain the soundness of the dollar and to keep gold at its present price. As recently
as last week in his State of the Union Message, President Johnson stated: “We*
have assured the world that America's full gold stock stands behind our com-,
mitment to maintain the price of gold at $35 an ounce. We must back this comr
mitment by legislating now to free our gold reserves.”
Sincerely yours,
Josep h W. B a r r .
T h e A m e r ic a n B a n k e r s A s s o c ia t io n ,

Washington, D.C., Janwry 26, 1968.
Hon. W r i g h t P a tm a n ,
Chairman, Banking and Currency Committee, U.S. House of Representatives,.
Washington, D.C.
D e a r Mr. C h a ir m a n : Enclosed is a statement of the position o£ the American
Bankers Association on the recommendation made by President Johnson in his.
State of the Union Message for removal of the gold cover.



This statement has been approved by our Administrative Committee and repre­
sents the official position of the Association. We ask that it be included in the
record of the hearings your Committee is currently holding on H.R. 14743 and
related legislation.
C h arles R . M

cN e il ,

Director, Washington Office.
Sta te m e n t




m e r ic a n




s s o c ia t io n

The continued efficient operation of the international monetary system—based
upon gold and the dollar—is threatened by the statutory requirement that Fed­
eral Reserve notes be backed by 25 per cent in gold. Although it is therefore
clear that the requirement must be relaxed or removed, such action will be use­
less and actually harmful in the long run unless Congress and the Administra­
tion take firm accompanying steps to eliminate our chronic balance of payments
deficit and dismantle existing foreign exchange controls. Otherwise, gold will
continue to flow abroad—$12 billion, or half of our gold stock, has moved out
since 1949—leading ultimately to a gold embargo or dollar devaluation, and a
breakdown in the international monetary system.
The steps necessary for elimination of our payments deficit and the ultimate
dismantling of exchange controls (which in the long run are self-defeating)
A frugal, no-fat Presidential budget for the coming fiscal year; cuts should
be made in all noncontractual categories except direct Vietnam spending;
Congressional enactment at the earliest possible date of the President's
proposed income tax surcharge; and
A relentless program to reduce the heavy outflow of dollars resulting from
our foreign military and economic aid, including cutbacks in troops and de­
pendents stationed in Western Europe.
These measures are severe but necessary. They recognize that the root causes
of our balance of payments deficit are inflation and economic overheating at
home and excessive Federal spending abroad. Until there is clear and convinc­
ing evidence that these causes are to be attacked effectively at their source—
more effectively than in the President’s message of January 1—any change in
the gold reserve requirement, however, necessary to maintain confidence in the
dollar in the short run, could in the long run actually undermine or destroy
that confidence.
[From the Washington Post, Jan. 23,1968]
P er m a n en t C ure H


N eeded




I lls

N e w Y o r k , January 22.—Alfred Hayes, president of the Federal Reserve
Bank of New York, said today the dollar crisis appears to have been surmounted
by President Johnson’s balance-of-payments restrictions and the cooperation of
major industrial countries.
“While we have made an excellent start, a great deal remains to be done,”
Hayes told the midwinter meeting of the New York State Bankers Association.
“I can see a risk that some Americans may mistake a necessary remedial crash
program for a permanent cure,” Hayes said.
“Interference with the free movement of capital and with tourist spending
is certainly neither a desirable nor a practicable long-run solution of the prob­
lem,” he said.
Hayes endorsed President Johnson’s proposal to remove the gold cover from
Federal Reserve notes.
Hayes said the President’s balance of payments restrictions “as a whole deserve
the nation’s full support, both because the Administration now seems deter­
mined to conquer this hitherto intracable problem, and because there is an
evident desire to spread the burden of remedial measures as widely as possible.”
Concerning a tax boost, Hayes said an increase “along the lines proposed
by the President is essential to achieve fiscal restraint on the scale needed . . .
I am hopeful that the sheer necessity of a tax rise will bring it into being with­
out further delay.”
Reductions in Federal spending that would be “large enough to deal with our
present problems are simply not feasible,” he said.


Ch ase M

an hattan


an k


New York, N.Y., January 22,1968.
Hon. W e i g h t P a t m a n ,
Chairman, Banking cmd Currency Committee,
House of Representatives, Washington, D.C.
D e a r Me. C h a i b m a n : The House Committee on Banking and Currency is now
considering a bill you have introduced to eliminate the present requirement that
the Federal Reserve maintain gold certificates equal to 25% of its note liabilities.
I should like, by means of this letter, to indicate my support for that legislation.
In supporting removal of the so-called “gold cover” , I do not in any way want
to detract from the central importance of bringing the long period of gold losses
to an early end. We should be clear that removing the cover in no way meets that
basic need. Indeed, the fact that our gold stock has now declined to the point
where the reserve requirement must be relaxed is itself a symbol and warning
of the need for more fundamental measures to protect the dollar.
I am deeply disturbed by growing evidence at home and abroad of spreading
uncertainty over the stability of the international monetary system, which rests
so heavily on the stability of the U.S. dollar and its convertibility into gold. Our
economic policies must, it seems to me, be directed as a matter of national
priority at the basic sources of that concern—namely, the strong and evident
inflationary pressures in the domestic economy and the long-standing balance of
payments deficit. I see no alternative, in meeting these problems, to the disciplines
of responsible monetary and fiscal policies. Specifically, I strongly feel that the
present situation demands both vigorous control on Federal spending and a
temporary tax increase adequate to achieve a decisive reduction in the Federal
budgetary deficit.
Important as it is to stem the losses of gold, the present gold reserve require­
ment is not, in my opinion, a useful means to that end. Instead, it has perverse
effects. Under present and foreseeable conditions, maintenance of the require­
ment would give rise to unnecessary and dangerous uncertainty over our settled
policy to convert dollars held by foreign governments and central banks into
gold upon demand.
Recent losses of gold and rising levels of Federal Reserve notes in circulation
have now reduced the margin of gold in excess of requirements to about $1*4
billion. Given the size of our balance of payments deficit in recent months, the
time necessary to stem the outflow of dollars even with forceful and effective
policies, and the unsettled atmosphere in world financial markets, that margin
is insufficient to meet possible demands. Moreover, looking to the future, the
prospect that a growing economy will require increased circulation of Federal
Reserve notes, thus impounding more of our gold into the required reserve, would
further squeeze the available margin of gold.
I recognize there is a clause in present law that would enable the Federal
Reserve to suspend the gold reserve requirement. However, my own contacts
abroad confirm that this rather vaguely worded provision is not understood.
Moreover, the provision appears to be designed to meet temporary emergencies.
I would certainly support use of the emergency provision if absolutely neces­
sary to meet our pledges with respect to gold. But I believe reliance on that
escape clause for a prolonged period could only contribute to continued uncer­
tainties in world financial markets. It would pose a grave risk of accelerating
the demand for gold by stimulating unnecessary fears that gold sales will shortly
be terminated by the U.S.
Consequently, I see no satisfactory alternative to relaxing the present gold
reserve requirement. Elimination of the requirement altogether would ,be an
effective expression of the repeated and appropriate pledges by the President
to maintain and defend the present value of the dollar with all the means at our
But I urge that this removal be recognized for what it is—a stop gap measure
that can be useful only as part of a broad and effective attack on inflation and
the balance of payments deficit through responsible fiscal and monetary policies.
Sincerely yours,
D a v i d R o c k e f e l l e r , President.

Chairman P a t m a n . All right, Mr. Barr and Governor Robertson.
We are glad to have you, gentlemen. Do you have a prepared state­
ment, or do you j ust want to answer questions ?




Mr. B arr . I have no prepared statement. Governor Robertson and
I are at your disposal and the disposal of the committee to answer
the questions you may have.
Mr. R obertson . Or try to.
Mr. B ar r . Or try to.
Chairman P a t m a n . Mr. Widnall would like to be recognized for a
statement, and certainly he will be.
Mr. W id n a l l . Thank you , Mr. Chairman.
I am making this statement on behalf of the Republican members
of this committee.
We are deeply concerned over the need for legislation removing the
gold cover from Federal Reserve notes. We are unified in calling for
full and complete hearings before action is taken on this most im­
portant question.
Three years ago, we cooperated with the Johnson administration
when we agreed to brief committee hearings and prompt action on the
bill to remove the gold cover from Federal Reserve deposits. Then, as
now, we were told that favorable action would reinforce world con­
fidence in the future of the dollar; that by putting more gold chips
on the table we would assure the world that we were not bluffing m
our desire to maintain the sanctity of the dollar.
Then, as now, the administration tried to convince the Nation and
the world that our balance-of-payments deficits could be cured if
private industry and banking “temporarily” cut back on their profita­
ble worldwide investments. With a shrug of the shoulders and a curi­
ous sense of national purpose, Congress, the public, the media, and
business and banking willingly joined forces with the administration
in that “voluntary” effort.
In the 3 intervening years the plight of the dollar has gone from
bad to worse. During that time the congressional committees with
legislative jurisdiction over international monetary affairs—primarily
ours—have ignored the growing payments crisis, apparently hoping
that the problem would go away. Businessmen and bankers did little
more than grumble, while hailing every administration promise that
suspension of the temporary voluntary restraints program was just
around the comer. Fortunately, many of our Nation’s top experts in
the field of international finance resisted the paths of least resistance
by repeatedly asserting the dangers of existing policies. Few of us
We are here this morning more at the request of international bank­
ers and speculators than of the Johnson administration. Our chronic
balance-of-payments problem has put us in the unenviable position of
having to respond to those in foreign lands who threaten to cash in
their dollar balances for gold unless we adopt their monetary and fiscal
dictates. The political course would be to condemn De Graulle, con­
demn the gnomes of Zurich. While they deserve to be criticized for
their shortsighted actions, to vent our frustrations in this manner alone
would be as fruitless as throwing over the poker table when your oppo­
nents failed to be bluffed out of a large pot.
The name of the game has been and always will be “confidence.” The
administration apparently feels that confidence can be restored by
making available for sale the last remaining gold, while adopting
short-run expedients aimed at short-run gain and long-run disaster.
The President’s latest balance-of-payments program clearly and un­



mistakably aims at funding deficits caused by Government actions with
artificially induced receipts from private investment while asking
Aunt Nellie to postpone her foreign vacation. Many foreigners ap­
plauded the President’s action, not because their confidence was re­
stored but because they welcomed the mandatory controls over compe­
tition from U.S. direct investments. Many who should know better
here at home reluctantly go along with the program because they
believe shortsighted policies can be tolerated for a short time. What
they fail to realize, however, is that, to the extent the President's
balance-of-payments program significantly reduces the deficits, the
need for undertaking a full review of our economic policies here at
home and our commitments abroad can be postponed. In short, history
has taught us that the degree to which shortsighted expedients are
successful insures their continuation. And, if we continue to downgrade
the role of U.S. capital movements and direct investments overseas—
where our comparative advantage vis-a-vis the rest of the world is
greatest—then surely our Nation’s future world leadership will be
Before Congress accepts at face value the priorities established in
President Johnson’s balance-of-payments program, the appropriate
committees of Congress should undertake extensive hearings. Because
a major portion of the current program finds its authority in section
5(b) of the 1917 Trading With the Enemy Act (12 U.S.C. 05a) of
the banking statutes, our committee would be the most appropriate
choice. Such hearings should explore the following subject areas of
immediate concern:
1. U.S. ability to maintain or increase balance-of-trade surpluses.
Since 1962, the U.S. share of total world export of manufacturers
significantly has declined. Without Public Law 480 and foreign aid
grant programs tied to U.S. exports our trade surpluses would be
virtually eliminated.
2. The extent to which the growth of “regionalism” and worldwide
commodity agreements have adversely affected our balance of trade,
together with a full review of foreign nontariff barriers.
3. Full disclosure to the extent possible of the factors accounting for
the huge fourth quarter—1967—balance-of-payments deficit and the
extent to which further liquidation of U.S. securities by foreign
nations could cause recurrent balance-of-payments dislocations.
4. A full review of the role of the gold speculator and the extent to
which various devices could be employed to counter gold speculation.
5. The extent to which the United States can maintain bilateral and
multilateral assistance at current levels in view of the Treasury Deartment’s admission that “tied” grants and loans create a significant
egree of substitution resulting in little net gain in exports.
6. Whether or not domestic labor costs have adversely affected U.S.
exports to the degree suggested by the Johnson administration. Treas­
ury figures indicate they have not.
7. The adverse impact on U.S. trade balance that would be caused by
threatened postponement of purchases by foreign-flag carriers of U.S.
commercial jet aircraft in retaliation for the proposed clampdown on
U.S. tourist travel. In this connection, the balance-of-payments impact
of the F - lll contract cancellation by the United Kingdom and the
degree to which the balance-of-trade surplus depends upon arms sales.




8. The charge that less than 10 percent of U.S. dollars accruing to
the Government of Vietnam from piastre sales for the support of U.S.
forces in Vietnam find their way back to the United States. The
House Committee on Government Operations estimates that for 1967
the Government of Vietnam expended about $300 million of its foreign
exchange derived in this manner for imports, and that less than 10
percent will be spent in the United States.
9. Long-term effects on U.S. overseas business interests caused by
controls over capital flows, direct investments, and forced repatria­
tion of profits. Does the President’s program suggest extraterritorial
law with regard to the internal operation of joint ventures?
10. The extent or lack of international cooperation in the operation
of the London “gold pool.”
We recognize that the primary responsibility for conducting our
international monetary affairs rests with the executive branch. Never­
theless, the role of Congress is one of review and independent assess­
ment. Congress has failed to assume this responsibility in connection
with a specific legislative request of major importance, such as the bill
before us.
We urge that these hearings on the gold cover bill include witnesses
representing the best talent available from business, labor, and bank­
ing, as well as the academic community.
Thank you, Mr. Chairman.
Chairman P a t m a n . I wanted to pursue just briefly the question I
asked Mr. Fowler about U.S. notes.
Now, it is my understanding that the passage of this bill will not
affect any money that is now outstanding?
Mr. B ar r . That is correct.
Chairman P a t m a n . All money will be on a parity, one with the
Mr. B arr . That is correct.
Chairman P a t m a n . All legal tender ?
Mr. B ar r . That is correct.
Chairman P a t m a n . I f you owe a debt or if you owe taxes, or any
obligation that you have, you may tender to the person to whom you
owe the debt a certain amount of any of this money ?
Mr. B ar r . That is correct.
Chairman P a t m a n . U.S. Federal Reserve notes, Treasury notes of
1890, pennies, nickels, dimes, quarters, what have you, all must be
accepted in payment ox debts.
Mr. B arr . That is correct.
Chairman P a t m a n . It pays the debt ?
Mr. B ar r . Yes.
Chairman P a t m a n . So I wonder what better money you can have
than that, especially with our huge debts and taxes today.
Now, Governor Kobertson, you agree with that, do you not?
Mr. R obertson . Very much so. This is the law of the land.
Chairman P a t m a n . It is our understanding there is a law—it has
been a long time since I have gone into it—that U.S. notes cannot be
retired without an act of Congress.
Mr. B arr . That is correct.
Chairman P a t m a n . That there are $322 million approximately,
known as the Lincoln greenbacks. That is correct, too ?
Mr. B ar r . Yes, sir; $322 million.



Chairman P a t m a n . And that money is on a par with the Federal
Reserve notes. I f this bill passes they will still be on a par with Fed­
eral Reserve notes and just as good as Federal Reserve notes for any
purpose in the world----Mr. B arr . Yes, sir.
Chairman P a t m a n (continuing). By any person who desires to use
Mr. Widnall, would you like to ask questions ?
Mr. W id n a l l . I will forgo asking questions at this time.
Mr. B arr . Mr. Chairman, Mr. Widnall alluded to several factors
in his statement. I am prepared to address any of these factors. He
enumerated 10 points. I am prepared, as I listened to the statement, to
comment on any of them except Vietnam, and I can supply that for the
I am prepared to comment on any area, although we are here to
testify on the bill that is pending before the committee. I thought it
was only responsible and reasonable that we be prepared to answer
any questions that this committee may want to ask in the entire inter­
national financial area.
Mr. W id n a l l . Well, the particular question that I pose is whether
or not domestic labor costs have adversely affected us to the degree sug­
gested by the Johnson administration. The Treasury figures indicated
they have not. Why is this ?
Mr. B arr . I will supply this for the record, sir. But I can give you
a tentative answer at this time. It would seem that U.S. labor costs, as
an element in the cost of what we produce declined in the period 196065, taken as a whole. Recently, however, there has been a turnaround.
I am not certain whether or not this turnaround has been reflected
in recent figures. But over the whole period there was an actual decline
in the cost of the labor input in the production of U.S. goods and serv­
ices. I will submit for the record further information.
(The information referred to follows:)
The data on comparative unit labor costs given in Table 7 of the Treasury
document were fuU-year averages, and thus not available beyond 1966. Even these
figures show, however, a 2-point increase in the index of U.S. unit labor costs in
1966 over 1965, compared with decreases of 3 and 4 points, respectively, for
France and Italy.
A similar comparison through September 1967 of available quarterly data on
this subject (expressed in terms of percentage changes from year-earlier levels)
is shown in the following table.

Years and quarters

1965 (average)..............................

Percent increases (from year-earlier levels)
---------------------------------------------------------------------------United States


- 4 .4




If: : : : : :



- 3 .2
- 4 .8


- 3 .5
- .9
- 2 .6



- .8

- 5 .6
- .8




Sources: Based on available quarterly (or monthly) indexes: for the United States, from Business Cycle Developments,
Department of Commerce; for other countries, from Economic Review, published by (United Kingdom) National Institute
of Economic and Social Research. These data differ from those given in table 7 of the Treasury document “ Maintaining the
Strength of the U.S. Dollar in a Strong Free World Economy" in that the latter are based on GNP accounts (not available
on a quarterly basis for most industrial countries) whereas the quarterly data are based on production indexes.



What these more recent data show is that:
Our own unit labor costs, following a persistant though moderate down­
ward trend over the 4 years 1961-65, turned upward again early in 1966 and
have since the beginning of last year been rising at an accelerated rate;
Whereas the corresponding cost indices of several of our major foreign
competitors, which had during the 1961-65 period been rising at rates rang­
ing from 3.5 to 6 percent per annum, have since the beginning of 1966 either
leveled off sharply or actually declined.
The recent sterling devaluation will, of course, tend to add to the weakening
of our international competitiveness implied by this new adverse trend in our
domestic currency costs relative to the United Kingdom and other countries.
The improving trend in our relative cost and price position which was evident
through the early 1960's did not, admittedly, bring as much improvement in our
export position and trade surplus as would have been necessary to eliminate our
payments deficit. However, it was certainly one of the important factors helping
to offset various other developments adversely affecting our trade position, such
as the continuing growth of effective manufacturing capacity in countries such
as Italy and Japan.
In considering either this earlier period of relative improvement or the cur­
rent danger of relative deterioration in our cost and price competitiveness in­
ternationally, there are several further points as to the causal relationships
between cost and price developments and international trade patterns which
should, however, be noted:
The trade effects of changes in relative costs and prices are not imme­
diate, but instead occur gradually, after some delay. By the same token,
however, they also tend to persist for a considerable period.
In addition, there are many other factors which—particularly in the
short run—also affect the levels of both our exports and our imports. These
include: (a) absolute and relative changes in over-all levels of business
activity here and abroad; (b) the commodity and country pattern of the
aggregate increases in world demand; (c) the extent to which we or our
competitors have slack resources available; and (d) changes in tariff struc­
tures and various other arrangements affecting trading relationships.

Mr. W i d n a l l . In the book that you issued in January, “Maintain­
ing the Strength of the United States Dollar in a Strong Free World
Economy,” on page 79 there is an analysis in table 7 of the unit labor
costs of "manufacturing in selected industrialized countries since 1961.
The U.S. figures are quite constant—1962 to 1966.
Mr. B arr . The costs declined through 1965, but rose in 1966.
Mr. W id n a l l . With all the other countries, with the exception of
Canada, there is a marked increase, very marked increase.
Mr. B ar r . That is correct.
Mr. W i d j s t a l l . Now, at the same time, our figures in connection with
trade are going down, our balance-of-payments situation has worsened
and worsened badly.
Would you give us, for the record, a breakdown of the fourthquarter balance-of-payments situation ?
Mr. B ar r . We do not have those figures yet, Mr. Widnall, and they
won’t be available until roughly the middle of February. We can’t give
you a detailed analysis. I can tell you a main cause, however, of the big
shift, was the sale by the United Kingdom of $570 million of secu­
rities which she held in the United States.



As you realize, the United Kingdom was under pressure. She held
these securities and she sold them and that was one of the main reasons
for the very large swing in the fourth quarter.
Mr. W id n a ll . The figures, I think, you also issued, show $600
Mr. B arr . $570 million was the amount of securities.
Mr. W id n all . T o what extent do the other countries hold U.S. Gov­
ernment securities, and to what extent does this pose a threat to future
balance-of-payments deficits in the same manner as the fourth-quarter
liquidation by the United Kingdom did ?
Mr. B arr . Other governments hold U.S. obligations, which they
hold in their reserves. The total amount of obligations held by othei*
nations I will furnish for the record. We have a table we can furnish
for the record.
Mr. W id n a ll . Y ou will put them in for each country, for the
Mr. B arr . Yes, sir.
(The information requested follows:)
The large adverse impact of securities liquidations by the United Kingdom
^Government on our balance of payments during the fourth quarter of last
year represented the final step in the conversion into liquid form of the re­
maining balance of a large investment portfolio of U.S. corporate securities
which the United Kingdom Government had requisitioned from private United
Kingdom citizens and firms at the outset of World War II.
While there are no available statistics which would show the existence or
extent of possible holdings of U.S. corporate stocks and long-term bonds
other than Treasury issues by other foreign governments or central banks* we
are not aware of, and have no reason to believe that there are likely to be,
any other cases similar to that of the United Kingdom involving signficant
holdings of investment portfolios of U.S. stocks and long-term bonds by foreign
official institutions.
What the United Kingdom did in the forth quarter, and the reason that this
had an adverse effect on our balance of payments, was to convert the remaining
balance of these long-term investment holdings into forms that are treated in
<*ur balance-of-payments accounting as liquid liabiUties to foreigners. This act
of converting, therefore, appears as a capital outflow on the liquidity balance.
All of the long-term U.S. securities that we know to be held by other foreign
governments and central banks represent either marketable U.S. Government
bonds and notes or special nonmarketable Treasury securities, a good part of
which are convertible into marketable issues. These foreign holdings of market­
able and convertible nonmarketable U.S. Government securities are already
included in our statistics on Uquid liabiUties to foreign official institutions,
and for this reason their possible conversion into other types of liquid dollar
assets would have no effect on our balance-of-payments deficit.
There follow three tables. The first shows foreign holdings, by country, of
U.S. Government bonds and notes. This table includes private foreign holdings
as well as official foreign holdings. The second table shows, by country, the
special nonmarketable securities held by foreign official institutions. The third
table is a summary table showing total official foreign holdings o f long-term
U.S. Government securities by type since 1950, the first year for which these
data are available.


[Position at end of period in millions of dollars]


France......... ............................................
Italy........... ..............................................
Netherlands________ ______________
Portugal........................... .......................
Sweden.................................................. ..

----------------------------- ---------------------------------------------1963 1964 1965 1966 May June July August SepOctember1 tober*






















unitee/k ]n id 6 m v : : : : : : : : : : : : : : : :
(328 (4i4
3^ 8
% 3
Yugoslavia........................................................................................................ .. .................................................. ....................................
Other Western Europe.........................
U.S.S.R............................................................................................................................. ...............................................................................
Other Eastern Europe..........................
Total, Europe.....................................
Latin America:

605 " 613
__687 _690 __676 _692 __719 _716 _ 7 £ _ j ^

Total, Latin America........................
AS,aChina mainland................................






1 C 2)











o»1| 81














»; «; ®! 8,















Total, Africa.......................................
Other countries:
All other..................................................
Total, other countries......................











8, 1 8,

62 ___62







- - 9

- is














63 ___63


8 ,1

(2) \

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







9 _____16 ___ 16 ___ 15 ___ 28 ___28 ___28 ___ 22 ___ 22 ____ 22

See footnotes at end of table, p. 35.




Congo (Kinshasa)...........................................................................................................................
s o u K t o :::::::::::::::::::::



( 2)
( 2)
Other Asia..............................................
Total, Asia..........................................


I I 1I 1I I I 1I

Other Latin American Republics___
Bahamas and Bermuda.......................
Netherlands Antilles and Surinam..
Other Latin America............................























{Position at end of period in millions of dollars]








































Grand total....................................... .. 2,742 2,405 2,329 1,713 1,680 1,685 1,685 1,666 1,671


International and regional:
International......................... ................
European regional________________
Latin American regional.....................
Asian regional.......................................
Total, international and regional.


August SepOctember1 tober*

* Preliminary.
2 Less than $500,000.
Note: Data represent estimated official and private holdings of U.S. Government securities with an original maturity
of more than 1 year, and are based on a July 31, 1963, survey of holdings and regular monthly reports of securities


[In millions of dollars or dollar equivalent]
Payable in foreign currencies

Payable in dollars






i Includes bonds issued to the Government of Canada in connection with transactions under the
Columbia River treaty. Amounts outstanding were $204,000,000, September 1964 through October
1965; $174,000,000, November 1965 through October 1966; and $144,000,000, November 1966
through latest date.

















Bank for


2 Bonds issued to the Government of Italy in connection with military purchases in the United





June........... . . .................... ................



End of calendar year or month



In millions of dollars]
Liquid holdings
End of period

196 0
196 1
1967, November ..




U.S. Govern­
ment bonds
and notes1

Nonmarketable convert­ nonconvertible
U.S. Treasury
ible U.S.
bonds and
bonds and




* Estimated on basis of periodic benchmark surveys and monthly reports of securities transactions.

Mr. W id n a l l . Now, after the progress that was made in connection
with trade as a result of the Kennedy round, we had high hopes for
the present and for the future. It seems that in many instances the
gains that we anticipated have been vitiated by taxes and rebates by
foreign countries.
Mr. B ar r . That is right.
Mr. W id n a l l . I have been reading that there is a move afoot for the
United States to enter for the same type of program-—I believe it has
been mentioned in the press and Ways and Means is seriously con­
sidering this type of action. Does the administration support export
tax rebate and----Mr. B ar r . Mr. Widnall, you have correctly pointed out that since
the Kennedy round has concluded, as we have reduced tariffs, the focus
of attention has shifted to the so-called nontariff impediments to trade,
border taxes, all sorts of regulations and other matters. The President
indicated in his balance-of-payments message of January 1 our con­
cern about these nontariff barriers and indicated our intention to start
intensive negotiations with our allies on this subject and also to dis­
cuss it with the Congress. That is precisely the position he is in at the
moment. We have no formal position as to whether or not we are going
to ask for border taxes, border adjustments in this country, such as the
Europeans use.
Mr. W id n a l l . On page 115 of “Maintaining the Strength of the
United States Dollar m a Strong Free World Economy,” at the foot
of the page it says, speaking about trade restrictions:
If, however, a continued movement toward trade liberalization may be ex­
pected, the economic justification for some part of these capital flows is lessened.

How does that square with what has happened?
Mr. B ar r . Mr. Widnall, I have a different printed copy than you.
You are reading from the bottom of page 115?
Mr. W id n a l l . Was this abandoned i My copy has a gold cover.
Mr. B ar r . Would you read that again? Here you are:
If, however, a continued movement toward trade liberalization may be ex­
pected, the economic justification for some part of these capital flows is lessened.

Would you repeat the question? I see the quotation.



Mr. W id n a l l . “ I f , however, a continued movement toward, trade
liberalization may be expected”----Mr. B ar r . R ig h t.
Mr. W id n a l l (continuing). “The economic justification for some
part of these capital flows is lessened.”
Mr. B a r r . And your question is? The reason for that statement, sir,
is that there has been a feeling in U.S. industry that if the border taxes
and other nontariff barriers, including the tariffs themselves, are main­
tained at a high level in the Common Market, then they only have one
chance to compete and that is to get into the Common Market with a
direct investment, to build a plant within the Common Market itself.
I f these border taxes, if the tariffs themselves are reduced, thene is
less need to build a plant abroad—rather than export from the United
States. That is the thrust of this statement.
Mr. W i d n a l l . Thank you. My time has expired.
Mr. B a r r e tt . Mr. Chairman, I just have a short question. I would
also like to take the opportunity to welcome our former colleague
here. He has always indicated that he is very knowledgeable in this
field and I am certainly very happy when a member who leaves this
committee demonstrates his ability elsewhere.
I was wondering, from the Statement that the chairman made,
does this exclude the printing of all gold notes ?
Mr. B ar r . Mr. Barrett, gold notes have not circulated domestically
in the United States since 1934.
Mr. B ar r ett . I am speaking of the gold certificate, for example.
It would eliminate the 25-percent gold reserve requirement----Mr. B ar r . That is right.
Mr. B ar r e tt (continuing). From the Federal Reserve notes and,
of course, it would also eliminate the $156 million reserve held against
the U.S. notes and Treasury notes of 1890.
Mr. B arr . Yes, sir.
Mr. B a r r ett . N o w , we will discontinue these gold certificates which
have served as a so-called reserve with respect to much of our circulat­
ing currency.
I was wondering now what will be the impact on the States and the
world psychologically, if this move is made.
I would like to say to you gentlemen, for example, in Turkey, many
people buy gold and they have no interest in the bank and they take
the gold and use it in a way that they think it is best protected.
What effect will it have on people of countries such as Turkey ?
Mr. B arr . Mr. Barrett, the position of anyone outside the United
States is not changed in the slightest. The only thing we are saying to
them is that the gold that we have available behind our international
commitments is completely available. We are removing any domestic
limitation and it is completely available to meet our international
The position in the United States is not changed either, sir.
You cannot, if you were to give me $35 today and say give me an
ounce of gold, I would have to tell you it is illegal, I couldn’t do it.
So your position is not changed. The only thing that is removed, sir,
is a ^otential hindrance to the normal issuance of currency that would
apply to the Federal Reserve Board. That is the only thing that is



Mr. B a r r ett . I just want to point this out. Just about 2 weeks ago
I was talking to a gentleman and I asked him where do you live and
he says in an upside-down world. I was wondering, are those people
who are not knowledgeable about gold and who are preserving gold
for their future and old age protection, what effect will it have, the
psychological effect it would have on those people? W ill it create a
disturbance in other countries ? I am sure it will not in the banking
industry and among all knowledgeable people.
Mr. B ar r . Let’s put it this way: Suppose the Congress refused to
give us this legislation today. That would mean that at the most in 2
years we would be up against the dilemma. Then the country would
be faced with some difficult alternatives. I suppose what could happen,
the Federal Reserve Board could quit issuing any more currency and
we would not have any currency to meet the business transactions of
the United States. And, secondly, the people you talk about and other
nations who do, as you put it, put away gold for their security, would
I believe, be more concerned if we do not make it clear that our gold
supply is fully available for international use.
This, I think, could be extremely disturbing in the world itself.
Chairman P a t m a n . Mr. Clawson.
Mr. C l a w s o n . Thank you very much, Mr. Chairman. Mr. Barr, it
has been suggested that I be a punster and find out if your appearance
here this morning is an indication of our willingness to go down to
the very last bar of gold ?
Mr. B ar r . I would subscribe to that statement, sir.
Mr. C l a w s o n . We are willing to go that far ?
Mr. B ar r . Yes, sir.
Mr. C l a w s o n . The statements of Mr. Fowler and Mr. Martin in­
dicated that we may have sufficient free gold to carry us through this
year; and you just indicated within 2 years we will be faced with a
very critical emergency situation, unless we enact legislation of this
The reason for my prefacing my question with that statement is
whether or not 3 or 4 weeks of very extensive hearings in depth by
this committee would interfere with the situation as it now exists—if
we took that long in order to really accomplish the purposes of this
committee in delving into the problems ?
Mr. B ar r . Mr. Clawson, I have learned over the years not to com­
ment upon the legislative possibilities of Congress. We are here today
with a recommendation. W e are urging its prompt enactment. In
urging its prompt enactment, I would not be so presumptuous as to
tell you how to proceed to resolve the issues that are before you. You
can proceed, of course, as you want.
I do want to make it clear and I want to clear up any misunder­
standings, while the Secretary and Chairman Martin said that it is
possible that this would last for 2 years, I want to indicate that it is
highly unlikely. They assumed that there would be no losses in the
London gold market, that no nations would ask to convert dollars into
gold. That is a very, very unlikely assumption, sir.
M r . M iz e . Why do you say that, Joe?
Mr. B arr . Simply because there are $33 billion held by foreigners
and there is an active market in London. The world today is going
through the rather dramatic experience of the British devaluation,



and with a world in today’s situation, Mr. Mize, I think that we must
make it unequivocally clear that we are standing by our international
commitments. I can’t predict what would happen.
I f there were no gold sales by the United States in the year that is
coming up, I would be very surprised indeed.
Mr. C l a w s o n . The Board still has the power under the emergency
provision to use their authority up to 30 days on the 25-percent cov­
Mr. B arr . Yes, sir.
Mr. C l a w s o n . In an emergency situation this could be exercised?
Mr. B ar r . It has been used very rarely—1919,1920, and 1933—and
only in a crisis situation. And a crisis situation is precisely what we
want to avoid.
Mr. C l a w s o n . I f we took 1, 2, or possibly even 3 months before
Congress finally acts on this, do you think we would reach a crisis
situation in that length of time? I thought the indication was we
would not.
Mr. B ar r . I wouldn’t care to predict. We have made our statement
and we have urged prompt action. What we mean by prompt action
and what the Congress determines prompt action to be may be some­
thing else.
Mr. C l a w s o n . That is what I am trying to find out.
Mr. B ar r . We would like to have prompt action. I want this com­
mittee to explore the issues and we will be delighted to do so with you
on anything: you want. The only thing is that I would hope that I would
give you, if I had any druthers, as we used to say in Indiana, I druther
have this legislation out in 30 to 45 days. I f this is not possible because
of the congressional schedule, we will meet it. ^
Mr. C l a w s o n . We have discussed very briefly the gold holdings of
the countries that are involved. It is indicated W some of the figures
that I have looked at that holdings by Belgium, Germany, the Nether­
lands, Switzerland, and the United Kingdom, amount to about $14.6
billion. France, when they were participating, held $5.2 billion more,
making a total of $19,827 million, with the United States having ap­
proximately $13 billion, or $32.8 billion total. This then gave the
United States holdings of approximately 40 percent ?
Mr. B ar r . It was about 42 percent.
Mr. C l a w s o n . We were participating, however, to the level of 50
percent, as far as our participation in the pool is concerned and since
France’s withdrawal, we still now have about 47.5 percent?
Mr. B ar r . R ig h t.
Mr. C l a w s o n . We are participating to 59 percent ?
Mr. B ar r . Yes, sir.
Mr. C la w s o n . D o you think this needs reevaluation and restudy for
the balance of the participation in the situation as a whole?
Mr. B arr . Perhaps, Mr. Clawson, there can be a slight adjustment
here. But, as you indicate, it is not large, in the area. Maybe we are off
5 or 6 percent. I f they increase by 5 percent, we came down by 5
percent, and we would be in the rough balance that you have indicated.
Mr. C l a w s o n . In a critical situation this might mean a great deal to
our country, in connection with the amount of gold we have on hand as
free gold?
Mr. B ar r . Possibly.



Mr. C l a w s o n . M y time has expired. I have quite a number of other
areas that I would like to explore and I hope we can come back.
Chairman P a t m a n . Mrs. Sullivan.
Mrs. S u l l i v a n . I would like to have you clarify one of your remarks
to Mr. Barrett. You said that it is illegal at the present time for you to
sell an individual an ounce of gold for $35. Is that just today? I f this
legislation is passed, would it still be illegal ?
Mr. B ajrr. N o , madam; it has been illegal since 1934. When I say
we can’t sell an ounce of gold, I mean you cannot hand me a bill and
ask me to give you cold goins or gold bullion in exchange. I f you have
a license^ you can come to the U.S. Mint and buy gold under the licens­
ing provision.
Mrs. S u l l i v a n . S o the passage of this legislation would have no-----Mr. B ar r . Would have no effect whatsoever on the currency.
Chairman P a t m a n . Mr. Johnson.
Mr. J o h n s o n . N o w , I would like to ask you something. Mr. Fowler
seems to predicate that there are two reasons for wanting to remove
this cover. One is, he says at the conclusion, “We can continue to be
assured that the Federal Reserve will be able to supply appropriate
amounts of currency to meet the needs of our growing economy for
I notice in the Federal Reserve bulletin that Mr. Robertson put out
in 1967, that in 1960 there was $33 billion worth of currency outstand­
ing, and right now there is $45.9 billion, as of the end of November
1967.1 notice in 1965 the currency was increased in circulation by $2.5
billion, and in 1966, by $2.3. But in 1967, the currency increase in cir­
culation was only $1.4 billion. Why, 1967 being a year when we needed
expansion of our currency, was currency expanded only $1.4 billion ?
Mr. R obertson . I would take another look at that table because I
-doubt that it includes the entire year of 1967.
We don’t have those figures as yet.
Mr. J o h n s o n . By the end of November, the currency outstanding
was $45.9 billion. The year before, $45.3 billion. So that is a $1.4 billion
increase in the first 11 months.
Mr. R obertson . The figures in December would add to that. So, just
•don’t weigh it too heavily. The volume of currency goes up or down,
not depending upon what we think it should be, but depending upon
what the needs are as they come to us through the banks, the com­
mercial banks. When people need more currency, the commercial banks
come in and get it from the Federal Reserve banks. We do not control
the supply. The people of this country control the supply. So that
the total volume will vary from year to year, month to month, day to
day, and week to week.
Mr. B arr . Mr. Johnson, may I add that those 1965-66 figures, I
think, are distorted. As you will remember, this committee eliminated
the silver certificate in 1964. There was a surge of Federal Reserve
notes in circulation in 1964, 1965, and 1966, as the silver certificates
were gradually retired and burned up, and replaced by Federal Re­
serve notes. That accounts for a rather large swing in those years.
Mr. J o h n s o n . I thought your answer would be a self-serving one, by
your saying that you inflated currency only $1.4 billion last year up
to November because you didn’t have the 25-percent gold backing, you
were scared of the ceiling, so you didn’t issue currency.



Mr. R obertson . Let me clarify that immediately. The amount o f
gold which we have in this country has no bearing whatsoever on the
amount of Federal Reserve notes outstanding.
As I stated earlier, the amount of Federal Reserve notes that are
issued depends upon what the needs of the people happen to be at any
given time. We are not down to the level where we would have to even
suspend the gold cover at this time. We still have $1.3 billion of free
gold. The only purpose now of asking for this legislation is to remove
any anticipatory doubts about their ability to get gold because of the
diminution of that free gold supply.
Mr. J o h n s o n . And if we were to remove this 25-percent gold cover
you, in effect, will not be restrained and you can issue currency just
as rapidly and inflate it in any way you want, depending upon----Mr. R obertson . Mr. Congressman, we have not been restrained in
any way by the gold cover, and we will be in exactly the same posi­
tion after this gold cover is removed as we are now. Under the law,
we have the power to suspend the gold cover.
Mr. J o h n s o n . Then the statement b y Mr. Fowler, that we have to
remove the gold coyer so we can continue to supply appropriate
amounts of currency is not a statement of fact.
Mr. R obertson .^Yes; it is a fact. We are trying to keep the free gold
supply from getting down so low people feel they have to come in
and get it while the getting is good. This is what we are trying to
avoid. By making it very clear to the world right now, not in any
panicky situation or crisis, that our entire gold supply is available
for the primary purpose for which it exists; namely, the backing o f
the international monetary mechanism of this whole free world.
Mr. B arr . May I reinforce one statement the Governor has made?
We don’t pay our bills in the United States with paper money or
coins. We write checks. And those checks are dependent upon Federal
Reserve deposits and tax collections. You must draw a distinction
between the deposits and coins. We make coins when we get an order
from the Federal Reserve banks and the Federal Reserve banks put
in an order to us for coins. When they get an order from the com­
mercial banks of the United States and the commercial banks put in
the order for coins, when the people with whom they are dealing say,,
“we want more coins,” and it is precisely the same situation with
Federal Reserve notes, Mr. Johnson.
The chain of reaction starts with the people who say, “we want
more currency, we need more in our transactions.” The bank asks for
it from the Federal Reserve and the Federal Reserve turns to us and
we print it in the Bureau of Engraving and Printing. There is no
inflation, no payment of bills, except the response to the needs of the
people for com or paper to perform commercial transactions.
Mr. J o h n s o n . I notice in this Federal Reserve bulletin that as the
currency outstanding in the United States increases, the amount of
Government bonds held by the Federal Reserve System almost equals
the amount of currency you issue. Maybe that is a coincidence.
Mr. R obertson . Pure coincidence. We buy or sell Government bonds
for the purpose of increasing or decreasing the availability of money
and credit m the country, and how it will jibe with any other partic­
ular statistics is coincidental.
Chairman P atmaist. Mr. Moorhead.



Mr. M oo r head . Thank y o u , Mr. Chairman.
Mr. Barr, on page 2 of Secretary Fowler’s statement, he said some­
thing like this:
* * * the strength of the dollar depends upon the strength of the U.S.

Again, on page 4—
The value of the dollar is dependent upon the quantity and the quality of
goods and services which it can purchase. It is the strength and soundness of the
American economy which stands behind the dollar.

This would be true, both domestically and internationally, would
it not?
Mr. B arr . That is precisely correct.
Mr. M oorhead . And would you not say that this is the more im­
portant aspect, more important than whether there is gold converti­
bility ?
Mr. B ar r . Absolutely. There is no question about it.
Mr. M oo r h ead . Let me read you an excerpt from a Washington
Post editorial of January 2. It says that—
* * * there is nothing immutable in the system of fixed exchange rates; indeed,
nothing patently advantageous. The time has come for a frank debate on the
issue of whether we would not all be better off if the dollar were permitted to
flow freely in the foreign exchange market.

Would you care to comment on that sentence?
Mr. B ar r . I would be delighted to comment on that sentence. It was
written by an editorial writer and theoretical economist who has not
been charged with the operating responsibility of maintaining a viable
international monetary system. Theoreticians like to speculate in this
But I would like to point out that the real test of whether an inter­
national monetary system is working or not is whether or not it facili­
tates and lubricates the flow of trade in the world.
Let me give you the figures. In 1959, the free world trade was $106,700 million. The latest figures we have, latest estimate for 1967, is $200
billion. This trade has grown up, Mr. Moorhead, around a solar system,
where the dollar is fixed, a fixed point, fixed in its relationship to a gold
price. Other currencies are also fixed, as you know, by operations in
the exchange market moving against that central point.
While economists love to talk about it and dream up other devices,
the burden of proof that this system can be improved upon is on them,
because it has facilitated the greatest expansion of free world trade
that the world has even seen.
I am not saying that any system is immutable. The only thing I am
saying is that the system has served the world very, very well. I am not
ready to junk it, for editorial writers or economists.
Mr. M oo r head . I am not suggesting that this is the time to junk
things. But I am suggesting that it does appear that the importance of
gold over the long haul is changing.
Mr. B ar r . That is correct.
Mr. M oor head . I further feel that the measures which have been
suggested in the January 1 statement, and now in the removal of the
gold cover, are not long-term solutions to a changing situation, but
merely a way of finding some time so you can get some long-range
<89—292— 68





solutions. What I am trying to do in this discussion is to be sure we are
working toward the long-term solution, which I can see reflected in the
next 4 or 5 or more years.
Mr. B ar r . Let me give you that long-term solution that the President
recommended in his January 1 message.
No. 1, pass -the tax bill. As it has been pointed out in the testimony
today, Mr. Widnall has alluded to it, a crucial factor is not gold. And,
as you pointed out, the crucial factor is the strength and stability of
the U.S. economy. It can’t get ahead of us, and we cannot price our­
selves out of the world market.
We must pass a tax bill and we must have a tough restraint on all of
our Federal expenditures while in Vietnam, and we must maintain
internal discipline.
No. 2, we have moved in the Kennedy round to pull down the trading
The President did announce, as I mentioned to Mr. Widnall, that we
are now preparing to look closely at the nontariff barriers that all
nations have practiced against us.
These are the loner-run approaches to the problem of maintaining
the strength of the U.S. economy in the world. And, incidentally, the
U.S. dollar. But mainly, it is the strength of the U.S. economy.
Mr. M oorhead . I have serious doubts about these proposals but if
there is no alternative I would hope that, No. 1, these interferences
with the individual American’s freedom of travel; and No. 2, the
market freedom of investments, crossing over borders, would be
thought of as temporary measures.
Mr. B arr . The President clearly indicated that. The President
clearly indicated that he took these steps with the greatest reluctance,
and they were temporary measures.
We do not desire to restrain direct investment. Clearly, as Mr. Wid­
nall pointed out, this is one of the strongest parts of the U.S. economic
position, vis-a-vis, the whole world. The only thing we are saying,
however, is that there is a pace at which direct investment can move,
and if it moves beyond that pace perhaps it is unsustainable. So we are
temporarily restraining it at this juncture.
We are saying the same thing about tourism.
When I sat on this committee 10 years ago—almost 10 years ago-*—
the tourist deficit in the United States was a billion dollars. It has
doubled now to $2 billion and no other nation in the free world can
earn that kind of surplus to go all over the world.
These are the issues we face as a free nation. The temporary meas­
ures that the President has asked us to undertake at this juncture are
necessary. But beyond that, it is the long-term approacn of keeping
this country strong in its position with the rest of the world.
Chairman P a t m a n . Mr. Stanton.
Mr. S t a n t o n . Thank you, Mr. Chairman.
Mr. Barr, in your three-point program for the salvation of the
United States, you left no room for reduction of Federal expenditures.
Mr. B ar r . I think I did. The record will indicate—maybe I didn’t
speak loudly when I got to that point. But it is certainly a definite
part of it. We asked the Congress and Congress agreed last year to cut
1968 appropriations by $10 billion, and I think the spending total was,
roughly, four. And I can assure you we are exercising every possible



iin d of restraint, including in the international area a directive, which
I would like to submit for the record. The President of the United
.States is instructing that all overseas personnel be reduced by 10 per­
cent, and for the executive branch of the Government, to stop this
traveling. We are not referring to you gentlemen. You will have to
work out your own salvation.
■(The information referred to follows:)



h it e


ou se,

Washington, January 18, 1968.
To the Heads of Executive Departments and Establishments.
Subject: Reduction of Overseas Personnel and Official Travel.
Today I sent the attached memorandum to the Secretary of State and the
Director of the Bureau of the Budget directing them to undertake a four-part pro­
gram to reduce United States personnel overseas. I expect each Department and
agency to cooperate fully in this endeavor.
In addition, I hereby direct the head of each Department and agency to take
steps to reduce U.S. official travel overseas to the minimum consistent with the
orderly conduct of the Government’s business abroad. I have asked, private U.S.
citizens to curtail their own travel outside the Western Hemisphere in the inter­
est of reducing our balance of payments deficit. Federal agencies should partici­
pate in this effort.
The policy applies particularly to travel to international conferences held
•overseas. Heads of Departments and agencies will take immediate measures to
reduce the number of such conferences attended.
hold our attendance to a minimum and use U.S. personnel located at or
near conference site to the extent possible.
schedule conferences, where possible, in the U.S. or countries in which
excess currencies can be used.
You should present your plans for travel to international conferences held over­
seas to the Secretary of State, who, with the Director of the Budget, will under­
take a special review of this matter.
This directive shall not apply to
travel necessary for permanent change-of-station for U.S. employees, for
their home leave, and for medical and rest and recuperative leave.
travel made necessary by measures to reduce U.S. employment overseas
outlined in the attached memorandum,
travel financed from available excess foreign currencies.
You are requested to submit to the Director of the Budget, not later than
March 15, a statement on the actions you have taken to reduce all types of over­
seas travel, the results expected from such actions, and your recommendations
as to any additional measures that might be taken.
L yndon B . Joh nson .




h it e


ou se,

Washington, January 18,1968.
Memorandum for the Secretary of State and Director, Bureau of the Budget.
.Subject: Reduction in U.S. employees and official travel overseas.
As a part of my program for dealing with our balance of payments problem,
announced on New Year's day, I would like you jointly to take the specific
measures to reduce U.S. employment and curtail official travel abroad, as out­
lined herein. Within the Department of State, the Senior Interdepartmental
Group, chaired by Under Secretary Katzenbach, shall serve as the focal point
for carrying out this directive.
You should make these reductions in a way which maintains the effectiveness
of our international programs. I would like you to give particular attention to
personnel reductions which can be made through relocation and regrouping of
functions, the elimination of overlapping and duplication, the discontinuance of
outdated and marginal activities, and a general streamlining of operations!

r e d u c t io n


U .S.

perso n n el


This directive applies to all employees under the jurisdiction of U.S. diplomatic
missions and includes the representatives of all U.S. civilian agencies which
have programs or activities overseas. It also includes military attaches, Military



Assistance Advisory Groups, and other military personnel serving under the
Ambassadors. It does not apply to U.S. personnel in Vietnam.
The Secretary of Defense has already initiated measures to reduce staffing of
the military assistance program. I am asking the Secretary to complete these
studies in time to support the goals outlined below.
You are directed to take the following actions:
1. As a first step, you should proceed, with appropriate participation by
U.S. Ambassadors and agencies, to reduce the total number of American
personnel overseas by 10 percent, with reductions of at least this magnitude
applied to all missions of over 100. Similar reductions should be made in
employment of foreign nationals and contract personnel. Your decisions on
this first phase, which shall be final, shall be completed by April 1.
2. You should also initiate a special intensive review of our activities and
staffing in 10 countries with very large U.S. missions. Your objective, in this
second step, should be to reduce U.S. employment by substantially more than
the 10 percent immediate reduction taken in the first step. Your final deci­
sions should be made on this phase by August 1.
3. As a third step, you should proceed to extend these intensive reviews
of U.S. activities to other countries beyond the first 10 as rapidly as feasible.
4. Simultaneously, you should initiate special studies from Washington
of functional areas aimed at reducing instructions, assignments, and activi­
ties which unnecessarily create the need for maintaining or increasing over­
seas staff, e.g., reporting requirements, consular work, and administrative
Clearly, reductions of this magnitude will involve major changes in agency
staffing and personnel plans. I am asking Chairman Macy of the Civil Service
Commission to assist agencies in solving attendant personnel problems and in
facilitating the reassignment of employees returning to the United States.

I am requesting all Department and agency heads to reduce official travel out­
side the U.S. to the minimum consistent with orderly conduct of the Govern­
ment’s Business. I would like you to give special attention to measures to mini­
mize travel to international conferences.
By April 1, I would like you to report on the actions taken in this regard and
to recommend any additional steps required.
L yndon B . J o h n so n.

Mr. S t a n t o n . Mr. Robertson, I lost you when you were talking to
Mr. Johnson on any restraint we have on the amount of Federal Re­
serve notes in this country at this time.
Mr. R o bertson . The gold reserve does not restrain us because we are
not down to the restraining point. I f we were, we could suspend the
gold cover under the power which the Congress has given to us, for a
30-day period, and then renew it every 15 days. But when you get to
this point, then you do create a lot of doubts in the world as to whether
or not dollars can be converted into gold. And that is what we want to
Mr. S t a n t o n . The reason I question that, is that Mr. Multer, 3 years
ago, asked Mr. Dillon that same identical question and he said, “Pres­
ently, the maximum amount of Federal notes that may be issued by
the Federal Reserve bank is fixed by law as a result of our 25-percent
cover.” Mr. Dillon said, “That is correct, it is the 25-percent cover.
There is a 25-percent cover, and that is the only thing that fixes the
maximum amount.”
Mr. R o bertson . I stand on m y answer.
Mr. S t a n t o n . I wish to clanfy your answer with that of Mr. Dillon
3 years ago.
Mr. R o b e r ts o n . A s you read it, and I state it, they sound to me ab­
solutely contradictory. I don’t back down a bit from my jx>sition.
Mr. B ar r . Mr. Stanton, may I indicate, and add one little thing to
it. Mr* Robertson, of course, is correct in that they can waive the cover



requirement down to 20 percent. But if they go below 20 percent, then
there is a tax that is added to the discount rate for every 2y2 points it
Mr. S t a n t o n . And lower if it goes to 15 ?
Mr. B ar r . Yes, sir.
Mr. S t a n t o n . I am familiar with that. In comparing this hearing
today with the one of 3 years ago, it was made very clear that the fu­
ture of the subject of the 25-percent gold cover rested in our solving of
our balance-oi-payments problem. It was not then a question, pri­
marily, of the availability of dollar cover on our money.
Mr. B arr . That is correct.
Mr. S t a n t o n . Would you say, Mr. Barr, our attempt to balance our
payments has been a failure ?
Mr. B ar r . N o , sir; I read those hearings rather carefully, and at
the time when Secretary Dillon was testifying before this committee
he had good reason to be rather optimistic. The second quarter of 1965
provided the first surplus, of $200 million, in our accounts since 1961,
and the second quarterly surplus since 1957. The next quarter, how­
ever, saw the buildup in Vietnam. This is when we moved aibout
150,000 troops almost immediately to Vietnam.
This entailed a very large additional foreign exchange cost—now
at the rate of about a billion and a half a year—for Vietnam. In spite
of these added Vietnam costs, we did pull down our liquidity deficit in
calendar 1966 to $1.3 billion. We cut down from a deficit of $2.8 bil­
lion in 1964 to $1,335 billion in 1965. It ran $1,357 billion in calendar
year 1966. It will run at a rate in excess, as we have indicated, o f $3.5
billion in 1967.
Mr. S t a n t o n . Mr. Barr, you brought up the subject of Vietnam
again. I do notice that some of us here have pointed out that the Gov­
ernment Operations Committee of Congress has estimated for 1967
that the Government of Vietnam is spending about $300 million of
its foreign exchange, for exports, and that less than 10 percent was
spent in the United States. Do you have any comment to make on that ?
Mr. B ar r . I will have to supply that ror the record. I am not an
expert on the operations in Vietnam.
Mr. S t a n t o n . It seems by the surplus, if this is a correct figure here,
there is certainly a loophole that should be corrected.
Mr. B arr . It might seem so. I will be delighted to check it.
(The information requested follows:)
V ie t n a m e s e C o m m e r c ia l I m p o r t s F




n it e d


The U.S. share of merchandise imports into Vietnam financed by Vietnam’s
own foreign exchange earnings is undoubtedly small. There are signs of improve­
ment, however. In 1966 arrivals from the United States financed by GVN-owned
foreign exchange, came to 2.8 percent of the total. For the first 7 months of 1967
the percentage, based on licensing, was 7.8 percent.
For geographical and historical reasons, the United States has not been a
big factor in the Vietnamese market. Japan is getting the largest share of the
market and other countries in the area such as Taiwan, Hong Kong, and Singa­
pore are also getting large shares. There are also special factors, such as the
Vietnamese fondness for motor scooters and light-weight motorcycles of type
which the United States is not a major producer.
Vietnam is thus a new market for the United States. It will take aggressive
salesmanship and export promotion on the part of U.S. industry if our market
share is to be increased significantly.
The U.S. mission in Saigon and the Washington agencies are well aware of
the basic facts in this situation. The mission is actively engaged in determining



which commodities the United States is or could be competitive in, in the Viet­
namese market, and based on such information will explore with the Vietnamese
Government ways in which sales of such U.S. products can be increased.
In considering direct actions which might be taken to assure that funds from
the United States are used for purchases from the United States, care has to
be taken that international agreements are not violated. However, U.S. officials
have had discussions with Vietnamese officials on this problem and are seeking
to work out with them measures which can be taken to increase U.S. market
(In millions of U.S. dollars]

Total.............................................. ...........................
United States........................................... ...........................
Germany.................... ...............................
Republic of C hina......................... ..
Hong Kong................................................
United Kingdom......................................








2 211.6



1 From Moss committee report dated Aug. 25,1967.
2 Based on foreign exchange licenses issued from US0M, Saigon.
Note.—Licensed imports from United States for 1967 predominately POL; from Japan motor scooters, textile yarns,,
and radios and TV’s; from France pharmaceuticals, industrial machinery, and motor vehicles.

Chairman P a t m a n . Mr. Stephens,
Mr. S t e p h e n s . There are two questions I would like to ask: On thesecond page of the statement of Mr. Martin—it is the first paragraph—
It is true that Congress has given the Federal Reserve Board authority to
suspend the gold cover requirement for a period of up to 30 days, and to renew
such suspension for 15-day periods thereafter.

What does that mean ? How does that operate ?
Mr. R obertson . All we would do would be to suspend, under the
power which has been given by the Congress. We would suspend the
operation of the gold cover requirement and continue issuing Federal
Reserve notes until we got down to the next tier, which would be 20
percent, and then 15, and then, going on down. We would merely
suspend it and renew it.
But this was obviously designed as a temporary means of avoiding
a crunch sort of operation.
Mr. S t e p h e n s . Y ou would have authority to issue more than the
25-percent reserve; is that correct ?
Mr. R obertson . No. What we do, would be issue notes, even though
25 percent of them exceeded the amount of free gold.
Mr. S t e p h e n s . The second question is on the third page of Mr*
Martin’s testimony :
Convertibility of the dollar into gold at a fixed price—$35 an ounce—is a key­
stone of the international monetary system and is a fundamental reason why
monetary authorities are willing to hold dollar reserves.

Where do we get the fixed price of $35 an ounce ?
Mr. R obertson . This was fixed, of course, in accordance with the
International Monetary Fund arrangement. The Congress approved



this particular fixing with the Fund. It is a position which the United
States has taken since this time.
Mr. S t e p h e n s . Congress has not fixed $35 an ounce?
Mr. R obertson . N o ; they did not fix that price, but they approved
the fixing of that price with the Fund by the United States.
Mr. S t e p h e n s . The fixing of $35 an ounce, or the fixing of a price?
Mr. R obertson . Both. A parity of $35 an ounce was set with the
Fund, and that advice was given to the Congress, which in turn then
approved the International Monetary Fund agreement.
Mr. S t e p h e n s . At $35 an ounce ?
Mr. R obertson . R ig h t.
Mr. S t e p h e n s . H o w was that arrived at as a particular fixed price ?
Mr. R obertson . I can’t answer that. I simply don’t know how that
particular fixed price was arrived at.
Mr. B ar r . Mr. Stephens, I am not sure that anybody can arrive
at this. It goes back into a rather murky phase of history when Presi­
dent Roosevelt changed the price of gold, literally every day, and
finally hit on a point. The chairman would probably have as much
knowledge of this as anyone. But the history books are notoriously
silent on this subject.
Mr. S t e p h e n s . Let me see if I am right in my observation, and I
would rather not, on that particular thing—Mr. Widnall has talked
about the continuing plight of the dollar and how in the last few years
we have taken one measure and then had to go to another measure,
and then another measure.
I would leave with the conclusion—I would disagree with the con­
clusion that Mr. Widnall has arrived at, that the plight of the dollar
seems to be the success of the measures we have taken, because every
time that we take a step that will maintain the stability of the dollar,
then there are counter moves made from the other side of the picture
because the dollar continues to be desirable, and more desirable.
So, we can’t stand still, because if we do stand still and take no meas­
ures, then we will find ourselves out all around and the stability of the
dollar will be gone. So, the success to allow our moves in the past few
years, continuing the plight of the dollar merely to offset the moves
that have been made by us to maintain the stability of the dollar—
am I correct in that ?
Mr. B a r r . Mr. Stephens, I think this is a very good point, and I
would like to point out for the record here that the plight of the dollar,
the fact that we can no longer run sizable balance-of-payment deficits,
as we have done since 1951—I think we generally recognized since 1959,
under President Eisenhower’s administration, at that time we began
to tie foreign aid. You remember that Secretary Anderson in 1960
moved again, as the position of the dollar worsened. The deficits were
very large in those years, $3.3 in 1968; $3.8 in 1959; and $3.9 in 1960.
President Eisenhower tried to bring dependents of our troops in
Europe home at that time, and this proved politically impractical and
was abandoned. However, it did trigger an intensive effort on the part
of the United States to neutralize our costs and we continued to move,
and the Government sector was the primary point of attack. We tried
to economize in the dollars we spent overseas, but we had a surge of
bank loans in 1963 that literally threatened to engulf our payments.
Then we enacted the interest equalization tax and in 1964 there was
an enormous outpouring of direct investments to Europe. At that time,



the direct investment program, the voluntary program for banks and
direct investments of corporations was established. Until the British
devaluation threw the world into another turmoil—and we are acting
again—and the history of this country in this extremely difficult area,
through three administrations, I think has been one of courageous acts
to attack the problems as they arise.
Mr. S t e p h e n s . I see that my time has expired. I would like to con­
clude with a comment that our continued effort to maintain the sta­
bility of the dollar keeps us under attack all the time, and the best way
to keep the gold drain, then, from being made as an international
thing, would be to make the dollar less desirable and change its sta­
bility, and then when you do that, you play the dickens with the
economy of the United States and the world.
Mr. B arr . I say amen to that.
Chairman P a t m a n . Mr. Mize.
M r . M iz e . You say the international central bankers look to the
soundness of our economy and soundness of our monetary fiscal policies
in general, as the basis for establishing the true value of the dollar, not
the amount of gold behind it. And I presume we would agree with that.
Some years back, back in the Eisenhower administration, there was
some $24 billion worth of gold, and now there is only $12 Million left.
I f we free this $12 billion worth of gold, against which there is some
$30 billion-plus claims—now this is a hypothetical question—and for
various reasons the countries holding these dollar claims convert the
available $12 billion and it is gone; then there is still some $22 billion
worth of claims left—what then ? What are you going to come up here
and ask us to do then ?
Mr. B arr . Mr. Mize, I would say, first of all, we are not going to
let this come to pass. We have an active program. As I have indicated,
this country has moved ever since starting in 1958, under President
Eisenhower, it has moved to meet every challenge that has confronted
it, and we will continue to move.
We have a program currently before the Congress. I f that is not
•enough, we will come forward with more. We are going to do what­
ever is necessary to preserve the competitive position of this country
in the world, and I am not going to admit we are ever going to come to
the situation you hypothesize.
Mr. M iz e . I preiaced this question by saying, “hypothetically.” I f
you were the Secretary of the Treasury, Mr. Barr, what do you think
you would do, if, for a variety of reasons, international policies and so
xorth, this $30 billion worth of claims against the $12 billion of gold
were exercised, and there wasn’t enough to go around. Supposing in
the next 2 years—and we passed legislation—$6 billion is converted,
and we only have $6 billion of gold left, are you going to say the re­
maining $6 billion is free ?
Mr. B arr . We will say any amount that we have is free, Mr. Mize,
but I want to point out that if somebody started to convert that amount
of money we would be back here within a week with even more
stringent programs than we have before the Congress at this time.
We would act precisely as President Eisenhower and President
Kennedy, and this President is acting. We are going to do what is
necessary to stop this situation. The gold drain is not a cause, It is a
symptom. It is a symptom of difficulty either in the domestic side of



our economy, or the world in general. We are moving in the world in
general with the creation of the special drawing rights, which will
probably be before this committee m April, and then we will have a
supplement to dollars and gold for world reserve, backed by the credit
of the free nations of the world.
We are moving in this direction, but I want to emphasize very
strongly, we are going to do what we have to do to stop any runs
on our gold reserve.
M r . M iz e . Then you are announcing publicly that even if we pass
this legislation, we are not going to free this gold and any nation or
any country central bank holding dollar claims should not get excited
about free convertibility because if they start to convert too much
we will stop exchanging dollars for gold.
Mr. B ar r . No, I ’m saying we are going to cure our payments prob­
lem which will greatly reduce the likelihood of substantial conversions
of dollars into gold. In addition, the people holding the large sums
in gold and dollars are the Europeans. They realize, and I have no
hesitation in putting this in the record, a run on the dollar would
have unfortunate consequences on them as well.
No. 2, they are our partners in the London gold pool and they share
in the cost that we incur.
There is no reason for them, none, with the possible exception of
one nation, and that is France, to make any attempt to damage our
reserve position.
Now, you get out into the less developed parts of the world and
there is not too much doubt they need the dollars they hold. The threat,
if there is a threat, it is in Europe. They are our partners in the gold
pool and they realize that the creation of instability will be to the
detriment of all.
So I don’t look for a threat from that direction. I look instead foi
cooperative action such as wTe have had in the past.
Chairman P a t m a n . Mr. St Germain.
Mr. S t G e r m a i n . I would like to ask one question that actually re­
quires two answers. That question would be: What would be the impact
on our domestic and on the international economy if we were to stop
buying and selling gold ? One directed to domestic, and one to inter­
Mr. B a r r . Mr. St Germain, on the domestic side, there would be no
impact. I would assume that our stocks would be available to industrial
users, as they are at the moment.
In the international sense, Mr. St Germain, this is the situation.
As I indicated, the world, the monetary system of the world operates
like a solar system. You have a fixed point, the sun. That is the U.S.
dollar. And it is fixed because it has a fixed relationship to the price
of gold—$35 an ounce. The currencies of other countries revolve
around this fixed point. Each has declared a par value for its currency
with the International Monetary Fund and has agreed to maintain
the value of its currency within 1 percent of its par value. They do
this by buying or selling dollars.
Taking the German mark, its par value is worth 25 cents. The
Germans say that they will teep that price at a low of 0.2475, and
a high of 0.2525. I f there are more marks in the market than the
market can absorb, the price starts to sag, and the Bundesbank goes
into the market and takes the excess off the market by selling dollars..



If there are not enough marks on hand, then the Bundesbank sup­
plies marks for the markets and takes in dollars. Now, this is the way
that this system has worked, literally, since the establishment of the
Bretton Woods arrangement, and more particularly since 1958 when
the major free nations made their currencies convertible.
The point that I attempted to make to Mr. Mize, in connection with
the Europeans, especially, is when we remove this fixed point in the
system, then you nave a system against which no one can operate.
Literally, you have chaos, and as I indicated, the doubling of world
trade that has occurred in the past 10 years would be impossible with­
out a financial system that is reliable and fixed. This is what would
Mr. S t G e r m a i n . Thank you. No further questions.
Chairman P a t m a n . Mr. Lloyd.
Mr. L loyd . Mr. Barr, on page 3 of Mr. Fowler’s testimony, he re­
fers to the dollars, 150 million or more, which are absorbed each year
hy domestic, artistic, and industrial users. What are the mechanics
under which they secure gold ?
Mr. B ar r . They are licensed by the Office of Domestic Gold and
Silver Operations of the U.S. Treasury. They come in and say, we
need so much gold for our operations, and the operations are licensed.
Mr. L loyd . Are they supervised ?
Mr. B ar r . Yes, sir.
Mr. L loyd . So you know the use to which the gold is put ?
Mr. B arr . That is correct.
Mr. L loyd . Would you favor a bill to subsidize the production of
gold in this country ?
Mr. B arr . No, sir. Mr. Lloyd, our position has been unequivocal in
this area. No. 1, we are at the moment spending about $8 or $10 million
a year, to find potential gold deposits in the United States, to see what
is here. From the best evidence we have, any subsidy would have to be
husre, and even then it wouldn’t produce much.
Mr. L loyd . Are the world reserves of gold today adequate for
domestic and artistic and industrial uses? Does the consumption ex­
ceed the production on a worldwide basis ?
Mr. B arr . N o , sir. I can g iv e y ou th e latest figures.
Let me give you the figures for 1966. The production in South
Africa was $1,081 billion.
The production in the rest of the world was around $400 million. A
total of $1,445 billion.
Mr. L loyd . That is production ?
Mr. B ar r . Yes, sir. From 1953 through 1965, the Soviet Union was
selling amounts of gold that ranged from 75 million to a high of 550
million in 1965. They did not sell any in 1966 or 1967.
Mr. L loyd . Excuse me. Are you reading from something that is
going to be in the record ?
Mr. B arr . I will be delighted to supply it.
Mr. L loyd . I think Mr. Fowler said he put something in the record.
Mr. B arr . I can answer your question quickly.
Chairman P a t m a n . Y ou are on page 40 of this book you have here?
Mr. B arr . Yes, sir. In 1966 industrial uses absorbed $675 million
worth of total production.



Mr. L l o yd . Are those 1961 figures ?
Mr. B ar r . 1966 figures. Less than half went for industrial uses.
Mr. L l o y d . What can gold producers get on the market today from
the industrial users?
Mr. B ar r . $35 an ounce.
Mr. L l o y d . Why don’t we buy more gold ? Why don’t we get more
gold in our gold stocks ?
Mr. B ar r . Why don’t we get more gold ?
Mr. L l o y d . Yes.
Mr. B ar r . We have to look at the world as a whole. There h as been,
actually a decline in the gold reserves of the free nations in the past
2 years—1966 and 1967. There was an actual decline because the in­
dustrial use was climbing and evidently there w a s a la r g e su rge o f
private hoarding.
Mr. L l o yd . Would you comment on this? Suppose we decided we
don’t want to redeem dollars with gold—what happens ?
Mr. B arr . This, as I understood it, and I am not sure I w as com­
pletely responsive to Mr. Mize—if you are asking me what happens
if we refuse to redeem----Mr. L l o y d . I am just wondering, myself, what happens if we decide
we don’t want to back our dollars with gold any more, and then what
happens to the dollar throughout the world ?
Mr. B arr . Well, I am going to repeat -that we are not going to let
that happen. Mr. Moorhead is not here now, but he asked me the ques­
tion about the floating rate, if you had a dollar that is floating, you
have no fixed point in a monetary system, and we are not going to get
to that.
As I indicated, the result, in my opinion, would be that there would
be a collapse of world trade.
Mr. L l o y d . What has brought on the run on our gold supply?
Mr. B ar r . You mean, the billion that we lost in the last quarter?
Mr. L l o y d . Yes.
Mr. B arr . The British devaluation. You will pardon me if I choose
my words carefully. I am delighted to explore as completely as possi­
ble with this committee all answers, 'but I do not want to trigger other
runs. Some fool put out a statement last Wednesday that the President
was going to change the price of gold on his state of the Union message.
That caused a serious embarrassment and some reserve losses, so you
will pardon me if I phrase my answer rather carefully.
Would you put it again ? What caused the run ?
Mr. L l o y d . Yes.
Mr. B ar r . T o the best of my knowledge, Mr. Lloyd, the British de­
valuation created in the world a worry on the part of many people
about the value of currencies. They had lost 14.3 percent in the British
devaluation and they were worried about credit and paper money.
A large portion of them, I think, decided they would hedge their
bets. Another reason is that there was speculation all over the world
that other countries might be forced to devalue. There was speculation
that the thrust of the attack would shift to the United States.
As a result of all these, this combination of circumstances, Mr.
Lloyd, I think that is the best reason I can give you for this billiondollar loss.



Chairman P a t m a n . Mr. Minisih.
Mr. M i n i s h . Thank you, Mr. Chairman.
Mr. Barr, Secretary Fowler, on page 6 of his testimony that “ vir­
tually all countries hold dollars in their reserves.”
Could you tell me which countries hold the most ?
Mr. B ar r . Which countries hold the most dollars? I believe it is
Germany. May I supply that for the record? The largest dollar-hold­
ing countries are Germany, Italy, Canada, and Japan.
M r . M i n i s h . You left out France.
Mr. B ar r . France limits the amount of dollars it holds, but, it still
has quite a few.
M r . M i n i s h . I see. Your Department is charged with collecting
taxes and debts owed the Government, is it not ?
Mr. B ar r . Yes, sir.
M r . M i n i s h . Have you ever thought about collecting the war debts
owed the United States by foreign countries, particularly, France?
Mr. B ar r . Yes, sir. I would like to submit at this point a statement
for the record on the subject of World War II debts owed to the
United States, and World War I debts owed to the United States.
Chairman P a t m a n . Y ou would like to insert it at this point in the
record ?
Without objection, it is so ordered.
(The information referred to follows:)
G o ld L

osses an d




epaym ent


In its effort to halt the loss of gold the administration has given special atten­
tion to the potential contribution of debt repayment. Virtually all of the loan
agreements and settlements made with foreign countries since the beginning of
World War II established fixed amortization -schedule® which call for regular
payments over a period of years. We expect both principal and interest on postWorld War II obligations to be paid in accordance with these schedules, and
with relatively few exceptions these payments are being made. Receipts from
such scheduled debt repayments amounted to more than $800 million in 1966.
Only in a few cases has it become impossible for debtor nations to meet sched­
uled payments, making it necessary to negotiate a rescheduling of the obligation.
Some of the loan agreements provide'for postponing payments under certain
circumstances. Where disputes arise resulting in payment delays, efforts are
made to reach agreement in order that payments may be resumed. There have
been a few instances, notably in the case of the Republic of China and the
U.S.S.R., where it has not yet been possible to reach agreement involving com­
prehensive settlement of World War II lend-lease and related accounts. (The
U.S.S.R. is making payments on lend-lease items which were in production or
storage in the United States before V-J Day.)
The United States has encouraged the governments of nations which are in a
strong financial position to make payments in advance of the scheduled due
dates and since 1959 advance repayments of nearly $3 billion have been col­
lected. Several countries, among them Germany, Italy, and Sweden, have now
prepaid all or nearly all of their World War II and postwar debt obligations to
the United States.
The situation is different with respect to World War I debts. Most governments
fulfilled their commitments under their World War I debt agreements until the
depression. Debtor governments stopped making payments in 1932, following the
expiration of the 1-year moratorium on debts owed to the United States nego­
tiated by President Hoover in an effort to mitigate the effect of these debt obliga­
tions on Europe’s economic health. Although some countries made token pay­
ments until the beginning of World War II, Finland is the only country which
is presently meeting its obligations in full.



While the countries which have large World War I obligations to the United
States have never denied the juridical validity of their debts, there is a view
widely accepted among them that the payment of these defbts should be dependent
on reparation payments by Germany. Resolution of the problem of governmental
claims against Germany arising out of World War I was deferred “ until a final
general settlement of this matter” by the London Agreement o f 1953, to which
the United States is a party.
The Government of the United States has never recognized that there was
any connection between the World War I obligations of those countries and their
reparations claims on Germany. While the London Agreement would not pre*
vent the United States from raising, on a bilateral basis, the question of payment
of any kind of the debtor countries’ World War I obligations (except in the case
of Germany), it must be recognized that any effort on the part of the United
States to collect these obligations would undoubtedly raise the problem of German
World War I reparations. From the practical viewpoint, therefore, there does not
seem to be any possibility of reaching an agreement on repayment in the absence
of an overall settlement of the World War I reparations problem, with its
wide-ranging political ramifications.

The French hold to the generally prevailing view with regard to their debts
to the United States. They not only have been 'servicing debts incurred after
World War II regularly but have paid more than $880 million in advance of the
due date. As of June 30, 1967 France’s obligations to the United States (ex­
cluding World War I debts) were roughly $300 million.
The World War I indebtedness of the Government of France due and unpaid as
of June 30,1967, was $5,077 million, including $2,091 million of the principal sum
and $2,986 million on interest arrearages. Unmatured principal was $1,773 mil­
lion. No payments have been made since 1931. The total obligation which might
be said to have been outstanding on June 30, 1967, including both matured and
unmatured principal and interest arrearages to that date, was $6,850 million.
The French Government has not contested the validity of its debt to the
United States. The French have instead asserted that there is a direct con­
nection between French payment of this debt and reparation payments by Ger­
many to France. The Chamber of Deputies ratified the 1926 agreement funding
the World War I debt with the reservation that the debt to the United States
was to be paid “ exclusively by the isums that Germany shall pay France.” The
Chamber of Deputies resolution at the end of 1932 declared that payments to the
United States were deferred until the United States should agree to enter a con­
ference for the purpose of adjusting all international obligations and of putting
an end to all international transfers or which there was no compensating trans­

Mr. B arr . A simple answer is that the free world has prepaid, rough­
ly, $3 billion of World War II debts. France has prepaid $880 million
of their debt. They are not only current, but they have prepaid.
World War I debts have a long legal, difficult history.
M r . M i n i s h . Have you ever thought of turning the question of the
unpaid French war debts over to the International Court of Justice?
M r . B ar r . N o .
M r. M in is h . I

wish the Treasury Department would do something
about trying to collect it. I know you are adamant on the surcharge
and I know that if one of our citizens fails to pay their income tax, the
IRS moves in on them, and justly so, and I would hope the Treasury
Department would move in on the countries that have owed us money
since World War I.
Chairman P a t m a n . Mr. Blackburn.
Mr. B l a c k b u r n . I am a little confused with all the testimony we
have had that no need exists for gold reserves for domestic dollars.
Why did we, initially, insist on 25 percent reserve ?
Mr. B ar r . Why, what?



Mr. B lack bu rn . Why did we, in the beginning, insist on 25 per­
cent reserve?
Mr. B arr . Let me read you a statement by some gentlemen who
preceeded you by a long time. This was a report of the Banking and
Currency Committee in 1913, when they established this reserve re­
quirement, and I will quote from the original report:
In a general way, the Committee believes that the requirement of a fixed
reserve is not a wise or a desirable thing, as viewed in the light of scientific
banking principles. It believes, however, that in a country accustomed to fixed
reserve requirements, the prescription of a minimum reserve may have a bene­
ficial psychological effect.

Mr. B la c k b u r n . That is, psychologically.
Mr. B arr . That is it. That was a 1913 report, when the Federal'
Reserve was created.
Mr. B la c k b u r n . I am encouraged by your insistence that we are
not going to let the gold become completely exhausted in the country,
but at the same time I think Harold Wilson of Great Britain made
equally strong statements some months back, that he was not going to
devalue the pound, but ultimately he had to do it because of unsound
fiscal policy.
Now, you started to say that the loss of gold is a symptom of a
disease and not a disease within itself. Would you care to comment
further on what the disease is that we are facing, so we can give some
thought to the solution ?
Mr. B arr . The President outlined the basic difficulty in the January
balance-of-payments message. Temporarily—this is on a temporary
basis. No matter how profitable the investments are overseas, and how
profitable they can be, there is a limit to the rate at which American
industries can invest overseas, just as you and I have a limit. I have been
plagued all my life because some banker wouldn’t loan me the money
to let me go as fast as I thought I should go. And this is precisely the
situation we are in on direct investments. We are not saying to stop
direct investment. We say, slow it down a billion so we can live with it.
We are not saying to the American tourist, don’t ever travel again.
We haven’t formulated our proposals completely, but I think what
we are going to say to the American tourist is, probably, go ahead and
travel, but we are going to make them think about how much money
they are going to spend.
We are saying to the Defense Department and State Department,
especially, hold down the number of people you have overseas. Stop
traveling overseas. We are saying to our allies in Europe, look, we
have our troops there to help you defend yourselves, but you must
help us neutralize these exchange costs. You must do your part.
We are saying it, not only in Europe, but we have said it in Japan,
and we are saying it in Taiwan and Thailand and in all the South­
east Asian perimeter where our costs are running a billion and a half
a year.
Mr. B la c k b u r n . I understand the President’s proposals. I have re­
viewed them rather thoroughly. What is the ultimate effect of our
foreign aid now? I do know that the dollars are tied. I know they
have to come and buy goods in this country with dollars. To the
extent that we axe increasing our domestic debts to finance foreign aid,
we are not paying enough taxes to finance the foreign aid programs



that we now support, aren’t we creating further domestic financial
problems for our country which in turn aggravates the international
situation ?
Mr. B arr . It need not do so if we would impose the taxes which the
President has required. I think we have an obligation in this country*
We can’t live in the richest nation of the world and get richer day
by day without paying any taxes or any attention to the people in
the developing countries. It need not be so. All we need is the will to
tax ourselves domestically.
In the international area it is different. It is quite different, be­
cause actions of others are required as well as our own. We cannot
come into balance on our international accounts unless we get the
{cooperation of the rest of the world. They can stop us. So we need
cooperation in the international area.
Mr. B lack bu rn . Well, I notice that the proposals by the President
are going to be temporary. I think we are paying temporary taxes now
that were imposed in World War II. The interest equalization tax was
going to be temporary when it was imposed 5 years ago. The voluntary
restraints policy was temporary when it was imposed 3 years ago.
I f these proposals are merely temporary, then they are not going to
solve the disease, are they—if everything we do is temporary—then
we are not really getting to the root of the problem, are we? The per­
manent solution to the problem is what I am after.
Mr. B arr . The permanent solution to the problem is to have a nation
that is strong enough to compete in the world and run an export sur­
plus, and run a surplus on the income that it is receiving from its
investments, its bank loans, and the rest o f these things, to meet the
military deployment costs of the United States, our aid costs, our
investment costs, and tourists costs, and import costs.
These are the principal factors we have to meet. To do that, we need
a strong, stable domestic economy. We need cooperation from the rest
of the world and neutralizing our military deployment costs.
Mr. B la ck bu rn . I have just one other question. I f our gold should
be exhausted, would the holders of the additional, say, $20 billion in
demand currency, come into this country and attempt to exchange
those dollars for goods ?
Mr. B arr . They can do it right now. They are welcome to do it at this
Mr. B la ck bu rn . What effect would that have on the domestic
economy ?
Mr. B arr . I f they came in and tried to do it in a week or a day, there
would be an enormous impact and a great surge. I don’t think it would
happen overnight. Twenty billion in an $800 billion economy is not
very much. Our country grows about that much every quarter.
Chairman P a t m a n . Mr. Gettys.
Mr. G ettys . What relationship, if any, does this proposal to with­
draw the gold cover have to the reduction of silver in our coinage a
couple years ago ?
Mr. B arr . It has no relationship.
Mr. G ettys . Other than the psychological ?
Mr. B arr . It has no relation at all.



Mr. G e t t y s . Wouldn’t the reduction of imports into the United
States, particularly in such fields like the textile industry, improve
our balance of payments ?
Mr. B a r r . Very doubtful, Mr. Gettys. You see, we are running a
trade surplus—Mr. Widnall disputed our figures—around a $4 billion
trade surplus this year. We do include Public Law 480 and aid exports.
I might add that this is the normal practice—the way other nations
generally report their own exports, and the method followed by the
On this basis, we have a $4 billion surplus in our trade accounts. We
are subject to retaliation. I think while, of course, an import, it might
seem that an import quota would temporarily be helpful, there would
be retaliation tomorrow.
Mr. G e t t y s . Could I ask, right there, aren’t a lot of these exports
of ours, the surplus, directly due to government expenditures in
foreign aid in which turn they are required to buy our goods?
Mr. B ar r . That is correct.
Mr. G e t t y s . In fact, the textile industry and others in the United
States are bearing the costs of putting themselves out of business.
Mr. B ar r . I don’t followyou, Mr. Gettys.
Mr. G e t t y s . In our textile industry, for example, isn’t the industry
simply paying taxes to send money to foreign countries to produce
goods to compete with us in the United States ?
Mr. B arr .. Y ou are saying that i f AID aid builds a textile plant
in some nation and they ship textiles back to the United States, that
the U.S. textile industry^ disadvantaged because we are in effect sub­
sidizing imports coming into the United States ?
Mr. G e t t y s . I will get to the larger question. Foreign investments
are being curtailed, and I think rightly so. Isn’t the Government the
chief offender of foreign spending? W h y is it that the Government
itself isn’t taking more drastic measures to decrease its own spending
Mr. B arr . It goes much deeper than that, Mr. Gettys. The Presi­
dent said he is going to cut a half billion in the expenditures overseas,
and mainly in the area of military.
Mr. G e t t y s . But the request^ of the private sector is greater than
it is of the Government in reduction in foreign spending.
Mr. B ar r . In that direct investment is a billion, and in the reduction
of Government outflows is a half billion. I guess you can say that.
The issue gets down to our security arrangements with the rest of
the world. Nearly all of our Government expenditures are in the area
of troop deployment. We have an exchange cost of $1.6 billion in
Europe, ahd about $3 billion worldwide. We are offsetting portions of
that. The Germans are buying $500 million of our bonds, offsetting a
portion of that.
As I indicated, we are working with all these other nations to off­
set. But mainly, it is tied in with security measures, and the real
issue, if we pull back our security from the world, our forces from the
world, I have the strong hunch there would be no order left in the
world and no point to invest, or travel. It would be too dangerous
to do it.
Mr. G e t t y s . I notice that Secretary Fowler refers to the $156 mil­
lion reserve held against U.S. notes and Treasury notes of 1890. Do



we liave any idea how much of those are in circulation, or where
they are?
M r . B ar r . $332 m illio n .
Mr. G e t t y s . They could, basically, be pretty well marked off ?
Mr. B ar r . They could be marked off. We are not going to. We are
keeping them in circulation.
Mr. G e t t y s . It is n o t a realistic reserve, is it?
Mr. B ar r . $156 million? We cannot remove it without action by the
Mr. G e t t y s . D o n ’t y o u th in k it w ou ld be w ell to ask ?
Mr. B ar r . That is included in this legislation.
Mr. G e t t y s . Thank you .
Chairman P a t m a n . Mr. Brown.
Mr. B r o w n . Thank y o u , Mr. Chairman.
In answer to a question earlier, Mr. Barr, with respect to daily
turnover, which Mr. Moorhead asked you, you said you were absolutely
opposed to letting the dollar “float” internationally. Doesn’t this legis­
lation say we are going to let the dollar float domestically?
Mr. B ar r . I am afraid I don’t follow you. What change does it
make domestically?
Mr. B r o w n . I f the dollar has no backing or cover it floats and finds
its own value. The gist of the editorial is that we should remove the gold
backing from the dollar internationally, and isn’t that what we are
doing here?
Mr. B arr . Yes, sir.
Mr. B r o w n . S o we are having the dollar float domestically.
Mr. B ar r . The dollar has floated domestically, under that theory
since 1934.
Mr. B r o w n . Y ou said there was a psychogical impact o f the cover.
Mr. B arr . I suppose so.
Mr. B r o w n . And I think you also said, in answer to Mr. Lloyd,
that you thought the run on gold was caused by a fear of many about
the holding of paper money.
Mr. B ar r . That is right.
Mr. B r o w n . S o, probably, feeling and subjectivity have a great
impact, or greater impact, than actually hard facts do as to the stability
of the dollar; is that true ?
Mr. B arr . In these areas, you have millions of people making millions
of decisions. When I say that they are reluctant to hold paper or
bank deposits, we don’t Know where all this demand came from. It
probably came from the Middle East, Asia, and some parts of Latin
America. We don’t know where it all came from. Mr. Brown, we have
had Secret Service checking this out ourselves to see if Americans have
been violating the statute for holding gold overseas, and the indica­
tions were that Americans were not concerned.
Mr. B r o w n . Has there been anything to date that you have observed
stabilizing the value of the dollar because of your request for this
legislation—in the international community ?
Mr. B ar r . Let me be very blunt, and say that since the Presidents
January 1 balance-of-payments message, the exchange market and
gold market have quieted down.
Mr. B r o w n . H o w much of this is due to the balance-of-payments
action and how much is based on your request for this legislation ?
89-292— 68—




Mr. B ar r . Can we supply that for the record ? We will be delighted
to supply for the record what the Europeans think about the impor­
tance of this legislation.
(The information requested follows:)

em oval


G old C over

The comments with respect to removal of the gold cover by foreign authorities,
public and private, that we have received clearly indicate the move would be
The basic attitudes of the monetary authorities of the major countries, as
represented by the Group of Ten plus Switzerland, was made clear as long ago
as 1964 in the Deputies report of that group. The report said:
“The gold held by monetary authorities should be readily available for use
in international settlements, and it is important in thiis respect that statutory or
conventional relationships of gold to the domestic money supply should not
prevent gold from playing its proper role in the international monetary system.”
Under Secretary Deming, who accompanied Under Secretary of State Katzenibach
to Europe the first part of January to explore the President’s newly announced
balance of payments program, has reported the current interest in this matter
and that in most of the capitals visited it was urged that prompt action by the
United States would assist in calming the nervousness apparent in the gold
Our Embassies in several countries have reported the foreign press comments
on this portion of the President’s state of the Union message. The telegrams
received are as follows:
J a n u a r y 19, 1968.
T o : Secretary of State, Washington, D.C.
From: American Embassy, London.
Subject: Reaction to President’s announcement on repeal of U.S. gold cover.
1. State of Union message statement on repeal of gold cover requirement re­
ceived favorable comment in United Kingdom’s press. Times business news edi­
torial of January 19 headed “No Joy for the Gold Speculators” says that anyone
who can still believe after Wednesday night that gold price is likely to rise, will
believe anything. Times acknowledges that the United States still faces difficulties
on economic/fiscal front, but says that those who hope to make quick buck out of
current problems of the United States “ Grossly underestimate the economic
power of that country and its will, when pressed to solve its problems in the
most impressively thorough way.” Times also had straight news story covering
same ground. Financial Times calls proposal along with tax increase “Un­
doubtedly serious which Congress can reject only at risk of provoking fresh
run on dollar.”
2. Financial Times says there is reasonable chance that both proposals will
be passed by Congress. It points out that mobilization of gold reserve is comple­
mentary to United States B /P program announced January 1 which would need
to have considerable practical effect because “ U.S. reserve is exceedingly large,
but it is not infinite.”
On London gold market Thursday’s demand declined sharply from high level
of Wednesday; price only declined one-eighth to $35.19%. Demand earlier in
week had been stimulated by rumors that President would announce gold price
increase on Wednesday. Announcement of gold cover removal was reported to
have been moderating influence on demand. Gold shares on London Stock Ex­
change moved decidedly upward. Reports indicated that investor sentiment still
believed in upward movement of gold price and investors could earn high yields
on these shares. U.S. announcement had been widely anticipated and discounted,
so had little impact on market sentiment.


19, 1968.

T o : Secretary of State, Washington, D.C.
From: American Embassy, Beirut.
Subject: Lebanese reaction to President’s remarks on gold backing for dollar.
1. Lebanese press gave extensive coverage January 19 to comments of Dirgen
Khalil Salem on President’s announcement in state of Union message that Con­
gress would be asked to pass legislation in liberating gold used as cover for
dollar. In statement, which carried by National News Agency, Salem said, “ Can­



celing the gold coverage of the dollar will not have any effect on the Lebanese
currency.” Continuing, Salem said move would strengthen dollar’s international
position by demonstrating determination of U.S. authorities to maintain its value.
2. In press statement Deputy Joseph Chader, former Minister of Finance, said
strength of dollar not based on 25-percent gold cover.
3. Industrialist Association President Butros El-Khoury told press his initial
reaction was that U.S. move would not affect Lebanon.
4. In only editorial reaction to appear, moderate Al-Hayat said world’s present
financial problems all stem from Vietnam war which is causing us balance-ofpayments deficit, which in turn made it impossible for us to assist UK with her
financial crisis and led to devaluation.
5. Dollar appreciated by one piaster to LL 3.14 in 24 hours following speech.


19, 1968.

T o : Secretary of State, Washington, D.C.
From: American Embassy, Paris,
Subject: French press comment on removal of gold cover.
1. French press comment on President’s request for removal of 25-percent gold
cover generally views action as necessary minimum step by United States to
insure greater stability for dollar. While French opinion has favored removal,
some press comments doubted whether United States was in fact willing to see
gold reserves decline to “the last ingot.”
2. Figaro calls measure admission by United States of dollars fragility and
obvious need for vigorous measures to halt dollar outflows.
3. Le Monde takes more negative view of significance of action. While basically
an archaic guarantee of value under system prohibiting direct conversion of
dollar notes into gold, gold cover nevertheless serves as technical restraint on
excessive money supply increases. Le Monde continues: “Basic cause of American
deficit beyond any doubt is financing made available through budgetary deficits.
At very moment gold cover is needed as warning signal, it’s removed.” Finally,
Le Monde concludes that it’s doubtful United States genuinely prepared to put its
entire gold reserve on line for defense of dollar in international markets because
of need to maintain kind of war chest in gold.
4. Les Echos regards action as removing useless anachronism and taking mini­
mum first step in shoring up international confidence in dollar. United States is
rapidly increasing dollar liabilities made removal of cover more or less impera­
tive. Important factor now to be watched is how effective new U.S. balance-ofpayments program will be in attacking real causes of deficit.


m e r ic a n


m bassy,



ru ssels.

January 19,1968.
To S e c r e t a r y o p S t a t e ,
Washington, D.C,
Subject: Press coverage, state of the Union message.
1. State of the Union message extensively covered on front pages of
Friday papers. (Time differential prevented Thursday coverage.) Most papers
highlighted Vietnam and defense of the dollar and noted that President gave
other subjects summary treatment. Most also noted prudence of President’s
response to recent “feelers” from Hanoi.
2. Gazet Van Antwerpen (Catholic) observed that achieving peace in Vietnam
now seems even mor'e difficult “isince the President . . . revealed a harder
line which might be decisive in preliminary contacts with Hanoi.” “ It is also
significant” that Johnson is using “ stronger words” after Mai Van Bo’s Paris
declaration. Paper suggests that U.S. officials “apparently accept the idea that
Bo’s statement proves Hanoi’s recent peace feeler was only a propaganda
maneuver” to end bombing. “The President does not want to get trapped”
into this without some reciprocal action from North Vietnam.
3. La Libre Belgique (influential conservative Catholic) said that “ there
was clearly nothing new” on Vietnam, the President “only reaffirmed a wellknown position,” however, this repetition after recent North Vietnamese declara­
tions “appeared to many observes as a sort of hardening.” Paper observed
United States clearly feared being led to stop bombing of North Vietnam with*
no reciprocal diminution from the other side. Here, viewpoints of Washington



and Hanoi “clearly diametrically opposed” and any narrowing of this gap
seem® “problematical.” No progress is being made toward negotiation because
“neither camp trusts the others’ promises.” Nonetheless, it is obvious that “the
war at the present level can result in neither American nor North Vietnamese
4. On monetary policy La Libre felt measures announced by the President
“ served electoral purposes above all.” The President avoided issues which could be
used against administration and planned only “short-term policies.” Gold will
not be revalued—obviously the President “intends to leave the burden of
definite decisions to a possible successor.”
5. New Flemish financial daily De Tijd took more favorable line than La Libre
Belgique on financial measures. Paper saw “great chance that balance of pay­
ments might soon be brought into equilibrium” and also commented that “re­
moval of gold cover of dollar should be considered a valid medicine in immediate future.”
6. Le Soir (Mass Circulation Independent) pointed up election year tend­
ency to assess message on partisan basis either as “weighty and sincere” or as
“ dull and flat.” At the beginning of his presidency Johnson was too euphoric but
is forced by events to navigate more closely. These facts were quite evident in
address. Paper added that many subjects were omitted or mentioned in passing
even in foreign policy field. On Vietnam, President avoided false optimism, was
rather “sober and realistic.” On domestic front, big news was request to lift
gold cover of dollar.
7. De Standaard (Influential Catholic) ran editorial by editor in chief Vandeweghe entitled “In A Minor Key.” This contended that message announced
no “spectacular initiative” ; writer believed President did not want to start
“discussions” with North Vietnam now because parties disagree on an agenda
and on participation of the N1#F.

n ig h t .

Mr. B row n . Mr. Barr, maybe it has been done before, but could
you tell me the gold reserve as of 1940, 1950, 1960, and 1967 ? Do you
have them handy ? And then, would you also indicate to me the ratio
of the reserves of gold to the amount of currency in circulation?
Mr. B arr . Here it is. Now, the question was, sir, what was the total
gold reserve in the United States in 1940 ?
Mr. B row n . I just picked out 1940, 1950, 1960, and 1967.
Mr. B arr . $22.8 billion.
Mr. B ro w n . What was the next ?
Mr. B arr . 1950, $22.8 billion.
Mr. B row n . 1960 ?
Mr. B arr . $17.8 billion.
Mr. B row n . 1967 ?
Mr. B arr . Well, $12 billion.
Mr. B ro w n . D o you have the figures there of the amount of cur­
rency for those same periods ?
Mr. B arr . N o, but we can supply that for the record.
(The information requested follows:)
Currency in circulation:
1940--------------------------------------------------------------------------------------------- $7.8
1950_____________________________________________________________ 27.2
1960---------------------------------------------- ---------------------------------------------- 32.1
1967_____________________________________________________________ 43.3

Mr. B row n . Obviously, from the discussion that we have had this
morning, you don’t think, during this period, say, from 1950 to 1967,
there was a run on gold ?
Mr. B arr . No.
Mr. B row n . Although it amounted to some $10 billion loss ?



Mr. B arr . On the contrary, gold was flowing to the United States.
Excuse me.
Mr. B r o w n . 1950 to 1967 ?
Mr. B arr . In that period, there was actually a net flow from the
United States. From 1950 through 1967, of course, there was a reduc­
Mr. B ro w n . Well, my time has expired, but the impact of this
legislation is that Congress is going to exercise the emergency powers
that the Federal Reserve can exercise, but only on a temporary basis;
is that about what you are saying ?
Mr. B arr . The Federal Reserve can operate on a temporary basis.
We say we are here to discuss this whole issue and we are asking you
to take a permanent step to remove this gold cover behind our Federal
Reserve notes and U.S. notes.
Mr. B ro w n . But your earlier comments were, we need this legisla­
tion now so, therefore, there is a bit of an emergency. But it is not the
emergency which would cause the Federal Reserve to use its emergency
Mr. B arr . N o.
Chairman P a t m a n . Mr. Rees.
Mr. R ees . Last October, the International Monetary Fund met in
Rio and there was an agreement among all the nations to create a new
international currency called a special drawing right. I would like to
ask a question in two parts: No. 1, what is the time schedule for im­
plementing the SDR’s, both in terms of developing rules and regula­
tions, and then coming before Congress for specific legislation; and
No. 2, what will be the relationship of the SDR’s toward the relieving
of pressure on the dollars used as a reserve currency?
Mr. B arr . The answer to your first question, Mr. Rees, is that the
IMF technical staff and executive directors are currently working up
the amendments that were agreed to unanimously by the Governors in
Rio. Their time schedule is that they should be done by, roughly, the
30th of March. At that time the draft will be submitted to the Gov­
ernors of the International Monetary Fund for ratification by a
majority vote.
That will then trigger the submission of this amendment to the
articles to the parliaments of the world, and we will be coming to
the Congress, I think, in about April. That is about the date that we
hope to bring this legislation, the request for approval to this amend­
ment to the articles, before this committee.
Now, what effect will the SDR’s have on reducing—would you re­
phrase that second part of your question.
Mr. R ee s . What effect will the SDR’s have in lessening the pressure
on the use of the dollars as an international reserve currency?
Mr. B arr . I don’t think it will lessen the pressure on using the
dollar. What it will do, Mr. Rees, let me say it this way. It will act
as a supplement to dollars and gold. Most nations of the world hold
their reserves in gold and dollars and now they are going to have a
third option, SDR’s. If by pressures, you mean the can’t get enough
gold and can’t get enough dollars, they have SDR’s, yes, in that re­
spect, it will relieve pressures.
Mr. R ees . Will SDR’s relieve direct pressure on dollars? If we
don’t have SDR’s we would have to make up the reserves by either
dollars or gold.



Mr. B arr . That is the real reason for the creation of the SDR. We
cannot increase gold production very substantially. As a matter of
fact it will probably decline in future years. At least, this is what the
miners say. It is hard to predict, but there is some indication in that
direction. Gold stocks have not increased in world reserves. We obvi­
ously cannot continue to run deficits, forever, to supply dollars to the
rest of the world. I f you are not going to be able to get more gold, and
you are not going to get more dollars, an additional instrument is re­
quired to relieve the pressures you note.
Mr. R ees. Governor Robertson, many people have intimated that
if you take away the v
<rold that immediately the printing presses will
be set up and start printing a lot of new money. Isn’t it true, though,
that the currency that you supply to your banks must be paid for by
the banks by using deposits that they have in the Federal Reserve
Bank, that really the only creation of money is by specific acts of the
Federal Reserve Board ?
Mr. R obertson. This is exactly right. The people of the country
determine how much they need and the banks of the country, which
get the Federal Reserve notes from us, pay for those Federal Reserve
notes. So the risk of just the printing of greenbacks, for example,
doesn’t exist under the Federal Reserve System. That is one reason
Congress set up the Federal Reserve System.
Mr. R ees. So it has really no relationship, or no need to have any
type of gold cover because whatever currency is printed must be
paid for.
Mr. R obertson. That is correct, exactly so, and that is all we are
Mr. R ees. Mr. Barr, is the restriction on American businessmen in­
vesting dollars primarily limited to Europe, and not the underdevel­
oped countries ?
Mr. B arr . That is right.
Mr. R ees. Isn’t it true in Europe there is a surplus of money which
an American company, if they wished to build a plant in Europe, could
borrow in that European money market; the President’s proposal
doesn’t mean that the American investor cannot go out and borrow
outside of the United States,^and isn’t the competitive position of the
American businessman wanting either to go into Europe pr expand
in Europe, a little better on the European money market, vis-a-vis the
local European company ?
Mr. B arr . It is a three-part question. You are correct. We are not
saying to the American business, you cannot invest in Europe. We
are saving, you can’t move funds from the United States to build a
plant in Europe at this juncture. We are saying, if you want to build
a plant in Europe, as you point out, go into the money market in
Europe and borrow your money, and it is also correctly pointed out,
there are a few entities any place in the world that have the credit
rating of some of our very large corporations, and they can pledge
their credit rating in Europe in the money market, and with that
credit rating, will probably have an advantage over most European
Mr. R ees. In talking about foreign trade and trade balance, if you
take away foreign aid sales and Public Law 480 sales, isn’t it true
that we still have a positive balance of exports ?



Mr. B arr . Yes; but it is, of course, smaller—$650 million in 1966;
but nearly $4 billion in the peak year of 1964.
Mr. R ees. Isn’t it true in the last several years that our increase of
exports, especially in the area of exporting technology and sophisti­
cated machinery, has increased?
Mr. B arr . Yes, sir; that is correct. This has been the strongest posi­
tion, strongest part of our export picture. Sophisticated and highly
technical, and heavily research-oriented exports.
Mr. R ees. Would a border tax or such hidden type of tariff do
nothing but open us up to retaliation by other countries, especially
those to whom we export most of the sophisticated goods ?
Mr. B arr . This subject is up for discussion. A border tax adjust­
ment is not a disguised tariff, it is an adjustment to reconcile the taxes
and prices internally with those that are coming in from the outside.
It is Jegal under GATT and the question we are exploring now is:
Was the original GATT thesis correct? It was premised on the as­
sumption that all corporation income taxes are not shifted forward
to the consumer, while indirect taxes such as turnover taxes, are shifted
forward to the consumer. I don’t believe many economists today would
say this is a valid thesis and this is what we are exploring with our
counterparts in Europe today.
Chairman P a t m a n . Mr. Williams.
Mr. W il l ia m s . Thank you, Mr. Chairman. I don’t think there is any
question about the fact that the disease we are trying to cope with
today is unfavorable balance of payments. There has been some com­
ment here today about the fact that our citizens who hold currency
cannot redeem that currency for gold, and there is no question about
Neither is there any question about the fact that the dollars are
flowing out of the country, and which are being held abroad, and
these dollars can be redeemed for gold.
Mr. B arr . That is correct.
Mr. W il l ia m s . This is the very same problem that we were coping
with 3 years ago when the gold cover was taken off the Federal Reserve
Mr. B arr . That is right.
Mr. W il l ia m s . Because of the fact that the problem has not been
corrected in the intervening 3 years, we are back now, considering
taking the gold cover off our currency. You made the statement today,
Mr. Barr, that we are not going to go so far as to exhaust or closely
exhaust our gold supply in this country. Why haven’t those steps
been taken in the last 3 years ?
Mr. B arr . Mr. Williams, I indicated that when Secretary Dillon
was before this committee he was putting in place at that time a
voluntary program to try to restrain direct investment overseas to
what we could earn. He was trying to restrain bank lending to a
reasonable pace that we could accommodate, where we could earn
enough to met these flows. That was a successful move. Something
he did not predict was the outbreak of hostilities in Vietnam, that
threw an added burden of a billion and a half on the balance-ofpayments picture.



Something he did not predict was that France would continue
to hit us for a billion and a half in gold in the calendar year 1965
through September of 1966. Something he did not predict was that
in November of 1967 the British would devalue with consequent
disturbance to the exchange market.
Mr. W i l l ia m s . Y ou have already made the statement, even with
the hostilities in progres, such steps can be taken to reduce this gold
Mr. B arr . That is right. The steps are simple, Mr. Williams. Raise
taxes and cut expenditures and keep internal discipline in the United
States. Don’t invest more and lend more or travel more overseas than
we can afford. Keep our trade surplus strong. And negotiate with our
allies so that they are bearing the fair share of the Durden, so that,
because of geography, we are not penalizing our payment accounts
because of our troop deployment.
Mr. W i l l i a m s . I f all this had been done a year or two ago, we
wouldn’t be here on this subject, would we ?
Mr. B ar r . Perhaps n ot, Mr. Williams.
Mr. W i l l i a m s . Let me say this. As you indicated earlier today,
this present requirement of 25-percent gold cover on currency is a
restraint in the issuance of currency. You made that statement.
Mr. B ar r . It is a theoretical restraint. It has never been an actual
Mr. W i l l i a m s . I think you are correct in this statement. Mr. Robert­
son indicated it is not a restraint, but let me call your attention, Mr.
Robertson, if the provisions of the law are followed and you do take
this means of temporary relief from the requirements of the law
that you do have to increase your interest or discount interest rates,
while you are following this temporary procedure----Mr. R o b e r t s o n . I would assume, if we got into that sort of position
we would be following such a monetary policy that you wouldn’t
achieve anything by this means at all.
Mr. W il l i a m s . All I am pointing out is, that even with your assump­
tion that the law as it is presently written, gold cover as it presently
stands is a restraint on the issuance of currency.
Mr. R o b e r t s o n . Almost none whatsoever.
Mr. W i l l i a m s . I would like to conclude with a comment that this
gold reserve business of this country is a pretty sorry picture. From
the figures you have given, we have gone from $23 billion down to
$12 billion. We have $1.3 billion in free gold and $10.7 in our reserve.
I think we have reached a critical position. I think this matter de­
serves careful study, and I would just very seriously question whether
removing the gold cover at this time is going to helj). I really feel that
the removal of the gold cover at this time is going to permit the
gold drain from this country to continue.
For as long as we have this unfavorable balance of trade, dollars
are flowing out of the country, which can be redeemed in gold. Then
our gold reserves are going to continue to dwindle, and there is
no reason----Mr. B ar r . What would you suggest we do, Mr. Williams ? We are
asking you to raise taxes, reduce the tourist outflow, curtail direct
investments and bank lending. We are asking our trading partners
in Europe to adjust. What would you add to the program?



Mr. W il l ia m s . There is no question that faults in our economy have
been responsible for helping to develop these conditions. These faults
in our economy, many of which are governmental inspired, have to
be corrected.
Mr. B a r r . That is correct. And this is what we have asked the Con­
gress to do, raises taxes $12.9 billion, and to cut appropriations $10
billion. And this is precisely what we are doing. I couldn’t agree
with you more.
Chairman P a t m a n . Mr. Bingham.
Mr. B in g h a m . First of all, I would like to compliment both of you
gentlemen on your excellent testimony; it has been very helpful.
Governor Robertson, as to the Secretary’s prediction that we will
need this year $2 billion additional in notes, I am surprised that that
rate of increase continues, in view of the constant increase in the use
of credit instead of cash. Would you comment on that?
Mr. R obertson. Credit takes care of most of it. Currency is a small
portion of the total money supply of this country. But currency has
been growing about $2 billion a year because the transactions which
are financed continue going up. I don’t think there is a man living
who could say today that the increase next year will be exactly $2
billion, and the next year $2.1 billion. You can’t predict with precision
because it depends entirely on developing conditions.
I f we get to the kind of checkless, cashless, society that some people
have been talking about, which I don’t think we are going to do, we
won’t need any change in this. There won’t be an increase in cur­
rency in circulation.
Mr. B in g h a m . Has the rate of increase in the cash requirement
been going down percentagewise?
Mr. R obertson. Currency has been a fairly constant percentage of
the total money supply. The transaction figure has been going up,
so that the money supply and the amount of currency have also been
increasing. And, as I say, currency has grown about $2 billion a year.
Mr. B in g h a m . Mr. Barr, I take it you would agree that since 1934
this 25-percent reserve requirement has really been a pretty theoretical
Mr. B arr . Absolutely.
Mr. B in g h a m . Because it can’t be put into practice.
Mr. B arr . That is right.
Mr. B in g h a m . So, its only value, presumably, has been a psychologi­
cal one, and your position is that psychologically, this is now a dis­
advantage in terms of the strength of the dollar overseas ?
Mr. B arr . That is correct.
Mr. B in g h a m . Now, I would like to bring you back to something
that Mr. Moorhead was raising before, about the long-term solutions.
I really don’t think you answered his questions in the way he meant
them, because you are talking about solutions that have to do with the
continuation of the Vietnam war, and I hope that this is not the longrange thinking of the administration, that the Vietnam war is going
to be with us f orever.
I think what he was getting at, and I am certainly interested in this,
is: What are we thinking of for the long term, in order to get away
from our dependence on gold as the basis, as the sun, so to speak, in
the solar system? There are so many disadvantages to gold. We don’t



produce much. The major country producers are South Africa and
the Soviet Union.
Are we really pushing fast enough to get away from our dependence
on gold as the center of the international monetary system.
Mr. B arr . Mr. Bingham, we have pushed this as fast as we can. And
I might add, we have had able assistance from the Congress—Con­
gressman Reuss and his colleagues, and the U.S. Senate—in trying
to bring into being a supplement to dollars and gold. We are very close,
as I indicated. You will have before you legislation in April, if we stick
on the timetable, that will for the first time create a reserve that we
can hold, backed not by the credit of one country, not by a mental, but
by the collective credit of every free nation in the world.
That is the way we are moving and I think it is a responsible way to
Mr. B in g h a m . Has any thought been given to getting over to a com­
modity other than gold, something like a particular grade of oil, for
example, as a basis for an international currency ?
Mr. B arr . I don’t believe much thought has been given to that, sir.
Mr. Reuss has probed in these areas, possibly more than I. But I am
not sure any thought has gone to using oil or wheat, or soybeans, or
tobacco, as a reserve. I know one country that does count in its reserves
Persian rugs. I think, appropriately so. They are very valuable, but we
don’t have too many Persian rugs.
Mr. B in g h a m . One final question. As we now undertake to sell gold
to central banks at this fixed price----Mr. B arr . Yes, sir.
Mr. B in g h a m (continuing). We make no distinction between those
central banks that sell to individuals, and those who do not ?
Mr. B ar r . That is right.
Mr. B in g h a m . As I understand it, Great Britain does not, and
France does?
Mr. B arr . That is right.
Mr. B in g h a m . Why would it not be reasonable to say that we will
not sell gold at the fixed price to central banks that then turn around
and sell it to speculators ?
Mr. B ar r . Mr. Bingham, we cannot figure a way to discriminate
between nations. This is a universal system. We discriminate if we say
to France we are not going to sell to you because you sell to your in­
dividual citizens. France can immediately, without too much difficulty,
make an arrangement with some ally some place to move dollars to
them, and they put it to us for gold, and France gets the gold 'back.
Maybe we are not ingenious enough. We cannot figure a way to keep
this universal system in operation and discriminate between nations.
Mr. B in g h a m . In other words, there is nothing wrong with such an
idea in principle, it is just that you can’t see a way to carry it out?
Mr. B ar r . That is right. Algeria has put $ 1 5 0 million to us for gold.
This didn’t make us happy. The Algerians announced it. We didn’t
announce it. As you know from diplomatic experience, our relations
with Algeria vary from warm to lukewarm, and sometimes chilly. We
know of no way to discriminate between nations.
Chairman P a t m a n . Mr. Wylie.
Mr. W y l ie . This is a very complicated subject for me so I will ask
two or three questions to try to help me understand its ramifications.



Mr. B arr . It is complicated for all of us. Don’t apologize.
Mr. W y l ie . I understand the purpose of this bill is to add to the
supply of gold so that more will be available for exchange to foreign
Mr. B arr . That is right.
Mr. W y l ie . Mr. Blackburn and Mr. Bingham have pursued the
thought that the gold cover was put on in the first place for psychologi­
cal reasons.
Mr. B arr . That is correct. That is our best indication, from reading
the record of 1913.
Mr. W y l ie . But psychological or not, it has come to have some value
as a reserve or as a backing for the U.S. dollar in the world market ?
Mr. B arr . Yes, sir. But what we are doing, Mr. Wylie, is to remove
the domestic backing so it will be available for the international
Mr. W y l ie . The Indians used the wampum. During World War II
I was in Germany. They used the German mark as a medium of ex­
change but it had very little value. You needed a whole bushel basket
full to buy, maybe, a loaf of bread. This goes back again to Mr. Bing­
ham’s question. You are in the process of establishing a world note, or
world piece of paper, which can be exchanged. But, doesn’t it have to
really go back to something that has some intrinsic value, to main­
tain its place as the sun in the solar system ?
Mr. B arr . Are you speaking of the dollar, or new reserve assets?
Mr. W y l ie . I am speaking of any medium of exchange, the wampum,
the mark----Mr. B arr . I guess it boils down to, what do people have confidence
in. The SDR will be accepted because there will be a solemn commit­
ment to accept it. You won’t be able to get your hands on it, but it will
be moved back and fourth between nations and it will rest on the eco­
nomic strength of the 103 nations that are members of the Monetary
Mr. W y l ie . N ow , Mr. De Gaulle has been checking in his claims, so
to speak, asking for gold. Are these claims made up of the dollars held
by Fr ance ?
Mr. B arr . That is correct.
Mr. W y l ie . That is all they are ?
Mr. B arr . Yes.
They ran out of dollars in September of 1966. They didn’t run out
completely. They kept a reserve to pay their debts and for transaction
purposes. But they ran it down to the point they thought was advisable,
and they have not put any claims against us since September of 1966.
Mr. W y l ie . Does France use gold as backing for its franc ?
Mr. B arr . N o .
Mr. W y l ie . I was thinking that maybe France was trying to become
a sun in the solar system, monetary solar system, when they asked
for our gold ?
Mr. B arr . I can’t speak for French policy, especially at the moment;
but I know that in the past the French have vigorously objected to any
attempt to let the franc become a reserve currency. They don’t want to
take on the headache of being a reserve currency, and I think they are
well advised.



Mr. W i d n a l l . Secretary Barr referred to a statement that I made
in which I challenged the accuracy of a figure submitted by the Treas­
ury. I didn’t challenge the accuracy of the figure, I challenged the com­
parative advantage shown by those figures when it included AID-tied
exports and Public Law 480 as part o f trade surplus.
Mr. B a r r . Mr. Widnall, we can show you the figures either way, and
the only point I was making, sir, was that I am so disturbed. I have
fought with this committee over PC’s. PC’s are finally out of the way
and we have a new budget concept, as a result of this wrestling match.
I want to make sure I am not in a statistical argument with you.
We keep our books this way because this is an international practice
and not our practice. We will be delighted to break them out any way.
Chairman P a t m a n . Mr. Galifianakis.
Mr. G a l i f i a n a k i s . Thank you very much, Mr. Chairman, and thank
you, Mr. Secretary, and Governor Robertson.
I admit to the complexity of the problem, and it is a generally
known proposition that the United States went off the gold standard
in 1934, which leaves me with the notion we didn’t have any great
need for gold standards and measures any more. Is there any link be­
tween the reasons that were applied for going off the gold standard
in 1934 and the reasons we now seek to apply for the removal of the
gold cover?
Is that too much in one breath ?
Mr. B a r r . May I supply that for the record ? I get a little fuzzy on
the 1934 history. As a matter of fact, the history itself is a little bit
(The information requested follows:)
There is, of course, a link between our going off the gold standard domestically
in 1938 and the present request to remove the gold cover requirement in the sense
that the gold cover has been an anachronism since that time. As brought out
elsewhere in the testimony, once our currency was no longer actually convertible
into gold domestically, there was no need for a domestic cover requirement.
There would, however, appear to be little similarity between the reasons that
lay behind the departure from the gold standard in 1933 and the increase in the
price of gold at that time and the reasons we now seek removal of the cover
requirement. The world then was in the depths of the depression and it was
believed the increased price of gold would stimulate recovery. We are, of course,
not in similar circumstances today.

Mr. G a l i f i a n a k i s . Reference h a s been made to so much psycho­
logical emphasis, and you would hear terms, certainly before 1934—
I don't recall them, but I have heard about them—that the dollar is as
good as gold. And you hear today that the dollar is as solid as gold, or
u s good as gold. And we keep making reference to the psychological
impact that removes the gold cover. Can’t we have an equal psycho­
logical impact by saying that gold has never been as good as the
Mr. B a r r . I think there are many who would agree with you, sir;
but I can’t prove it one way or the other.
Mr. G a l i f i a n a k i s . With your description of the dollar as being a
central focal point around $200 billion international trade, it would
seem to me gold has never been as good as the dollar.
Mr. B a r r . There is an argument—to which I don’t know the
answer—there are those who say the dollar gives gold its value. I f we
didn’t buy gold, it might fall to $10 an ounce; and the others dispute



it. I don’t know the answer, but at least it is a subject of dispute. Does
gold give value to the dollar, or the dollar give value to gold?
Mr. G a l if ia n a k is . I f we fail to enact this legislation^ and I think
it is needed, what do you envision the symptoms to be m the next 6
months on our economy ?
Mr. B arr . I f we fail to enact this legislation ?
Mr. G a l if ia n a k is . I f the Congress fails.
Mr. B arr . Domestically, I would see no action. Governor Robertson
might wish to comment.
Mr. R obertson. I would see no reaction insofar as the domestic
economy is concerned. But I would see the possibility of anticipatory
takings of gold by those foreign central banks which see the free gold
diminishing and, therefore, want to get in fast, while they can. And
also, I think it might give rise to further speculation against the
dollar in the sense that people will believe that since this free gold is
getting down so low there must be something being considered about
increasing the value of the gold, which means decreasing the value of
the dollar.
This is the farthest thing from the mind of anybody. We want to
maintain the value of the dollar in gold and eliminate the speculation
against a change in the price of gold. By making clear the amount of
gold which is available for our international transactions, we would
do exactly that.
Mr. B arr . I want to make it clear that I think our allies in Europe,
and the United States are in the same, are in absolute agreement. We
will use our gold to the last bar. We are not going to raise the price.
Chairman P a t m a n . Mr. Bevill.
Mr. B evill . Mr. Chairman, I would just like to ask this question. I
believe it was stated earlier that there are only three major countries
that have been using the gold reserve.
Mr. B arr . Yes, sir.
Mr. B evill . Would you tell me what those countries are, the names
of those countries?
Mr. B arr . Belgium, Switzerland, and the Netherlands, among the
group of 10 plus Switzerland.
Mr. B evill . Is there any precedent for any other country in the
world that was on this gold reserve, having the gold reserve and then
going off the gold reserve ?
Mr. B arr . I will have to supply that for the record.
Mr. B evill . And would you name some of these major countries
that have never been on the gold reserve?
Mr. B arr . Yes; we will supply that.
(The information requested follows:)
G old R


P r a c t ic e s


O t h e r C o u n t r ie s

If only major countries are considered and if we revert to the pre-World War I
period of the gold standard, then it is fair to say that all major countries at one
time or another had gold reserve requirements. The majority have, however, long
since repealed or suspended these requirements. Also, some countries that do
still have reserve requirements allow these to be met by foreign exchange in
lieu of gold.



Among the countries which hare repealed or suspended requirements are:
United Kingdom
Some countries that do have reserve requirements are:

Gold only

and gold

Netherlands........................................................................................................................................................... .
South Africa.....................................................................................................................................
Mexico..................................................................................................................................................................... .

Chairman P a t m a n . Mr. Halpern.
Mr. H alpern . I would commend both of our witnesses this morning,
Secretary Barr and Governor Robertson, for their very enlightened
and most helpful and informative testimony.
Governor Robertson, there is no doubt that the main role played by
the gold cover is a psychological one. That has been brought out here
this morning. Do you foresee any psychological ramifications on the
international scene from the fact we have been forced to move, as a last
resort, the removing of these gold cover requirements ?
Mr. R obertson. No, I don’t. I think the psychological reaction, if
any, would be very good, because it would give a truer picture of the
amount of gold that is available for exchange for dollars; and the pur­
pose of this is not to enable this gold to go out. What we need to do—
and if we don’t, we shouldn’t beTiere today—is to employ such mone­
tary and fiscal policies in this country as do establish the kind of
economy which can afford to have dollars going abroad. And the
trouble is we have too many dollars going abroad.
Mr. H alpern . I think the psychological effect would be good.
Mr. B arrett (presiding). 1 wonder if it would be an imposition
to shorten your time and give the other members a few minutes ?
Mr. H alpern . Surely.
Mr. B arr . We are available to the committee this afternoon and
in the morning.
Mr. B arrett . The House will be in session.
Mr. H alpern . Secretary Barr, you mentioned the retaliation from
opposing quotas on imports. Don’t you fear retaliation if we enact
the restrictions outlined by the President in his balance-of-payments
Mr. B arr . T o which restrictions are you referring, Mr. Halpern—
direct investment? I don’t think we will. I don’t think that will en­
courage it. As a matter of fact, there has been, I am sure you are aware,
some political feeling in Europe against such investment. I don’t look
for retaliation in that area. In tourism, we are preparing to discuss
with the Ways and Means Committee what we are going to do in this
As I have indicated, it is not so much to cut down the total flow of
traffic, but to cut down the amount spent overseas. And 1 think Euro­



peans can understand this objective and sympathize with it, and the
best indication that we have is that our sales of airplanes will not suffer.
Mr. H alfeknt. The point was made earlier by Mr. Blackburn, I be­
lieve, that the removal of the gold cover and various recommendations
in the President’s balance-of-payments message were temporary meas­
ures to shore up the U.S. financial position, as well as the entire inter­
national monetary system of the free world.
I gather the ultimate solution, as you see it, would have .to lie in
maintaining economic stability and simultaneously moving toward a
system of international currency. We are, in fact, placing a great reli­
ance on this new development. What if some nation, for example,
France, refused to go along ?
Mr. B a r r . With the SDR ?
Mr. H alpern . Yes.
Mr. B arr . They voted for the amendment at Rio, Mr. Halpem.
Negotiations are proceeding satisfactorily at the moment. Fifty per­
cent of the Governors must ratify the agreement, and then 60 percent
of the nations having 80 percent of the votes must ratify it. So France
couldn’t block the adoption.
Mr. H alpern . Didn’t France say they wouldn’t ratify it unless we
improved our balance-of-payments picture?
Mr. B arr . It is my impression that France is insisting we do not
actually issue SDK’s until our balance-of-payments position----Mr. H alpern . That is exactly right. That is my point.
Mr. B arrett . Mr. Reuss.
Mr. R euss Secretary Barr, as you have explained, our direct invest­
ment program for continental Western Europe is that American cap­
ital investment in 1968 be terminated.
Mr. B arr . Outflows from the United States.
Mr. R euss. Shortly after the President’s message an exception was
made for Greece, a country where a democracy was recently displaced
by a military dictatorship, and Melina Mercouri has been wondering
out loud why we did that.
Mr. B arr . We didn’t make an exception for Greece. Greece was in­
cluded, not being in the same economic strength as the rest of Europe.
Mr. R euss . There are no restrictions on American investment in
Mr. B arr . Greece and Finland are in the 110-percent category with
Latin America, most of Africa, less developed nations. This was an
economic judgment, Mr. Reuss.
Mr. R euss . And the answer is, Greece is poor ?
Mr. B arr . The answer is, it was an economic judgment.
Mr. R euss . Portugal is poor. Is Portugal exempt ?
Mr. B arr . There were economic judgments made in these areas, Mr.
Mr. R euss . Ireland is poor. Is Ireland being given the same treat­
ment that the militanr dictatorship in Greece receive ?
Mr. B arr . Ireland is in the 65-percent group.
Mr. R euss . Greece is in the 110-percent group ?
Mr. B arr . That is right. It goes back, as I understand it—it is
linked to the interest equalization tax list. That is the list we use.
Mr. R euss. Well, I am still mystified.



Mr. B arr . The IET list, as you know, has changed from time to
time. But we did not change it here. We took it as it stood, as it ap­
plied to less-developed nations, and applied the direct investment
program designation of less-developed nations to precisely conform
to the IET list.
Mr. B arrett . Mr. Brock.
Mr. B rock . I have enjoyed your testimony so far, gentlemen. In
the general area of the gold cover, I don’t think many of us would
really argue the point that there is very little value to the average
American in having a 25-percent requirement. We do have a question
as to the psychological impact of a related unit of value of some kind,
be it gold or—somebody else suggested, maybe soybeans. But we have
gold today. I think Mr. Galifianakis raised the point which might
be interesting to explore: Which is more valuable, gold or the dollar ?
I think we could find out if we not only took this step, but then pro­
ceeded to sell our gold at whatever price we could obtain on the open
market. Just dump $12 billion worth of gold and see what happens*
and then go off the gold standard. I think it would make a most in­
teresting exercise.
We are not really talking about gold here today. What we are
talking about is a basic flaw in our competitive ability as a nation.
That is what concerns me. Because I don’t hear enough conversa­
tion or answers as to what we are doing to address ourselves to the
flaw. I don’t think the President’s program is adequate. I don’t think
it addresses itself to the real problem.
For example, he challenges management and labor to exercise the
utmost responsibility in their wage-price decisions. And how did he
assist them in this process, by abolishing the wage-price guidelines.
It is sort of discouraging to see this administration talking about cur­
tailing private investment overseas when our net income from private
investment is one of the major factors in us having a balance of pay­
ments at all.
We are cutting off our nose to spite our face a few years down the
road by reducing our private investment overseas. We talk about re­
ducing loans which are paid back in a very short period of time and
which, primarily, go out to finance the export of American goods
The President says we are going to reduce Government expendi­
tures overseas, the impact of our troop commitment over there, by
having them purchase U.S. securities. Well, what is going to happen
when we have to pay those securities off ? What happens to your bal­
ance of payments, 5,6,7 years down the road, if we have not corrected
this basic imbalance in the competitive structure of the United States,
and this is caused by irresponsibility on the part of the U.S. Govern­
ment, which will have an accumulative deficit of $100 billion under
this administration?
I think we should address ourselves a little more to what we are
doing about the basic problem, and not worry so much about the gold
Mr. B arrett . Before Mr. Fino is recognized, I want to say to you
gentlemen here this morning, Mr. Barr and Mr. Robertson, we will
recess until Thursday morning at 10 o’clock and will have a few other
persons who wish to be heard, and you will be here also ?
Mr. B arr . Yes, sir.



Mr. F in o . I was just curious, Mr. Barr, as to one part of your
testimony here this morning where you said that Algeria had cashed
in $150 million for U.S. gold. Are you at liberty to say where Algeria
got 150 million American dollars?
Mr. B ark . I would tell you, if I knew- the answer. The best answer
that we can find is that they had about $175 million in reserves. This
is the best we can find. W e don’t have access, even with the best of
intelligence, to all the affairs of other nations. But the best informa­
tion we have is that they cashed out about $150 of the $175 million
holdings that they had.
Mr. F in o . Would you venture to say that it might be some of the
bankers of France that are in cahoots, or working together, in Algeria?
Mr. B arr . Well, it would be sheer speculation on my part, Mr. Fino.
I don’t know. They had $150 million. That is all I know. Where they
got it, I don’t know. I am sorry.
Mr. B arrett . Thank you, Mr. Fino.
The committee will stand in recess until 10 a.m. Thursday morning.
(Whereupon, at 12:30 p.m., the committee recessed, to" reconvene
at 10 a.m., Thursday, January 25, 1968.)



THU RSDAY, JA N U A R Y 25, 1968

H ouse of R epresentatives ,
C om m ittee on B a n k in g an d C urrency ,

Washington, D.C.
The committee met, pursuant to recess, at 10:45 a.m., in room 2128,
Rayburn House Office Building, Hon. William A. Barrett presiding.
Present: Representatives Barrett, Sullivan, Reuss, Moorhead,
Stephens, St Germain, Gonzalez, Minish, Hanna, Gettys, Annunzio,
Rees, Bingham, Galifianakis, Widnall, Fino, Dwyer, Brock, Clawson,
Johnson, Mize, Lloyd, Blackburn, Brown, Williams, and Wylie.
Mr. B arrett . The meeting will come to order, please.
Today the committee continues consideration of H.R. 14743, a bill
to eliminate the reserve requirements for Federal Reserve notes and
for U.S. notes and Treasury notes of 1890. We have back with us
Under Secretary Barr and Vice Chairman Robertson, who are avail­
able to answer any additional questions which the members may have.
Following them, we will hear from Congressman Charles W.
Whalen, Jr., of the Third District of Ohio.
The committee was also scheduled to hear from Mr. Danielian,
president of the International Economic Policy Association, today.
However, Mr. Danielian could not appear today, and we will attempt
to schedule him next week. In addition, a request to be heard on this
legislation has been received from the Liberty Lobby. I understand
the staff is in contact with that organization to arrange a mutually
agreeable time to be heard.
It is my further understanding from the chairman of the committee,
Mr. Patman, that additional proposed witnesses were to be received
from the minority for consideration. As yet, it is my understanding
that no names or organizations have been submitted by the minority
on this matter. It is hoped that the committee will be able to conclude
t e s t i m o n y on this bill next week and that the committee will then
proceed m executive session to mark up the legislation.
Now, Mr. Barr and Mr. Robertson, if it is not an imposition, we
would like to call the Congressman from Ohio, who desires to make
a brief statement. This will give us an opportunity to have the other
members present who may desire to ask you further questions.
Will the gentleman, Congressman Charles W. Whalen, Jr., of the
Third District of Ohio, come forward ?
Congressman, we are very happy to have you here this morning.
While you have not been in this body too long, vou have gained a great
deal of affection by not only the Republicans but also the Democrats.
And we are very grateful to have you come here this morning and give
us your testimony.




I f you desire to read your statement, you may do so, or if you pre­
fer to be asked questions, we will do that. Whatever you choose to do,,
we will abide by it.

Mr. W h a l e n . Thank you very much, Mr. Chairman. I w ill read this
statement as it is rather short.
Mr. Chairman and members of the House Committee on Banking
and Currency, I appreciate this opportunity to testify on behalf of
H.R. 14743 and H.R. 14783, a companion measure which I introduced
on January 23.
You also have heard expert testimony urging the removal of the socalled gold coyer. Therefore, I will not expose you this morning to a
lengthy recitation of the merits of the bills now before this committee.
Instead, let me offer three observations for your consideration.
The first, the requirement that gold certificates equal a certain per­
centage of Federal Reserve notes outstanding is an anachronism. Until
the early 1930’s the United States operated on the gold standard. Gold
circulated as currency. Representative paper money was redeemable
in gold by its holders. Dollars held by foreigners likewise were ex­
changeable for gold.
When our country abandoned the gold standard in 1933, two ves­
tiges of this system were retained. The first was a twofold gold cover
requirement. Specifically, the Federal Reserve System was directed
by Congress to hold gold certificates as a percentage of, first, Federal
Reserve notes outstanding, and second, member bank reserve de­
posits—held by the Federal Reserve. The latter requirement was
repealed by Congress in 1964. The former remains.
Today domestically held American currency is not redeemable in
gold. Thus, the provision that gold certificates be held in reserve
against Federal Reserve currency is meaningless. It is a throwback to
the early thirties. Since the gold cover is not applicable to today’s
monetary system, it should be discarded on a purely theoretical basis.
As an economist, I often am asked, “Won’t repeal of the gold cover
remove the discipline from our monetary system?” In this connection,
two factors must be remembered. First, Federal Reserve notes repre­
sent only a small percentage, approximately 22 percent, of our Na­
tion’s total money supply. By far the larger portion is demand de­
posits held by commercial banks, accounting for approximately $141
Second, Federal Reserve officials already possess sufficient authority
from Congress to prevent creation of an excessive money supply.
These powers, as you know, include the right to, first, adjust member
bank cash reserve requirements; second, conduct open market trans­
actions ; and, third, establish discount rates.
My second observation, if our Nation is to continue to meet its inter­
national commitments, the gold cover statutes soon must be repealed.
The second remnant of the old gold standard is our Government’s
guarantee to sell gold when presented dollars by foreigners. Our
ability to honor this commitment, however, has been inhibited by the



previously cited archaic requirements that gold certificates equal a
certain percentage of the total of Federal Eeserve notes outstanding.
"Thus, under today’s law, we presently guarantee $10.7 billion of our
total $12 billion in gold. This leaves only $1.3 billion in free gold to
meet the demands of those foreigners who may wish to exchange their
dollars for gold.
Elimination by Congress of the last remaining gold cover clause
would offer two immediate benefits. First, it would enhance the U.S.
ability to honor its international pledges by freeing approximately
$10.7 billion in gold.
Second, this display of determination should create a favorable
psychological effect abroad. This, in turn, should end the speculative
activities, which apparently contributed substantially to our de­
teriorating balance-of-payments situation in the fourth quarter of 1967.
My final observation, removing the gold cover, however, does not
solve our balance-of-payments problem. I f Congress repeals the re­
quirement that gold certificates be maintained as a percentage of Fed­
eral Reserve notes outstanding, we in effect are buying time. In this
context, such action only can be considered as an expedient. It does
not address itself to the cause of our gold outflow; namely, the accumu­
lation of dollars abroad as a result of recurring American balance-ofpayments deficits.
Thus, upon passage of H.R. 14743 or some similar measure, Congress
faces another task. It is vital that we adopt a long-range program
which will provide a positive, sound solution to our balance-ofpayments problem.
Thank you, Mr. Chairman, for this opportunity to appear before
your committee. And I will endeavor to answer questions if there are
Mr. B ar r ett . Thank you, Mr. Whalen. I have no questions to ask
you. But I want to say, you have submitted a very fine statement, and
I am very grateful for your statement.
Mr. Widnall.
Mr. W id n a l l . Thank y ou , Mr. Chairman.
You are certainly welcome here before the committee today. And you
have made an excellent statement.
Mr. W h a l e n . Thank y o u , Mr. Widnall.
Mr. W i d n a l l . And I personally know that you are well qualified
in this field. And it was one of your activities long before you came to
Congress, and we are fortunate to have you here.
Do you have any suggestions as to how the speculative activity in
gold might be curbed ?
Mr. W h a l e n . A s I have indicated in my testimony, certainly one
step that could be taken would be to repeal immediately the so-called
gold cover. I think that the psychological effect would be such that
the speculation would cease. It would indicate to the world our intent
to honor the commitment which we now have.
Mr. W i d n a l l . What happens if this does not work ?
Mr. W h a l e n . It is a question, of course, as to how long this specula­
tion would continue, Mr. Widnall. As I have indicated, if this is re­
pealed, certainly we will have additional gold with which to meet our
commitments. I cannot foresee the possibility of the entire $10.7 billion
of additional free gold being drained from our country in any short
period of time.



Mr. W id n all . As I understand it, the normal domestic trend is run­
ning about $700 million a year, and we have got about $1.3 billion level.
So without any unusual circumstances, that could be used up in a 2year period in this country ?
Mr. W h a l e n . Without the removal of the gold cover ?
Mr. W id n all . Yes.
Mr. W h a l e n . Yes.
Mr. W id n a ll . That is all.
Mr. B arrett . Mr. Reuss.
Mr. R euss . I am delighted to hear your view’s on the subject of the
gold cover, Mr. Whalen.
As regards the solution of the long-term problem, while that is not
specifically the purpose of the hearings, that would be enlightening.
Would you care to give us some of your ideas?
Mr. W h a l e n . Mr. Reuss, I think first we have to determine who the
real culprit in this situation is. I believe any analysis will indicate that
the balance-of-payments deficit was created largely in the public or
governmental sector of our economy. Just using 1966 figures—the 1967
ones are not in as yet—an analysis would indicate that the private
sector generated a $4.3 billion trade surplus, whereas the governmental
sector created a $5.6 billion deficit, the difference, then, of course, being
the $1.3 billion trade deficit which occurred in 1966.
Thus, we should examine many of our commitments abroad in order
to determine whether perhaps they, too; might not be archaic. I am
referring particularly to our troop commitments in Europe, the United
Kingdom, and J apan.
I am not prepared, and doubt that any of us are prepared, at this
time, to state that we should remove our troops from these areas. But I
suggest that it would be well to establish what I would term a bipar­
tisan, bicameral commission to study this question and report to the
Congress in a period, let us say, of about 6 months. Such a commis­
sion could provide some of the answers that we would like to have as
to whether or not these commitments are as valid today as they were
when they were made in the late 1940’s. This certainly is one approach.
I, of course, would agree with some of the proposals made by the
President, some of the more positive ones, such as our efforts to improve
our exports, and our efforts to attract more travelers to the United
States from abroad.
Mr. R euss. When you say that the major cause of our balance-ofpayments deficits, which in turn are at the root of our problems, is
the governmental account rather than the private account, you are
talking very largely about military commitments, are you not ? Our
foreign aid is very largely covered by the Buy American provision.
Mr. W h a l e n . It is spent back in the United States, that is correct.
Mr. R euss. So that the main problem is caused by our overseas mili­
tary commitments in Europe and Vietnam, is that about it ?
Mr. W h a l e n . Yes.
Mr. R euss . I think you have made a real contribution to our think­
ing. Thank you very much.
Mr. W h a l e n . Thank you, Mr. Reuss.
Mr. B arrett . Mr. Fino.
Mr. F in o . First of all, I want to congratulate you, Mr. Whalen,
for appearing before this committee. We always appreciate hearing
your expert testimony.



I think it was about 15 years ago when I first came to Congress
that we had a gold reserve of about $24 billion or $25 billion, and
now it is down to about $1.3 billion; am I correct ?
Mr. W h a l e n . Mr. Fino, we had in 1957 approximately $22.7 bil­
lion in gold. Of course, this was under the same restrictions that
we have today plus the additional 25-percent restriction, which was
repealed in 1964. And this, of course, has dropped in the last 10 years
by a little over $10 billion.
Mr. F in o . S o that actually we have about $1.3 billion in gold that
could be moved out without any restrictions ?
Mr. W h a l e n . That is right, free gold that is not set aside or isolated.
Mr. F in o . But under the present law, that is under this restriction ?
Mr. W h a l e n . Yes.
Mr. F in o . And from your testimony, I gather that unless we drasti­
cally cut excessive foreign spending, we are going to find ourselves
without this $10.7 billion ?
Mr. W h a l e n . Mr. Fino, let me restate the thrust of the argument
which I gave in my formal remarks. I feel that this is an anachronism,,
that the so-called gold cover bears no relationship to the monetary
system that we have today. And thus from a purely theoretical stand­
point, it should be healed, regardless of the balance-of-payments
situation. It is unfortunate, I must admit, that we change the rules
somewhat late in the game. But purely on a theoretical basis, since
the gold cover has absolutely no meaning in terms of our current
monetary system, it should be repealed. But the second argument*
as I indicated, is that it should be repealed in the very near future
because of the balance-of-payments problem that we have.
And if we are going to meet these commitments, we are going to end
speculation. In my opinion, we should certainly take this first step.
I think this is a necessary first step. Certainly there are other steps
which we must take to go to the roots of the problem.
Mr. F in o . Some of the legislators have suggested that we withhold
delivery of gold to these foreign countries in exchange for American
dollars, if these foreign countries owe us money, either on World War
I or World War II. What do you think about that?
Mr. W h a l e n . A s far as World War II is concerned, to my knowl­
edge, at least, the countries that owe us are meeting their obligations
on time. In fact, some of them are paying in advance due to this
With respect to World War I, it is a fact that nations still in debt
to us are not paying on that debt. It is rather fruitless to think in terms
of reclaiming that debt. That debt was based primary upon the repara­
tions concept, and since Germany f ailed to meet its reparations, France,,
Great Britain, and the others, in turn, could not pay us. I think it
basically was a fruitless concept to begin with.
Mr. F in o . Y ou express no tear here this morning regarding this
committee reporting out legislation that would remove this lid on the
$10.7 billion ?
Mr. W h a l e n . N o, I don’t express fear. I do have a fear, however, that
unless we take further steps, this balance-of-payments problem will
persist. This is what I hope the committee, in its wisdom, will remember,
that this step is needed m order to honor our commitments. And from
the theoretical standpoint alone, the gold cover should be removed.



But this will not end the problem. Thus, I feel the Congress must cer­
tainly look at the overall balance-of-payments problem and come up
with some positive, constructive programs.
Mr. F i n o . Getting back to my original question, isn’t it true that
until we do something about our balance-of-payment deficits, we will
find that we have dissipated this $10.7 billion?
Mr. W h a l e n . Over a period of time; yes.
Mr. F i n o . Thank you.
Mr. B arrett . Mrs. Sullivan.
Mrs. S u l liv a n . I have a very brief question, Mr. Chairman.
Congressman Whalen, for the record, would you favor flexible ex­
change rates as proposed by Professor Friedman and others, or do
you support the existing system of fixed exchange rates ?
Mr. W h a l e n . Not at this time. I would support the present system.
Mrs. S u l l iv a n . Thank you.
Mr. W h a l e n . It is worthy of consideration, I might say, but I am
not prepared to espouse this course at this time.
Mrs. S u l l iv a n . Thank you, Mr. Chairman.
Mr. B arrett . Mr. Mize.
M r . M iz e . I f w e h ad n o b a lan ce-of-p ay m en ts problem , a n d w e
en joyed a surplus balance o f p aym en ts, w o u ld y ou still recom m end
th is legislation ?

Mr. W h a l e n . Yes, I would, Mr. Mize. I don’t think there would be
the urgency 'about it. Quite obviously, the balance-of-payments prob­
lem has brought this to our attention. But as I suggested before, it has
no theoretical or even practical value under today’s monetary system
in the United States, and therefore, it should be discarded.
I say I am a little unhappy. I suspect we 'all are somewhat unhappy
in having to change the rules under these conditions. But I feel that
the rules just are not pertinent to today’s system.
Mr. M iz e . Let us assume this legislation were enacted, and let us
assume that those holding dollars against our available gold would
start converting for various reasons. France obviously has some rea­
sons. For example, let us assume that we would withdraw our troops
from Germany, and for that reason they might decide that they would
like to draw down gold for their dollars. And let us assume that all
$12 billion was taken, even though we were assured yesterday by the
Treasury Department that that would not be permitted. What kind of
a money system could you visualize, with all other countries in the
world having gold and we not having any ?
Mr. W h a l e n . I would not quite agree that all other countries of
the world would have gold. And I would agree also with the state­
ment that was made before, I just don’t think this is possible. The
commitments that we have to f oreigners amount to about $30 billion.
It is not conceivable to me at this time or in the short run that all of
the dollars involved in these commitments would be exchanged for
gold. Because, after all, the United States really is the banker of the
world. We perhaps didn’t want to be placed in this position, but this
is the position in which we find ourselves. I can’t see the other nations
of the world deliberately destroying the bank by exchanging their
dollars for gold.
M r . M iz e . Of course, it was not conceivable, say, 5 years 'ago, that
France could have been as arbitrary as they have been.



Mr. W h a l e n . Well, that perhaps is correct. But with De Gaulle,
anything is possible.
M r . M iz e . S o fo r a v ariety o f possible reasons, as im prob able as th ey
m a y seem to be n ow , the countries m ig h t decide th a t th ey w anted to
convert th eir d o lla r h old in gs to g old .

Mr. W h a l e n . I presume this is certainly possible, but I don’t think
very probable, Mr. Mize.
Mr. M iz e . Thank you.
Mr. B ar r ett . Mr. St Germain.
Mr. S t G e r m a i n . Thank you, Mr. Chairman.
We want to thank you, Mr. Whalen, for coming to testify before us
this morning. We know the background you have in this field.
You mentioned the role of the United States as a world bank. I f
we would liken this to our domestic banks commercially, they are re­
quired to keep a 10-percent reserve against liabilities. In essence, the
reserve, as far as our commitments internationally are concerned, and
the world bank, would come out to approximately 30 percent, would
Mr. W h a l e n . I f you assume that the $10.7 billion would be applied
against this.
Mr. S t G e r m a i n . Nothing further, Mr. Chairman.
Mr. B ar r ett . Mr. Williams.
Mr. W i l l ia m s . I am certainly happy to see you here this morning,
Mr. Whalen. You say that you regard the removal of the gold cover
as something which should be done. And you go on further to state
that it is unfortunate that we have reached a condition in which we
presently find ourselves through an unfavorable trade balance. I be­
lieve we both realize the importance of confidence in the American
Now, confidence is largely a matter of psychology. And we have
heard the statement made before this committee that the only value
of having a gold cover is a matter of some psychology. I don’t see how
you can separate the two. And I don’t believe that you can remove
the gold cover from our currency and continue to maintain the same
degree of confidence in the American dollar.
What are your thoughts on that ?
Mr. W h a l e n . I presume that I presented that information, Mr. W il­
liams, in my formal statement. But let me restate it in another way.
We have carried over from the thirties the commitment that anyone
abroad, any foreigner who holds American dollars, may convert those
dollars into gold at the rate of $35 per ounce. However, we indicated
to our own nationals that we would no longer convert their money
into gold as we did when we were operating on the gold standard.
But at the same time, we retained the gold cover clause which stated
in effect that the Federal Reserve had to hold a certain percentage
of gold or gold certificates technically against the Federal Reserve
notes outstanding.
In teaching this in class, for example, I have been asked the ques­
tion, “What does this mean when Americans cannot convert into gold,
why this artificial reserve?” It is very difficult to answer. It has no
applicability in the domestic economy. But we have made this com­
mitment abroad. And I feel if we take this necessary step it will indi­
cate to foreigners that we are honoring this commitment, we do



intend to follow through with our promise to redeem gold for dollars
turned in.
Mr. W il l ia m s . But in spite of the fact that it does not have any
effect as far as a practical matter is concerned, just the fact that our
currency is backed up with gold to some degree is responsible in some
part for the confidence that people here and abroad have in our cur­
rency, is it not ?
Mr. W h a l e n . Mr. Williams, I never use the word “backed,” because
I think it is deceiving. In my opinion, if you define the term “backed”
to mean redeemable, since our currency domestically is not backed
by gold, it is not redeemable, as you have suggested, but it is redeem­
able abroad. What we are saying is that we are going to free this gold
so that we can continue to honor this commitment.
Mr. W il l ia m s . N ow , suppose we do free this gold, just as gold was
freed 3 years ago, when the gold cover was taken off the Federal
Reserve deposits, and the unfavorable balance of trade continued.
So now we are in the position where we are considering this move to
make more gold available so that dollars held abroad can be redeemed
in gold. Now, do you think that there is going to be any real stimulant
provided to correct this unfavorable balance of trade just by taking
this move, or do you think we are going to go on doing business at
the same old standard and our gold reserve will continue to be
depleted ?
Mr. W h a l e n . Y ou weren’t here, Mr. Williams, when I made some
remarks in this area. I did not say that this would solve the problem.
This is a necessary first step, but it does not go to the root of the prob­
lem, and a second step must be taken. I certainly hope that this Con­
gress will take a hard look at this and come up with some positive,
constructive, long-term solutions to our balance-of-payments problem.
Mr. W il l ia m s . I f we enact H.R. 14743, to remove this gold cover,
aren’t we also removing the urgency for taking the second step that
you have mentioned ?
Mr. W h a l e n . I hope not.
Mr. W il l ia m s . But on past experience, wouldn’t it indicate that such
might be the case ?
Mr. W h a l e n . I would concede that you have a point. But I cer­
tainly hope from this past experience that we would learn for the
Mr. W il l ia m s . One more question. As our gold reserve continues to
be depleted, and let us assume that we get down in 5 years to $4 or $5
billion unless necessary steps are taken—don’t you think that the con­
fidence in the American dollar would be undermined to the point where
more and more countries would be converting their dollars into gold ?
Mr. W h a l e n . This is possible. But I question really the degree of
lack of confidence in the American dollar. Some of the movement cer­
tainly has been speculative. But, after all, the dollar serves as a reserve
currency in many countries of the world, representing about 45 percent
o f the world reserves.
Mr. W il l ia m s . I ask you, as the ability of the American Government
to redeem dollars in gold diminishes, isn’t this going also to diminish
confidence in the American dollar ?
Mr. W h a l e n . It could. But confidence in the American dollar is
strong, and we in this country tend to be more concerned about con­
fidence than foreigners.



Mr. W il l ia m s . I was addressing myself to the time 5 years from now
when our reserve might be more seriously depleted.
Thank you very much.
Mr. B arrett . D o any other members wish to ask questions ?
Mr. Gettys, we recognize you.
Mr. G ettys . Thank you, Mr. Chairman. I join with my colleagues
in welcoming you, and I am aware of the expertise of Mr. Whalen on
this subject, and of his excellent background. I believe he was head of
the Department of Economics at the University of Dayton.
Would you state, Mr. Whalen, whether or not you feel there is any
implication other than psychological that would affect the economy
o f the United States domestically in this matter if we remove the gold
Mr. W h a l e n . I don’t think it would have any material effect at all
Mr. G ettys . Thank you.
Mr. B arrett . Mr. Hanna.
Mr. H a n n a . Mr. Chairman, I would simply like to extend my con­
gratulations to Mr. Whalen for his fine grasp of this very important
I would like to ask you to let me briefly review this situation. I hope
you will not hold me firmly to the numbers that I recite. I f I recall cor­
rectly, in 1948 the United States had over $25 billion worth of gold.
At that time, it had an economy that had a gross national product of
something like $286 billion. It had assets abroad of over $29 billion.
Now, in the intervening years, although the gold supply has gone
down to something like about $12 billion, the gross national product is
reaching for $800 billion, and the assets abroad are something like $85
to $89 billion. So it occurs to me that the strength of the Nation cer­
tainly has not diminished in the period of time in which we have
allowed the transition from gold holdings. It has, in fact, gained more
strength at home and more investment abroad.
Would the Congressman comment on that as an assessment of our
situation ?
Mr. W h a l e n . I would agree. The point that you have made is well
taken. And it points up the fact that gold plays only a limited role in
both our domestic activities as well as our activities abroad.
Mr. H a n n a . I thank you, Congressman.
Thank you, Mr. Chairman.
Mr. B arrett . Mr. Annunzio.
Mr. A n n u n z io . Thank you , Mr. Chairman.
All that I want to say is that I welcome my neighbor in the Longworth Building and my friend. I appreciate the very favorable com­
ment on H.R. 14743.
Mr. W h a l e n . Thank you, Mr. Annunzio.
Mr. B arrett . Thank you, Mr. Annunzio.
In a spirit of brevity, let’s see the hands o f those now who desire to
ask questions.
Mr. Bingham.
Mr. B in g h a m . I have no questions. I would just like to compliment
my colleague on a fine statement.
Mr. G a l if ia n a k is . I, too, would like to join with the welcoming
committee to our colleague, and say that the statement is very succinct,



and I agree with both points, the need for the removal of the gold
cover, and the need for long-range planning to improve the balanceof-payments problem.
What do you predict will happen to the demand for gold if we en­
act this piece of legislation? Have you got a judgment as to that?
Mr. W h a l e n . When you use the term “demand for gold,” do you
mean abroad or in our own economy ?
Mr. G a l i f i a n a k i s . Abroad, principally. I am trying to ascertain
what are the prospects of gold in the future? You know, right now
there seems to be economic thinking that this is all very theoretical,
and I am trying to figure out actually what is going to be the prospect
of gold in the future.
M r . W h a l e n . As I indicated previously, the point made by M r .
Hanna was well taken. We have expanded world trade at a time when
there has not been an equivalent increase in the gold supply of the
world. This indicates that gold probably is going to play a lesser and
lesser role in international trade, and that some new type of accom­
modation will be created, probably the special drawing rights, was
approved last year.
Mr. G a l i f i a n a k i s . D o you envision a commodity like gold as re­
placing gold?
Mr. W h a l e n . N o . I cannot foresee that.
Mr. G a l if t a n a k is . Thank you very much, Mr. Chairman.
Mr. B ar r ett . Thank you, Mr. Galifianakis.
Congressman, we certainly appreciate your coming and edifying all
our members here this morning. We appreciate that you are so
knowledgeable in this field.
Mr. G o n z a l e z . Mr. Chairman, I apologize for being late. But I
would like to ask one question.
The only real question I have either the day before yesterday or
today is, in your opinion, Congressman, don’t you think we are giving
the opinion that we are overreacting at this point ?
Mr. W h a l e n . A s I indicated to a previous question, I am not so
sure but what there is more of a lack of confidence in the United
States than abroad. Foreigners are concerned. But there is some ques­
tion as to whether the problem really is as serious as perhaps the
administration has painted it.
Mr. G o n z a l e z . Certainly it should not be made a partisan political
Mr. W h a l e n . That is correct. That is why I have taken the liberty
of introducing a bill similar to the one the committee has introduced.
I feel that this cover is not necessary to begin with and, secondly, it
is essential that we remove it in order to meet our commitments abroad*
Mr. G o n z a l e z . Thank you , Mr. Chairman.
Mr. B ar r ett . Thank you, Mr. Gonzalez.
Mr. W h a l e n . Thank you very much, Mr. Chairman.
Mr. B a r r ett . N o w , will the Under Secretary and Governor come
forward, please?
Mr. Secretary and Governor, I certainly want to apologize for
prolonging this. And I am very grateful that you gave us the oppor­
tunity to have our members heard.




Mr. R obertson . He d id a very excellent jo b , may I say.
Mr. B ar r . Mr. Chairman, may I state for the record that I listened
very carefully to the colloquy between Congressman Whalen and
this committee. And I would like for the record to show that I agree
with just about everything that he said, except possibly his point about
the seriousness with which we view this situation in the administration.
We think it is extremely serious. This is a matter of judgment.
With that possible exception, I would like to associate myself with
just about everything that Congressman Whalen offered this
I congratulate the minority on possessing a Member of such astute­
ness and vision.
Mr. B a r r e tt . Thank you, Mr. Secretary.
Mr. Secretary, I have no further questions. In the interest o f moving
the committee forward today to see if we can reach a conclusion that
will allow you two gentlemen to return to your respective offices, we
will now ask Mr. Widnall if he desires to ask any questions.
Mr. W id n a l l . Mr. Chairman, I do. But if any other members of
the committee who were here at the previous time that they testified
didn’t have a chance to ask questions, I would defer to them first.
Mr. B ar r e tt . Mr. Gonzalez, were you able to ask any questions of
the Governor and the Secretary on Tuesday ?
Mr. G o n z a l e z . Not really, other than just the same question I
asked the Congressman a while ago. And I think that has been
answered, and he agreed to what the Congresman said, just a question
of timing and whether or not we were giving the impression that
we were overreacting to the situation. I just wanted to get their opinion.
I have no other specific questions.
Mr. M oorhead . Would the gentleman yield for an unanimousconsent request?
Mr. Chairman, in yesterday’s Washington Evening Star, the
columnist, Sylvia Porter, has an excellent column entitled “More of
Gold and the Dollar.” I think it states the case for the enactment of
this legislation in very clear and readable terms. I ask unanimous
consent that this column be made a part of the record at this point.
Mr. B a r r ett . Without objection, it is so ordered.
(The article referred to follows:)
[From the Washington (D.C.) Evening Star, Jan. 24,1968]



o n e y ’s






G old





(By Sylvia Porter)
Q. If Congress approves President Johnson’s request to remove the 25 per
cent “gold cover" behind paper currency, what will remain to back the dollar?
How wUl the dollar’s worth be measured ?
A. The dollar, as always, will be backed by the enormous power of the economy
to produce goods and services and its awesome capacity to continue expanding
jot®, output, paychecks and profits year after year. This power comes from
the huge amounts the Treasury collects in taxes. This is the force that under­
pins ithe American currency.
As for measuring the dollar’s “worth,” the amsw'er is, as it has always been
during this century, by the total goods and services paper dollars will buy.



These points were as true a year ago as they are today, or five or 10 years
ago. But jstill the fact is that the President in his State of the Union message last
week finally did call for legislation “ to free our gold reserves” so that the world
would be assured “ that America’s full gold stock stands behind our commitment
to maintain the price of gold at $35 an ounce.”
Passage of this legislation would break the last remaining link between .the
precious metals of gold and silver and paper currency. Thus, questions about
the ’background and implications of th'e move take on new concern. For instance r
Q. What is the gold cover?
A. It’s a statutory requirement that there be 25 per cent in gold behind Federal
Reserve notes, which represent practically all the paper money in cirula/tion.
This requirement freezes about $10.7 billion of the $12 billion gold reserve, leav­
ing only about $1.3 billion in free gold to meet the demands qualified foreign
creditors for gold in exchange for their dollars.
Q. What is the background of this requirement?
A. It is a hangover from the pre-1933 era when U.S’. paper money was entirely
convertible into gold.
When the dollar was devalued in 1934 and the price of gold was set at $35
an ounce, the law prohibited U.S. citizens from owning gold, and that made any
gold cover an anachronism overnight. Still, tradition demanded it and the ini­
tial Requirement was a fat reserve against both notes and member bank de­
posit®. In 1945 and again in 1964, the cover was substantially loosened—and now
it is to be removed in whole or in part.
Q. What would this accomplish?
A. All the gold would become readily available for sale to qualified foreign
creditors at $35 an ounce. This knowledge alone should strengthen confidence
in the dollar. It should make foreigners less eager to turn in dollars on which
they can earn interest instead of gold on which they can earn nothing and which
costs money to store.
Q. Would this enourage the Treasury to print more money ?
A. It is the Federal Reserve System which controls the money supply through
its policies determining the availability of credit. Cash represents only about
one-fourth of the total money supply; the balane is “checkbook money.” This
fear is unfounded.
Q. Is this a sign of weakness?
A. It is certainly another warning to get U.S. budgets under better control.
What the country is doing is buying time to put accounts in shape and to build
a stronger world monetary system. The dollar remains the only reserve cur­
rency in the world, the only truly international money. Gold is not its strength,
the economy is.
(Distributed 1968, by PublisheTs-Hall Syndicate All Rights Reserved)

Mr. B ar r ett . Mr. Widnall.
Mr. W id n a l l . Mr. Secretary, I have in front of me the Senate re­
port on gold reserve requirements that was issued on February 10,1965,
almost 3 years ago, when the Senate subcommittee issued a report on
gold reserve requirements to accompany H.R. 3818. This was a bill to
eliminate the requirement that Federal Reserve banks maintain certain
reserves in gold certificates against deposit liabilities. Under the pur­
pose of the legislation, in the third paragraph, it says:
The bill would give time to the Government to take firm and effective action
and solve our balance-of-payments problems in a sound and growing economy
without compelling such drastic measures as to threaten our prosperity and our
strength at home and abroad. But it would require that the balance-of-payments
problems be faced and solved properly while we -still have a large stock of gold,
instead of postponing action until our gold is lost and our international financial
position has weakened.

Do you think that same paragraph could be used to report on this
Mr. B ar r . I think it would be appropriate, Mr. Widnall. And let me
say that one of the hazards of occupying the position of Secretary or
Undersecretary of the Treasury or Chairman of the Federal Reserve
Board is that you make predictions that sometimes do not come about.



May I point out, sir, that shortly after that report was issued, the
President of the United States, and the administration, announced the
voluntary program. It was designed to restrict investment by U.S.
corporations overseas, and to hold down bank loans that caused dollars
to leave this country. They did move in that direction, sir. That was the
plus side of the factor.
On the minus side, however, a few months later we deployed our
troops into Vietnam.
Another minus factor was the fact that we did not realize what the
extent of French gold purchases, which amounted to $1% billion would
And the third minus factor, Mr. Widnall, is the fact that the British
devaluated 011 November 18, and the repercussions of that action made
some of the predictions look a little bit ridiculous in the light of events.
Mr. W id n a ll . Of course, all those things had not happened at the
time of this report.
Mr. B arr . That is correct.
Mr. W id n a ll . But still the report said it would give time to the
Government to take firm and effective action to solve our balance-ofpayments problem. Do you think voluntary restraint is appropriate
for effective action ?
Mr. B arr . There was certainly a move in that direction, Mr. Wid­
nall. We had to do something to curb the enormous outflow of di­
rect investments that were leaving the United States in the fourth
quarter of 1964. We also had to tighten up on bank lending, because
tnis was getting away from us. Now, whether it was firm and effective
action or not, it was action, sir, which seemed appropirate and ade­
quate in the circumstances. It did, as I pointed out, bring the United
States into surplus in the second quarter of 1965 for the first time
since 1961, and the second time since 1957. We were moving in the
right direction. The interruption of Vietnam, large French withdraw­
als, and the British devaluation brought many predictions to naught.
And now we are coming back, sir, with, as I have indicated, a vastly
more stringent program putting manadatory controls on direct in­
vestment, and restraining even further the ability of banks to lend
We are attempting to get another half billion saving on our Govern­
ment expenditures; we are asking American tourists to defer, to hold
down their expenditures overseas. We are moving in a way today,
Mr. Widnall, that I think could be called drastic.
Mr. Gonzalez pointed out that perhaps some people think we might
be overreacting. Our position is that the situation we face now is ex<
tremely serious, and calls for drastic action, sir.
Mr. W id n a ll . Then with respect to tourism, as I understand it, you
don’t want to restrain tourism within our hemisphere, to South and
Central America, is that correct ?
Mr. B arr . That is correct, sir.
Mr. W id n all . Wouldn’t that solve spending hundreds of millions
of American dollars overseas that could then be used by those coun­
tries to purchase things from other countries ?
Mr. B arr . There is that point, Mr. Widnall, although if you will
look at the pattern of trade between this country and Canada, Mexico,
and South America, you will see that there is a very, very heavy re­



turn. I f we spend a dollar in those countries, most of it comes back. So
we do feel that we can be more liberal in our own backyard, where
the dollars we spend will flow back to us, than we can be in Europe
and Asia where there is less likelihood of the dollars flowing back.
Mr. W id n a ll . Let me understand something about the sale of gold
for commercial purposes. I f I as a commercial user want to purchase
gold, what is the present procedure that I must follow with the Treas­
Mr. B arr . Roughly, the way it works is this, Mr. Widnall: First
of all, you would come to the Treasury Office of Domestic Gold and
Silver Operations. You would apply for a license. They would investi­
gate you as to your general reputation, the legitimacy of your busi­
ness, et cetera. I f this investigation turned out to be appropriate, you
would be granted a license. Under this license, you would be permitted
to buy either directly from the Treasury or from our domestic pro­
ducers. Fabricators of gold in small amounts are permitted to operate
without a license. The pattern has been that roughly half of our total
domestic production of $50 or $60 million is bought from the Treasury,
and the other half is bought from the producers under a license from
the U.S. Treasury. In addition, of course, the Treasury sells some $150
million from official stock to satisfy total domestic demands.
We do have a staff of auditors who go out and spotcheck the books
of these licensees and persons who operate under the authorization for
small processors periodically to attempt to make certain that they are
living in conformity with the regulations that we have issued.
Mr. W id n a ll . I s an end-use certificate required ?
Mr. B arr . Yes; one is required for any purchase from the United
States and any over $200 from a licensed refiner. Also we require a
system of reporting from these licensees which indicates the level of
their inventory, and what they are doing with the gold. This report­
ing system and the end-use certificates, as I indicated, are backed up by
our staff of auditors.
Mr. W id n all . H ow does this differ from the procedure of the sale of
gold ?
Mr. B arr . H ow does it differ ?
Mr. W id n a ll . Differ.
Mr. B arr . In the London gold market anyone can come in----Mr. W id n a ll . Except Americans?
Mr. B arr . There are regulations, Mr. Widnall, that vary from
country to country. Let me give you a little background. Under the
U.S. regulations, residents and citizens are not allowed to hold gold
or buy it except under a license. Almost precisely the same regula­
tion applies to the citizens of the United Kingdom.
The Italians have an import and export license of some sort.
The Swiss allow free movement of gold.
We could give you this for the record. But there is a pattern that
varies from country to country as to the liberality with which they
treat this whole gold question. I think the Swiss and the French have
the most liberal attitude in permitting their own citizens to own gold
and to buy it and sell it.
But in the London gold market, if you absent the fact that countries
have their own laws, this is a market where gold is traded freely. It
comes into the market from South Africa, from the rest of the pro-



clucing countries of the world; and some of it even, occasionally, from
Russia. And it goes out to the people who place the orders.
Mr. W i d n a l l . In my preliminary statement on behalf of the mi­
nority, I mentioned 10 points. One of the points had to do with the
extent of the international cooperation in the operation of the London
gold pool. And also that which would apply to speculative activities. I
think that Congress should, as soon as possible, go into this. I don’t
know that it should be done in an open meeting; I would advise that it
be done in executive session.
Mr. B ar r . I concur, Mr. Widnall. And I would be delighted to do
Mr. W id n a l l . Y ou would like to cooperate with us ?
Mr. B ar r . Yes, indeed, sir.
Mr. W i d n a l l . Mr. Chairman, you said something about other wit­
nesses to be succeeded by the minority. I can give you some names
right now that we would like to have appear.
Mr. B ar r ett . You may do so for the record.
Mr. W i d n a l l . The following persons will be called as witnesses on
Dr. Danielian, from the International Economic Policy Associa­
tion ;
Howard Piquet, of the Library of Congress;
Judd Polk, from the International Cnamber of Commerce.
And I have another one. Dr. Nazarola Patterby, the dean o f the
graduate school of Farleigh Dickinson University.
And we would like to have Mr. Rutherford Poats, the AID Adminis­
trator for Vietnam, testify on the Government Operations Committee
charge that there is a $300 million per year leakage from U.S. support
assistance to South Vietnam. We are trying to get together a panel.
Mr. B a r r ett . Those are the names submitted by the minority. They
will be scheduled, according to the chairman of the Banking and Cur­
rency Committee, Mr. Patman.
Thank you, Mr. Widnall.
M r. W

id n a l l .

T h a n k you.

Mr. B ar r ett . Mrs. Sullivan.
Mrs. S u l l i v a n . Thank yo u , Mr. Chairman.
I would like to ask Mr. Barr how to answer the questions that are
being put to me. I don’t know the answers. But with the gold cover
removed, why will we have to redeem the dollars for gold when they
are presented for exchange by foreign governments?
M r . B a r r . Mrs. Sullivan, if you are talking to your constituents, I
would hope that you are talking to someone with an international
financial background, because it is a complicated issue. As Congress­
man Whalen indicated, we sort of stumbled into the role of the world’s
banker. At the end of World War II, the whole world was in a state
of disarray. There were few currencies that circulated freely in which
people had any confidence. At that time, the International Monetary
Fund was created. The United States was the only country in the world
which was standing on two feet with any power. We formalized, at
that time, a responsibility in the whole system. Our responsibility was
to be the fixed point in the solar system. We agreed to hold the dollar
at a stable price by continuing to convert dollars put to us by foreigners
89-292— 68------- 7



into gold at a fixed price of $35 an ounce. Other countries took on, at
the same time, a parallel commitment that they would maintain the'
value of their currencies—would specify the value of their currencies
in the Monetary Fund and would hold to that value, keep their cur­
rencies at that value by intervening in the exchange market with dol­
lars to keep their currency at par or within 1 percent on either side.
So the real reason that I guess you must explain to your constituents,,
as to why do we convert our dollars for international claims, is that
we are the fixed point in the international financial operations of the*
world, and that it has worked very well since the war, because, as I
have indicated, trade has doubled.
I think, Mrs. Sullivan, it comes down to this. You asked the question
about the fixed versus the floating exchange rates. Let me give you an
example. I f you were a coffee producer in Ghana—there are wide
swings in the price of coffee. That is one risk that you have to take into
consideration if you are a coffee grower or a dealer. But if you have
to add to that consideration, Mrs. Sullivan, the fact that not only
does the price for the coffee swing, but also the price of the money in
which you are going to be paid might be swinging violently back and
forth, then I think, Mrs. Sullivan, you might come to the conclusion
that the whole business is just too risky, and you can’t figure the swings
and the odds. And this is the reason, as I said, that unless there is some
fixed point in this whole area of the value of money, that risk becomes
so great that the results could be devastating, in my opinion, to trade
in the world.
I don’t know if that is going to satisfy your constituents, but that
is the truthful answer.
Mrs. S u l l i v a n . Just one further question. Do we hold the currency
of other countries?
Mr. B arr . Yes, we do. We hold foreign currencies in the Exchange
Stabilization Fund. We also hold the currencies of other countries
through the system of Federal Reserve swaps that Governor Robertson
might like to comment on.
Mr. R o b e r t s o n . Very limited amounts at this time, because we have
not been in the practice of obtaining these currencies. There could
be a time when we would hold more if our balance of payments was
the opposite, if we had a surplus instead of a deficit. But the amount
of foreign currencies that are held today are insignificant.
Mrs. S u l l i v a n . And if we wanted to exchange their currencies, turn
them back, what do we get for them, dollars?
Mr. R o b e r t s o n . We eliminate dollars that they hold.
Mrs. S u l l i v a n . And are these foreign currencies in the larger na­
tions backed with any precious metals or anything else except the
economy and good standing of the country ?
Mr. R o b e r t s o n . They are backed in large part by dollars, because
the dollar is the reserve currency of the world. And that is the reason
that we have to be in a position to exchange dollars for gold, so that
the stability of that dollar is fixed. Otherwise, they are not willing to
hold the dollars.
Mrs. S u l l i v a n . Then would it be true that if we would stop ex­
changing their dollars for our gold that----Mr. R o b e r t s o n . The dollar would no longer be a reserve currency,
thev would be unwilling to hold it if the value of that dollar was going*
to fluctuate in terms of gold.



Mrs. S u lliv a n . I see. Thank you very much.
Mr. B arrett . Mr. Fino.
Mr. F in o . Mr. Barr, the thought that comes to me is that if we clamp
down on U.S. tourism, tourist travel, and we start placing restrictions,
don’t you have the fear that there would be retaliation on the part of
these countries which would further create an imbalance of payments?
Mr. B arr . There is that risk, Mr. Fino. And it is one that we have
to weigh. We will begin discussions, I think, today with the Congress
on the appropriate types of moves in this whole area of tourism and
travel. This is definitely something that we must keep in mind.
Our earliest indications are that we probably will not get retaliation
from the Europeans if we in effect say to the American traveler, “ You
can go ahead and travel, but slow down a little bit, and shorten up on
your stay and don’t spend so much money when you are over there.”
I think we might get retaliation, Mr. Fino, to be perfectly honest, if
we said that no Americans can travel any more. And that could be
difficult. So that is the consideration that we are going to take into
In direct investment, Mr. Fino, I do not think that we are going to
get retaliation. As a matter of fact, many European nations think that
we are investing too much in their countries. They put up the cry that
we are buying up their industry with their credit. And to the best of
our knowledge, we will not get retaliation there.
In the matter of troop deployment, Mr. Fino, this gets over into
diplomacy and defense posture. But I think we are putting it to them
very straight, that we sure willing to tax ourselves to help defend them
in mutual security pacts, but they must help us to wipe out the ex­
change costs of these troop deployments.
So that in that area I don’t think we will get retaliation. But you are
absolutely correct, in all of these things we have to weigh the possibili­
ties. You move on one side, and there is a tendency to move on the
other. We must try to mitigate it.
Mr. F in o . What do you think was the basic reason why Great Britain
canceled its contract for the F - l l l ?
Mr. B arr . I am afraid, Mr. Fino, that she came to the conclusion
that she could not afford it.
Mr. F in o . Thank you.
Mr. B arrett . Mr. Moorhead.
Mr. M oorhead. Thank you, Mr. Chairman.
Mr. Barr, you testified that for the past 20-odd years the gold ex­
change system, with the dollar being the currency of reference, has
worked well. It has permitted expansion of trade, freedom of move­
ment of capital, freedom of movement of people, and so forth. There­
fore, you argue, as I understand it, that we should keep the existing
system, because it has worked in the past. But it seems to me that
maybe we should be reviewing and studying this system, because the
system which has promoted increased freedom of trade and increased
freedom of movement of people and capital is the very system that is
now requiring us to put restrictions on movement of capital, and re­
strictions on movement of tourists, and if not restrictions on trade, at
least devices that are not consistent with truly free trade.
So that isn’t this system now doing just exactly the opposite of what
it has done for 20 years ?



Mr. B arr . Let me answer your question in two parts, Mr. Moorhead.
First of all, I quite agree that there is nothing so immutable in the
world that it should not be examined with the idea in mind that
perhaps it could be changed. I think an exploration of all other
possibilities is certainly in order, and I would recommend that the
Congress look at them as we have.
But I do stand by my statement that this system has worked, Mr.
Moorhead. I would say that our difficulties today are not the fault of
the system. That is not the villain, Mr. Moorhead. The fault of the
system has been our inability to correct this parade of deficits that we
liave lived with since 1951. That is the villain. And I am afraid, Mr.
Moorhead, that there is no system that can be devised that would re­
move the necessity for discipline on the part of this Government to
meet its problems. Maybe something might make it easier, but I doubt
it. I am afraid, Mr. Moorhead, there is no way to gimmick ourselves
out of this situation. The villain is not the system, but the fact that we
have been unable to correct this parade ox deficits since 1951.
Mr. M oorhead. Let me ask you this: Is the Treasury considering the
possibility, let us say, in the distant future, that there may have to be
a change from the present gold exchange system ?
Mr. B arr . Very definitely, Mr. Moorhead, in the sense that, as I
have indicated, we are not only considering, but are going to present
to you legislative proposals in this area in April when we come to you
with the special drawing rights plan.
However, I want to emphasize that the special drawing rights plan
is not a panacea designed to make it easier on the United States. This
is no solution to the basic problem of our balance of payments. It is
designed to meet the problem which rises from the fact that gold pro­
duction is not sufficient, without the continued deficits in the U.S.
balance of payments, to provide nations with increasing reserves. We
have never indicated that it is an answer to our problems. And we will
continue to make clear that the plan is not a panacea for our current
difficulties which arise from the fact that we are spending too much
and taking in too little.
Mr. M oorhead. Y ou testified, and it was very brilliant and clear, that
the system that we set up at Bretton Woods was a solar system, with
the dollar being the center of the solar system, and the point of refer­
ence for all other currencies.
Mr. B arr . Eight.
Mr. M oorhead . And the reason that the dollar could hold this posi­
tion as the center of the solar system is that we were willing to tie the
dollar to gold, isn’t that correct?
Mr. B arr . That was one of the reasons. And the other reason^ of
course, was—and still is—the huge economic strength of the United
States. There are two reasons. The gold and the enormous economic
power of the United States. You know, Mr. Moorhead, that this coun­
try accounts for some 40 to 45 percent of the total production of the
free world, and about one-third that of the whole world. So it is a
combination of those two things.
Mr. M oorhead. But as the economic power of the United States visa-vis the rest of the world declines in importance, as the total world
supply of gold decreases relative to world economic activity, and par­
ticularly the gold supply of the United States declines relative to the



rest of the world trade, are we not in a position where we have built
a system based on one assumption which has now changed?
Mr. B ar r . That is true to some extent and the shift to the special
drawing rights takes account of that, Mr. Moorhead, because then
while the dollar will continue to be a major factor in that solar system,
there will also be another sun in there. That is the whole philosophy
in this special drawing rights approach.
Mr. M oor head . That is really what I am trying to get at, whether, as
the basic assumption of the Bretton Woods agreement shifts, we
should be shifting with it.
Mr. B a r r . That is correct.
M r . M oo r h ead . While I am very much in favor of the special draw­
ing rights agreement, I think it is just a little bit of a bite of what we
are going to have to face in the future, which is to develop a much
stronger international currency of reference. What I am really urging
is that the Treasury keep moving ahead toward this, because we are
in a much better bargaining position now, with a very large share
of the free world’s gold, than we will be 10 years hence, when we will
probably not have such a large share.
Mr. B arr . I would like the record to show that I concur, com­
pletely, with that statement. And I assure you that we are pushing as
hard as we can. It seems our allies are a little bit difficult to nudge
along—but I agree, this is the time to keep on it. And I assure you we
While the first step of the SDR might be small, I think this scheme
has within it the seeds of growing ratner rapidly, if the world should
get into a crisis. In the event of a crisis, such as we had in the early
thirties, I think you would see this small germ jumping out into a full­
blown scheme almost immediately—if we had anything occur in the
world such as we did in 1933 and 1934.
Mr. M o or h ead . I am most encouraged by your statement. I believe,
with my fingers crossed, that our economic system is in sufficient good
shape that we won’t have a domestically inspired money panic and
Mr. B ar r . Right.
Mr. M oorhead . However, I am not persuaded that we have arrived at
a point where an international money panic could not occur causing a
possible international depression which would also be a depression
tor us.
Mr. B a r r . I concur, Mr. Moorhead. And I want to repeat that this
is the thrust of the whole SDR scheme, starting small, but it could be
expanded rapidly and I think it would be expanding rapidly if we
got into such a crunch.
M r . M oo r h ead . Thank you.
Mr. B a r r ett . Mrs. Dwyer.
Mrs. D w y e r . No questions.
Mr, B ar r e t t . Mr. Brock.
Mr. B r o c k . Thank you, Mr. Chairman.
I have so many areas, I don’t know where to begin.
Thank you for coming back. I appreciate your statement, Mr. Barr,
that you don’t think we can gimmick our way out of this situation. I
hope that signals a major policy shift on the part of the administra­
tion. I think we have tried to gimmick our way out of this situation
for the last 6 years by SDR’s or the interest equalization tax.



May I ask you, have you in the Treasury—or has the Commerce
Department in the administration of the figures—done a study of the
effect—I know it is hard to isolate—have you done a study of the effect
of the interest equalization tax in the first year of application and in
the last 12 months ?
Mr. B arr . Yes, we have. We can give it to you, Mr. Brock. We will
supply that for the record. But I can tell you, to my knowledge, that its
effect in stopping the enormous outflow of funds that was running in
1963 was quite dramatic.
(The information requested follows:)
The effectiveness of the IET, in comparison with the period prior to its
inception, has continued through the first three quarters of 1967.
In the first three quarters of 1967, there were no purchases by Americans of
new foreign security issues subject to the IET. This compares with:
In the year and a half preceding the effective date of the IET, total new
issues of foreign securities had amounted to over $2 billion, of which about
$700 million were issues of countries later subjected to the tax.
In the 18th months following the effective date of the IET, total new
foreign issues declined to $1,3 billion, of which only $130 million was sold
by countries to which the tax applied. All of this amount was exempt from
the tax because the sales had been arranged before the tax was proposed
($110 million) or under other provisions of the law.
A -similar continuing effect can be seen in the figures on net transactions in
outstanding foreign securities. During the. first three quarters of 1967 there were
net U.S. purchases of outstanding foreign securities amounting to $21 million.
This compares w ith:
In the 18 months preceding the effective date of the tax, U.S. residents
made net purchases of outstanding foreign securities of about $250 million.
In the following 18 months, Americans were net sellers of outstanding
foreign securities to the extent of almost $300 million.
In 1967 unacceptable levels of evasion of the IET on transactions in outstand­
ing securities were discovered and measures were taken, as part of the 1967
legislation to extend the IET, to quench this invasion.
Since mid-1963 net American sales of outstanding foreign securities have
been almost entirely in foreign stocks; there have continued to be some net
purchases of foreign bonds, in greatly reduced amounts, during most of this
period. This pattern continued through the first three quarters of 1967, with
Americans selling $12 million of foreign stocks and purchasing $32 million of
foreign bonds.
The IET has also continued to be effective with respect to long-term bank
loans to foreigners (to which the tax was first applied on February 11, 1965).
In the first three quarters of 1967, long-term bank loan commitments to IET
countries totaled only $136 million, of which $114 million were exemipt from
the IET, principally because the loans financed U.S. exports. This compares with:
Long-term bank loan commitments to IET countries totaled $1.2 billion
during 1964, and almost $600 minion during the period from January 1 to
February 10,1965.
During the remainder of 1965, loan commitments to IET countries came
only to $442 million, of which almost $250 million were exemipt from the tax
because the loans financed U.S. exports and the extraction o f raw materials.
The following table summarizes these comparisons:
[In millions of dollars]
1962 and 1st
2d half of
half of 1963 1963 and year

1st 3 quarters
of 1967

American purchases of new securities issued by IET countries (American
purchases ( —)) (total)___ ______ __________________ _____ ____ ______
American transactions in outstanding foriegn securities (fiet American
purchases ( —)) (total)............... .......... .............................................................




Foreign stocks....................... .......... ........................... ....................................
Foreign bonds............................................................................ ....... ...........






fin millions of dollars]
Jan. 1-Feb. 10,
loan commitments to 1ET countries (total)....................... ..................
Subject to I ET........................ ..........................................
Exempt from IET..............................................................


Feb. 11-Dec. 31

1st 3 quarters
of 1967





Note: Detail may not add to totals because of rounding.

Mr. B r o c k . I saw an interesting study just in the last day or two.
I think the conclusions were that business investment, trade, interna­
tional trade, in other words, the private sector of the economy, had
produced for this Nation $109 billion in net profit in the last 20 years
Mr. B a r r . I am not sure; we would have to review that.
Mr. B r o c k . An inflow of $109 billion. The same study showed that
the net outflow due to Government—our military activities, our troops
abroad, and so forth—the net outflow was $125 billion in the same
period of time. You can’t blame the private sector of the economy for
our current difficulty.
Mr. B ar r . Y ou cannot. And we are not attempting to, Mr. Brock.
Mr. B r o c k . Then why in the world do we come up with a program
to solve it that addresses itself to the private sector rather than the
public sector?
Mr. B ar r . Mr. Brock, let me say this. I use a figure of roughly $6%
billion to $7 billion as the price of the Government sector’s contribu­
tion to payments. Do you want to write it down? These are rough,
but in the ball park. Of that amount, about $3 billion net is for mili­
tary deployment—roughly $1 billion in Europe, one-half billion dol­
lars in Japan, and $1% billion in Southeast Asia and Korea.
Then, however, you have a factor of about $1% billion in Public
Law 480, food that we shipped overseas. That comes right back in,
on the export statistics side. It is not a drain, you can’t call it a drain.
Mr. B r o c k . It washes out.
Mr. B ar r . It washes out, that is correct. And then we got about
$900 million last year in Export-Import Bank loans, which similarly
ets counted as an outflow from the Government sector, but also comes
ack in as a receipt in the form of Government-financed exports. Do
you agree with that ?
Mr. B r o c k . Yes.
Mr. B ar r . And then we get into aid, about $2^ billion. Now, on the
AID accounts, here is where the argument comes down. The AID
accounts, most of them, are also tied to U.S. goods and services.
There might be a slippage of something around $400 million, but most
of it is U.S. goods and services, Mr. Brock. But reasonable men can
disagree as to whether or not these AID funds do displace com­
mercial exports which would add to the balance of payments.
But you set that aside, so you get down to one factor that realty pulls
on the Government account that everybody agrees on. That is our
troop deployment overseas, which is about $3 billion net. Now, there
we are into the area of mutual security, Mr. Brock. And that is the
issue that we are confronted with here today.




Mr. B rook . Does that $3 billion include all the dependents ?
Mr. B arr . Yes, indeed. That is total spending, and it is based on
good accounting. In the defense sector—as I indicated to you, Presi­
dent Eisenhower tried to bring back the dependents in 1960. He was
unsuccessful. Secretary McNamara addressed himself to this issue in
early 1961. And here are some of the things he has done. He has run
up the Defense Department price standard for foreign procurement
from, I think it was about 6 percent, to a current level of at least 50
percent. In other words, Defense won’t buy anything overseas unless
the advantage runs at least 50 percent.
So, consequently, they buy very, very little overseas. We did have
an arrangement with the Germans that they would buy in the United
States the arms they needed to rebuild their army, and their military
establishment, which would run roughly parallel to the cost of the
money that we spend in Germany.
Well, this proved politically unpopular, and it may have contributed
to the fall of the Erhard government. They could not get their Bunde­
stag, their Congress, to come up with the money.
Mr. B rock . I can hardly blame the German people. The planes we
were building were not flying, they were crashing.
Mr. B arr . Some of the F-104’s had a little trouble with them. But
that was not the basic issue.
Mr. B rock . They had a lot of trouble.
But the thing that bothers me about this is that every time we get
into difficulty we look for somebody else to blame.
Mr. B arr . We are not blaming anybody else, Mr. Brock. These are
security arrangements we had.
Mr. B rock . I am very much aware of that. Of course, maybe I disy

payments problem, simply because—we had four or five of the best
economists in the United States of America here in this building yes­
terday for a 4- or 5-hour seminar, and we had the top leadership of the
chamber, the AFL-CIO, and the international chamber and so forth.
And do you know, there was just one person in the room, one out o f
this whole group, that advocated the proposed program or the Presi­
dent’s balance of payments, ju^t one man. And I would bet a whole
lot that he had a part in drawing it up.
Now, why is it that really intelligent people can come in to this
room and say, it just won’t work? These are not people who are just
politicians; these are people who are professional in the field.
It looks to me like, you say, we are going to stop our dollar outflow
by telling the banks to stop any further loans. And yet those loans
in large measure go to American firms, or their subsidiaries overseas,
and the subsidiaries use them to buy American products.
So you have washed a self-defeating thing there. And, frankly, the
bank will tell their subsidiary in London or Paris to make the loan
even if it is in excess of their reserve ability to get the job done.
Mr. G onzalez . Mr. Chairman, will the gentleman yield at that
point, because it brings up some questions that I think are very impor­
tant at this point.



We are talking about the $109 billion that have been made in profits
over 20 years.
Mr. B rock . Yes.
Mr. G onzalez . But the biff question is, how much of that $109 bil­
lion has been repatriated to tie United States, that is, has come back?
That is a question I haven’t heard answered.
Mr. B arr . We will have to supply that for the record.
(The information requested follows:)
The repatriated profits from direct private investment amounted to $51,753
milUon for the years 1946-66, inclusive.

Mr. B rock . I am talking about $109 billion repatriated from both
investment profits and trade. I am not talking about what is left over
there in the form of investment which still yields return.
What is your net inflow from investment today per year?
Mr. B arr . I think it would help, Mr. Brock, if we got the thing in
Can we have the accounting for the balance of payments?
The statisticians behind me will probably all faint, but at the risk
of palpitation and heartburn, this is the way I look at it.
Have you got a pencil?
Mr. B rock . Sure.
Mr. B arr . Here are the receipts that we can look on that go into
this pool of exchange. We can look at receipts— this was about where
we were in 1967 before the devaluation—in the first three quarters of
last year, expressed as annual rates. Receipts on the trade balance, over
$4 billion.
Receipts from private investment—this is dividends, royalties, in­
terest, fees, the whole gamut—roughly $6 billion.
Foreign investment in the United States by Government and private
citizens, over $2 billion.
And you come out to a total of over $12^ billion.
What were the charges against this country?
The charges against the country were tourism, minus $2 billion.
Services and other items, minus $1 billion. Capital outflow from the
United States, $5 billion.
Government, about $6^ billion. The Government sector breaks down
roughly this way: $3 billion net for troops, and roughly, $3^ billion
Public Law 480, Eximbank, and so forth, net, of repayments and other
Government capital receipts.
So you had about $15 billion outflow and over $12^ billion inflow,
and you had a deficit of over $2 billion, annual rate, in the first threequarters.
And if you want to look at it the other way, what are your receipts,
you have got a $ 1 2 1 4 billion pool. The economists can argue back and
forth all they want to, but, for instance, in 1963 we had this enormous
surge of bank loans going out of the United States, more than we
could get out of the pool that we were earning. In 1964 we had this
huge flow of direct investments going out of the United States, more
than we could get out of this pool, literally more than you could get out.
And I quite agree, the private sector has to earn the exchange that
is going to be used mainly in one area, troop deployment. But if we
are going to keep our troops deployed, if we are going to try to keep



in balance, and earn enough to cover the occasions when there are
surges, -as we have had in the past, bank loans, in direct investments, or
as in Vietnam, the private sector has to show a surplus to keep this
whole accounting system from getting out of whack.
The present pool of receipts is not sufficient to meet the outflow o f
Mr. B rock . Maybe what I am saying is that I don’t think you can
afford to have troops everywhere in the world. I f you want to put
them in Vietnam, all right, but take them out of Europe. I f you want
to put them somewhere else, OK.
But there are going to be exceptions, obviously. We are not at a
point today of the absolute collapse of the dollar. We are a long way
from that.
Mr. B arr . That is right.
Mr. B rock . The dollar is perfectly strong currency.
Mr. B arr . That is correct.
Mr. B rock . We are talking about whether it was good as gold. O f
course it is. But that isn’t important. The point is that what we are
saying today is going to dry up our inflow 2 or 3 years down the road,,
and we are just putting off the problem, and we are going to have
more of a problem than last year, and I will bet you dollars to donuts
that you are going to be talking about balance of payments 10 years
from now, 15 years years from now, because we are a world power
and we are going to have to face up to that.
Mr. B arr . One thing I have to say, I sat on this committee 10 years
ago when we were discussing precisely these things. As long as we are
a world power, we are always going to have to be wary of a balanceof-payments problem.
I would be interested if somebody would supply me with what the
solution is, what the economists gave you yesterday. Can you answer
that ? Did they have a solution ?
Mr. B rock . I didn’t agree with them on the solution.
Mr. B arrett. The time o f the gentleman has expired.
Mr. Hanna ?
Mr. H a n n a . Thank you, Mr. Chairman.
As usual, Mr. Brock has very lucidly, and I think very helpfully
sharpened up our understanding of where this problem lies.
As is so often the case, I am looking a little bit on the other side o f
the ledger from what Mr. Brock implies. I, too, feel that it is hardly
in our long term self-interest to discourage profitable investment.
Mr. B arr . I agree.
Mr. H a n n a . However, where I think the departure comes is that
there are long-term interests separate and apart from private in­
vestment. It has always appeared to me—and I will ask Mr. Robertson
if he does not feel that this is also true—that there is a long-term in­
terest in the United States in two ways: In continuing aid flow to un­
derdeveloped countries, No. 1, in that this helps establish stability,
which is required by a rich country just as much as it is required by
a poor country, if we are all going to be able to live together in a
rather troubled world; and, No. 2, is it not in our long-term interest
to build markets which inure to the benefit of the private sector as



So that if we lag in either of these two things by cutting out a por­
tion of our assets to serve this purpose, we would be doing both the
public and the private sector of our country harm.
Am I incorrect in that, Mr. Robertson?
Mr. R obertson. N o, you are exactly right. I don’t think the United
States can isolate itself or live by itself alone without foreign trade.
I don’t think it can avoid a responsibility to provide aid to less-devel­
oped countries.
The amount of it, of course, depends entirely upon the Congress,
and the decisions made by Congress. I don’t think we can afford not
to have military troops stationed wherever the Government in its
wisdom decides they should be.
It may be that this deserves greater consideration than has been
given to it. But we can’t avoid it completely.
Consequently, we have to look, in my opinion, to the private sector
in order to get a reduction in the amounts of the dollar outflow. And
that is exactly what we have done. I wouldn’t want this hearing to
close without making it very clear that all parts of the balance-ofpayments program have not been failures since 1964.
You may remember that in 1964 there was a dollar outflow of $2.4
billion through the banks. In the same year, there was a $2.4 billion
outflow through direct investments. And we launched a program
to try to curb the two.
What has happened ?
Under the bank program—and I say this with some reluctance be­
cause I handled this particular program and I don’t mean to take
personal credit for it—we had an outflow of only $370 million all told
over that 3-year period since 1964.
On the direct investment side we had $7.5 billion outflow.
You don’t want to curb-----Mr. B r o c k . Would the gentleman yield for one point ?
Mr. H a n n a . Yes.
Mr. B rock . Rather than giving all the credit to the Government
action, wouldn’t a minor factor be the fact that we have higher inter­
est rates than we have had in the last 40 years ?
Mr. R obertson. I personally don’t put too mudh emphasis on the
interest rate levels in determining what the outflow is. I think that
in a case where interest rate levels are higher abroad you will certainly
find people trying to borrow in this country where it is cheaper, there
is no question about that. It does have a bearing, and does contribute
to the solution, there is no question about thaJt at all.
All I am trying to point out is that you have to have some means
of leveling down the total amount of dollar outflow through the pri­
vate sector, without longrun disadvantages, you have to have some
means to do it.
And the program we have today is no longrun solution, it is a pure
attempt to buy time.
I agree with this completely. And I hope that this committee and
everyone else will attempt to find a longrun solution. And if you can’t
find it, on the Government side, you have to find it on the private side.
Mr. H a n n a . Mr. Robertson, my personal opinion, and one that I have
expressed to our friends in Japan and other places, is that one of the
first long-term solutions is to get the European nations to agree that



there ought to be the alternative in the IMF that would take a portion
of the pressure yofEthe dollar to create deficits.
It seems to me that if there is going to be live and growing trade,
there have to be deficits someplace. And when we have European
nations which have not been willing to convert their surpluses down­
ward toward the position of the deficit, it continues to put pressure
especially upon the dollar, since that is the more desirable medium
o f exchange.
What I hope we will do with this program is to continue to address
it in a manner that will bring the maximum pressure on those people
who have been a little reluctant to work with us in this program.
And I ask you, in your view, will we continue to do just that.
Mr. R obertson. I f we don’t, we are certainly remiss.
Mr. H a n n a . I want to go on the record very strongly, Mr. Chair­
man, that it is my opinion that if we do not do just exactly that—I
don’t like this medicine any better than anybody else, but I want it to
be clear to the countries that haven’t cooperated with us—that when
we get a bellyache they are going to be uncomfortable in the stomach
at the same time, and they are going to continue to be so until they
cooperate with us in finding some of these long-term solutions.
Mr. R obertson. I think it requires contributions on all sides, not
only by the deficit countries, but by the surplus countries.
And could I just add one thing, Mr. Brock. I was not attempting
to take credit for the success of the bank program. The banks deserve
the credit. They realize the importance of the problem, and their co­
operation has really been the deciding factor.
Mr. B arrett . The time o f the gentleman has expired.
Mr. Clawson?
Mr. C law so n . Thank you very much, Mr. Chairman.
Mr. Barr, to the extent that the balance-of-payments program is
successful in reducing our deficit from last year by $1 to $3 billion, as
has been suggested, would that not relieve the pressure from the Gov­
ernment, the public sector, on our balance of payments, without elimi­
nating the mandatory controls that we are now considering on direct
Mr. B arr . I don’t think it will relieve the pressure on the Govern­
ment, Mr. Clawson. I don’t believe that American manufacturers and
corporations, American banks, and American travelers will take these
restraints forever. We live in a free country, Mr. Clawson, where all
these interested parties have a way to get to the Congress and to us
and to express their opinion. This is tough medicine. And I don’t think
that putting this program into effect is going to relieve any pressure
on us. I think it is going to increase the pressure, frankly.
Mr. C law son . I f it is successful, you think that it will relieve the
pressure, and that these controls will fee removed ?
Mr. B arr . Absolutely, as quickly as we can.
I am not going to sit here and predict, Mr. Clawson—the record of
our predictions in three administrations in the past 10 years is dismal
in this area. I am inclined to the viewpoint of Mr. Brock, that as long
as we are a world power and a great nation we are going to be arguing
about this for 15 years, whoever is here. I am not going to predict. But
I do say that if this program is successful, a lot of corporations are
going to miss investment opportunities. A lot of people aren’t



going to travel, or won’t get to stay as long or do as much as they want.
A lot of banks are going to miss loan opportunities. And there is
going to be tremendous pressure on this Government to get rid of
this program. And if there is the least suspicion that the Government
itself is prodigal in wasting exchange, I think there is going to be a
storm of protest.
Mr. C law son . It is questionable. I f such is the case, why is there a
reluctance on the part of our business community to come in and
testify in opposition to this ?
Mr. B arr . I can’t imagine why. This would be the first time I have
noticed reluctance on their part.
I tell you this, Mr. Clawson. We have found this much out. They
realize, the great multinational corporations, and the great banks that
operate all over the world, realize that we are all in this soup together,
and it is not very productive to belabor each other as to who is at
fault in this area.
I am surprised, however, that they are not willing to come in and
testify. I think with a little persuasion they would be delighted to be
in here. I don’t believe they are happy.
Mr. C law son . I was gomg to ask you if you think they are satisfied.
Mr. B arr . I would think, on the contrary, it is not a question of being
happy. I think that they are in our position. But they don’t know what
else to recommend.
Mr. C law son . Mr, Robertson, you mentioned the capital outflow of
$2.4 billion in 1964 as being much higher than the outflow in 1965,
1966, and 1967. And it has been suggested that perhaps this might indi­
cate that the banks were fearful in late 1964 that the Government was
going to impose mandatory controls early in 1965.
Mr. R obertson. I think in 1964 they may have anticipated that
some action would have to be taken, because they were quite aware of
this balance-of-payments problem. And some of that outflow may have
been attributed to that. It was large in 1963, too, however. The whole
volume is growing.
Mr. C law son . There could have been some fear on their part that
mandatory controls were going to come about ?
Mr. R obertson. Yes; anticipatory lending, getting in under the
Mr. C law son . I have nothing further.
Mr. B rock . In taking the figures you gave me, Mr. Barr, they are
accurate, and I agree with the net result. I wonder, though, if we don’t
use a rather strange kind of accounting in Government, on occasion.
For example, the foreign investment in this country is not really—
it shouldn’t be considered a net liquid asset; it is an investment on
their part in this country, and can be repatriated. Our capital outlay,
capital investment overseas, is—if you were in a business and you put
it down on the balance sheet, you would put it down as an asset, and
you would put it down as a long term—this is an entirely different
thing from a liquidity problem.
Mr. B arr . Y ou are quite correct. I indicated that this is the way I
look at it. In the balance of payments, it is a dollar in or a dollar out.
We, a sort of treasurer for the United States, and like a corporate
treasurer, really. As far as his cash flow is concerned, it doesn’t make
any difference whether it is capital investment or expenditure in his
cash flow projections. That is all I am talking about.



Mr. B rock . What bothers me about this whole discussion is that
some people have been confusing liquidity with solvency, in the first
place, and I think there is a great deal of difference.
And, No. 2, we are not looking at the basic cause. The balance of
payments is nothing more than a symptom, and we are not addressing
ourselves to the disease as such.
Mr. B ar r ett . The gentleman’s time has expired.
I wonder if the chairman may interpose at this time. I believe there
are about six members here that are entitled to 5 minutes each. And
we hope we can give them the opportunity to have their 5 minutes.
And if we continue on that basis without anyone yielding, maybe we
can give each of the remaining members their actual 5 minutes.
Mr. Bingham?
Mr. B in g h a m . Thank you , Mr. Chairman.
Mr. Barr, I think in your answer to Mrs. Sullivan’s question about
how she is going to reply to her constituents, you have forgotten a
little bit about the problem of what it is to be a Congressman.
And I think, frankly, the Treasury could come up with a better
short answer to that question. I would like to try on for size with you
the following three points as to why we have to go on selling gold
internationally when we don’t do so locally.
First, world trade depends on our having a reserve currency.
Mr. B ar r . That is correct.
Mr. B i n g h a m . Secondly, the dollar is today the principal reserve
currency in the world.
Mr. B ar r . That is correct.
Mr. B i n g h a m . And, third, the dollar has that status because we do
peg it to the gold level.
Mr. B ar r . That is a very good answer. I can’t dispute any of it.
Mr. B i n g h a m . Thank y o u .
Mr. B ar r . I tried to explain this one time in a political campaign,
and I got beat. And I don’t recommend that you campaign in this
area. I couldn’t get anybody to understand it.
Mr. B in g h a m . N o w , I tend to share a great deal of the concern that
Mr. Brock has been expressing, I must confess. I think he points out
that this program, this proposed program on the international balance
of payments is one which, if continued, is going to be self-defeating,
that we simply must not cut off the flow of American direct investment
abroad for any long period of time.
Now, my question to you is this: What are the factors which make
you and the Treasury feel confident that this program that is proposed
is a temporary program ?
Mr. B ar r . I would say several factors. No. 1, it is a drastic pro­
gram, so drastic that I don’t believe it could be continued ad infinitum,
Mr. Bingham, I don’t believe it can be.
Secondly, as I have indicated to Mr. Moorhead, while the SDR’s—
the special drawing rights—are no panacea for the problems that we
face at the moment, the SDR’s can create a climate where purely
speculative movements of gold will be lessened because monetary
authorities will have a way to build up their reserves without depend­
ing on the dollar deficit. And the concern about the dollar in that im­
mediate sense might tend to decline a little bit, because there are other
ways of getting reserves.



Lastly, I think that we have gone through the big surge that hit
the economy when we started our troop buildup in Vietnam. And I
think that we have a good opportunity in the year or so ahead to
establish—especially if we pass a tax bill—a better price-wage policy
here in the United States.
You remember that in 1965, just before we went into Vietnam, we
did go into surplus in the second quarter. And we had a good record
going for us that year. Our prices were relatively steady, our wage
rates were not increasing more than the productivity ox labor. We
had a good program going for us.
I believe now, if Vietnam has leveled off, that we do stand a chance
to get back to that situation that we were moving into in 1965, when
we were coming close to bringing our payment accounts into balance.
Mr. B in g h a m . I would just like to say that for myself that unless
we are going to be able to bring the Vietnam drain down—and I see
no prospect of that—we are going to have to cut back our troop de­
ployment in Western Europe.
Thank you, Mr. Chairman.
Mr. B arrett . Mr. Mize?
Mr. M ize.There is $30 billion-plus held overseas now; is that cor­
Mr. B arr . That is correct.
Mr. M ize . What was that figure in 1951, roughly ?
Mr. B arr . I f you will excuse me a minute, Mr. Mize, I have to find
it in the book. It is somewhere in the book.
Mr. M ize. Will you answer m y next very brief question, Mr.
Robertson ?
What other nations use gold as a backing for their currency ?
Mr. R obertson. There are three in Europe: Switzerland, the Neth­
erlands, and Belgium.
Mr. B arr . I have found the table, Mr. Mize.
What was the query you gave me, sir ?
Mr. M ize.1951.
Mr. B arr . We only go back to 1957 on this table. In 1957 it was
$15,825 million, of which $6,170 million was private, and $964 mil­
lion was held by international organizations, and official institutions
lield $8,691 million.
Do you want the latest that we have ?
Mr. M ize.N o .
Now, Mr. Robertson, though you went over this matter previously
yesterday, will you again explain what and how—what effective re­
strictions of the issuance of Federal Reserve notes will remain when
we take the gold restriction off ?
Mr. R obertson. I would say none. And I don’t think the gold cover
is any restriction at all? as I said the day before yesterday.
We will have to continue providing the American people with all
the Federal Reserve notes that they need in order to carry on trans­
The only feature of the gold cover is that it would require an in­
crease in the discount rate which might very well penalize the people
of this country by a higher rate level than would be called for by
•economic conditions.



But, insofar as the amount of notes issued, it depends upon the
demands of the people of the United States. The gold reserve require­
ment itself does not restrict the issuance. Assuming the gold cover is
removed, we would be exactly in the same position as we are today
in that regard.
Mr. M ize. Thank you.
Mr. B a r r e t t . Mr. Galifianakis?
Mr. G a l i f i a n a k i s . Thank you very much, Mr. Chairman.
Reference has been made to the fact that we are now getting to
curing the disease that plagues us. As I look at H.R. 14743, it is
certainly not designed to cure the balance-of-payments problem. And
it doesn’t affect the solidarity of the domestic dollar at all.
But it does improve the solidarity of the international dollar.
Do we have in your present setup; in the Government an agency, or
a group, or a committee that specifically concerns itself on a longrange basis with the balance-of-payments program?
Mr. B ar r . We do, Mr. Galifianakis. It was set up under President
Kennedy. It is the President’s Cabinet Committee on Balance of
Payments. The Chairman is the Secretary of the Treasury. The mem­
bership includes, among others, the Under Secretary of State, the
Secretary of Commerce, the Secretary of Transportation, the Secre­
tary of Agriculture, the Secretary of Defense, and the Chairman of
the Federal Reserve Board also participates regularly. They meet
frequently to examine developments and formulate recommendations
to the President in the balance-of-payments area.
Mr. G a l i f i a n a k i s . I f this be the case, and they are charged with
that responsibility, do you see a further necessity for creating a com­
mission, a special commission?
Mr. B ar r . I would doubt, Mr. Galifianakis, if this would help. It
might tend to dilute it. The real responsibility here rests on the Sec­
retary of the Treasury. But he shares it—he can’t discharge his respon­
sibility unless he gets cooperation from the other Departments, such
as Dexense, State, Commerce, Transportation, and Agriculture, and
from the Federal Reserve Board.
Mr. G a l i f i a n a k i s . Is the private sector of the economy represented
on that?
Mr. B ar r . N o , it is not.
Mr. G a l i f i a n a k i s . Has consideration been given to, maybe, em­
bellishing— Mr. B ar r . The private sector o f the economy is represented in Mr.
Trowbridge’s advisory committee, which advises as to the Commerce
measures that need to be implemented.
Mr. G a l i f i a n a k i s . Could we have some response----Mr. B arr . Incidentally, I might add that we do have one other
committee, the Advisory Committee 011 International Monetary Ar­
rangements, the so-called Dillon committee. It is chaired by former
Secretary of the Treasury, Mr. Douglas Dillon. It is composed exclu­
sively of the private sector. It includes Mr. David Rockefeller, Mr.
Andre Meyer, Mr. Robert Roosa, who was previously Under Secretary
of the Treasury, Mr. Frazar Wilde, Mr. Walter Heller, Mr. Kermit
Gordon, Mr. Edward Bernstein, and Mr. Francis Bator.
Mr. G a l i f i a n a k i s . D o the President’s committee and the Dillon
committee meet jointly?



Mr. B arr . N o , they do not. The Dillon committee advises the
Mr. G a l i f i a n a k i s . Can we suggest a consideration of perhaps add­
ing to the President’s Committee maybe the representatives of the
industrial and commercial world?
Mr. B arr . They come up to the President’s Cabinet Committee, as
I have indicated, if they are in any commercial or industrial side, they
come up through the Secretary of Commerce.
Now, the banking community, their opinions are reflected usually
by the Chairman of the Federal Reserve Board. So they come to the
committee through appropriate channels.
Mr. Galifianakis, the problem in this area is that quite often we
are dealing with very delicate security matters, and to bring them in
as a part of the membership I don’t think it would work.
Mr. B a r r ett . The time o f the gentleman has expired.
Mr. Blackburn?
Mr. B l a c k b u r n . Mr. Barr, I recall yesterday I was asking, What is
the long-term solution to the disease? We agreed the balance of pay­
ments is only a symptom of it. And I recall your response was that
we must adopt the President’s tax increase proposals, and we must
cut spending wherever we can.
Well, now, am I to conclude from that that there is a relationship
between our domestic financing of fiscal policy and the balance-ofpayments problem ?
Mr. B arr . Very definitely. That is the most crucial element in the
whole area.
The President stressed this in his balance-of-payments message. He
says that is the No. 1 thing to do, discipline ourselves.
Mr. B l a c k b u r n . Can I conclude, then, that basically the proposal
to raise taxes and cut spending is to result in a closer relationship
between our Federal expenditures and Federal income?
Mr. B a r r . That is correct.
Mr. B la c k b u r n . T o the extent that there isan excess of expenditures
over income, what is the effect of that on our domestic economy and
our balance-of-payments problems? I am wondering about the
Mr. B ar r . The theory, Mr. Blackburn, is that an excess of expendi­
tures over income, creating a deficit, stimulates the domestic economy.
Now, there are times when the stimulus doesn’t hurt. I f you have
slack in the economy, unemployment, unused savings, unused plant
equipment, it doesn’t hurt. At a time such as the moment, though, when
the economy is running full tilt, a government deficit throws in a
stimulus that gets not more production, but higher prices.
Mr. B l a c k b u r n . Which is just inflation, is what we are talking
Mr. B ar r . Yes.
Mr. R obertson . And if I can add to that, as we get the inflation,
of course our competitive position in the world market is diminished.
And, of course, one of the really big factors in achieving a solution
is to increase our trade surplus. You can’t do that if you are losing
your competitive position in world market as the result of inflation
here at home.
89-292— 68------- 8



Mr. B l a c k b u r n . So you have a double-barreled negative effect on
balances of payments, in that a booming economy at home encourages
Mr. B a r r . That is correct.
Mr. B l a c k b u r n . And it also discourages exports by increasing
prices of goods which we wish to sell on the world market.
Mr. B a r r . That is correct.
Mr. B l a c k b u r n . S o , then, these preachments of doom that the
minority party has been making for the past several years have proven
to come true.
Mr. B a r r . I will say this, that there were deficits that we were run­
ning in the period 1961 through 1965, Mr. Blackburn, at which time
we had an absolutely steady wholesale price index in the United States,
at a time when the labor costs of producing our goods were actually
declining. Now, at that time the budget deficits did not impair our
balance-of-payments position. What we are saying at the moment that
the whole situation has shifted, that these deficits are literally intoler­
able when we are running at full blast. That is the difference.
Mr. B l a c k b u r n . Just one other question has come to my mind. I
recall some figures that I have recently seen which indicate that our
cost of labor for goods sold in our exports has remained fairly constant
over recent years.
Now, we all know that the cost of labor domestically has been
going up because of wage increases, and so forth.
Mr. B a r r . That is right.
Mr. B l a c k b u r n . I am wondering whether or not the consistency of
the cost of labor of the goods sold is not more of a reflection of the
fact that the things we are selling are those things in which the cost
of labor has been maintained through technological advances, and
whether or not some study has been made as to the extent to which we
have lost out in sales in other commodities in other areas, perhaps, be­
cause the cost of our labor has increased.
Mr. B a r r . Mr. Blackburn, I think you will find that if you take
the period 1961 through 1965—that the cost of labor per unit declined
on nearly the whole spectrum of manufactured articles, and probably
an important reason was that we put in the investment credit back in
1962. This stimulated a great surge of investment. We gave American
labor better tools. And they used these tools. And as a consequence,
their productivity increased.
Sure, the wage rates went up, but the production that was coming
from the combination of American labor and American capital went
up faster than the wage rates.
So the cost of labor in production across the broad spectrum de­
Mr. B l a c k b u r n . Then there may be some spots in which we have
lost out because of the increase in wages. But overall, do you think
that we have been competitive ?
Mr. B a r r . That was true through 1965, as I said, Mr. Blackburn.
It is not as true today.
In 1966 and 1967 there was erosion.
Mr. B a r r e t t . The time o f the gentleman has expired.
Mr. Brown?
Mr. B r o w n . Thank you, Mr. Chairman.



Following up on Mt. Blackburn’s discussion a little bit, Mr. Barr, do
you find any increase in productivity by virtue of the increase in cost
of a product that conies with an additional tax ?
Mr. B a r r . Well, there is that argument, Mr. Brown. But what we are
saying literally is that the country can produce just so much. We have
just so much labor, and so much plant. And those are the tools of pro­
duction. When demand starts running, a combination of Government
demand and private demand, too strongly, it is incumbent on someone
to try to pull that demand down in the form of a tax increase, and the
demand down from the Government in the form of expenditure re­
ductions, to make sure that we are not throwing more demand on the
country than it can supply. That is what a tax increase does. It takes
away demand.
Mr. B r o w n . But, Mr. Barr, as I understand it, the proceeds of the
surtax is not going to be set aside. Basically, this money is going to be
reflected back in spending.
Mr. B a r r . It is not going to be set aside. What is going to happen,
Mr. Brown, is that instead of going into the market and borrowing the
money with the possible inflationary consequences that arise from that,
we are going to be taking it away from them. And in that effect we are
going to be trying to equate, bringing closer into equilibrium between
demand and supply. I f we just go to the market and borrow it, there
can be a tendency at this time for this to 'be strongly inflationary;
especially if it is taken up with the commercial banks, as it probably
would be.
Mr. B r o w n . Mr. Barr, if there is a contract today that has not been
negotiated between management and labor, and a surtax is enacted,
is not the surtax going to be reflected in that contract?
Mr. B a r r . I have heard this argument. I don’t believe it
Mr. B r o w n . Y o u don’t think----Mr. B a r r . Of course, when labor and business have a situation where
there is just no unemployment, there is this enormous demand that we
have running, more demand than we can accommodate, it will be much
easier for laoor to get higher wages and business to get higher prices.
What we are saying—and labor and business agree with us—is that we
will pull off some of that demand in the form of a tax increase to re­
duce the potential for higher costs being passed on.
Mr. B r o w n . Isn’t the basic problem in the balance of payments
merely a question of building a better competitively valued mousetrap ?
Mr. B a r r . Absolutely.
Mr. B r o w n . Whether it be a tour, a vacation, or a mousetrap ?
Mr. B a r r . We have had a long discussion here of what we are try­
ing to do long term. Here are the long-term proposals and measures
that we have for improving the balance of payments: A tax increase.
We are going to have legislation coming to this committee to liberalize
the lending of the Export-Import Bank, so that we can go out and
compete better with other nations in financing exports.
We are asking the Congress for a $200-million program to promote
We are asking our allies to reduce nontariff barriers to trade.
We are trying in the direct investment program to get increased
income from the direct investments abroad.



We are trying to stimulate foreigners to invest in the United States.
We have a program that will be coming to the Congress to try to
stimulate foreign tourism to the United States.
On portfolio investment, we have brought in 60 European invest­
ment bankers just last fall as part of a wide-ranging program to try
to sell American stocks and bonds abroad.
The Congress passed the Foreign Investor Tax Act in 1966, which
will facilitate foreign investment in the United States.
And, of course, in the Government area we are asking our allies for
military offsets, and we are asking others to help us with aid to lessdeveloped countries.
That is the basis of the long-term program we are looking for.
Mr. B r o w n . Just one final question—you probably don’t have the
answer right now.
Can you tell me whether or not there was stepped-up activity in the
areas or investment which were covered by the President’s New Year’s
resolution immediately prior to its announcement ?
Mr. B ar r . Y ou mean an attempt by American corporations to posi­
tion themselves to get their money#outside the United States ?
Mr. B r o w n . I mean in anticipation of it.
Mr. B a r r . We couldn’t find them. This was one of the best security
operations we ever ran in the U.S. Government, Mr. Brown. There were
only about 11 people that knew about it. And we couldn’t find that
there was any anticipatory movement.
Mr. B r o w n . Thank you.
Mr. B a r r e t t . The time of the gentleman has expired.
Mr. Secretary, and Governor, many of the members may desire to
ask you some questions through the mail, for the record. I am sure you
will be willing to respond to their questions.
Thank you very much.
Mr. Williams?
Mr. W i l l i a m s . Thank you, Mr. Chairman.
Mr. Barr, I want to say to you that I think you do a tremendous job
before this committee. I don’t agree with some of the things you
say. But I certainly admire your ability in appearing before this
I don’t know how you were defeated, whenever it was.
Mr. B ar r . Nobody ever understood it, and sometimes I wonder now.
Mr. W i l l ia m s . There must have been other factors in the picture.
You mentioned earlier a parade of deficits. Were you talking about
our national budgetary deficits, or were you speaking about our deficits
in balance of payments ?
Mr. B ar r . Deficits in balance o f payments.
Mr. W i l l i a m s . When you were before us on Tuesday you outlined
certain steps that could be taken which would correct our unfavorable
balance of payments. One of the things that you recommended was to
raise taxes, cut expenditures, and keep internal discipline in the United
States. And I think in answering Mr. Blackburn you made it clear that
the deficits which we are experiencing must be corrected to maintain
internal discipline. I think you cleared that upvery well.
Mr. Hanna quoted a number of figures: The increase in our gross
national product between now and 1948; also the great increase in
investments abroad.



Do you have any idea of what the gross national product would be
today, and the investments abroad would be, in terms of the dollar in
1948? In other words, how much of this increase is really due to
inflation ?
Mr. B arr . We can supply that for the record, Mr. Williams. I don’t
have that information with me.
(The information requested follows:)
Our 1967 gross national product, in current dollars, was $785 billion. In real
terms as currently calculated (1958 dollars), it was $669 billion. In terms of
1948 dollars, it would come out to something like $530 billion.
The gross value of all U.S. private investments abroad at the end of 1966
(latest year for which data are available) was slightly over $86 billion. De­
flating this figure on the basis of the same U.S. GNP deflators would give estimates
of about $76 billion in 1958 dollars and about $60 biUion in terms of 1948 dollars,
The usefulness and significance of these estimates—particularly that for U.S.
private investments abroad—is, however, somewhat uncertain. A fuUy correct
conversion of any economic series as complex as these are necessarily involves
major conceptual and data problems in selecting and applying the appropriate
deflator. In the valuation of our outstanding foreign assets, particularly, involv­
ing both financial and physical investments, made over time, at different price
levels, in different countries, with differing rates of depreciation, etc., calcula­
tion of any correct valuation of the present stock of such investments, in terms
of 1948 dollars, is virtually impossible—at least within the limits of data available
to the Government. The use of the U.S. GNP deflator is necessarily arbitrary.

Mr. W il l ia m s . Very well.
Mr. Robertson^ permit me to congratulate you on your appearance
before this committee.
You state that we have an insignificant amount of foreign currency
in this country. What is the exact amount ?
Mr. R obertson . I would be very glad to provide it. But I would
guess it is less than a billion dollars.
Mr. W il l ia m s . Less than a billion dollars.
You also made the statement----Mr. R obertson . I will give y ou the exact figure.
(Theinformation requested follows:)
During 1967 the average of month-end figures for convertible foreign curren­
cies held by the Treasury and the Federal Reserve System was $990 million; on
December 31,1967, such holdings were $2,345 million of which $1,604, million was
held by the Federal Reserve System.

Mr. W i l l i a m s . You also made the statement that this foreign cur­
rency is backed by the dollar. Isn’t it a fact that the dollar is used as
the central point in this financial solar system because the dollar is
backed by the gold ?
Mr. R o b e r t s o n . Oh, y es.
Mr. W i l l i a m s . S o that unless w e do take some of the steps as you
have advocated to permanently correct this unfavorable balance of
trade, unfavorable balance of payments, one of these days we are not
going to have any gold, and the gold will no longer be tne fixed point
m the solar system.
Mr. R o b e r t s o n . N o question about itat all.
Mr. B a r r ett . Thank you, Mr. Secretary.
Mr. Barr, and Mr. Robertson, you have been very helpful, and,
speaking on behalf of all the members, we are very grateful to you.
The committee will stand in recess until Tuesday morning at 10
(Whereupon, at 12:05 p.m., the committee recessed, to reconvene at
10 a.m., Tuesday, January 30,1968.)



(The following additional questions to Under Secretary Barr were
proposed by Congressman Brock for insertion in the record:)
Question 1. Can you supply for the record a breakdown, country by country,
of the U.S. securities, government and corporate, held by foreign central banks
for the past 10 calendar years ?

(See p. 33 for response.)
Question 2. What was the approximate balance of payments impact resulting
from the prolonged copper strike ?

e p l y of

U nder S ecretary B

ar r to

Q u e s t io n

No. 2


C on gressm an B


The 6-month-long copper strike apparently is having an adverse impact on
our balance of trade, taking refined copper together with ores, concentrate,
blister, scrap, and mill products. The net adverse impact, through December
1967, is estimated as roughly $175 million. A decrease in our exports of about
$90 million—principally in refined copper—was accompanied by an $84 million
rise in our imports. The rise in imports was also concentrated on refined copper,
reflecting the closure of the refineries because of the strike.
These figures must, however, be regarded as rough estimates. Not all the data
for December is yet available. Also, these estimated strike effects were com­
puted with reference to the first 9 months of 1966 as a base period. However, this
may result in significant understatement. This base period was dominated by in­
creases in inventories and the movement of the domestic economy to very high
levels of operation, both of which likely had a considerable adverse impact on
our copper trade position. In contrast, during the first months of 1967, some o f
these pressures probably abated. Further, the copper trade figures for the first
half of 1967 probably reflect some accumulation of copper inventories in antici­
pation of the strike. It should be noted, in addition, that the production of copper
involves as byproducts production of small amounts of gold and silver. An al­
lowance for this lost production has not been taken into account.

H o u se o f R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k in g a n d C u r r e n c y ,

Washington, D.C.
The committee met, pursuant to recess, at 10:05 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
Present: Representatives Patman, Barrett, Sullivan, Reuss, Moor­
head, Stephens, Gonzalez, Minish, Hanna, Gettys, Annunzio, Rees,
Bingham, Widnall, Fino, Halpern. Clawson, Johnson, Stanton, Lloyd,
Blackburn, Brown, Williams, and Wylie.
Chairman P a t m a n . The committee will please come to order.
Today, the committee continues hearings on H.R. 14743, the gold
cover bill.
Witnesses for today include Dr. N. R. Danielian, president of the
International Economic Policy Association and Dr. Howard S. Piquet*
Senior Specialist in International Economics, Legislative Reference
Service of the Library of Congress.
Hearings will continue on Wednesday and Thursday and will in­
clude the following witnesses:
Dr. Judd Polk, economist, U.S. Council of International Chamber
of Commerce; Eugene L. Stewart, general counsel, Trade Relations
Council of the United States; Dr. Leif H. Olsen, senior vice president
and economist, First National City Bank of New York; Roy L. Reierson, senior vice president and chairman of the advisory committee,
Bankers Trust Co. of New York; and Dr. Leslie C. Peacock, senior vice
president and economist, Crocker Citizens National Bank, San Fran­
cisco, Calif.
As indicated in the memorandum sent to all members on January 26*
following the conclusion of the hearings on Thursday, the committee
will meet in executive session to consider reporting out H.R. 14743.
I just wonder, Mr. Widnall, since these witnesses are called at your
request—we are very glad to do it, of course—would it be reasonable
for you to ask the others to be here tomorrow and they can certainly
have a fair amount of time to file their statements. Then we can get
through tomorrow and then go right into the executive session on
What do you think about that ?
Mr. W i d n a l l . It depends on the nature of the witnesses. There ought
to be more time, Mr. Chairman. Some of them are coming from a very
great distance.




Chairman P a t m a n . That is all right. We will do it that way. We
want to be absolutely fair about it; and then have our executive
session on Friday. But if we could get through tomorrow, we could
have the executive session Thursday. It mi^it inconvenience your
people that way. But I will yield to your request.
However, we have lost 2 days on this. We lost last Wednesday, and
then we lost Monday, you know, and we are going along rather slowly
for a bill of this type. It is really on the urgent list.
I f you insist on that, Mr. Widnall, we will do it and keep you
in mind.
We will have an executive session, if we g;et through Thursday
morning, and if necessary we will come back Friday morning, or meet
Thursday afternoon, one or the other.
All right, we have as our first witness, Mr. Danielian, president
of the International Economic Policy Association.

Mr. D a n i e l i a n . Thank y o u , Mr. Chairman.
I want to express my appreciation to the committee for allowing
me to come before them today. I was originally scheduled to appear
last Wednesday. The committee found it necessary to shift those nearings until Thursday, which conflicted with an important out-of-town
engagement I had and, therefore, I much appreciate this opportunity
to come before you.
I appear today on behalf of the International Economic Policy As­
sociation in support of the administration’s request to eliminate the
gold reserve requirement behind the Federal Reserve notes, U.S. notes
and Treasury notes in circulation. Our organization stands behind
the President in his determination to honor the moral commitments
' 1
1 J ay its external debts in full measure by the
rge the Congress to make it clear in firm
and binding declarations and specific statutory language that at no
time should the Government and its agencies purchase gold at a price
higher than $35 an ounce—as shown in table 1 attached to my
Such a limitation will have the effect of abating speculative hoard­
ing of gold. Current production of gold and some reserves have been
disappearing into industrial uses and private hoards.
Such demand exceeded the amounts of gold newly available to the
market in the past 2 years and had to be met in part by a reduction
in world monetary reserves. These are estimated to have declined by
a billion dollars in 1967 for this reason. This is indicative of specula­
tion around the world that the price of gold will go up. It is not
unrealistic to assume that official withdrawals of gold from the United
States have the same motivation.
Once it is made clear that this hope is illusory, it is likely that
the speculative interest in buying and hoarding gold will abate. As
gold m vaults or in mattresses does not earn a return, it is to be hoped
that, once this speculative interest is eliminated, gold may flow back



into circulation and be exchanged for goods and services or
In any event, there is no moral obligation on the part of the United
States to raise the price of gold now or in the future, thereby giving
windfall capital gains to the hoarders of gold, be they private or
official. The raising of the price of gold would in effect mean handing
to the hoarders of gold claims upon U.S. resources.
If, for instance, we should at any time raise the price of gold by 100
percent, to $70 an ounce, the $30 billion or more of free world official
gold holdings abroad could be exchanged for $60 billion. This wind­
fall profit ox $30 billion would be a claim upon U.S. goods and serv­
ices. It is estimated by some that there is $15 to $20 billion in private
hoards and undisclosed stocks in Communist hands. An increase in
the price of gold would give them, too, an unwarranted and unearned
claim upon the resources of the people of the United States.
Better use can be made of U.S. resources than to pay to the hoarders
of gold a claim on the United States of this magnitude. Those coun­
tries that have acquired this gold have shown little disposition to meet
the costs of common defense or foreign aid, nor have they shown an
interest in economic and political cooperation with the United States.
Western European countries have plenty of reserves in the form
of gold and the dollars they now hold. This is shown in table II. They
do not need the additional dollar reserves which would result from
an increase in the price of gold. I f we should succumb to their pres­
sure in the future to raise the price of gold and thus double the dollar
value of their gold holdings, what will they do with the additional
I f they do not wish to buy more goods and services in the United
States now, when they can afford it, will they be inclined then to spend
the increased dollars resulting from the redemption of gold to buy
even more goods and services here? I f not, what use will they make
of their increased dollar purchasing power? What effect will alterna­
tive uses have on the United States ?
One use they could make of their unearned capital gains would be
to buy goods and services in the United States, by selling back to us
gold which they purchased at $35 for a much higher price. Of course,
this would be inflationary; it would be uncompensated, in that we
would be getting the same gold back at an inflated price; it would be
like giving foreign aid to the rich. When you include, in this same
club of speculators, the Communist countries and South Africa, this
operation loses its attraction completely.
Another use the speculators and hoarders could make of their
windfall capital gains would be to invest in U.S. corporate securities,
U.S. Government bonds, or real property. This would seem perfectly
harmless, but in view of the magnitudes involved, to sell U.S. capital
assets, without compensation, would aggravate our future balanceof-payments position, as we would be called upon to pay interest and
dividends, not to mention the instability in financial markets due to
shifts in such large quantities of liquid assets.
In the third place, Europeans may use the windfall profits on gold
revaluation to buy up U.S.-owned investments in their own countries.
Those investments have greatly contributed to their postwar economic
growth; they are, in fact, the most enlightened expressions of inter­



national economic cooperation and, in the future, the most effective
means of closing the technological or management gap, with which
the Europeans are so concerned. But nationalistic instincts sometimes
go contrary to rational economic behavior, and they may opt for
disestablishment of American ownership in their countries.
They have already taken the first step in this direction by use of
the power they have acquired in liquid assets to force the U.S. Govern­
ment to limit industrial acquisitions and expansion in Europe. What
more could they do with the enormous capital gains resulting from
the repricing of gold? If they assert nationalist policies and gradually
buy up U.S. investments, they may slow down technological progress
and economic growth, and the United States would lose in export
markets and investment income, further aggravating balance-of-pay­
ments deficits.
I f I seem to dwell at some length on the relationship between bal­
ance of payments, gold, and investments, it is because I feel that they
are inextricably related in this world of cold, and sometimes not too
cold, war strategy and this relationship is not understood in the United
At least, I have been trying to explain it interminably ever since
1959 in many media, without always achieving measurable success
in understanding. But we must understand it if we are to succeed in
holding our own in the world. Let us once and for all realize that about
one-third of our foreign exchange earnings come from investmentrelated exports and investment income. Even this has not been enough
to pay for the Government’s expenditures abroad. If you curtail in­
vestments, you limit your external income, and with it your ability
to sustain political and military positions abroad.
Disestablishment of U.S. investments is, unfortunately, a (political
objective all around the world. This finds expression in different forms:
in Western Europe, in pleas for partnerships and joint ventures; in
the Middle East, through nationalization and renegotiation of exist­
ing arrangements; in South America, through limitations on foreign
U.S. private investments and services abroad add about $6 billion
a year to our external income and another $6 billion to our invest­
ment-related exports. I f we allow this to be whittled away by take­
overs, transfers of ownership, foreign borrowings at high interest
rates, or sale of assets in the United States to meet our current account
Government expenditures, we are going to find that we will be unable
to maintain our commitments for collective security and economic de­
velopment around the world.
There is a historic example of this process. Contrary to currently
accepted theories of Great Britain’s difficulties, the major reason for
the deterioration of the British balance of payments is not the trade
deficit. Great Britain has generally had a trade deficit. In the past,
she was able to make up the difference in her trade deficit and sustained
British presence around the world through income on investments
and services. Twice, after World War I and World War II, British
investments were liquidated to the tune of £ 1 billion or more each
time. Their external debts increased, and Government expenditures
abroad soared. As a result, the invisible income on investments and
services has not been sufficient to meet these increased costs.



During the 9-year period, 1958 through 1966, Great Britain had a
cumulative surplus of £3,603 million earned overseas by the private
sector. No less than £3,588 million of this came from cash inflow from
private investments overseas. Even on imports and exports of goods
and services, at £41,598 million and £51,613 million cumulative for
the period there was a surplus of £15 million.
But in the public sector, during the same period, there were net
government expenditures abroad of £5,238 million, simply too much
for the surplus in the private sector to overcome. And the country
ended the period with cumulative net deficits in its external payments
of £1,635 million.
It cannot be substantiated, therefore, that the underlying disequi­
librium of Britain’s balance of payments has been due to a persistent
imbalance of the private sector’s trade with the rest of the world.
It has been due, on the contrary, to the fact that net Government
expenditures overseas have persistently exceeded the surplus earned
by the private sector. The insufficiency of foreign investment income
was fundamental reason for her retrenchment.
The United States is in danger, if it continues as it has for all but
one of the past 18 years to spend more on Government account abroad
than it can earn on private account, of losing the capacity to meet its
international commitments. Lifting the gold cover will not correct
this situation. At best, it will only give us a limited amount of addi­
tional time to make fundamental adjustments.
I hope it is realized in the highest policymaking circles of our
Nation that in the interests of the long-range security of the United
States and its allies, foreign investments are not expendable. They are
the very core of our ability to wage war or maintain peace.
Our studies indicate tnat the private sector of U.S. international
transactions, including all items, both current and capital account,
are in balance or in surplus. It is Government sector expenditures
that throw us into deficit. Furthermore, U.S. deficits are incurred
in our economic and financial transactions with Asia, South America,
Africa, and international institutions, where military and foreign aid
expenditures are largest.
The irony of the present U.S. embarrassment over its balance-ofpayments deficits is that the surpluses being acquired by Continental
Western Europe are the result of expenditures that we have been
making in Europe in the maintenance of our troops for the common
defense, with an out-of-pocket foreign exchange cost of $1.5 billion,
plus the foreign aid and military expenditures of the United States
m other parts of the world, from which Western Europe earns its
surplus dollar.
We do not have a balance-of-payments deficit with Western Euro­
pean countries. Our payments deficit originate in the Far East as a
result of foreign aid and military expenditures, and in other places
where we have foreign aid and military deployments, while the
Western European countries are earning their surplus dollars through
trade with those areas. Table III analyzes this for the 2 years, 1965-66.
By a tightfisted policy on the part of Continental European coun­
tries with respect to meeting the costs of their own defense, and lack
of support of our efforts in the Far East and in foreign aid on easier
terms, they have acquired surpluses which they are now trying to
use against us through withdrawal of gold.



The first impact of this arm twisting has been to force the U.S.
Government into undertaking unusual actions in control of U.S.
investments, particularly in Europe, as much a limitation on the
individual stockholder in a U.S. company as a limitation of travel
would be for a tourist.
How we respond to the exigencies of the moment will determine
our ability in the future to be masters in our own house.
Coming back to my original recommendations, this country must
meet its obligations as promised in the presently acceptable currencies
of the world, including gold, but should never fall into the trap of
raising the price of gold, thereby giving other nations an additional
weapon with which to whip us, particularly by buying out our in­
vestments or technology with unearned capital gains. This would
be the surest way of pushing us back into fortress America, with
a very great loss of freedom.
There must be a ffirm and unequivocal assertion by the Congress
that we are onto this game, and will never allow speculators to gain
and use an undeserved windfall profit through future increase in
the price of gold to dispossess us at the expense of our taxpayers.
The Bretton Woods Agreement Act o f 1945, authorizing the U.S.
participation in the International Monetary Fund, made it clear that
any change in the par value of the dollar required legislative approval
but did not limit the price at winch gold could be purchased. There­
fore, there is still a limited possibility that the United States could
in fact pay a significantly higher price for gold than the par value of
$35 an ounce.
Under article IV, section II of the articles of agreement of the
International Monetary Fund, the Fund is authorized to fix the mar­
gin above and below par value for transactions in gold by members.
This could be done by a simple majority and the United States does
not have a veto. The International Monetary Fund could set the mar­
gin at any percentage above and below parity.
The Gold Reserve Act of 1934, section 734 of title 31 of the United
States Code, authorizes the Secretary of the Treasury to 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
Under existing law, the Secretary of the Treasury would be free
to buy at the increased price resulting from any higher margin fixed
by the Fund. While we cannot by ourselves change the articles of
the Fund, the Congress can and should restrict the authority of the
Secretary of the Treasury in this legislation to the purchase of gold
at a price not to exceed the present margin of 1 percent above the
par value of $35 an ounce without congressional authorization.
Furthermore, by amendment of the article, the par value of gold
and the dollar can be changed. Now we have a veto over such a change.
But one never knows what pressures will develop in the future. To
what uses will the continental European countries put their enhanced
power after they have acquired more of our gold ?
In all fairness, I should make clear that while our organization
supports the two specific recommendations with regard to the gold
cover and the gold price, the analysis and speculation in support o f



them are given wholly on my own responsibility and no member of
the organization has seen this paper, nor can be held responsible
Thank you very much, Mr. Chairman.
(The attachments to Mr. Danielian’s prepared statement follow:)
[In millions of U.S. dollars]





Additions to
world mone­
tary stock 2

195 6
........... 1,125
195....................................... 7 ......1,275
195....................................... 8 ......1,285
195....................................... 9 ......1,380
196....................................... 0 ...... 1,378
196....................................... 1 ......1,540
196....................................... 2 ......1,515
196....................................... 3 ......1,906
196....................................... 4 ......1,856
196.......................................5 ......1,840
196....................................... 6 ......1,370
1967«.................................. ........... 1,420


Estimated industrial and artistic use3
U.S. Bureau
of the Mint

5 650


hoarding <


1 New production plus Russian sales less purchases by mainland China.
2 Data from International Monetary Fund, “ International Financial Statistics."
s Based on series published by the BIS (annual report, 1966) for 12 countries and by the U.S. Bureau of the Mint for an
additional 29 countries not covered in the BIS series.
* The residual amount, cols. A—(B and C)=D.
s Fund staff estimate.
a Estimate from First National City Bank, Monthly Economic Letter, January 1968.
(In millions of U.S. dollars]


United States............................................................................................................
United Kingdom.......................................................................................................
Industrial Europe.................................................................................................... ...................9,215


West Germany..................................................................................................
Italy................: ..................................................................................................
. 204
Switzerland.......................................................................................................................... 1,925


Other developed areas...........................................................................................
Less developed areas.............................................................................................



Total country holdings..............................................................................
BIS.....................................................................................................................................................-4 2


Total official holdings...............................................................................


Source: International Monetary Fund, International Financial Statistics, September 1967.




[In millions of U.S. dollars]
United Kingdom

Other Western







Exports of goods and services1......................................







Merchandise................... ............................................
Military transactions.................................................
Other services...................................................
Income on investments............................................







Imports of goods and services........................................







Transportation.............................. -...........................
Military expenditures................................................







Balance on goods and services..........................
Remittances and pensions...............................................
U.S. Government grants and capital, net.....................
U.S. private capital, increase ( —) .................................







Direct investments. ............................................... ..
New issues sold in the United States...................
Other transactions and redemptions....................
Other long term..........................................................
Short term............................................. ............









Western Europe investments in the United States..







Direct investments....................................................







Total transactions with the United States
(U.S. payments (—) ) ....................................







Total reported increase in European gold
reserves and liquid dollar holdings......... ..
Errors and omissions and receipts from <—) or pay­
ments to other countries.............................................













i Excludes military grants.
Note—Detail may not add to totals because of rounding.
Source: U.S. Department of Commerce, Office of Business Economics, Survey of Current Business, June 1967.

T r e a s u r y D e p a r t m e n t R e p l y to S t a t e m e n t of M r . D a n i e l i a n R egarding
A u t h o r it y T o R a is e P rice of G old

There are two reasons why the dollar could not be effectively devalued through
action by the Fund to widen the margins above and below par at which gold
can be purchased and sold. In the first place, while Article IV, section 2 of the
Fund Articles of Agreement does authorize the Fund to prescribe a margin above
and below par value for transactions in gold by members (currently 1% ), the
discretion which it has is effectively limited by another provision relating to
exchange transactions, Article IV, section 3 provides that the maximum and
minimum rates for exchange transactions between the currencies of members
should not differ from parity in the case of spot exchange transactions by more
than 1%. Thus, to allow gold transactions under wider margins would be incon­
sistent with the whole par value system of the International Monetary Fund.
Secondly, the Fund Articles contain specific provisions, Article IV, sections
5 and 7, establishing procedures for changes in par values, i.e., the price for gold
in terms of specific currencies. For this reason, it would be inconsistent with
the spirit of the Articles of Agreement to change par values or the price of gold
by the indirect method of widening the margins on gold transactions.
Furthermore, no change in the dollar’s gold parity is possible without U.S.
consent. Under Article XVII of the Articles of Agreement of the International
Monetary Fund no modification of the Agreement may be made without threefifths of the members, having four-fifths of the total voting power, having



accepted the proposed amendment. Since the United States voting power in the
Fund exceeds one-fifth, no amendment to the Articles may be made without the
United States having voted in favor thereof. Section V of the Bretton Woods
Agreements Act provides that unless Congress by law authorizes such action, the
United States shall not accept any amendment under Article XVII of the Articles
of Agreement of the Fund. Therefore, the Articles of Agreement of the Fund
may not be amended without action by the Congress.
Moreover, Article XVII also provides that acceptance by all members is
required in the case of any amendment modifying the provision that no change
may be made in the par value of a member’s currency except on the proposal
of that member. Again, Section V of the Bretton Woods Agreements Act provides
that the United States may not propose or agree to any change in the par value
of the United States dollar, or approve any general change in par values, unless
Congress by law authorizes such action.
It is, therefore, quite clear that the par value of the United States dollar
may not be changed without action by the Congress.

Mr. B a r r e t t (presiding). Thank y o u , Mr. Danielian.
I just have one very short question here. On page 9, you indicate
that—at least, it is my concept—that you are not against removing
the gold cover. Is that true or----Mr. D a n i e l i a n . We support the President. On page 1, I have
stated unequivocally, we support the President in removing the gold
cover. We also recommend that a limitation be placed upon the repur­
chase of that gold at a price higher than $35 an ounce.
Mr. B a r r e t t . Thank y o u , Mr. Danielian.
Dr. Piquet, we will let you present your testimony, if you are pre­
pared, and then we will ask you questions thereafter.
Mr. P i q u e t . I appear before you, Mr. Chairman, not as a witness
who has asked to be heard, but as one of your own advisers. I have
spent over 2 0 years as a consultant to committees and Members of
Congress and I speak only in what I conceive to be the public interest.
Although I am the senior specialist in international economics of the
Legislative Reference Service of the Library of Congress I do not
speak on behalf of that organization.
I am not going to read a paper, although I do have a brief document
that I shall let you have. You may want to refer to it as I talk.
Mr. B a r r e t t . D o you desire to submit that for the record ?
Mr. P i q u e t . I f y o u w ish .
Mr. B a r r e t t . It may be inserted in the record, without objection,
and so ordered.
Mr. P i q u e t . First, the overall problem, or series of problems that,
in a sort of shorthand, we refer to as the balance-of-payments prob­
lem, seems to me to be a misnomer. We cannot separate gold, balance
of payments, trade, aid, and other problems, including the domestic
economy, the Federal budget, and so on. They are all intertwined, and
all are part of the same problem. It is easy to become so enmeshed in
details that we fail to see the forest, because we are concentrating on
the trees.
That which we call the balance-of-payments deficit, in my opinion,
is a relatively subordinate matter. If we examine the balance-of-pay­
ments figures for a number of years we find that the so-called deficit



w a s a s h i g h a s $3.9 b illio n b a c k in 1960. It su b sid e d to $2.4 b illio n in
1961 a n d K ep t g o i n g d o w n g e n e r a lly u n t il 1965, w h e n i t w a s re d u c e d
to $1.3 b illio n .

And in 1966 to $1.4 billion. Obviously, something happened in 1960
that was not happening in the years between 1960 and 1966. That
something was speculation, speculation against the dollar in favor of
When President Kennedy made it clear, in his speech via the satel­
lite Telstar, that the United States was not going to raise the price of
gold, its price in London declined from $41 an ounce—this is back in
1961—to $35 an ounce, and the balance-of-payments deficit was re­
duced to manageable proportions.
In 1966 and 1967, if we take the figures that are available—that is,
for the first three-quarters of both years, 1966 and 1967—we find that
the balance on goods and services, that is, autonomous private trans­
actions, improved by $100 million, from $5.6 billion to $5.7 billion.
There was an improvement in the trade balance of $300 million. The
balance on investment earnings improved in 1967 over 1966 by $ 2 0 0
million, other services remained constant. The only deterioration was
in travel and transportation of $400 million, much of which resulted
from travel of Americans to Canada for Expo 67.
Private direct investments—those that tne President decided should
be curtailed—actually declined from $2.4 to $2 billion.
Portfolio investment outflow increased $500 million and all other
capital outflow, including short-term capital, increased $700 million.
The dollar outflow in connection with military expenditures increased
$500 million, while “ all other” transactions improved by $400 million.
The sum total was that in the first three quarters of 1967, compared
with the first three quarters of 1966, the deficit increased by about
$800 million, none of which resulted from any net deterioration in the
private sector, except short-term capital.
In other words, what seems to have been happening in the fourth
quarter of 1967, we don’t have actual figures for the xourth quarter,
out we know that the overall deficit was between $3.5 and $4 billion,
was a sudden increase in the outflow of funds for speculative purposes.
There is a strong presumption that the deterioration in the fourth
quarter of 1967 was not because of an increase in autonomous private
investment outflows nor because of a deterioration in the trade balance.
The deterioration occurred because of an increased military step-up
and because of private short-term capital outflow.
Experts in the Department of Commerce say that when the detailed
1967 figures are released they will show an “errors and omissions” item
of approximately $ 1 billion. This means that dollars were flowing out
of the country for some unexplained reason. I conclude, on the basis
of the experience of 1960 and 1961 and the figures that are available for
the first three quarters of 1967, that there was a sudden outflow of
dollars stimulated primarily by British devaluation of the pound and
hope and expectation on the part of speculators that “the dollar would
be next.”
“Devaluation” is a misleading term. It does not signify deterioration
in the moral worth of the dollar or in the domestic purchasing power
of the dollar. All that it means, in the case of the United States, is that
the price of gold is increased. As Dr. Danielian has pointed out such



action would play into the hands of the producers and hoarder’s of
President Eisenhower, you may remember, a few days before the
expiration of his term of office, in January 1961, issued a proclama­
tion forbidding Americans to hold gold anywhere in the world. We
have not been allowed to hold gold in the United States since 1983.
The profitability of gold speculation is easy to explain.
A speculator buys a bar of gold, either in Switzerland or in London
for $14,000. At 5 percent interest it costs him at the rate of $700 a year
to hold it. Then, if the United States should raise the price to $70 an
ounce he makes $14,000 on his $14,000 investment—a 1 0 0 -percent
gain. And all that he loses is his interest cost.
If, however, the United States does not raise the price of gold, and
speculators become convinced that it will not do so, what do they
do ? They return the gold and get their dollars back. Again, all they
can possibly lose is the cost of holding the gold.
This is not true speculation. This is one-way speculation. The price
can go up, but it can’t go down. To make it even simpler, suppose the
United States were to guarantee the price of wheat at $ 1 a bushel—
to guarantee to buy or sell at any time at the same price—and then
the rumor gets around that it is going to raise the price to $ 2 a bushel.
Speculators would buy wheat until it came out of their ears. If the
price is raised to $ 2 they make a 1 0 0 -percent profit, less only the cost
of holding the wheat. If, however, the price is not raised they return
the wheat and get their money back. They can’t lose.
Obviously, something is wrong with respect to the way we are man­
aging the relationship between dollars and gold.
I f the ailment that needs to be cured is speculation, should we not
apply remedies to that part of the problem, instead of penalizing
private foreign investment which, over the years, yields more in terms
of income than is paid out currently in the form of capital outflow.
If you add the amount of money that Americans sent abroad over
the past 13 years in the form of new direct private investment and,
in a column alongside of it how much Americans collected over those
13 years on that cumulative investment, in the form of dividends,
royalties, et cetera, you will come up with a plus balance of $17 billion.
Restricting such investment is truly tantamount to “killing the goose
that lays the golden eggs.”
The United States, whether we like it or not, has been put into the
)osition of serving as the de facto world reserve banker. We are no
onger “ just another country.” It is to be expected that we should have
a reasonable deficit in our balance of payments because we are supply­
ing the world with about one-third of its liquid monetary reserves in the
form of dollar exchange. I doubt that even President de Gaulle is
going to be foolish enough to wreck the dollar. He has got us “run­
ning scared,” however. I don’t think he wants to wreck it while
France’s short-term dollar assets of some $1.4 billion equal 25 percent
of her total gold reserve—$5.2 billion.
Certainly, the British don’t want to wreck it, and other European
countries don’t want to wreck it, in spite of what they may say, be­
cause they have too much at stake in the soundness of the dollar.
The United States, as world banker, has been supplying dollars
through its balance-of-payments deficits that are used as monetary





reserves by other countries. This has been going on ever since the close
of World War II when other countries were short of gold.
After the United States raised the price of gold in the early 1930’s
gold flowed into the country in large quantities, so large in fact that it
came to be known as the “golden avalanche.” By the end of 1948 the
United States had accumulated over 70 percent of the world’s total
monetary gold. It was something like the game of monopoly, with the
United States winning all the money. Some foreigners ridiculed the
United States for being so foolish as to amass such a large stock of the
inert metal and thought it might be a good idea to demonetize it.
The British decided to use something to supplement gold as mone­
tary reserves and started to accumulate dollars. They soon discovered
that dollars were not only as good as gold, but even better because
they earned interest. Other countries aid the same. Although they
used some of the dollars that they acquired through trade and aid
for purchasing U.S. goods and services they kept large quantities of
them on deposit in American banks in the form of demand deposits.
They have continued to increase these deposits until they amounted
to over $29 billion on September 30, 1967, of which $14.4 billion was
payable in gold on demand to foreign governments and central banks.
The United States as a central world bank is far from insolvency.
Americans had claims against them by foreigners of a little over $60
billion at the close of 1966. At the same time they had claims against
foreigners of $ 1 1 2 billion. It is true that a large proportion of our
claims on foreigners are long-term claims, whereas over $30 billion
of the $60 billion of the claims against us are short-term claims. This
is a banking function, to exchange its own short-term liabilities for
the long-term liabilities of its customers.
When I go to a bank to obtain a loan to buy a house, I give, say, a
2 0 -year note that I will repay, with the house as security, and the
bank gives me in exchange its check, or money, to pay to the seller. This
is the international role that has been placed upon us by other
countries. We did not choose it and we are not “ forcing” it on other
countries. Under the circumstances we have little choice but to behave
as good bankers.
I f a banker tells a depositor who asks for cash, “ Oh, no, you don’t
really want this cash because we don’t have much, we are losing it too
fast” that depositor wouldn’t patronize that bank very long. As a
nation, we are foolishly giving the impression that we are nervous
about our gold losses. I f we are good bankers we will take all of our
gold and make it available to pay foreign dollar claims.
as an American, cannot get gold for my dollars and no other
Americans can get gold for their dollars. Only foreign central banks
and foreign governments can convert dollars into gold at the U.S.
We have an obligation to pay gold on demand to such holders
amounting to over $14 billion, and the important thing is our liquidity
ratio. How much reserve do we have against these liquid claims ? About
84 percent, provided we remove the 25-percent gold cover against
Federal Reserve notes. I f we don’t remove this cover the ratio is only
about 1 1 percent.
The reason why it is important that the gold cover be removed, and
removed promptly, is the psychological consideration that this is good



banking. If we equivocate and reduce it from 25 percent to, say, 12%
percent, we shall give the impression that we are being forced to do it.
This could do great harm, psychologically.
We should release this inert gold for international purposes and do
it with great self-assurance.
In my opinion the U.S. dollar is 4still sound. I haven’t yet detected
any actual deterioration in confidence in the dollar. The problem
that we face is the psychological one of insuring that there will not
be any loss of confidence in the dollar.
This means that we must not “run scared.” I f there were already
loss of confidence in the dollar I doubt that the dollars circulating in
the Eurodollar market would have expanded to over $15 billion. These
are U.S. dollars that circulate in Europe, and in certain other parts
of the world. They are not controlled by any government but are
held and loaned by bankers, and borrowed by businessmen. Even
Eurodollar bonds are being issued, and the interest rate on them has
been increasing. These dollars are not held by central banks or by
governments and are not legally convertible into gold. This does not
look to me like a loss of confidence in the dollar.
What is the basic key to the problem ? Elimination of the gold cover
is the obvious first step, but the most basic key is to keep the dollar
inviolate in terms of purchasing power. This means avoiding inflation.
There is no economic problem, in my opinion, that the United States
faces at the present time that is of any greater importance than main­
tenance of the purchasing power of the dollar. This means the adoption
of fiscal programs to keep the dollars from being inflated. I assure you
that—despite attempts to blame labor for cost-push inflation and to
blame others for demand-pull inflation are directed at the wrong
targets. These are rather high-powered words for simple ideas that
are rather meaningless.
Inflation occurs when Government debt is monetized by the central
banks and when more money and credit are pumped into circulation
than is needed. There has been no important inflation in any country
in modern times that has not been caused by the overissuance of
money or credit. Once this has occurred labor, consumers, industries,
merchants, and others endeavor to make up for the shrinking value
of money by trying to increase the prices of the goods and services
that they sell. Some are more successful than others because they are
organized and can exert strong pressure. Seldom are governments
willing to admit that they themselves have caused inflation. It is easier
to point the finger of blame at others.
First in importance is removal of the gold cover, and next is to do
something about speculation against the dollar. The latter is not in
any bill before you, but since 1962 a number of economists have been
pushing for an idea which involves some rather subtle reasoning.
It is that the United States continue to convert dollars into gold,
when presented for redemption by foreign governments and central
banks, at a fixed rate of one thirty-fifth of an ounce of gold per
dollar, as long as it has the gold to do 4so, but that it abandon the
advance “guarantee” to purchase all gold presented to it at same fixed
price of $35 per ounce. Simply stated, the United States would con­
tinue to sell gold at its present price but would leave open the question
as to whether, and at what price, it will buy gold in the future.



The United States would thus continue to support the value of the
dollar in terms of gold but would no longer promise to support the
value of gold in terms of dollars. Under such circumstances, specula­
tors who buy gold would have to assume the risk of loss in order to
enjoy the possibility of making a large profit.
As I understand the law, the President has discretionary power over
the purchase and sale of gold. A simple announcement, therefore,
making it clear to speculators that the United States might not buy
back the gold that they hold if they decide to return it to the Treasury
would go a long way to deter speculation in gold. The President has
authority to refuse to buy gold, or to buy gold only in amounts and
from sellers determined by the U.S. Government.
However, since under present law the U.S. Treasury cannot buy or
sell gold at a price other than $35 per ounce, proposals that involve a
change in the price of gold would require congressional authorization.
Furthermore, refusal by the United States to buy gold would not be
in violation of the Articles of Agreement of the International Mone­
tary Fund, which provide that the obligation to maintain exchange
rates within prescribed limits may be met either by buying and selling
gold freely or by maintaining exchange rates within those limits
through exchange operations.
Let me conclude my remarks by saying that the problem we face is
speculation against tne dollar. Nothing in the facts seems to indicate
there has been an abnormal or sudden increase in foreign investment
or an abnormal or sudden increase in tourism. Therefore, it would seem
to be logical not to penalize trade and investment but to concentrate on
speculation. Let us not overlook the fact that for 34 years the United
States has been in the forefront of the Western World in pushing for
nondiscriminatory trade under the unconditional most-favored-nation
policy, and for an open, multilateral payments system. We were the
ones who pushed for formation of the GATT and we were among those
who, at Bretton Woods, insisted on creating an International Mone­
tary Fund. Now, with a single stroke we have cast doubt on the credi­
bility of the fundamental foreign economic policy of the United
States. This is because we have our eye on the wrong ball. We are
concentrating on symptoms rather than on the ailment that troubles us.
(The paper prepared by Mr. Piquet follows:)




a l a n c e -o f - P a y m e n t s


e f ic it



il m e n t


Sy m



By Howard S. Piquet1
Most of those who have expressed agreement with the President’s action and
proposals to narrow the deficit in the U.S. balance of payments have deplored the
fact that some such action “had to be taken.” All have expressed hope that the
limitations on U.S. private foreign investment and on foreign travel will be
temporary and will be removed as soon as there is substantial improvement in
the international accounts.
Restriction of the outflow of capital and of funds on the part of American
tourists has the same kind of effect on the international accounts as would an
across-the-board restriction of imports. Ever since 1934 the United States has
exercised its leadership to bring about reductions of trade barriers throughout the
world and to maintain and unrestricted payments system. The Trade Agreements
Acts, commencing in 1934 and culminating in the Trade Expansion Act of 1962 and
1 Senior Specialist in International Economics, Legislative Reference Service of the
Library of Congress. The views expressed herein are his own and are not to be attributed
to the Library of Congress.



the Kennedy Round, were accompanied by strong support of the General Agree­
ment on Tariffs and Trade (GATT) and the International Monetary Fund
(IMF). Naturally, there is grave concern that the restrictive measures that have
just been adopted and proposed are in clear contradiction of this policy and that,
once adopted, they will become more permanent than temporary.
Even experts in international economics give the impression of disagreeing, not
only with respect to solution of the “balance-of-payments problem” , but also with
respect to the nature of the problem itself. Some of the disagreement appears
to arise from failure to distinguish between financial (including fiscal) and
monetary phenomena.
Economic problems often involve unseen, subtle forces and relationships as
opposed to the seen and the obvious. There is always danger of concentrating
attention on symptoms instead of on fundamental ailments.
Unfortunately, “monetary” and “financial” are not clean-cut, mutually-exclusive categories, one reason being that, although only the State can create
“money” , once created it serves as the basis for private credit which performs
the same functions as money. Furthermore, when Government debt (a financial
phenomenon) is monetized, the money supply (a monetary phenomenon) is
If the United States were “just another country” its continuing large balanceof-payments deficits could not be tolerated. They would bring about weakness in
the foreign exchange value of the dollar and result in a loss of monetary reserves
(gold) which would necessitate restrictionist domestic economic policies. This
was the condition of Western Europe at the close of World War II.
However, the United States is not “just another country” . Ever since World
War II it has been used by other countries as a central banker, performing
functions of financial intermediation. Which means that it has been exchanging
its short-term liquid liabilities for the long-run liabilities of other countries
and their nationals. It is not necessary for a banker, or any one else engaged in
the business of lending, to keep his monetary inflows and outflows always in
balance. What is essential is that he maintain sufficient reserves to maintain
confidence in his ability to meet the demands of his creditors. In the short-hand
of the day this is “liquidity” .
There can be little doubt about the international financial integrity of the
United States. At the end of 1966 the obligations of Americans to foreigners,
including governments and central banks, totaled $60 billion, while American
claims against foreigners totaled $112 billion. The country’s liquid reserve (gold)
of some $12.5 billion equals approximately 40 percent of its total outstanding
liquid liabilities. If the analogy of central banking is applicable this is a pretty
healthy reserve.
There has been easy acceptance by the Administration, by many members of
Congress, and by the press of the assertion that the only way to solve the
“problem” is to bring the plusses and the minuses in the international accounts
into closer balance with each other, at least down to the 1965-1966 deficit level
of $1.4 billion. The fact that certain Europeans have been urging that we do
this does not mean that the restrictive balance-of-payments measures that have
been taken or proposed are the only, or even a logical, solution of the “problem.”
We must make sure, before taking major action, that we understand clearly
the nature of the problem that we are trying to solve. It is doubtful whether
confidence in the dollar depends primarily upon the attainment of balance between
the total inflow and the total outflow of funds across our national boundaries.
The heart of the problem is maintenance of confidence in the integrity of the
dollar, which is a monetary problem having heavy phychological overtones.
I find it difficult to admit that there has been any substantial lessening of
confidence in the dollar in view of the fact that the short-term liabilities of U.S.
banks to foreigners have been increasing rather than decreasing and, even more
significant, the fact that Euro-dollars in circulation are estimated to have ex­
panded to $15 billion. These are dollars that circulate freely outside of the United
States without any controls by government whatsoever. If foreigners were losing
confidence in the U.S. dollar would they be expanding their Euro-dollar holdings
and operations? [In this connection see the article in the Wall Street Journal of
January 15,1968].
If the problem is one of maintaining confidence in the dollar there is serious
doubt as to whether restricting the outflow of U.S. investment capital and
limiting foreign travel (which are financial transactions) are on target. We seem
to be trying to cure symptoms rather than the ailment giving rise to the symptoms.



On the basis of a comparison of balance-of-payments statistics for the first
three quarters of 1967 with the first three quarters of 1966, there is a strong
presumption that the large outflow of funds in 1967 [figures for which have not
yet been released by the Department of Commerce] was speculative in nature,
roughly similar to the dollar outflow during the fourth quarter of 1960. This
time, the immediate occasion appears to have been devaluation of the British
pound, which induced speculators to anticipate that the dollar was next in line.
The President has made it clear that the United States is determined to main­
tain convertibility of the dollar into gold at the ratio of $1.00 to l/35th of an
ounce of gold, by asking Congress to remove the 25 percent gold backing against
Federal Reserve notes, thereby making it clear to the world that the country’s
entire gold stock, and not only the $2.5 billion of “free gold” over and above
the amount presently being maintained as backing for Federal Reserve notes,
will be available to redeem dollars.
If confidence in the dollar is in danger of being impaired by speculation would
it not be more logical to cure it by direct means rather than to penalize such
“normal” financial transactions as foreign investment and tourist expenditures—
that have shown no substantial increase (certainly not during the first three
quarters of 1967) comparable to the increase in the over-all deficit for 1967?
As long as the United States not only redeems dollars in gold at the rate of
l / 35th of an ounce of gold per dollar, but also guarantees that it stands ready,
at all times, to purchase all gold presented to it at $35 per ounce, is it not to be
expected that speculators, whenever they feel there is a chance of the United
States devaluing the dollar in terms of gold, will buy gold and hold it for the
rise? If the price of gold is increased they will make a handsome profit. If its
price does not increase, all that they lose is the interest cost of holding the gold
because they can return it at any time to the U.S. Treasury in exchange for
dollars. This is not true speculation; it is “one-day street” speculation. The
speculators can gain but they cannot lose. Since 1962 proposals have been made
that the United States abandon its “guarantee” to buy all gold presented to it
at the fixed price of $35 per ounce. Such action would appear to be more perti­
nent than limiting the outflow of private investment and restricting travel by
The most important deterrent of all against dollar speculation is avoidance of
accelerating inflation. This can be done only by hitting hard at its source. Regard­
less of cost-push and demand-pull explanations, the truth is that inflation arises
from the over-issuance of money by government. The price rises that ensue
result from attempts by individuals and groups to catch up with the erosion of
the value of the monetary unit that has already occurred by the fact of over­
issue. Inflation can be stopped only by putting an end to the continuing
monetization of the Federal debt. If the United States will demonstrate its
determination to keep its own financial house in order confidence in the dollar
will remain unimpaired and speculative drives against the dollar will cease.
Under such circumstances there would be reason to believe that the inter­
national dollar-exchange standard can continue to function satisfactorily for
some time to come, regardless of when, or whether, the newly-devised Special
Drawing Rights are activated.

Mr. B a r r e t t . Y ou indicate we should not tell them that we will
sustain the $35 an ounce, or we will not sustain $35 an oun ce.
Mr. P i q u e t . Y o u mean in the dollar ? In redeeming the dollar ?
Mr. B a r r e t t . That is right.
Mr. P i q u e t . We sh o u ld keep t h a t as is.
Mr. B a r r e t t . On the question of sustaining the purchase o f gold
•at $35 an ounce, telling them we will or we will not tell you what we
will do, would this not cause a run to liquidate gold, anticipating that
the United States may desire to lower the price of gold ?
M r. P

iq u e t .



m e a n , o n th e p a r t o f sp e c u la to r s ?

Mr. B a r r e t t . Yes; o n the part of speculators.
Mr. P i q u e t . I think they would not speculate against the dollar.
I don’t see any harm in speculating against gold in favor of the dollar.
Driving the value of the dollar up above the value of gold would
increase confidence in the dollar, relative to gold.



Mr. B a r r e t t . Tliis is an academic question that has bothered me for
some time. Some of these countries, that is, the people of these coun­
tries, have no confidence in the bank.
Mr. P i q u e t . Y o u are thinking o f France, I imagine.
Mr. B a r r e t t . I will mention no country. But they go and they
purchase gold in the form of bracelets, or whatever it may be, and
then they put that in a private security because they think this is the
best way that they can secure their money for their later years.
Now, if we indicate that we would not sustain the price of gold at
$35 an ounce, or we may indicate in the future it may be lowered,
looking at the speculators’ part that you had pointed out, that he
anticipates he must win, he can’t lose, if he holds his gold; if we sustain
the price of gold at $35 an ounce, would this not cause these people
then to run and liquidate their gold in these countries 'because of the
fear it may go down ?
Mr. P i q u e t . I think they would. They certainly wouldn’t hoard it,
to the extent that they thought it might decline in value. The price
of gold would find a level on the open market in line with its value
in industrial uses.
Mr. B a r r e t t . I agree with you implicitly and I think you make a
beautiful statement here, very knowledgeable, and very edifying. But
I was wondering, because of this turbulent situation we find ourselves
in all over the world, if this wouldn’t add to this turbulence of those
j>eople who have hoarded gold for so many years, now are running to
liquidate that gold; would it not give us a really upside-down world?
Mr. P i q u e t . I think it might be a very healthy turbulence.
Mr. B a r r e t t . Y o u do ?
Mr. P i q u e t . T o throw the gold on the market and take it out of
hoards would, I think, be rather healthy.
Mr. B a r r e t t . You don’t think the people in the main would lose
their confidence in the United States ?
Mr. P i q u e t . No; I think it would improve confidence in the dollar,
and I think we must think clearly on this question: Does gold support
the dollar in value, or does the dollar support gold in value ? I feel that
it is the dollar that supports gold, rather than the reverse. In other
words, we are on a world dollar standard, not a gold standard.
Mr. B a r r e t t . We agree on that. I certainly want you to know that
is my feeling, too. But I am wondering about that individual who is
not knowledgeable, who does not know the monetary system as the
European bankers and these countries, whether or not that gold they
put away for tlieir old age, hearing the United States making this
expression, “We will tell you what we will do when we are going to
do it. We won’t tell you we sustain a price of $35 an ounce, or whether
we will lower it.”
Now, this might cause those people to lose respect for the United
States also.
Mr. P i q u e t . I think that probably the Frenchman might, the people
you are talking about; instead of hoarding gold they would hoard
dollars, if the dollars were worth more than gold. I think that the
hoarders are not the ones we are primarily concerned about here. It
is the speculators who are causing the trouble, not the hoarders. Those
persons who have been hoarding gold have been doing so for a long
time. This is a characteristic of these particular people. I don’t think



this is a major consideration, compared with what we have been talk­
ing about.
Mr. H a n n a . Would the gentleman, before we start questions, ad­
dress a few remarks to the relationship between the guarantee and
the ability to borrow to speculate in gold ?
Mr. P i q u e t . Y o u mean, on the part of speculators?
Mr. H a n n a . Yes.
Mr. P i q u e t . It is very important.
Mr. H a n n a . D o we not need to put our attention a little bit on this
particular aspect?
Mr. P i q u e t . Of th e pyramiding?
Mr. H a n n a . Yes.
Mr. P i q u e t . Let me call your attention to a paper that I wrote
in 1962 that appears in the Joint Economic Committee volume called,
“Factors Affecting the U.S. Balance of Payments.” In it I gave figures
to show how much you could pyramid this thing. Here this morning,
I simply said you buy one bar of gold and you make 1 0 0 -percent profit.
But by borrowing for the purpose of buying gold, you can pyramid
up to almost 1 0 times the figures I gave here, and I call your attention
to them on page 321 of the 1962 report referred to.
Mr. H a n n a . May that be included in the record at this point, Mr.
Chairman, and this answers my question.
(The document referred to xollows:)



e g is l a t iv e






ib r a r y



89-292 0—68------10

S e r v ic e

C ongress


P age

I. Introduction___________________________________________________
The Thesis__ ______ ________________________________________
Some Basic Principles Restated______________________________
IT. International Balance Under the Free Gold Standard______________
Gold Parities and Price L e v e ls..____________________________
Illustration of International Financial Adjustment Under the
Free Gold Standard. . _________ _______________ ___________
III. International Balance Under Conditions of Inconvertibility________
IV. Recent Changes in the U.S. Balance of International Payments____
Speculation in Gold------------------ --------- --------------------------------What is “ Short-Term Capital” ? . ............ ..... ................................
V. The Mechanics of “ One-Way” Speculation_______________________
Speculation in Wheat___________ __________________________ Gold Speculation..................................... .......................................
The Swiss Gold Market___________________________ _________
A Typical Transaction______________________________________
VI. Probable Effects of Abandonment of the Gold Price Guarantee____
VII. Gold Speculation and the Balance of Payments Deficit____________




I . I n t r o d u c t io n

This paper questions the traditional conception of the relationship
between international transfers of gold and deficits in the balance of
international payments. Usually the balance of international pay­
ments is discussed first and, if there is a substantial excess of interna­
tional payments over receipts, accompanied by an appreciable outward
flow of gold, it is assumed that the former caused the latter. In
consequence, solution of the problem of the loss of U.S. gold is made
to hinge upon prior elimination of the balance-of-payments deficit.
It is proposed that it might be as logical to consider the problem of
gold first, and to relate its loss to the balance-of-payments deficit.
If so, it is inappropriate to conceive of the problem of the “balance-ofpayments deficit” as central, and the problem of gold as subordinate.
Two problems of equal importance need solution, namely (a) the loss
of gold, and (b) the persistent balance-of-payments deficit. It is true
that they are interrelated, but there is no reason to assume that the
solution to either problem automatically will provide a solution to the
One of the difficulties in the way of finding solutions to these prob­
lems is that even experts do not agree as to the nature of the problem
to be solved. There is even failure to agree upon the size of the
balance-of-payments deficit itself. The experts differ as to what
should be included in computing the deficit, and some even suggest
that there is no deficit at the present time.
More and more it is becoming clear that what is really troublesome
is not so much the balance-of-payments deficit as the loss of gold and
the undermining of international confidence in the dollar as the free
world’s monetary standard. It is contended in this paper that a
persistent outward flow of gold can, in effect, be a cause, as well as an
effect, of persistent deficits in the balance 0 1 international payments.

The thesis of this paper may be summarized as follows:
Some of the gold losses of the United States may be attributed
to recent and current deficits in the Nation’s balance of international
payments. Some of them, however, may be attributed to speculation
in gold, in anticipation of dollar devaluation relative to gold (that is,
an increase in the dollar price of gold). Such speculation is en­
couraged by the huge accumulation of foreign dollar balances that
have arisen out of past deficits in the balance of international pay­
ments. The outflow of gold during any given period of time, however,
is not necessarily directly related to the balance-of-payments deficit
during that period.

2 . To the extent that the gold losses are being caused by speculation
in gold, there is little that can be done to prevent them by increasing
interest rates.
3. An important factor encouraging speculation in gold is assurance
by the U.S. Treasury that, at all times, it will buy all gold presented
to it by foreigners at the predetermined price of $35 per ounce. This
assurance provides a price floor below which the world dollar price
of gold cannot fall.
4. One way of helping to curb speculation in gold would be to
remove this price floor. Without such protection, speculators in gold
who are betting that the United States will raise the price of gold,
would face the prospect of losses, as well as gains.
5. Such action, particularly if taken in conjunction with proposals
already made that the United States issue gold certificates to guar­
antee its pledge to redeem in gold the dollar balances held in the
United States by foreigners, would go far toward preserving inter­
national confidence in the dollar.

There is danger, in the world of affairs, of losing sight of funda­
mental principles and, without realizing it, of substituting for them
preconceptions that impede logical thinking and intelligent action.
In no problem area is it more important that principles be clearly
understood than in the area of gold and the balance of international
1 . Value of gold not intrinsic.—Nothing, not even gold, has intrin­
sic value. Value is a quality that humans attribute to something.
Value is economic in nature when the importance attributed to some­
thing relates to a human desire to possess it. It is not a physical
characteristic of an object, but rather a subjective appraisal by man.
Gold, like other things, is valued by man for various reasons. Gold
has long been valued for purposes of ornamentation, for use as jewelry,
for industrial purposes including dentistry, and as a means for hoard­
ing wealth. The physical characteristics of gold, its virtual indestruc­
tibility, coupled with its limited supply, caused it to acquire a posi­
tion of preeminence as the ideal money material, superseding other
materials for this purpose, such as silver, tobacco, and paper.
The many uses of gold, including its use as reserve money, give it*
value, not only in terms of U.S. dollars, but in terms of everything else.
When gold came to be the monetary standard of most countries in
the 19th century, its value increased. If nations were to cease using
gold as reserve money, its value would decrease. I f each nation
sought to accumulate gold without regard to the requirements of
other nations, its value would rise. Like everything else, the value
of gold depends upon the desire for it, on the one hand, and its physi­
cal scarcity on the other. There is nothing more mysterious about the
value of gold than about the value of anything else.
2. Relationship between the value of money and the value of the
material of which it is made.—A central question regarding national
and international monetary systems is the degree to which the value
of money should be related to the value of the material of which it is
made. At one extreme is gold, and at the other extreme is paper.
Historical experiences of many nations with paper money, the supply


of which is determined by man-made decisions alone, have not been
happy ones. This is why many students of monetary affairs hesitate
to break the few remaining ties between money and gold.
As long as a country is on a free gold standard, m the sense that its
currency is freely convertible into gold at a fixed ratio, and gold is
freely convertible into its currency at the same ratio, the value of its
currency cannot differ from the value of gold. No country has been
on the free gold standard since the United States abandoned that
standard in the early 1930’s.
Once a country abandons the free gold standard its currency be­
comes “managed*,” and its money supply comes to depend upon de­
cisions of its governmental and banking authorities. In most of the
famous inflationary experiences of history the supply of money was
limited only by the speed with which the printing presses could be
operated. In more recent years the supply of money has become
practically synonymous with the supply of bank credit which, in turn,
is determined by central banking and governmental policies with
respect to central bank interest rates and open market operations and
the requirements of government financing.
The temptation to expand the supply of money is great, particularly
when economic recession and unemployment threaten. Because,
thorughout history, this temptation so often has led to runaway in­
flation, conservative students of monetary history and policy are not
sanguine as to mankind’s capacity to regulate the supply of money
unless there are some built-in safeguards against overissue. For
quite a while the use of gold in the form of the free gold standard
performed this function reasonably well.
3. Importance of confidence.—The value of paper money that is
not convertible into gold depends entirely upon its power to command
goods and services in exchange. It continues to be acceptable as a
medium of exchange only as long as there is general confidence in its
ability to do so. Without public confidence paper money is worth no
more than the paper upon which it is printed. Unlike gold and other
precious metals, there is no minimum value of the money material
itself below which the value of the money cannot fall. This is why,
by definition, paper money is known as credit money (Latin : credo,
credere, meaning “ to believe,” or “to have faith” ).
Loss of confidence in the ability of an inconvertible currency to
perform the purchasing power function causes it to lose value. Its
loss of value, in turn, brings about a still greater loss of confidence, a
process that can continue until the currency loses all value. At pres­
ent, international confidence in the dollar depends, in part, upon the
ability and willingness of the U.S. Treasury to exchange gold for all
dollars presented to it at 0.89 gram per dollar (1 ounce of gold for
$35). It might be that international confidence in the dollar would
be maintained even if the United States were to cease redeeming dol­
lars in gold. It can be generalized, however, that gold is more accept­
able throughout the world than paper currency because of deep-seated
historical and psychological attitudes regarding it. The advantage
to the United States would seem to lie in continuing to pay gold for
dollars, upon demand.



I n t e r n a t io n a l B a l a n c e U

nder t h e

F ree G old S t a n d a r d

Prior to World War I, when the leading countries of the world
were still on the free gold standard, the international financial balanc­
ing mechanism was largely automatic. Currencies were readily
convertible into gold at fixed parities of. exchange, and gold moved
freely from country to country.
Freely moving prices within countries, together with the free inter­
national movement of gold, provided the world with a multilateral
payments systems which worked so well that, by the close of the 19th
century, it was looked upon as “natural” and “permanent.” This
almost-automatic system came to prevail largely because of the United
Kingdom’s position in the world economy. The ready convertibility
of the pound sterling into other currencies and into gold, and the
strong international creditor position of the United Kingdom, made it
convenient for traders everywhere to carry on international trade in
pounds sterling. Convertibility meant that the British pound could
be exchanged for gold at a fixed ratio at the will of the holder, regard­
less of his nationality. The fact that the United Kingdom maintained
convertibility made it easier for other countries to do so also.

Under the free gold standard currencies were legally defined in
terms of their gold weights. The U.S. dollar was 23.22 grains of pure
gold and the British pound sterling was 113.0016 grains. The ratio
of the weights of the two currencies ($4,866+ to £1) was known as
the par of exchange. Individuals anywhere could convert gold into
currency, or currency into gold, at the legal ratio or convert either
currency into the other at the current exchange rate. Gold was the
standard of value, both domestically and internationally, and also
provided a mechanism for keeping currencies in line with each other
at approximately their gold parities. In consequence, gold was dis­
tributed throughout the world according to need, as determined by
changing prices and foreign exchange rates.
I f commodity prices in the United States, for example, increased
relative to prices in the United Kingdom there would be a tendency'
for U.S. imports from the United Kingdom to increase, and for U.lS.
exports to the United Kingdom to decrease. This increase of imports,
relative to exports, would cause the dollar to weaken, in terms of
pounds sterling. The decline could not go beyond the “ gold export
point,” however, which was the level at which it becomes profitable to
convert dollars into gold and to ship the gold to the United Kingdom.
Since the supply of money and credit in both countries was directly
dependent upon gold reserves, the exportation of gold from the
United States to the United Kingdom had the effect of curtailing
credit in the United States, and of permitting it to expand in the
United Kingdom. As a result, prices in the United States would fall,
while prices in the United Kingdom would rise. As prices in the
United States ceased rising, and started to decline, there would be a
tendency for merchandise imports from the United Kingdom to de­
cline, and for U.S. exports to the United Kingdom to increase.
Before long, price levels in the two countries would come into
balance with each other and there would be international financial


equilibrium, with the two currencies exchanging for each other at a
point close to parity.
Usually, long before the gold export point was reached, the decline
in the value of the U.S. dollar, in terms of other currencies, in the
foreign exchange market would attract short-term capital, which
would tend to bring the international payments and receipts into
balance. The system worked well largely because the British Govern­
ment and the Bank of England pursued liberal trade and monetary
policies and served as world banker.
As long as countries operated under free gold standard conditions
they were not conscious of any balances, or deficits, in their interna­
tional receipts and payments because money inflows and money out­
flows never were far out of line with each other. Movements of capi­
tal and gold provided the automatic correctives which distributed gold
among nations.
Essential to the functioning of this system was willingness of coun­
tries to allow their economies to adjust to each other. Fluctuations in
exchange rates, although relatively narrow, were sufficiently sensitive
to cause international capital and gold transfers. The inflation or
deflation that resulted from international gold movements usually was
gradual and mild. Difficulties appeared, however, when countries
that had departed from the free gold standard, and experienced
marked inflation, tried to return to the gold standard at previous pari­
ties of exchange. The United Kingdom tried to do this shortly after
World War I with disastrous consequences. Once functioning, the
free gold standard leads to economic stability, provided that the prin­
cipal countries of the world do not try to insulate their economies
against outside influences.

The steps in the process of adjustment under the exchange rate
mechanism of the free gold standard may be summarized as follows:
1 . An excess of U.S. commodity imports over commodity exports
causes dollars to become more plentiful in terms of British pounds
sterling, so that dollar exchange drops from $4.866= £ 1 (parity)
to, let us say, $4.87=£1.
2 . In consequence, £ 1 will now purchase more dollars than previ­
ously and it becomes profitable to convert pounds into dollars for
short-term investment in the United States.
3. The ensuing flow of short-term capital into the United States will
increase the supply of short-term capital relative to the demand for
it and cause the short-term interest rate to fall, thus tending to neu­
tralize the effect of the decline in the exchange rate.
4. Meanwhile, since the dollar is now cheaper in terms of pounds
sterling it becomes more profitable than before for foreigners to buy
merchandise in the United States. Hence, U.S. exports will increase
relative to imports, thereby tending to correct the excess of imports
over exports. The effect will be to raise the value of the dollar in
terms of pounds and tend to bring it back to parity.
Observe that these correctives (capital movements and merchandise
trade) were brought about by fluctuations in foreign exchange rates


without any manipulation of interest rates and without any shipments
of gold.
5. I f the adjustment mechanism just described fails to work
promptly the value of the dollar in terms of pounds sterling will con­
tinue to fall until it reaches $4.886=£1 . This is the “gold export
point.” Since it costs—or used to cost—approximately 2 cents to ship
1 pound sterling in gold from New York to London it will be more
profitable to ship gold than to pay more than $4,886 for £1 in foreign
6 . The movement of gold from New York to London decreases
U.S. monetary reserves and increases those of the United Kingdom
thus serving to contract credit in the United States while expanding
it in the United Kingdom.
7. In consequence, commodity prices in the United States will tend
to fall relative to prices in the United Kingdom, thereby making the
United States a better market in which to buy and the United King­
dom a better market in which to sell. U.S. exports, therefore, will be
stimulated while imports will be retarded.
8 . Generalizing the illustration, changes in exchange rates, by induc­
ing short-term capital movements, by making it profitable to ship gold,
and by changing the relationship of exports to imports served to dis­
tribute the world’s gold among the nations in accordance with their
needs and to prevent prices in all countries from getting out of line
with each other. This is what economists mean when they refer to
the “ automatic equilibrium under the free gold standard.”

n t e r n a t io n a l





C o n d it io n s


I n c o n v e r t ib il it y

Two World Wars and a major economic depression shattered this
world payments system. Currencies are no longer based on the free
gold standard, but are “managed,” in that the quantity of money and
credit in circulation is determined by the fiscal and monetary policies
of governments and central banks. The nexus between commodity
price levels and gold has been broken. Monetary gold is now used only
to settle international balances as a matter of government policy. In
practice, the U.S. Government buys gold at the fixed price of $35 an
ounce and sells it at the same price to foreigners, on demand. The
U.S. dollar is not freely convertible into gold domestically, and the
United States is no longer on a free gold standard.
Now that the automatic correctives of the gold standard are no longer
operative, countries watch their international payments with a keen
eye so as to be in a position to intervene whenever weakness develops,
meaning by “ weakness” a tendency for outward payments to exceed
receipts from abroad.
A country’s balance of international payments is a barometer of its
economy vis-a-vis the outside world. Adjustments that used to be
prompt, and usually near painless, under the free gold standard now
require considerable effort, time, and strain. Strong pressures develop,
therefore, to prevent them from occurring. As soon as there are
unfavorable developments in a country’s balance of international pay­
ments, efforts are made to “correct” them, usually by piwenting
In foreign exchange rates were allowed to fluctuate freely and
widely there would be a persistent tendency for price levels to adjust


to each other through changes in imports and exports of goods and
services. Thus, if prices in the United States should rise to higher
levels than in the United Kingdom, imports into the United States
from the United Kingdom would increase, thereby causing the value
of the dollar to fall in terms of pounds sterling. As the dollar falls
in value, relative to other currencies, it becomes profitable for foreign­
ers to convert their money into dollars and to use them to buy certain
goods in the United States, which would tend to correct the rising
prices. This reasoning, known as the purchasing power parity theory,
because it emphasizes the attainment of international equilibrium
through international price adjustments, rather than through gold
movements, probably would work if countries were willing to allow
their economies to adjust to each other.
However, since adjustments sometimes cause deflation by forcing
certain wages down, governments resist. The home currency is not
allowed to fall 011 foreign exchange markets, and steps are taken to
introduce exchange controls, export subsidies, quotas limiting imports,
and other devices designed to prevent adjustment. In the absence of
a free international gold standard, wide variations in uncontrolled
foreign exchange rates would make international commercial trans­
actions hazardous and would be a serious deterrent to international
Notwithstanding worldwide abandonment of the free gold stand­
ard and freely fluctuating foreign exchange rates, there are still deepseated pressures for economic forces to adjust internationally. What
has been eliminated is the sensitive mechanism of the gold standard,
which made it possible for national competitive economies to adjust to
each other quickly and with a minimum of friction. Although gold is
still used to settle international balances, it no longer brings the pur­
chasing power of national currencies into line with each other in any
sensitive way. Prices, wages, and other economic variables can now
be out of line with each other, internationally, for a long time.
The automatic correctives of the old payments systems served to
insulate the basic factors of production (principally labor) against
sudden shocks from abroad. With the automatic correctives no
longer operative, the factors of production become more sensitive in­
ternationally, unless governments intervene to prevent outside influ­
ences from being felt through such devices as the curbing of imports.
It is conceivable that the leading countries of the free world could
agree upon an international monetary system that would approach
the automaticity of the free gold standard. There was hope, as World
War II drew to a close, that the United Nations would be able to
establish an international currency and a world reserve bank. The
most that could be agreed upon, however, was establishment of an
International Monetary Fund which, though constituting an impor­
tant step toward international monetary stabilization, is not an ade­
quate substitute for the free gold standard.
Under the free gold standard, international gold movements were
residual and passive, in that gold was shipped abroad to reestablish
international equilibrium whenever other economic variables, such as
exchange rates, merchandise trade, services, and capital movements
failed to balance. Although gold is still used to settle international
balances, it no longer moves automatically as a corrective. At the


present time, gold can be more than a residual item in the balance
of international payments. Independent movements of gold, such
as those caused in 1960 by speculation against the dollar in the free
old market in London, can oe the symptom of a cause, as well as a
irect result, of a deficit in the balance of international payments.


IV . R


C hanges


U.S. B
P aym ents


ala n c e of


n t e r n a t io n a l

Between 1951 and 1956 the United States incurred an overall deficit
in its balance of international payments, each year, of between $0.3
and $2 .1 billion. The excess of international payments over receipts
took the form of additions to dollar balances in U.S. banks to the credit
of foreign banks and foreign nationals and aroused little concern in
the United States.
In 1957, because of the Suez crisis, the deficit was transformed into
a surplus of $0.4 billion. But in 1958 the United States suddenly
exported $2.3 billion of gold, and immediately the balance-of-payments
deficit problem loomed large in the eyes of many Americans. The
principal European currencies became externally convertible at the
end of 1958, since which time short-term capital outflows have been
of more than usual significance. In 1959 gold exports receded to $0.7
billion, but again reached a high level of $1.7 billion in 1960. In
1961 the gold loss again declined to $0.7 billion, but during the first
half of 1962 was at an annual rate of $2 billion.
The stock of U.S. monetary gold now amounts to almost $17 billion,
which is about one-third below the 1949 peak of $24.8 billion, when
the United States held approximately 70 percent of the free world’s
total monetary gold. Its present stock accounts for over 40 percent
of the free world’s total gold supply and to over 150 percent of the
$10.5 billion short-term dollar assets of foreign central banks (as of
March 1962). Thus, notwithstanding the steady loss of gold during
the past few years, the stock of U.S. monetary gold is still large, con­
sidered in historical perspective and in relation to U.S. short-term
liabilities to foreigners.
An outstanding characteristic of the U.S. balance of international
payments during the past few7 years has ben the phenomenal increase
in short-term capital outflows. I f these outflows are excluded from
the balance of international payments, the overall deficits in 1960 and
1961 are reduced from $3.9 to $2.5 billion, respectively, to $1.8 and
$0.6 billion. In other words, about one-half of the large balance of
payments deficit in I960, and about three-fourths of the somewhat
smaller deficit in 1961, are accounted for by short-term capital out­
flows. Stated differently, if it had not been for the large increases
in short-term capital outflows, the international accounts of the United
States would have been practically in balance.
The overall balance of payments deficit of the United States between
1951 and 1962, together with short-term capital outflows and gold
movements, are shown in the accompanying table.
During the first half of 1962 the overall deficit declined to an annual
rate of $1 .2 billion. Recorded outward short-term capital movements
declined to $0 .8 billion (annual rate), but gold exports were running
at an annual rate of $ 2 billion.


XJ.S. balance of international payments: The overall deficit, short-term capital
movements, and gold movements, 1951-61
[In billions]




-$ 0.3
-1 .1
-2 .1
-1 .5
-1 .1
-1 .0


+ .2

(Hr equals
+ .3


1962 3.............


-3 .4
- 3 .8
-3 .9
-2 .5
* -1 .2

short-term movement
(+ equals
movement outward
- .3
* -2 .1
* -1 .9
* -.8

-$ 0 .8
+ 2.3
+ .7
+. 7
s + 2.0

•Sometimes called the conventional balance, to distinguish it from the basic balance (which excludes
private short-term capital movements).
3 Including approximately $600,000,000 in 1960 and $600,000,000 in 1961, shown officially as “ errors and
omissions.” The official assumption has been that large negative errors and omission figures reflect un­
recorded short-term capital outflows.
* Annual rates based on figures for 1st half of the year.

Recent deficits of international dollar payments over dollar receipts
have taken the form of increasing balances to the credit of foreign
banks or nationals in U.S. banks. An outstanding fact is that although
sales of gold to foreigners have increased, there has been no net
decline in foreign-held dollar balances. If there had been an appre­
ciable loss of confidence in the U.S. dollar, the foreign-held dollar
balances would have decreased as foreigners deserted dollars in favor
of gold.
Maintenance of confidence in the U.S. dollar is vital because the
dollar has become the world’s reserve currency. Confidence depends
upon both its convertibility into gold and the stability of its purchas­
ing power. At present the dollar is convertible into gold—in practice,
though not required by law—for the settlement of international bal­
ances at the fixed price of $35 per ounce. If the price of gold were
to be raised, that is, if the dollar were to be “devalued” with respect
to gold, or if there were what appeared to be well-founded rumors
to that effect, there could be a stampede to convert dollars into gold.
Heavy speculation in gold on the free "old market in London during
the latter half of 1960 ran the price of gold to a temporary high of
$41. per ounce.
It seems highly probable that an important reason for the sub­
stantial withdrawal of gold during the latter half of 1960 was the
purchase of gold from the U.S. Treasury by the Bank of England
to replenish the gold that it had been paying to those who were
exchanging dollars and other currencies for gold for speculative pur­
poses. The assurance that the United States stands ready to buy gold
at the fixed price of $35 per ounce encourages speculation in gold.
A person having, or obtaining, gold abroad who believes that the
United States will devalue the dollar has only to sell dollars short and
to sell his gold to the U.S. Treasury after devaluation occurs, thereby
reaping large dollar profits. The cost and risk of the transaction are
small since the speculator can lose no more than the cost of the trans­
action itself. I f the United States does not devalue the dollar the
speculator can always present his gold to the U.S. Treasury and
receive dollars for it at the fixed price of $35 per ounce.


If the United States, while continuing to redeem foreign-held dol­
lars in gold at $35 per ounce, were to terminate the implicit guarantee
to purchase gold for dollars at that price, speculators would have to
take a chance of loss since they would no longer be assured of the
minimum price of $35 per ounce. Such action by the United States
would discourage speculation in gold and should stimulate the return
of substantial quantities of gold to the United States.
Stated succinctly, the United States would give assurance that,
although it intends to support the dollar in terms of gold, it has no
intention of continuing to support the world gold market in terms of
dollars. The United States, of course, would purchase gold at the
world market price whenever it deemed it necessary to do so to re­
plenish its gold reserves.
The conversion of foreign-held dollar balances into gold, whether
by foreign central banks for the purpose of replenishing their gold
reserves, or by foreign nationals in anticipation of a rise in the dollar
price of gold, has no effect upon the U.S. balance-of-payments deficit.
In such cases the loss of gold is balanced by an equal decrease in
foreign dollar balances.
It is when short-term capital leaves the United States for the pur­
pose of buying gold that the effect is to increase outward payments,
thereby aggravating the balance-of-payments deficit. When these dol­
lars (short-term capital) are used to purchase gold abroad to be
hoarded in anticipation of dollar devaluation, the effect is to withdraw
gold from the free gold market (in London or Switzerland). To
the extent that the gold purchased is not newly mined gold, but is
supplied by the gold market, it ultimately comes from the Bank of
England’s reserve. The Bank of England, in turn, replenishes its
reserves by converting some of its dollar balances into gold at the
U.S. Treasury.
Thus, the loss of gold which was made possible by the outflow of
short-term capital is a cause, rather than a result, of an increase in
the U.S. balance-of-payments deficit.

Short-term capital transactions are a more or less miscellaneous
category in which are placed, for the purpose of constructing a bal­
ance-of-payments statement, all dollar outflows that cannot otherwise
be accounted for. Short-term capital is sometimes thought of as “ a
stock of footloose money hopping from country to country only be­
cause relative interest rates vary, or in search of gains from excliange
rate speculation.” 1
The concept of short-term capital is vague. The definition that is
followed for balance-of-payments purposes was determined primarily
by the need for a criterion that is statistically manageable. Short­
term capital, thus defined, is “ capital which is held in the form of
assets (including bank deposits) with an original maturity of not
more than 1 year.” ’ A number of transactions that are classified as
short term are more in the nature of long-term transactions because
1 C f .: Monthly Review, Federal Reserve Bank of New York, July 1962, article entitled
“ Short-Term Capital Movements and the U.S. Balance of Payments,” p. 94. According to
this article, “ short-term capital transactions are among the least understood items in our
balance-of-payments accounts.”


they are regularly renewed at maturity. Similarly, some of the
capital flows between parent companies and their subsidiaries may, in
fact, represent only short-term financing, although in existing statis­
tics they would be shown as direct investment.
Confusion arises from failure to distinguish between capital and
dollars. Capital is a financial concept, whereas the dollar is a monetary
concept. Private short-term capital movements that arise from im­
port needs are true capital movements. They represent an investment
of funds for the purpose of acquiring gain in the form of income on
principal. Similarly, if short-term funds move from one country to
another because of international differences between interest rates,
there has been a movement of capital. In both cases, dollars (or other
funds) are used, as principal to obtain a right (or power) to receive
future income.
In all probability, an indicated above, a large number of dollars
moved from the United States to other countries in 19G0 and 1961, not
for the purpose of securing a right to receive future income on those
funds as principal, but rather in anticipation of a change in the value
ratio between the money unit itself and gold. Dollars that move in
response to this motive do not represent an investment of capital, and
are not financial transactions. They represent rather, money manipu­
lation, or speculation against the dollar, itself, with respect to its gold
Although investment, on the one hand, and manipulation on the
other, are not separated by a clear line of demarcation, it is clear that
the transfer of dollars from the United States in anticipation of an
increase in the dollar price of gold is the realm of monetary specula­
tion, rather than in the realm of investment. Dollars that move in
response to this motive should not be included in the category of short­
term capita], but should constitute a separate category. Unfortu­
nately, there is no way of ascertaining how many dollars move in re­
sponse to the motive of monetary speculation.
Unlike ordinary international transfers of short-term capital, where
differences between rates of interest here and abroad are casual, the
outward flow of dollars for the purpose of speculating in gold is in­
fluenced little, if at all, by interest rates. For, if it is anticipated that
the dollar price of gold will be doubled, from $35 to $70 per ounce,
the interest charges incurred by holding gold are insignificant com­
pared with the large speculative gains to be made.
Y. T



e c h a n i c s of


ne-W a y

” S p e c u l a t io n

Some persons find it difficult to think of a ratio from the point of
view of both elements comprising it, simultaneously. Thus, the ratio
2 :3 can be thought of either as 2 being two-thirds as large as 3, or as
3 being iy2 times 2. In the same manner, some persons find it difficult
to distinguish between the price of gold in terms of dollars, and the
price of dollars in terms of gold.
At the present time the U.S. Treasury supports dollars in terms of
gold, and gold in terms of dollars, at the fixed ratio or 0.89 gram
one-thirty-fifth of 1 ounce of gold per dollar. Or, as more commonly
stated, it buys and sells gold at the fixed price of $35 per ounce. It
does it by paying 0.89 gram of gold for every dollar presented to it by


foreigners, and by buying all gold presented to it by foreigners at $35
per ounce.


The accompanying diagrams might help clarify thinking on the
subject. But, instead of delving directly into the relationship between
dollars and gold, let us first consider the relationship between dollars
and some commodity other than gold, say wheat.
Assume that the U.S. Government is supporting the world price of
wheat at $ 1 per bushel, by selling it to foreigners, and buying it from
them freely at that price. Assume, further, that rumors spread to the
effect that the United States is about to increase the price of wheat.

ia g r a m


Speculators will waste no time in buying all the wheat that they
can lay their hands on at $ 1 per bushel in anticipation of the price
rise, withdrawing dollars from bank accounts, and borrowing on wheat
as collateral, so as to buy more wheat for future delivery. As long
as they know that the United States will continue to buy all wheat
presented to it at $ 1 per bushel, they can lose nothing more than the
interest charges of borrowing the dollars to buy the wheat futures.
For, if the U.S. Government does not raise the price of wheat to some­
thing higher than $ 1 per bushel, or if the world price should fall to
less than $ 1 per bushel, they can always sell their wheat to the U.S.
Government at $ 1 per bushel.
This kind of speculation is highly profitable. The speculators can
make a financial killing if the Government raises the price of wheat,
but will lose practically nothing if the Government does not raise the
price, or if the world price should fall. This might be called one-way
speculation. Under the circumstances, the speculators will exert every
effort, through propaganda and political pressure, to induce the Gov­
ernment to raise the price of wheat.


To reduce the profitability of such speculation, all that the Govern­
ment has to do is to announce that it 110 longer will guarantee to buy
all the wheat presented to it at the predetermined price of $ 1 per
bushel. Once the guaranteed floor price is removed, speculation oecomes a two-way street. The speculators can then lose, as well as
gain, because the future price of wheat is indeterminate. Speculation
then assumes its normal, proper role in the economy, which is to absorb
the risks of price fluctuations. Two-way speculation performs a use­
ful function; one-way speculation does not.

Gold is a commodity, and the same reasoning applies to it that
applies to wheat. The U.S. Treasury (not by statute, but by admin­
istrative practice) supports its price at $ 1 per 0.89 gram. Substitute
gold for wheat in the diagram, and the same reasoning applies.
As rumors spread that the U.S. Treasury is about to double the
price of gold, speculators waste no time in buying all the gold that
they can lay their hands on at $1 per 0.89 grams in anticipation of the
dollar devaluation, withdrawing dollars from bank accounts and
borrowing on gold as collateral, so as to buy more gold for future
delivery. As long as they know that the U.S. Treasury will continue
to buy all gold presented to it (by foreigners) at $1 per .0.89 grams,
they can lose nothing more than the interest and premium charges
involved in borrowing dollars to buy the gold futures. For, if the
U.S. Treasury does not raise the price of gold to something higher
than $1 per, 0.89 grams, or if the world price of gold should fall to
less than $ 1 per 0.89 grams, they can always seil their gold to the U.S.
Treasury at $ 1 per 0.89 grams.

D ia g r a m 2


This kind of speculation is also highly profitable. The speculators
will make a financial kill ing if the Government raises the price of gold,
but will lose very little if the price of gold is not raised, or if it should
decline. This, too, is one-way speculation, and the speculators will
exert every effort to induce the U.S. Treasury to raise the price of
The U.S. Treasury could reduce the profitability of such specula­
tion by announcing that it no longer will guarantee to buy all gold
presented to it by foreigners at the predetermined price of $1 per 0.89
grams (or any other predetermined price). Once the implicitly guar­
anteed floor price is removed, speculation in gold will become a twoway street. The speculators can then lose, as well as gain, because the
future price of gold is indeterminate. Ihe fact that since January
1961, it has been illegal (by Presidential order) for Americans to hold
gold abroad hardly deters the unscrupulous from engaging in the
Nothing herein is intended to suggest that the U.S. Treasury should
cease paying gold for all dollars presented to it by foreign holders at
the fixed price of 0,89 grams per dollar. U.S. dollars are instruments
of credit and ultimately are backed by the real wealth and productivity
of the U.S. economy. The requirement that they be redeemed in gold
serves the useful purpose of limiting their volume, thus restraining the
temptation to over-issue.
The President of the United States has made it clear, upon numer­
ous occasions, that the United States has no intention of raising the
dollar price of gold. But, by silence, he has implied that it also has
no intention of allowing the dollar price of gold to drop below $ 3 5 per

There are free gold markets in London and Switzerland, where
gold and gold for future delivery can be bought and sold freely.
Contracts for future delivery can be bought in London or Zurich and
can be purchased by anyone paying for them in hard currency, includ­
ing U.S. dollars. Because the Swiss market offers complete facilities
for the acquisition of bar gold and gold coins, it is probable that more
of the speculation in gold has been carried on there than in London.
Although it is illegal, under IT.S. law, for Americans to buy gold
abroad, there is not hing in Swiss law to limit such transactions." Any­
one. whether a Swiss resident or a foreigner, can buy, sell, and import
gold, or store it, without formality. Furthermore, Swiss banks ob­
serve secrecy, which prevents them from divulging information about
any transaction. The identity of the owner under the system of
“numbered accounts” is known only to one or two persons within the
bank, so that shrewd investors from all over the world can own such
accounts. According to a well-known expert on the subject,2 gold
bars and gold coins can be acquired as easily as groceries in a super­
market. No questions are asked and any hard currency is acceptable
in payment.
No official statistics are available to indicate the actual volume of
gold bought and sold in the Swiss gold market, but it has been esti­
mated that at least $3 million worth has been traded in per working
- Pick, Franz, “ G o ld : IIow and W here T o Buy and Hold It.”
New Y ork City. 1961.


Pick Publishing Corn

day. It has also been estimated 3 that during the hectic days of
October 1960, when the world price of gold was soaring to over $40
per ounce, more than 50 percent of the buying orders were of U.S.

t y p ic a l

t r a n s a c t io n

On December 30,1000, a speculator, wanting to buy gold for delivery
in London or Switzerland at the end of June 19G1, would have had
to pay $36.54 per ounce (the price of gold which was $35.65 per ounce,
plus a premium of 2 y2 percent).
By purchasing 1 bar of gold (400 ounces) outright, he could use
it as collateral for a bank loan to buy 1 0 additional bars for future
(6 months) delivery. If, during that period, the price of gold should
be increased to $70 per ounce, the speculator would make a profit of
over-$147,000 on an original investment of less than $15,000. The
mechanics of the transaction are as follows:
On Dec. 30,19G0: Buys 1 bar of gold (400 ozs.), at $35.05 per oz_____ —$14,260
On. Dec. 30, 1960: On tlie basis of the 1 bar of gold, as collateral
for a loan, buys additional 10 bars for future delivery (6 months)
at a premium of 2% percent. Two and one-half percent of 4,000
ounces at $35.65 per ounce. Uses the original bar as collateral
to borrow from bank at 6 percent interest. (6 percent on $3,565
for 6 months)_________________________________________________
Total outlay_______________________________________________


On June 30, 1961: Sells 4,400 ounces gold at $70 per ounce------------- +308, 000
Less original outlay--------------------------------------------------------------------- —14,367
+293, 633
Buys (under the futures contract) 4,000 ounces gold at $35.65 per
ounce____________________________________ ___________________—142, 600
Difference_________________________________________________ +151, 033
Repays bank loan_____________________________________________
Net gain__________________________________________________ +147,468

If the price of gold does not rise, or even if it should fall, the most
that the speculator could lose would be $6,532, which is the total of
the 2% percent premium cost of the futures contract ($3,565), the
difference between the buying price of gold under the futures contract
($35.05) and the selling price to the U.S. Treasury ($35) on 4,400
ounces ($2,860), and the small interest charge on his bank loan ($107).
This is what is meant by one-way speculation. The speculator
can make a large profit on a small investment, but because the United
States will buy all gold at the predetermined price of $35 per ounce,
he can lose very little. Small wonder that a rumor to the effect that
the United States is about to raise the price of gold can start a specu­
lative stampede on the free gold market.

P robable E

ffects of



bandonm ent

of t iie



P r ic e


Some have misinterpreted the proposal that the United States
abandon the assurance that it will buy all gold offered to it at the
predetermined price of $35 per ounce to mean that the United States
•Op. cit., p. 37.

89-292 0





would no longer buy any gold. The proposal does not imply this.
The United States is a sovereign nation and will continue to buy gold,
or any other commodity that it wants, at the world market price.
Gold, as a commodity, will command a world price whether the United
States guarantees it, or not. Whether, under the circumstances, the
price would be higher, or lower, than $35 per ounce is indeterminate.
Action of this kind by the United States would amount to the
demonetization of gold. It has been asserted that if the United
States were to do this: (a) the value of gold would decline precipi­
tously and, at the opposite extreme, (b) the value of gold would rise
because there would be a scramble for gold in anticipation of eventual
remonetization. Although it is conceivable that either of these
diametrically opposed predictions could come to pass, it seems un­
likely. It is more probable that, after a few temporary price flurries—
both downward and upward—the price of gold would settle back to
somewhere in the vicinity of $35 per ounce. It is unlikely that many
persons would hold gold once the United States had decided to tear
loose from it. Some other country, of course, could remonetize it, but
it is not probable that it would do so without the cooperation of the
United States.
Finally, one might ask what difference it would make if gold did
cease to be the standard of international payments. Gold is no longer
the monetary standard within the United States, even though it con­
tinues to serve as nominal backing of U.S. currency. It is not real
economic backing, however, because holders of currency cannot obtain
gold for it. The'most that the gold does is to act as a restraint against
If the international gold standard (or whatever one chooses to call
the present system) collapses it would be necessary to evolve a new
system of payments. In fact, gold is a relative newcomer on the
world’s monetary stage. In ancient times silver was the standard, and
it was not until the 19th century that gold attained a preeminent
position. Abandonment of gold as an international standard would
soon result in the adoption of some other standard. It might even
hasten the adoption of rational liquidity arrangements, such as those
recently proposed by Under Secretary of the Treasury Iioosa, under
which various currencies would be held and used to settle international
However, countries will not be willing to keep the bulk of their re­
serves in one another's currencies as long as the price of gold can go up,
but not down. Such a plan would be more likely to succeed if the iloor
price supporting gold were removed, for unless there are safeguards
against the flight of currencies (U.S. dollars and the currencies of
oilier countries as well) into gold, there is not much likelihood that
the monetary authorities of many countries will be willing to hold
their reserves in each other’s currencies.



S p e c u l a t io n




a l a n c e - of-P a y m e n t s


e f ic it

It should be noted, again, that a deficit in the balance of payments
does not necessarily result in an equivalent withdrawal of gold in the
same period of time during which the deficit was incurred." Through­
out the period 1951-57 foreign banks and foreign nationals were build­


ing up their dollar balances in U.S. banks in preference to withdraw­
ing gold or buying U.S. exports.
These dollar balances have become very large and they are subject
to conversion into gold at any time, as long as the United States con­
tinues to redeem dollars in gold (for foreigners, though not for Ameri­
cans). The extent to which, and the rapidity with which, foreign
central banks convert tlieir dollar balances into gold depends, not only
upon their own monetary requirements, but also upon an awareness
that if they withdraw too much gold, too quickly, it will have a bad
effect upon international confidence in the dollar. For this reason,
the Bank of England and other central banks are cautious about how
much of their dollar balances they convert into gold. It is in their
own self-interest that the dollars to which they have a claim be “ as
good as gold.”
A current deficit in the balance of international payments may, or
may not, result in a corresponding gold loss, and it is not necessary
that a deficit in the balance of payments be incurred before foreigners
can withdraw gold. Like any other bank balance, the foreign dollar
balances are redeemable in cash—in this case gold—at any time.
What is not always appreciated is the direct and close relationship
between dollar-gold speculation in Europe, in anticipation of a rise
in the price of gold, and the U.S. balance-of-payments deficit. Dol­
lars that are sent from the United States to Europe for the purpose
of buying gold for speculative purposes take the form of short-term
capital outflows and, as such, add to the payments side of the U.S.
balance of payments. They undoubtedly accounted in large part,
for the fcalance-of-payments deficit in 1960.
The dollars that leave the United States to buy gold in Europe are
added to the dollar balances of the banks supplying the gold to the
open market in London or Zurich (principally the Bank of"England).
As dollars accumulate, the bank finds its gold reserve diminished by
an equivalent amount. It therefore converts some of its dollar bal­
ances into gold to replenish its reserves, which has the effect of increas­
ing gold exports from the United States. In this indirect manner,
speculation m gold through the exportation of short-term funds from
the United States causes both an increase in the U.S. balance-of-payments deficit and an increase in the exportation of gold.
Gold that is purchased for speculative purposes with some currency
other than dollars, however, or with dollars that have not been with­
drawn from the United States for the purpose, do not affect the U.S.
balance-of-payments deficit directly because such transactions do not
depend upon new outward flows of dollars. The fact that the large
outflows of gold from the United States in 1960 and 1961 were accom­
panied by substantial increases in short-term capital outflow would
seem to indicate that U.S. dollars from the United States were being
used to speculate in gold.
During the first 6 months of 1962, however, the large gold outflow
was not accompanied by large short-term capital outflows. In fact,
the outward movement of short-term capital during the first 6 months
of 1962 was about half of what it was in 1961. The presumption is
that the gold that has been leaving the country in 1962 has been in
response to speculation in terms of currencies other than dollars.

As long as the U.S. Treasury assures speculators that it will continue
to buy gold at any predetermined price there will be a temptation for
holders of dollars to speculate against the dollar whenever there are
rumors to the effect that the United States is going to devalue the
dollar in terms of gold. I f the dollars are withdrawn from the U.S.
economy the speculation will result in stepped-up outward short-term
capital movements and in aggravation of the U.S. balance-of-pay­
ments deficit. Those who are prone to speculate will do so whenever
they see a gambler’s chance to make something on a “sure thing.”




Mr. W il l i a m s . A s I understand your statement, Dr. Piquet, you
will continue to value the dollar at one thirty-fifth of an ounce of gold.
But the only thing that you would suggest is that this country make a
statement that we do not guarantee that in buying gold to redeem our
dollars, that we would continue to pay $35 an ounce?
Mr. P i q u e t . We don’t buy gold to redeem dollars; we sell it at $35
per ounce. The proposal is that we continue to do this, but that we no
longer guarantee to buy the gold back at the same price.
Mr. W i l l ia m s . On price. But not the guarantee on the dollar?
Mr. P iq u e t . N o, you wouldn’t affect that. Just one way. In other
words, we continue to support the dollar in terms of gold, but we
would not continue to support gold in terms of dollars.
Mr. B ar r ett . Mr.Widnall.
Mr. W id n a l l . Mr. Danielian and Dr. Piquet, we certainly appre­
ciate you coming today and spending this time with us, as it is one of
the most important subjects we have to consider this year, and we
want to get all the light we can on it.
Back in 1965 the Senate issued a report at the time that Congress
eliminated the requirement of the Federal Reserve banks maintaining
certain reserves in gold against deposits.
In the third paragraph, the purpose of the legislation, it says:
The bill would give time to the Government to take firm and effective action
to solve our balance of payments problems in a sound and growing economy
without compelling such drastic measures as to threaten our prosperity abroad,
but would require the balance of payments problem be faced and solved while we
still have a large sack of gold, instead of postponing action until our gold has
been lost, and our international financial condition has weakened.

Here we are, 3 years later. To what extent has the situation deterio­
rated during the intervening period ?
Mr. P iq u e t . The basic situation has not deteriorated, Mr. Widnall.
In 1964, our balance-of-payments deficit—on the liquidity basis—was
$2.8 billion, in 1965 it was down to $1.3 billion, and in 1966 to $1.4
billion. It was improving, not deteriorating, until 1967. A balance-ofpayments deficit of a billion to a billion and a half is not to be worried
about too greatly because it supplies the liquidity that other countries
need. If we were to get the deficit down to zero, the same foreign banks
and others who are now criticizing us for our deficit would be criti­
cizing us because we no longer had a deficit.
Mr. W id n a l l . If there is nothing to worry about, why are we mov­
ing against tourism and investment overseas?
Mr. P iq u e t . New direct private investments overseas strengthen
our balance of payments; they do not weaken it.
Mr. W id n a l l . The administration is taking steps to do things to
weaken our investments overseas.
Mr. P iq u e t . It would damage our balance-of-payments position, if
it is anything more than very temporary. Direct investment, you
Mr. W id n a l l . Yes. I just want to point out that 3 years ago a warn­
ing was given, and it doesn’t seem to me that necessary steps have been
taken, and these necessary steps aren’t being taken. Some of the steps
that are sponsored by the administration are going to hurt it and
become permanent, rather than temporary, as they suggest.



If the United States maintains its present world commitments, do
you regard these temporary controls as tending to become permanent?
Mr. P i q u e t . I am afraid I did not hear your question.
Mr. D a n i e l i a n . May I comment on this question that Mr. Widnall
has raised, as well as some other points that Dr. Piquet has brought
UPI must say I have great respect and admiration for Dr. Piquet’s
scholarship and I have been one of his ardent admirers for many years.
I do disagree with him on a couple of points, however.
The first, that the balance of payments has improved in the last 3
years. I think this: We have improved our statistical treatment of the
balance of payments, but not the balance of payments.
The improvements in 1965 and 1966 were illusory. They were the
result of changes in the nature of the accounts from short- to
long-term obligations, and instead of outflows they looked like inflows.
But the basic balance-of-payments deficits during those years were
still in the order of $2.9, $2 .8 , $2.9, $3 billion. So there were not im­
provements, really, in the terms of real resources.
There was a shortfall in real resource transfer to accomplish the
things we want to accomplish abroad.
Secondly, I would agree with Dr. Piquet on his recommendation that
we do not give any guarantee on the repurchase of gold.
I thought a great deal about it, but unfortunately we have treaty
obligations and this is not a unilateral decision that we can make.
We have an obligation in the IMF to buy and to redeem dollars
presented to us, either in the currency of the other country or in
equivalent gold at $35 an ounce. And so what he is recommending is
that we really get out from IMF, and I am not sure that this is feasible,
without really creating even greater chaos in the world.
So that is the reason why I am limiting my recommendations to a
firm assurance that we are not going to raise the price of gold.
Now, I don’t know whether we have the freedom to say we may
pay less for it, because I think we are bound by the IMF charter.
The general theory, that we don’t have to worry about the balanceof-payments deficits, and that we can just unload paper dollars on
other countries, I think, suffers from one simple debility.
In the United States, the Government is in position to print, di­
rectly, and usually indirectly, through the sale of Government bonds
to the Federal Reserve, Federal Reserve notes which really are paper
money. The Government, under a deficit condition, can force the
American public to accept these paper currencies because they are
legal tender; they can force the acceptance of these dollars in pay­
ments of debts.
Unfortunately, we do not have that power internationally. We can­
not force these other countries or the people in other countries to ac­
cept paper dollars. There is no international machinery that says
dollars in international transactions must be accepted in payment of
debts. Lacking this kind of authority, we cannot just blithely go on,
saying we are going to run a $3 or $4 billion deficit because we want
to do this and that, all over the world, and whether you approve of
our objectives or not, you must accept and hold these dollars.
So, lacking this kind of international authority to enforce the ac­
ceptance of dollars, I think we put ourselves in the control of those



countries that are financing our debts—the increasing current lia­
bilities of the United States. We have been financing our deficits, in
part, by the export of about $ 1 billion or more of gold, on the average,
m the last 1 0 years, and in part by increases in our current liabilities
of about $ 2 billion or so.
Suppose one of these days when the Secretary of the Treasury
is trying to sell a foreign government or central bank some $500
million worth of bonds, because he has to pay troop expenses in Ger­
many or war expenses in Vietnam, these potential lenders shake their
heads and say, “Now, you haven’t been a very responsible borrower
in the past and we are not going to buy them any more.”
Then, how are we going to finance these activities? We cannot, just
because we are a rich country, force other people to lend their re­
sources to us. And this is actually what we are concerned with.
When other countries have a balance-of-payments surplus with us,
it means they have given us resources to carry out some of the ob­
jectives that we have been undertaking and we have been borrowing
resources from them, giving them dollars in return for them.
Suppose one of these days, they said, “We are not going to accept
dollars for that purpose.” So until we have a world government or
world organization that says dollars must be accepted in payment
of international debts, we do not have, completely, the freedom that
Mr. Piquet suggests we exercise.
I think we would do better if we think in terms of the resource
transfer problem in trying to do things abroad.
The Government of the United States has been spending approxi­
mately $8 to $10 billion a year in foreign exchange abroad. That is
about 30 percent of our total earnings abroad. And this has been
spent for political and military purposes. The private sector is not
earning enough to offset this, and the only way you can solve this
problem is either increase your earning power or find somebody who
is going to lend you the money, or reduce your expenses.
Now, have we done all of these things effectively in the last 6 or 7
years to bring our payments into balance ? I must say that if we had,
we would not be in this situation now. We would not be subject to
the pressures and, really, the arm twisting that has been going on in
Brussels and Paris, and Basle. This is really arm twisting, because
they are our creditors and they hold our dollars and they are asking
for payment.
What kind of payment are they asking for? First, gold, because
they hope they can make a capital gains out of it; and next, I think,
they are going to have some political objectives. Whether they want
us to get out of Vietnam or whether they want to buy our invest­
ments, I don’t know what it will be, but we are really in the midst
of some of the toughest political jockeying that is going on in the
world, and I am not sure that Eastern Europe and its interests are
not involved in this at the present time.
Mr. W id n a l l . What you are saying, as I gather, is that there is
some sort of international blackmail taking place at the present time
to force us in this position. I would like to refer to certain statements
that were made in December by the top Treasury and Federal Re­
serve officials, and I would like to quote them, “The dollar is now on
the frontline and we will sell our gold down to the last bar.”



I feel that disturbed confidence and stimulated some of the specula­
tion. How do you react ?
Mr. D a n i e l i a n . Well, there are two aspects of gold hoardings that
must be separated. First, I think there is a native-village-type gold
hoarding, which is not necessarily speculation against the dollar. It
may be speculation against their own currency. They are all afraid
of the inflation of their own currencies and I don’t believe an Indian
snake charmer, or maharajah is holding gold, thinking of its con­
version to the dollar. He doesn’t have faith in the rupee, and there­
fore he holds gold. Then there is more knowledgeable hoarding that
is going on on an international basis that is definitely directed against
the dollar.
Mr. B a r r e t t . The time of the gentleman has expired.
Mr. P i q u e t . I would like to make one point, if I may, and that is,
we are under no obligation in the International Monetary Fund, as far
as I have been able to ascertain, to support the price of gold. We have
to support the dollar; but we don’t even have to do that, according to
the Fund agreement, by direct conversion. We can do it through
exchange operations, as other countries do.
Let me call your attention to a recent—1966—monograph by Dr.
John Parke Young “U.S. Gold Policy: The Case for Change.” In Dr.
Young’s opinion, the proposal that we have been discussing would
not necessitate our violating the International Monetary Fund
Mr. D a n i e l i a n . May I, just to correct the record ?
Mr. B a r r e t t . Mr. Danielian, we are very desirous of getting your
help, and Mr. Piquet’s help. We want to, if we may, give the other mem­
bers a chance to ask you some questions.
I am sure the other members are very anxious to ask you some ques­
tions. We usually operate on a 5-minute rule, and we are hoping we
can get your stored-up knowledge and exhaust your warehouse of
knowledge by the time we have finished asking these questions.
At this point, before I recognize Mrs. Sullivan, I would like to insert
in the record the speech of Chairman Patman on the floor on May 25,
“The Dollar Is Stronger Than Gold.”
(The material referred to follows:)
[From the Congressional Record, May 25, 1967]






S tr o n g e r T h a n G old, I n s is t s B a n k in g
C o m m it t e e C h a ir m a n W r ig h t P a t m a n



(Mr. Patman (at the request of Mr. Montgomery) was granted permission to
extend his remarks at this point in the R e c o r d and to include extraneous matter.)
Mr. P a t m a n . Mr. Speaker, gold is universally recognized as a means of settle­
ment of international financial transactions for the principal reason that the
world price of gold is supported by the world’s strongest full faith and credit
obligation—the U.S. dollar. Gold has very little intrinsic value and its glitter is
more psychological than anything else.
Still, we find gold useful as a medium of exchange and a store of value inter­
nationally speaking simply because the United States of America supports the
price of gold by promising to pay foreign holders at a fixed rate of exchange of
$35 per ounce.
Therefore, it should be clear to all that the usefulness of gold is utterly depend­
ent upon a fixed rate of exchange for some hard currency, and our dollar has
assumed that role because we have the largest, steadiest, and strongest economy
in the entire world. Thus, it is our economic power, coupled with our Govern­



ment’s taxing power, that stands behind the dollar. It is the full faith and credit
of the United States specifically guaranteeing our dollars that protects and
supports the value of gold—not the reverse, Without fixed hard-currency support,
I suspect gold would have some substantial value as a mere commodity, but not
a whole lot in comparison with its present monetary value.
So as long as we continue to successfully strive toward the great national
goals clearly set forth in the Full Employment Act of 1946 of maximum produc­
tion, employment, and purchasing power we will have a sound economy and a
sound dollar, with or without gold.
Probably our main problem as world banker is due to an excessively rapid
foreign investment program by our large banks and large corporations seeking to
carve out profitable positions for themselves in the Common Market countries
and other international markets.
If we decide to continue indefinitely to prop up the monetary price of gold, it
will probably be necessary to impose stricter controls over the huge outward flow
of dollars for investment in Western Europe.
In this connection, Mr. Speaker, I insert at this point in the R e c o r d a very
intelligent letter to the editor, written by Mr. Walter C. Louchheim, appearing
May 23 in the Washington Post newspaper:
“ G old




“Your financial editor, Hobart Bowen, was perpetuating a fallacy when he
wrote in his article of Sunday, May 14, about the apprehension of European
bankers as to a possible suspension of gold purchases or sales by the United
States. I must also take issue with his statement that “there isn’t a country in
Europe that wouldn’t like to buy gold for dollars.”
“Mr. Rowen is really referring to a few central bankers in a few European
countries. Anyone who has visited Europe recently and has discussed the dollar
with bankers in a broad sense knows that confidence in it has never been higher.
They also learn that this confidence is not dependent upon how much gold there
is in Fort Knox but rather upon the resources and prosperity of our economy, the
stability of our government and the free convertibility of our currency at all
times, for all purposes and in any amounts.
“Apparently Mr. Rowen’s article was based upon the views of a malcontent
member of the French Embassy staff who has been using his office to spread
financial Gallism around Washington. It ill behooves a representative of France
to imply, as this man does in the story quoted by Mr. Rowen, that the United
States is a defaulter on its international obligations while history is still so
recent and so clear as to what countries have failed to pay their foreign debts.
“If we had a representative in France who was engaged in spreading such
unjust and unfriendly allegations as this Frenchman is reported to be doing we
would, I believe, call him home.
W a l t e r C. L o o h h e i m .”

Mrs. S u l l i v a n . Just a comment that I had. The point was made
by the witness that we are not legally or morally obligated to
support the price of gold at $35 per ounce. I think it would be good to
have Dr. Young’s statement that you referred to put into the record
at this point.
Mr. B a r r e t t . That may be done, without objection, and it is so
(The article referred to follows:)












Princeton, New Jersey

15 8

This is the fifty-sixth in the series e s s a y s i n i n t e r n a ­
t i o n a l f i n a n c e published from time to time by the Inter­
national Finance Section of the Department of Economics
in Princeton University.
The author, John Parke Young, was for several years
Chief of the Division of International Finance in the De­
partment of State, H e was Chief Economist to the Senate
Commission on Gold and Silver; Director of the Senate
Foreign Currency and Exchange Investigation; member
of the United States Committee which drafted the original
Articles of Agreement for the International Monetary
Fund and the International Bank; and member of the
International Secretariat at Bretton Woods. H e is author
of The International Economy and other books and has
taught economics at Princeton University, the Univer­
sity of California at Los Angeles, and Occidental College.
A t present he is Visiting Professor of Economics at the
Claremont Graduate School
The Section sponsors the essays in this series but takes
no further *responsibility for the opinions expressed in
them. The writers are free to develop their topics as they
will. Their ideas may or may not be shared by the editorial
committee of the Section or the members of the Depart­
f r i t z m a c h lu p , Director


The international-payments system has not lacked attention during
recent years. While a great deal has been said, there is much to be settled,
and it does not necessarily follow that much will be settled soon. The
appropriate function of gold in a revised international monetary system
is a matter of debate. What the United States does about gold has an
important bearing upon the developing system. This paper discusses the
gold policy of the United States, particularly the policy of unlimited
sales of gold at the option of foreign governments.
I propose that the United States sell gold only at its own discretion,
as do all other governments, at the same time firmly maintaining the
exchange rate and convertibility of the dollar. Such discretion is needed
in the interest of an orderly utilization of our gold reserve, and especially
to prevent erratic gold outflows from leading to further misconceptions
regarding the strength of the dollar, and perhaps a gold crisis.
The proposed move, by reducing excessive dependence upon the gold
element in our monetary reserves, would relax the limitations imposed
by gold over desired domestic and foreign policies. It would provide
greater flexibility for government policies directed toward goals such as
economic growth, stable full employment and production, and foreign
economic and political objectives. It would be another step in the evolu­
tion of money where gold is supplemented or replaced by credit arrange­
ments—a development wrhich has gone a long distance in domestic
monetary systems in all countries. The move would be part of a program
of international monetary reform that takes account of the declining
role of gold in monetary systems. The pros and cons of restricting gold
purchases by the United States are also considered, but such action is
not recommended, at least for the present.

The gold policy of the United States has throughout this country’s
history undergone two major changes excluding small reductions in the
gold content of the dollar in 1 8 3 4 and again in 1 8 3 7 , which made it
profitable to bring gold to the mint for coinage. The country was legally
on bimetallism, but the mint ratio of 1 5 ounces of silver to one ounce
of gold favored silver and little gold was coined. The new ratio, after
1 8 3 7 , of 1 5 .9 8 8 to one favored gold. Changes have been made from

t im e t o t im e in t h e p e r c e n t a g e o f g o l d r e s e r v e r e q u i r e d to b e h e ld b e h in d
t h e c o u n t r y ’ s m o n e y a n d b a n k d e p o s it s .

The first major change was the well-known shift from legal bi­
metallism to the gold standard by the law of 1 8 7 3 . This law abolished
free coinage of silver into dollars—a measure which at the time attracted
little attention, since the price of silver discouraged its presentation for
coinage. For a quarter of a century thereafter, however, as the price of
silver declined, the merits and demerits of the gold standard were subject
to heated, and often not very illuminating, political debate.
The second major change in gold policy came in 1 9 3 3 when gold was
withdrawn completely from domestic circulation, concentrated in the
hands of the Government, and its price raised substantially. The Ad­
ministration under Franklin D. Roosevelt suspended redemption of all
money in gold, made illegal the holding of gold by the public and banks,
prohibited the export of gold except under license, and commenced
buying gold at higher and higher prices. The price was finally fixed by
the Gold Reserve Act of January 1 9 3 4 at $ 3 5 an ounce, compared with
the previous price of $2 0 .6 7 . These are the only basic changes that this
country has made in its gold policy.
According to present policy, the U. S. Treasury will sell gold in
unlimited amounts at $ 3 5 an ounce to friendly foreign governments and
their central banks wishing to use the gold to add to currency reserves
or settle international accounts. It will not sell gold to private persons,
although there are exceptions for domestic buyers with legitimate use for
gold in industry or the arts. American citizens are in general prohibited
from holding gold either at home or abroad. The United States, con­
versely, will buy gold freely in unlimited amounts at $ 3 5 an ounce from
foreign governments or central banks, and lawfully acquired gold from
private persons, such as gold from domestic mines. (The Treasury col­
lects a handling charge of % of one per cent, so that the purchase price
is actually $3 4 . 9 1 2 5 and the selling price $3 5 .0 8 7 5 .) The United States
thus maintains unlimited convertibility internationally of dollars into
gold or gold into dollars on the above basis. No other government
maintains convertibility of its currency into gold on any basis.

A positive long-range gold policy for the United States must recog­
nize the fact that gold has long been losing ground in monetary systems.
For generations there has been a progressive substitution of credit for
commodity money, first domestically and more recently internationally.
The trend has been irregular but unmistakable. After the First World
War and during most of the interwar period gold iost much of its
influence over monetary policy and domestic economic conditions, also

disappearing completely from circulation in virtually every country of
the world. Gold played little part in monetary affairs during the Second
World War. After the war, various restrictive devices were used to
maintain exchange rates. Gold continued relatively inactive during the
early postwar years.
During the past decade gold has regained monetary importance as the
payments deficits of the United States and the removal of payments
restrictions by major countries have focused attention on the role of
gold in international reserves— its principal surviving function. Pro­
posals for reforming the international monetary system generally down­
grade gold.
The demise of gold, however, does not seem imminent. It is possible
to ridicule the digging of gold from the ground only to bury it at Fort
Knox, but the glitter of gold remains, and holds the world in its spell.
It is universally accepted by central banks in settlement of accounts. It
is widely regarded as an assured means of payment and considered to be
the most conservative type of reserve. Predictions regarding the final
demonetization of gold are precarious.
B^ut events could move further against gold. If it were not for this
country's policy of buying gold freely at $ 3 5 an ounce—a policy criti­
cized by many economists—the price of gold would probably decline.
The future of gold as a monetary metal is to a considerable extent in the
hands of the United States. As the owner of the world's largest gold
hoard, as well as for other reasons, it has an important stake in the
future role of gold.
The United States supported the price of silver, under pressure from
silver producers, long after silver had ceased to be a monetary metal—
except in China and a few outlying parts of the world, and as the
material used in fiduciary coins. The U. S. Treasury was finally bailed
out of this costly project, in which huge and unneeded hoards of silver
were accumulated at high prices, by the rise in industrial demands for
silver and by demands for subsidiary coinage.
Is gold going the way of silver in the foreseeable future, with this
Government in similar fashion supporting the price of gold through
unlimited purchases at $ 3 5 an ounce? Is the United States likely to find
itself the owner of large stocks of a cheapening metal, a decline concealed
by its own artificial support? Will increasing industrial demands for
gold spare the United States from possible losses in the value of gold, as
they did in the case of silver? So long as the United States is selling
rather than buying much gold, and with gold apparently firmly en­
trenched in the public mind as an immutable article of value, these
questions may seem irrelevant. Perhaps they are looking too far into
the future; perhaps not. At the present time it seems unlikely that other

countries will alter their link to gold in the foreseeable future, or cease to
desire it as a reserve component, particularly so long as the United
States continues to buy it freely. It would, moreover, be unrealistic to
assume that this country is about to refuse to accept gold. (This subject
is discussed below.)
In light of the long-term downtrend of gold, however, it could be
argued that the United States, as part of a long-range gold policy, should
gradually and by orderly process reduce the large gold element in its
currency reserves, converting part of this gold into other forms of
liquid reserves available to support the dollar internationally. These
might consist of holdings of strong currencies of leading nations, the
relative amounts to be varied according to demands and developments
affecting these currencies. The United States also could repay in gold
its outstanding drawings from the International Monetary Fund, there­
by reinstating reduced drawing rights available to meet balance-ofpayments needs. A possible undesirable aspect of such repayment is
some loss of independent control over available reserves, since access to
the gold tranche requires action by the IMF. Such action, however, is
largely a formality, as the Fund does not deny drawing of the gold
Repayment by this country in gold would eliminate the need for
technical transacti<Dns between the Treasury and the IMF, in which the
United States draws foreign currencies, such as Canadian dollars, and
sells them for U. S. dollars to countries desiring to repay drawings to
the Fund. Such countries are debarred from paying U. S. dollars to the
Fund because the latter is overstocked with dollars—that is, Fund hold­
ings of dollars exceed 7 5 per cent of the United States quota. Such
transactions make it unnecessary for foreign countries to use their U. S.
dollars to buy gold for repayment to the Fund. Outstanding drawings
by the United States in August 1 9 6 6 totalled $ 1 ,5 1 0 billion, but, because
of drawings of dollars by other Fund members, the amount repayable to
the Fund was only $ 8 8 1 million.
Several years ago the United States bought $ 8 0 0 million of gold from
the Fund, with a Fund right of repurchase. The Fund received interestbearing U. S. Treasury bills and short-term notes, which it considers
as investments and not holdings of dollars.
A deliberate reduction of gold reserves, the timing and amounts in­
volved, would depend largely upon ( 1 ) judgments regarding the pros­
pects for a further decline in the importance of gold, ( 2 ) consequent
risks in holding large amounts of gold as compared with risks in holding
a larger share of reserves in currencies that might depreciate, ( 3 ) pos­
sible repercussions upon confidence in the dollar and its use as a reserve
currency, and ( 4 ) the effect upon international financial markets. There

is also the question whether a guarantee of currencies held as reserves
should be sought and, if so, in what form— in gold, the escape from
which was the reason for holding other currencies, or perhaps in terms
of a composite of leading currencies.
Views regarding gold and its future run the gamut from shock at any
thought that gold is not the ultimate measure and safest storehouse of
value to belief that gold is an obsolete and primitive monetary base,
whose days are definitely numbered. Keynes, writing in 1 9 2 3 , said, “ In
truth the gold standard is already a barbarous relic.” 1 Under present
conditions it appears safe to say that the United States, apart from the
effect of its own possible but improbable actions against gold, need not
be unduly concerned over the large gold element in its reserves.

Regardless of views as to the future of gold, the United States, I
believe, needs to exercise full control over disposition of its gold reserves.
I propose, therefore, that the United States sell gold only at its own
discretion—the practice of all other countries. Gold would be sold when
foreign exchange was needed to maintain exchange-rate stability, at
such times and in such amounts as the United States deemed expedient.
The case for cessation of free sales of gold rests largely on three
grounds: first, that erratic gold sales lead to misconceptions as to the
basic strength of the dollar; second, that a run on the gold reserves of
the United States, with unfortunate consequences, is possible under
present free convertibility of dollars into gold; and, third, that main­
tenance of unlimited access to its gold hampers this country in pursuing
policies directed toward economic needs and present-day goals.
Gold Outflow and Misconceptions Regarding the Dollar

The weakness of the payments position of the United States has been
magnified by world focus on gold exports from this country. These
exports are commonly regarded as a gauge of the strength of the dollar.
Doubts as to the ability of the United States to maintain free sales of
gold have thus been a major factor in world confidence in the dollar.
They have also, unfortunately, been reflected in attitudes within the
United States regarding its own currency, thereby contributing to the
adoption by this country of restrictive and other inherently undesirable
The United States is actually an economic giant and the dollar the
strongest currency in the world; in world markets the dollar is in ex­
tensive and usually preferred demand. The purchasing power of the dollar
1John Maynard Keynes, Essays in Persuasion (London: Macmillan, 1931), p. 204.
89-292 0





has remained relatively stable for over q. decade. While there is no assur­
ance that such stability will continue, in contrast with other currencies the
record of the dollar is excellent.
The large amount of liquidity, actual and potential, which is behind
the dollar is being obscured by undue focus on gold exports, often
capricious. The defensive position of the United States in international
financial affairs has been nurtured by erroneous views regarding the
real strength of the dollar. Erroneous views regarding the dollar have
hurt the United States in its position of world leadership. These mis­
conceptions regarding the dollar have been abetted by uncontrolled
movements of gold.
A Gold Crisis

Predictions have been made that the United States will be confronted
with further large and accelerated outflows of gold, and that prospects for
restoring balance in external payments without imposition of stronger
capital controls, and even some controls on current transactions, are not
bright. Gold reserves have declined from $2 2 .9 billion at the end of
1 9 5 7 to about $ 1 3 .4 billion in August 1 9 6 6 . The loss of several bil­
lion dollars more in the next year or two is foreseen in a number of
quarters and is expected to lead to public nervousness, and perhaps a
financial crisis. Heavy gold losses, it is said, could trigger a run on the
dollar, fears of dollar depreciation or formal exchange restrictions, stockmarket collapse, forced suspension of free gold sales, and other untoward
events. The dollar exchange rate would doubtless survive intact (the
support given the pound sterling in recent crises illustrates what can be
done to sustain a currency in a situation far more precarious than would
be likely to confront the dollar). But any events of the sort mentioned
would involve economic loss and other difficulties. Such events are not
necessarily dependent upon payments deficits, but could take place re­
gardless of progress in restoring balance. Whether these forecasts are
right or wrong, and I believe them overly pessimistic, the possibility of
a gold crisis cannot be dismissed.
Control over sales of gold would make it impossible to have a run on
gold and a crisis leading to involuntary suspension of free sales of gold.
A run on the dollar as distinct from gold would, of course, continue to
be possible but would be more orderly than if there were a scramble to
get gold while the gold vault was still open. Withdrawal of the right
accorded foreign governments to purchase gold at will from the United
States would permit this country to regulate the outflow of gold in
orderly fashion, to utilize holdings of foreign exchange in place of gold,
and to sell gold as the United States itself considered desirable. It would
remove whatever possibility there is of foreign attacks on the dollar

through gold withdrawals for political ends. The possibility of a sudden
outflow of gold, with accompanying consequences, would no longer hang
over this country. A controlled reduction in our gold reserves might be
necessary but would be less disturbing than erratic outflow. If the
United States controlled the outflow of gold this country would have
less interest in preventing premiums in the free gold market, which at
present tend to increase the demand for gold. Operations in the free
gold market through the gold pool could, of course, continue if con­
sidered desirable.
The United States might wish to build up its holdings of foreign
exchange substantially, so as to be prepared to meet possible demands
without large and untimely exports of gold. For this purpose it could
export gold gradually at its own initiative, or could acquire additional
amounts of foreign currencies through credit arrangements.
A useful device that has been employed by the United States for this
purpose is the sale of nonmarketable bonds to the monetary authorities
of a country whose currency is basically strong and convertible. These
so-called “ Roosa bonds,” named after Robert V. Roosa, former Under
Secretary of the Treasury who developed them, are often denominated
in the currency of the foreign country, thereby providing an exchange
guarantee for the owner. Their maturities have generally been about two
years. The holder of the bonds has the option of converting them into
9 0 -day Treasury bills, which in turn can be converted into dollars upon
two days’ notice. The bonds carry an interest rate comparable to that on
U. S. Government obligations of similar maturity. Through the sale
abroad of obligations of this and other types the United States could
enlarge its holdings of foreign exchange as it desired, thereby obviating
sales of gold.
Desired Policies Hampered by Gold Convertibility

The United States has been hampered in domestic and foreign policies
by undue dependence upon gold and maintenance of gold convertibility,
namely, by fears lest desired measures add to the outflow of gold. An
adequate attack on the sluggishness of the American economy and low
growth rates during the early i 9 6 o,s was considerably delayed by such
fears. Indicated measures would, it was anticipated, encourage capital
outflow, lack of confidence in the dollar, and other consequences leading
to loss of additional gold. Foreign policies such as aid to developing
countries, encouragement to foreign investment, and trade liberalization
have similarly felt restraining pressure from gold losses.
While the payments deficit is the underlying problem and responsible
for most of the limitations on policies, gold outflow is a matter of con­
siderable official concern. To many persons the loss of gold looms large

and is the visible culprit. Newspapers refer to the “ gold gap.” Policies
such as tied aid, “ Buy American,” and limitations upon capital exports
have to a considerable extent been adopted in order to prevent an undue
outflow of gold. Control over gold outflow would help to remove ex­
cessive concern over the dollar because of payments deficits. Control
over sales of gold would, of course, not promote balance in international
payments, which is the underlying problem, except perhaps indirectly
through its effect upon capital flows. Measures to promote balance in
international payments would still be needed.
Although the United States would under the proposed policy still
need to export gold to help finance the payments deficit, control over
gold exports so as to avoid psychologically disturbing movements, and
possession of greater ability to utilize foreign-exchange holdings in
settling accounts, would provide more flexibility and strengthen this
country's international position. The proposed policy would not only
prevent disorderly outflow of gold, but would lessen dependence upon
gold by facilitating settlements in means other than gold, as noted
above. The United States could develop further its various foreigncre^it arrangements as substitutes for gold.
Withdrawal of free access to our gold reserves would thus reduce
gold's influence over monetary, fiscal, and other policies. It would be an
extension into the international field of measures taken in 1 9 3 3 affecting
this country’s monetary and banking system, when domestic redemption
of U. S. currency in gold was abolished. This removal of the obligation
to redeem currency in gold domestically provided needed latitude for
monetary and fiscal policies. Continuation of gold redemption interna­
tionally, however, constitutes a loophole in control over gold. If large
payments deficits continue, convertibility in gold can be the source of
serious difficulty. So long as our gold reserves were more than ample no
problem arose. In recent years, however, when large payments deficits
have persisted and our gold reserves have shrunk, the handicaps and
dangers imposed by unlimited convertibility internationally have become
clear. (A corollary is that the legal limitations upon the amount of gold
to be held as reserves behind U. S. currency should be removed, thereby
permitting all of our gold to be available for international settlements.
The knowledge of this availability would be a positive factor in this
country’s payments and dollar position.)
Many persons doubtless would not consider the weakening of the
so-called discipline imposed by gold an advantage. They would regard
gold as a check upon irresponsible policies, and a means of forcing more
rapid external adjustment. Opponents of the proposed policy who do not
have confidence in government would note that removal of gold’s re­
straining influence opens the door to mismanagement, a complaint

similar to the “managed currency” outcry heard during the 3 0 's. The
record of Federal Reserve policies since then, however, does not lend
much support to such fears. Moreover, external adjustment need not be
subjected to a mechanistic and perhaps unduly harsh schedule.
The proposed policy would be a move in the direction of an interna­
tional monetary system in which the excessive importance of the gold
element in reserves would be reduced. Reduction of reliance upon gold
would provide more leeway for the creation of an amount of interna­
tional liquidity appropriate for growing world trade and an expanding
world economy. Maintenance of gold convertibility places a limit upon
the volume of liquidity, and sooner or later can be a deflationary force.
International liquidity cannot yet be expanded in response to needs as
readily as can domestic credit by central banks. We are still waiting for
a mechanism to provide the necessary amount of elasticity in the supply
of international money. Plans currently under discussion will, hopefully,
be a constructive step toward meeting this need. The proposed policy
would be in furtherance of the developing trend of international mone­
tary reform. It would continue the historic trend toward diminution of
the power of gold.2
In addition to these points there are other related considerations
which make desirable the withdrawal of unlimited convertibility of the
dollar into gold. The size of the gold element in the reserves of the
United States has been left almost entirely to decisions in which this
country has had little or no part. Foreign countries, presently in a
position to put pressure on the dollar via gold, can reduce, perhaps
substantially, the gold holdings of the United States. Until a stronger
international monetary system has been established and financial na­
tionalism further reduced, the amount of this country's gold reserves is a
matter of consequence. With control over sales of gold, the United
States might decide, for example, that it is wise to keep gold reserves
approximately at their existing level, at least for the present, and meet
demands for foreign exchange by means other than gold exports when­
ever feasible.
Free sales of gold by the United States have permitted foreign central
banks to build up their gold reserves by drawing down the gold reserves
of the United States. From the standpoint of redistribution of this
country’s abnormally large postwar gold holdings, this transfer of gold
from the United States to foreign countries, thereby strengthening
depleted reserves of Europe, has been a healthy development. The ques­
tion is raised, however, how far this outflow should go. From the stand2 A typographical error in a draft of this paper omitted the letter “1” in the word
gold. Persons desiring to dethrone gold completely might consider the abbreviated
spelling appropriate for some who worship the gold standard.

point of those who wish to reduce the gold element in this country’s
reserves, continued outflow of gold would not be a misfortune.
The transfer of gold reserves to foreign countries reduces the total
liquidity of the United States, unless the gold establishes a credit balance
in favor of this country in a foreign bank. The latter has not generally
been the case since exports of gold have been used largely to help pay
for the importation of goods and services and the exportation of Ameri­
can capital, particularly heavy private foreign investment and govern­
ment outlays abroad. Gold reserves of the United States have, therefore,
been supplemented by swaps and various other credit devices as substi­
tutes for gold lost, a constructive development.
The United Kingdom has generally sought to maintain some 9 0 per
cent of its reserves in gold, recognizing its special responsibilities and
recalling the devaluation of the dollar in 1 9 3 3 . France not long ago
decided to increase the gold portion of its reserves. A number of other
countries having confidence in the dollar exchange rate prefer to main­
tain the major portion of their reserves as liquid earning assets in New
The large gold reserves of the United States have enabled this country
to meet major obligations abroad, and to achieve particular foreign
policy objectives, especially military and foreign-aid objectives. They
have helped it finance payments deficits and maintain dollar stability at
a time when large foreign expenditures by the United States are of
special importance. The amount of this type of assured liquidity is at
present largely subject to foreign decisions. While the trend of monetary
affairs is away from gold, and the United States at some stage might
wish to liquidate much of its gold, this country should be in a position
to make its own decisions. The proposed policy would permit this.

Unlimited sales of gold by the United States at the option of foreign
central banks are unnecessary for maintenance of the exchange rate of
the dollar at $ 3 5 an ounce of gold. (Even if the United States were to
introduce wider exchange-rate margins, control over gold sales would
in no way interfere.) Numerous countries have shown that, given
appropriate monetary and fiscal policies, exchange-rate stability can be
maintained through purchase and sale of foreign exchange by the central
bank and without gold movements. Nor are free sales of gold essential
to world confidence in the dollar (apart from an initial jolt if present
policy were to be changed), to the free convertibility of the dollar into
other currencies, and to the functioning of the dollar as a reserve
Maintenance by the United States of unlimited access to its gold

reserves by foreign governments not only promotes a false judgment of
the strength of the dollar, making possible a gold crisis and limiting
desired policies, but it is not an economically significant objective in
international monetary policy. The meaningful objectives are: (a)
stability of the dollar in the foreign-exchange market, (b) free con­
vertibility of the dollar into other currencies, (c) strong foreignexchange reserves to assure continuance of convertibility and exchange
stability, (d) maintenance of stable internal purchasing power of the
dollar, and (e) avoidance of prolonged and unwieldy payments defi­
cits—a basic objective underlying all of the above. Success in achieving
these objectives facilitates use of the dollar as a reserve currency. Free
sales of gold, however, are unnecessary for the attainment of any of
these objectives.
Since the world is largely upon the dollar-exchange standard, wherein
foreign central banks aim to provide convertibility of their currencies
into dollars, and since the United States maintains free interchange­
ability of gold and dollars in either direction for such banks, the United
States is indirectly maintaining gold parity for world currencies gen­
erally. It is primarily dollar parity, however, rather than gold parity, in
which countries are interested. They wish to maintain their exchange
rates at the official parity with the dollar. Since their currencies and the
dollar are both defined in terms of gold, gold parity and dollar parity
are identical. This identity is recognized in Article IV Section i(a ) of
the IMF Articles of Agreement, which reads: “The par value of the cur­
rency of each member shall be expressed in terms of gold as a common
denominator or in terms of the United States dollar of the weight and
fineness in effect on July I, 1 9 4 4 .”
Gold parity has become largely symbolic. It can, moreover, be effec­
tively maintained by the United States without free sales of gold.
Control over sales of gold would place the major task of maintaining
exchange parity (also gold parity) on this country’s total reserves, gold
plus foreign exchange, without putting undue emphasis upon the gold
element. Control over gold sales would not eliminate gold parity of the
dollar. The dollar would also continue to provide such parity for other
currencies convertible into dollars.
The United States has gone a certain distance toward the substance
of control over gold exports by obtaining restraint and cooperation of
principal central banks. The restraint, however, varies from country to
country, is uncertain, and of limited scope. Moreover, in the event of
serious fears abroad regarding the dollar, even though unfounded, for­
eign central banks could not be expected to refrain from asking the
United States for gold or to subordinate their personal responsibility in
order to help the dollar. Experience to date indicates that central

bankers are not necessarily immune to rumors and to the influence of
actions by others, rational or irrational. Central bankers understandably
do not wish to take chances with their own currency for the sake of the
dollar. In meeting a central bank's request for gold under a system of
controlled gold exports, the United States would be conferring a favor
rather than asking one, as it must when it urges restraint on other
countries in taking its gold.
Cessation of free sales of gold need not await possible modifications
in the international monetary system, such as expansion of the functions
of the International Monetary Fund, liberalization of automatic drawing
rights on the Fund, wider exchange-rate margins, creation of a com­
posite reserve unit (CRU) with or without a tie to gold, or procedures
to facilitate external adjustment. These modifications are not dependent
upon free sales of gold by the United States. Control over gold outflow,
and resultant elimination of the need for foreign cooperation regarding
gold withdrawals, would strengthen the hands of the United States in
negotiations regarding international monetary reform. Less dependent
upon European restraint in taking its gold, this country would be better
able to exercise the degree of leadership warranted by its economic
The abolition in 1 9 3 3 of domestic access to monetary gold was a far
more drastic step in view of public opinion at that time regarding the
function of gold, together with fears of paper money and of a “managed
currency,” than would be abolition of free access internationally.
Domestically, the purchasing power of the dollar was the significant
factor, rather than the ability of a private citizen to obtain gold.
In regard to charges that the United States would be violating a
moral obligation to countries which have chosen to maintain reserves
largely in dollars instead of gold, these countries would suffer no loss
since the exchange rate and convertibility of the dollar would be main­
tained. Furthermore, the United States would still export gold, and
could provide gold to any central bank to which this country had an
obligation. The official price of gold would be unaffected, and holders of
gold would still be able to sell their gold to the United States at $ 3 5
an ounce. Whether the United States should alter its gold-buying policy
is a separate question.

Immediate Impact

Announcement that the United States would henceforth sell gold only
at its own discretion would doubtless cause public nervousness. Since
the function of gold is often not well understood, strong reactions might

be expected, with forecasts of inflation, dollar devaluation, and other
consequences. The move would be interpreted in some quarters as a
sign of weakness. This country's foreign-currency reserves might thus
be under pressure.
The United States would need to be prepared to meet a possible im­
mediate withdrawal of funds by foreign holders of dollars. Private
holders do not have access to gold and would thus not be directly af­
fected, but nevertheless might sell their dollars because of general
nervousness. Central banks, recipients of dollars sold, might decide to
convert some of their dollar balances into other foreign currencies. Under
certain conditions they could require payment either in gold or their own
currency at the option of the United States (IMF Articles of Agreement,
Article VIII, Section 4 ).
Large withdrawals of dollars by central banks, however, would appear
unlikely. In the first place these banks would be confronted with the
question of where they could place their funds with greater security
than in the United States. Some funds might go into Swiss francs and
other strong European currencies, but none of these currencies is
freely^ redeemable in gold and in this respect would offer no attraction
over the U. S. dollar. Official holders of dollars would find little benefit
in shifting to other currencies.
In the second place, central bankers, although perhaps unhappy over
the change, would doubtless recognize that the exchange rate and free
convertibility of the dollar were the significant factors, and that the
U. S. Government was pledged to continue these unchanged; moreover,
that the Government was in a strong position to make good on this
pledge. Furthermore, dollars are needed to finance current international
transactions. This policy regarding gold sales would also be similar to
that of their own governments.
Additional factors discouraging withdrawal of dollars by foreign
holders, official and other, are the needs for dollar working balances, the
availability of liquid earning assets, and the extensive facilities offered
by American financial institutions, particularly in New York. A large
or sustained withdrawal of funds as a result of this Government’s action
would appear improbable. As the days passed and no untoward results
appeared, and as public discussion clarified the issue, the business and
financial community would doubtless settle down to business as usual.
The Dollar as Reserve Currency

Insofar as one of the present attractions of the dollar as a reserve cur­
rency is its free convertibility into gold, cessation of such convertibility
would be a handicap. On the other hand, the facts that no other country
offers gold convertibility, nor greater security, liquidity, and access to

such extensive financial facilities necessary for a reserve center, would be
compelling incentives for central banks to leave reserve funds in dollars.
The strengthened ability of the United States, as a result of control
over gold outflow, to deal with payments deficits and possible dollar
crises, coupled with renewed pledges of exchange stability and dollar
convertibility, might well result in even greater confidence in the dollar.
It is unlikely that the basic position of the dollar as a reserve currency
would be impaired.

Cessation of convertibility of the dollar into gold would have little or
no direct effect upon international liquidity. An additional portion of
this country’s gold would, however, become effectively available to it for
settling balances. Apart from the 2 5 per cent legal-reserve requirement,
which locks up most of its gold, the United States under the present
policy of free sales of gold would find it difficult to use most of the free
gold without causing public fears and possible economic disturbances.
Such fears would1be intensified if the Federal Reserve Board were
compelled to exercise its right to suspend temporarily the reserve re­
quirement. The free gold’s effectiveness as a working reserve is thus
If gold exports ,could take place only at the discretion of the United
States, the likelihood that gold exports would suggest to the public a
possible gold crisis would no longer exist. The United States could use
its gold in an orderly manner, and with fewer newspaper headlines
raising fears of trouble. This country’s liquidity would in substance be
To the extent that the proposed action led to greater use of credit as a
supplement to gold for reserve purposes, it would add to world liquidity.
If the move caused governments to negotiate more bilateral credits or
currency swaps, perhaps in order to avoid selling gold in view of un­
certainty as to whether gold could later easily be acquired, international
liquidity would thereby become greater.
International liquidity would be reduced if the proposed action led to
a withdrawal of foreign balances from the United States and their con­
version into the currency of the holder. If France, for example, con­
verted dollars into francs, international liquidity would be contracted.
If, however, France converted the dollars into Swiss francs or some
other currency available as international reserves, no net reduction of
international liquidity would take place.

The proposed action would in itself be neither inflationary nor de­

flationary. To the extent, however, that it indirectly resulted in an
expansion of liquidity, or to lessened confidence in money and a flight
into goods, it could increase inflationary pressure. If, for example, it led
to arrangements for increased international credit as a supplement to
gold, the tendency would be in the direction of monetary inflation. In
view of the relatively small probable increase in liquidity or flight to
goods as a result of the cessation of gold convertibility of the dollar,
together with continuous growth of world trade, any inflationary con­
sequences would be negligible.
Conversely, there would appear to be no incentive for contraction of
credit arrangements as a result of the proposed action. If, however, it
were to lead to withdrawal of dollars and their conversion into the
currency of the holder, such withdrawal would reduce liquidity, as noted,
and tend toward monetary deflation. Since large dollar withdrawals ap­
pear unlikely, for reasons discussed, no serious deflationary conse­
quences seem likely. Moreover, any deflationary contraction of liquidity offset by arrangements for the expansion of international,
credit. Discussions in the Group of Ten and in the International Mone­
tary Fund of means to accomplish any needed expansion of credit are
well advanced, despite lack of agreement. The amount of credit con­
traction, if any, would doubtless be small.
Effect Upon Gold

The effect of the proposed action upon gold itself would probably be
different in the short run from the long run. The free market for gold
might consider the action as indicating a scarcity of gold, with a resultant
husbanding of gold and increased prospects for a rise in the price of gold.
This could result in upward pressure on the price of gold in free markets.
The United States would not wish to encourage preference for gold or
to have the action interpreted as upgrading gold. It should be considered
rather as a means for orderly utilization of this country’s gold. A state­
ment by the United States that it would not hesitate to utilize its gold,
perhaps coupled with an actual export of gold at its own initiative,
would probably suffice to avoid misinterpretation. If necessary, a hint
that it regarded its gold reserve as large in relation to other forms of
reserve, would probably put matters in proper perspective. The United
States could avoid having the action increase the appetite for gold by
public statements geared to the necessities of the situation. For example,
a statement noting proposals to reduce the price of gold, a"hd stating that
these did not represent official policy, would have a depressing effect
upon gold demand by merely raising the possibility of such action. In
any event, since the United States would be controlling gold exports, a
possible increase in the demand for gold would not harm this country.

If there were public discussion and substantial support for the pro­
posals that the United States should not buy gold except in selected
cases, and that the price for purchases should be less than $ 3 5 an ounce,
such discussion would tend to weaken the demand for gold. It would
dispel some of the aura surrounding gold.
Discontinuance of free redemption of dollars in gold by the United
States, the last country to maintain such redemption and this only for
governments, could hardly be considered as strengthening the role of
gold. It would be pushing gold farther into the background and weaken­
ing what influence it still retains. It would be limiting even further the
effect of gold upon this country’s monetary, fiscal, and economic policies.
The implications of the move would sooner or later become evident.


The time for introduction of a policy of selling gold only at the dis­
cretion of the United States is when gold outflow has slowed down and
no disturbing economic events have occurred. If such action were taken
during a period of large gold losses, public apprehension, or economic
difficulties, it would be likely to accentuate any loss of confidence in the
dollar. The action would then be misinterpreted and regarded as a sign
of weakness.
Announcement would presumably be made on a week-end when
markets were closed. In order to minimize misinterpretation, the an­
nouncement should state emphatically that ( 1 ) exchange rates for the
dollar vis-a-vis leading currencies would be unaffected by the move,
( 2 ) large resources were available to maintain the dollar exchange rate
and that gold would be exported as necessary, ( 3 ) convertibility of
dollars into other currencies would continue without restriction, ( 4 )
private commercial exchange operations would be unaffected, and
( 5 ) Congress was being requested to remove restrictions on utilization
of the country’s entire gold reserve. Th’e last would involve political
difficulties which might preclude or suggest deferment of such a request.
The advantages of control by the United States over sales of gold
appear substantial, particularly in light of the dangers inherent in the
present policy of maintaining unlimited gold sales. Possible difficulties
which might accompany such a move appear manageable and, in fact,
minimal. Subsequent control and limitation on the purchase of gold—
much more of a departure from present policy—merits study, as dis­
cussed in a later section.

A Rise in the Price of Gold
A number of proposals have been made in recent years for changes in

the gold policy of the United States. A proposal widely discussed is
that the official dollar price of gold be raised substantially—from the
present $ 3 5 an ounce to perhaps twice this level. A main purpose would
be to increase the monetary value of existing reserves by writing up
the value of gold, thereby adding to world liquidity. Other purposes
include stimulation of the production of gold, assistance to foreign
countries by increasing the value of their gold holdings, and financing
aid to developing nations through utilization of the “profit” from writing
up the value of reserves, thus reducing the burden on taxpayers.
There are strong arguments against such a measure. The resulting
large increase in the supply of money, including extensions of credit
based upon expanded gold reserves, could be seriously inflationary.
Moreover, the additional amount of liquidity accruing to the interna­
tional monetary system would be arbitrary and not well-related to needs;
these needs grow year by year. Revaluation of the dollar, as well as that
of the pound sterling and other currencies that would doubtless follow
a change by the United States in the dollar price of gold, would be
disturbing to trade, investment, financial markets, and the business com­
munity generally. Principal beneficiaries would be the Soviet Union,
with its large gold production and reserves, and the Union of South
Africa, the major producer of gold. The developing nations as a group
own relatively little gold. Speculators against the dollar and pound would
be rewarded, whereas those who accepted in good faith official assurances
regarding the stability of these currencies, and who thereby helped avert
a collapse, would be penalized. Stimulation of gold production would
result in a wasteful expenditure of labor and other resources, since less
costly means of increasing liquidity are available.
Proposals to reduce the gold content of the dollar—that is, to devalue
the dollar for external payments— refer similarly to a rise in the price of
gold, but in a different context. These proposals have as their objective
a reduction in the payments deficit by making American goods and
services cheaper to foreigners, assuming that other major countries
would not devalue their currencies by similar percentages—an unreal­
istic assumption. Dollar devaluation would be a drastic and unsettling
move with far-reaching consequences. Under present and prospective
conditions it offers more disadvantages than advantages. It has been
firmly rejected by all recent Administrations.
Flexible Exchange Rates

Related to the proposal for dollar devaluation is that for flexible
exchange rates, wherein rates would be allowed to move in response to
market supply and demand. If rates were allowed to move without
limit, the dollar would have no effective gold par. Under such a system
no reserves would be needed, although exchange-rate fluctuations could

be wide. If, however, exchange-rate movements were to be confined
within established limits, such as a fixed margin either side of par,
reserves would be necessary in order to maintain these limits. Under
such a system of wider exchange-rate margins, a tendency for the dollar
to fall below the limit would be met by sales from reserves. Any inter­
vention by government to prevent excessive instability within the limits
would similarly require use of reserves.
According to requirements of the International Monetary Fund’s
Articles of Agreement, exchange rates for spot transactions must be
confined within a margin of one per cent above or below par. Liberal
interpretations of this requirement, however, have enabled countries,
such as Canada, to employ a system of flexible exchange rates for an
extended time. A system of wider exchange-rate margins has substan­
tial support as a means of promoting external adjustment, whether the
problem be deficit or surplus. It is, however, not free from disadvan­
tages, such as greater uncertainty and risk for exchange transactions.
Proposals for a rise in the price of gold, dollar devaluation, completely
flexible exchange rates, and wider exchange-rate margins have received
extensive discussion elsewhere. To enter into further discussion of these
questions here would take us far afield.
Gradual Reduction in Price of Gold

Another proposal, offered originally in i960 by Professor Fritz
Maqhlup of Princeton University, is for a gradual and periodic pre­
announced reduction in the official price of gold.8 He proposes that the
United States reduce the dollar price of gold by small amounts, perhaps
two or three per cent, in a few instalments spread over a period of time.
The first reduction might be two per cent, followed a year later by a
previously announced two or three per cent. The objective would be
to discourage a flight out of key currencies into gold; the future reduction
in price would be definitely known. The plan would presume prior and
essentially open negotiations with other countries— especially those with
leading currencies— under the auspices of the International Monetary
Fund, so that these countries could reduce the price of gold in their
currencies by similar percentages and at the same time.
Machlup points out that lack of confidence in the dollar and concern
by foreign central banks over their large dollar balances is based upon
fear that the dollar may be devalued. Demands for gold thus represent
a hedge against the contingency that the price of gold may rise. If, how3 “Comments on the Balance of Payments and a Proposal to Reduce the Price of
Gold,” The Journal of Finance ( 1961), pp. 186- 193. See also his International Payments,
Debts, and Gold (New York: Scribner, 1964), pp. 240-244, 347.

ever, it were definitely known that the price of gold was going to fall,
this knowledge would reverse the trend and lead to a conversion of gold
into dollars and other currencies; the gold could later be bought back
more cheaply if desired.
Speculators operate upon the principle that the price of gold can move
only in one direction, and that is up. Their expectations are supported
by the facts of history. Announcement that the price of gold will go
down by a certain amount and at a certain date would cool their ardor—
provided that the future price reduction is credible. The Machlup Plan,
therefore, provides that in order to remove any doubt whether the
announced price reduction will take place and the lower price continue,
the Government should sell gold freely and without hesitation at the
lower price. Hoarders would not wish to buy something which they
know will have a lower price later.
Offerings of gold to central banks, he notes, would increase. Central
banks, desiring to avoid a loss in their reserves, would tend to switch
from gold back into dollars and other key currencies. Gold drawn out
of hoards and deposited in central banks would add to international
liquidity. It would not be necessary to continue the periodic reductions
indefinitely, since the chief objective would be to make clear that the
price of gold can go down as well as up, and that hoarders can lose
money. An incipient run on gold reserves could be averted by announce­
ment of a forthcoming price reduction, which would force a retreat of
speculators. The Machlup Plan was proposed as an intermediate measure
until the international monetary system is strengthened. It could serve
a useful purpose if governments were prepared to cooperate sufficiently
to make it effective.
Gradual Rise in Price of Gold

Proposals have been made to raise the price of gold periodically and
by such small amounts, announced in advance, that speculators would
find little or no advantage in hoarding gold. Such proposals, made in­
dependently by Kiyojo Miyata in 1962 and Paul Wonnacott in 1963,
are based on the thought that if the annual percentage increase in the
price of gold is less than the current rate of interest, the costs of carrying
the gold are in excess of the profit. An announced plan to raise the price
of gold about two per cent a year would, they believe, discourage hoard­
ing. The objective would be to increase the value of international
reserves by raising the price of gold but avoid some of the disadvantages
accompanying a single large increase. An unanswered question is
whether speculators would be convinced that the rise would be confined
to two per cent, especially since there would doubtless be agitation for
a substantially higher price.

Removal of Price Floor for Private Transactions
In order to discourage speculation on the price of gold, L. Albert
Hahn in 1963 suggested that when central banks bought gold from
private individuals and from the free market they should buy only at
reduced prices. The official price for transactions among central banks
would remain unchanged. A small reduction for private purchases, he
believes, would be sufficient to discourage speculation. Alternative pro­
posals of Hahn are that central banks should neither buy from nor sell
to hoarders and speculators, that central banks should sell gold only to
other central banks, and that private ownership of gold should be pro­
hibited by all countries.
A variation of the alternative proposals of Hahn was made in 1965 by
Professor James Tobin of Yale University. He proposed that the
London gold pool, which buys and sells gold in the free market in order
to confine price fluctuations within narrow limits, should never buy gold
in the free market. The pool would thus not place a floor under the price
of gold. A t present the pool in effect guarantees speculators against loss.
The United States, which participates in the pool with other countries,
should, he suggests, seek agreement of the others that none of them will
buy gold in the free market, and that none will buy gold from any gov­
ernment that does buy gold in the free market. If the others do not agree,
he believes the United States should seriously consider putting the plan
into effect unilaterally.4
Refusal to Buy Gold Freely
A number of proposals have been made to the effect that the United
States should refuse to buy gold or buy only on a restricted basis. The
earliest such proposal with which I am familiar was made by Lord
Keynes back in 1923. He wrote,
. . . The present policy of the United States in accepting unlimited
imports of gold can be justified, perhaps, as a temporary measure,
intended to preserve tradition and to strengthen confidence through
a transitional period. But, looked at as a permanent arrangement, it
could hardly be judged other wise than as a foolish expense. If the
Federal Reserve Board intends to maintain the value of the dollar at
a level which is irrespective of the inflow or outflow of gold, what
object is there in continuing to accept at the mint gold which is not
wanted, yet costs a heavy price ? If the United States mints were to be
4 The proposals of Miyata, Wonnacott, and Hahn are discussed in Machlup’s book
(fn. 3 ) ; that of Tobin in Guidelines for International Monetary Reform, Part 2, Joint
Economic Committee, Hearings Before the Sub-Committee on International Exchange
and Payments, Eighty-ninth Congress (Washington 1965), pp. 597- 59^.

closed to gold, everything, except the actual price of the metal, would
continue precisely as before.
Confidence in the future stability of the value of gold depends
therefore on the United States being foolish enough to go on accepting
gold which it does not want, and wise enough, having accepted it, to
maintain it at a fixed value. . . . ( O p . c i t p. 204.)
The London Economist in its issue of December 24, i960, contained
an article entitled “ Where the Rainbow Ended,” which was a parody
representing what the memoirs of Per Jacobsson, then Managing Direc­
tor of the International Monetary Fund, might be as written ten years
in the future. In these imaginary memoirs Per Jacobsson describes a
decline in 1961 in the gold reserves of the United States, and general
nervousness leading up to a short statement by the Federal Reserve Bank
of New York, agent for the Treasury, to the effect that its undertaking
to buy and sell gold at $ 3 5 an ounce, or at any price, lapsed forthwith.
The memoirs added, “ In three sentences the Fed had demonetized gold.”
The memoirs then state that the International Monetary Fund
promptly announced it would buy gold from central banks, giving in
return deposits at the Fund, but that after December 3 1 it would
assume no obligation to buy gold; it would continue, however, to sell
gold to anyone. A t one stroke, the memoirs said, the International
Monetary Fund became a central bank for central banks. The price of
gold fell sharply, and was about $2.50 an ounce when the International
Monetary Fund decided to put all its gold out for public tender.
A proposal to withdraw the present undertaking to buy gold freely
from foreign governments was offered in the Minority Views on the
Annual Report of the Joint Economic Committee on the January 1962
Economic Report of the President, 87th Congress, 2nd Session. Such a
proposal had been discussed in 1961 by Howard S. Piquet in a study
prepared for the House Foreign Affairs Committee. The Minority
Views, presented by three members of the House of Representatives and
three members of the Senate, contain the proposal that the United States
“ terminate its guarantee to buy gold from foreigners at $ 3 5 an ounce
or at any other predetermined price.” The United States, according to
the Minority proposal, should avoid devaluation of the dollar and,
therefore, should continue to sell gold to foreigners at $ 3 5 an ounce.
A guarantee to buy gold at fixed prices, the Minority Views note,
encourages speculation. If the speculator is wrong and devaluation does
not take place his loss is slight, whereas if devaluation does take place
he collects a profit. Removal of the guarantee would reduce speculation
and, according to the Minority Views, lead to a return flow of gold to
the United States.
89-292 0





The Minority Views do not state that the United States should cease
to buy gold, but merely that it should no longer agree to buy gold in
unlimited amounts at any predetermined price. Unless the United States,
however, actually refused to buy gold at $ 3 5 an ounce, or unless with­
drawal of a guarantee were interpreted as a genuine threat of such
refusal, it is questionable whether speculators would be greatly deterred.
Moreover, if other governments continued to buy gold at the equivalent
° f $ 3 5 an ounce, speculators would still have an outlet for their gold with
little risk to themselves.
A carefully developed proposal, somewhat similar to that presented in
the Minority Views (pages 54 8 -56 1), was offered by Professor Emile
Despres of Stanford University in 1965. He believes that the dollar is
not merely as good as gold but better than gold, and that only because
the United States is willing to buy gold freely at $ 3 5 an ounce is gold
kept as good as the dollar. Despres proposes that the United States
deprive gold of its present unlimited convertibility into dollars, that is,
that it cease to buy gold except on its own terms. This action, he believes,
would cause gold to depreciate and reveal the true strength of the dollar.
He would continue unlimited sales of gold for dollars. His aim would
be to remove the “ tyranny of gold” and build a strong international
monetary system based upon credit. A strengthened dollar-reserve
system, he feels, would result from his proposal.
Despres would establish on a country-by-country basis ceilings on the
amount of gold the United States would be prepared to buy from each
country at $ 3 5 an ounce. A t the same time the United States would
provide countries with firm lines of credit in substitution for their gold
made redundant by the ceilings. Foreigners’ access to dollars would thus
remain unimpaired, since countries selling gold to the United States
would simultaneously draw upon these credits in an agreed ratio to the
sales of gold. In this manner, while a substantial portion of their gold
holdings would no longer be a potential source of dollars, credit would
take the place of this gold. International liquidity would not be reduced.
Professor Gottfried Haberler of Harvard University has suggested
that in the event of a run on our gold reserves, the United States should
pay out gold freely and announce that it will no longer buy gold at
$ 3 5 an ounce, or in fact at any price. The United States should at the
same time declare that if and when the gold is exhausted the dollar would
be allowed to float. It would thus be permitted to seek its own level in
the foreign-exchange market. He believes that the value of gold would
probably depreciate in terms of foreign currencies, and that the dollar
might depreciate in terms of gold and in the foreign-exchange market.
These prospects, he notes, would not be attractive to foreign monetary

Haberler believes that the dollar problem has been allowed to become
needlessly difficult for the United States. He describes the official Amer­
ican attitude as “ frozen into a position which exposes the country, quite
unnecessarily, to the blackmail of foreign dollar holders.” 5 He reasons
that a hint by the United States that it was prepared to undertake the
proposed action regarding gold would place this Government in a posi­
tion to negotiate international monetary reform in accordance with this
country’s real strength.
A view similar to that of Haberler regarding the course the United
States should follow in the event of a run on its gold reserves was set
forth by Emile Despres, Charles P. Kindleberger, and Walter S. Salant
in an article in the London Economist (February 5, 1966). They note
“ The real problem is to build a strong international monetary mechanism
resting on credit, with gold occupying, at most, a subordinate position.”
They state that the United States could by itself bring about this change,
in several ways, namely, by widening the margin around parity at which
it buys and sells gold, reducing the price at which it buys gold, and other­
wise depriving gold of its present unlimited convertibility into dollars.
The resulting system which they visualize would be one based upon the
Refusal by the United States to purchase gold, or willingness to
purchase gold only in limited quantities, would have far-reaching con­
sequences for the international monetary system and the status of gold as
a monetary metal.

The policy of purchasing freely unlimited quantities of gold at $ 3 5 an
ounce has been criticized as supporting an artificial value for gold,
harmful to the dollar, and perpetuating a role for gold in the interna­
tional monetary system not adapted to modern conditions. Were it not
for this country’s maintenance of unlimited convertibility of gold into
dollars, the price of gold would probably decline. The dollar, in strong
world demand, is considered by a number of economists to be basically
more valuable than gold.
Possible Consequences
It has been suggested that the United States should withdraw support
from gold and either refuse to buy gold, or buy gold only in amounts
and on a basis determined by the United States, perhaps at less than $ 3 5
an ounce. Such a policy, insofar as it caused gold to depreciate, would
5 Haberler’s views are set forth in a paper entitled “The International Payments
System,” presented in a Symposium sponsored by the American Enterprise Institute,
Washington, D.C., September 1965.

reveal the underlying strength of the dollar. Dollars, it is said, would be
in even stronger demand than at present for international reserves,
being commonly preferred to gold in view of the depreciation and un­
certain position of gold. Dollar balances would thus serve as the base
for a dollar-reserve system, already in existence to a large extent. (The
less developed countries have for a number of years been reducing their
gold reserves and operating largely on the basis of the U. S. dollar or
the pound sterling. Gold holdings of the Latin American countries have
steadily declined from a total of $1,9 5 5 billion at the end of 19 51 to
$1,0 50 billion at the end of 1965. Foreign-exchange holdings of these
countries, on the other hand, increased over the same period from
$1,0 2 5 billion to $2 ,2 35 billion.) The proposed action, if the results were
as expected, could be a stepping stone to further development of the
international monetary system. The bargaining position of the United
States in international monetary affairs would be strengthened if the
dollar were in a stronger position.
If other countries continued to buy gold, while the United States
refused gold, and their currencies continued to be convertible into
dollars, such countries could be a channel for the conversion of gold
into dollars. So long as any major country with a convertible currency
accepted gold at a price equivalent to $ 3 5 an ounce, gold could readily
be converted into dollars at this present price. The world price for
gold, moreover, would not fall below this level.
The crucial question is what action other countries would take, and
whether they could long continue to accept gold at the present price in
the face of the refusal of the United States to accept gold freely. A
strong world demand for dollars, whether because of a payments surplus
on the part of the United States or because of increased world trade and
the consequent need for more dollar reserves, would result in other
countries with convertible currencies receiving gold that would other­
wise have gone to the United States.
These countries, therefore, might receive large amounts of gold be­
cause of (a) growing world demands for dollars and the fact that their
currencies were a means of obtaining dollars for gold, or (b) lack of
confidence in the price of gold and the desire to convert gold into strong
currencies. They could experience increased demands on their dollar
and other foreign-exchange holdings, gold being offered in payment.
A t the same time, these countries would experience an expansion of
their own currency, which would be paid out to persons wishing cur­
rencies instead of gold. The receipt of gold and resulting loss of foreignexchange reserves could become a problem, because of the possibility
that other countries would close their doors to gold and because of

inflationary consequences of the currency expansion. What would these
countries be likely to do under such circumstances?
If the situation became serious they could restrict the sale of dollars
and other exchange convertible into dollars, or they could refuse to
accept gold, as did Sweden during the First World War. Exchange
restrictions would check the indirect conversion of gold into dollars and
the consequent loss of foreign-exchange reserves, but would not restore
confidence in the price of gold and halt resulting gold offerings. E x ­
change restrictions have a number of well-known difficulties. If refusal
to accept gold became widespread, particularly if a few leading nations
refused gold, any country which held out and continued to accept gold
would probably receive larger amounts, and sooner or later be forced to
refuse gold. In the event of a general refusal by central banks to accept
gold, many countries, including the United States, would find themselves
the owners of large amounts of gold for which no monetary outlet, or a
limited one, existed. The free-market price of gold would decline.
If the United States continued the present policy of buying all gold
offered, but only at a lower price, and would also sell at the lower price,
this would amount to appreciation of the dollar exchange rate, with
repercussions on trade and the balance of payments. The consequences
would depend largely upon whether the new price were fixed or open to
further decline, and upon the actions of other countries regarding their
exchange rates, that is, whether they made similar exchange adjust­
ments. This is not the proposal of those suggesting that the United
States refuse to buy gold, except perhaps at its own discretion.
If the United States reduced its buying price but not its selling price,
whereas other countries with convertible currencies accepted gold at the
equivalent of $ 3 5 an ounce, gold would not be offered to the United
States at the lower price. The situation would be similar to its refusal
to buy gold. Apprehension over the $ 3 5 price could reduce demands for
gold so that little gold would be sold by the United States.
The International Monetary Fund, unless it found some way to refuse
gold, could become a dumping ground for gold— perhaps a useful
instrumentality to spread internationally the loss resulting from the
depreciation of gold. This could be a bit hard on the International
Monetary Fund, until the situation was remedied through provision of
additional resources or revision of Fund functions regarding credit
A s to the likelihood and timing of the above course of events, refusal
by the United States to buy gold would undoubtedly cause central
bankers to reconsider their own policies and the wisdom of accumulating
large gold reserves. They might decide that no change in policy was

called for, at least for the time being. On the other hand, some of them
might follow the lead of the United States and not wait for the above
events to develop and run their course. This country’s action could thus
lead to a similar rejection of gold by other countries. It would, in any
event, tend to weaken the monetary role of gold.
Refusal by the United States to buy gold could bring about a situation
close to the demonetization of gold for much of the world. A flight from
gold internationally could develop and snowball, hastening if not causing
the complete dethronement of gold. (The pattern of exchange rates
would not necessarily be altered by the demonetization of gold, especially
in the case of rates that are realistic.) If a chaotic market for gold
ensued, the price of gold could doubtless be stabilized by the United
States through its buying policy, as conditions might warrant. The
possibility, however, of further reductions in the price of gold would
create uncertainty for central banks wishing to continue to accept gold.
On the other hand, refusal by the United States to buy gold might be
interpreted in some quarters as a sign of weakness. It is possible that
the dollar, rather than gold, would depreciate. Doubts as to whether the
rejection of gold by the United States would stick, and speculation that
gold would survive and stage a monetary comeback, would tend to deter
foreign central banks and to limit gold’s expected depreciation. Demands
for hoarding, especially in disturbed and backward parts of the world,
would not disappear. Gold might have the proverbial nine lives and
retain all or most of its value.
Depreciation of its large gold reserves would reduce the international
liquidity of the United States, with possible effects upon confidence in
the dollar— a further counter to the expected depreciation of gold in
terms of dollars. Such a loss of liquidity would be less if the United
States were to convert part of its gold into other forms of reserve before
taking any action that would depreciate gold. Depreciation of gold
would, similarly, cause a decline in world liquidity. The development of
additional credit arrangements to fill the liquidity void for the United
States and the world generally would be essential.
Refusal by the United States to accept gold, and the resulting need for
new credit arrangements, could accelerate the establishment of a more
effective and broadly based international monetary system. Replacement
of gold in the international monetary system would require multina­
tional administrative machinery to assure competent and reliable policy
management over.the creation of international means of payment. This
machinery now exists to a large extent in the International Monetary
Fund and elsewhere, and could be further developed to meet new re­
quirements. Proposals for a composite reserve unit, C R U , envisage
additional machinery of this type.

Effect on International Monetary System
A major aspect of the question of limitation on purchases of gold by
the United States obviously has to do with the role of gold in the present
international monetary system. Gold is currently serving a valuable
function as a common denominator among currencies, along with that
of providing a large amount of international liquidity. It is universally
accepted without question in payments. While these functions could be
replaced by an IM F unit and the further development of credit devices,
the world may not be ready for such advanced and inherently rational
procedures. Disagreement and inadequate action could result, with the
monetary system the loser. Furthermore, opponents of the suggested
move can point out that the range of possible depreciation of gold is less
than that of credit money, which can theoretically depreciate to zero.
Against gold are the facts that the purchasing power of gold is un­
stable, that the cost of increasing -the supply of gold is in a sense a waste­
ful expenditure, and particularly that the relatively fixed amount and
slow growth of the supply of gold is the source of problems for the
international monetary system. The commitment to maintain parity
with gold, coupled with its limited and relatively inflexible supply, can
have deflationary consequences and cause a slowdown of economic
growth. Parity commitments require economic adjustments that are
often painful, and in many cases otherwise unnecessary. This is the main
case against gold. Proposals to raise the price of gold flow out of this
situation of limited supply and poor adaptability to growing needs for
Under present monetary practices, wherein pressures to maintain gold
parity fall particularly upon this country, it is free sales rather than
purchases of gold that constitute a special problem for the United States.
Hence my proposal to withdraw unlimited convertibility of the dollar
into gold. Control over sales of gold would not require a departure from
gold parity, as noted. On the other hand, refusal by the United States
to purchase gold could destroy the monetary role of gold. While such
demonetization would remove certain difficulties, it would have farreaching consequences.
The probable consequences would be disruptive of international finan­
cial conditions; the economic repercussions would doubtless be exten­
sive ; the psychological reaction would be considerable, as would the po­
litical. The United States would be subjected to severe criticism at
home and abroad, especially in countries with large holdings of gold
and in gold-producing countries. These disturbances, not necessarily
unmanageable, would be of unknown intensity, magnitude, and dur­

The proposed move would be a divisive factor in the Western financial
cooperation that has evolved in recent years. Even though cooperation
in planning international monetary reform and in other matters leaves
much to be desired, central banks have learned that a considerable
amount of cooperation is essential— another case where they must all
hang together or they will hang separately. The fact that the proposal
would not contribute to further cooperation, however, does not neces­
sarily mean that the United States should fail to take such action if and
when conditions indicate its desirability.
These consequences reveal the need for thorough study and prepara­
tion if the United States were to refuse to buy gold, or to limit its
convertibility into dollars. Matters requiring analysis include the diffi­
culties inherent in the present role of gold and possible alternative
solutions, long-run objectives including transitional measures, and such
things as guidelines regarding prices to be paid and amounts of gold,
if any, to be purchased. The United States might wish, for example, to
purchase at present prices existing gold holdings of the developing
nations, so as to avoid causing them loss. Decisions would need to be
reached as to whether existing gold holdings of other friendly nations
should receive some form of special consideration, and if so what kind
of treatment. In view of the importance of sterling, gold holdings of the
United Kingdom might warrant special treatment. One of the major
questions to be studied is the role of gold (perhaps eventually none) in
an adequately revised international monetary system and an expanded
International Monetary Fund. There is also the question of what action
the Fund should be prepared to take in the immediate sense, apart from
a possible fundamental change in its structure and functions. These
questions all need thorough exploration.
If the view is accepted that gold is on the way out as a monetary metal,
the United States may discover it has a bear by the tail. It can hold onto
a large stock of a metal with a prospective loss of value, and also face a
reduction in reserves. If it should withdraw free convertibility of gold
into dollars at $ 3 5 an ounce, it probably would precipitate such decline.
This paper is concerned primarily with the reverse problem, namely,
the inadvisability on the part of the United States of maintaining un­
limited convertibility of dollars into gold. Control over sales of gold
could be undertaken immediately and without the disturbances that
would accompany limitations on the purchase of gold. Such limitations on
the purchase of gold could be considered for subsequent action, depend­
ing particularly upon developments in international monetary reform,
and the possible need for independent action by the United States. To ap­
praise and determine how to deal with the gold problem and its long-

range aspects is part of the broad question of international monetary
reform. The world in this connection should remember that gold is not
an end in itself.

There do not appear to be any legal requirements of the U. S. Gov­
ernment or commitments as a member of the International Monetary
Fund which would prevent the President from putting into force the
proposal made in this paper that the United States sell gold only at its
own discretion.
United States Legal Provisions
The Executive has authority under the Gold Reserve Act of 1934 to
discontinue the free purchase and sale of gold, a privilege now accorded
only to foreign governments and under regulations determined by the
Treasury. The President’s authority to change the gold content of the
dollar terminated June 30, 1943, but his discretionary authority over
the purchase and sale of gold did not terminate.
The President, therefore, can sell gold entirely on a discretionary
basis, as proposed herein, without additional legislation. Similarly, the
President has authority to refuse to buy gold, or to buy gold only in
amounts and from sellers determined by this Government. Since under
present laws the United States cannot buy or sell gold at a price other
than $ 3 5 an ounce, apart from minor charges, proposals that involve
departure from the present official price of gold, such as a gradual reduc­
tion of the price, or a gradual increase in price, would require new
authority from Congress.
Obligations as a Member of IM F
The Articles of Agreement of the International Monetary Fund do
not require members to buy or sell gold freely, although under certain
conditions the Fund may require a member to buy gold from the Fund
itself. Sales of gold by the United States only at its own discretion, or
refusal by the United States to buy gold, would not contravene the Fund’s
Members are required to declare to the Fund the par value of their
currencies in terms either of gold or the U. S. dollar of the present gold
content (Article IV , Section 1 ) . Members must maintain their ex­
change rates within one per cent of this par (Article IV , Section 3)
and do so without exchange restrictions on current transactions, unless
such restrictions are specifically authorized by the Fund (Article V III,
Section 2 ). A change in the par value, that is in the price of gold, must be

only “ to correct a fundamental disequilibrium” (Article IV , Section 5 a ),
and a change of more than ten per cent requires Fund approval. Pro­
posals involving small changes in the official price of gold, therefore,
do not require Fund concurrence, unless the accumulation of such
changes reaches ten per cent of the initial par value.
The Articles provide that the obligation to maintain exchange rates
within the prescribed limits is satisfied if the member's monetary
authorities “ freely buy and sell gold within the limits prescribed by the
Fund” (Article IV , Section 4 b). The United States has notified the
Fund that it is meeting this obligation by buying and selling gold
freely. This method of meeting the obligation is, however, optional
with the United States. The United States has the right to maintain
exchange rates within the limits through exchange operations, as do
other countries, and is not required to buy or sell gold freely in order
to fulfill this obligation.
The Fund has the right to buy a member's currency with gold if the
Fund desires to replenish its holdings of such currency (Article V II,
Section 2 ii). The United States, therefore, would be required to accept
gold from the Fund if the Fund felt it needed more dollars and chose
to use gold in acquiring the dollars. The Fund must itself accept gold
from its members (Article V , Section 2 and Section 7 ), and conceiva­
bly could require the United States to buy some of this gold. The
United States, however, has an important voice in Fund actions.
Another provision in the Articles of Agreement requires a member
to redeem balances of its currency held by another member when asked
to by the other member (Article V III, Section 4 ). The country re­
deeming its currency can do so either by paying the other member in
gold or in the currency of such other member. This means that if the
United States desired to convert its holdings of a foreign currency into
dollars, the foreign central bank would have the option of paying either
in gold or dollars. The United States, of course, is not required to
convert such currency into dollars, and could sell the currency for some
other currency, unless the foreign country restricted such transfer.



Mr. B a r r e t t . Mr. Fino.
Mr. F in o . Thank you, Mr. Chairman.
Dr. Piquet, with regard to your statement that no legislation would
be required to leave uncertain the buying price of gold at $35 an ounce,
would you please have the Library of Congress prepare an analysis of
the need or lack of need for legislation in order to accomplish-----Mr. P iq u e t. That is the guarantee ?
Mr. F in o . Yes.
Mr. P iq u e t. Yes, sir.
Mr. F in o . Just one other observation. On January 18, a Mr. Austin
Barker, an economist and also a partner in the brokerage firm of Hornblower & Weeks, in an article, expressed opposition to removal of the
gold cover.
Mr. P iq u e t. To whom did you refer?
Mr. F in o . C.— for Charles, I suppose—Austin Barker, an economist
and a partner in Homblower & Weeks, in his article, on page 3, he
says, speaking about this business of balance of payments, and I am
quoting Mr. Barker:
In itself it will do nothing to help the payments deficit and may even
cause harm through a further loss in confidence, because its removal is consid­
ered a sign of weakness, nor is the removal needed to assure the world that we
will maintain the price of gold at $35 an ounce, because we can do that under the
present gold cover system.

Mr. P iq u e t. Of course, I disagree with the statement for the rea­
sons I have already given. In the last sentence he says that we will
maintain the price of gold at $35 an ounce. What I have been talking
about is maintaining the value of the dollar in terms of gold. It is just
the opposite from maintaining the price of gold. Even the President
made the same mistake in his speech on the state of the Union on
January 17. It was undoubtedly a slip of the tongue.
F a r from being a sign of weakness I think it would be a sign of weak­
ness if we fail to remove the 25-percent gold cover against Federal Re­
serve notes. We have the gold buried at Fort Knox, guarded by troops,
and not touchable by anybody.
The Daughters of the American Revolution, when Mr. Truman was
President of the United States, introduced a resolution to appoint a
committee to go down there and take a look at the gold. They didn’t
seem to trust the administration and wanted to make sure it was there.
Gold has come to be a mystical thing. It is an inert metal. I f it isn’t
going to be used for international redemption of the dollar, why are
we holding it? It certainly does not limit the total supply of money
and credit in this country. The connection between gold and credit
money was abolished long ago. The bulk of all transactions in this
country are carried on neither in gold nor in paper money, but in bank
credit in the form of checks. There is a gold “ mystique.” The gold “ in
back of” the dollar is supposed to do something, but we are not quite
sure what.
Mr. F in o . You indicated from your testimony here this morning,
that you wern’t too concerned with the imbalance of payments. You
expressed this fear, or concern, about the imbalance of balance pay­
ments deficit.
Mr. P iq u e t. I didn’t go quite that far.
Mr. F in o . That is the impression I got.



Mr. P iq u e t. What I said was, the ailment should not be confused
with its symptoms. The symptoms are evidenced in the balance-of-pay­
ments deficit figures. The principal ailment is fear M an impending
loss of confidence in the dollar.
I must disagree with you, Dr. Danielian, much as I do not like to do
so, but as far as I know, the Commerce Department has not changed
its basic method of computing the liquidity balance-of-payments
deficit. I f you take the Bernstein formula, of computing the deficit on
the “ official settlements” basis we actually had a positive balance of $200
million in 1966. There is a lot to be said in criticism of the figures, but
I don’t think that the Commerce Department has changed its figures
in any way that would indicate that the balance-of-payments deficit
was still in the neighborhood of $8 billion in 1965 and 1966.
Mr. D a n ie lia n . I didn’t say that the figures were changed. The ac­
counts to which these transactions have been charged have been
For instance, if you converted a 364-day paper into a 366-day period,
1 day more than a year, instead of an outflow it becomes an inflow, and
then there were prepayment of debts and one-term transactions and
so on, and the result is the figures look good at the end of the year, but
in terms of basic movement of resources we have been running a bal­
ance-of-payments deficit of approximately $3 to $4 billion, consist­
ently, since 1958, and I have predicted it year after year, without any
great deal of mathematical calculation, simply because the private
sector earnings have a short fall of that much m comparison with Gov­
ernment expenditures, and that short fall has been between $3 and $4
billion, year after year.
Mr. F in o . Dr. Piquet, your testimony here hinges on confidence on
the dollar. You make a big point, a strong point-----Mr. P iq u e t. That is the problem, seems to me.
Mr. Fino. N o w , don’t you think that there would be less confidence
in the dollar if we didn’t have any gold in this country?
Mr. P iq u e t. N o, I d on ’t.
Mr. Fino. You don’t think s o ?

Mr. P iq u e t. I think that dollars are accepted by other countries for
the same reason that you and I accept them—because we have confi­
dence that we can spend them for goods and services.
Mr. Fino. You have confidence in your Government. You have con­
fidence in the United States, the integrity of the United States.
Mr. P iq u e t. I am not in the slightest conscious there is any gold in
Fort Knox whenever I spend, or acquire, a dollar. I accept a dollar in
payment for services, or as part of my salary from Government, be­
cause I can spend it. The important potential eroding here is a decline
in its purchasing power—inflation.
Mr. Fino. Let me ask you this: would the foreigner or foreign coun­
try have the same confidence, if they knew we had no gold in this
country ?
Mr. P iq u e t. Most of the foreigners who hold dollars cannot convert
their dollars into gold any more than you and I can. Only central banks
and foreign governments can convert dollars into gold on demand, and
the dollars so held presently amount to about $14 billion.
Mr. Fino. Doesn’t that give that country whose central bank is
holding the gold, and the people in that country greater confidence in
their monetary system?



Mr. P iqu et . I think confidence is something that cannot be meas­
ured by statistics. You have confidence in the behavior of a govern­
ment; confidence in the integrity of a currency, because the govern­
ment behaves in such a way, with respect to taxation, budget deficits,
et cetera, that it inspires confidence that it is not going to impair the
purchasing power of its money.
Economic history following World War I was marked by successive
devaluations of currencies. We should keep in mind that the only
major country in modern times that has not been forced to devalue its
currency has been the United States. We devalued in 1933, but we
weren’t forced to so. We are also the only country that has maintained
convertibility of its currency into gold with respect to central banks
and foreign governments.
France has devalued a number of times since the war. So has the
United Kingdom and Germany.
Mr. B arrett . The time o f the gentleman has expired. Mr. Reuss.
Mr. R euss. I am very happy to hear the endorsement of both of you
gentlemen to the bill before us to remove the gold cover, and also your
additional statements.
Dr. Piquet, let me address myself to the point you raise, that those
who find it, or think they find it, profitable to speculate against the
dollar by creating gold flurries from time to time, ought to be warned
that in the end they may be playing a losing game.
Mr. P iquet . Tnat is what I intend to accomplish by a;bandonment
of the guarantee to purchase gold at $35 per ounce.
Mr. R euss . N ow , let me make a statement here, and I know there is
a quorum of the committee present.
I assert that the following is true, and if I state something which
any member of this committee thinks is not true, I would yield to him
so he can set the record straight.
I think the following is true: I don’t believe there is a member of the
House Committee on Banking and Currency who is prepared now or
in the future to vote to increase the price of gold above its present $35
an ounce; and I further believe that there are a considerable number of
members of the House Banking and Currency Committee who would
view with equanimity a decrease in the price of gold at some future
time, when it made international sense to sit still for such a decrease.
I now invite any of my colleagues who disagree with this statement of
mine to indicate the disagreement.
Mr. J oh nson . I didn’t understand the second premise about
Mr. R euss. Let me make it clear that while I believe from my con­
versations that it is the sense of everyone here that the Congress of the
United States will not increase the official price of gold, I also believe
that there are many Members who would not take it amiss if at some
future time the official price of gold be decreased, who would not view
that with alarm.
Now, I don’t believe that there is any Member here who disagrees
with the proposition I have just put. And if that is so, as it seems to he
so, Dr. Piquet, haven’t we, in a sense at least, created the kind of inter­



national environment which you think may signal the speculators that
they may not have everything their own way from here to eternity.
Mr. P iq u e t. I think so. You may remember that Prof. Fritz Machlup, of Princeton, a few years ago, proposed that the United States
announce in advance that it will lower the price of gold in successive
stages. The important thing is to keep the speculators guessing as to
whether they can get dollars back for their gold holdings.
The assurance, if it is recognized as an assurance, that the United
States is not going to raise the price of gold, goes part way in this
direction. I would nke to go the full way.
Mr. M oorh ea d . W ill the gentleman yield ?
Mr. R eu ss. I willyield to Mr. Moorhead.
Mr. M oorh ead . Just to clarify, I think maybe you changed the
second proposition in the second time around. Certainly, I would go
along with you on the dropping of the guarantee. I don’t know that I
am prepared to agree with you, if you meant an official lowering of the
price of the gold.
Mr. R eu ss. No. I meant to keep the proposition very general, so as
to not pin anyone down.
Mr. M oorh ea d . Then I want to associate myself with your remarks.
Mr. L lo y d . Would the gentleman yield ?
Mr. R eu ss. In a second. The gentleman from Pennsylvania, Mr.
Moorhead, has given credibility to the statement I have made. He
has come out and said that as far as he is concerned in the future
he would not be perturbed at some change on the down side of the
price of gold.
I yield to gentleman from Utah.
Mr. L lo y d . I would like to express my general agreement. Dr.
Piquet has said, in the present situation the speculators do not con­
sider themselves to be speculators; but under the proposition sug­
gested by Mr. Reuss they would indeed have to recognize that they
might become speculators. With that proposition, I am in agreement.
Mr. R euss. Let me try another question. I may have to come back
for the answer. I will ask this of Dr. Danielian. You have said, Dr.
Danielian, and on this Dr. Piquet is in agreement with you, that by
and large the big balance-of-payments deficit that we incurred in
1967 was due not to the private account of trade, tourism, investment,
remittances, but was due to the governmental foreign spending ac­
count, which is very largely military. This is a fact; is it not?
Mr. D a n ie lia n . Mr. Reuss, the Defense Department issued a study
on January 4, and on page 5, there is a table on military expenditures.
I would like the record to produce this, if it is not in the record
Mr. R euss. I ask now that the January 4, 1968, Defense Depart­
ment summary be included in the record at this point.
Can you make it available, Doctor ?
Mr. D a n ie lia n . Yes, sir.
Mr. B a r r e t t . That will be done, without objection, and so ordered.



(The document referred to follows:)
[News release, Office of Assistant Secretary of Defense for Public Affairs, Jan. 4 ,19 6 8]
S t a t e m e n t S u m m a r i z i n g A c t io n s b y t h e D e p a r t m e n t o f D e f e n s e S e r v in g
To R e d u c e t h e N e t F o r e i g n E x c h a n g e C o s t s o f D e f e n s e A c t i v i t i e s D u r i n g
t h e P e r io d FY1961-FY1967

The Department of Defense has long recognized that, due to the size of U.S.
defense expenditures entering the international balance of payments (IBP), it
has a major responsibility to reduce the foreign exchange costs associated
with defense activities to the minimum consistent with the requirements of
national security. In recent years, this continuing concern has been expressed
in a wide range of Department of Defense programs serving to hold down and,
where feasible, to reduce defense IBP costs and to increase receipts. There
programs have been re-emphasized and expanded during the past two years
as the intensification of hostilities in Southeast Asia (SEA) sharply raised
foreign exchange costs. As part of this renewed effort, the Secretary of De­
fense in April 1967 re-emphasized the need to continue concentrated attention
on the Department of Defense balance of payments program, and outlined more
than 20 separate actions or studies relating to various facets of the program.
The primary function of the Department of Defense is to provide for the
security of the United States. Therefore, balance of payments considerations
cannot be overriding, or indeed, examined independent of requirements stem­
ming from our national security objectives, including fulfillment of our com­
mitments to help provide for the security of other nations. The Department
of Defense balance of payments program has been developed and is being car­
ried out under two general guidelines: first, essential combat capability must
be maintained and second, expenditure reductions must be achieved without
creating undue hardship for U.S. Military and civilian personnel and their
The following table summarizes balance of payments data relating to U.S.
defense actvities:
YEARS 1961-67»2
[In billions of dollars]







U.S. forces and their support..........................................
Military assistance.............................................................
Other (AEC, etc.)................................................................









- .3

- .9

- 1 .4

- 1 .2

- 1 .3

- 1 .2

- 1 .8

Net adverse balance...................................................................
Increase in SEA related expenses over fiscal year 1961 .









1The data reflected in this table are on a gross basis. They do not reflect so-called feedback effects; e.g., as U.S. military
expenditures increase in a foreign country, that country will in turn be in a position through these increased earnings to
increase its imports from the United States directly or through third countries Expenditure data also include expenditures
in foreign currencies purchased from U.S. Treasury. In fiscal year 1967, these expenditures were approximately $200,000,000, of which $26,000,000 were in excess or near-excess currencies.
2 Details may not add due to rounding.
3 Less than $50,000,000.

Between FY 1961 and FY 1965, the net adverse balance on the defense account
was reduced from about $2.8 billion to less than $1.5 billion. This reduction was
achieved through (1) a substantial rise in receipts from sales of U.S. military
goods and services to foreign countries, ( 2 ) a reduction in overseas uranium
purchases of more than $200 million and (3) a successful effort to hold down
Department of Defense expenditures in the face of (a) rapidly increasing



foreign wages and prices, (b) increases in pay and allowances for U.S. military
personnel (16% between FY 1961 and FY 1965) and (c) considering SEA related
increases, a net increase in U.S. military personnel deployed in foreign countries.
Between 1961 and 1966 overall wages in France rose by 41%, in Germany
by 52% and in Japan by 61%; during the same period wages increased in the
U.S. by only 20%. Similarly, the cost of living rose in France by 19%, in Ger­
many by 16% and in Japan by 34% from 1961 to 1966—but in the U.S. by only
9%. Average annual wages—including social security benefits under local law
and other related costs—paid foreign nationals on Department of Defense rolls
also have increased markedly during the last six years. For example, from FY
1961 through FY 1966 average foreign national wage costs to the Department
of Defense increased in France, Germany and Japan by approximately 50%.
While relative increases in prices and wages can have an eventual favorable
impact on the U.S. competitive position in foreign markets and hence on the
U.S. balance of payments position, for the Department of Defense they simply
increase the cost of maintaining our defense posture overseas. (In Western
Europe alone, it is conservatively estimated that such price and wage increases
serve to increase Department of Defense foreign exchange expenditures by over
$40 million annually.)
In FY 1966 and FY 1967, as a result almost entirely of the U.S. effort in SEA,
Department of Defense expenditures rose markedly. Between end FY 1965 and
end FY 1967, about 452,000 additional U.S. military personnel were deployed in
SEA countries. During the same period total military strength in all foreign
countries, including SEA, increased by about 434,000. Hence, in areas outside
of SEA, there was a net reduction of approximately 18,000 military personnel.
Concurrent with the substantial increase in U.S. military strength in SEA,
there was a substantial increase in logistical support requirements for military
operations in South Vietnam. The extensive construction program included deep
water ports, logistic depots and airfields. The supplies and equipment needed
in Vietnam include more than one million different items. This reorientation
and tremendous expansion of effort in SEA is shown in the following table which
highlights shifts in military IBP expenditures by major geographic area:
[In billions of dollars]
Fiscal year

1961............... .......................................................................
1962............... .......................................................................
1963............... .......................................................................
1964............... .......................................................................
1965............... .......................................................................
1966............... .......................................................................
1967............... .......................................................................





Worldwide 2






1Japan, Philippine Islands, Republic of China. Ryukyu Islands, South Vietnam, and Thailand. These data should not
be equated with increases in SEA-related expenditures over 1961, shown in the table on p. 2, or with "costs of the war”
since there have been increased expenditures in other geographic areas resulting either directly or indirectly from the
Vietnam conflict. Other adjustments also are required to derive estimated SEA “ war costs.”
2 Details may not add due to rounding. Although there was a marked net increase in Department of Defense IBP ex­
penditures in fiscal year 1966 and fiscal year 1967, this net increase would have been significantly higher had it not been
.or the Department of Defense balance-of-payments policies already in effect at the time hostilities were intensified an d
•he new measures which have been undertaken since that time.

The Department of Defense balance of payments program relating to reduc­
tions in foreign exchange expenditures by U.S. personnel has three main focal
points; first, a strenuous effort to review requirements for U.S. military and
civilian personnel in foreign countries, with a view to reducing these require­
ments where feasible; second, continuing stress on voluntary actions by individ­
uals to reduce personal spending on the local economy; and third, efforts to
hold down IBP expenditures related to nonappropriated fund activities.
a. Military Strength Levels in Foreign Countries
Special procedures governing U.S. military strength in foreign countries have
been developed during the past several years. These procedures, which supple­
ment normal manpower requirements reviews, reflect the continuing Department



of Defense effort to assure the assignment and continued deployment of military
personnel in foreign countries at the minimum levels necessary to meet military
requirements. Under these procedures, an overall end fiscal year ceiling on
military strength in foreign countries is established for each military depart­
ment. In certain cases there are additional subsidiary country and/or area
Since 1963, although there has been an overall net increase in U.S. military
strength in foreign countries, there also have been a substantial number of
actions which served to reduce such requirements for military personnel without
detriment to U.S. national security objectives and with beneficial balance of
payments effects. Some of these actions are as follows: In FY 1964, three U.S.
air defense units in Spain were phased out; SAC Reflex B-47 operations were
consolidated in Europe (and later the B-47’s were redeployed from Europe)
and U.S. personnel requirements in U.S. military headquarters in foreign coun­
tries were reduced by 15% below end FY 1963 levels. (These actions served to
reduce military strength requirements in foreign countries by about 6,500.)
In FY 1965, the Army’s Line of Communication (LOC) in France was reorga­
nized and three U.S. interceptor squadrons and a C-124 transport squadron
were withdrawn from Japan to the U.S. (On completion of these actions, mili­
tary strength requirements in foreign countries had been reduced by more than
7,000 spaces.) In FY 1966 and FY 1967, over 20 overseas activities were con­
solidated, reduced or discontinued with a savings of about 8,000 military spaces.
In FY 1967, also, there was a gross reduction in U.S. military manpower re­
quirements in Europe of about 18,000 U.S. military and civilian personnel re­
sulting from the U.S. relocation from France. These reductions stemmed in part
from special Department of Defense manpower revalidation procedures asso­
ciated with the relocation.
Certain of the earlier actions outlined above, and others, served to reduce
U.S. military strength in Western Europe by approximately 51,000 between
March 1962 (the peak of the Berlin Buildup) and March 1965. Between March
1965 and March 1967, there was a further net reduction of approximately 16,000
U.S. military personnel in Western Europe.,
Expenditures J>yIndividuals
A continuing effort is made by the Department of Defense to encourage partici­
pation by its personnel stationed in foreign countries in voluntary programs
designed to channel available disposable income back to the U.S. These programs
were initiated by the Department of Defense early in 1961. As applied to in­
dividuals, these programs emphasize and encourage voluntary actions to reduce
spending on the local economy, to increase use of payroll allotments and other
voluntary savings programs and to increase spending in U.S. controlled facilities,
including use of U.S. operated recreation areas.
In 1966 and 1967, existing programs relating to voluntary reductions in per­
sonal spending by Department of Defense personnel stationed in foreign countries
were intensified and new programs were initiated. Disbursement procedures
were modified to make it easier for servicemen to leave their pay “on the books.”
Regulations were amended to permit servicemen to increase the size of their
allotments sent home. In addition, the Uniformed Services Savings Deposit
Program was enacted. The law and accompanying Executive Order revitalized
the old Soldiers, Sailors and Airmen’s Deposit Program. Participation in the
program is limited to military personnel on active duty in a foreign area.
Amounts deposited under the program earn interest at the rate of 10% per
annum, compounded quarterly and interest is paid on deposits up to a maximum
of $10,000 while the depositor is on a duty assignment for more than 90 days
outside the U.S. or its possessions or Puerto Rico. Any part of unallotted current
pay and allowance (in multiples of $5), including a re-enlistment bonus paid
in a foreign country, may be deposited.
Against the background of the actions outlined above, the Department of
Defense undertook in August 1966 a concerted effort to encourage greater partici­
pation by all its members in foreign countries in the voluntary balance of pay­
ments program. The Directorate for Armed Forces Information and Education
is producing and distributing materials supporting these personal savings pro­
grams, including Bulletins for Commanders, a special Fact Sheet for Service­
men, a special film and radio and television and press material. In November
1966, 277,000 copies of a special Fact Sheet entitled “Your Personal Savings
Program” were issued. Later in the year about 300 copies of a 10 minute film
entitled “Gold and You” were distributed for showing to Department of De89-292—6S------14



fense personnel. This film explains the U.S. balance of payments program, out­
lines ways and means of achieving reductions in IBP spending by U.S. personnel,
and emphasizes the revitalized Uniformed Services Savings Deposit Program
as an attractive avenue of saving. In this respect, as of September 30, 1967,
there was $183.5 million in gross deposits in the program. ( It is recognized that
these deposits—as in the case of savings associated with similar programs—
cannot be equated directly with equivalent net IBP savings since some portion
of the new deposits are made in place of other forms of savings or expenditures
which would not enter the international balance of payments.)
Currently, the Office of the Secretary of Defense and the military departments
are taking additional steps to provide more comprehensive orientation on the
U.S. IBP problem to Department of Defense personnel prior to their assignment
In South Vietnam, the efforts to encourage voluntary reductions in personal
spending serve also as a significant part of the overall effort to reduce inflation­
ary pressures in the local economy. Additional measures in South Vietnam in­
clude a special piaster budget for spending by U.S. agencies in that country, the
use of military payment certificates and a prohibition on the use of regular
American currency in the country as part of the effort to eliminate unauthorized
currency transactions. In this respect, the rest and recuperation (R&R) program
recently established in Hawaii for military personnel serving in South Vietnam
also serves to hold down the foreign exchange cost resulting from R&R leaves
outside U.S. dollar areas. On the basis of an average expenditure of about $265
per man on R&R in foreign countries, use of Hawaii as an R&R site is estimated
to result in foreign exchange savings of about $20-$25 million in FY 1968.
c. Nonappropriated Fund Activities
It is the policy of the Department of Defense to promote the sale of U.S. items
in overseas nonappropriated fund activities. Military exchanges and other non­
appropriated fund activities in foreign countries have been directed to take
whatever steps are possible, within the limits of sound business practice, to stock
merchandise of U.S. origin to the greatest practicable extent. At the same time,
it is recognized that there is a demand for foreign merchandise by U.S. personnel
stationed in foreign countries and that a more favorable effect on the U.S. bal­
ance of payments will result if such goods are purchased through U.S.-operated
* onappropriated fund resale activities than procured directly on the local econ­
omy or from other foreign outlets. Accordingly, nonappropriated fund resale
activities in foreign countries are authorized to procure for resale foreign-made
goods available in the local market, subject to certain restrictions. Among these
restrictions is the requirement that the price of foreign items sold in overseas
exchanges and other retail outlets must be at least as high a the selling price
prevailing on the local economy. This pricing policy in effect permits a lower
markup and more attractive prices on U.S. goods because of the additional profit
from sales of foreign items, thus stimulating demand for U.S. products.
The Department of Defense also has expanded the use of catalogues to empha­
size the availability of U.S. merchandise. In the fall of 1966, the Navy Ship
Store Office distributed 25,000 U.S. commercial catalogues specially printed for
the Navy to all overseas exchanges and to some 50 ships located outside the U.S.
The Army and Air Force Exchange System also has established a “mail a gift”
service for U.S.-made items which can be delivered in the U.S. In July 1967, the
Military Departments were requested to review the sale of foreign merchandise
directly or through concessionaires, by the various clubs, messes and sundry
funds and curtail such sales by eliminating items, restoring to the military ex­
changes the responsibility for the sale of those items normally sold through that
channel and by minimizing the presence of display type concessionaires.
In July 1967, new procedures were approved governing overseas exchange pro­
curements based on a percentage of foreign merchandise procurement expendi­
tures to total exchange sales, including Vietnam—27y2% for July-December 1967
and 25% for January-June 1968—and a concurrent re-emphasis on U.S. mer­
chandise sales. This action was designed to halt and reverse the increase in the
proportion of foreign procurement expenditures to total sales experienced in the
July-December 1966 period in SEA and concurrently, to increase emphasis on
better stockage of U.S. merchandise and to assure the highest priority for pur­
chase, promotion and sale of U.S. manufactured items. This program is being
monitored closely in order to assure that there is no shift by Department of
Defense personnel from purchasing in the exchanges to purchasing foreign items
on the local economy. Early in August 1967, the Military Departments also were



requested to conduct a thorough review of items stocked for resale in exchanges
to ensure in-stock positions of U.S. manufactured goods in demand and to sub­
stitute comparable U.S. manufactured items for foreign goods wherever feasible.
This continuing stress on foreign exchange economies in the nonappropriated
fund area rests on a base of actions taken during the FY 1961-FY 1966 period.
In FY 1960, the overseas military exchanges spent about $150 million for the
purchase of foreign merchandise and total exchange sales were slightly less than
$500 million. In FY 1966, expenditures for foreign merchandise were slightly
less than the FY 1960 level, but total exchange sales had risen to slightly more
than $700 million, or a $200 million increase over FY 1960. The nonappropriated
fund activities have provided, and provide today, perhaps the single most sig­
nificant avenue through which U.S. military and civilian personnel and their
dependents in foreign countries “return” dollars to the United States.

The Department of Defense has made strenuous efforts to hold employment of
foreign nationals to minimum essential levels. Major emphasis on reducing em­
ployment of foreign nationals was initiated in July 1963 with some actions to
be effective by end FY 1964 and -additional actions scheduled by end FY 1965.
The results of the FY 1964-1965 program are reflected in the following table,
which also reflects FY 1966-1967 SEA related increases:
Fiscal year


Foreign national strength
(Mar. 31 data)

D0D IBP expendi­
tures (in millions)



Between FY 1963 and FY 1965, there was an overall net reduction of close to
42,000 foreign nationals employed on Department of Defense rolls and a con­
current decrease in IBP expenditures for foreign nationals of about $30 million,
in spite of some upward pressure in this area already being experienced as a
result of the conflict in SEA. (During this period Department of Defense U.S.
civilian strength in foreign countries remained relatively stable.) But the
savings shown do not fully reflect the actions taken, in as much as foreign na­
tional wage costs were steadily rising during the period. I f the FY 1963-1965
reductions had not been made, and if SEA foreign national employment increases
had been added to the FY 1963 employment level, total foreign national expendi­
tures in FY 1966 could have been well above $500 million, and in FY 1967 well
above $600 million, instead of at the levels reported.
The increase in foreign national employment during the last two fiscal years
is attributable almost entirely to SEA requirements. From March 1965 to
March 1967, foreign national employment in Vietnam alone increased by about
47,000, while for the same period the number o f foreign nationals in Western
Europe declined by an additional 4,000. (Between March 1961 and March 1967,
there was a net reduction of approximately 28,000 foreign nationals in Western

Department of Defense policies place primary emphasis on use of U.S. mate­
rials and supplies in support of U.S. defense activities. Efforts to restrain IBP
expenditures for materials, supplies and equipment can be related initially to a
Presidential directive in November 1960 calling for reductions in Department
of Defense procurement abroad during OY1961.
Beginning in January 1961, Department of Defense purchases (excluding
Military Assistance Program (MAP), nonappropriated fund procurements and
POL) normally were “ returned” to the U.S. when costs of U.S. supplies and
services (including transportation and handling) for use outside the U.S. did



not exceed the cost of foreign supplies and services by more than 25%. In
mid-1962 the standard 25% differential was increased to 50%, and on a case-bycase basis could exceed 50%. These policies, which are continually re-emphasized,
remain in effect today. Hence, in cases where the U.S. versus foreign procure­
ment source is to be determined on price differential grounds, a 50% premium
in favor of U.S. end products or services is acceptable automatically and cases
over $10,000 where the price differential is over 50% continue to be forwarded
to the Deputy Secretary or the Secretary of Defense for procurement source
determination. From CY 1961 through FY 1967, about $340 million in procure­
ments had been diverted from foreign products to U.S. products or services
under this program, at an additional budgetary cost of about $75 million, or
about 22%.
Similarly, for Department of Defense procurements of goods and services for
use in the U.S., case-by-case review procedures using the 50% differential as
a “bench mark” were initiated in July 1962. The 50% differential was subse­
quently formalized as a part of Department of Defense procurement regulations
with a clear statement that this policy would be kept in force only as long as is
required by the U.S. balance of payments situation. From FY 1963 through FY
1967, based only on cases where foreign source bids were received, approxi­
mately $13 million in procurements which normally would have been foreign
were returned to U.S. sources at an additional budgetary cost of approximately
$4 million, or about 31%.
With respect to purchases of POL, in FY 1967 the Department of Defense
returned to the U.S. somewhat over $100 million of the approximately $570
million which normally would have been earmarked for overseas procurement;
thus, about 20% of Department of Defense overseas procurement requirements
in FY 1967 were purchased in the U.S. Additional returns have been determined
to be infeasible, principally on economic grounds, e.g., the additional budgetary
cost involved would greatly exceed any benefits in foreign exchange savings.
Emphasis on reducing Department of Defense expenditures overseas for
materials, supplies and services is continuing. The Secretary of Defense in
July 1967 approved a recommendation to establish as a FY 1968 objective a
reduction in IBP expenditures for subsistence in foreign countries below FY
1967 expenditures, which were about $100 million, under specific guidelines.
Similarly, in mid-July 1967, the Deputy Secretary of Defense confirmed the
use of more stringent criteria governing the selection of foreign research and
development projects. The Director, Defense Research and Engineering also
has directed that a semiannual review of all foreign projects be made to ensure
full compliance with these criteria.

Department of Defense efforts to reduce expenditures relating to the construc­
tion and operation o f facilities in foreign countries have two principal focal
points. First, the Department of Defense has attempted to operate required facili­
ties at minimum costs under ground rules which in part require that maintenance
and repair of real property be conducted at levels sufficient only to ensure con­
tinuity of operations and to preclude uneconomical costs due to excessive
deterioration. As part of this effort, there are continuous reviews to seek out
areas where base closures or consolidation of activities can be achieved without
detriment to national security objectives and with savings in budgetary and
IBP costs. Second, the Department of Defense has eliminated or deferred all
construction not essential to military needs and attempted to reduce the foreign
exchange costs of essential construction even where additional budgetary costs
are required.
Proposed construction programs in foreign countries are subject to special
reviews as to essentiality, and those which are approved are designed, where
permitted by the applicable country-to-country agreements, so as to reduce for­
eign exchange costs to a minimum. Under specially developed construction pro­
cedures, the Department of Defense is emphasizing the use o f : (1) U.S. procured
materials, (2) U.S. Government furnished materials and equipment, (3) U.S.
flag carriers, (4) prefabricated buildings manufactured in the U.S. and (5)
competent troop labor. It is recognized that these construction procedures may
result in increased budgetary costs; however, extra budgetary costs generally
are considered acceptable provided the added cost over normal construction
inethods does not exceed 50% of the amount of reduction achieved in IBP costs.



These special procedures also may be acceptable as approved on a case-by-case
basis even though premium costs may exceed 50%.
In view of the magnitude of the construction program in SEA, particularly
in Vietnam, an extraordinary effort has been made to reduce the IBP impact
of the program. The results of this effort can be stated very simply. Of the over
$1.4 billion in approved and funded construction for South Vietnam, almost* $1
billion had been expended through June 30, 1967. But, only about $250 million,
or approximately 25% of these expenditures were foreign exchange costs. This
achievement also must be considered in the light of the extreme urgency under
which much of the construction work has been accomplished.
The emphasis to restrict overseas construction projects to those necessary
to meet national security objectives continues also in other geographic areas.
As a result of a study called for in April 1967, the Secretary of Defense subse­
quently approved an action to hold IBP expenditures for military construction,
including NATO Infrastructure, but excluding expenditures for construction in
Vietnam, to $270 million in F Y 1968.

Military assistance IBP expenditures generally are reflected in three separate
areas: offshore procurement, NATO Infrastructure and all other MAP costs.
An intensive effort is being made to hold down IBP costs in all these areas.
In December 1960, the Department of Defense issued instructions to the Unified
Commands to review the MAP in their respective area and to recommend adjust­
ments that would lead to reductions in dollar expenditures abroad either through
deletion or deferral of requirements or through transfer to the U.S. of sources
of supply. Initially, recommendations for changes were limited to adjustments
which would not increase budgetary costs to the Department of Defense by more
than 10%. This differential subsequently was raised to 25% and beginning in
December 1963, the 50% differential relating to military functions appropriations
procurements was applied also to MAP offshore procurement. In addition, policy
guidance was revised in mid-1963 to require that offshore procurements under
MAP cost sharing agreements be limited essentially to the fulfillment of prior
commitments. Under the policies outlined above, IBP expenditures for MAP
offshore procurement were reduced from about $160 million in FY 1963 to less
than $50 million in FY 1967, and all other MAP expenditures entering the IBP
were reduced by about one-third during this period.
Military Assistance Program funds also were used during the FY 1961-1967
period to provide the U.S. contribution to NATO multilateral efforts, the most
significant of which is NATO Infrastructure, i.e., the joint U.S.-Allied funding
of airfields, communication facilities, firing ranges and other facilities. During
1966, the XT.S. negotiated a reduction in its percentage share contributed to NATO
Infrastructure from 30.85% to 25.77%
Stringent control procedures to restrain MAP IBP costs, stemming in part
from the provisions in the Foreign Assistance Act of 1961, as amended remain
in effect todajr. For example, in addition to the percentage guidelines outlined
above with respect to offshore procurement, the Assistant Secretary of Defense
(International Security Affairs) must certify before foreign procurement can
be undertaken that failure to procure outside the U.S. would seriously impede
the attainment of MAP objectives.


During the FY 1961-FY 1967 period, the U.S. military sales program has
resulted in important balance of payments benefits to the U.S. In FY 1961,
Department of Defense cash receipts, which stem in large part from military
sales, were slightly over $300 million. By FY 1963, Department of Defense cash
receipts had risen to well above $1 billion and during the FY 1963-1967 period
have averaged close to $1.3 billion, with unusually large receipts of close to $1.6
billion in FY 1967.
The principal objective of the foreign military sales program, however, is
basically the same as that of the U.S. grant aid program, i.e., to promote the
defensive strength of our allies in a way consistent with overall U.S. foreign
policy objectives. Encompassed within this overall objective are several specific
To further the practice of cooperative logistics and standardization with
our allies by integrating our supply system to the maximum extent feasible
and by helping to limit proliferation of different types of equipment.



2. To reduce the costs, to both our allies and ourselves, of equipping our collec­
tive forces, by avoiding unnecessary and costly duplicative development programs
and by realizing the economies possible from larger production runs.
3. To offset, at least partially, the unfavorable payments impact of our develop­
ments abroad in the interest of collective defense.
Under the policies and goals outlined above, between FY 1902 and FY 1967,
the total program has resulted in sales of about $9.8 billion. In addition, out­
standing sales commitments as of June 30, 1967 amounted to approximately $2
billion. The list of equipment involved has been dominated by sophisticated
weapons systems: e.g., F - l l l ’s, F-4’s, POLARIS equipment, HAWK and PERSH­
ING missile systems, etc. Of the $11.8 billion of sales and commitments, $8.5
billion are for cash and $3.3 billion are credit transactions. Of the latter amount,
about $2.1 billion are being financed by the Export-Import Bank without any
Department of Defense guaranty and about $1.2 billion through a combination of
Department of Defense credit sales and guaranty loans.
About 75% of the sales and commitments to date have gone to Europe and
Canada, 12% went to the Far East, primarily Australia, Japan and New Zea­
land, with about 13% distributed among a substantial number of other countries
throughout the world.
All important proposals for military sales are reviewed by the Secretary of
Defense, with appropriate interagency coordination, and Presidential decision
frequently is required. Decisions to sell equipment are based on a positive
determination that it is in the best overall U.S. national interest to make the sale.
In addition, there have been some instances where U.S. sales have been asso­
ciated with arrangements under which the purchasing country gains increased
access to U.S. military procurement requirements on a competitive basis. From
an overall standpoint, such arrangements at times are desirable, even though
they serve in part to increase U.S. foreign exchange expenditures.

The Department of Defense also is attempting to achieve maximum feasible use
of U.S.-owned excess currencies and barter arrangements as a means of con­
serving Department of Defense dollar expenditures entering the IBP. In terms of
priorities, Department of Defense uses excess currencies before barter for over­
seas procurements were a choice exists.
Specific policies and procedures have been developed which provide for the
use of U.S.-owned foreign currencies rather than dollars for payment of over­
seas Department of Defense requirements. Where feasible, such items as (1)
overseas allowances, ( 2 ) travel, transportation, per diem and related expenses of
Defense personnel, dependents, employees of contractors and (3) contract pro­
curements, are paid for in excess currencies. It should be noted, however, that
the bulk of excess currencies held by the U.S. are currencies of countries where
the number of U.S. forces and the magnitude of Department of Defense expendi­
tures are relatively small (in FY 1967 less than 1.5% of all military personnel
assigned overseas were stationed in excess or near-excess currency countries,
and less than two-tenths of one percent were in excess currency countries.) In
addition, there are relatively limited possibilities of using excess currencies to
meet requirements in other countries, based in part on the nature of existing
country-to-country agreements governing use of the currencies.
With respect to barter, where it has first been determined that excess currencies
cannot be used and a determination also has been made under Department of
Defense balance o f payments procurement guidelines that the requirement must
be met from an overseas source, an effort is made to use barter procurement,
under procedures developed with the Department of Agriculture.
In its initial year, in FY 1964, the Department of Defense barter program
amounted to less than $25 million. In FY 1967, the barter program amounted to
slightly over $200 million (including about $15 million AEC barter), or about an
eightfold increase over the FY 1964 level.

During the past several years, the Department of Defense has given continuing
attention to improving IBP reporting and management control procedures in an
effort to supplement and enhance the various specific balance of payments policies.
Some examples are as follows:



1. In FY 1964, Department of Defense implemented a revised system for re­
cording and reporting Department of Defense expenditures and receipts entering
the IBP. During FY 1967 these reporting procedures were further refined.
2. The Secretary of Defense has assigned balance of payments expenditure and
receipt targets to various components of the Department of Defense. These tar­
gets which reflect approved actions, provide useful bench marks from which to
measure Department of Defense balance of payments efforts.
3. As part of the actions and studies undertaken in April 1967, a Department
of Defense-wide review of IBP procurement actions and related accounting
is underway. These reviews serve to emphasize the need for continuing attention
by activities to current IBP procurement policies and to help assure that IBP
accounting reports accurately identify and report properly the impact of De­
partment of Defense expenditures entering the IBP.
4. Specific procedures have been included in annual budget reviews which call
for the identification of IBP impacts resulting from alternative budget decisions.
International balance of payments implications also are required to be sub­
mitted for review in connection with basic budget estimates for construction,
procurement and research, development, test and evaluation appropriations.

The Department of Defense balance of payments program will receive con­
tinuing attention during CY 1968 in keeping with the Presidents Message on Bal­
ance of Payments of January 1, 1968. This emphasis will rest in part on the
significent number of policies and practices already in effect which serve to hold
down, and, where feasible, reduce Department of Defense expenditures entering
the IBP. In addition, the IBP Action and Project List, issued in April 1967, sets
out for examination additional proposals where there was some possibility of ad­
ditional IBP savings and/or the need for renewed attention. Decisions on some
of the proposals, as noted above, already have been made. Other items on the
project list still are under study and favorable decisions in 1968 on certain of
these longer-term items may provide additional IBP benefits in the future. In
addition, Department of Defense is examining other proposals with a view to
reducing further the IBP costs of personal spending by U.S. forces and their
dependents stationed in foreign countries, particularly in Western Europe.
In Western Europe also, it is anticipated that these actions will be supple­
mented by the previously announced planned redeployment of approximately
35,000 U.S. military personnel from the Federal Republic of Germany during
CY 1968, with some associated reductions in foreign national employment. This
action, based on current plans, will serve to reduce Department of Defense IBP
costs by about $75 million at an annual rate, although substantial IBP savings
are not anticipated until the first half of CY 1969. In SEA, the current outlook
is for a smaller increase in expenditures as compared to the increases expe­
rienced in 1966 and 1967.
Overall, with respect to Department of Defense IBP expenditures, based on
present programs and strength levels, significant new savings will be more
difficult to achieve. As a result of past efforts, the “easy” reductions have long
since been made. For example, under present circumstances the Department of
Defense already appears to have reached the borderline, in the procurement
area in terms of IBP savings/budgetary cost tradeoffs.
The Department of Defense also will continue to take all steps feasible within
existing policies which would serve to increase receipts. Nevertheless, it is cur­
rently anticipated that there will be a reduction in Department of Defense cash
receipts in CY 1968 below FY 1967 levels. In this respect, however, Department of
Defense data exclude special purchases of securities by other countries and
these purchases are expected to be substantial in FY 1968 and CY 1968. For
example, as previously announced, the Bundesbank (FRG) has agreed to pur­
chase in FY 1968 $500 million in U.S. medium term securities to ease the net
IBP impact of stationing U.S. forces in Germany. There may be other actions
of this nature which also represent a departure from the more traditionally
military offset approach. Although these actions would be of benefit to the U.S.
balance of payments during this period, they would not be reflected in Depart­
ment of Defense receipts data. The Department of Defense is participating with
Treasury and other U.S. Government agencies in these efforts.



[In millions of dollars]
Fiscal year
U.S. forces and their support:
Expenditures by U.S. military, civilians and
dependents 2............................................................
Foreign nationals (direct and contract hire).—
Major equipment...............................................
Materials and supplies (includes P0L)p._.
Operation and maintenance (o th e r)..........
Other payments4...............................................














$956 $1,121

















Military assistance program:
Offshore procurement...............................................
NATO infrastructure.................................................
Other............................ ................................................








Net change in dollar purchased foreign currency
holdings. .........................................................................















Total expenditures.....................................................








Cash receipts *....................................................................








Total receipts___ -.........................................................








Subtotal.............. ............................. ...............................
Other expenditures (AEC and other agencies included
in NATO definition of defense expenditures).................















Net adverse balance (NATO definition)...................




1,704 . 1,478



1 Data differ somewhat from data on the defense account shown in the Department of Commerce publication, Survey
of Current Business. Commerce data exclude, on payments side, small amounts representing retired pay, claims and
grants, and net changes in DOD holdings of foreign currencies purchased with dollars. On receipts side, Commerce data
exclude military sales through commercial channels and barter. These data are included in Commerce accounts under
other entries.
2 Includes expenditures for goods and services by nonappropriated fund activities.
* Beginning With fiscal year 1964, data for materials and supplies include only expenditures for 0. & M. supplies and
stock fund* {wrahases.;
<Beginning with fiscal year 1964, "Operation and maintenance (other)” includes ali. O. & M. payments not included
elsewhere ami "Other payments" includes expenditures for retired pay, claims, research and development, industrial
fund activities, etc.: :
5 Cash receipts data include primarily: (1) Sales of military items through the U.S. Department of Defense; (2) reim­
bursements to the United States for logistical support of United Nations forces.and other nations' defense forces; and
(3) sales of services and excess personal property. They do not include estimates of receipts for military equipment pro­
cured through private U.S. sources, except where these are covered by gOvernment-to-government agreements, and
data are available, i.e., FRG, Iran, Italy, and Saudi Arabia.

Mr. D a n ie lia n . Worldwide expenditures of the Department of
Defense went up from $2.8 billion in 1965 to $ 3.4 billion in 1966; to
$ 4.1 billion in 1967; and so there has been an increase of $ 1.3 billion
between fiscal 1965 and fiscal 1967. This is as of June 30.1 think in the
second half of the year, it probably went even further up.
Mr. R euss. My time is about to expire. If, after everyone has had
an opportunity, I can seek recognition again, I would ask you whether
in your judgment, and given our military strategy, which is not the
job of the Banking and Currency Committee to discuss, we have done
everything that we could have done in order to reduce the balance-of payments impact of our military expenditures abroad ?
I will defer that question because my time is up. Thank you, Mr.
Mr. B a r r e t t . Mr. Halpern.



Mr. H alpern . Dr. Piquet, would you not evaluate the President’s
proposals differently, depending upon whether they are regarded as
short-term or long-term measures ?
Mr. P iqu et . The short-term versus long-term approach can
become a trap. The newly imposed controls on foreign investment are
intended, to be short term. Arid, it is probable that they will be re­
pealed after the balance-of-payments deficit figure improves
With respect to restrictions on tourism, I think that whatever re­
strictions are imposed will be removed at the earliest possible moment.
A more serious danger lies elsewhere. There are at present tremendous
pressures for the imposition of import quotas, border taxes, and for
remission of taxes on goods exported, all in the name of cures for
the balance-of-payments deficits.
Imposition of a system of import quotas would be at direct variance
with the trade policy followed and advocated by the United States for
the past 34 years. It would be inconsistent with the tariff reductions
made in the recent Kennedy round and in violation of the obligations
assumed under the General Agreement on Tariffs and Trade. The vio­
lation would be particularly significant inasmuch as the United States
has been the leader in the liberal trade movement over the past three
decades, and was the leader in establishing the GATT itself.
Certain controls can be removed quickly, while others cannot. Im­
port quotas are in this latter category. So, I think the danger is a very
great one.
Mr. H a lpern . H ow would you evaluate the necessity of a domestic
tax increase in terms of its importance in strengthening our inter­
national position ?
Mr. P iqu et . The proposed tax increase?
Mr. H alpern . Yes. How would you evaluate the necessity of a
domestic tax increase in the terms of its importance in strengthening
our international position?
Mr. P iq u e t . The present proposal for a surtax has become so
highly political that I, as one of your professional advisers, do not
feel I should comment on the political side of it. But I would general­
ize that tighter control of the Federal budget, either by way of tax
action and/or by way of curtailment of expenditures is a must.
Mr. H a lpern . In other words, you feel something must be done?
Mr. P iquet . Yes. We must move in the direction of living within
our means.
I do not believe that the Federal deficit—or the Federal debt—is a
bad thing, in and of themselves. But, monetization of the debt is dan­
gerous for, instead of taking money out of the pockets of taxpayers
and/or bond purchasers, the bonds are sold to the Federal Reserve
and then used a*s a basis for money and credit expansion.
Mr. H alpern . N ow , one further question: Do you really think in
practical terms that there is much likelihood that merely by announc­
ing that we may not buy gold at the same price at which we will sell
it, the price of gold would push downward below $35 an ounce, when
it has for so long been pushing up in the other direction?
Mr. P iqu et . This is a question that economists themselves do not
agree upon. Some believe the price of gold would rise because there
would be a scramble for it, while others think it would do the precise
opposite. This is something that cannot be forecast.



M y own opinion is that the guarantee price of $35 per ounce of gold
on the part of the United States is such an important reason for the
price of gold remaining at that level that if the United States an­
nounced that it was no longer going to guarantee in the future to pur­
chase at that price all gold presented to it, it would be tantamount, in
the long run, to demonetizing gold and that the value of gold, relative
to the dollar, would decline. This is an opinion; I cannot prove it.
Mr. H a lp e r n . Thank you.
Mr. B a r r e t t . Mr. Moorhead.
Mr. M oorh ea d . A s I understand your proposition, Dr. Piquet, it
is that we should continue to prop up the dollar with gold but we
should no longer prop up gold with the dollar?
Mr. P iq u e t. Precisely.
Mr. M oorh ea d . N ow , Mr. Danielian, as I understand it, on what I
call legal, as opposed to economic, at least, you do not go along with
Dr. Piquet’s proposition, because you believe that it is blocked by
our participation in the IM F . I would like to ask you, sir; as an
economist, if the lawyers should tell us that we could legally adopt
Dr. Piquet’s suggestion—in other words, forget the IM F for the
moment—just as an economist, would you then approve of Dr. Piquet’s
Mr. D a n ie lia n . Yes; provided we find some means of either con­
trolling our deficits or having these other countries buy our obligations
so we can continue doing some of the things around the world that
may be necessary for our security. To do that, and then not be able
to finance our activities abroad, may push us back as I said, into the
fortress America concept.
I f we cannot keep our deployment in the Pacific or in the near
East, in different parts of the world, we may gradually have to retrench,
as the British have had to retrench. So I agree wholly with Dr.
Piquet. A s Mr. Martin said, we mustn’t allow this barbaric metal
to rule our lives; but, on the other hand, we have to find means of
financing the things we want to do abroad.
So, with that reservation, I would go along with him.
Since a good deal of the discussion has revolved upon this point, I
would like to read two provisions of the IM F articles that may be
In article IV , section 1, it says “ the par value of the currency of
each member shall be expressed in terms of gold as a common denomi­
nator, or in terms of the U .S. dollar of the weight and fineness in
effect on Ju ly 1, 1944”—which is $35 an ounce.
Article V I I I , section 4, on convertibility of foreign held balances:
“ Each member shall buy”—it doesn’t say may buy—“ balances of its
currency held by another member, if the latter, in requesting the
purchase represents that the balances to be bought have been recently
acquired as a result of current transactions; or that their conversion
is for making payments for current transactions. The buying mem­
bers have the option to pay either in the currency of the member mak­
ing the request, or in gold.”
When you have excess dollars in the hands of countries, that they
present for payment through IM F , or directly, you have to pay the
par value indicated by article IV .



Mr. M oorh ea d . I think we are getting into a very technical discus­
sion here. It would be impossible to argue the construction of the
IM F agreement in this open hearing, but I think it is extremely
significant that we have a legal memorandum submitted to us saying
whether or not this suggestion is legal, because I think both after
Mr. Reuss’ statement and the silence of the committee, the committee
is certainly interested in this thing. But if we are blocked by an
international agreement, we might as well dismiss the idea.
Mr. B a r r e t t . Would the gentleman yield ?
Mr. M oorh ea d . Yes.
Mr. B a r r e t t . Mrs. Sullivan asked to insert the very same thing
in the record at the time Mr. Piquet spoke on the subject.
Mr. M oorh ea d . Dr. Piquet, could you submit a memorandum?
Mr. P iq u e t. The pamphlet I referred to by Dr. John Parke Young
goes into this at great length, and it is going to be in the record.
Mr. M oorh ea d . Does it reach the-----Mr. P iq u e t. That we are not bound to buy the gold. That is an
Mr. M oorh ead . Then, Dr. Danielian, would you read that article and
submit a memorandum showing where you think it is in error, be­
cause there seems to be a dispute over the construction of this agree­
ment, and it seems to me we could resolve the question pretty quickly.
(The information requested follows:)
I n t e r n a t io n a l


c o n o m ic

P o l ic y


s s o c ia t io n ,

Washington, D.C., February 1,1968.
Hon. W r i g h t P a t m a n ,
Chairman, Committee on Banking and Currency, U.S. House of Representatives
Washington, D.C.
D e a r Mr. C h a i r m a n : When I appeared before the House Committee on Bank­
ing and Currency on Tuesday, January 30, 1968, I called attention to the fact
that the Articles of Agreement of the International Monetary Fund require the
United States to redeem its currency from member governments for gold in
certain circumstances. Attention was directed to a monograph by John Parke
Young with the indication that it refuted my contention.
The monograph in question is United States Gold Policy: The Case for Change,
No. 56 in the Princeton University Essays on International Finance, published
in October of 1966. I have carefully reviewed this monograph. Its purpose is to
demonstrate that the United States need not continue its policy of freely buying
and selling gold at $35 an ounce. It suggests the United States could stop doing
so and meet its obligations to the International Monetary Fund in the same
fashion as do all other members, that is, by undertaking to maintain the parity
of its currency with that of all other members within a margin of one point by
redeeming dollars in the other country's currency. Under conditions of balance
of payments deficits, the United States presumably would not have sufficient
quantities of other countries’ currencies. Therefore, it must pay in gold. This is
what has been happening.
Mr. Young does not contend that this is not obligatory. At page 13 of the
monograph, he concurs that the United States may be required to redeem
dollars from other members either for their own currency or gold under Article
VIII, Section 4 of the IMF Articles of Agreement. He also states, at page 30,
that the United States may be required to buy gold from the Fund under Article
VII, Section 2ii, of the same Articles.
Mr. Young’s monograph confirms, rather than refutes, my contention.
Sincerely yours,

N. R . D

a n ie l ia n





Mr. M oorhead. Did I understand you to say that you opposed the
restrictions on travel and investment which the President announced
on January 1 , or only that you opposed them if this was to be a con­
tinuing thing?
Mr. P iqu et . It was .stated by the people who are on the inside, that
the heat that was anticipated would be so great when the figures of
the fourth quarter were announced that “The President had to do
something.” That is one way in which it was put to me. Others, on
the other side of the fence, however, put it differently, saying that
“ Somebody pushed the panic button.” In view of all that has been
said here this morning, it seems to me that the restriction of new direct
private foreign investment and of travel by Americans abroad are, to
use a football analogy, “off side.”
Mr. M oorhead. Thank you, Mr. Chairman. My time has expired.
Mr. B arrett . Mr. Clawson.
Mr. C law son . Thank you very much, Mr. Chairman.
Mr. Piquet, in your presentation, or at least in the discussion since
I have been here, and I am sorry I wats not present for your presenta­
tion, you have talked about the mystical atmosphere in which gold is
Mr. P iq u et . The atmosphere?
Mr. C law son . The atmosphere surrounding gold, as mystical.
Mr. P iq u et . Yes, a sort of “mystique.”
Mr. C law son . I have difficulty, personally, separating this confi­
dence you say i,s necessary from gold. We do not have your expertise
and sophistication in this field. The majority of us, and I think this
may be true of the foreign countries—and our constituents have prob­
lems in separating confidence and gold, when talking about confidence
in the dollar.
Would you subscribe to that point of view ?
Mr. P iquet . I f you ask certain economic advisers to American banks
that question they will say that gold provides the basis for confidence
in the dollar. I f you talk to other advisers in other banks they will
tell you precisely the opposite, that confidence in the dollar rests not
upon gold, but upon confidence in its purchasing power and stability.
I don’t think there is an objective answer to your question. It is a
matter of belief. I have the feeling that the dollar is the basic cur­
rency in the world, not only the reserve currency, but also the vehicle
currency, just as the pound sterling was during the 19th century. The
vast majority of all international transactions are conducted in terms
of. dollars, not gold. Even in international settlements, dollars are
used as well as gold.
Mr. C law son . Let me ask you this question: supposing we do not
take action on this legislation----Mr. P iq u et . Don’t take action on removal of the gold cover?
Mr. C law son . That is right. Just let nature take its course. What
would be the result ?
Mr. P iq u et . It would mean that we would continue to sit on a pile of
inert gold and refuse to allow it to support continuation of the present
international monetary system. It must be understood that anv system
of international money—any system, including the gold standard, the
old pound sterling standard, the dollar-exchange standard or some
system of drawing rights—will break down if the major countries



involved are not willing to obey tlie rules of the game. The gold stand­
ard can be wrecked if important countries hoard too much gold.
Short of a system of world government, short of a world economy,
similar to the national economy of the United States, within which
there is free movement of goods and services, and in which prices are
allowed to adjust to each other, any device, or any system that we can
dream up, whether it be based on gold, dodo bones, or paper can be
wrecked if the people—if countries—don’t abide by the rules of the
Thus far, there has been no major deviation from the rules of the
game as far as the dollar-exchange standard is concerned.
Mr. C law son . I s this because of the gold ?
Mr. P i q u e t . I would say, regardless of gold.
Mr. C law son . Regardless of gold ?
Mr. P iq u et . And I think, as Prof. Charles Kinderberger pointed
out in a very interesting recent pamphlet in the Princeton international
finance series, that the reason why the dollar has come to be the vehicle
and reserve currency of the world, is comparable to the reason why
English has come to be the world’s dominant language because there are
so many Americans carrying on transactions everywhere.
Mr. C law son . What difference does it make whether or not we con­
tinue to redeem these dollars with gold, and why not just forget the
Mr. P iqu et . I don’t think we would gain anything by making an
abrupt decision that we are going to throw gold overboard. Let’s use it
while we have it. If the present system is working, why not let it con­
tinue to work?
Mr. C law son . Until it runs out, or falls down ?
Mr. P iqu et . Yes, until a real danger point is reached. We have a lot
of gold, $12 billion of it. If there were a determined attempt on the part
of other countries to wreck the present system they have the power to
do so. I doubt if they will do so because they stand to lose as much by
such action, if not more, than we.
Mr. C law son . In connection with this, isn’t it a fact the priorities
of the President’s balance-of-payments program and its concentration
on direct investment is essentially what most European central bankers
hope we would do, because of their more or less discomfort over the
cold wind of competition from the U.S. technology ?
Mr. P iq u et . When it comes to appraising the feelings and motives
of others we are on thin ice. I certainly would not take all of their
statements at face value. Self-interest, pride, and sometimes un­
conscious patriotism play a part. I remember when I was in Canada
some years ago and purchased something in a department store. This
was at the time when the Canadian dollar was selling at a premium
relative to the U.S. dollar. The clerk who accepted my money was
gleeful over the fact that, for the first time in his memory, the Cana­
dian dollar was worth more than the U.S. dollar.
There may be some such pride in what the Europeans are telling
us to do now. We have been very free in our advice to them, particu­
larly in the early days of the Marshall plan. Now that they are pros­
perous again, and the United States is encountering difficulties in its
balance of payments, some of them get a psychological kick out of



telling us what to do. I am not so sure but that if I were in their posi­
tion I might not feel the same way, in view of the ubiquitousness of
Americans in European industry and commerce.
M y own personal observation in France and England has been that,
in spite of what they say, they are anxious to have American capital
invested in their countries. What troubles them most is that Ameri­
cans so often go with the capital. They would prefer to have the
capital without the Americans.
Mr. C la w s o n . I would like Mr. Danielian also to respond to that
same question, if you will.
Mr. D a n ie lia n . I have looked into this problem on many trips to
Europe. In fact, beginning with I 960, during the tax debate of 1961
and 1962, it was quite obvious that Finance Ministers of European
countries—this is a matter of record, Mr. Dillon put the information
into the record—Finance Ministers of the Common Market countries
insisted that the United States control direct investments in Europe.
In 1963 I went to Europe and visited with many central bankers—
bankers, businessmen, Finance Ministry people, and Foreign Ministry
people— and there was complete unanimity on these thoughts. U.S.
balance-of-payments deficits are due to U .S. investments in Europe,
and to correct that, the United States must control the U .S. invest­
A t that time, the banking opinion was still undecided, whether or not
they should put the squeeze on. They were considering in what way
they could bring discipline into U .S. behavior. This past summer I
was there again, inquiring into this problem, and this time it had
gotten beyond the policy sphere into public opinion. The businessmen
and publications, and so on, have all been arguing for curtailment of
U .S. investments. They are now hopeful that we can work out some
new partnership with them whereby they can join in the ownership of
U .S. industries.
I do not believe that it is a mere coincidence that as a result of
discussions in Basle, and on this, of course, Mr. de Gaulle has been in
the forefront of this theory, in relation to U .S. investments, I don’t
think it is mere coincidence that the first and most severe measures
were taken against U .S. direct investments as a result of this gold
crisis. Does that answer your question?
Mr. C la w s o n . Well, at least, we have some variation of opinion.
Thank you.
Mr. B a r r e t t . Mr. Hanna.
Mr. H a n n a . Mr. Chairman, may I say for the record that I count
myself quite fortunate to have been present this morning, to have
heard the presentation of these two gentlemen. I think you have made
one of the most valuable contributions that this committee has
I am particularly struck—and you correct me if I am wrong—by
the fact that the message that you gentlemen have been bringing to
•us is that we ought to nave a positive policy toward our position in
terms of gold and the dollar, and the balance of payments, and we
should not merely react, we shouta have our own positive policy and
it should be based upon an intelligent understanding of what our
situation really is.
Now, isn’t that what you have been trying to tell us?



Mr. P i q u e t . I w o u ld a g r e e ; y e s.
Mr. D a n i e l i a n . I believe s o ; we even wrote a whole book on the
subject, and I hope it will be read.
Mr. H a n n a . I concur wholeheartedly, and I think that is the posi­
tion of the committee.
It would seem to me that from what you two gentlemen have said,
that in some respects the problem is a problem of discipline which
occurs in any activity of mankind, of maintaining a proper balance
between the ingredients that are in action. It seems to me our deficit
right now is something like a problem of cash flow in a business ac­
tivity. That it would seem to me that the President’s program is only
correct if it is reasoned on the basis of adjusting the investments
abroad and the expenditures abroad so that we do have some sensible
cash position or cash flow in terms of what our responsibilities are for
short-term imbalance.
Is that not correct?
Mr. P i q u e t . I t h in k so.
Mr. D a n i e u a n . I don’t consider the balance-of-payments problem a
short-term one. This has been one of the fundamental mistakes that
has been made since 1960.
Mr. H a n n a . D o you think that the United States could maintain a
long-term position of either surplus or perfect balance?
Would you answer that question?
Mr. D a n i e l i a n . It depends on the amount of noncompensatory
expenditures we have abroad. I don’t think we can do it in the range
of $10 million a year. On the other hand. I think we have means of
earning more money abroad with harder 'bargaining on many fronts,
like the agricultural front, for instance.
We practically gave up our agricultural interests in the Kennedy
round of negotiations, and there are many other areas in which we can
really work hard and earn more money. I don’t think we can do it
through exports. I don’t think we can equalize the $4 billion deficit
through exports alone.
Mr. H a n n a . I don’t think it would be healthy for us. I think that
would be very unhealthy. But what I am trying to ask is, can the inter­
national trade actually support a position of the United States of per­
fect balance of surplus? Where will the liquidity come from, if we
maintain that position over a period of 3 years? Would either one of
you care to comment on that ?
Mr. P i q u e t . I would say that, up to now, the U .S. balance-of-pay­
ments deficits have been caused by the desire of the foreign recipients
of dollars to keep them in the form of deposits, investments, and
monetary reserves in preference to spending them on goods and serv­
ices in the United States. It is possible, if not probable, that if the
Vietnam war comes to an end soon, we shall be holding hearings on
Capitol Hill on a “ dollar shortage,” as we were doing 20 years ago.
A major difficulty is that there is no direct connection between the
amount of dollars t>eing pumped into the world and the need for those
dollars as reserves. Either a glut or a shortage of dollars is bad. In
other words, it is not a true international system, and it is certainly not
as desirable as some international system would be that would adjust
the supply of vehicle and reserve currency to the need for it.



Mr. H a n n a . Then you lead right into my final question, which is
this: Regardless of what steps we take in this problem of balance of
payments right now, it is my persuasion we ought to utilize those
steps to get the European cooperation for a viable alternative to the
Mr. P iq u e t. Yes; but we shouldn’t be so anxious to do this that we
give the impression that our own dollars— our I O U ’s—are not good.
We should be anxious to cooperate with the Europeans, but since they
are the creditors and we are the debtor, it is hardly up to us to insist
on some other system. W e probably have taken too much leadership
along this line already. W e say so much that we run the risk of our­
selves undermining confidence in our own I O U ’s. But we should
always be ready to cooperate.
I am in favor of a Triffin plan for a World Reserve Bank for,
believe me, when we have that, we shall also be close to world peace.
Mr. D a n ie lia n . I think we are confusing three different problems.
One is the problem of liquidity, which is a means of settling differences
in balance of payments between nations of a short-term nature.
Second, the need of the United States and Great Britain for tre­
mendous amounts of external resources to carry on political and mili­
tary operations.
Third, foreign-aid requirements of underdeveloped countries. And
there is a tendency in this country to lump them all together under
the generic term of “ liquidity.”
Liquidity, as some lady defined it, is the ability to pay your bills
while you do not have the money.
Well, that may be all right for a little amount, but when it comes
to billions and billions of dollars, we just aren’t able to find the
people who are going to finance it. So we have to find ways of trans­
ferring the amount of resources necessary to carry on the politically
motivated expenditures; and you cannot depend upon the private
economy to do it. This can be done in actually transferring the re­
sources from here to there—and this is why we have come out recom­
mending, buy American, in foreign aid, for iiistance, which was
opposed in 1961, and now it has become very fashionable. And that is
why we think that, for instance, the Europeans should pick up the
tab on the maintenance of our troops for their security.
In other words, you either accomplish these things by physical trans­
fer of resources from the United States to other countries, or you get
other countries to accept a share in the payment of these expenses; and
you cannot do it through dependence upon the private economy.
Mr. B a r r e t t . The time of the gentleman has expired. Mr. Brown.
Mr. B ro w n . Thank you, Mr. Chairman. I have been so interested
in the general discussion that I haven’t any specific questions at this
time. However, I would like to inquire of the chairman, are we going
to continue with these witnesses later on, or did you intend this morn­
ing would be the termination?
Mr. B a r r e t t . W e will have witnesses tomorrow, but they will be
different witnesses.
We will certainly miss these two gentlemen. They have been very



Mr. B ro w n . I want to take my time to thank you for your appear­
ance, and when Mr. Bingham completes his questions, I might have
one or two.
Mr. B a r r e t t . I f you desire, you may ask questions in writing, and
I am sure the two gentlemen would be glad to answer them for you.
Mr. Bingham.
Mr. B in gh a m . Thank you. I, too, have no questions at this time.
But I would like to thank the witnesses for their testimony.
Mr. B a r r e t t . Thank you, Mr. Bingham. Mr. Reuss.
Mr. R euss. Thank you , Mr. Chairman.
Because the House is now convening, if agreeable with you, Dr.
Danielian, would you be kind enough to answer in writing a question
which I propounded to you just a few minutes ago, which I will re­
phrase as follows:
Would you indicate any way in which the United States could
have, or still can reduce its balance-of-payments losses on our foreign
military posture in Europe and Asia, without interfering with the
size of that military posture? In other words, obviously, anyone can
figure out brilliant means of cutting our balance-of-payments deficit
by coming home from Vietnam, bringing troops home from Europe,
and so on. But my question is, given the quantum of our military
posture, can we do more, or could we do more, to minimize the balance
of payments ?
Mr. D a n ie lia n . I am flattered by the confidence you have shown in
me in asking this question. But I am wondering whether the Secre­
tary of Defense would not be a better source of information on this
Mr. R euss. Well, if you are satisfied that we are doing everything
to minimize the balance-of-payments impact of our foreign military
stance, so indicate; if you think there are tilings we could be doing
that we aren*t doing, indicate that.
Mr. D a n ie lia n . I will try my best.
(The information requested follows:)

n t e r n a t io n a l


c o n o m ic


o l ic y


s s o c ia t io n ,

Washington, D.G. February 2, 1968.
Memorandum for: The Honorable Wright Patman, Chairman, Committee on
Banking and Currency, U.S. House of Representatives, Washington, D C.
Subject: How to reduce the balance of payments impact of military expenditures
in Europe and Asia.
From: N. R., Danielian, President.
At the end of the hearings on the gold cover legislation on Tuesday, January
30, 1968, Congressman Henry Reuss requested our views as to ways and means
of reducing the balance of payments impact of U.S. military expenditures in Asia
and Europe without reducing the size of our commitment. We take this to mean
without reducing the number of our troops. This sets up a pretty difficult target
to reach.
The Defense Department has undertaken since 1961 many actions designed to
reduce the balance of payments impact of our military expenditures abroad.
In spite of this, however, they estimate the foreign exchange costs in Fiscal 1967
to total $4.1 billion, of which Western Europe accounted for $1.5 billion and
Asian countries, $1.7 billion. In the case of Western Europe, in spite of all actions
taken by DOD, there was hardly any material reduction in total foreign exchange
costs between 1961 and 1967. In Asian countries, on the other hand, these expenses
went up by over a billion dollars, most of the escalation having taken place
between 1964 and 1967, from $600 million in 1964 to $1.7 billion in 1967. It is not
unlikely that the foreign exchange costs of our operations in the Far East
will be even larger in Fiscal 1968.
8 9 -2 9 2 — 68--------15



Our military expenditures in Western Europe are mostly in the context of the
NATO common defense commitments; about half—between $700 and $800
million—in Western Germany.
The Department of Defense has undertaken many activities in Western Europe
to reduce these foreign exchange costs in amount. The principal ones have been:
first, offset procurement of defense equipment by Germany, and, more recently
when Germany declined to continue these offset purchases of military hardware,
in the form of the purchase of $500 million in U.S. medium-term securities in
Fiscal 1968. An attempt is now being made to continue these arrangements to
offset or immunize these military expenditures as an immediate claim on gold.
News reports from Bonn seem to indicate that the German Government is not
disposed to buy long-term bonds from us.
The sale of Treasury securities to the German Government which may in the
future still be converted into gold is not an adequate or wise means of meeting
the costs of stationing U.S. troops in Western Europe. It is not an offset against
these expenditures, but is simply mortgaging the future and it does not directly
ease our balance of payments deficits and the claim on gold.
It seems to us that our Western European presence, within the context of the
NATO Alliance, is a collective security arrangement, and, therefore, the cost
must be shared in an arrangement which would eliminate the impact on the U.S.
balance of payments. The United States contributes to this collective security not
only its troops in Europe, but also the total military capability of the United
States, as expressed in our total military budget. Generally, this country is
allocating 10-12 percent of its gross national product for defense, as compared
with 5-6 percent in most Western European countries. The assumption of the
foreign exchange cost of our troop presence in Germany and other NATO
countries, equitably divided, would add but a fraction to their military budget.
The problems that have been raised are political, rather than the capacity to pay.
The objections from European countries have been the tax burden, the limits
on their military budget, and the public relations aspects of paying for the
presence of U.S. troops in their midst. These objections may be overcome if the
NATO Alliance could develop either of two alternative approaches: First pro­
curement of goods and services in the United States in the equivalents of our
miiltary expenditures, making sure that such procurement will be in addition
to their normal purchases in the United States; or a lend-lease concept of paying
military costs within the NATO Alliance where each country would contribute
the local national costs of troop presence.
We realize that there are situations such as Spain where we have a bilateral
arrangement in exchange for bases that may make this kind of sharing of costs
more difficult.

The situation in Asia, particularly the larger part of the costs relating to
Vietnam, differ from those in Europe, first, because they are not being made in
the context of a formal mutual defense agreement, and, secondly, because the
economic base of the countries involved could not afford to support the activities
which we have undertaken. On the other hand, most of those countries are
dollar-deficit countries and they are in need of growing amounts of imports from
the United States. Hence, it should be possible to make specific arrangements
with countries like Japan, the Philippines, Republic of China, Thailand, and
South Korea to increase their procurement in the United States on a current
basis with the accretion of dollar reserves due to military expenditures. This
would require payment in block dollars in American banks acceptable for U.S.
procurement upon specific administrative arrangements, assuring additionality
of imports from the United States over a base period.
Although the question posed to us did not specifically encompass the defensesupport grants to South Vietnam, which amounted to $584 million in 1966 and
over $2.5 billion total for the period 1953-66, this is widely recognized as one of
the more conspicuous forms of dollar drain. The use of these grants in the later
years to fight inflation due to military expenditures by means of massive import
programs is a strange waiy of managing what should be essentially a mobilized
war economy. Many congressional investigations and reports have been critical
of this program as wasteful and hurtful to our balance of payments. It would
seem to us that a better system of allocation and utilization of resources applicable



to a wartime economy can be devised than this free-for-all import assistance
program. Not being on the scene, however, we hestitate to make specific recom­

Mr. B a r r e t t . Mr. Piquet and Mr. Danielian, I certainly want to
thank you. You have been very fine witnesses here this morning, and
I am thanking you on behalf of the committee.
I am sure they all appreciate the very fine dissertation you gave
here this morning.
Mr. D a n ie lia n . Would you allow the record to show the appearance
of Mr. William Moran, my executive director and vice president of
our organization, as a member of the panel—because he has been
advising me on this testimony.
Mr. B a r r e t t . Yes, sir; that may be done, without objection, and so
Thank you, gentlemen, for being here, and the committee will stand
in recess until 10 o’clock tomorrow morning.
(Whereupon, at 12:05 p.m., the committee recessed, to reconvene
at 10 a.m., Wednesday, January 81, 1968.)


W EDNESDAY, JA N U A R Y 31, 1968

H ouse of R epresentatives ,
C om m ittee on B a n k in g an d C urrency ,

Washington, B.C.
The committee met, pursuant to recess, at 10 a.m., in room 2128, R ay­
burn House Office Building, Hon. Wright Patman, chairman.
Present: Representatives Patman, Barrett, Moorhead, Hanna, Annunzio, Rees, Galifianakis, Widnall, Fino, Brock, Stanton, Mize,
Blackburn, and Brown.
Mr. B a r r e t t (presiding). Our first witness this morning will be Mr.
W. B. Hicks, Jr., executive secretary of the Liberty Lobby.
Mr. Hicks, would you please come forward? You may read your
statement and be questioned afterward, or if you desire to give a sum­
mary and then be questioned, you may do so. An y way you choose.
We do want you to feel at home here this morning, to feel as though
you are a member of this big family. So whatever way you choose to
make your presentation, we will abide by it.

Mr. H ic k s . Thank you, Mr. Chairman.
I am W . B. Hicks, Jr., executive secretary of Liberty Lobby. A t my
left is Mr. Michael Jaffee, our general counsel.
I am here to present the views of our board of policy, on behalf of the
170.000 subscribers to our monthly legislative report, “ Liberty Letter.”
Our board of policy consists of approximately 11,000 volunteers
who live in every State and practically every city and town in Amer­
ica. They vote annually on the general positions to be taken by the
Washington staff of Liberty Lobby. We attempt to carry out their
wishes by analyzing significant legislative proposals to see how they
affect the positions voted on by the board; and then by appearing be­
fore congressional committees to support or oppose the specific
To complement our activities in Washington, we carry out grass­
roots information campaigns both through our monthly newsletter and
by other means, to arouse public support or opposition for legislation.
In the case of the proposed repeal of the gold cover requirement on
Federal Reserve notes, our Washington staff has decided that in order
to carry out the positions voted on by our board of policy, we must
oppose the passage of the legislation in its present form.




Our opposition is predicated on the adverse effects that we think the
legislation will have on the national security and the power of the
United States in future crises, both military and economic.
Our basic position is this: We, as a nation, must act to prepare our­
selves for whatever is to come. This is, or should be, the first duty of
our Government.
Regardless of the form of future crises—whether they be food
shortages caused by draught or disease, or sudden failure of the
economy, or a military confrontation— our Nation will need gold to
meet the crisis. Gold that we will not have, if we go on following our
present course.
Can it be denied that we are presently under pressure to sell our
gold to foreign claimants? No. And if the proposed legislation is
passed in its present form, freeing our last remaining gold for ship­
ment abroad without legislative restriction, can anyone point to a
factor that will definitely prevent the loss of all our gold? We have
searched in vain for it.
It is true that responsible spokesmen have assured us that they
would never allow that to happen. But have they said at what point
in the decline of our reserve they would act to stop further gold sales ?
Is it not true that, no matter how pressing the need to embargo the
foreign shipment of gold at some point in the future, it would require
an act of determination and political courage far beyond that which
we should expect of political appointees and bureaucratic advisers to
the administration ?
Is it not more likely that, if this legislation is passed as presented,
some future administration will allow our gold reserve to fall below
the safety point, even inadvertently ?
And, what is the safe level below which our reserves should not be
allowed to fall? How much gold would be required to import food
for the American people for a 2- or 3-year period, should our own
production fail for any reason? Certainly, we should always main­
tain that amount of gold in a strategic gold reserve, no matter how
pressing other demands for it may appear to be.
We are proposing that a study be made of our Nation’s future
need for gold as a strategic resource; that a determination be reached
of the minimum number of ounces of gold that we should maintain
as a strategic gold reserve, separate and apart from any monetary
reserves; and that such a reserve be established by law, before releas­
ing our domestic monetary reserves for foreign shipment.
We feel that it is necessary to set up the new strategic gold reserve
before releasing our domestic reserve for a very vital and compelling
reason: it is certain that, once our gold has been “ freed” for foreign
claims, to attempt to reclaim it for any reason would set off a run on
our reserves. Congress would not be able to legislate a recovery of
any amount of gold from our monetary reserves in time to accomplish
the purpose of the legislation. The gold would all be gone before the
President could sign the act into law.
Therefore, we urge this committee to delay the release of our
domestic monetary reserve into the foreign claims reserve until the
committee has called for testimony from economists and military
experts on the subject of setting up a strategic gold reserve that will
assure the Nation of the ability to survive future crises. Then, when



this much of our gold supply has been earmarked and withheld by
law from monetary uses, Liberty Lobby’s attitude toward this pro­
posed legislation would be altered.
But we cannot overemphasize the fact that the Congress will have
but one opportunity to take this necessary action. Once the Congress
relinquishes its last legal control over our remaining gold, future
considerations of a strategic gold reserve will be academic, unless we
are prepared to buy back the necessary amount of gold at a price twice
that for which we sold it. W hy must we burden ourselves needlessly
in the future, when by foresight, we can avoid it ?
Thank you.
Mr. B a r r e t t . Thank you. Two short questions. Which does your
committee consider the stronger, the dollar or the gold ?
Mr. H i c k s . Well, I believe that probably a majority of our support­
ers would feel that gold is stronger in the sense in which it is commonly
presented; I would have to say personally that I think the dollar
supports itself, basically, on the productivity of the Nation.
Mr. B a r r e t t . May I just continue this a little further then. You
say at the time it is presented. What element of time, now, are you
characterizing that may be presented to be stronger?
Mr. H i c k s . I am afraid I don’t understand the question, sir.
Mr. B a r r e t t . Well, I asked, which do you think is the stronger,
gold or the dollar, and you said gold, but you think it would be at the
time that it is presented.
Mr. H i c k s . Oh, I think I failed to make myself clear.
What I said was, I believe a majority of the supporters of Liberty
Lobby would say the answer to that question is simply that gold is
stronger than the dollar. I think this is an unarguable concept, look­
ing at it from one point of view, but I, for one, do not believe that if
the dollar were disconnected from gold that it would cease to serve
as the major currency of the world.
Mr. B a r r e t t . And still maintain its strength ?
M r . H i c k s . I t h in k a s lo n g a s A m e r i c a h a s a p r o d u c tiv e e c o n o m y
s y s te m , th e d o lla r w i l l b e th e m a jo r c u r r e n c y o f th e w o r ld .
Mr. B a r r e t t . Which country today produces the most gold ?
Mr. H i c k s . It is m y understanding that South A frica does, sir.
Mr. B a r r e t t . Greater than Russia?
Mr. H i c k s . Yes, sir. In fact, I recently read an article on the subject

of Russian gold production, which indicated that practically the entire
Soviet production from one year to the next goes into foreign com­
merce in purchase of goods from abroad for the Soviet Union.
I understand that South Africa does produce two-thirds of the
world’s production annually.
Mr. B a r r e t t . There were statements made here last week that the
United States produces 52 percent of the world gold. Would you
agree on that?
Mr. H i c k s . I can’t imagine on what that would be based. I under­
stand, in fact, our costs of gold production run so near to the $ 35-anounce mark that many mines that have gold in them are closed down
because of this limitation on the price of gold.
Mr. B a r r e t t . Thank you. Mr. Fino.
Mr. F i n o . Mr. Hicks, I have just one question, which came to my
mind when the chairman asked you the question: “Which, in your



opinion, you considered stronger, gold or the dollar?” Apparently
from your answer you seemed to have some mixed feelings.
May I ask you this question: Which would you rather have, gold
or a dollar in your pocket ?
Mr. H ic k s . N o question. As I said, the concept is unarguable that
gold is something that cannot be printed or counterfeited. It is real
and so, therefore, gold would always be preferable to paper money.
Mr. F in o . Don’t you have some fear that if we remove the lid or the
restriction on this gold reserve and make it available for transaction
purposes and delivery in payment of dollars that we might dissipate
this reserve of $ 10.7 billion?
Mr. H ic k s . Yes, sir.
That, in fact, is the entire thrust of our position before the com­
mittee here today. We feel that it is a certain thing if we free this for
international claims, it will eventually, at some point in the future,
all be gone, leaving us with no gold reserve to use for strategic
Mr. F in o . The testimony before this committee on previous oc­
casions, more particularly, yesterday, was that the basis of this whole
financial structure is confident in the dollar.
Don’t you believe that there would be more confidence in the dollar
if we had some gold behind that dollar, than if we did not ?
Mr. H ic k s . Yes, sir. I am sure of that. There would be more con­
fidence. However, I would not like to have that interpreted as saying
that I believe there would be no confidence in the dollar if there were
no gold behind it.
Mr. F in o . Y o u say there would be much more confidence ?
Mr. H ic k s . There would be more if it were a gold dollar.
Mr. G a l i f i a n a k i s . I came in a little late. I was impressed by Mr.
Hicks’ statement that he would prefer to have gold. Are you advocat­
ing that people begin to accumulate gold in order that they might
have a measure of wealth? Are you not aware that gold was first used
as a measure of value centuries ago; that gold is bulky, very difficult to
carry; that gold, unlike the dollar, does not accumulate any interest;
I would like for you to expand on your statement about your prefer­
ence to have gold rather than the dollar.
Mr. H ic k s . Well, sir, I would have to say, first of all, this is not the
point of our statement.
I was asked a question here about my personal feelings on the
subject, and I think if we had—theoretically, if we had a gold dollar,
everyone would be more confident in the gold dollar than they would
be in a paper dollar.
A s far as the use of gold as money, I mean, exclusively, I think
this is an impractical idea. I f we did trade in gold money, then gold
would earn interest, because by loaning gold you could get gold back
with interest. But this is a theoretical thing and I don’t see the point.
I fail to see it.
The question is not, should we go to a gold dollar, in my under­
Mr. G a l i f i a n a k i s . Well, Mr. Fino asked you, if you had a prefer­
ence as to what you would choose, the metal gold or -the dollar, and
you stated, “ gold.” And it leaves me a little bit awed by that kind of



You know, Japan and West Germany, which have become large in­
dustrial nations, didn’t try to acquire gold. Their acquisition was cen­
tered around the American dollar.
Mr. B r o c k . Would the gentleman yield for a second?
I think he missed the original statement of Mr. Hicks in which
he was asked by the chairman of the committee, which was stronger,
gold or the dollar, and he said that he probably thought the member­
ship would feel gold was stronger, but he personally felt that the dol­
lar was; that it was the basic unit of world reserve; and I think per­
haps you misinterpreted what he was saying.
Mr. G a l i f i a n a k i s . I predicated my remarks by saying, I heard the
latter part of it and offered the opportunity for the explanation. He
admits that using gold is impractical. He stresses that that gold is
necessary to preserve the confidence in the dollar.
Isn’t that the very reason for removing the gold cover, to preserve
that confidence we are talking about?
Mr. H e c k s . I didn’t say gold was necessary to preserve the confidence
in the dollar. In fact, I said exactly the opposite, that confidence in the
dollar would not droj) to zero if there were no gold to back it up. Be­
cause the dollar essentially, today, is not backed up by gold. It is backed
up by the productivity of the American economy, the credit of the
United States.
However, to say that I would prefer gold to paper money is not—I
don’t have to apologize for saying that—I think this is a human feel­
ing that the majority of the people throughout history of mankind have
always preferred gold coins to paper currency, when it comes to pre­
serving a store of value, basically, because the Government cannot
deprive them of their value by inflating the currency.
Mr. B r o w n . Would the gentleman yield ?
Mr. G a l i f i a n a k i s . Yes.
Mr. B r o w n . I would like to ask my colleague at this time about the
cases of Germany and Japan to which he has referred. When they
rely upon the dollar, are they relying upon the domestic dollar which
has no backing; that is, the Federal Reserve note only, or are they rely­
ing on the international dollar which is backed by gold ?
Mr. G a l i f i a n a k i s . I think they, of course, relied initially on the in­
ternational dollar..They wouldn’t overlook the domestic dollar and the
productivity which backs that also.
Mr. B a r r e t t . The.time of the gentleman has expired. Mr. Brock.
Mr. B r o c k . I think you raised a very significant point in your testi­
mony, and I appreciate it. I also appreciate the fact that you say that
if we had a strategic gold reserve which was adequate for our military
and strategic needs, that you would support this legislation. I think that
is a fairly significant step you take and I am impressed with your point,
and I think it is well taken. I think it should be given consideration,
and I appreciate your testimony.
Thank you.
Mr. B a r r e t t . Mr. Moorhead.
Mr. M o o r h e a d . N o questions, Mr. Chairman.
Mr. B a r r e t t . Mr. Stanton.
Mr. S t a n t o n . 'No questions, Mr. Chairman.
Mr. B a r r e t t . Mr. Rees.



Mr. R e e s . N o q u e s t i o n s .
Mr. B a r r e t t . Mr. Mize.
M r . M i z e . N o q u e s t io n s .
Mr. B a r r e t t . Mr. Brown.
Mr. B r o w n . I would like to

thank the gentleman for appearing and
for presenting his statement. I have no questions.
Mr. B a r r e t t . Thank y o u .
Our next witness will be Dr. Judd Polk, economist.
Mr. Polk, would you come forward ?
Mr. Polk is from the U.S. Council of the International Chamber
of Commerce.
It is nice to have you, Mr. Polk. You can sit more centrally, unless
you have associates with you.
Mr. Polk, it is my understanding you do not have any copies of your

Mr. P o l k . That is correct, Mr. Chairman.
Mr. B a r r e t t . And you desire to read your statement and then
answer questions ?
Mr. P o l k . Yes, sir. It won’t be a strict reading of the statement.
I should say at the beginning that the views I am presenting are
essentially my personal views as an international economist.
The organization for whom I am the economist, the U.S. Council
of the International Chamber of Commerce, is still studying this pro­
gram and they anticipate making a statement. How identical it will
be with the views I express here, I am not sure yet. But certainly on
the item of the release of the gold cover, I think there is no disparity
in our views whatsoever.
Mr. B a r r e t t . We want you to feel very comfortable here and feel
you are among friends. We may want to ask you one or two questions.
Whatever way you may desire to proceed, you may do so now.
Mr. P o l k . Thank you, sir.
Mr. F i n o . Did I understand the witness to say that he works for the
U.S. Chamber of Commerce, or is employed by them ?
Mr. P o l k . No; the U.S. Council of the International Chamber of
Commerce. This is a separate organization, Mr. Fino.
Mr. F i n o . Not connected with the U.S. Chamber of Commerce ?
Mr. P o l k . N o . There is some historic connection but as the country’s
international interests became greater, the U.S. Council broke off from
the U.S. Chamber of Commerce. Not out of any disparity of views,
but for convenience of operation.
Mr. F i n o . A further question. Are the views expressed here this
morning a reflection of the thinking and feelings of your organizatic
Mr. P o l k . I am in favor of the release of the gold cover to cover our
international responsibilities; to cease using it to cover our domestic
Mr. B a r r e t t . Would you mind talking into the mike ?
Mr. P o l k . Yes, sir.



Domestically, the United States has not relied on any linkage with
gold, as members of the committee know, since 1934.
It plays no significant part in the determination of our credit or
monetary policy.
Gold is not a factor in money supply or credit conditions, and I be­
lieve it is the almost unanimous agreement of economists that it should
not play such a part. The conditions that affect the supply of gold are
not related to the conditions which should determine the supply of
credit and money in the United States.
In fact, to insulate currency and credit conditions from sporadic
gold movements, we have made it illegal for our citizens to hoard gold.
This is a somewhat unusual step. I believe that in the case of the
United Kingdom it is also illegal there for citizens to hold or specu­
late in gold. I believe this is largely true in the Netherlands. In other
countries of the world, I believe it is not true.
We hope in the United States that other countries like ourselves will
move in the direction of a more economic determination of the supply
of money and credit, not based 011 gold. In other words, we hope that
in the interests of a coherent world monetary and credit structure,
other countries like ourselves will move from linkage with gold and
might soon move to make it illegal for their citizens to hold gold.
As it is, however, other countries are very goldminded, and they
traditionally act upon their anxieties about inflation and stability of
currencies by getting into gold.
We have just been through a period following the devaluation of
sterling, on November 18, when there was a considerable—often called
massive—movement of foreign private interests out of currencies and
into gold. It seems this was probably less speculation against the dol­
lar than it was against paper currencies in general.
I think I should say candidly that this, in my view, helpful step of
releasing the gold reserve for its use internationally, in the face of
international anxieties about the paper-currency situation, does not
go much of the way toward resolving any of the underlying problems
of the international currency network, or even the anxieties that create
some of our temporary difficulties.
In short, we need to do much more than release our gold reserve for
its useful purpose in international settlements.
We should be intensively exploring in the Congress and elsewhere
the steps that will have to be taken in our efforts to cope with the causes
of this present emergency.
We are faced with inadequate dollar-holding and very poor dollarspending habits in the rest of the world and we should be looking into
the causes that lead countries to accumulate their dollars and convert
them into gold rather than spend them or hold them. This is what is
leading to the emergency condition in the gold market.
Personally, I am confident that the only reason we can assign a very
minor role to gold in the United States in maintaining the stability
of the dollar is that we have productive assets far more important
than gold. We have these productive bases, both here and abroad.
The tremendous earning potential of our foreign investment is some­
what new to us and often gets forgotten.
We have now something over $115 billion in investment abroad. I
have estimated the output of these production bases abroad must be in
the order of a magnitude of something between $150 and $200 billion.



This is an order of magnitude that compares very favorably with the
GNP of all countries of the world with the exception of Russia and
the United States itself.
The earnings from these productive efforts abroad are now in the
order of magnitude of $15 to $20 billion.
Since, internationally, we have no strict statistics on these, when I
speak of “order of magnitude,” it is merely making a bow to the fact
that we can’t count the production. Nonetheless, reasonable reflection
leads to the establishment of these enormous figures and it is in this
productive state abroad that the United States real assurance for the
dollar lies.
Similarly; it seems to me, it behooves us not to take steps that in
any way would render more difficult and less profitable the operations
of our foreign investment establishment; and particularly in these
days when the international responsibilites of the United States are
clearly increasing and have done so regularly in the military and
political fields.
They are especially costly. These are not productive expenditures
in the normal economic sense.
In other words, they represent to us a deficit that has to be covered.
One looks, as an economist, in vain for a reasonable source of cover­
ing these expenditures unless it has come from the private producing
community and the large-scale production efforts abroad.
In this connection, the direction of our international economic
policy is, I believe, disturbing. The ever-increasing restrictions on
investment and credit not only interrupt the natural economic evolu­
tion of these vital assets, but even threaten their proper maintenance.
The program is very perplexing to businessmen. It isn’t easy to
speak definitively yet on the effects of the present measures, and, as I
mentioned,, the U.S. Council, fov which I work, is, like other organiza­
tions, studying the problem intensively now, and hopes soon to set
forth its views.
In my judgment, we need to explore urgently in the months ahead
how to reconstitute the traditional rule of international money and
credit to acommodate, not frustrate, our economic growth and the
rest of the world’s.
Thank you, Mr. Chairman.
Chairman P a t m a n (presiding). Thank y o u , sir.
Now, I have discussed this with Mr. Barrett, who has been acting
chairman during my absence—which I appreciate very much—and
we would like to have the other two witnesses come around and present
their statements, 10 minutes each, and then we will interrogate all three
of you at once.
Mr. P o l k . Yes, sir.
Chairman P a t m a n . Next we have Mr. Charles A. Weil. Repre­
sentative Kupferman, of New York, requested that Mr. Weil be
permitted to testify Is Mr. Weil here?
Mr. W e i l . Yes, sir.
Chairman P a t m a n . Have a seat at the microphone. Mr. Stewart is
not here.
Mr. Weil, you proceed for 10 minutes and then you may put in the
record your statement, or any other material that you want that is
relevant, and then we will be privileged to ask both of you questions.
You may go ahead, Mr. Weil.




Mr. W e il . Mr. Chairman, I am Charles A. Weil, age 70, of New
York City, retired businessman, who has done business all over the
I have been a writer on military strategy and economics for over
30 years, a veteran of two World Wars, with a novel approach to this
problem from the purely military, national security, patriotic angle.
The proposal to repeal the 25-percent gold coverage for Federal
Reserve notes, is a,menace to the effective conduct of foreign relations
and national security. It constrains protesting unilateral financial
disarmament from the national security aspect though heartily sup­
porting opposition for need of disciplinary measures that make a
balanced budget mandatory.
The people must be alerted. I have already sent each member of this
committee a pamphlet, dealing with this and related geostrategic as­
pects of the Vietnam war, but appear here to mobilize opinion against
what we are being let into, and against which I warned 5 years ago
to the House Ways and Means Committee in a memorandum against
fiscal policies that “win elections and lose wars,” March 19, 1963,
hearings page 2911, and the following, to which this committee is re­
spectfully referred, as I foresaw then the very present dilemma the
proposed repeal will only aggravate.
(The pamphlet referred to may be found on p. 309.)
Mr. W e il . From President Johnson, himself—at San Antonio and
Honolulu—our vital interest in a world balance of power has been
conceded and enunciated. Indispensable to such a foreign policy are
the means to implement same. We are committed to the same strategy
followed successfully by England and for several hundred years de­
scribed by the great English military historian and analyst, Liddell
Our historic practice was based on seapower. This naval body had two arms ;
one financial which embraced sea-borne expeditions against the enemy’s vulnera­
ble extremities and military provision of alUes.

Lloyd George said much the same in his memoirs quoted by Russian
Marshal Sokolovosky, with a significance that cannot be overlooked.
Such defense capability necessitated a currency acceptable in for­
eign countries for imports to prosecute war and support overseas mili­
tary forces and allies.
It compelled a policy of stable purchasing power for sterling that
made Britain not only the naval bulwark of the maritime world but
its banker and central reserve, financial as well as military.
Such policy required and created a strong credit standing for
sterling to pay for indispensable imports and, if necessary, as medium
in which to borrow abroad to carry on war, if and when her gold and
foreign assets were exhausted. It gave confidence that when peace re­
turned Britain could, and would, return to sound money, that in most
countries depends on some relation to gold and a sound balance-ofpayments position. That, gentlemen, is a condition, not a theory.
Sooner or later, if we continue to let gold slip out, as it certainly
will, if this fatal measure is enacted we might find ourselves compelled
to admit defeat and to pull out of Vietnam with the disastrous effect on
our strategic position that President Eisenhower wrote Winston



Churchill in 1954 the passing of Indochina into the hands of Com­
munists would have.
Such foreign financial coercion to withdraw before national se­
curity objectives have been achieved, can happen to us. France ex­
perienced it in 1922, when compelled, by stress of the franc, to with­
draw from the Ruhr; and for fear of which financial duress again
in 1936, France desisted, without English support, from marching
into the Rhineland, which would have overthrown Hitler and prob­
ably prevented World War II. This was told me, personally, by Albert
Sarraut, who was French Prime Minister at the time.
Pressure against the franc and sterling in 1956 compelled with­
drawal from Suez in 1956, according to Anthony Eden and Anthony
Nutting, then respectively British Prime Minister and Foreign Min­
ister. The confrontation over Cuba started a run on the dollar.
We experienced it in the Civil War and afterward for many years
when uncovered greenbacks shrank to 38 cents on the dollar and
caused high interest rates and the crash of 1873 that ushered in the
6 -year depression until resumption of specie payment in 1879.
French monetary expert, Jacques Rueff, De Gaulle’s financial ad­
viser, stated his disbelief in letting our gold outflow continue, as it
certainly would if we remove the 25-percent gold cover from Federal
Reserve notes, in a recent interview:
I am not sure that your miUtary people, for reasons of national security in case
of emergency want to be left with so little gold.

A report attributed to the former Director of the Office of Domestic
Gold and Silver Operations of the U.S. Treasury is that, when it
looked as if Rommel was defeating our forces at Kasserine Pass—and
I wasn’t awfully far away from there in 1943—Gen. Mark Clark had
to pay for military supplies in gold; that suppliers would not accept
paper dollars and that the same happened in the Pacific following our
disaster at Pearl Harbor.
It is said that the fall of Rome was due to its loss of gold, in the fifth
We financed and won World Wars I and II with the strategy
described by Liddel Hart and Lloyd George. We have lost half our
gold stock. In 1941, we had almost two-thirds of the world’s gold
stock and a national debt of only $61 billion short-term obligations to
foreigners of only $3 to $4 billion, a favorable balance of payments
and a money supply—currency and checking accounts—of only $50
billion covered by $24 billion in gold, a ratio almost 1:2 and no need
of foreign exchange for support of troops abroad in defense of the
maritime world.
We have lost half our ^old stock, only $11.5 billion remain. We have
a national debt approaching $350 billion and, instead of surplus, have
a persistent international payments deficit for 17 years, currently
worsening with an annual rate of $2 to $2.5 billion. As a result, the
United States currently owes about $35 billion to foreigners, including
4.8-billion-dollar holdings of the IMF.
Our domestic budget deficit has risen to over $20 billion currently, a
money supply of $182 billion against gold cover of $11.5 billion, a ratio
of 1:15 and while we need external foreign exchange resources to pay
for vast military forces outside the dollar area.



In 1941, the Federal Reserve discount rate was 1 percent. Today
that rate is 4y2 percent, with much higher for long-term financing that
can only make war financing most difficult as a problem at home as
well as abroad.
This measure would force interest rates to rise even higher than
the penalty taxes and rates under present provisions of law and selec­
tive rediscount and credit as I personally experienced in Brazil, that
when chronic currency depreciation took over, interest rates rose to
5 percent per month, 60 percent per annum, to compensate for the risk
of such depreciation in purchasing power, foreseen not only by John
Stuart Mill but even the godhead of “new economics,” Lord Keynes.
Proponents of gold cover repeal speculate the value of the dollar,
its purchasing power abroad, depends exclusively on the country’s
productivity without the security of its gold cover. Our only experi­
ence in 1933 negatives the pretense when the dollar fell steadily in
value abroad until its relation to gold cover was reestablished at a
new price for gold.
There is not a single instance in our history to support the repeal
and many instances in foreign countries to destroy this newest of fine­
spun theories of money debauchers.
However, assuming arguendo the gamble with dollar’s value in
peacetime may not be disastrous, as my friend here has argued, it is
most likely to be calamitous in wartime when there is always a shortage
of manpower, domestic raw materials, and foodstuffs, and shipping
to produce and transport goods to pay for indispensable imports for
war production and food, together with lack of shipping to transport
American overseas expeditionary forces and materiel for allies and
acceptable money to subsidize them.
Let us rather conserve our financial strength, that is, what re­
mains of our gold stock for foreign emergencies, some of which are
already threatened in Korea and the Middle East, as I foresaw 5 years
ago. That means not repealing our present reserve requirements which
place an effective de facto embargo on about all our remaining gold
stock without the unfavorable shock of an embargo.
That would have been the English way. Let us not encompass this
country’s conquest, or its alternative, nuclear war, on fine-spun theories
of the stupid savants of academe in league with Keynesian Marxists
and union leaders who see no further than the next union election.
I don’t suppose the Joint Chiefs of Staff approve of this removal
measure unless for fear of the treatment, the French call it “limogesin-g” accorded Admiral Anderson as CNO for holding views con­
trary to the political establishment.
Keynes himself wrote:
Lenin is said to have declared that the best way to destroy the capitalist system
was to debauch the currency . . . Lenin was certainly right. The process en­
gages all the hidden forces of economic law on the side of destruction and does
it in a manner which not one in a million is able to diagnose.

I trust I am one of those.
In fine, Senator Fulbright in the New York Times, Saturday, Jan­
uary 27, conceded the dilemma, that the choice is between domestic
requirements and power politics. But he overlooked the latter was not
of our making but onty a defensive reaction to avowed intents and
acts by confessed enemies. However, he also conceded that history
shows eventually the former gives priority to the latter.



The “realists” or “hawks” give priority to the former, the “senti­
mentalists” or “ doves” the latter, which is reflected in the basic fiscal
and monetary issues fundamental to the bill before this committee.
We overlook that Lord Keynes was primarily concerned with recur­
rent domestic cyclical depressions, not military challenges for world
domination nor depressions resulting from such challenges as in 1929
to 1941. This bill represents the outcome of an economic and political
philosophy generated to prevent domestic depressions but which has
turned out, as I predicted, incompatible with defense of the realm.
Proponents of this bill overlook we have survived and can still sur­
vive many depressions but not military conquest, or its alternative,
nuclear war. They would, out of humanitarian instincts, jeopardize 200
million sound and solid Americans and the rest of the free world for
the votes of 5 million disadvantaged persons. That is your choice in
bald terms, the choice between evils. We must choose the lesser, lest
neither the 5 million nor the 200 million survive.
Perhaps this can be resolved by diplomacy with enemies, perhaps by
accommodation with nations having parallel interests to nelp carry
our mutual burden.
But if shortsighted political pressures overcome my feeble words as
I expect, sooner or later, and, I fear much sooner than I like to believe,
we will have to stop the gold outflow or perish from the earth.
So he performed a very useful service in focusing attention on the
fundamental problem created by the Eusso-Chinese avowal of inten­
tions and acts to dominate the world that created the dilemma between
incompatibles, between which we must choose, if we cannot apply Castelreagh’s advice of adjustment between domestic and external
This is my direct, gentlemen, and I am welcome to be crossexamined.
Chairman P a t m a n . Mr. Barrett.
Mr. B arrett . I have no questions. I do want to thank Mr. Weil and
Mr. Polk for coming here and giving us their testimony.
Chairman P a t m a n . Mr. Fino.
Mr. F i n o . Mr. Weil, most of the testimony before this committee has
indicated that gold is not so important, that, if anything, its value is
merely psychological. I would like to know, why is it that all of these
foreign countries are hellbent on grabbing our gold ?
Mr. W e il . Mr. Fino, I have been in many of those foreign countries
iand I know how they feel. It is visceral, and it is based upon a long ex­
perience and long history of finance in the world, since John Law’s
bubble burst in the 1700’s.
Mr. F i n o . Mr. Polk, do you see any difficulties on the mandatory
repatriation of profits with regard to those U.S. direct investments
that are jointly owned by the United States and European investors?
Mr. P o lk . Yes, sir. This range of problems is certainly, now, very
much under examination by specific companies to ascertain how it
affects them. I believe it is the general reaction of companies now that
there will be many instances, particularly for those companies who
are most cooperative in the earlier period of the voluntary restraint
program. This will create real difficulty for the maintenance of their
minimal investment activities abroad now.



I think some of them figure, for example, that the immediate pay­
back within a year that will be required, approaches 95 percent, and
this is not a basis on which they can sustain operations. I am sure that
the Commerce Department administrators are becoming aware of
this problem. I don’t know to what extent there will be sufficient
flexibility in the administration to take care of some of this, but it
is a very real problem.
Mr. F in o . Mr. Barrett asked the previous witness what, in his
opinion, he considered stronger, the gold or the dollar, and the wit­
ness indicated, with some mixed feelings, that the dollar and the
gold—and it was very difficult to elicit from him a firm, definite,
exact, direct answer. And I followed that with the question, as you
recall, which would he rather have, the gold or the dollar? There
was no equivocation about that. He said the gold.
How do you feel about it. Which would you rather have?
Mr. P o l k . Without any ifs, ands, or buts, the dollar.
Mr. F i n o . Thank you.
Chairman P a t m a n . Mr. Hanna.
Mr. H a n n a . N o q u e s t i o n s .
Chairman P a t m a n . Mr. Brock.
Mr. B r o c k . Mr. Polk, first off, would you say again, what was our
total investment overseas?
Mr. P o l k . We estimate it is around $115 billion. When I say “esti­
mate”, we have a fairly firm basis through 1965, that this has been
updated by inspection.
Mr. B r o c k . What is the output, the production output, the sales of
those investments overseas?
Mr. P o l k . I estimate that at $165 billion, currently, with the proviso
that there is a large possible margin of error in an estimate based on
what we know about manufacturing concerns, which represent only
about a third of total direct investment abroad, and about one-sixth
of the grand total investment. Nonetheless, I think this is a fairly good
Mr. B r o c k . That would be the gross international product on an
annual basis ?
Mr. P o l k . Yes. I wouldn’t want to overdo the analogy. It is not
operated like a country. This is cooperative production, scattered
around the world. But in magnitude, it is in that order.
Mr. B r o c k . What are the profits on those investments, on that pro­
duction or sales, or provision of services?
Mr. P o l k . By and large, 10 percent is a fair figure.
Mr. B r o c k . Y o u are talking about $16.5 billion. Of this, the annual
return to this country is something in the neighborhood of $6 billion?
Mr. P o l k . That is correct.
Mr. B r o c k . So we are reinvesting $10 billion a year from our profits
overseas ?
Mr. P o l k . Probably.
Mr. B r o c k . In addition, we are also investing around $4 billion from
this country a year, aren’t we? What is the capital investment out?
Mr. P o l k . Around 3 ^ , now, in direct investment.
Mr. B r o c k . So we have 10 over there, plus 3%—$13.5 billion per year
now on those investments. That is $13.5 billion. I f we get a 10-percent
return, that would mean close to $1.5 billion net profit we would make
next year on the investments we are going to make this year ?
89—292— 68— 1
— 16



Mr. P o lk . Yes, sir; counting only the profit on new investment.
Total earning on all our investment would be 10 times that amount.
And profits repatriated are currently in the range of $6 billion a year.
Mr. B rock . This is where I think the administration’s proposed
balance-of-payments program reaches a level of incompetence that has
been exceeded by few. It is frightening to me to see us following the
identical pattern that was followed in England the last few years.
I spent the weekend in England and talked to their economists,
political and diplomatic leaders, and they ha,ve taken the attitude, just
as we seem to take it in this administration program, that in order to
address a problem that is created by the public sector we attack the
private sector. The net return on our investments since World War
II, as I recall the testimony of the previous witnesses, was $109 billion.
The net outgo as a result of governmental action was $125 billion.
So the deficit is entirely the result of governmental policy and yet the
President’s program would curtail, or eliminate, investments, require
the repatriation of profits now being earned, and reduce or eliminate
any other loans overseas. It will be self-defeating.
I talked to some people in the English business community and the
English political leadership, and I said, “Gentlemen, what will be your
response to the balance-of-payments program in the United States?”
They said, “Well, the immediate consequence is going to be on increas­
ing our bajance-of-payments deficit, which we just got through facing,,
that resulted in a devaluation. We will have to respond in kind to
protect ourselves. And the same thing is going to happen to Japan,
Germany, Italy, and France.”
Any country in the world is going to have to respond in kind in
order to protect their reserve position, because we are making an as­
sault upon their reserves.
I f we reduce our deficit, we reduce their surpluses.
Have you given any thought to the ramifications of this program in
these terms? What is the potential for international trade recession
similar to that which occurred in the 1920’s, as a, result of these
Mr. P olk . I don’t think this is subject to statistical forecast. We are
dealing with a factor here that is at least as psychological as the
anxieties that arise on the gold front.
It would seem to me it is entirely within the realm of expectation—
let me start again. It depends a very great deal on what other measures
are taken in the meantime. I f this general program of U.S. restriction,
plus the continued European pursuit of surpluses in their interna­
tional accounts, proceeds with nothing more, we are bound, I think,
to see a considerable deflationary movement. We have interest rates at
a world level now that in the judgment of many economists—certainly,
mine—is inimical to capital formation and production itself.
There are psychological overtones to this that put one in mind of the
situation when the collapse of the Kredit Anstalt in the early thirties
touched off a world depression.
Again, offhanded, I think that there is sufficient economic sophisti­
cation in the world to intercept deflationary movements of that depth.
On the other hand, I do hear it said, quite openly, in Europe as well
as this country, that perhaps we should live with a negative growth
rate. This, to me, is incredible.



Mr. B r o c k . I would agree with you on some improvement on our
economic sophistication, but I think it is largely domestic sophistica­
tion and not related to international sophistication.
I f I can conclude with this, the president of the First National City
Bank, in the recent issue of U.S. News & World Report, made some
interesting comments on the balance-of-payments program. He said
something to this effect: That controls beget controls, rather than re­
lieving the situation on the short term and long term. Very shortly
the temporary controls become permanent, and in order to stop the out­
flow that thence occurs as a result of negative effect from previous
years, you had to impose even more controls.
Would you agree with this premise?
Mr. P o l k . Yes; I d o .
Chairman P a t m a n . Mr. Annunzio.
Mr. A n n u n z i o . No q u e s t io n s .
Chairman P a t m a n . Mr. Stanton.
Mr. S t a n t o n . Thank you, Mr. Chairman.
We appreciate your testimony this morning. Mr. Polk, in your atti­
tude or approach toward the problem we are now faced with here in
the committee, the general impression given by the administration and
our Treasury officials on this subject is that we stand behind our com­
mitment to exchange gold for dollars, down to the last bar,, if necessary.
Would this attitude, down to the last bar—maybe a figure of speech—
would this coincide with your own thoughts on this subject, or should
there be a breakoff point at which we should, maybe, for national
security reasons or defense or some other reason, take another look at
this thing in a year’s time ?
Mr. P o l k . Mr, Stanton, I must say, not having a great deal of
thought to what that minimum might be, I think it would be very
small indeed. I can imagine the Government stockpiling gold, as it
would any strategic metal, and gold indeed has increasing strategic sig­
nificance in electronics and high technological and industrial uses. As
far as curtailing it for the purposes of maintaining some remaining
contingently available psuedomonetary fund, I would not be in favor
of this.
Mr. S t a n t o n . Another question: To the extent that the President’s
January i mandatory controls, for the most part, only affect those
corporations already in Europe and elsewhere, doesn’t the President’s
balance-of-payments program most seriously affect that many U.S.
corporations who intended to branch overseas sometime in the near
Mr. P o l k . Yes, it does, unless they scale their intentions down to
$100,000. I think this problem, again, is one that is under considera­
tion and I would hope that there is flexibility to take this into account.
You are quite correct.
Mr. S t a n t o n . To the extent that U.S. capital outflows and direct
investment are reduced, do you see any increased Eurodollar, Euro­
bond interest rates, and other economic dislocations?
Mr. P o l k . Although we were watching Europe with increasing
interest—by “ we,” I mean all of us in the international financial com­
munity;—we don’t know what the capacity of the European market
itself may be for generating substitutes to dollar credits. In my own



views, as you gather from my statement, dollar credit is absolutely im­
perative for the implementation of both U.S. growth, including U.S.
growth abroad, and the growth of the rest of the world.
When we shut off the normal source of finance—the most ad­
vanced country in the world has, after all, been playing a role that is
consistent with its achievements in production—when we cut this off,
we look to see if one might expect European sources—I say European
because Europe is mo,st of the rest of the advanced industrial world—
will be adequate to the needs ?
Now, there has been some encouragement in the last couple of years
as we have tried to borrow more in Europe under the voluntary pro­
gram as it has existed. We may be getting up to a billion dollars
a year in new credit. This has certamly stimulated the growth, an
overdue growth, of the European capital market. I don’t really expect
that it is going to come up, however, to the level that American com­
panies between their transfer of savings here, legitimate savings, and
their earnings retained abroad, were able to generate in the past.
In other words, I think credit is going to fall off. Now, I think this
is a long way around—but the Eurodollar market is just part of the
entire context here—we will find the Eurodollar availabilities are also
curtailed and this will bring credit stringency.
Mr. S t a n to n . I might have missed your answer to this question, if
it was asked when I was called out. Did you comment on the President’s
January 1 statement as regards the subject of tourism? How do you
feel in regard to that statement ?
Mr. P o lk . I don't in any sense consider myself an expert on tourism,
and this is obviously an extremely touchy problem. So one feels, I think
you understand, uncomfortable in commenting on it. Notwithstand­
ing that, I think probably it is my duty as an economist and a citizen,
to say that I rate very highly the right of Americans to travel. I think
it is in the best interests of this country and I view with a great deal of
concern any effort to curtail that right.
Now, if those efforts took the form of actual statutory prohibition
or statutory provisions to inhibit travel by making it unduly costly,
this, I think, raises a fundamental political problem: Is this within
the context of the rights that Americans should have, and is it in the
best interests to have the country curtail that travel? On the sheer
economic question, would it save us money in the balance of payments,
I think the answer is a sort of hesistant “ Yes” . I think it would, for a
temporary period. I think it would be a much lesser amount than has
usually been thrown around, but probably, “ Yes.”
The balance between the curtailment of right and the interests of
the country in having our people abroad, has to be weighed against
somewhat doubtful and temporary savings in balance-of-payment
terms that might be achieved for a brief period.
Mr. S tan to n . Strictly from an economist’s point of view, do you
see any direct relationship or indirect relationship between the outflow
of gold in our country, which is a fact, and the relationship between
that fact and the deficit of our Federal budget during the same period
of time? The increase in size of the deficit of the budget, with the in­
crease in the outflow of gold ?
Mr. P o lk . No; I don’t think there is a direct relationship. I think
there is a relationship. I think it has to be traced through far more



intricate logic than is normally done in the debating of this issue.
Somehow the Federal deficit has to be related to the spending habits of
the country and the spending habits of the country to their import
habits, and their import habits have to then be fitted into the context of
the importing habits of foreign countries, and this has to be fitted into
the psychological attitude of foreign countries toward gold, which is
apart from this, and after you sort that all out, I think you say there
is some relationship, a complex one, a most difficult one to spell out,
and in my judgment, normally highly oversimplified.
Chairman P a t m a n . Mr. Blackburn.
Mr. B la ck bu rn . Mr. Polk, you stated that the dollar was preferable,
in your mind, over gold. Yet at the same time, you wouldn’t tend to
minimize the psychological impact that gold does have in the world
monetary market.
Now, the President’s proposals, I think even your testimony, and
most everybody agrees, that it does not pose a long-range solution to
the problem, that we are just attacking symptoms and not the basic
What do you think is the simplest and quickest thing we could do ?
Let me ask you, for example, one of the major drains is the mainte­
nance of our troops in Europe, Britain, and these places. Suppose we
were to pull back a large number of those troops and their dependents.
Wouldn’t that pose, and I am putting aside the possible political
implications this might have internationally, but economically,
wouldn’t that be the simplest and most far-reaching and longlasting
solution to our monetary problem ?
Mr. P o lk . This is a logical argument and I have certainly heard it
I must say, personally, I dislike the notion of trying to ascertain the
priority of security obligations on the basis of financial considerations.
This is especially so when the financial considerations in my judgment
are subject to quite a different kind of treatment.
Now, whether we are excessively overextended abroad is a decision
to be made by this country in its constitutional processes. This is some­
what divorced from the question of, are we financing those expendi­
tures in a wise way. I would not like to latch onto a financial embar­
rassment as a reason for altering the deployment of our troops, for
Mr. B la ck bu rn . Well now, we are all very much aware of Great
Britain’s retreat into Small Britain, we might call it, when her plans
are ultimately carried out. Hasn’t she been forced to take this rather
ignominious step by reason of financial considerations ?
Mr. P o lk . I think: you could put it that way. I would prefer putting
it generally in terms of the shrinkage of their relative power.
Mr. B la c k b u r n . Isn’t that an illustration of basic fallacy, when you
say that you don’t like to give finances consideration when considering
our international commitment? Can you separate the two that easily,
when we have the very dramatic example of Great Britain before us
today ?
Mr. P olk . I think that is a very good point and it is a conceivable
logical fallacy. What we have, I think, involved here is a question of
judgment. Is the United States considering a revision of its interna­
tional commitment because of an item that is called “ deficit” in bal­



ance of payments that ranges somewhere between $1 and $4 billion
a- year m our recent experience, or is the United States review­
ing those commitments in terms of whether we as a country are pro­
ducing enough to maintain forces of that size abroad? In my judg­
ment that latter question is not, in fact, forced on us. In Britain’s
case, I think it has been clearly forced.
Mr. B l a c k b u r n . Well, suppose we were, too, as another alternative,
and inclined to agree that $1.5 billion a year deficit, with the gross
national product running now close to $800 billion a year, perhaps
we are letting the tail wag the dog a little bit. Suppose we were to
remove or to stop our commitment to buy gold at $35 an ounce, and
sell gold at $35 an ounce, and let the dollar reach its economic value
on the world market; would that be an alternative to removing the
gold cover?
Mr. P o l k . Yes; i t w o u l d .
Mr. B l a c k b u r n . N o w , that would set off certain instability, would
it not, in the international monetary market?
Mr. P o l k . Unquestionably.
Mr. B l a c k b u r n . Well now, what we have to decide, and I don’t
think anybody really has an answer to this, is what would be the
severity and how long lasting would be the repercussions? Do you
predict utter chaos, or would you predict 3 or 4 months of unsettled
world fighting?
Mr. P o l k . We are now talking about the alternative of the United
States altering its gold policy?
Mr. B l a c k b u r n . R i g h t .
Mr. P o l k . We are talking in a field where the stakes are rather high
and where one cannot be certain of a judgment. Let me say I am not
trying to evade this question. I personally believe that, should the
United States change its gold policy, cease buying and selling of gold,
it would become apparent that it is the monetary use of gold, the
United States use of it, that keeps gold at $35 an ounce, and I think
the world price would slip. But I am not certain of that and I am
certain that there would be disturbances in the market.
This means that I would much prefer a solution that did not directly
involve this risk and I think we have such solutions.
Mr. B l a c k b u r n . Let me ask you this quick question. The fact that
gold is not being mined on a large scale, we know that there are gold
deposits in this country but the cost of mining is not low enough to
justify mining at $35 an ounce, now the fact that the industrial uses of
gold are not high enough to give the real value of gold something
greater than $35 an ounce, something great enough to justify its mining
today, except, as I understand, in South Africa and Russia, where the
cost of labor is a very small thing, doesn’t that indicate to you that we
are maintaining the price of gold, and the gold does not maintain the
price of a dollar?
Mr. P o l k . Yes; it does, among other reasons.
Mr. B l a c k b u r n . I see my time has expired.
Chairman P a t m a n . Mr. Brown. ^
Mr. B r o w n . Thank you, Mr. Chairman.



Following up, Mr. Polk, what Mr. Blackburn had to say, I think you
would agree with the statement that has been made before the com­
mittee that today the dollar is propping up gold rather than vice versa %
Mr. P olk . Yes; I would say so.
Mr. B ro w n . I am not quite sure that I understand your position in
this next area. Is it our short supply of gold which is the mam problem
that this legislation would alleviate, or is your support of this legisla­
tion unrelated to gold supply but, rather, based upon your belief that
gold backing should go ?
Mr. P olk . Not the latter. My support is based on the belief that the
most useful thing that gold can do in the world today is to stabilize
conditions in markets that involve very strong feelings about gold.
These markets can range all the way from the dealings of Arab chief­
tains to exiled political leaders, to Indian peasants, to French peasants,
and to central banks, to some extent, who are in a way deferring to the
other feelings.
I think we have a world in which these feelings are still operative—
in short, where people want gold. The most useful thing that we can do
with gold is to ease this international supply system by releasing U.S.
gold. It is not hurting us and not doing us any good. It would give, I
think, some stability and above, some time to the continuation of the
discussions which have become quite broad now in the international
monetary field to erect a better system of payments.
Mr. B row n . D o you think that these anxieties, or this anxiety to
which you referred earlier and have alluded to now, that gold kind of
tempers, or alleviates? would be further alleviated if we then went to
some means of providing a greater supply of gold, such as the subsidiz­
ing of the production of gold ?
Mr. P o lk . Yes, at least to a minor extent, I think the appetite would
be appeased. But this isn’t really the main reason for doing it. I think
the main reason is, if we do it we don’t have to do anything as drastic
as a radical alteration of our gold policy—of our buying and selling
policy, or changing the price of gold, which we are not going to
change. We don’t have to do this. We have time to discuss alterna­
tives to this kind of policy.
Mr. B ro w n . Well, let me just phrase another question to you, then.
First of all, do you really think that most international economists
believe as you do ? Have you expressed to us this morning any opinions
that are radical or unshared by others ?
Mr. P olk . That is a hard question to ask me. I am certainly aware—
I think all economists are—when we get together there is a broad
range of opinion on a specific issue.
Mr. B row n . Wouldn’t most international economists probably say
the same thing you said this morning in answer to Mr. Fino’4s ques­
tion: “Would you rather have gold or the dollar,” and you said, “ The
dollar, no ifs, ands, and buts” ?
Mr. P o lk . Yes, sir.
Mr. B row n . Then, is it just the anxiety that you talk about that
causes the necessity for maintaining the international backing of
the dollar?



Mr. P o l k . By “the international backing,” you mean----Mr. B r o w n . Gold b a c k i n g .
Mr. P o l k . Well, yes. One of the ways in which we are advanced as
an advanced economy is in our credit and banking practices.
Now, we have a perfect solution when a run on a bank starts in
the United States, and there hasn’t been one since we have had the solu­
tion. But if people really, all that much want cash instead of bank
accounts, we would issue cash. But when an international run on the
bank starts, so to speak, there is no place to go except to the United
States, asking for gold, and here we cannot alter the supply of gold
as we could domestically our cash reserves.
So, what we are asking in a way, what we are hoping, is that other
countries will, in their attitudes toward international credit, come to
have the same kind of attitude that the most advanced countries have,
certainly including ours. There is no real basis for their doubts about
the dollar.
Mr. B r o w n . Well, Mr. Polk, you would agree, would you not, that
the balance-of-payments problem and the legislation we are con­
sidering here today are intimately related?
Mr. Polk. Yes; I would.
Mr. B r o w n . Then, are we not today in a comparable position to that
of Great Britain of many years ago; that is, as the return from ac­
cumulated overseas investments commenced to compound itself, she
found herself in the strange position of having almost a gross exces­
sive favorable balance of payments and a deficit balance of trade?
Mr. P o lk . I am not sure I know how best to answer that question.
There are parallels between Britain and the United States, but I see
them largely in terms of Britain having been over some of this path
at an earner date when they underpinned the maritime world o f the
18th and 19th centuries. They were the top nation.
Now, the nature of the world has changed somewhat. No one would
imagine bv maintaining a navy alone that somehow the whole texture
of a world would be firmed up. We have inherited a different kind of
leadership that has to be shared, and a different kind of world. I guess
it is those differences that----Mr. B r o w n . Well, Mr. Polk, if we happen to be following a similar
course, and if our future holds for us that which the future of Great
Britain held, you wouldn’t be supporting this legislation now, would
you ?
Mr. P o l k . I am not sure, Mr. Brown, I understand in what particu­
lar way you feel we are following a similar course. ^
Mr. B r o w n . Others have testified before this committee and indi­
cated that this is very possibly true, that as our overseas investments
continue to accumulate, the return becomes much greater, and soon
you find yourself with a much greater return than there is direct
investment out, and so you have a surplus in your balance of payments.
I f there were a surplus in our balance of payments, I doubt very
much that you would be urging this committee to report out this
Mr. P o lk . That is certainly true. And I think we could do with a
little period where we had that kind of situation.



Mr. B r o w n . Again, I would ask whether or not you think we are
following a comparable course of action in history. I think you said,
Mr. P o l k . Well, I think these things are hard to calculate out in
broad historic terms. How much did Britain get out of their invest­
ment? You have to net out what she spent to keep the British-type of
world going. I think this is hard for us, too. What we are doing,
obviously under different international communications and techno­
logical terms, is to take the lead in international production and in­
vestment, and this is tremendously profitable on the face of it.
At the same time, we have taken the lead in certain costly activities,
basic political and policing activities.
Mr. B r o w n . I wouldn’t expect you to be 100 percent accurate be­
cause Mr. Barr, the Under Secretary of the Treasury, was here
awhile back and after giving us predictions and suggestions on what
would happen if we don’t pass this bill and what would happen if we
do, he said, in answer to a question, “We have been 95 percent wrong
in the past.” Needless to say, that causes us to somewhat question the
complete accuracy of his prediction today in this reference.
Mr. Weil, one question. I want to make sure I have the thrust of
your argument. Oversimplified, is the thrust of your argument that
preservation of our reserves of gold is essential to our national security,
as a thing of value to exchange for other things of value, rather than as
a backing for the dollar ?
Mr. W e i l . That is correct, sir. I am interested, particularly in the
international political power, political situation, and I tried to empha­
size that; and I think you will find it even more emphasized in the
memorandum which I presented. And if the committee would only
permit me to read a few words from a memorandum presented to
the House Ways and Means Committee 5 years ago, you will find that
Cassandra is as usual, very unwelcome.
Mr, B r o w n . My time has expired. I would be happy to have you do
so, but you can’t do it on my time because I have none.
Chairman P a t m a n . Thank y o u .
This concludes the testimony of you two gentlemen. We now have
another witness who has just appeared, Mr. Stewart.
Mr. B r o c k . I would like to come back to one question to Mr. Polk,
and he can answer it for the record.
We have talked about a lot of alternatives, and I would like you to
submit your alternative to the balance-of-payments program. You say
there are viable alternatives to what we are doing and the viable alter­
native to raising the price of gold, I would be very grateful if you
would let me know what you suggest we do because we do have some­
thing of a problem.
Mr. P o l k . I think that, b y and large, we are headed in the right
Chairman P a t m a n . Y o u can answer it for the record* When you get
your transcript to correct you may supply the answer to his question
m writing.
Mr. P o l k . Very good.



(The information requested follows:)

o l ic y

C o n s id e r a t io n s



U n it e d



I n t e r n a t io n a l


in a n c e

(By Judd Polk)
The general objective in international finance is to continue moving toward
international arrangements which provide:
—adequate credit for international production, which means adequate
freedom of capital movements so that the great capital markets—num­
ber one being New York—can serve efficiently as world centers;
—adequate cash ( “liquidity” ) both for trade settlements and to cope with
deteriorations in confidence;
—adequate cooperation in economic policies.
In short, the proper evolution of credit for a growing and increasingly inter­
nationalized world economy must be accommodated in an environment of rein­
forced confidence. This evolution of credit involves new procedures and attitudes,
and consequently invites in this period of growth anxieties. Confidence, which
is the essence of credit, has to be built, and in this building the strongest factor
internationally, as we have found domestically, is a cumulative record of pro­
ductive growth under reasonably stable conditions.
There is clearly no simple magic formula for building a credit structure world­
wide. A “credit” is( above all, a documentation of trust, of confidence that the
productive activities for which the credit is provided will be successfully con­
cluded. Paradoxically, one of the major obstacles to the successful conclusion
o f such activities is the tendency of creditors to get nervous, to force liquidations
o f projects, and thus to arrest the production which alone could validate the
credit. It must, moreover, be frankly acknowledged that the achievement of
the above objectives of credit and production are immeasurably more complex
internationally than nationally. And for this there is a simple explanation:
there is no international sovereign to oversee money and credit operations.
There is no international “legal tender”. There is no readily expandable inter­
national “cash” available to increase creditors’ liquidity when their nervous­
ness threatens a “ bank run”. In lieu of international cash, a bank run means
essentially a run on the world’s limited gold reserves, and more specifically
on the gold in U.S. reserves.
So, while the problem of an adequate international financial system introduces
a singular difficulty because of the unavailability of an international monetary
authority with sovereign powers, the problem is nonetheless far more one of
building than of invention. The achievement of an adequate, efficient system
will be expedited by pursuing all the essential elements simultaneously.



As in the operation of major national economies, certainly the $800 billion
U.S. economy, the all-important institutions internationally are financial rifarkets, a term here meant to include both the money market (for demand and
other short-term instruments) and the capital markets (for instruments of
longer maturity than a year). While conditions in short-term and long-term
markets involve differences, these are less relevant here than the broad charac­
teristics they have and should have in common as places where a high degree of
liquidity is assured to holders of debt instruments of any maturity. The liquidity
which a good market affords is incidental, however, to its classic and still most
vital function of facilitating the translation of idle savings into productive
commitments. The regular further development of the major international
financial markets should be the prime objective of policy. Otherwise, the cost
to the world economy will run into ill-spared tens of billions of dollars a year
in world production. What is at stake is the continued growth of international
production, which has regularly achieved 10% a year over the past two decades,
and of international trade which in providing expanding markets is vitally
important to continued achievement in national or international production.



In short, the international financial problem much resembles that of any econ­
omy, certainly that of the United States: financial institutions and operating
policies must assure the essential means for the ready translation of savings into
production. This vital translation is the investment process.

The confidence problem, which is deeply rooted in the long history of national
monetary difficulties and even wildly destructive inflations, can ultimately be
met only by demonstrated stable relations between achievements of borrowers
and the expectations of lenders in regard to production for which financial accom­
modation has been provided. When creditors* anxieties—which stem from con­
ditions and worries almost completely outside and in spite of the promising pro­
ducers* “work in progress’*—touch off a liquidity scramble, this all-important
productive achievement by borrowers is simply undermined. Production halts
while creditors evaluate inappropriately the cash value of their assets.
Whether conceived in terms of hot money movements, unstable short-term
capital flight, or simply exchange speculation, the snowballing search for in­
ternational cash in periods of anxiety has constituted a major problem of inter­
national finance throughout this century. The enormity of international com­
mitments in trade and production today dramatize the crippling effects of the
system’s inability to provide liquidity seekers with a flexible cash asset com­
manding international acceptance. Such a flexible asset is a key element in all
modern national monetary systems. The ability of a system to provide unlimited
cash in a liquidity crisis is the main assurance modem industrial nations
give against the disastrous impact of bank runs on production.

Intergovernmental approaches to the problems of the world economy are
bound to be politically more complex than governmental approaches to national
problems. At the same time, the disparities in economic policies are greater
on the international scene that in regions of a single nation. The lack of an
international government with power to induce cooperation by different nations
emphasizes the unusual importance of constantly seeking improved ways and
means for their voluntary cooperation in basic economic policies. In particular
at this time, such cooperation must provide for higher consistency of national
reserve aspirations: the direction of national policies in most of the world
outside the United States to produce regular increases in reserves is not con­
sistent with the simultaneous rejection of dollar reserves or any international
alternative to the dollar. Similarly, national tax policies directed toward the
assurance of reserve accumulation in all nations are inconsistent with interna­
tional financial balance.
These three vital international financial objectives—credit adequate for pro­
duction, cash adequate to assure confidence, and economic cooperation to fill
some of the gaps in the international political structure—continue to spell out
the proper direction of work ahead. It is an encouraging aspect of international
financial policy that much progress toward all of these objectives have been
fairly recorded since 1944, when the International Bank and Fund were
founded—an identifiable new chapter in cooperation. On balance, this progress is
readily distinguishable in spite of recurring setbacks, as in the recent vulner­
ability of sterling in the wake of liquidity pressures, and since sterling’s devalua­
tion, in the months of anxiety about the dollar and the adequacy of U.S. gold
U.S. policy in the immediate months ahead should return to pursuit of these
basic objectives:
1. On the cash problem, which is uppermost in international attention,
it is important to press for broadened IMF reserve functions at an early
date—earlier than the present schedule envisaged for activating in 1961)
or 1970 the first Sepcial Drawing Rights. It is equally important to con­
tinue the efforts to secure the cooperation of foreign central banks and
governments in minimizing official gold conversions, in combatting the regu­
lar drain of official gold reserves to private hoarders, and in facilitating



the expenditure of accumulating dollars. Further extension ofthe bilateral
swap-credit arrangements, already a considerable achievement, should be
continuously sought, as well as special bilateral dollar-holding understand­
ings of the sort already begun with various important countries. A more
concentrated effort should be made to terminate the harmful and growing
generation of free dollars to meet local costs of our current military
2. On the credit problem, the prospect of progress has obviously been
worsened by the ever-broadening program of capital controls adopted by
this country. The provision of capital to the rest of the world is the normal
position for the highly developed United States economy and is critically
important to the viability of our present world investment structure—a
structure which in turn makes vital contributions to foreign economies.
Investment contributions by other industrialized countries are important
to balance against the calls on U.S. sources. The recent signs of greater
capital-generating capacity abroad are important to balanced world finance,
and should be further encouraged.
3. On the problem of international policy cooperation, there is little more to
say specifically. The important thing is to resist the evident tendency to dis­
card cooperative approaches merely because not enough cooperation has
been achieved to date to prevent the current discomforts of the U.S. gold
drain. There is reason to believe that relatively marginal achievements in
cooperation will be enough for the evolution of a workable payments system.
The symptoms of imbalance—the U.S. gold drain, the U.S. balance-ofpayments deficits, the persistent surpluses of Europe, the shortfall of capital
financing—are all of most limited range in comparison with the production
of the economies to which the symptoms pertain. We are talking of aggregate
national GNPs of $1600 Million (half accounted for by the United States),
and against this, financial symptoms in the $1 to $4 billion range.

Chairman P a t m a n . Mr. Stewart has come in. Before calling Mr.
Stewart, Mr. Fino and I have discussed, along with Mr. Barrett, that
we would like to have the three witnesses tomorrow morning take 1 0
minutes each. Then we will interrogate all three of them, as we usually
do. Then after that we will try to have an executive session on the bill,
and see if we can dispose of it tomorrow, rather than having a Friday
Without objection, we will do that.
Mr. Stewart, you were not here when we called you. This places us
ut a little disadvantage because we usually hear the witnesses, each
one, and we interrogate all three of them together. But I am sure you
must have some good r e a s o n for not being here. How much time would
you want to take, if we hear you now ?
Mr. S t e w a r t . Ten minutes.
Chairman P a t m a n . That will be all right. We will hear you.
You can file your entire testimony, Mr. Stewart, although you need
not recite it all. Identify yourself and proceed.

Mr. S t e w a r t . My name is Eugene Stewart. I am general counsel
of the Trade Relations Council of the United States, a trade associa­
tion with broad industry representation, interested in the factual
side of our foreign-trade picture.



Very briefly, this morning, I intend to present for the record and
for such consideration as your committee may deem relevant to your
balance-of-payments study, a computerized list of a very severe im­
balance in our foreign trade that affects 1 2 2 manufacturing industries.
By way of explanation as to my appearance at this hour, Mr. Chair­
man, I had explained, but doubtless not in the most effective way,
that as president of a nonprofit corporation which is creating lowincome housing in the District of Columbia, we had great pleasure this
morning at 9 :30 to have our final settlement on the project with the
FHA and FNMA and the builder and the bank. This project has
taken so many years and months of preparation, and there were so
many people involved in the settlement this morning, that it was
simply impossible to arrange it at a different hour, and I was told
it was not possible for the committee to hear me other than this
morning, and that I could come at 11:30.
Chairman P a t m a n . That is satisfactory.
Mr. S t e w a r t . The Trade Relations Council has established a com­
puterized data bank into which it has placed all relevant Government
data concerning employment and output and foreign trade of U.S.
manufacturing industries defined at what is known as the Four-Digit
Level of the Standard Industrial Classification.
The Standard Industrial Classification is the system of statistical
collection used in the Census of Manufacturers and the Annual Sur­
vey of Manufacturers.
Regretfully, the statistical system used by our Government in col­
lecting industry data is entirely different than that used in tabulating
imports, and still different from that used in tabulating exports. So
that if you wish to know how a particular industry was doing in
foreign trade, there is no place in Government statistics for you to
The Trade Relations Council, however, through a computer tech­
nique, has been able, with the assistance of the Commerce Department,
to correlate import and export classifications with many, but not all,
of the statistical classifications of American manufacturing industries.
Of the 425 industries defined by our .Government, for which sta­
tistics are regularly collected, we have data in our data bank for 296.
Now, very briefly, the substance of the study this morning. We pro­
gramed our computer to select those manufacturing industries for
which data for the years 1958 to 1966 are in our data bank, which in
the year 1966 had a balance-of-trade deficit. We then called for an
analysis of those data which would show the trend from 1958 through
The document which I have presented to you presents the salient
information on each of the 1 2 2 industries, but the cover page is all
that need occupy our attention at this moment. It is the summary, and
I call your attention to the -two lines above the bottom of the page,
“ Total of Above Industries.” We have a situation presented in which,
in 1966, the column at the far right, the balance-of-trade deficit of
these industries was $7,517 million, and that in the 6 -year period,



using 1958 to 1960 as a base period, from that base period through 1966
this balance-of-trade deficit had worsened from $2,969 million deficit
in the base period, to $7,517 million deficit in 1966.
Now, if you look at the very bottom of the page, under the column
“ Imports,” you will notice that these 1 2 2 industries received the
impact of 63 percent of all imports of manufactured products into the
United States, and in 1966, they accounted for only 14 percent of
our exports.
I f you will look at the line “ Total of Above Industries,” which was
two lines from the bottom of the page, you will find that the imports
of these 1 2 2 industries increased from $6 ,2 2 1 million in the base period,
to $11,375 million in 1966, nearly 83-percent increase, or an average of
about 14 percent a year.
Just adjacent to that column under “Exports,” you will see that the
exports grew from $3,252 million to $3,857 million for 19-percent
growth, or the rate of a little over 3 percent a year.
The purpose of my remarks this morning is to say this: That when
your committee and others are considering all facets of the balance-ofpayment problem, at least there should be available to you information
that shows for a selected group of industries our trade picture is so bad
that the increase in the trade deficit of those industries is accounting
for a larger gross impact on our balance of payments than the net
deficit each year.
If, for example, in the trade of these 122 industries, import quotas
were to be established just at the 1965 level, which involves a 14-per­
cent rollback, it would achieve a savings of $1.5 billion in our balanceof-payments situation^ which happens to be the amount that the
administration is seeking to secure through restrictions on direct in­
vestments and restrictions on travel.
Now, I simply submit to you that in the course of considering what
action ought to be taken, you at least ought to have available to you
these data.
They are not available to you from any other source, other than the
Trade Relations Council, and we respectfully submit them to the
committee as a public service.
Thank you, Mr. Chairman.
(The material referred to follows:)

[Employment data in thousands; all other data in millions of dollars]

Total of above industries............................................
Percent change, average, 1958-60/1966....................................................
All manufacturing industries..................................................
Percent change, average, 1958-60/1966....................................................
Percent, 122 mdustrjes of the 425 in all manufacturings......................


Value of shipments







6,041.1 126,922.3 184,009.2
+77 5
17,135.4 $340,265.1 $538,494.2

Imports, c.i.f.



_ $9,836.1 $17,837.9


Balance of trade


$371.9 -$1,060.8
-4 .0


- .4

3,857.5 -2,969.4
$14,578.7 $26,888.7 +$4,742.6 +$9,050.8





Food and kindred products......................................................
Tobacco products..........................................................
Textile mill products....................................................
Apparel and related products....................................
Lumber and wood products.......................................
Paper and allied products......................................... .
Rubber products...........................................................
Leather and leather products....................................
Stone, clay, and glass products.................................
Primary metal products............................................. .
Fabricated metal products...........................................
Machinery, nonelectric...............................................
Machinery, electrical.....................................................
Motor vehicles................................................................
Instruments and related products.............................
Miscellaneous manufacturing..................................................

of Indus*




[Employment data in thousands; all other data in millions of dollars]

muusuy \oiw









Z, 152.5

+21. 2

imports, cJ.f.





Balance of trade







- 2 .0
- .1


- .5
- .4
-2 .2

-24'. 4

Percent change, average 1958-60/1966.........................................








2211, 2261—Weaving mills and finishing plants, cotton......................
2221, 2262—Weaving mills and finishing plants, synthetics.................
2281—Yarn mills, except wool.....................................................................
2283—Wool yarn mills...................................................................................
2294, 2297—Processed textile waste and scouring and combing
plants....................................................................... .....................................
2298—Cordage and twine.............................................................................
Subtotal, textile mill products, 9 industries.................................
Percent change, average 1958-60/1966.........................................










-6 .2

















_ 6,854.9



+2$. 1



Subtotal, food and kindred products, 17 industries...................
Percent change, average 1958-60/1966................ ........................

Value of shipments



2011,2013—Meat slaughtering and processing plants.........................
2022—Natural and process cheese_________________________
2024,2026—Ice cream, frozen desserts, fluid milk..........................
2031—Canned and cured seafoods____ _______ _______ _______ ____
2051,2052—Bread, biscuit, crackers, cookies, and related products.
2061,2062,2063—Sugar and sugar refining______________ ________
2071,2072—Confectionery, chocolate, and cocoa products________
2082-Malt liquors.................................................... _..................................
2084—Wine and brandy.................................................................. ............
2098—Macaroni and spaghetti............................. ................ ....................



89-292— 68-

2311, 2253, 2259, 2322, 2341, 2384; 2321-2389 except 2342, 2351,
2371—Fur goods.............................................................................................
2391, 2271,2272,2279,2392—Carpets and household furnishings___
Subtotal, apparel and related products, 30 industries...............
Percent change, average 1958-60/1968........................................



_ 1,155.6

and 2371—Apparel..........................................................................
+46T 5





- .7

-7 .9


2421,2426—Sawmills and planing mills; hardwood and flooring..........
2429—Special product sawmills.................................................................
2431, 2433,2439—Millwork plants, prefab wood products, and wood
products, not elsewhere classified.........................................................
2432—Veneer and plywood plants...........................................................















Subtotal, lumber andwood products, 7 industries....................




8 500.2




-4 .7








+58. 2



Subtotal, paper and allied products, 2 industries......................
Percent change, average 1958-60/1966........................................










^ 1,112.8
+38. 4



+75. 4





2611—Pulp mills ..........................................................................................
2621—Paper mills, except building...........................................................


Percent change, average 1958-60/1966.......................................


816—Inorganic pigments............................................................................
Percent change, average 1958-60/1966........................................





$41.0 ^










+6!T 1




$1.0 .


3021—Rubber footwear................................................................................
Percent change, average 1958-60/1966........................................
See footnotes at end of table.

[Employment data in thousands; all other data in millions of dollars]
Value of shipments



Imports, cJ.f




Balance of trade





















+ .4
-8 .8
-5 .8
- .7

-5 .2
- .4

-5 .2




_ 3,986.1





Subtotal, leather and leather products, 9 industries..................
Percent change, average 1958-60/1966.........................................


3211—Flat glass...............................................................................................
3241—Cement, hydraulic..............................................................................
3253—Ceramic ware and floor tile.............................................................
3262—Vitreous china food utensils.............................................................
3263—Earthenware food utensils................................................................
3264,3269—Porcelain electrical supplies and pottery products, n.e.c_
3271,3272—Concrete block, brick, and other products........................
3281—Cut stone and stone products..........................................................
3291—Abrasive products...............................................................................









+ .3
+ .4
-6 .6

- .5
- 2 .4

Subtotal, stone, clay, and glass products, 12 industries...........











Percent change, average 1958-60/1966.........................................







3111—Leather tanning and finishing..........................................................
3121,3199—Industrial leather belting and packing and leather goods,
3131—Footwear cut stock.............................................................................
3141,3142—Footwear and house slippers, except rubber....................
3151—Leather gloves.....................................................................................
3171—Handbags and purses.......................................................................
3172—Small leather goods............................................................................




3312,3313,3316,3317; 2814—Blast furnace, steel mill, and electro­
metallurgical products...............................................................................
3333—Primary zinc........................................................................................
3334—Primary aluminum.............................................................................
3339—Primary nonferrous metals..............................................................











Subtotal, primary metal products, 8 industries...........................



_ 18,173.7








Percent change, average 1958-60/1966.........................................







Subtotal, fabricated metal products, 3 industries.......................
Percent change, average 1958-60/1966.........................................





_ 1,665.5



















Subtotal, machinery, nonelectric, 2 industries............................
Percent change, average 1958-60/1966.........................................





















+ » t.l









+ 7 l.l

3636—Sewing machines................................................................................
3651—Radio and TV receiving sets............................................................




Subtotal, machinery, electrical, 2 industries................................
Percent change, average 1958-60/1966.........................................










3569—General industry machines, n.e.c...................................................




3481,3315—Steel wire drawing and fabricated wire products...............

See footnotes at end of table.



[Employment data in thousands; all other data in millions of dollars]

Industry (SIC and name)

3713, 3717—Motor vehicles, trucks, bus bodies, and parts................
3751—Motorcycles and parts.....................................................................

Value of shipments













Imports, c.i.f.







Balance of trade







3851—Ophthalmic goods............................................................................
3871,3872—Watches, clocks, and watch cases.....................................

















3913—Lapidary work...................................................................................
3914—Silverware and plated ware...........................................................
3931—Musical instruments and parts.....................................................
3941—Games and toys.................................................................................
3949—Sporting and atheletic goods.........................................................
3962—Artificial flowers................................................................................
3964—Needles, pins, and fasteners.........................................................
3981—Brooms and brushes........................................................................
3995—Umbrellas, parasols, and canes.............................................. ..
Subtotal, miscellaneous manufacturing, 12 industries............
Percent change, average 1958-60/1966.......................................










-4 .2
-4 .7
-2 .6
-3 .0
- .6
- .6
-3 .5




-4 .7
-8 .9
-4 .7
-1 .3
-9 .2

—V......... .

iNot available.

Source: Trade Relations Council of the United States, Inc., Employment, Output, and Foreign Trade
of U.S. Manufacturing Industries, 1958-66.


Subtotal, instruments and related products, 3 industries
Percent change, average 1958-60/1966.......................................



Subtotal, motor vehicles, 3 industries.........................................
Percent change, average 1958-60/1966....................................




Mr. B a r r e t t (presiding). I sort of sense that you have a feeling
here that might be related to high tariffs? Do I properly and ade­
quately comprehend that feeling?
Mr. S t e w a r t . N o ; you do not. The Trade Relations Council has no
position advocating high tariffs, or any particular level of tariffs. We
have dedicated our services through this computer facility in attempt­
ing to make available in meaningful terms authentic statistics which
are not forthcoming from the governmental sector about our trade
Mr. B a r r e t t . I think you have a very fine compilation of all these
1 2 2 industries here, something that I think is a great incentive to fol­
low your method and system of bringing these facts to the Congress. I
think you are doing a splendid job on this, and it is certainly very edu­
cational. While it is only 122, we ought to have all the industries.
Mr. S t e w a r t . S o that the committee would know what the full
picture is, I have set forth on the summary page the total for all manu­
facturing industries, the 425, and you can see the picture presented for
the total.
We fortunately have a surplus in our trade of all manufacturing in­
dustry, but in the total balance-of-payments picture, when we are
running heavy deficits in such things as our foreign aid outlays and
the like, when the administration itself is advocating that our export
surplus be increased, one of the permissible methods at this juncture,
under article 1 2 of GATT, would be to consider bringing the rate of
increase of imports of the deficit industries under a measure of con­
trol, not to embargo, not to freeze out, but to achieve for the duration
of the balance-of-payments problem a measure of control which within
its sector can make a contribution as important as that which the Gov­
ernment is considering under the unprecedented steps of bars on direct
investment and restrictions on travel.
Sir. B a r r e t t . One other very short question. I assume now that you
are not going to talk on the removal of the gold cover ?
Mr. S t e w a r t . N o . Because your committee had under consideration
this very unprecedented step, it occurred to several of us that the com­
mittee might wish to have these data available in the total deliberation
which it will give the balance-of-payments problem.
Sir. B a r r e t t . In order not to steal too much time of the members
here, I am quite sure they will want to ask you some questions. Mr.
Mr. W i d n a l l . Thank you. I just came in and I missed your discxission, and I apologize for not being able to be here beforehand. I will
waive my chance right now in favor of Mr. Fino.
Mr. B a r r e t t . Would you yield for this one statement? In order to
give the other members an opportunity to be heard before we are
called to the floor, could we adhere strictly to the 5-minute rule, so we
can get over to the last member ?
Mr. F i n o . Getting to the issue at hand; that is, the removal of the
gold cover, you indicated that your purpose here is to get into the field
of the balance-of-payments deficit.
Will you say that the balance-of-payments deficit has had a definite
impact on the drain of gold ?
Mr. S t e w a r t . Indeed, sir, it has.



Mr. F i n o . Now, we have held hearings on this legislation and we
have had a tremendous amount of testimony adduced at these hearings.
Most of the testimony before this committee has been to the effect that
fold is not so important, but, if anything, its value is merely psychoogical. I have been asking the witnesses here this morning—I don’t
know whether you were here—why is it that foreign countries are
hellbent on grabbing all of our gold, if it is only for psychological
reasons ? Would you care to comment on that ?
Mr. S t e w a r t . Governments, in part, base policies upon the beliefs
of their people. And this certainly is a widespread belief in this coun­
try, and in other countries, that the currency is strengthened by a
measure of backing by gold.
When in our foreign trade picture we see a surplus of dollars ac­
cumulated in the reserve of other governments, and, contrary to the
notions of the last decade, those dollars are not used to purchase goods
and services from the United States, but rather to demand our gold,
a concern and an uneasiness sets in, at least among the business people
with whom I am in contact, as to a weakening ox the strength of our
currency because of these uninterrupted events, and I would judge
that other governments and other people must feel the same way
about it, Mr. Fino.
Mr. F i n o . Mr. Barrett asked the question of the previous witnesses
regarding the strength of the gold and the strength of the dollar. He
wanted to know from the witnesses which they consider stronger, the
dollar or the gold, and the witnesses indicated that there were some
mixed feelings about which was stronger. I would like to ask you,
which would you rather have, the dollar in your pocket or the gold in
your pocket?
Mr. S t e w a r t . The Treasury Department, as you know, has pre­
pared an excellent booklet which explains the balance-of-payments
problem in a technical point of view, and that booklet itself points out,
when governments accumulate a surplus of dollars they reach a point
where they do not wish to accumulate any more dollars in their re­
serves and they then begin to demand gold.
Since the drain on our gold which leads you to the consideration of
possible modification of the gold cover is in part influenced by the
iailure of foreign countries to spend their dollar reserves for goods and
services from the United States, and since our balance-of-trade deficit
affecting one out of every three manufacturing workers is related to
that rate at which dollars outflow, it seems to me relevant for the United
States as a policy matter to consider imposing regulations over the rate
at which that deficit increases in the future, and at which still addi­
tional dollar surpluses pile up abroad.
For, these reasons, we felt that we would be doing a service to the
committee in making these data available.
Mr. F i n o . Just one further question. Do you see any difficulties on
the mandatory repatriation of profits with regard to the U.S. direct
investments that are jointly owned by the United States and foreign
or European investors ?
Mr. S t e w a r t . Any regulation of this sort removes from business­
men some of the options which they require in a prudent and wise man­
agement of a business enterprise. What you do with your reserves
and your surplus is a function, not in the best sense of Government




policy, but of what is best for that particular business. And the deci­
sion to be made is as varied as the number of businesses abroad.
No less important than these other components is the inflow of divi­
dends and profits from abroad at times when the health of the enter­
prise abroad can stand it. Any regulation that interferes with the
exercise of good business judgment in that area is bound to be detri­
mental to the long-range interests of the United States, and at least
at the time when we are considering such drastic measures, we should
also study in depth the other components of the balance-of-payments
problem such as I have described this morning.
Mr. B a r r e t t . Mr. Brock.
Mr. B r o c k . Thank you, Mr. Stewart.
This is excellent and I appreciate it very much. It is a fascinating
study. It is going to take me a little while to get all I can out of it. But
you don’t have any nonmanufacturing industries, any services, tech­
nological groups, and so forth ?
Mr. S t e w a r t . These are all manufacturing industries. We have no
others in our data bank.
Mr. B r o c k . D o you have any figures on the return on the investment
of manufacturing industries from overseas investments ?
Mr. S t e w a r t . Regrettably, we do not as yet have such data in our
data bank.
Mr. B r o c k . I have never seen it selected out. All we get here are the
gross figures. That is why this is so particularly relevant. And it be­
comes more so as pressure increases for some sort of import tariff
restriction. .But you do have things which we can select out that are
relatively significant. For example, your deficit on sugar, $566 million
there is not a whole lot we can do about that. We are going to have
to import sugar.
Mr. S t e w a r t . Yes, sir. One policy alternative that can always be
considered is, however, at what rate do we wish to increase or worsen
that particular deficit. There are alternatives with domestic policy
in any industry that can be considered.
It is not a question o f eliminating deficits that exist, but exercising
a measure of control over how much larger they get in the future, and
at what rate.
Mr. B r o c k . And the quality that is involved.
Mr. S t e w a r t . Yes, sir.
Mr. B r o c k . In a particular kind of flow.
Mr. S t e w a r t . Yes, sir.
Mr. B r o c k . Thank you very much.
Mr. B a r r e t t . Mr. Mize.
Mr. M j z e . Mr. Stewart, I join my friend, Bill Brock, in complimenting you on a very scholarly study. I am sure it is all here, but would
you give us some examples of imported products on which you want
this approximate 14-percent rollback?
Mr. S t e w a r t . Yes, Mr. Congressman. My suggestion is that all of
the products o f these 1 2 2 industries, which represents about one-third
of tlie American market for manufactured goods, be placed under
quantitative limitations on imports, based initially on the 1965 annual
rate of increase, tied to the rate of increase in our exports, which is.
3 percent a year.



M r . M iz e . Would we have any kind of conflict with the outcome
of the Kennedy round discusions in the type of legislation or restric­
tions you are imposing ?
Mr. S t e w a r t . N o , Mr. Congressman, for two reasons: first, article
1 2 of GATT, under whose auspices the Kennedy round was conducted,
specifically permits a member country to use quantitative limitations
for balance-of-payments reasons.
Second, the reference point, the year in relation to which the Ken­
nedy round was negotiated was 1964.1 am suggesting consideration of
quotas for 1965, which was 14 percent above 1964, with a growth factor
of 3 percent a year, and only applied to a products spectrum which is
equivalent to one-third of our market. Surely, such a limited response
to the need which will produce the saving in the magnitude I have
mentioned is much to be preferred over an across-the-board remedy
such as a border tax as has been suggested by the administration.
M r. M iz e . Would you anticipate any reciprocal action by govern­
ments against which this approximate 14-percent rollback would
Mr. S t e w a r t . N o , sir; for two reasons: First, the action would be
taken pursuant to article 1 2 of GATT, which specifically permits and
allows us to do so; and secondly, there were many years in which the
United States, without retaliation, and with, indeed, great com­
plaisance, in a spirit of cooperation, watched the countries of Europe
and other areas of the world do precisely this, to use for a limited
period of time import quotas to get hold of a bad balance-of-payments
situation. I am not advocating these as permanent measures, only for
the duration of the intensity of our emergency.
M r . M iz e . Thank you.
Mr. B a r r e t t . Mr. Blackburn.
Mr. B l a c k b u r n . I don’t want to sound redundant, but I do, t o o ,
want to congratulate your group for providing this service, and I
have asked this question of some administration officials, and I would
like to pose the same question to you to get your reaction.
A study presented by the Treasury Department shows that the
labor factor in export goods has remained fairly constant over the
years. The question I have: is this labor factor constant because we
are only exporting those goods in which we can maintain the labor
factor at a constant rate, although we have given increases in salarv,
still our productivity per man is increasing at a sufficient rate to off­
set his wa.o^ increase, or are there areas in which we would otherwise
be supporting a great deal, except for the fact the labor factor has
increased in the country greater than in other countries?
Mr. S t e w a r t . I think, if you look at the summary sheet, I can sug­
gest an answer to you. Look, for example, under the two lines from the
bottom after “Above Industries” under the export column. The 1 2 2
industries we are talking about are nredominantly labor intensive, and
you will find exports increased only 19 percent in the 6 -year period.
Eight below it you will find the average for all manufacturing, and
you will find that on the whole, exports increased by 84 percent.
Other studies performed by the Council show that this export in­
crease is largely attributable to the capital intensive technologically
based industries and from a labor point of view, the labor content of a
million dollars worth of exports from such industries is very much



smaller than the labor content of a million dollars of imports from
labor intensive production. So we have the phenomenon that we may
have a healthy overall balance-of-trade situation in dollars, but not
quite as healthy a situation from the point of view of jobs created
and displaced.
Mr. B l a c k b u r n . S o you are saying the net result, even though we
are shipping more out in dollars, is to decrease the number of Ameri­
can laborers engaged in manufacturing goods being exported?
Mr. S t e w a r t . That is correct.
Mr. B l a c k b u r n . I would appreciate it very much if you could pro­
vide me with whatever studies your Council might have made in this
respect. I am very much interested in it.
Mr. S t e w a r t . I shall do so.
Mr. B a r r e t t . Mr. Brown.
Mr. B r o w n . Thank you, Mr. Chairman. I also would like to thank
you for providing us with the data that you have. I want to make sure
that I understand your statement regarding the GATT situation, the
GATT agreement.
Am I correct in my understanding of your statement that under arti­
cle IV, or whatever it is----Mr. S t e w a r t . Article 12.
Mr. B r o w n . That each government having a deficit balance of pay­
ments has a right to set quotas on all imports, or is it only in deficit
balance-of-trade industries ?
Mr. S t e w a r t . A very good question.
The answer to it is, first of all, it is the intent of article 1 2 , that a
nation be in a more or less chronic balance-of-payments situation.
Mr. B r o w n . What do you mean by “chronic” ?
Mr. S t e w a r t . A long, continued one, and I think we will qualify
under that.
Mr. B r o w n . Like “several” means more than two?
Mr. S t e w a r t . Over a period of years. Secondly^ a government may
either impose quotas across the board or it may do it selectively.
Article 12 does not foreclose either choice.
Thirdly, it is not required in article 1 2 that the quotas be imposed
on those products which themselves are undergoing a balance-of-trade
A government may choose to marshal its total resources by imposing
quotas across the board to get an overall absolute reduction in imports;
or it may do it selectively? and because of the great importance of the
U.S. market to foreign interests that export here, and because of
the great sensitivity of our position as a leader in the liberalization
of the world trade, it seems to me to make sense to consider a limited
response which would, however, husband our resources to a degree that
would help restore confidence in the dollar, the objective we are all
Mr. B r o w n . And, therefore, if I may add, it is your conclusion that
we should go back to the 1965 level with respect to the 122 industries
that have a deficit balance of trade ?
Mr. S t e w a r t . Correct. That is my conclusion.
Mr. B r o w n . N o w , then, I think you said earlier, in answer to Mr.
Fino's question, or Mr. Brock’s question, that you consider—at least,
I got the impression—that you consider the legislation that we are deal­
ing with here today as drastic action ?



Mr. S t e w a r t . Yes, I d o , sir.
Mr. B r o w n . D o you realize that the representatives of the adminis­
tration, Mr. Kobertson from the Federal Reserve Board, and Mr.
Barr from the Treasury Department, both rather “pooh-poohed”
the tremendous significance of this legislation. They said today the
gold cover doesn’t control the flow of currency. We still have $1 .3
billion free gold. We have never gotten to the point where Treasury
had to consider, or Federal Eeserve had to consider, the problem of
currency exceeding the reserves which we presently have, so that
therefore gold backing today doesn’t control the flow of currency
Mr. S t e w a r t . I think in my own remarks I attached a symbolic
significance to it, which can only be important to the confidence held
in the Government and its currency by the people in this country and
in other nations.
We cannot entirely ignore things of symbolic importance. It doesn’t
mean that we necessarily make them a major premise, but to ignore
them, I think, can lead to disaster, just as quickly as to give them
exclusive controlling force.
Mr. B r o w n . Mr. Stewart, as a representative of business, do you
think that today’s decisions with respect to capital expansion, reloca­
tion, all of these different things, that these are based as much on a
hard-nosed analysis of the facts about taxes, and so forth, as they
are on a kind of a feeling about things ?
Mr. S t e w a r t . Well, I would say this----Mr. B r o w n . I think in your testimony you said earlier that this
feeling seems to prevail.
Mr. S t e w a r t . The Government policies in this area are mutually
exclusive and absolutely contradictory. On the one hand, we are
devoting great energy to attempting to create jobs by industry, to
appeal to industry, to create jobs for the disadvantaged of our popula­
tion. The disadvantaged, primarily, are those who do not at the
moment possess a high level of skill. Job opportunities for them by
definition must come m labor-intensive industries, but it is our foreign
economic policy to eliminate the labor-intensive industries by subject­
ing them to unrestricted imports so as to transfer resources into the
sophisticated or technologically oriented industries.
This is a clear-cut contradiction of our policy for the employment
of the disadvantaged. Secondly, we have massive programs to assist
our own underdeveloped areas, such as the Appalachian program.
You will find that the industries represented in this tabulation,
such as textiles, apparel, steel, fiat glass and the like, are located in
a significant degree in Appalachia, and in similarly less-developed
The manufacturing jobs that they provide call for essentially un­
skilled and semiskilled labor or a low threshold of educational attain­
ment, yet we are systematically weakening those industries and elimi­
nating their employment potential from those areas by our foreign
economic policy. This is a square, clear-cut contradiction in our
national policy. I f you ask me if there is a consistency in our national
policy, I must say to you as a serious student of the subject, that there
is not.



Mr. B r o w n . Well then, don’t yon concur that many of these de­
cisions are more feeling than fact, because if you try to reach an
answer from the standpoint of policies, you come to no conclusion
because there are contradictions?
Mr. S t e w a r t . They are piecemeal and pragmatic responses to a
situation without relating them to total international policy, and a
pragmatic solution to a segment of an overall problem deserves to be
described as action based upon feel as much as anything else, certainly
not based upon systematic analyses.
Mr. B r o w n . I f I may follow with one further question or com­
ment—Isn’t this anxiety that attaches itself to the question of removal
of the gold cover as important as though it were a real concern?
Mr. S t e w a r t . It certainly is.
Mr. B a r r e t t . I understood you to say about 122 of these industries
supply about one-third of the American population in their needs?
Mr. S t e w a r t . One-third of the manufacturing1jobs, Mr. Chairman.
You will notice at the bottom line, in 1966, it was 35.3 percent.
Mr. B a r r e t t . I noticed that. It is my understanding that there are
about 500 corporations that supply the need to about 40 percent of
the American population.
Would these industries be tied up in any of these 500 corporations?
Mr. S t e w a r t . Well, Mr. Chairman, within the 1 2 2 industries there
are doubtless manufacturing plants that are owned by one or more
of the 500 corporations.
The value of this study is that it proceeds on an establishment
basis; that is, individual plants are classified.
Mr. B a r r e t t . May I interpose and say, while I certainly want to
commend you and the industry for making this very fine study and
having it computed in the way that you have, would it not be just
as convenient to take a larger span of the manufacturers of America
to get a better perspective under the same method that you use ?
I am asking you this because I want to lead to another question.
Mr. S t e w a r t . We have not left out any industry, to our knowledge,
in our data bank that had a trade deficit in 1966. Since we were
focusing on a balance-of-payments problem to which trade deficits
relate, we thought that the universe for study were those industries
who are contributing to that payment deficit )yy a trade deficit.
Mr. B a r r e t t . Well, let me ask you, would the import quotas, as you
suggest, possibly lead to higher prices for the American consumers?
Mr. S t e w a r t . Well, in my judgment, it would not, for this reason:
the imports in each one of these areas does not yet account for a major
part of the American market. Indeed, as I recall, almost all of the
industries’ imports account for less than 2 0 percent of domestic consumption; The manufacturing capacity utilization rate in these areas
is, according to the general picture presented by the Federal Reserve
Board statistics, running somewhere around 85 or 90 percent.
We therefore have a situation in which these industries have capac­
ity that is unused. Imports do not represent such a large part of the
market that cutting back imports 14 percent would result in a short­
age of supply, because that slack would be made up by increased uti­
lization of existing capacity by the domestic producers, which would
lower their costs; so I think no change in consumer prices would follow
from the fact of the quotas alone.



I f we were to roll the imports back a number of years, the answer
might be different; but based 011 1965, no.
Mr. B a r r e t t . Y o u are interested in a very flexible quota system, are
you not?
Mr. S t e w a r t . I am interested in a quota system that provides an
annual growth factor keyed to the growth in the American market and
growth of our exports. I regard this as flexible.
Mr. B a r r e t t . Is it not also the administration policy to seek a
reduction of nontariff barriers ?
Mr. S t e w a r t . I think there is a distinction here between----Mr. B a r r e t t . And let me say this: I think you are using this to per­
mit GATT, rather than encourage them.
Mr. S t e w a r t . Well, Mr. Chairman, in regard to nontariff barriers,
the effort that is being made there is in the context of such permanent
barriers as frontier taxes imposed by every European country, which
are not related to balance-of-payments reasons.
Secondly, the administration had an unexampled opportunity to do
something about this during the years of negotiations with the Ken­
nedy round and failed signally to achieve any significant progress.
What we are now proposing is not the systematic adoption of nontariff barriers, but the selective use of very reasonable and equitable
quotas for the duration of this particular emergency, because i f we do
not strengthen the confidence in the dollar abroad, results in our coun­
try will far exceed any temporary inconveniences involved in
consulting----Mr. B a r r e t t . Are we doing something that would cause the other
countries to react in reverse of what you are doing ?
Mr. S t e w a r t . I f we base it 011 my recommendation, 011 a chronic
balance-of-payments situation, and limit the quotas to these particular
industries, or those industries that have a demonstrable and increas­
ing trade deficit, we do not encourage other countries on a broad scale
to retaliate because it would be a violation of their commitments under
GATT to do that, since we invoke article 1 2 ; and, secondly, all of the
countries have utilized similar measures in the past when they were
in a similar situation. So it would be difficult for them now to say, we
deny to you the right to do what we did when we were in the same
situation. It is not a practical question.
Mr. B a r r e t t . N o other questions, Mr. Stewart.
You have certainly been very helpful here, and I know the members
appreciate your edification this morning. You are a good witness and
we were glad to have you.
The committee will stand in recess until 1 0 a.m. tomorrow morning.
At that time, we will have the following witnesses:
Leif Olsen, First National City Bank of New York;
Roy Reierson, Bankers Trust-Co. of New York; and
Mr. Peacock of the Crocker Citizens National Bank of San Francisco.
(Whereupon, at 12:05 p.m., the committee recessed, to reconvene at
1 0 a.m., Thursday, February 1,1968.)

TH U RSDAY, FE B R U A R Y 1, 1968
H o u se o f R e p r e s e n t a t iv e s ,
C o m m it t e e o n B a n k in g a n d C u r r e n c y ,

The committee met, pursuant to recess, at 1 0 a.m., in room 2128,
Rayburn House Office Building, Hon. Wright Patman (chairman)
Present: Representatives Patman, Barrett, Reuss, Stephens, St Ger­
main, Gonzalez, Hanna, Annunzio, Rees, Galifianakis, Widnall, Fino,
Dwyer, Halpem, Brock, Johnson, Stanton, Mize, Lloyd, Blackburn,
Brown, Williams, and Wylie.
Chairman P a t m a n . The committee will please come to order.
We have Mr. Leif H. Olsen, Mr. Roy L. Reierson, and Mr. Leslie
C. Peacock.
Mr. Olsen is senior vice president and economist for the First Na­
tional City Bank of New York.
Mr. Reierson is senior vice president and chief economist for the
Bankers Trust Co. of New York.
And Mr. Peacock is senior vice president and economist for the
Crocker-Citizens National Bank of San Francisco, Calif.
We are glad to have you gentlemen, and we would like to ask that
you confine your statements to 1 0 minutes each, and then give us an
opportunity to ask you questions, if you please.
We are attempting to finish by 11:30, if we can, to see if it is possible
to vote the bill out this morning in executive session.
Mr. Olsen, if you will start first, then Mr. Reierson and Mr. Pea­
Anything you do not present this morning you can insert in the

Mr. O l s e n . Mr. Chairman, I want to thank you and the committee
for this opportunity to speak in support of the legislation to remove
the 25-percent gold reserve requirement for Federal Reserve notes.
Other witnesses, of course, have presented testimony about the loss
of gold since 1957 and the present status of the gold stock, so I won’t
cover that ground again. But I would like to call your attention to
developments since the gold reserve requirement against Federal
Reserve deposits was removed in 1965.
It is interesting to note that of the total decline in the gold stock
which lias taken place since 1965, 55 percent is accounted for by an




increase of $7 billion of Federal Reserve notes in circulation, reflecting
the expansive monetary policy of the last several years.
The remainder, except for small domestic sales to industry, was due
to an outflow of gold to foreign governments.
Even if we had lost no gold in recent years, the question of reducing
or removing the gold cover requirement would have arisen at some
point. Now, we know of course that there are provisions in the Federal
Keserve Act which permit the Board of Governors to suspend the
gold reserve requirement. But there are penalties, penalties which will
add from 1 to l 1/^ percent or more to the discount rate, depending upon
how far the gold reserve declines. Obviously, however, there are limits
to the extent to which such suspension can be carried on without inter­
fering with the orderly conduct of monetary policy.
There is what might be called the “mechanical” aspect to the pro­
posal to remove the gold reserve cover. A normal expansion in Fed­
eral Reserve notes is needed to satisfy a growing economy and a grow­
ing population. It seems to me that to force, in effect, a rigid cessation
of any further expansion of such currency would serve no useful pur­
pose and would be extremely disruptive to the economy. Both at home
and abroad, it would harm confidence in our ability to conduct our
economic affairs in a rational manner.
Others have testified before this committee that removal of the
gold cover is needed to maintain the confidence of foreigners that
America will continue support of the gold exchange standard. At
the end of September, foreign official holdings of U.S. dollars; that
is, holdings by central banks and governments, amounted to $15 billion.
Private holdings amounted to $16 billion. There is no question that
the dollar is strong as an international currency. It is eagerly sought
after for use in commercial transactions. It cannot be denied, however,
that some measure of its value is attributable to the fact that it is con­
vertible into gold by the U.S. Treasury. This value tends to be sub*
stantially diminished when foreigners see only $1 .1 billion avail­
able for conversion. This excludes an $800 million gold obligation to
the International Monetary Fund.
I do, however, believe that at this time, when the Treasury and the
Federal Reserve find it necessary to request legislation to remove the
gold reserve requirement against Federal Reserve notes, the dialog
should be broadened. We should be circumspect and consider all the
ramifications of this move. It has been presented as largely a me­
chanical step, necessary to remove an obsolete impediment to orderly
monetary policies. But Congress should not overlook that this very
step is part of a major question; namely, the future role of gold and
the dollar in international finance.
Over the years, since the end of World War II, we have increased
our financial assets at a far more rapid rate than we have increased
gold production. Moreover, on a net basis, none of the new gold pro­
duction since 1949 has flowed into the Treasury stocks. The United
States and Great Britain notably have been net losers of gold over
this period of time.
Consequently, gold has developed a scarcity value, in terms of dol­
lars as well as other currencies. Markets are very sensitive to scarcity
values in any commodity. And when commodities are scarce they tend
to rise in price. As a result, markets will, from time to time, test the



ability of suppliers to hold the price. The most recent such test for
the gold price took place during the month of December when the
United States lost $900 million of gold, largely to private buyers in
the London gold pool.
As you know, central banks of seven countries supply gold to the
London gold pool to prevent the price of gold in private markets from
rising above the U.S. price of $35 per ounce.
This committee has been told by administration witnesses that
American citizens cannot own gold. Gold belongs in a nation’s inter­
national reserve. But private ownership of gold is permitted in many
parts of the world and through the London gold pool, the private
market has direct access to the monetary gold stock of the United
States and six other countries. France is a member but, as we know,
no longer makes gold available.
I believe we wiil see successive efforts on the part of the private
market to test the willingness and ability of the United States to
maintain the present gold arrangements or the present dollar price of
gold. I f private acquisition of gold is joined by purchases of some
central banks our present gold stock, after removal of the cover, would
be drastically reduced or depleted, unless we stopped gold sales.
Of course, the logical strategy behind removal of the gold cover—
from the standpoint of supporting the dollar overseas—is to say that
our entire gold stock is now available for conversion by foreigners.
As I understand it, as a further part of that strategy the Treasury
hopes to correct our balance-of-payments deficit long before we run
out of gold. To this end, the administration at the end of last year
hastily revised its controls program and added some new aspects.
These range from a moratorium on private dollar investment in con­
tinental Europe to potential restraints on tourist travel.
The new controls program seeks to fragment the balance of pay­
ments. This cannot be done. Cutting back on one area can have un­
desirable effects on another. New funds going into direct investment
are being cut, even though they help to finance a sizable share of U.S.
exports—as much as one-third of total nonagricultural exports in 1964,
according to the latest available figure. Furthermore, investment cuts
today will recluce investment income tomorrow. And we must not over­
look the possible effects of our controls program on sterling, whose
fortunes are closely linked to the dollar.
Considering the lateness of the hour, that is* our heavy gold losses and
the magnitude of last year’s deficit, the emergence of new controls is
not surprising. They will, of course, be supported by American in­
dustry. JBut they must also be supported by fiscal and monetary policies
and reductions in Government spending overseas. Controls alone sim­
ply do not work. Without that support, we will get no more than tem­
porary relief in the months immediately ahead. As more oversea
liquidity and earnings are brought home the benefits will diminish. I f
monetary and fiscal policies continue to be excessively expansive in
pursuit of our domestic and oversea programs, then the effect of the
controls on the deficit will be lost.
We have lived with controls for 4 ^ years, beginning with the im­
position of the interest equalization tax, as a temporary measure, in
July 1963. There were those who predicted at that time that controls
would proliferate because one begets another. And we have seen it



Our hasty, troubled, ad hoc approach to solving the balance-of-pay­
ments problem has probably done more to worsen it. The anticipation
in private markets of increased controls has undoubtedly intensified
the outflow of dollars above what might be regarded as normal.
For example, the public statements of Federal officials expressing
uneasiness about the situation last December created excessive nervous­
ness in the marketplace and led to large dollar outflows.
The Treasury has indicated before this committee that if after re­
moval of the gold cover we again experience substantial gold drains,
new and tougher measures will be undertaken. This, too, is not likely
to engender confidence. This affects not only Americans, but foreigners
who also have a major stake in the free movement of dollars.
The great danger we face is that the Treasury will be misled into
thinking that after losing $2 or $3 billion more of gold, stronger and
more sweeping controls are needed and that they will surely work.
Then, if we lose another $2 or $3 billion of gold, more controls will fol­
low. There must be a point at which even the Treasury officials will be
convinced that controls alone do not work. I only hope that point comes
soon enough to prevent the creation of a structure of controls, deeply
rooted, standing opposite retaliatory controls of other countries.
I f the Federal Government does not expect to be able to deal deci­
sively with the problem of domestic inflation; if it does not expect to
be able to further restrain spending and slow down monetary expan­
sion ; if it does not expect to be able to get a tax increase enacted; and
if it does not expect to be able to cut back substantially on its huge
oversea commitments, then we are not going to correct our balance-ofpayments deficit. And if we don’t correct the deficit we are going to
lose more gold, if not the foreign central banks, then to the private
market through the London gold pool. For with growing wealth, it
becomes less and less burdensome tor an individual or an institution
to lock up $1 million, $5 million, or $10 million in gold.
I can’t believe that the United States would purposely elect to be
left without anj gold. Consequently, we had better begin* facing up to
some hard decisions about the present gold arrangements. For what
could we possibly gain by hanging on to our remaining gold stock if
the price of doing so is comprehensive exchange control over the dol­
lar and the consequent setback to world trade and investment? It
would be better to raise the price of gold than to continue down the
avenue of controls, if these are the only alternatives. I f "we continue
down the control route because we are unwilling to adopt the right
domestic policies, we will end up in the same place anyway—with an
increase in the gold price or—much worse, I think—a moratorium on
gold sales. But along the way we will do even greater harm to the
world’s international financial structure.
Chairman P a t m a n . Thank you very much.
Now, we will hear from Mr. Reierson, senior vice president and
chief economist of the Bankers Trust Co. of New York.




Mr. R e ie r s o n . Mr. Chairman and members of the committee, pro­
posals to eliminate the 25-percent reserve requirements against Fed­
eral Reserve note and deposit liabilities have been made repeatedly
over the years. Back on November 18, 1959, back in your home State,
Mr. Chairman, I suggested that consideration be given to their elimi­
nation. In that address, I observed:
In meeting the broad complex of the balance-of-payments problem * * * it
may be wise to alleviate these anxieties by reducing, or even eliminating, the
present 25-percent gold reserve requirement against Federal Reserve note and
deposit liabilities.

Subsequently, a number of distinguished members of the financial
community took a similar position. The gold certificate reserve re­
quirement on Federal Reserve deposits was removed in March 1965.
The present proposal is to eliminate the reserve requirements against
Federal Reserve notes and against U.S. notes and Treasury notes of
1890Elimination of the remaining reserve requirements would have no
significant effect upon Federal Reserve credit policy, upon banking
and credit conditions in the United States, or upon the domestic value
of the dollar. In the comparatively near future, the reserve require­
ments will have to be eliminated—or reduced—to accommodate the
growing currency needs of an expanding economy. The reserve re­
quirement is an archaic holdover from the days before 1933 when the
dollar was convertible into gold, domestically. No other major indus­
trial nation has a similar requirement at present.
I f done in a favorable international monetary environment, action
to remove the remaining reserve requirements would have passed
largely unnoticed. Taken under present adverse conditions, however,
such a step could weaken, not strengthen, the standing of the dollar
The root cause of the problems of the dollar is the failure to reduce
the American balance-of-payments deficit, especially since 1958,
when deficits have increased in size. The U.S. balance of payments has
been in deficit in every year since 1949, except for 1957, the year of
the Suez crisis. These deficits have contributed to large gold losses, to
big increases in short-term liabilities owing to foreigners, and to a
serious deterioration in the international liquidity position of the
United States—as shown in the attached tables.
Repeated efforts to deal with the payments problem have not suc­
ceeded, confidence in the dollar has dwindled, and the devaluation of
sterling last November 18 was followed by a massive attack on the
dollar, reflected in tremendous waves of gold buying abroad. As a
result, the United States, in the few weeks following the devaluation of
sterling, reported a gold loss of $925 million, at least.
Elimination of the gold certificate reserve requirements will do
nothing to correct the basic problem—the large American payments
deficit and the resulting outpouring of dollars at a rate which is far




greater than foreigners want or need to hold. Elimination of the re­
serve requirements at this time is? in fact, likely to encourage delay
in taking the effective action required to bring the American balance
of payments into sustainable equilibrium, and would in all probability
be interpreted abroad as an indication that we are content to continue
down the road that has already cost us over $ 1 1 billion in gold during
the past 10 years.
Consequently, if the American balance of payments continues in
deficit, repeal of the reserve requirements would not prevent but might
even encourage further drains on our gold stock and bring closer the'
danger of an international monetary crisis. This is because, in a
troubled and uncertain world, our national interest surely argues
against permitting our gold reserve to decline below a reasonably
large minimum amount. Whether one thinks in terms of national de­
fense, or in terms of the need for gold in the monetary system of the
future, whatever its form, it is difficult to see the United States denud­
ing itself of the only generally accepted reserve medium currently
available to support the dollar in the foreign exchange markets.
A solution to the American payments problem is not to be found
in the activation of the special drawing rights now under considera­
tion by the International Monetary Fund. This device, not yet ap­
proved, will not be uesd to ease the payments problems of individual
countries. Nor is a solution to be found in gimmicks, such as reducing
the American buying price of gold, or in adopting a system of flexible
exchange rates. In an inflationary world environment in which gold
production is declining and in which the $35 price is being maintained
only by taking gold out of monetary reserves, both central banks and
others are eager to conserve and build up their gold holdings. Gold
is still regarded as the only ultimate means of payment internationally
and the preeminent hedge against persistent decline in the value of
currencies—as current experience clearly demonstrates.
Nor can the industrial strength of the United States and the large
American investments abroad save the dollar from severe pressures
in the foreign exchange markets or prevent large gold losses, if the
payments deficits persist. Despite the productivity o f American in­
dustry, the commercial trade surplus dropped to a miniscule $600
million in 1966, the latest year for which data are available. American
investments abroad are not readily salable and are in private owner­
ship—two important considerations that prevent their being mar­
shaled in defense of the dollar.
There is, therefore, no alternative available to the United States,
if the dollar is to be restored to strength and if serious monetary dis­
order is to be prevented, other than to achieve prompt and meaningful
improvement in its payments position. Repealing the gold certificate
reserve requirements would be in order if the American balance of
payments were clearly on the mend, with the quarterly deficits being
sharply reduced and sustainable payments equilibrium m sight within
the year. Unfortunately, this is not the prospect.
On the basis of information presently available, there is little basis
for a realistic appraisal of the probable savings that will result from
the latest balance-of-payments program. Despite these uncertainties,
one may hazard the guess that the payments savings achieved by the



new program will fall far short of the $3 billion to $3.25 billion target
projected for 1968. The current year is, therefore, likely to show still
another substantial payments deficit.
The longer term prospects for the present program are even more
dubious. The American public is not likely to tolerate, for too long,
highly restrictive restraints on travel; the risk of foreign retaliation
will probably increase with the passage of time; even without more ex­
tensive involvement, rising wages and prices will add to the foreign
exchange cost of the military operations. The longer the payments pro­
gram continues, the more serious will be the adverse effects upon the
ability of American business and financial enterprise to compete in for­
eign markets. Despite the fact that receipts from direct investment
abroad have been exceeding outflows by $1.5 billion to $2 billion per
year in recent years, the goal in the latest payments program is to
achieve a $ 1 billion saving this year. The upward trend of receipts on
direct investment, one of the few favorable trends in the American
payments record of recent years, will assuredly suffer if restrictions
on direct investment are continued for very long.
If the Congress desires to strengthen international confidence in the
dollar, the more effective approach would be not to repeal the gold
certificate reserve requirements and to insist that additional action be
taken to achieve sustainable equilibrium in the balance of payments of
the United States. Action is required along three fronts:
1. To reduce the payments cost of the foreign economic and military
activities of the Government. The present program sets a savings
target of only $500 million on the Government programs which have,
year in and year out, been showing deficits of several billions of dollars.
In contrast, the private sector, which has consistently shown large pay­
ments surpluses, has a target of saving, under the program, of $2.5
billion to $2.75 billion.
2 . To achieve a substantial reduction in the Treasury deficit in fiscal
1969. The temper of the voters and the Congress being what it is, this
would appear to require more effective curbs on spending than are re­
flected in the latest budget message. Failure to achieve a significant
improvement in the fiscal position of the U.S. Government will clearly
have a highly adverse effect upon the standing of the dollar in world
financial markets.
3. To follow a credit policy that is appropriate to the inflationary
conditions in the American economy, the highly adverse payments
position and the plight of the dollar abroad.
These steps will have to be taken sooner or later if the dollar is to
be saved. Neither an increase in the price of gold, nor the use of SDK’s,
nor other possible courses of action, will relieve the United States of
the necessity of bringing its international accounts into balance. The
discipline of the balance of payments ultimately is inescapable for a
major industrial country. Even with the alleged benefits or unilateral
devaluation—a course of action which is not available to the United
States—the British are being forced to recognize, at long last, that
their balance of payments must be brought into equilibrium, even if
this involves unpalatable actions which they refused to take earlier.
By holding to the present gold certificate reserve requirements and
by taking additional steps now, we can still restore confidence in the
dollar and stave off an international monetary crisis.



(Attachments to Mr. Eeierson’s statement follow:)
Balance of payments—Liquidity basis
(In millions of dollars)
Surplus or

194 9
195 0
195 1
195 2
195 3
195 4
195 5
195 6
195 7
195 8

deficit (—) Year—Continued
195 9
196 0
196 1
196 2
196 3
196 4
196 5
196 6
196 7


[Dollar amounts in millions]
End of

End of


Latest versus—


U.S. monetary gold stock (as reported)........ ....................................
U.S. monetary gold stock (excluding IMF gold counted in the
U.S. stock).............................................................................................
Gold tranche position, IMF....................................................................
Short-term liabilities owing to:
Foreign official agencies.................................................................
Other foreigners...............................................................................



111,984 -12,443




U0,951 -13,476
2 381




8 13,408



Ratio of U.S. monetary reserves (Jan. 24, 1968) to short-term
liabilities owing to foreign official agencies (October 1967):
(a) Gold, as reported......................................................................
(b) Gold, ex IMF.............................................................................
(c) Gold (ex IMF) plus gold tranche..........................................
Ratio of monetary reserves (Jan. 24,1968) to total short-term
liabilities to foreigners (October 1967):
(a) Gold, as reported.....................................................................
(b) Gold, ex IMF.............................................................................
(c) Gold (ex IMF) plus gold tranche..........................................
“ Free” gold:
Gold stock (as reported)................................................................
Gold stock (ex IMF gold)...............................................................
Drawings (net) on IMF..........................................................................


















’Jan. 24.1968.
2 November 1967.
8October 1967.

Chairman P a t m a n . Thank you, sir. Now, we are glad to have Mr.
Leslie C. Peacock, senior vice president and economist, Crocker-Citizens National Bank, San Francisco, Calif.
Y ou may proceed.


Mr. Peacock. Thank you, Mr. Chairman.
Some of the arguments for removal of the 25-percent gold reserve
requirement rest on the proposition that the formal link between gold
and currency is an outmoded and potentially harmful feature of our
domestic monetary system. These arguments I believe to be cor­



rect. In my judgment, the requirement has little or no relevance to
the inherent soundness of our domestic currency, and clearly we should
not allow it to take precedence over the public’s requirements for
normal growth in the supply of currency.
With strong prospects that the Nation’s gold stock will be inade­
quate to meet requirements in the not too distant future—reflecting
the combined impact of currency expansion and additional gold
drains—there is presently not much hope of being able to develop an
ultimate alternative to the elimination or relaxation of the require­
I f the issues raised by H.E. 14743 were no broader than the ques­
tion of the removal of an undesirable appendage which could stand
in the way of desirable currency expansion, or if the Congress could
pass this bill with a legislative history or other indication of intent
that the bill is designed to do no more than that, it is not likely that
the proposed legislation would arouse much anxiety or opposition.
I f this were the sole purpose of the bill, however, there might be some
questions raised as to its premature consideration.
Clearly, the bill has a broader import—and that is that it would
pave the way for this country to continue to purchase with gold ex­
ports what it has not been able to earn through adequate performance
of its international accounts—that is, international confidence in the
sustained convertibility of the dollar at the rate of $35 per ounce.
Arguments advanced in behalf of the bill indicate clearly that the
proposal is meant in part to remove any suspicions that the full U.S.
gold stock may not be available for the satisfaction of legitimate for­
eign claims. Much of the language used in support of the proposal,
particularly with reference to how far this country is prepared to go
in paying out gold, underscores this point.
In many respects, in fact, the bill implies a strategy of dealing with
international financial problems; and support for the bill reasonably
might be expected to imply support for the strategy which it sug­
gests. It does not seem unreasonable to assume that congressional
approval of the bill also could be considered as being tantamount to
congressional approval for a plan of action which calls for, in the
event of a failure to achieve progress toward reaching a sustainable
position in the balance of payments over the next year or so, the con­
tinued paying out of gold and possibly, but not likely, the complete
liquidation of the U.S. gold stock.
Such a strategy has much to recommend it, not the least of its merits
being that the policy posture which it supports tends to minimize gold
drains in the short run and assures the United States the maximum
amount of time in which to struggle for answers which, after a decade
of search, remain as elusive as ever. ^
The fact that a full and unconditional commitment of U.S. gold to
the satisfaction of international claims—as long as gold remains—
would add significantly to this country’s time and maneuverability in
responding to international financial problems is not open to question.
The question remains, however, whether this is the wisest course of
action. The question cannot be answered categorically, but at least
some observations can be offered. I f the United States has the capacity
and the willingness to bring about near-term and significant improve­
ment in its balance of payments, if this progress can be sustained and



built on, if it can !be secured without exacting too high a price in terms
of regimentation or inferior economic performance at home or a dam­
aging withdrawal from international responsibilities, and if all this
can be done while we are heavily committed in southeast Asia, then
the strategic arguments^ which underlie this bill unquestionably are
correct. I f these possibilities could be held to be strong probabilities,
there would be little risk in the removal of the gold cover requirement
and little risk that our gold stock would be dissipated without the
consideration of existing alternatives.
If, on the other hand, Congress accepts the gold payment strategy
underlying this bill and finds subsequently that balance-of-payments
programs are inadequate to meet our urgent needs, it also is almost
certain to find that it has chosen the worst alternative now open to the
United States.
In addition to the commitment to pay out gold until the stock is com­
pletely exhausted, these alternatives include now, as they always
(a) The willingness to resort at some point to a suspension of
gold payments while there is still gold left for the purpose of
exchange rate stabilization;
(b) The willingness to take the initial step toward a worldwide
increase in the price of gold; and
(c) The willingness to undertake corrective measures which,
however painful they might be in the short run, would succeed in
restoring a sustainable position to the international accounts.
Of all these alternatives, the latter is, in my judgment, the most
preferable at the moment. In the final analysis, any of these alterna­
tives is preferable to the exhaustion of gold supplies by meeting
demands which would ensue from attempts to preserve the existing
nrice of gold in the face of continuing and substantial deficits in the
balance of payments.
It is not easy to say what price the country^ must pay in order to
achieve the balance-of-payments progress required. Tne price is to be
reckoned in terms of accepting less buoyant domestic economic condi­
tions than many consider essential, in terms of the elaboration and
proliferation of selective economic controls which most of us deplore,
m terms of accepting encroachments on certain freedoms—such as
foreign travel—which many view darkly, in terms of paying higher
taxes and/or accepting less in the way of services from the Federal
Government, and in terms of settling for a small share of responsi­
bility for what happens elsewhere in the world. Even if one could lay
out precisely what will be required in terms of these sacrifices, there
still would be room for debate as to whether the game is worth the
In contrast with these ambiguities, some thoughts can be expressed
with relative certainty. Among them is the judgment that existing
programs for the defense of the dollar, insofar as they are known,
do not appear adequate to the task. In the light of this personal judg­
ment, and in view of my strong opposition to the export of gold indef­
initely under circumstances which offer no prospect that the factors
underlying the gold drain will be reversed, I cannot endorse the pro­
visions of H.E. 14743.



A more reasonable course of action, in my judgment, would be in
musing as profitably as we can the time remaining for intensive meas­
ures aimed at restoring payments equilibrium. I f these measures are
not sufficient and the supply of free gold is exhausted without a sharp
improvement in prospects for our balance of payments, I would be
opposed to the continued export of gold.
This is not a comfortable view, nor is it one which is in harmony
with my traditional preference that American bankers avoid state­
ments and actions which complicate the task of officials in bolstering
international confidence in the dollar. Perhaps the most that can be
said is that the views are honest ones.
Chairman P a t m a n . Thank y o u , sir.
Mr. Reierson, I would like to ask you first about the payment of
gold to citizens of England. Can a citizen of that country get gold
when he wants it through this gold pool ?
Mr. R e i e r s o n . N o , sir.
Chairman P a t m a n . H o w do they go about it? Under what condi­
tions can a citizen of that country get gold ?
Mr. R e i e r s o n . Legally ?
Chairman P a t m a n . Y es, sir.
Mr. R e i e r s o n . My impression is that citizens of the United Kingdom
and citizens of the United States are legally prohibited from holdlnggold.
Chairman P a t m a n . We enforce it here. Do they enforce it there?
Mr. R e i e r s o n . T o the best of m y knowledge, I believe it is enforced,
•although I have no direct evidence. I have asked the British authori­
ties— —
Chairman P a t m a n . Is there any country in the world that pays out
gold on demand?
Mr. R e i e r s o n . I believe there is one very minor country that does.
I asked Mr. Schweitzer about this about a week ago. He mentioned
one other country, the name of which I can’t even remember. The
answer is, there is no major country that follows our practice.
Chairman P a t m a n . They would obviously have control over their
money and credit and gold, that particular country you are talking
Mr. R e i e r s o n . This is such a small country, it is without conse­
Chairman P a t m a n . Mr. Olsen, I would like to ask you now about
our exports of goods and services, concerning our balance of pay­
ments. I have been impressed over the years that maybe we are on the
plus side on the actual balance of trade on goods and services. Is that
-correct or not?
Mr. O l s e n . Yes, sir. We have had a rather comfortable surplus for
some years.
Chairman P a t m a n . So our problem has grown out of the fact that
we have permitted the export of money and credit; is that right?
Mr. O l s e n . In part; y e s .
Chairman P a t m a n . Well, do you know of any country on earth,
except our own, that does not control the export of its money and
credit? We have not been controlling it, but I don’t know of any
other country in the world that doesn’t have such controls; do you?



Mr. O l s e n . STo. Most of the major countries have some form of
Chairman P a t m a n . Dr. Peacock, do you agree with the answers
that these gentlemen have given to these questions? I know you have
your own viewpoint.
Mr. P e a c o c k . Yes, sir; I d o .
Chairman P a t m a n . All right.
Mr. Widnall.
Mr. W i d n a l l . Thank y o u , Mr. Chairman.
First, I would like to thank each of you for coming down here
today and for the very frank statements which you have given. I
think it is very helpful for the record and sometning that has been
needed to fill in holes in what we have had presented to us so far.
You don’t have to answer this question if you don’t care to, but
with the full cooperation of the chairman, the minority has been given
this additional week of public hearings in order to explore the balanceof-payments program.
Would you care to venture a guess, why the international business
community, those U.S. corporations with large overseas direct invest­
ments, has resisted in no uncertain terms the opportunity offered by
us to come in and testify ?
As I say, you don’t have to answer that.
Mr. R e i e r s o n . Mr. Chairman, I recognize the sensitive nature of
this question. I can report that I did discuss this specific question with
a high official of an international business corporation. I asked him
whether he had been invited to appear at these hearings, knowing that
invitations were being extended to members of the business commu­
nity, and he said he had not. I then asked him if he were invited, would
he appear, and he said no.
I then asked him why he would not appear, and his answer was,
“Fear of retaliation.” The present direct investment program cannot
possibly operate unless numerous exemptions are granted. In this in­
stance it was the fear that if somebody from this company appeared
at these hearings and took a critical point of view, this might en­
danger or impair, or influence, or affect the decisions that the Departcent of Commerce might make in their applications for exemptions
which they will be forced to make.
I am making no generalization. I am giving you an accurate report
of one interview.
Mr. W i d n a l l . Mr. Olsen.
Mr. O l s e n . I would certainly agree with what Mr. Reierson has said
with respect to the nature of the program—that corporations in many
instances will have to come in to seek exceptions when they encounter
peculiarly difficult problems. But I have not had an experience such as
Mr. Reierson described in talking with corporate heads.
I would offer, though, the suggestion that I believe the Ways and
Means Committee is holding hearings on the control program, begin­
ning here on the 5 th of February. I would expect to see there the heads
of corporations, and I would certainly hope so.
Mr. W i d n a l l . The direct investment program finds its legality on
banking law, and that is the reason it should have occurred here.
Mr. Peacock, do you have any comment?



Mr. P e a c o c k . One of the things which has not been said is that most
heads of large, international corporations find themselves not in sym­
pathy with the restrictions. Nevertheless, they are of a rather mixed
mind because while they may agree as to the necessity for actions
which would limit the outflow of funds on long-term investment ac­
counts, and they are reluctant to oppose these restrictions without also
offering some alterations. There is a very great shortage of alternatives
at the present time.
Mr. W i d n a l l . Mr. Peacock, I would like to say this to all of you.
I admire your courage in coming here today and speaking frankly
about this. It seems to me that banks are under the same pressures that
the business community seems to feel they are suffering under at the
present time.
With our present worldwide military and foreign aid commitments,
can the President’s program be in any manner considered temporary ?
Mr. O l s e n . I am not encouraged at all that it will be temporary,
except that the course of events will force decisions that will change
the program as it evolves.
It has been from the first instance, when the interest equalization
tax was enacted, there were many who were regarded as cynical who
said that measure, which was temporary, would be with us for a long
time; and it appears now it is likely to be. So the history of legislation
of this sort indicates that it stays with us for a long time. It takes more
fundamental changes, which I touched on, and I think Mr. Reierson
had touched on, also, to guarantee that these controls would be
Mr. W i d n a l l . Mr. Reierson.
Mr. R e i e r s o n . May I make a comment on your question. I have just
taken a look at the testimony submitted in February 1965, preceding
the elimination of the reserve requirement against Federal Reserve
deposits in March. There is a very interesting similarity between the
optimism then expressed and the determination to put our balance-ofpayments situation in order, and similar statements that we are hearing
m the present hearings.
I also read with interest Mr. Barr’s comment on the reason for our
failure to deliver on the promises made in 1965. In 1966, assuming
that the President’s higher estimate is correct, the payments deficit
will be close to $4 billion. Vietnam, if my recollection of Secretary
Barr’s testimony is correct, accounts for $1 % billion.
The United Kingdom in 1967 accounted, according to his testimony,
for $600 million. This still leaves $ 2 billion of the deficit unaccounted
for or unexplained.
My point is this: The reason we have failed to come to grips with
this problem is not due to lack of effort. The voluntary programs
covering direct investment and lending by banks and other financial
institutions have been in effect for some time. The interest equalization
tax has also been in effect.
We have been trying, apparently, to reduce the cost of the foreign
aid and military programs and we have been promoting exports and
foreign travel in the United States.
The big mistake, I think, is that we have failed to support the balance-of-payments efforts by appropriate general economic policy. The
fiscal policy of the United States in the past 2 years has been nothing
short of horrendous.



With the outbreak of Vietnam, we began to increase nondefense
expenditures—on a cash budget basis—at an unprecedented rate, in­
stead of curbing them. We have so far failed to enact a tax increase.
We have been following a credit policy, which, except for a few
months in 1966, has certainly been quite inconsistent with the infla­
tionary trends at home, and the serious state of the dollar abroad.
The real thrust of my statement is that there are some things we
can do in a special balance-of-payments program, particularly, I
think, in the Government sector.
I have no hope that this effort will be temporary. Our efforts in
this area will not succeed, however, unless we are willing to support
this effort by the use of appropriate general economic policy, in the
fiscal and credit area.
Mr. W i d n a l l . Mr. Olsen.
Mr. O l s e n . I only want to reinforce briefly what Mr. Reierson said,
by recalling a study which was done in 1963, by the Brookings Insti­
tution. That study in many ways makes much more interesting reading
today than it did in 1963.
My recollection is that they projected a surplus in our trade account
of $5.3 billion by the year 1968. They projected thait because they
expected that the United States would have less inflation than the
rest of the world, and that our rate of productivity would grow more
rapidly than the rest of the world. It was not based on the success
of controls. And even though they did not foresee the advent of the
growth of the Vietnamese war, the growth in our trade surplus on
which their forecast now depended has not come to pass.
For the last 3 years we have actually had a higher rate of inflation
and we have done less well than other countries in Europe and other
countries in the world who are our trading partners.
I say this because we so frequently tend to be overly optimistic.
This study was done by thoughtful men who, nevertheless, frequently
draw a picture of the future which is ideal and not, unfortunately,
often realistic.
Chairman P a t m t a n . Mr. Barrett.
Mr. B a r r e t t . Mr. Chairman, I would like to ask Mr. Peacock: On
page 3, you seem to give a sort of continuity of “ifs.” “If, on the other
hand, Congress accepts the gold payment strategy underlying this
bill and finds subsequently that balance-of-payments programs are
inadequate to meet our urgent needs,” and then you go off and you
give (a), (b), and (c).
I would like to ask you, Mr. Olsen and Mr. Reierson: It is better
to control the monetary flow by an increase in taxes, rather than
putting controls on everything we do overseas, and to destroy the
harmony we may have now through the monetary fund in all
Mr. P e a c o c k . There is no single area in the balance of payments
which, being dealt with as a separate sector, is capable of giving us
the degree of improvement that we need. That is why I take the
position that it would be very easy to support a bill removing the
gold reserve requirement if there were in existence, or in definite
prospect, the land of comprehensive measures which are needed.
I f one examines the various approaches to restoring equilibrium to
the balance of payments, I think we, first of all, must work harder on



the reduction of the dollar drain from Federal expenditures over­
seas. This is an essential part of a constructive, adequate balance-ofpayments program.
There is not enough room in that area alone to restore equilibrium in
the balance of payments, however, so I would suggest we also must go
further. We must work on basic underlying economic conditions in
this country—such things as the rate of growth in aggregate demand,
the degree of overheating that hampers price-cost stability in the
United States. In this connection, I would note that a tax increase
around the comer, or definitely in prospect for this year would make
one feel somewhat more comfortable that we are in a better position
to deal with the balance of payments.
The prospects in the short run for getting gains out of our trade
surplus, and out of reductions in the oversea expenditures of the Fed­
eral Government, are not so strong, and probably cannot be so strong,
as to suggest tomorrow or the next dav that we can dispense with the
kind of controls we have already introduced.
Mr. B a r r e t t . I am somewhat impressed with Mr. Reierson’s state­
ment, and I was wondering if you would tell us which you think is the
stronger, the dollar or the gold ?
Mr. R e i e r s o n . A s of today, I don’t think there is any doubt but
that gold is stronger than the dollar—for a variety of reasons.
Mr. B a r r e t t . I am sorry you say it is.
Mr. R e i e r s o n . It is stronger than the dollar, and I don’t think there
is any reasonable prospect that the international monetary system will
dispense with gold for many years to come.
First, gold is the underpinning of the whole IMF structure. Second,
there are many central banks today which are holding more dollars
than they would like to hold. They have not been able or willing to
convert them into gold, first, because the United States has been
using persuasive techniques to induce them to invest in 13-month ob­
ligations in order to reduce the deficit.
In addition, the United States has been using, for a number of years,
various techniques designed to induce them to hold the dollar obliga­
tions rather than to convert into gold.
Secondly, one reason they go along with this is their fear that if the
major countries were to convert substantial amounts of dollars into
gold, which they would prefer to hold, this would cause great difficulty
for the international monetary system.
And, third, the amount 0 1 the rush into gold at the time of the
sterling devaluation is evidence of uncertainty about the future of the
dollar. We don’t know how much gold was paid out. My guess is that it
was somewhere between a billion and a half and $2 billion, paid out in
a matter of a few weeks. While some of it probably went to some cen­
tral banks, the great bulk of it went elsewhere.
So, as of today, unfortunately, it is my opinion, and it is not one
that makes me happy, that gold is definitely stronger than the dollar.
Mr. B a r r e t t . Mr. Olsen, my time is going to run, but I would like
to get your concept of this and, if you will, give me your concept. I
think you are inclined to think that the dollar is stronger than gold,
and if you do, I would like to ask you, at which period in our economy
is the dollar the stronger ?
Mr. O l s e n . What time?
Mr. B a r r e t t . Yes.



Mr. O l s e n . Well, let me say that the expression “strength” is some­
thing I find difficult to define; gold has a value, because we give it a
value. At the present time, it has considerable value, of course, and the
purchases of gold which were made in December, in particular, were
purchases which may have been mixed with fear. They were also pur­
chases which, I think, stemmed from great hope, hope that possibly
the United States would be forced into increasing, or perhaps doubling,
the price of gold quickly.
So that gold has, as I stated in my statement, a certain scarcity
value which, by virtue of its being a monetary unit, has developed
relative to other currencies. What its strength would be as a commodity
is something which we have yet to test at some point. The dollar is used
in international transactions, in commercial transactions, in the mar­
kets. It earns an income as an investment. In this sense, the dollar has
a great deal more usefulness than sold.
The strength of gold will only be borne out by future events in the
world financial structure.
Mr. B a r r e t t . Just one final question. When will the dollar be
stronger or weaker, what period? What time in our economy? I know
when we have a booming economy—I am trying to get this into the
Mr. O l s e n . When will the dollar be stronger than gold ?
Mr. Barrett. When will it reach its weakest point ?
Mr. O l s e n . I think it is, as Mr. Reierson says, weak at the present
time in the sense that gold is being sought more eagerly than it has
been previously—if that is a measure of its relative strength to gold.
But I would hasten to add, however, that the strength or weakness of
the dollar should be measured more importantly against other cur­
rencies rather than against gold.
Chairman P a tm a n . Mr. Fino.
Mr. Fino, before you start, may I pose this question: We had un­
derstood we were to have an executive session at 11:30. But I have
talked with Mr. Widnall and he thinks we could safely go to 11:40.1
wonder if it would be all right with the members to say now we will
have an executive session at 11:40, and pass on the bill ?
(No response.)
Chairman P a tm a n . Without objection, so ordered.
Mr. F i n o . Thank you, Mr. Chairman.
I, too, want to compliment you gentlemen for your straightforward,
honest evaluation of this legislation before this committee.
I have no questions except that I do want to say I am happy to hear
that you gentlemen do not agree with the Treasury Department or
the Federal Reserve Board that the elimination of the gold cover will
not affect the international confidence in the American dollar. That
is it.
Chairman P a t m a n . Mr. Reuss. ^
Mr. R e u s s . Thank you, Mi*. Chairman.
I note that there are 40 minutes between now and 11:40. There are
10 people here. Does anybody who shall come after me mind if I take
my 5 minutes? I f anybody does, say so. Hearing nothing—thank you,
Mr. Chairman.
Gentlemen, you have been leading us toward the truth, and I want
you to continue that. Let me, before asking my question, see if the three



of you gentlemen can’t stipulate with me about a couple of truths
that I think are self-evident.
Truth No. 1. We have got to get our balance of payments under
control and in equilibrium. Do we all agree ?
Mr. R e i e r s o n . Yes, sir.
Mr. O l s e n . Yes, sir.
Mr. P e a c o c k . Yes, sir.
Mr. R e u s s . The January 1 President’s program is likely not to suc­
ceed in doing that, and besides that, it has autarchic overtones which
you gentlemen don’t like. Is that a fair statement ?
Mr. R e i e r s o n . Yes, sir.
Mr. O l s e n . Yes, sir.
Mr. P e a c o c k . Yes, sir.
Mr. R e u s s . Let us stipulate also that we need to stop price inflation
in this country by adopting sound fiscal and monetary policies, spend­
ing less, taxing more, and creating money in an amount which will
not add unduly to demand^ and we need to do that for domestic rea­
sons and also for international reasons, because otherwise the price
of our exports and the demand for our imports produces international
Can we stipulate to that point ?
Mr. R e i e r s o n . Yes, sir.
Mr. O l s e n . Yes, sir.
Mr. P e a c o c k . Y es, sir.
M r . R e u s s . N o w , my point. It seems to me that the private account
in our international balance of payments; that is, traae, tourism, and
investments, pretty well balances out, or even yields a little surplus,
and that the devil in the flesh is our public account.
Can we stipulate to that ?
Mr. R e i e r s o n . Yes, sir.
Mr. O l s e n . Yes, sir.
Mr. P e a c o c k . Y es, sir.
Mr. R e u s s . OK. It is also true, I believe, that while we can save
a few dollars, or scores, or even hundreds of millions of dollars, by
eliminating fluff and nonsense from our foreign embassies, cutting
down on the number of employees, which we should certainly do, and
while it is true that a few dollars may leak out of our aid programs,
by and large, the biggest single item in our balance-of-payments deficit
is the cost of our military posture in Asia and Europe?
Mr. R e i e r s o n . Mr. Reuss, may I offer a qualification and a reser­
vation which may be based as much on ignorance as on anything else ?
I have some reservations about the accuracy of data that have
been submitted as to the balance-of-payments cost of the economic
program. But beyond this I think there is a question which to me
has not yet been answered; namely, what is the adverse effect upon
our commercial export market of the giveaway programs of the Fed­
eral Government? I f we could get a defensible answer on this, I really
believe, Mr. Reuss, that the payments cost of the economic programs
would be greater than they are presently stated.
Mr. R e u s s . Instead of being chicken feed, they may be chicken
feed to the second or third power, but the main drain is with $1.5
billion that we spend in and around Vietnam, and the $1.5 or more
that we spend in and around Germany and the rest of Europe. I think



it is time we told the public the truth about this, and isn’t what I am
saying the truth ?
M r. O lsen . I would agree. We have done this in our monthly
economic letter in the past, analyzed the accounts of the Government
and private sector to indicate that over the years the private sector
has indeed been largely in balance. But I would add the qualification
that it is difficult to fragmentize the balance of payments to the extent
of indicating that Government outlays overseas don’t in some way
find their way into the spending stream and thereby result in some
higher private exports from this country.
It is interesting to look at our balance-of-payments situation over
the long term. In comparison to the early twenties, the deficits that we
have incurred over the past 10 years or more are without precedent.
It may well be that our foreign aid program and military posture
overseas which we never had prior to World War II, accounts for
the difference.
Mr. R e u s s . Isn’t this the fly in the ointment ? In World War II,
when we fought Hitler and the Japanese, I never heard of the words
“balance of payments,” and the reason I never heard of it, was there
wasn’t any problem. We were the only trading country in the world.
Everyone else was devastated or behind enemy lines, so we accumulated
& tremendous surplus.
Now, however, we are attempting military operations on a vast
scale without, so far as I can see, any important allies who are willing
to pick up the balance-of-payments costs of those operations. There­
fore, is it not true, gentlemen, that we are attempting something un­
precedented in history? Has there ever been a time when anything
like this was tried before ?
Mr. P e a c o c k . I think it is quite right to say that the United States
has been in the unique position of deciding independently the amount
of money it needs to spend abroad, then looking to the private sector
to generate the surplus required to finance it. I believe this has never
been done successfully.
Mr. R e u s s . Let us, then, as my time expires, ponder this thing,
because, as I see it, we are simply attempting more ventures abroad
in the governmental sector than God must have meant us to. The
balance of payments seems to be working drastically against us.
Mr. R e i e r s o n . May I make a one-sentence comment? Nothing I said
earlier should be construed as differing with what you say, vis-a-vis,
the military. I completely agree that the military cost is very big, that
it is bigegr than it should be, and that it needs very careful, very
serious, and very energetic attention.
Chairman P a t m a n . Gentlemen, since some members, including Mr.
Reuss, will obviously not get to ask all the questions that they desire
to ask, will it be satisfactory if we submit questions to you in writing,
and when you look over your transcript, answer them, please?
Mr. R e i e r s o n . Yes, sir.
M r. O lsen . Y es, sir.
Mr. P e a c o c k . Yes, sir.

Chairman P a t m a n . That will help the members, because there are
certain questions we feel strongly about and we would like to submit
them in writing, please.



Mr. H a l p e r n . Mr. Chairman and gentlemen of our panel, I certainly
want to thank our distinguished panel for their superb testimony. I
believe they have contributed greatly to the history of this legislation
and have effectively cleared the air on any doubts there may have been
on this bill. So I wish to extend my heartiest compliments to them.
It took years to interest the American business to invest abroad, and
now the administration attempts to discourage this investment. As I
see it, this is a reverse of the trend that took years to develop, and we
may not ever be able to reverse it again.
In terms of comparative advantage, vis-a-vis other nations, isn’t the
role of the U.S. direct investments overseas and free capital flow more
vital to future balance-of-payments consideration than balance of
trade? In other words, has the administration underestimated the vital
importance of encouraging more, not less, direct investment, and I
direct that to the three of you for any comment you may wish to make.
Mr. R e i e r s o n . Mr. Halpern, I think that both are important. On
the trade, we have suffered a very serious decline in our net commercial
export surplus which in 1964 was $3.9 billion and which in 1966 got
down to $600 million.
Over the years, prior to 1964, this commercial trade surplus was
of the order of magnitude of 2 to 3 million, so the decline is important.
On the direct investment, I certainly agree, because again, direct in­
vestment, if we take the outgo and balance it against the inflow, has
been showing surpluses year after year after year; the surpluses re­
cently have been running a billion and a half to $2 billion. I am
greatly concerned, as I said in my statement, as to the impact of the
direct investment program, and this is the big target in this program.
Let’s face it. This target is $1 billion out of the total target of $3
billion, and this is a billion the administration is really trying to get.
'I am very much concerned about the impact upon the flow ox income
from direct investments—one of the few items m the balance of pay­
ments that has been behaving favorably in recent years.
Mr. O l s e n . Well, I would agree with that assessment. The impor­
tance of our direct investments, I think both direct investments and
our trade efforts, are of equal importance.
Actually, much of our export is linked to the growth of direct in­
vestment overseas. We, through our foreign policy efforts after World
War II, particularly with the Marshall plan, worked hard to create
an environment for the growth of international investment and trade
overseas, and business communities followed this lead.
Now, we find that we are seeking to cut back sharply on the very
goal which we spent billions of dollars after World War II to
achieve. So in many ways, our foreign policy position overseas tends
to be somewhat contradictory to our policy with respect to the private
sector of the economy at the present time, and this conflict is not
going to be resolved, I am afraid, in any constructive way, if it
continues in the present course.
You can cut back sharply on investments and still see the balanceof-payments deficit grow, and grow substantially, in fact, because
of the damage that you do to the income-producing ability o f private

Mr. R e i e r s o n . And the decline in exports that might follow re­
striction on direct investment.



Mr. H a lp e r n . Mr. Peacock, would you care to comment ?
Mr. P e a c o c k . I don’t think I would care to add anything.
Chairman P a t m a n . Mr. Stephens.
Mr. S t e p h e n s . Thank you, Mr. Chairman.
The military posture of the United States has been discussed and
Mr. Reierson made some comments on it. Are we going to have to
make a choice of having military forces in other countries, or having
them all at home, if we are going to achieve a balance of payments ?
Mr. R e i e r s o n . I think there are several sorts of choices involved.
I think we should give some of our allies abroad, who can afford it,
the choice to decide whether they will cover balance-of-payments
costs of the troops or accept the consequences. I f they are not willing
to do this, then, this is a token that they do not really believe the
defense support of the United States is that important.
Beyond that, I think if you will examine the record you will find
that when the troops were sent to Germany, there was a distinct
understanding that they would be returned shortly thereafter. Now,
this is something that I think could be explored. I have been told this
by a man who knows. Third, I think there is also the question of
what military posture involves. Does it involve a rest camp in Europe
for wives and children? Why should we treat troops in Europe so
favorably when we consider what the boys in Vietnam are going
through ?
I know the answer of the military. But this is a decision that does
not affect our military posture at all.
Finally, another area that needs very careful investigation is: How
many military establishments are we maintaining around the world
which are no longer of military significance, by virtue of the change
in the art of war, and the perfection of new military devices ?
How many military establishments are we maintaining because
some chap on the area desk in the State Department feels that it
would ease his problems, if we continue to pay money into these
areas? These are very serious questions. I really think that a sub­
stantial reduction can be made in the military outlays abroad without
impairing our military posture.
Mr. S t e p h e n s . Only slight mention was made of the foreign aid
program. But we have spent a substantial amount of money in the
period since World War II in the foreign aid program.
We have taken our money, is it not true, and it has been utilized
to rehabilitate other countries? It was designed initially under the
Marshall plan. We have built up these other countries^ and now we
are suffering some of the consequences of the economic advantages
that we have given to these other countries with our money.
Mr. R e i e r s o n . I think, in retrospect, it was a mistake for us not to
make this a loan instead of a grant. In the light of what has developed
since this, it would have been very appropriate and useful.
Mr. S t e p h e n s . I don’t question the wisdom of that.
Mr. R e i e r s o n . This is past history.
Mr. S t e p h e n s . That is the main reason that my position has been
to favor the program of the Asian Development Bank that takes other
countries’ money, too, and is put out as loans. But the other thing
that I would like to ask you, if you would, any of you, to develop some
thought on this:



Is it possible for us to continue to be the international bankers for
the world and also the guardian of peace for the world, and still not
have a continual balance-of-payments deficit ?
Mr. R e i e r s o n . I think the answer is really put the other way: I f
we continue to have these big payments deficits, it will impair our
ability to be the world banker, which is a function which I regard
as very important, and one which was thrust upon us. We did not ask
for it. But it is a responsibility which we cannot easily shed because
there is no alternative available.
Mr. S t e p h e n s . Y o u mean as far as the world banking situation, that
we are the financial center of the world ?
Mr. O l s e n . We have said much here about our military outlays,
about inflation, about the pursuit of full employment. There has been
a good deal of debate about the merits of these goals. While they all
seem, and are in many ways, worth while, I think we go astray in
not accurately projecting the consequences of seeking all of these
goals at the same time. We don’t face up to the fact that if we con­
tinue to seek all of these goals immediately and simultaneously, we
will impair our ability to achieve any or all of them in the future.
Mr. S t e p h e n s . Well, my time has expired, but I would like to make
one comment. I agree with you that the consequence of some sup­
posedly worthwhile goals will cause dislocations. For example, we
have had that in the southern section of the United States in the
textile field. America has assisted foreign countries to build up textiles.
The competition has made serious inroads on domestic markets and
reduced domestic production. But if you will take the map and look
at the areas in Appalachia that have received a concentration of atten­
tion for U.S. help as poverty areas, you will find they are the areas—
every single one of them—where there used to be high employment in
a cotton mill or textile mill.
Chairman P a t m a n . Mr. Brock.
Mr. W i l l i a m s . I would like to call attention to the fact that at 11
we decided to terminate questioning at 11:40. It is now 11:20, so that
half of the time has been used, and four members have consumed all
of this time. I don’t see any point in trying to mark up this bill in an
executive session, and I would like to suggest we continue until
12 o’clock.
Chairman P a t m a n . We would have to come back tomorrow, but it
is not likely we would have a quorum because some members don’t like
to come back on Friday.
Mr. W i l l i a m s . I f we are going to try to discuss a bill as important
as this----Mr. A n n u n z i o . I would like to move that the remaining time you
have left be divided among those who haven’t had a chance to ask
Chairman P a t m a n . Let’s divide this among those who haven’t had a
chance to ask questions.
Let’s divide it up, 2 minutes each, and any questions you don’t get
in may be submitted in writing. W ill that be satisfactory ?
Keep the time, Mr. Clerk, to give each one an opportunity.
Mr. W i l l i a m s . Is the chairman going to try to mark this bill up
and discuss it and reach a decision by 12 o’clock?
Chairman P a t m a n . All right, Mr. Brock.
89-292— 68------- 19



Mr. B r o o k . Thank you, Mr. Chairman.
I hope we can accomplish something of significance.
Mr. Peacock, in light of your statement, what action could we take
that would immediately—I mean, within the next 60 days—make an
impact upon our policy situation?
Mr. P e a c o c k . Actions which would result in the immediate improve­
ment of balance-of-payments performance are out of the question.
What is needed is not so much a large improvement within the next
60 days, but rather the initiation of far more effective action than we
have any reason to believe is contemplated now.
Mr. B r o c k . I do think there are certain things that could be done
to be effective. I think the thing that bothers me, and I personally
would disagree with you in this respect, is that we lost $900 million
of gold last month. We have a billion and a half left in free reserves.
I question whether we have the time to take the action to correct the
basic imbalances without removing the gold cover, as you seem to
It seems to me we are simply buying time. I do happen to agree
with you, if we don’t take effective action, then we have done nothing
other than postpone the pending bill.
Mr. R e i e r s o n . I don’t think action will show up in the figures in the
next 60 days. But I do think that the action is important in itself. I f we
embark upon a positive course of action, that would be important.
Mr. B r o c k . I would like to ask one question for the record. Would
you each, in correcting your transcript, answer for me what you think
the most effective single action is that this Government could take
legislatively to correct our imbalance of payments in the short run,
with the minimum adverse long-term effect ?
Chairman P a t m a n . Y


can answer that for the record.

(The information requested follows:)

R e p l y o f M r. R e i e r s o n -

This is a very difficult question to answer, especially since some of the most
effective actions would not require legislation. In the legislative area, perhaps
first priority is in the fiscal area—to hold Government spending below the amounts
projected in the Budget Message and to enact a surtax.

Chairman P a t m a n . Mr. St Germain.
Mr. S t G e r m a i n . N o q u e stio n s.
Chairman P a t m a n . Mr. Johnson.
Mr. J o h n s o n . I h a v e n o q u e stio n s. I y ie ld m y tim e .
Chairman P a t m a n . Mr. Stanton.
Mr. S t a n t o n . Gentlemen, on behalf of this Congressman, you have
been the most enlightening witnesses we have had on this particular
subject. Now that you understand the time pressure that we are under,
I would like to know, in your own personal opinion, considering that
you have somewhat a divergence or opinion on this particular legis­
lation, how each of you feel about the wisdom of perhaps forestalling
a decision on the question of removing the gold cover until such time
as the Ways and Means Committee determines exactly what will be
this Government’s balance-of-payments program? This is presuming
that a program of a balance of payments that the President suggested
on January 1 will be enacted within the next 60 days?



Chairman P a t m a n . Any other questions you will submit in writing.
Mr. S t a n t o n . I have just the one question. I just asked one question,
and I want an answer.
Chairman P a t m a n . You want an answer for the record?

Mr. S t a n t o n . I want an answer now.
Chairman P a t m a n . Well, of course, that would be in violation of
our agreement.
Mr. S t a n t o n . N o ; it w i ll n o t be. I h a v e n ’t u se d m y 2 m in u te s.
Mr. R e ie r s o n . I see no great emergency that requires immediate
action today or tomorrow.
Mr. O l s e n . I would agree also that the logical thing would be to
follow, after the hearings on the program, the balance of program.
Mr. P e a c o c k . We are in accord.
Mr. S t a n t o n . I agree, gentlemen, for the simple reason if we come
up with a strong program and we impress upon the world the strength
of the dollar, we would be under less pressure on this type of legisla­
tion, once the world knows we mean business and we do have a strong
balance-of-payments program.
Chairman P a t m a n . Since the gentlemen have answered the ques­
tion ; Mr. Gonzalez.
Mr. G o n z a l e z . Gentlemen, apparently, from the reading of your
testimony, essentially you believe in holding up things for the time
Mr. R e i e r s o n . I d o .
Mr. G o n z a l e z . And, Mr. Reierson, as I came in you were mentioning
something about the necessity of stopping the giveaway programs.
Could you define those ?
Mr. R e i e r s o n . I do not believe I said we should stop them. I believe
I said—the giveaway programs—and I was referring specifically to
the ajgriculture program—were having adverse effects upon our com­
mercial market, and that we do not know how much the adverse effect
is, and that this adverse effect upon the commercial market adds to the
balance-of-payments cost of these programs.
Mr. G o n z a l e z . This is the foreign aid agriculture program?
Mr. R e i e r s o n . Yes, sir.
Chairman P a t m a n . Mr. Mize.
M r. M ize. Were any of you, or any of your colleagues with similar
views, asked to join the Government’s fiscal and monetary experts
as they developed the President’s January 1 proposal to help this
balance-of-payments problem?
Mr. R e i e r s o n . No, sir.
Mr. O l s e n . N o , sir.
Mr. P e a c o c k . N o , sir.
M r. M ize . I s there any estimate as to how much o f the gold losses
of the fourth quarter o f last year were paid out to speculators, thereby
reducing the world gold monetary reserve ?

Mr. O l s e n . The estimates are that somewhere between a billion and
a half and $2 billion were withdrawn from the monetary gold stocks
of the world.
M r. M ize. Thank you.
Chairman P a t m a n . Mr. Hanna.
Mr. H a n n a . N o q u estio n s.
Chairman P a t m a n . Mr. Lloyd.



Mr. L l o y d . N o q u e stio n s.
Chairman P a t m a n . Mr. Annunzio.
Mr. A n n u n i z o . Thank you, Mr. Chairman. No questions.
Chairman P a t m a n . Mr. Blackburn.
Mr. B l a c k b u r n . I have no questions.
Chairman P a t m a n . Mr. Rees.
Mr. R e e s . Gentlemen, I would like to ask three questions for the
Most of the restrictions would be on American firms investingabroad in highly developed countries of Western Europe. Can’t these
companies go to the European capital market and borrow there, with­
out inhibiting their ability to expand in Europe? Isn’t (their greatest
long suit American technology and American know-how ?
Second, the program of the administration is, No. 1, a surtax; No.
2 , an attempt to cut down spending, both foreign and domestic; and
No. 3, a program to restrict our balance-of-payments deficit through
specific restrictions.
Do you think this is sufficient to handle the balance-of-payments
problem, and third, do you think this, tied in with the bill before us,
represents a feasible package ?
Chairman P a t m a n . Y o u are asking that to be answered for the
record ?
Mr. R e e s . I don’t believe there is time to answer any other way.
Chairman P a t m a n . All right.
(The information requested follows:)

e p l y op

M b. R

e ie r s o n

I think these actions are an essential hut I believe that Government spending
must be held dbwn more than the Administration proposes. In addition to the
three lines of action you mentioned, a less expansionary monetary policy is also

Chairman P a t m a n . Mr. Brown.
Mr. B r o w n . Mr. Brock asked you to state the single most effective
means of curing our balance-of-payments problem. I would like to
have you state alternative means in their order of priority, as you
view it.
Mr. O l s e n . That question, I assume, you want for the record?
Mr. B r o w n . Yes, sir.
Mr. O l s e n . I only wanted to say this, which is obvious, to be sure.
As you know, I took a position in support of removal of the gold cover,
with reservations, which I outlined. I want to stress the importance of
this legislation because a failure to remove the gold cover means one of
two things: A freeze in domestic currency, or a change in the present
gold arrangements with respect to the world.
(The information requested follows:)



M b. R

e ie r s o n

In approximate order of priority I would suggest: (1) a less expansionary
monetary poUcy; (2) more restraint on spending than the Administration pro­
poses, together with the imposition of a surtax; (3) vigorous and effective action
to reduce the cost of the Government’s foreign mUitary and economic programs;
(4) much greater support than has been given in the past to efforts at promotion
of exports and travel by foreigners in the United States; and (5) efforts to induce
other important industrial countries to modify their practices vis-a-vis the rebate
of taxes on exports and the imposition of border taxes on imports or to permit
the United States to adopt similar measures.



Chairman P a tm a n . Mr. Galifianakis.
Mr. G a lifia n a k is . Mr. Chairman, I have a couple of questions.
There are a variety of explanations about going off the gold standard
in 1934.1 wish you would comment on the link between the reasons that
were applied in 1934 for going off the gold standard and the reasons
that are being applied now for the removal of the gold cover. That is
one point, for the record.
The other is, I wish you would comment in the light of the fact that
the Federal Eeserve Board now has authority, and I take it, you under­
stand they do have authority, to temporarily life the gold cover.
I wish you would comment as to the gravamen of the passage of this
bill, in the light of the fact they do now have the authority to do that
Chairman P a tm a n . Yes; you gentlemen answer that for the record.
(The information requested follows:)



M b.


e ie r s o n

The fact that in the United States and in all other major countries gold no
longer functions as a medium of exchange is a reason why the gold certificate
reserve requirements are no longer meaningful. The dollar is not freely con­
vertible into gold, domestically, and the gold position of the United States, or
changes in the gold stock, have had no discernible effect upon the rate of ex­
pansion of bank credit which the Federal Reserve permits. The function of gold,
today, is to serve as an international monetary reserve and settlements medium.
As to your second question, Mr. Brown, the fact that the Federal Reserve has
authority to suspend the gold certificate reserve requirement and the further
fact that the United States still has a substantial amoun of “free” gold are rea­
sons why I see no pressing urgency to take immediate action on the elimination
•of the gold certificate reserve requirements.

Chairman P a tm a n . Mr. Williams.
Mr. W illia m s . I want to thank you gentlemen for coming here this
morning. I found your testimony to be most helpful, and I was happy
to learn you don’t believe there is any great urgency to remove the
gold cover. We have had representatives from the Treasury Depart­
ment and Federal Reserve before us, and they seemed to believe that
if we do take the gold cover off our currency, definite steps will be
taken by the administration to correct our unfavorable balance of pay­
ments. The President’s state of the Union message, in which he came
out with a $186-billion budget, $10 billion over the last fiscal year, and
with some new giveaway programs, would, even with a tax increase,
result in an $8 billion deficit. Also, during this fiscal year we have seen
a projected $6 to $8 billion deficit bloom into a $30 billion deficit. Now,
with inflation pricing this country out of the international markets, and
all of the other things that are happening in this country today, do
you believe there is any indication of any determination at all on the
part of the administration to take the necessary steps to restore in­
ternal fiscal discipline here at home, and create a favorable balance
of payments?
Mr. R e ie rso n . Y o u want it for the record?
Mr. W illia m s . I want it right now. I have 35 seconds left.
Mr. R e ie r so n . My answer is, I see no evidence that the present pro­
gram presented is adequate to the task.
Mr. W illia m s . D o you care to comment on that, Mr. Olsen?
Mr. O ls e n . I would agree with that, as it is now contemplated.
Mr. W illia m s . Mr. Peacock.



Mr. P e a c o c k . I would agree with that.
Chairman P a t m a n . Mr. Wylie.
Mr. W y l ie . I have no questions.
Mr. R e i e r s o n . Would you please arrange with the clerk to have the
list of questions for the record put in order, because my notes are very
erratic and incomplete.
Chairman P a t m a n . We will have the reporter help u s on that. We
will be very glad to do that.
Mr. B r o w n . May I ask one more thing for the record. You gentle­
men do this for the record. How can one in the briefest, most succinct
Way, express the reasons for voting “No” on this legislation?
Chairman P a t m a n . Thank you, gentlemen, very much.
You have been very helpful and we appreciate your testimony.
(Whereupon, at 11:40 a.m., the committee adjourned and moved
into executive session.)

(The following statements, letters, and information requested by members
of the committee, were submitted for inclusion in the record:)
Statem en t



e p r e s e n t a t iv e

W alte r S. B
F rom N evada

a r in g ,

C o n g ressm an


L arge

Mr. Chairman, I thank you for the opportunity to make a statement on the
legislation before this committee, H.R. 6428 and related bills, proposing the
removal of the 25-percent gold support that now underlies the paper currency of
the Federal Reserve Bank of the United States.
I am unalterably opposed to this proposed legislation.
As one who has been interested in gold mining and the gold problem
throughout the years, I am most distressed at the proposal pending before your
committee today. I have urged, as have many of my colleagues, over the years
and during several administrations, that proper remedial action be taken to
halt the continued mounting of the balance of payments deficit.
The removal of the gold cover would open the way to unlimited expansion of
Federal Reserve notes. . . to the weakest money known to man, fiat money and, in
my judgment, a collapse in the value of our currency.
Why are we being asked to remove the gold cover? Is it because this is the only
way to prevent a complete collapse of our fiscal basis of our country?
Treasury Secretary Fowler stated before this committee that, and I quote,
“the world knows as a fact that the strength of the dollar depends upon the
strength of the U.S. economy rather than upon a legal 25 per cent reserve require­
ment against Federal Reserve notes, and it is clearly appropriate for this fact
now to be recognized in legislation.”
The world also knows a® a fact that, the value of our dollar has been steadily
depreciating, hence they—our foreign creditors—would rather have our gold than
our value shrinking dollars.
As the late Lucius Beebe so accurately put it: “Most people know that
basically, and when all is said and done, gold is the only abiding, permanent,
perennial and universal standard of value in human affairs. Whether it is
legal or its ownership is forbidden, gold is the one and only property whose
essential worth has never been questioned and which will always be the
unimpeachable commodity.
“A dishonorable federal government may repudiate its money as o u t ’ s has done.
An irresponsible banker may indulge in fantasy in terms of its confiscation, but
everyone who has had a $10 gold piece on his watch chain knows he has a property
which has never yet been devalued in the history of human folly and government
Mr. Chairman, to dissipate our remaining gold would constitute one o f the
worst monetary blunders in history. For the life of me, I can’t see the headlong
rush to destroy ourselves financially.
The economists constituting the President’s Council of Economic Adbvisers
are dedicated Keynesians. They are of the opinion that gold is a “barbarous
relic.” They are also of the opinion that the shortage of monetary gold is a
major economic problem. They fear that the shortage of monetary gold would
restrict international trade and world economic output.
Yet, realistic authorities of European countries have shown no desire to
abandon the monetary use of gold nor to agree to any schemes that would foster
worldwide inflation.
Mr. Chairman, this problem of gold is a complicated one. So much so, top
economists are at odds with one another. Even our esteemed Treasury Depart­
ment seems confused when it comes to gold. For example, on May 17th, Fred




Smith, General Counsel of the Treasury, in a letter to the Honorable Wayne
Aspinall, chairman of the House Interior and Insular Affairs Committee, on the
subject of gold subsidy bills stated:
“Gold is not comparable to other commodities or metals. It is primarily
important as a monetary standard of value. The dollar is linked to gold, and it
is the firm policy of the Government to maintain the present dollar price of gold
at $35 an ounce. This policy is the foundation for the international monetary
This is contradicted by Secretary Fowler in his statement before this committee
“Today, the strength of the dollar is not a function of this legal tie to gold—
a tie which is only applicable to one portion of our total money supply, Federal
Reserve notes. The value of the dollar—whether it be in the form of a bank
balance, a coin, or ‘folding money’—is dependent on the quantity and quality
of goods and services which it can purchase. It is the strength and soundness of
the American economy which stands behind the dollar.,,
It is quite obvious, Mr. Chairman, that foreign nations do not hold our
economic strength in very high esteem as witnessed by their wanting our gold—
not our dollar. It’s not that these countries have complete disrespect for our
economic strength. But they wonder how any government that seemingly refuses
to put its financial house in order, both at home and abroad, can continue to
remain economically strong.
The printing of more and more paper fiat money isn’t going to keep us
economically strong no matter how much juggling of figures the Administration
goes through.
The cause of foreign concern over the stability of our dollar hinges on our
inability to correct the deficit in our balance of international payments.
William Martin, Chairman of the Board of Governors of the Federal Reserve
System told this committee that in order to arrest the decline of gold, “we must
achieve a major improvement in our balance of payments.”
Secretary Fowler, appearing before the House Ways and Means Committee,
January 22,1968, told that committee, “The keystone to this balance of payments
program is the surcharge proposal you have before you.”
As far as I am concerned, Mr. Chairman, the “keystone” to our balance of
payments program has been our failure to drastically curb foreign economic aid
which pours more paper dollars into the hands of our foreign creditors.
In hopes of easing our balance of payments deficit, our government was count­
ing on the International Monetary Funds special drawing rights to come to the
rescue. This “paper gold”—or to put it more basically—our I.O.U. to the special
drawing rights did not exactly meet with roaring approval by the European
nations. They’re not interested in pitching in to solve our balance of payments
It is interesting to me, Mr. Chairman, that while the Treasury Department
and the Admiinstration express great concern over our vanishing gold, they
adamantly oppose the gold subsidy bills before Congress on the grounds it
would trigger a run on the dollar. What did the Treasury people think we
liave had for the past seven years if it was not a run on the dollar.
By the stroke of a pen some 34 years ago, the price of gold was at $35 an
ounce. This action was taken as a depression measure when gold was selling at
$20 an ounce. Since the depression days, costs of all commodities including
mining, have more than doubled but the price of gold has remained the same.
Ever since the end of World War II many efforts have been made to increase
the price of gold to its rightful height in the market place. Invariably these
efforts were met by incantations by Government spokesmen, over and over
again, that the currency of the free world would be tossed into chaos by any
effort of the American Government to increase the price of gold for domestic
producers. Even efforts to appease the money managers through offers to have
bills declared legislative that the official U.S. Government price for gold would
remain at $35 an ounce and that any higher prices paid for mining domestic
gold would be considered a subsidy by the American Government to its do­
mestic gold producers have failed. Such efforts have been counter-acted by
charges that this action would create a two-price system for gold and would be
very upsetting to foreign bankers.
For these reasons, many proposals, and among them measures which I have
sponsored, to increase the price of gold paid to the domestic producer have failed
to win approval. It would be most prudent at this time to take steps to increase



our domestic gold production through the enactment of a realistic gold relief
bill providing financial incentives to reactivate the production of gold. Such a
subsidy would reveal to the world that our government is aware of the import­
ance of gold as money.
Canada has for some time paid production bonuses to its gold mining industry.
Australia has seen fit to provide incentives for gold production. Yet these acts
have not stirred foreign bankers to view with apprehension the strength of the
monetary systems of these two countries.
It does not seem logical, Mr. Chairman, that foreign nations or bankers would
object to the United States paying an adequate price for domestically mined
gold. Such a bill as I have introduced in Congress providing such incentives
would in no way violate the Bretton Woods Conference agreement, or the In­
ternational Monetary Fund, since this legislation does not propose to change
the price of gold per ounce.
To me, Mr. Chairman, this would solve our gold problem. At least it would be
one way. The other way, of course, is to cut our foreign aid program with its
torrential outpour of U.S. dollars. Removing the gold backing from the dollar
is opening the door for financial chaos. What will we use as a basis for our
monetary system when our gold supply is gone? Fiat money?
In closing, Mr. Chairman, I would like to end with this quote by Raymond
Rodgers, Professor of Banking, New York University, and author of the article
on money in the current edition of “Encyclopedia Americana” :
“It is the indisputable lesson of history that sooner or later, and usually
sooner, all paper money declines in quality—representative money becomes credit
money, credit money becomes fiat money, and fiat money becomes the epitome of
Thank you.
A m e r ic a n F e d e r a t io n o f L a b o r
& C o n g ress of I n d u s t r ia l O r g a n iz a t io n s ,

Washington, D.C., January SO, 1968.
Hon. W r i g h t P a t m a n ,
Chairman, Banking and Currency Committee,
U.S. House of Representatives,
Washington, D.C.
D e a r M r . C h a i r m a n : Would you be good enough to enter the enclosed state­
ment on the gold cover legislation in the proceedings of the hearings which your
Committee recently held on this matter.
Thanking you for your cooperation, I am,
Sincerely yours,


J. B

ie m u x e r ,

Director, Department of Legislation.
Statem en t



The AFL-CIO urges the Congress to remove the 25 percent gold cover on
Federal Reserve notes.
The AFL-CIO has a consistent record in support of complete removal of the
gold cover on both notes and deposits of the Federal Reserve System. On August
13,1963, the Executive Council of the AFL-CIO declared:
“ * * * at the earliest opportunity, the U.S. should eliminate the 25 percent
gold cover on its currency. Most other nations abandoned such gold covers
long ago. There is no rational reason for the U.S. not to make all of its gold
available for international transactions if necessary.”
On February 10, 1965, the AFL-CIO statement on this issue to the Senate
Banking and Currency Committee declared:
“The sensible and rational action, therefore, would be complete removal
of the gold cover on both Federal Reserve notes and deposits—as proposed in
S. 743.
“To remove only part of the gold cover at present, as provided in S. 797, is
not better than removing all of it, as some have suggested. There is no rational
economic reason to remove the cover on Federal Reserve Deposits and keep it
on notes. The entire requirement of the gold cover is an outmoded, harmful
anacronism—all of it, not merely part of it. And it should be removed rationally,
without fear or the potential panic of acting under the gun.



“ If only part of the present cover requirement is removed, the Congress will
probably have to review this issue again, because the cover should be completely
removed as soon as practicable.”
However, only part of the gold cover was removed in 1965—the 25% cover
on Federal Reserve deposits. The 25% cover on Federal Reserve notes was per­
mitted to remain.
The resolution on the balance of payments, adopted by the Seventh Constitu­
tional Convention of the AFL-CIO in December 1967, stated that “the gold
cover should be completely removed as soon as possible.”
The legal requirement that 25 percent of Federal Reserve notes be covered
by gold is an anachronism. American citizens can no longer convert their Federal
Reserve notes into gold. If the gold cover ever had any real utility, it has none
at present.
Moreover, the gold cover ties up nearly all of our monetary gold stock, except
in an emergency. Most of the gold stock plays no active part in either the domestic
economy’s spending stream or in the international economic arena, as the basis
for settlements among central banks.
The gold cover is not only useless, it is harmful. The persistence of this out­
dated gold cover has contributed to unrealistic fears about America’s ability to
meet its internatioal financial obligations—playing into the hands of speculators
and those who wish to undermine confidence in the American dollar.
Temporary action may be taken under the existing statute to make the gold
stock available for international transactions, if an emergency demands it. How­
ever, such temporary, emergency action—taken under the gun—would generate
needless fears and concerns.
Students of this issue have long advocated removal of the anachronistic gold
cover. In its report in 1961, the Commission on Money and Credit, compiosed of
bankers, businessmen and trade unionists, declared:
“The Commission believes that the threat of a confidence crisis would be greatly
Teduced if it were generally recognized, both here and abroad, that all o f the U.S.
gold is available to meet our international obligations. Any doubts about the U.S.
policy should be removed by elimination of the gold reserve requirements at the
earliest convenient moment so that all of the U.S. gold stock is available for
international settlements.”
Walter S. Salant and Emile Despres, in their study, “The United State® Balance
of Payments in 1968,” published in 1963, stated:
“The statutory requirement of a gold reserve against Federal Reserve notes
and deposit liabilities long ago ceased to serve any useful purpose. It should be
abolished. Although the requirement can be suspended in an emergency, its aboli­
tion now would release U.S. gold reserves for normal international settlements) in
the future. This would make clear that the reserves are available to the full and
at all times, not merely in emergencies, to serve their only useful function.”
There are domestic, as well as international, economic considerations for com­
plete removal of the gold cover. The AFL-CIO and many others advocate an ex­
pansionary monetary policy—and adequate expansion of the money supply, at
relatively low interest rates, to encourage the expansion of sales, production and
jobs. With the persistence of significant amounts of unemployment, particularly
among Negroes and youth, and the persistence of idle productive capacity, there
is a continuing need to reduce unemployment and add strength to the domestic
economy, which is the foundation of our international economic strength.
However, the 25 percent gold cover can be used as a dangerous curb on mone­
tary expansion. The cover should be removed to permit our monetary managers
to pursue policies to help the economy achieve and maintain full employment
and maximum use of our plants and machines.
The remaining gold cover should be completely removed, without further delay.
Partial action, again, can only cause future embarrassment and the need for an­
other Congressional review.
Of the $12.4 billion of U.S. Treasury gold stock on December 20,1967, approxi­
mately $10.6 billion was held as the required cover for Federal Reserve notes.
Congress should not permit this situation to perisist, with the possibility of
drifting into needless emergencies and related fear and speculation. Such emer­
gencies should be avoided.
The U.S. government’s entire monetary gold stock should be made available
to back up the international position of the dollar.



(The folowing statment on H.R. 14743, in opposition to proposals to remove the
Gold Cover from Federal Reserve was filed today by the Independent Bankers
Association of America with the House Banking and Currency Committee.
Comparable letter was likewise submitted with Chairman John Sparkman,
Senate Banking and Currency Committee, referencing S. 2857)
I ndependent B



s s o c ia t io n o f


m e r ic a ,

Washington, D.C., January 31,1968.
Hon. W r i g h t P a t m a n ,
Chairman, Banking and Currency Committee, U.S. House of Representatives,
Rayburn Office Building, Washington, D.C.
D e a r M r . C h a i r m a n : We appreciate the invitation to submit the views of
the Independent Bankers Association of America with regard to the President’s
recommendation for removal of the Gold Cover from Federal Reserve currency.
We oppose the recommendation, and the legislation that goes with it, as con­
tained in H.R. 14743, <as contrary to the best traditions of our great land, and
contrary to the lessons of history that clearly show that no nation has been
able to survive the deliberate removal of the gold backing from its currency.
We consider it a matter of first importance, and a matter of great urgency, that
our Government, and specifically the incumbent Administration, continue our
Nation’s support for the substance of the dollar, which government witnesses so
far heard at hearings on this legislation have thus far refused to acknowledge.
Treasury officials, in direct correspondence and conference room consultation
with our Association officers and committmen, insist that the gold backed dollar
no longer has a role in our domestic economy, but is only of value internationally,
and that it is strictly old fashioned, outdated and outmoded, to any longer insist
on gold backing for the dollar.
In almost the same breath high Treasury officials, representing the Administra­
tion, have joined together with our international “friends” in the Group of Ten
at Rio, to become partners in a world “paper gold” pact that will shortly begin to
crank out printing press paper currency. Unless, as we sincerely hope, the U.S.
Senate declines to confirm the pact.
We have been exposed to the usual four-syllable language that the interna­
tional “paper gold” pact is only a “ supplement” to gold, but we reject this as
unrealistic and untrue, and note, as is generally the case, that the United
States will provide most of the real money for the operation of this international
paper structure.
We must state to you, that after our Association officers and fiscal policy,
debt management committeemen conferred with ranking Treasury officials and
were severely reminded that a gold cover for currency is old hat in the extreme,
our Government Fiscal Policy Committee recommended, and our Executive
Council, at its semi-annual meeting, at the Chase-Park Plaza Hotel in St. Louis,
last October 26, adopted the following resolution:
“The Independent Bankers Association of America expresses unanimous oppo­
sition to a proposal for removal of the 25% gold backing from the U.S. Federal
Reserve notes, even though this action might be calculated to enchance this
country’s position in the international liquidity situation.
“ The lesson of history clearly reveals that no nation has been able to sur­
vive the deliberate removal of the gold backing from its currency. The likelihood
is that if this universally recognized basis were eliminated, gold would rapidly
flow out of this country.
“ The Association fears that depriving the United States currency of its gold
backing would do irreparable harm to the nation’s economy in the years ahead.”
As far as we can tell, and we regret this because we should have company,
our Association seems a lone voice in financial and banking circles being heard
responsibly in opposition to this hurried and urgent “crash” legislation. We
repeat and insist, with emphasis and vigor, that history shows no nation has
survived calculated removal of gold backing from its currency.
Respectfully and sincerely,
S t a n l e y R. B a r b e r ,
Independent Bankers Association of America.

(S )


il t o n

J. H


Government Fiscal Policy Committee.



S t a t e m e n t o n H.R. 14743 S u b m i t t e d b y Mr. D o n a l d M. G r a h a m , V i c e C h
m an,
C o n t in e n t a l I l l in o is N a t io n a l B a n k a n d T r u s t C o m p a n y
C h ic a g o

a ir



The simple answer to the question of removal of the present 25% gold re­
serve backing our currency as proposed in H.R. 14743 is : “ Yes” . I believe that
is the correct answer. But I come to that conclusion only after considerable soulsearching, and with full realization that the gold cover issue is of far less
economic significance than what we do about rectifying our chronic—and
worsening—balance of payments deficit and what we do about fiscal responsi­
bility in the United States. Proper solutions to both of these problems—and they
are inseparable—are the real key to the financial soundness of the free world.
At no time in modern history has the economic future of the free world faced
a greater challenge than today. This challenge did not appear suddenly from
some unexpected and extraneous source. It is the natural culmination of many
years of rapid growth of the free world and the problems of financial instability
and stress associated with that growth.
The responsibilities of the United States in international financial stability*
are unmistakable. As the political and economic leader of the free world, the
role of this country in shaping the structure and determining the evolution of
the postwar international economy has been decisive. Through the Marshall
Plan and other post World War II aid, the United States did much to rebuild
a war-torn world. This outflow of dollars—and gold—was essential. It origi­
nated from conscious and carefully considered policy decisions. As years went
on, however, we have failed to adapt our international financial position to
changing times and conditions.
The nature and magnitude of these problems and the challenge to us can be
considered under four major headings:
1 . Worldwide economic growth and stability.
2. International monetary system and liquidity.
3. The chronic U.S. balance of payments deficit.
4. Domestic economic soundness.
First—a few thoughts about the general problem of worldwide economic growth
and stability. The postwar record of economic growth has been impressive—but
not without important deficiencies. On the one hand, we have seen tremendous
advances in the standards of living of the economically developed countries of
North America and Western Europe, and in Japan, Australia, New Zealand, and
a few other countries. On the other hand, the economic disparity between these
"haves” and the large mass of remaining “have-nots” has widened despite
billions of dollars of aid freely granted by the United States. This gap has
widened largely because of the failure of the less-developed countries to come to
grips with their economic, social, and political problems and to establish a sound
and viable economic base on which to build their future. The challenge to bridge
this gap is becoming increasingly urgent if we expect to create a world of political
tranquility and continued economic progress.
At the same time, we are discovering—I hope—that we cannot simultaneously
fight a major war, provide economic and military assistance for many other
parts of the world, and still expect to expand our government activities on a
sound basis at home at the same time. Part of our problem has arisen from
attempting to do too many things at the same time. We must obtain greater
participation from other developed nations throughout the world; after all. they
have now fully recovered from the ravages of World War II. The less developed
countries must also put forth extraordinary efforts to marshal their own avail­
able resources. But they must also be willing to exhibit some patience and control
and not expect to become mature nations overnight. Obviously, the solution is
difficult and will require a new and closely coordinated approach from all nations.
A second major area of great immediate concern involves the international
monetary system and the need for increased international liquidity. Events of
the past year, and especially recent weeks, have sharply underscored the imme­
diate and vital need to provide for greater flexibility and manageability in the
international monetary system. On balance, the present system created at Bretton
Woods almost 25 years ago has served the free world well—particularly the
industrial countries. But it has become quite evident that the present tools and
resources at hand are no longer adequate to meet the needs of today’s volatile
and capital-hungry world. The challenge here is for an innovative but respon­
sible approach to international monetary reform which will restore financial
stability and confidence and prepare a sound basis for further economic growth.



The question of whether or not the volume of international liquidity is appro­
priate today is the subject of much debate and is difficult to determine. Events
of the recent past, however, provide support to the argument that in an increas­
ing number of countries monetary reserves have fallen below the levels consid­
ered adequate to support temporary payments imbalances. The inadequacy has
been reflected in a growing tendency of governments to resort to restrictive
monetary and fiscal policies for purposes of reserve protection. In some cases,
such policies are fully justified—as in the United Kingdom. In others they are
urgently needed—as in the United States. A steady increase in the need for such
measures only for balance-of-payments purposes, however, tends to point toward
an overall decline in reserve adequacy. Furthermore, wide disparities have
developed over the years between the rate of growth in world trade and the
smaller rate of growth in international liquidity. We cannot tolerate adjustments
which strangle trade growth rather than expand liquidity.
The present international monetary system has no built-in mechanism per­
mitting the level of international liquidity to adjust to a desired or required
level. Current liquidity shortages cannot be alleviated on short notice. As you
know, additions to the gold stock are haphazard, depending largely upon the
volume of gold production and fluctuations in private demand. For many years
the U.S. dollar has provided the necessary additions to the stock of interna­
tional reserves. It is now ironic that to continue in this role the U.S. would
be required to run continuous sizable deficits in our balance of payments. It is
also ironic that we have quickly seen the reaction in terms of complaints that
we are unduly restricting world trade from the announcement and proposal of
various moves by the U.S. which would limit our deficit.
For the future then, the dollar cannot provide the whole answer to liquidity
needs. And obviously the role of sterling as a world currency has received a
severe blow from pound devaluation. Automatic drawing rights on the Interna­
tional Monetary Fund have served well in a restricted sense in recent years but
for the future they too represent only a partial solution.
We must move forward, therefore, with the creation of new reserve instru­
ments as proposed at last year’s annual International Monetary Fund meeting.
This proposal envisages the creation of “ Special Drawing Rights”— SDRs—by the
IMF which would have the dual characteristics of a credit instrument and a
reserve asset. This proposal offers an attractive solution to the need for a
flexible and manageable reserve-creating process. But it is not without its
problem areas also. An initial, difficult question concerns the volume of SDRs to be
periodically created. Again, we cannot escape making judgments as to proper
reserve adequacy for a given situation. There would continue to be maldistribu­
tions of SDRs between the “have” and “have-not” countries just as under the
Fund’s current system.
The SDRs would not provide an international financial panacea. Their creation
would in no way excuse a country, including the United States and the United
Kingdom from the discipline of pursuing and maintaining a long-run balance in
its international payments position. It would remain the responsibility of each
country to keep its own house in order through appropriate monetary and fiscal
policy actions. Considering the rather unattractive alternatives to SDRs, how­
ever. it is hoped that the current proposal will be implemented as soon as
possible. Unfortunately, obstacles remain in the form of required ratification
by the legislatures of the Fund’s member countries and France’s express demand
that SDR creation must wait until both the United States and the United
Kigdom have restored balance in their international payments positions. Given
these circumstances, the United States should exert particular efforts in both
the economic and political areas to overcome these obstacles as quickly and de­
cisively as possible.
The Third very obvious problem area centers on the TJ.8. balance of payments.
Years of complacency, and an unwillingness to come to grips with economic real­
ity, have unavoidably but predictably placed our balance of payments in its
current untenable position. While it is easy to criticize other countries for their
restrictions on imports of specific American commodities—or their central banks
and private citizens for hoarding gold—the plain fact remlains that the United
States is itself responsible for the management of its balance of payments. And
in this we have failed.
It is quite clear that pressure on the dollar and the resulting drain on pur
gold stock that developed following the devaluation of the pound required
prompt and dramatic action to improve our balance of payments position. The



various controls imposed and proposed by the President on January 1 restricting
capital investment, bank credit, foreign travel, etc., it seems to me are steps of
the type which had to be undertaken in the present emergency situation. They,
o f course are unpopular. They will be disruptive. They will be difficult to ad­
minister. If continued for any prolonged period they will cause serious harm
to the flow of capital and trade and hurt rather than help our balance of pay­
ments position.
In sponsoring these measures, however, the Government is following an al­
ready established trend of selective interference which started more than four
years ago with the Interest Equalization Tax. Given fiscal procrastination in
Washington, it is hardly surprising that we have had to fall back on the various
selective restrictions as temporary expedients to relieve our balance of payments
deficit. Nevertheless, we must take the view of these controls as at least “doing
something” in an area which has seemed barren of effort at the Government level
for too long a time.
But these steps are constructive—as I have already indicated—only if they
are temporary. They are no substitute for the fundamental cure of fiscal and
monetary soundness, and their stay in our lives should be as brief as possible.
They are clearly inconsistent with our long-term goals of unrestricted interna­
tional trade and capital movements.
Our primary international responsibility is to reacquire control over our
balance of payments in the shortest possible time. For this we must be willing
to make sacrifices in terms of short-run domestic growth objectives. Failure
to do so will sharply increase the likelihood of a much greater and unavoidable
sacrifice: a breakdown of the international monetary mechanism, the decline
of the dollar as the world’s major reserve currency, and the possibility of a
prolonged stagnation in world trade and economic growth.
Let us remember again that we have just had our tenth balance of payments
deficit in a row—and 1967 was one of the largest of all. Let us also remember
that in the same ten year period our gold stock has fallen by almost 50%, while
at the same time our liquid liabilities to foreigners have doubled. Our friends
throughout the world are aware of these figures, so we cannot be surprised
either about speculative flights into gold or about talk about a devaluation of
the dollar. These are conditions that beget rumors, and rumors lead to irrational
actions and fears. This is true even though we are stronger internationally on a
balance sheet basis than most anyone realizes—with total investment abroad
twice as large as foreign investment in the U.S.
I have strong faith in the determination of the London gold pool members
and in the size of their resources to believe that any imminent change in the
gold price is out of the question. I firmly believe that the monetary authorities
of both this country and of the free world generally are rational enough to
recognize that any devaluation of the dollar would be considerably more harmful
than beneficial.
The fourth area of our concern relates to that domestic economy. Our economists
seem to agree that 1968 will be a record year in almost all aspects. But unfor­
tunately, the same questions that cloud the outlook internationally hang over
the domestic scene.
The U.S. economy is faced with inflationary pressure and nervousness about
the dollar which is more widespread today than it has been in more than a
decade. The recent price increases in the economy stem in large part from the
inflationary fiscal and monetary policies which are at the very root of our inter­
national problems.
After a period of relative price stability in 7 of the last 10 years, we have now
seen 2 years in a row with price increases in excess of 3% per year—and we
have the prospect of even larger price increases in 1968. It is difficult to expect
labor to confine wage increase to increases in productivity—or management to
avoid a new round of price increases—under these circumstances. The damage
has already been done. Those price increases largely reflect inflation created by
our government fiscal policies and an over reliance on monetary policy. Waiting
month after month and year after year to take fiscal action, premised on the hope
for a solution in Viet Nam, has proved to be very costly.
Apathy on the fiscal front forced a serious credit crunch in mid-1966 as the
Federal Reserve was saddled with a burden which should not be expected of
monetary policy. The President’s request for at least nominal expenditure cuts
and a tax increase in his State of the Union message a year ago encouraged the
Federal Reserve to adopt the easy money policy that characterized most of



19g7—too easy, as things turned out. Meanwhile, fiscal inaction grew more

serious. It took the Administration until August 1967 to come up with a specific
tax proposal and then White House spokesmen were unable to convince the
House Ways & Means Committee to take it seriously. Congressman Mills should
be thanked by all of us for his insistence on true budget spending cuts before
a tax increase is even considered—and a persistence in that point of view can
have far-reaching effects in restraining government expansion over the years.
Nevertheless, failure of the Congress and the Administration to get together on
fiscal policy action contributed importantly to an environment which made it
impossible for the British pound to be devalued without creating a tremendous
wave of uncertainty among American businessmen, investors, and—for that
matter—all thinking citizens.
A tax increase is still needed, unpopular though it may be. Expenditure cuts
are even more needed, and they are even more unpopular. Every program has
a strong pressure group supporting it. But both tax increases and expenditure
cuts must be accomplished.
A nation which in the current year is running a budget deficit far above that
for any other year in history (except for World War II) has obviously weakened
seriously its flexibility in the fiscal policy area. By acting in this manner it has
also impaired monetary flexibility in producing the most explosive combination
of easy money and the highest long-term interest rates in our memory.
Fiscal policy must do the job we have a right to expect of it. It can then—
and only then—have a powerful effect in avoiding the stringency of further direct
controls, not only with regard to emergency measures designed to meet the im­
mediate balance of payments deficit but also direct controls over credit and
over prices and wages—controls which are repugnant to all of us.
The challenge to the United States is clear. Statesmanship in our fiscal and
monetary policy is the key not only to our domestic stability but also to our
role as leader and banker for the free world. We have preached the doctrine
of fiscal responsibility to almost every country at one time or another since
World War II. Now the pressure on the dollar and the persistent and increased
drain on our gold reserves is forcing us to take some of the actions we have
advocated for others.
Under these circumstances, we have no real choice but to remove the legal
requirement of a 25% minimum gold reserve against Federal Reserve notes.
As we all know, U.S. Treasury gold stock declined in 1967 by more than $1
billion and at approximately $11% billion it stands at less than half the level
reached in the early post-war period. We now have about 25% of the free world’s
gold, as against 70% two decades ago. Over $10 billion of our gold is required to
be held as backing for our currency and that amount will increase during 1968
as our economy continues to expand. This is an exceedingly slim margin.
Our Government has made it abundantly clear that our gold is fully committed
as a backing for international transactions. In his message on balance of pay­
ments and gold to the Congress seven years ago President John F. Kennedy
“ . . . Our gold reserve now stands at $17.5 billion. This is more than 1y2
times foreign official dollar holdings and more than 90% of all foreign dollar
holdings. It is some 2/5 of the gold stock of the entire free world.
“ Of this $17.5 billion, gold reserves not committed against either currency or
deposits account for nearly $6 billion. The remaining $11.5 billion are held un­
der existing regulations as a reserve against Federal Reserve currency and
deposits. But these, to, can be freed to sustain the value of the dollar; and
I have pledged that the full strength of our total gold stocks and other inter­
national reserves stands behind the value of the dollar for use if needed.”
This last sentence received world-wide publicity and acceptance. It is a firm
pledge. The action being asked of your Committee is action which is essential
to back up that pledge. The fact that this gold is already available under
present legislation, which permits temporary suspension of the gold require­
ment (with penalties) in case of need, provides small comfort. To deny action
to eliminate the gold currency reserve now is to suggest to the world that
we are entertaining ideas of further roadblocks to the free movement of trade
throughout the world by limiting gold availability to pay dollar claims which
have already been incurred. This must not be allowed to happen. Despite all
that has happened the dollar and its tie to gold are still the keystone of world
prosperity. The integrity of that relationship requires that we act to remove
our gold currency reserve—a reserve which has no counterpart in Germany,.



France, Italy, Japan, or the United Kingdom. Removal of the gold cover, never­
theless, makes it even more imperative that we take our responsibilities of fiscal
and monetary soundness much more seriously and not fall back on the crutch
of direct controls that can only strangle world trade in the long run.


m e r ic a n

M in in g C o n g ress,

January 25,1968.
Hon. W r i g h t P a t m a n ,
Chairman, Committee on Banking and Currency, U.S. House of Representatives,
Rayburn House Office Building, Washington, D.C.
D e a r M r . C h a i r m a n : I would appreciate your acceptance of the enclosed state­
ment presented on behalf of the American Mining Congress for the record of the
hearings held by your Committee on the subject of legislation to eliminate the
gold reserve requirements for Federal Reserve notes and for U.S. notes and
Treasury notes of 1890.
With warmest regards and best wishes, I am
J. A l l e n O v e r t o n , Jr.,
Executive Vice President.
Statem ent





in in g

D on ald H . M cL a u g h l in , C h a ir m a n of t h e B oard, H
C o ., o n B e h a l f o f t h e A m e r i c a n M i n i n g C o n g r e s s

om estake

Mr. Chairman, as a representative of the American Mining Congress and as
an officer of the Homestake Mining Company which operates the largest gold
mine in the western hemisphere, I am appearing before you to voice the opposi­
tion of the mining industry to the principle embodied in the bill before this Com­
mittee, the objective of which legislation is to remove the 25 percent gold cover on
Federal Reserve notes.
We object to this legislative action which will sever the last remaining link
between gold and our domestic currency system. With some justification it has
been said that the 25 percent gold reserve now required by Federal law is more
or less symbolical since dollars held by our citizens are not redeemable in gold.
With the passage of this legislation the domestic dollar will be completely reduced
to fiat currency. Incongruously enough, the dollar internationally still will be
convertible into gold. In fact, the purpose of the removal of the “gold cover” is to
free up our entire national gold reserve to pay off claims presented by foreign
citizens at the bargain price of $35 per ounce.
The original intent of imposing a gold cover requirement upon the Federal
Reserve System was to impose a restraint upon over-expansion of our currency.
Unfortunately, successive Administrations in the conduct of their fiscal and
monetary policies have paid little heed to the discipline of gold, and our money
managers are confronted with the embarrassing necessity of urging this legisla­
tion to make our national gold stockpile available for redemption of dollars held
by foreign banks to a total that now far exceeds the gold we have in our reserve
and for sale to hold the price on the London market as well as to supply gold for
industrial uses.
On January 19, 1968 the Federal Reserve Board reported that the gold re­
serves held against Federal Reserve notes of $40,876 billion have fallen to a
dangerously low 27.4 percent, with our national gold reserves reduced to $11,984
billion. Our “free gold” , non-committed to the Federal Reserve System, available
to meet foreign claims is now approximately $1.3 billion. Quite obviously a re­
occurrence of heavy gold withdrawals of the magnitude which occurred in the
closing weeks of 1967 would soon exhaust our supply of “free gold” , at which
point costly penalties would be imposed upon the Federal Reserve by existing
Federal law if the 25 percent gold cover were not removed. Still further losses
of gold would, in all probability, lead to an embargo on gold followed inevitably
by a reevaluation of gold, which would mean a higher price for gold not only
in dollars but in all major currencies.
In spite of the positive statements of the Treasury Department, the Federal
Reserve and the Administration that this will never occur and that the dollar
will be defended to our last bar of gold, it is all too likely to occur when our gold
reserve reaches some critical point in its decline. The time to face the issue is
now while we still have gold and can speak with more strength than we will have
when our supply is approaching exhaustion.



The conception that our dollar is as good as gold was rudely shattered by the
gold buying abroad triggered by devaluation of the British pound, which only
too clearly demonstrated weakness and distrust of the American dollar as a
store of value. Confidence in the stability of the dollar has been weakened by
the continuing and increasing deficit in the United States balance of payments
now estimated by the Administration at from $3% to $4 billion and by the
prospects of an even greater internal Federal deficit which may be in the range
of $20 billion with increasing danger of even faster inflation.
While the Administration has proposed certain measures to correct the balance
of payments deficit and now comes forward with this proposed legislation to
remove the 25 percent gold cover from Federal Reserve notes, these proposals
come too late with too little to offer as a solution to the magnitude of our mone­
tary problems. Rather than strengthening confidence in the dollar, we believe
removal of the gold cover may well be regarded in foreign circles as a further
admission of weakness since some of our foreign creditors may well be worried
over whether claimants at the end of the line will be able to receive gold when
settlements are made. Notice served on the world that our limited national gold
reserve is being freed of all restrictions is not likely to be reassuring to our
creditors unless accompanied by clear indications that we intend to live within
our means.
We wish to raise two pertinent queries: To what point will this nation permit
its gold stocks to be depleted without imposing an embargo? To what low level
will our gold reserves drop before our military authorities warn that the security
of the country is being placed in jeopardy in the event of conflict?
We appreciate the gravity and complexity of our monetary problems which
may cause the Congress to decide that removal of the gold cover is necessarily
inevitable. We appreciate further that confidence in the dollar and a sound cur­
rency is a matter of concern, not only to gold operators, the mining industry and
the entire business community, but to every American citizen. However, if a
majority of the Members of Congress see fit to enact the legislation now before
this Committee to remove the gold cover, we earnestly submit that due considera­
tion should be promptly given to legislation to permit our citizens to own gold
coins or gold bullion without limitation and to stimulate and increase our pro­
duction of gold through incentive payments to domestic producers.



A m e r ic a ,

San Francisco, January 22,1968.
Hon. W r i g h t P a t m a n ,
Chairman, Banking and Currency Committee,
Rayburn House Office Building,
Washington, D.C.
M y D e a r M r . P a t m a n : You will find attached a statement covering my views
on the proposed legislation to remove the “gold cover” on Federal Reserve notes
which I believe is coming up for discussion in your Committee.
R. A . P e t e r s o n ,
Statem ent



A . P eterson , P

r e s id e n t , B a n k
L e g is l a t io n



m e r ic a , o n

G old C over

The Bank of America fully supports the President’s recommendation for re­
moval of the present requirement that Federal Reserve Notes outstanding be
covered by a 25 per cent gold certificate reserve. Retention of this requirement
can only contribute to uncertainty in the international financial markets.
The major argument for retention of the gold cover is that it precludes ex­
cessive growth in the domestic money Supply which would contribute to inflation.
However, Federal Reserve Notes account for less than one-fourth of the money
supply. Therefore, as a restraint the present gold cover requirement is largely
ineffective. The demand for currency in circulation is principally a function of
commercial activity in the United States, and the supply of currency should be
responsive to these demands.
Moslt of the U.S. gold stock is currently required as reserves for domestic cur­
rency. As the U.S. economy grows, increased issuance of Federal Reserve Notes
will require abandonment of the gold cover requirement within a few years in
any case.
89-292 0 — 68------- 20



Stability of the international monetary system requires continued confidence
in our willingness and ability to provide gold -to foreign governments and central
banks at the $35 per ounce price. This confidence would be greatly strengthened
by removal of the gold certificate reserve requirement for Federal Reserve Notes:.
However, it must be recognized that removal of the gold cover from Federal Re­
serve Notes in no way lessens the necessity for reduction in the U.S. balance of
payments deficit. Nor will removal of the gold cover reduce the immediate need
for more fiscal responsibility (expenditure reductions as well as tax increases)
in the domestic budget. A return to more stable prices in the domestic economy
is a must if we are to achieve sustainable economic growth at home and a balance
in our international payments.
A l e x a n d r i a , V a ., February 2,1968.
Hon. W r i g h t P a t m a n ,
Chairman, Committee on Banking and Currency,
House of Representatives, Washington, D.C.
D e a r M r . C h a i r m a n : The Banking and Currency Committee’s action yester­
day, to recommend passage of H.R. 14703. is cause for regret in several ways.
This judgment is reached even though the basic idea of the bill—that the
Federal Reserve should have ample power to supply paper currency to satisfy
the wishes of owners of bank deposits to convert the latter into “pocket money”
and that locking up gold certificates and gold as a 25% reserve “'behind” such
currency is a highly questionable guide to policy—is plausible enough. Relaxa­
tion in those regards in the intermediate future is not opposed to this state­
Reasons for regarding yesterday’s speedy action as meriting regret include
the following:
1. The Administration’s arguments in support of the urgent enactment of the
bill were a collection of truths, half truths, and substantial untruths. In the
interest of arriving at policies well designed to overcome some of the deplor­
able results of recent years, some Congressional committee should “ smoke out”
and clarify the incomplete truths and the untruths. Much of the relevant sub­
ject matter falls within the responsibilities of this Committee.
Among the Administration arguments in which there were substantial de­
grees of untruth or error were:
That all of our depleted gold stock ought to be made completely and im­
mediately available “ to support this country’s international monetary commit­
ments,” whereas in fact a great deal of U.S. gold has recently been sold—and
apparently will be sold in the future—in the London open gold market (and
perhaps similar markets in other financial centers). There presumably most (or
perhaps all) of the buyers are not central banks but a host of unidentified per­
sons. Under this practice the United States and six associated countries are fur­
nishing gold at close to the monetary parity price to any racketeer and law­
breaker, foreign or domestic, who wishes to exchange dollars for gold; any
exiled dictator with a fortune obtained by looting his own country; any inter­
national plotter, or hoarder—while this gold is forbidden to all U.S. citizens
at home or abroad and the law-abiding citizens of various other countries.
There seems to be no reliable publid information on who the buyers of this
gold in London are, or even on its general destination.
This gold, moreover, was mostly bought by the United States Government in
the 1930’s paid for with dollars of far greater value than the dollar today, and
held in the Treasury’s gold stock ever since at an obscure but real sacrifice
of cost in potential receipts to the U.S. budget and the taxpayers. (This cost
was briefly described to the Senate Banking and Currency Committee by Pro­
fessor Roy Blough several years ago. Time and space do not permit a careful
restatement of the cost at this point.)
The contention here is not that stabilization of the London open market price
is conclusively unwise. Such gold sales, however, should not be lumped as an
“international commitment” and as an implied debt of honor of the United
States, along with selling gold to foreign central banks. The practice was adopted
only a few years ago and was rejected in the early post-war years. (The open
market in those years was not in London but elsewhere.) Furthermore, unless
Governmental agencies are to be told to use the nation’s assets in any way they
see fit—which the Congress more or less did with respect to gold in the Gold Re­
serve Act of 1934—there should be some Congressionl and public review and
endorsement of the principle.



There was no significant discussion of these sales to the faceless public abroad
during these hearings on this bill. The question was not even raised. So far as
the writer’s very incomplete knowledge goes, there has never been a formal
airing of the policy since it was begun.
b) The Administration position on gold has been to insist in the strongest
terjns that, on the one hand, unrestricted international convertibility of dollars
abroad into gold at $35 an ounce was indispensable to both the value of the dol­
lar and the continued healthy operation of “the international monetary system,”
while also insisting on the other hand that U.S. citizens ought not Ito !be allowed
to hold any gold, would, not obtain any benefit from owning gold, and could not
legitimately aisk to do iso. This contrast in assertions 'seems irreconcilable, ex­
cept superficially.
At the same time, both the Administration and this Committee are to be ap­
plauded for their deitermination against any U.S. increase in the $35 per ounce
level of official gold buying and selling, and also for their repudiation of a “float­
ing exchange rate” for the dollar. In fact, the full case against both is much
stronger than was stated.
c) At least one Administration spokesman in these hearings grossly over­
stated the probable effects on world trade and payments and on the foreign
exchange value of the dollar in case of suspension of the present form of gold
convertibility. The tendency of repeated assertions that the international mone­
tary system and world trade would collapse into chaos if such convertibility
should terminate, as if it were an unquestionable consequence—which the
spokesman may have sincerely believed but which many others of greater experi­
ence in the international monetary field have judged to the contrary—served to
frighten the Committee into unnecessarily hasty action. This erroneous view has
also foreclosed desirable balance of payments policies.
d) The Administration argument that demonstrating that our entire $12 bil­
lion of gold is available for sale and will be sold “down to the last bar” will be
an effective discouragement to “gold speculators” likewise ought to have been
incisively challenged. In fact, the frequency with which some Government offi­
cials have said this, with emphasis on the “selling down to the la'st !bar,” makes
one suspect a sort of Freudian “death-wish” that this stage will be reached and
will be a variety of moral triumph. In any case, the persuasiveness and effective­
ness of this demonstration seem doubtful.
e) The Administration presumption that of course the rate of growth of Fed­
eral Reserve notes in circulation should be free to continue as in recent years
blotted out any question whether the Reserve System may have fostered too
great a rate of expansion in the money supply in recent years—perhaps ever
since World War II, as well as after World War I—including bank deposits along
with currency. Will this Committee, so specially charged with Congressional
responsibility for policies of money and credit, have any better opportunity this
session to press the Administration, including the Federal Reserve 'System, for
vvhether and how they expect to improve the record of the la'st 23 years? In that
period the purchasing power of the dollar has fallen almost by 50 per cent, and
the ownership of Savings Bonds, savings deposits, most insurance, etc., has been
turned into a net loss of purchasing power, due to the price inflation, despite the
illusory receipt of “interest” (after taxes).
f ) It iseems regrettable, further, that the hearings did not contain a challenge
of some of the statistical assertions in the Treasury brochure introduced in part
in the testimony, entitled “Maintaining the Strength of the United States Dollar
in a Strong Free World Economy,” as well as of some of the theoretical princi­
ples asserted, such as those listed above. The data on the trade surplus of this
country and on the labor component of U.S. exports are two which might well
have been analyzed further.
Turning now from dubious Administration arguments in these hearings, it
seems regrettable that this Committee did not go further into the money and
credit aspects of the Administration program for dealing with the nation’s bal­
ance of payments, other than H.R. 14763.
In this connection, the writer has long deplored the fragmentation of integral
and essentially inseparable programs among several scattered committees of the
Congress. It leads to failure anywhere adequately to survey the problem as a
whole. Joint hearings by several committees seem to an outsider to be the most
plausible solution, despite the difficulties entailed.
As a result of the quick conclusion of these hearings, the writer is forced to
submit to the forthcoming House Ways and Means Committee’s hearing on the



proposed taxation of American tourists a substitute program for handling the
entire balance of payments problem, most elements of which have more to do
with money and credit problems than with taxation.
It is regretted that this Committee in these hearings could not have had
the time—though of course the almost prohibitive demands on the Members’ time
is kept in mind—to permit the publication in the hearing record of written state­
ments following the oral hearings, which might have helped reconcile some of
the perennial and almost tragic disagreements among economists and financial
specialists of all kinds, before the Committee voted on the bill. In problems of the
complexity and controversially of monetary policy, domestic or international,
satisfactory solutionis seem impossible of attainment in statements limited to ten
or even twenty minutes of oral presentation, or in Committee questioning under
the five-minute rule and similarly curtailed answers to difficult questions by the
Sincerely yours,
G e o r g e A. E d d y .




en nett,

Kennett, Mo., January 22,1968.
Hon. W r i g h t P a t m a n ,
Chairman, House Banking and Currency Committee,
Washington, D.C.
D e a r M r . C h a i r m a n : I do very much urge upon you and your Committee the
prompt passage of legislation to remove the gold cover against Federal Reserve
Regardless of how one might feel about actions and events of the past related
in any way to this problem, it seems to me that it is absolutely necessary for
this legislation to be enacted now.
I know that you are fully knowledgeable on this whole matter and I will not
bore you with any of the arguments or reasons with which you are so thoroughly
familiar. Suffice it to say that I am completely convinced that this action is both
desirable and necessary and that time is of the essence.
Respectfully yours,
J o seph



elm an


O r a n g e , C a l i f ., January 22, 1968.
Hon. W r i g h t P a t m a n ,
Chairman of House Committee on Banking and Currency,
Washington, D.C.
D e a r M r . P a t m a n : It seems that the government is about to remove the socalled gold cover for our currency (Federal Reserve Notes), so it becomes inceasingly difficult for people who have studied the matter to justify the govern­
ment in selling its securities to commercial banks in exchange for bank credit.
Is this not an exchange of government credit for bank credit, with government
paying interest on the exchange? Further, after acquiring the bond, the com­
mercial bank has enlarged its reserves for the purpose of expanding its loans
under the fractional reserve banking laws. It seems to me that this practice
is a great abuse of the rights of taxpayers, and causes them to pay unnecessarily
a huge um of money on account of servicing this debt.
Should not the laws prevent commercial banks from using funds other than
those behind savings accounts, for the purchase of government securities? Banks
should not be allowed to monetize the national debt at a profit to them. Can
you not write to our newspapers and magazines (such as Fortune) and show
good cause why some of these manifest abuses should not be eliminated? If
the news media are so tied in with finance, as to make it impossible to tell the
public what the public ought to know about these things, then we do not have
freedom of the press in actual practice but only in theory.
It seems to me that now that our gold is no longer a factor to support our
currency inside the United States, that the government should, with statutory
limitations imposed, pay directly into circulation in payment of government
obligations, United States notes which would be legal tender in payment of all
debts, public and private, and be recalled from circulation by payment and col­
lection of taxes. Who needs the banks for this process, when the banks have
no title to gold or silver and nothing to give government but bank credit (an in­
tangible thing).



The people who bring about a revolution in the creation of new money in the
United States will go down in history as great benefactors of the people.
Hoping to hear from you, I remain,
Sincerely yours,
R o b e r t L. F a u c e t t .
W e s t C h e s t e r , P a .,

Jarmary 22,1968.

Congressman W r i g h t P a t m a n ,
U.S. House of Representatives,
Washington, B.C.
D e a r C o n g r e s s m a n P a t m a n : Enclosed is a copy of my letter to the Treasury,
which you may want to print in the record of your hearings. I oppose removing
the gold cover because it would be the final emasculation of our currency, and it
will not prevent an increase in the gold price. Inflation is rampant throughout
the world, even in the industrial countries. Revaluation is a joint responsibility
of the industrial countries. I invite you to read my data and draw your own
W i l l i a m B. R e t a i j j c k .



C h e s t e r , P a .,

January 1968.


F r e d e r i c k L. D e m i n g ,
H on . H en ry H . F ow ler,
Hon. W i l l i a m McC. M a r t i n ,
Hon. R o b e r t A. W a l l a c e .
D e a r S i r s : This is a note on gold, silver, and paper currency. It contains a
suggestion for revaluing all paper currencies to bring them into equilibrium with
gold and silver.
Table I shows the inverse relationship between gold remaining in the U.S.
Treasury and gold in private holdings. This results from selling gold at 35 paper
dollars per ounce, when the price would have to be increased to $90 just to com­
pensate for the inflation since 1933.
Also shown in Table I are the decline in our Reserve Position in the IMF, and
the increase in Roosa bonds sold to foreign governments to dissuade them from
taking gold.
Table II shows that the silver outflow continues, despite the write-off of silver
Table III traces the disappearance of our silver coins. Americans are now
hoarding over a billion ounces of silver coins. This is only natural, since they
cannot own gold.
I suggest evolving a convertible paper dollar as follows:

Dollars per ounce

Present monetary price........................................................................................ ......................
New price in silver certificates and silver coins............................................ ......................
New price in all other present paper dollars.................................................. ......................
New price in convertible dollars........................................................................ ......................





Present dollars to
buy 1 new con­
vertible dollar
Silver certificates, silver coins, nickels, and pennies....................................

. . . 1.29=20.67=$1

All other paper dollars and clad coins.............................................................

1.29 20.67
5.17 =82.68=$4

L29 2067



The par value of all other currencies would be changed simultaneously and in
the some proportion. Such a revaluation can Jbe voted through the IMF by means
of Section 7 of the Fourth Article of Agreement. The United States, plus England,
Canada, and the six Common Market Countries have 52% of the voting power in
the IMF, which is more than the simple majority needed. The 52% voting power
is calculated in Table IV, which also shows that all other major currencies are
depreciating faster than the U.S. dollar. Revaluation is a joint responsibility
of the industrial nations.
Some features of this revaluation are:
1. The new convertible dollars would be freely convertible into coins
of gold or silver, as well as bullion, by American citizens or anyone else.
2. The new gold price is not even high enough to compensate for the
inflation since 1933, as shown in Tajble I. A lower price might now draw
gold back into the monetary system.
3. The new silver price restores the historic gold/silver ratio of 16, and
should be high enough to draw silver back into the Treasury. It should
also draw hoarded silver coins back into circulation, and permit silver
coins to be minted again.
4. No more clad .coins would be minted. Those returning to the Treasury
would be destroyed. Some of them would remain in hoarding, like the
wartime steel pennies, ,but the Treasury would retain the seigniorage profit
on the hoarded coins.
5. The purchasing power of silver coins, nickels, and pennies is increased
fourfold in this revaluation which would require a new small coin for sales
taxes and parking meters. I suggest a half cent coin, possibly of steel, like
the wartime penny.
I believe that a world-wide revaluation is inevitable, and cannot be avoided
by removing the gold backing from the Federal Reserve notes. Once we put
our entire gold stock up for sale, it will sell rapidly, just as our silver did,
and soon we will have too little gold to control the price.
W i l l i a m B. R e t a l l i c k .
[In billions of dollars]


1965 . ...

Treasury gold World private
stock at
year end



New gold
coming to
market 2


Number of
current dollars
Gold added to U.S. reserve
Free World position in the
having pur­
outstanding chasing power
monetary stock
of 351933
dollars 3
- 1 .0




1 From Pick's Currency Yearbook.
2Annual reports of the IMF and Bank for International Settlements, and annual gold reviews of First National City
3 Calculated from Consumer Price Index of U.S. Bureau of Labor Statistics.
4 $1,030,000,000 of this gold is owed to the IMF.


{Millions of ounces of Treasury silver]
Backing silver

Free silver

Outflow during

Released by

June 1965........................
December 1965..............
June 1966........................
December 1966..............





January.........: .................
December........... ............





Source: Daily statements of U.S. Treasury.
Date of sample (number in sample)





84 ....................
4 ....................
13 ....................

Millions put
into circulation


1959 and earlier...........................
1960 and earlier...........................
1961 and earlier...........................
1962 and earlier...........................
1963 and earlier...........................
1964 and earlier...........................



Total, silver ouarters..................




I97 nrmmr

Clad, 1965...................................................
Clad, 1966...................................................
Clad, 1967...................................................




" 3 1 3 ....................
2 1,817
35 ................................................
255 ................................................

Total, clad ouarters.....................
Fraction of 1965 clad in the sample...
Total silver/1965 clad...............................
Approximate millions disappeared
since 1962 coins.......................................................................................
Ounces of silver *.........................................................................................


603 ................................................
.39 ................................................

s i , 010

2,250 ................................................
410 ................................................


75 ....................

2 210

2 1,265


1Coins in circulation at end of calendar 1962, frcm working memorandum 22, case 64904, by Arthur D. Little for U.S*
2 From mint reports.
3(1.87-1.31) 1.817—1,010.
* An additional 760,000,000 ounces disappeared in halves and silver dollars.


IMF quota

(millions of

Votes (in
Percent of
thousands)» total vote

United States............................
United Kingdom.......................
Italy....................... .....................




Total for 106 IMF members.




Value of money,
1956=100 2









t Calculated from IMF Articles of Agreement XII, sec. 5, "Voting.”
2 From IMF and First National City Bank.


U nder S ecretary

of t h e


reasu ry,

Washington, D.C., February 1, 1968.
Hon. W r i g h t P a t m a n ,
U.S. House of Representatives,
Washington, D.C.
D e a r M r . C h a i r m a n : I am enclosing for insertion in the record of your com­
mittee’s hearings on H.R. 14743 our comments on a list of ten points which
were brought up by the minority during the hearings.
Sincerely yours,
J o seph W . B


1. U.S. ability to maintain or increase balance of trade surpluses. Since 1962,
the U.S. share of total world export of manufacturers significantly has declined.
Without P.L. 480 and foreign aid grant programs tied to U.S. exports our trade
surpluses would be virtually eliminated.
2. The extent to which the growth of “regionalism” and worldwide commodity
agreements have adversely affected our balance of trade, together with a full
review of foreign non-tariff barriers.
3. Full disclosure to the extent possible of the factors accounting for the huge
4th quarter (1967) balance of payments deficit and the extent to which further
liquidation of U.S. securities by foreign nations could cause recurrent balance
of payments dislocations.
4. A full review of the role of the gold speculator and the extent to which vari­
ous devices could be employed to counter gold speculation.
5. The extent to which the U.S. can maintain bilateral and multilateral assist­
ance at current levels in view of the Treasury Department’s admission that
“tied” grants and loans create a significant degree of substitution resulting in
little net gain in exports.
6. Whether or not domestic labor costs have adversely affected U.S. exports
to the degree suggested by the Johnson Administration. Treasury figures indicate
they have not.
7. The adverse impact on U.S. trade balances that would be caused by
threatened postponement of purchases by foreign flag carriers of U.S. commercial
jet aircraft in retaliation for the proposed clampdown on U.S. tourist travel. In
this connection, the B /P impact of the F - l l l contract cancellation by the
United Kingdom and the degree to which the balance of trade surplus depends
upon arms sales.
8. The charge that less than 10% of U.S. dollars accruing to the government
of Vietnam from piaster sales for the support of U.S. forces in Vietnam find
their way back to the U.S. The House Committee on Government Operations
estimates that for 1967 the government of Vietnam expended about $300 million
of its foreign exchange derived in this manner for imports, and that less than 10%
will be spent in the U.S.



9. Long-term effects on U.S. overseas business interests caused by controls
over capital flows, direct investments, and forced repatriation of profits. Does
the President’s program suggest extraterritorial law with regard to the internal
operation of joint ventures)?
10. The extent or lack of international cooperation in the operation of the Lon­
don “Gold Pool” .
We recognize that the primary responsibility for conducting our international
monetary affairs rests with the Executive Branch. Nevertheless, the role of Con­
gress is one of review and independent assessment. Congress has failed to assume
this responsibility in connection with a specific legislative request of major impor­
tance, such as the bill before us.
We urge that these hearings on the gold cover bill include witnesses represent­
ing the best talent available from business, labor and banking, as well as the
academic community.

The President’s January 1st message stressed the vital importance of increasing
our export surplus and his program calls for a variety of short- and long-term
measures to accomplish this. The most important and most urgent of these is
enactment of the tax surcharge. A sharp resurgence of excessive demand pres­
sures in our economy would not only spill over quickly into disproportionately
rapid increases in imports. It would also add further to the cost-price pressures
already working their way through our economy as a result of previous excessive
boom conditions, with serious and lasting damaging effects on the competitiveness
of our exports in world markets.
Our relative share of total world export markets for manufacturers reflects
a great many factors—including certainly, over time, our changing cost and price
competitiveness relative to other major exporters. Over the period 1961-64, at
least, improvements in our competitiveness helped us to roughly maintain our
share of world markets, in the face of other* adverse, factors such as the con­
tinuing growth in effective manufacturing capacity in countries such as Italy
and Japan, and the faster growth of trade within the EEC and the EFTA groups
of countries.
Although a deduction of all Government-financed exports from our trade ac­
count does of course give a correspondingly smaller surplus, the period from 1960
through at least the first three quarters of last year has nevertheless shown
substantial trade surpluses even on this basis.
[In millions of dollars, annual rate]


Less estimated Government financed............
Exports excluding Government financed
Surplus (excluding Government financed... .







19,489 19,954 20,604 22,071 25,297 26,244 29,168
1,898 2,209 2,333 2,721 2,801 2,758 3,012
17,591 17,745 18,271 19,350 22,496 23,486 26,156
14,723 14,510 16,187 16,992 18,621 21,472 25,510
2,859 2,325 2,084 2,358 3,875 2,014


1 Partly estimated; 1967 total trade data represent seasonally adjusted data for the 1st 3 quarters at an annual rate.
The Government financing for 1967 isjestimated on the basis of seasonally unadjusted January-September data.
Note: The 4th quarter 1967 data on Government financed exports are not available as yet, so that the full year surplus
excluding such exports cannot be computed.
Source: Department of Commerce, Survey of Current Business, June and December 1967.

Available evidence does not permit a definitive judgment to be made as to
whether the trade generating effects of the regional integration arrangements
presently in existence have or have not tended to outweigh trade diverting
Between 1960 and 1966, total United States exports expanded from $20.6
billion to $30.4 billion, an increase of 48 percent. During the same period, United
States exports to the European Economic Community rose from $3.5 billion
to $5.3 billion, an increase of 52 percent.



The growth of exports, particularly to Western Europe, can be attributed to a
number of factors. Rising incomes, stimulated to some extent by the formation
of these integrated communities, have increased demands for American-produced
goods. An upgrading of efficiency on the part of European industry has been
reflected, in part, in greater demand for high quality capital goods which embody
the latest technology. Relative price stability in the U.S. made American goods
more competitive and permitted increased penetration of some markets. More­
over, the growing effectiveness of American marketing techniques and servicing
ability in foreign areas has also increased sales of U.S. products.
United States exports to the European Free Trade Area (EFTA) during the
same period increased from $8.2 billion to $3.8 billion, an increase of 22 percent.
This is less than the average increase in United States exports to all areas
during the period, and reflects primarily the relatively low rate of increase in
United States exports to the United Kingdom during the period.
There are two other regional groupings of some significance in international
trade, the Central American Common Market and the Latin American Free Trade
Area (LAFTA). From 1961, at which time the Central American Common
Market became effective, to 1966, U.S. exports to the Central American Com­
mon Market countries increased by 70 percent ($207 million in 1961 to $362
million in 1966). The regional grouping represented by LAFTA has not yet de­
veloped to a point at which it ha^s a major impact on the trade patterns of its
member countries; however, it can be noted that U.S. exports to the countries
now included in LAFTA rose from $2.9 billion in 1960 to $3.5 billion in 1966, an
increase of 21 percent.
Commodity Agreements
The United States is participating in negotiations for the renewal of the
International Coffee Agreement and the establishment of a cocoa agreement.
The aim of these agreements is the moderation of price fluctuations without dis­
torting production and consumption patterns. The elimination of sharp fluctua­
tions in export prices is particularly important for many less developed coun­
tries whose foreign trade is dependent upon a limited number of commodities.
The stabilization of price fluctuations, if it can be done without distorting
the long-term trend, can benefit both the IDC’s and the developed countries
in some case®. Absence of wide price fluctuations can provide the LDC’s with
stable foreign exchange receipts with which to import the goods and services
needed to diversify and develop their economies. These goods and services will
come from the developed countries-, and since the United States is the major
world exporter, much of these goods and services will be of American origin,
when the United States is a competitive supplier.
Another type of commodity agreement is the Grains Agreement negotiated
in the framework of the Kennedy Round. The United States approaches the
question of commodity agreements on a case-by-case basis to assure that any
agreement developed is on balance beneficial to the United States.
Non-Tariff Barriers
Inasmuch as the President has asked the Special Trade Representative, Am­
bassador Roth, to carry out a far ranging review of trade policy, one of the
most important aspects of which is an analysis of non-tariff barriers, any sub­
stantive comment at this time would be premature. Now that tariffs have been
significantly reduced, these non-tariff barriers can play a critical role in re­
stricting the growth of world trade in general and U.S. exports in particular.

Final data are not yet available to provide a complete accounting of the
deficit in the fourth quarter. Trade data show, however, that there was a sharp
decline in our trade surplus. There was a fall-off of almost $700 million from
our $1,072 million quarterly average earlier this year, of which about $500
million was accounted for by increased imports and the remaining $200 million
by a decline in exports. An additional significant adverse factor in the fourth
quarter was the liquidation by the U.K. of the remaining $570 million balance
from its long-term investment portifolio of U.S. securities.
Basically, the upsurge in imports, which became particularly noticeable in
November and December, reflects the further warming up of the domestic econ­
omy. As of now, we have again moved into a situation where more rapid
growth in our GNP will almost inevitably bring a more than proportionate



rate of increase in our imports. In addition, wage and price increases of the
kind we are already experiencing as a delayed effect from our previous period
of booms, accentuated by the further push of a new outburst of excessive demand,
could seriously undercut the competitiveness of our exports on world markets.
This development underscores the importance of the tax surcharge, the delay
in the enactment of which has already cost us important balance-of-payments
dollars in the trade account. All doubts should now be resolved: this tax sur­
charge is the single most important action we can take to defend the dollar.
Foreign holdings of United States securities
The large adverse impact of securities liquidations by the U.K. Government
on our balance of payments during the fourth quarter of last year represented
the final step in the conversion into liquid form of the remaining balance of a
large investment portfolio of U.S. corporate securities which the U.K. Govern­
ment had requisitioned from private U.K. citizens and firms at the outset of
World War II.
While there are no available statistics which would show the existence or
extent of possible holdings of U.S. corporate stocks and long-term bonds other
than Treasury issues by other foreign governments or central banks, we are
not aware of, and have no reason to believe that there are likely to be, any
other cases similar to that of the United Kingdom involving significant holdings
of investment portfolios of U.S. stocks and long-term bonds by foreign official
What the United Kingdom did in the fourth quarter, and the reason that this
had an adverse effect on our balance of payments, was to convert the remaining
balance of these long-term investment holdings into forms that are treated in
our balance-of-payments accounting as liquid liabilities to foreigners. This act
of converting, therefore, appears as a capital outflow on the liquidity balance.
All of the long-term U.S. securities that we know to be held by other foreign
governments and central banks represent either marketable U.S. Government
bonds and notes or special nonmarketable Treasury securities, a good part of
which are convertible into marketable issues. The foreign holdings of marketable
and convertible nonmarketable U.S. Government securities are already included
in our statistics on liquid liabilities to foreign official institutions* and for this
reason their possible conversion into other types of liquid dollar assets would
have no effect on our balance-of-payments deficit.
We previously submitted three tables (p. — ). The first shows foreign holdings,
by country, of U.S. Government bonds and notes. This table includes private
foreign holdings as well as official foreign holdings. The second table shows, by
country, the special nonmarketable securities held by foreign official institu­
tions. The third table is a summary table showing total official foreign holdings
of long-term U.S. Government securities by type since 1959, the first year for
which these data are available.

While gold is primarily a monetary asset it is also a commodity. It has been
estimated that recognized industrial and artistic demands account for about onehalf the annual amount of new production. This means that there must be some
private use of, and markets for, gold. The remaining one-half of new gold pro­
duction, or about $700 million per year, would normally be expected to flow into
monetary stocks to the extent not taken up by speculation and hoarding demands.
The latter may be differentiated. Gold hoarding takes place in certain areas of
the world, particularly in Asia and Europe, and has been traditionally practiced
as a reflection of lack of confidence in the security and value of domestic cur­
rencies and other assets. Speculative demand may be defined as that demand
associated with a presumption that the price of gold—especially in terms of the
dollar—will be changed.
This speculation is presumably based on three factors: first, the overall demand
and supply situation for gold; second, the belief that an increase in the price
of gold will be needed to supply international liquidity; and third, that the
dollar price of gold may not be maintained because of U.S. balance-of-payments
deficits. Speculative demand for gold, then, is symptomatic of basic questions and
uncertainties about the international monetary system.
The only effective way to counter speculation is to clear away its basic causes.
Many devices designed to restrict access to existing free markets in gold would
tend to accentuate speculative demand and drive it elsewhere. In view of the



major role of gold for monetary purposes, speculative demand probably cannot
be completely eliminated. Nevertheless, new production is expected to continue
to exceed legitimate private requirements for some years. Through adoption of
the SDR plan to assure that the world’s growing need for reserves can be met,
and by strengthening confidence in the dollar through our balance-of-payments
program, speculation in gold can be substantially reduced.

A very important part of our government-wide effort to improve the U.S.
balance-of-payments position comprises aggressive steps to insure the effective­
ness of AID’s tied procurement policies, i.e., to assure that AID financing covers
additional U.S. expoirts rather than exports which might otherwise have been
paid for with the recipient country’s free foreign exchange. Elements of this
“additionality” oriented program include, but are not limited to, increased
emphasis on the promotion of U.S. exports in selecting goods and services for
AID financing, further orienting U.S. commercial staffs in the more important
AID recipient countries, selectively limiting the list of goods eligible for AID
financing, and taking advantage of opportunities for special arrangements to make
AID-financed goods attractive to importers through such measures as reduced
surcharges, the waiver of import deposits and favorable terms for bank credit
These efforts to minimize or eliminate the substitution of AID-financed goods
for U.S. commercial exports have been going on both in Washington and in the
field for many months and there are numerous indications that the program is
meeting with considerable success. As evidence of the government’s determination
to pursue this program with the utmost vigor, President Johnson directed the
AID Administrator, on January 11, 1968, to take further steps to reduce the
balance-of-payments cost of the U.S. AID program. Improvement of the effec­
tiveness of our arrangements with the individual countries to assure that AIDfinanced goods are additional to U.S. commercial exports was an important
element in this Presidential directive.
A related program, designed to improve the U.S. balance-of-payments posi­
tion while at the same time seeking to strengthen multilateral development
finance institutions and preserve their multilateral character, is also under way.
This program comprehends improved burden-sharing by capital exporting coun­
tries in their contributions, improved access of the development finance institu­
tions to wider world capital markets, and mitigation of the impact on our bal­
ance of payments of access by these institutions to our own capital market.
In general we are seeking to insure that the provision of development finance
through the multilateral institution makes an active contribution to the inter­
national payments adjustments process.
In the case of the World Bank, there has been a positive effect on the U.S.
balance-of-payments position, partly as a consequence of the Bank’s borrowing
capital in markets other than the United States and partly through the invest­
ment of the proceeds of bond issues floated in the United States in a manner
that neutralizes for a time any impact on our balance of payments. The InterAmerican Development Bank has also raised sizeable amounts of money abroad
and has invested the proceeds of its U.S. borrowings in ways compatible with
our balance-of-payments policy. The IDB has, furthermore, taken added steps to
attract non-member capital by limiting procurement under its loans in accord
with the amount of financial resources that non-member countries make avail­
able on appropriate terms. Finally, with respect to the International Develop­
ment Association we have indicated our readiness to participate in a substantial
replenishment of IDA resources provided adequate balance-of-payments safe­
guards for the U.S. are built into the replenishment operation.
com m ent

of it e m


The data on comparative unit labor costs given in Table 7 of the Treasury
document were full-year averages, and thus not available beyond 1966. Even
these figures show, however, a 2-point increase in the index of U.S. unit labor
costs in 1966 over 1965, compared with decreases of 3 and 4 points, respectively,
for France and Italy.
A similar comparison through September 1967 of available quarterly data on
this subject (expressed in terms of percentage changes from year-earlier levels)
is shown in the following table.


Percent increases (from year earlier levels)
1965 (average)...................................... .............................
-0 .7
1966—1.................................................... .............................................9
II ......................... ............................
Ill................................................ .............................
IV................................................. ............................
1967—1................................................... .............................
II ......................... ............................
I ll................................................ ............................





-4 .4
- .8

-3 .2
- 4 .8 .
-5 .6
- .8


-3 .5
- .9
-2 .6

i Not available.
Sources: Based on available quarterly (or monthly) indexes: For the United States, from Business Cycle Develop­
ments, Department of Commerce; for other countries, from Economic Review, published by (United Kingdom) National
Institute of Economic and Social Research. These data differ from those given in table 7 of the Treasury document “ Main­
taining the Strength of the U.S. Dollar in a Strong Free World Economy" in that the latter are based on GNP accounts
(not available on a quarterly basis for most industrial countries) whereas the quarterly data are based on production

What these more recent data show is that:
—our own unit labor costs, following a persistent though moderate down­
ward trend over the four years 1961-65, turned upward again early in
1966 and have since the beginning of last year been rising at an accelerated
—-whereas the corresponding cost indices of several of our major foreign
competitors, which had during the 1961-65 period been rising at rates
ranging from '3.5 to 6 percent per annum, have since the beginning of 1966
either levelled off sharply or actually declined.
The recent sterling devaluation will, of course, tend to add to the weakening
of our international competitiveness implied iby this new adverse trend in our
domestic-currency costs relative to the U.K. and other countries.
It is this comparatively recent reversal of previous moderately favorable
trends in our cost and price situation relative to foreign competitors—subsequent
to, and in large part resulting from, the late-1955 and early-1966 period of excess
boom in our domestic economy—which underlies the Administration’s stress on
prompt enactment of the tax surcharge and other measures to stabilize our
domestic costs and prices as the most important single action needed to correct
our ibalance-of-payments deficit.
The improving trend in our relative cost and price position which was evident
through the early 1960’s did not, admittedly, bring as much improvement in
our export position and trade surplus as would have 'been necessary to eliminate
our payments deficit. However, it was certainly one of the important factors
helping to offset various other developments adversely affecting our trade posi­
tion, such as the continuing growth of effective manufacturing capacity in
countries such as Italy and Japan.
In considering either this earlier period of relative improvement or the current
danger of relative deterioration in our cost and price competitiveness interna­
tionally, there are several further points as to the causal relationships between
cost and price developments and international trade patterns which should,
however, be noted:
The trade effects of changes in relative costs and prices are not immediate,
but instead occur gradually, after some delay. By the same token, however,
they also tend to persist for a considerable period.
In addition, there are many other factors which—particularly in the
short run—also affect the levels of both our exports and our imports. These
include: (a) absolute and relative changes in over-all levels of business
activity and incomes here and abroad; (b) the commodity and country pat­
tern of the aggregate increases in world demand; (c) the extent to which
we or our competitors have slack resources available; and (d) changes in
tariff structures and various other arrangements affecting trading rela­
The one basic point which ought to be clearly apparent, however, is that any
further increase in our unit labor costs or return to faster increases in our whole­
sale prices for manufactures which might follow the current renewal of upward
movement in our domestic economy would over time seriously worsen our com­
petitive position in international trade.



It should not be necessary to expect any postponement of aircraft purchases
“in retaliation,, for U.S. efforts to reduce our tourist travel deficit. Many coun­
tries—some of them in comfortable balance-of-payments positions—have re­
stricted the tourist expenditures of their nationals. Many of the countries which
may expect to see their tourist earnings temporarily reduced are now in surplus
and have shown understanding and support for the President’s program to bring
the U.S. international accounts into better balance.
The question, however, embraces also the possibility that earnings forecasts
of foreign airlines may need to be adjusted if U.S. tourist travel is to decline
and that these airlines may decide to postpone aircraft purchases—not for rea­
sons of retaliation but out of business prudence.
It is not clear that business prudence will dictate that course of action for
these reasons:
1. The President’s request is for a temporary curtailment of dollar outflows for
travel. A curtailment of limited duration probably would not lead to substantial
changes in the airlines’ long-range plans for expansion and modernization of their
aircraft fleets.
2. To the extent possible, the program to curtail travel outflows will be designed
not to reduce the number of travelers—the factor upon which aircraft require­
ments depend—but rather to encourage a reduced level of expenditures overseas
by travelers.
3. Our travel program includes and stresses measures designed to increase
foreign travel to the United States which would increase the traffic of foreign air­
lines as well as that of U.S. airlines.
International air transport has become a highly competitive field and no air­
line can maintain its position without continuous up-dating of its equipment as
technological advance continues. For many of the newer aircraft the potential
buyer must establish his place in the queue for future deliveries. For these rea­
sons it may well be that a temporary curtailment of U.S. tourist travel will have
no substantial impact on United States sales of aircraft.
The B/P impact of the F - l l l contract cancellation "by the United Kingdom
We now expect to receive, over the next ten years, about $700 million less than
we would have received if the British had not cancelled their F - l l l orders. A
more exact figure is not possible at this time because the amount of cancellation
charges is still to be determined. The British purchase was largely being
financed by a series of Eximbank credits, which would have been repaid over the
period indicated above. The figure mentioned includes estimated interest earnings
on these credits.
Because cancellation charges will become payable mainly over the next year,
and also because repayments to Eximbank were exepected to be relatively small
this year and next, the impact of cancellation will be felt mainly in the period
beginning wiith 1970.
The degree to which the balance of trade surplus depends upon artns sales
Most arms sales by the U.S. are made through the Department of Defense and
are shown in our balance of payments statistics, when the goods and services are
delivered, as “transfers under military sales contract” . These are not included
in our merchandise trade balance. The British purchase of F - l l l aircraft, now
cancelled, was made entirely through the Defense Department; therefore, can­
cellation will not affect our merchandise trade surplus as such.
The merchandise trade surplus does include commercial exports of military
equipment. These commercial exports of military equipment are not separately
identified in our export statistics. They are, however, relatively small in com­
parison with Defense Department sales.
During January-September 1967 our merchandise trade surplus was $3 billion
(not seasonally adjusted), representing $22.7 billion of exports and $19.7 billion
of imports. For comparison, transfers under military sales contracts amounted
to $884 million. In addition, we had advance receipts under DOD military sales
contracts amounting to $237 million.
If one adds transfers under military sales contracts to merchandise exports,
the former was less than 4 per cent of the total.




The U.S. share of merchandise imports into Vietnam financed by Vietnam’s
own foreign exchange earnings is undoubtedly small. There are signs of improve­
ment however. In 1966 arrivals from the U.S. financed by GVN-owned foreign
exchange came to 2.8 percent and for the first seven months of 1967 the percent­
age, based on licensing, is 7.8 percent.
For geographical and historical reasons the U.S. has not been a big factor in
the Vietnamese market. Japan is getting the largest share of the market and
other countries in the area such as Taiwan, Hong Kong and Singapore are also
getting large shares. There are also special factors, such as the Vietnamese
fondness for motor scooters and light weight motorcycles of types for which the
U.S. is not a major producer.
Vietnam is thus a new market for the U.S. It will take aggressive salesman­
ship and export promotion on the part of U.S. industry if our market share is to be
increased significantly.
The U.S. Mission in Saigon and the Washington Agencies are well aware of
the basic facts in this situation. The Mission is actively engaged in determining
which commodities the U.S. is or could be competitive in, in the Vietnamese mar­
ket, and based on such information will explore with the Vietnamese Government
ways in which sales of such U.S. products can be increased.
In considering direct actions which might be taken to assure that funds from
the U.S. are used for purchases from the U.S., care has to be taken that
international agreements are not violated. However, U.S. officials have had
discussions with Vietnamese officials on this problem and are seeking to work
out with them measures which can be taken to increase U.S. market shares.

The President’s program proposes to reduce the amount of new direct foreign
investment in 1968 by about $1 billion. The program recognizes the value of
foreign investment to American business in terms of the diversification of
operations and the expansion of their total markets through operations in
foreign countries. Direct investments have also benefitted the economies of
the countries where made and have been a significant factor in their economic
growth and foreign exchange earnings and the return on investments of years
past is a fundamental and large stabilizing element in our balance-of-payments
The problem is not the intrinsic value of foreign direct investment, but rather
the rate at which we can presently afford new investment in terms of our
balance-of-payments situation. The rate of new direct investment has increased
rapidly over recent years, but investment outflows do not produce an immediate
and offsetting return to the investor or to the U.S. balance of payments.
The direct investment program requires that our companies in order to
continue expanding in Europe will have to finance more of their operations
there by borrowing in Europe. In fact they have done so to an increasing extent
in recent years under the voluntary restraint program. For example, borrowings
of American subsidiaries in European capital markets which in earlier years
were very small amounted to $451 million in the first three quarters of 1967
(this is in addition to their substantial borrowing in local currency). Borrowing
abroad will finance expansion abroad and in so doing will give added stimulus
to the development of European capital markets, which European countries
and the United States have long considered desirable in the interests of the
world economy. Over the last five years international borrowings in Europe
have increased from $360 million in 1962 to $1.3 billion in 1966.
The long-term effect of the degree of restraint called for in 1968 may prove
to be quite moderate, in terms of the over-all growth and strength of U.S. overseas
business interests. In the first place, the program authorizes an actual increase
in direct investment in the developing countries, as a group, to 110 percent of
the base period 1965-66. In the oil-producing areas, the United Kingdom, Japan
and Canada, a target of 65 percent of the base period is fixed. The major impact
of the program relates to Continental Europe, which has been the persistent
surplus area corresponding to the United States deficit. However, both in this
area and in the intermediate Schedule B countries, there are wide possibilities
for obtaining financing from European and other foreign sources of capital,
either through the flotation of securities or through the borrowing of Euro­



dollars or local currencies. It has been our understanding that under the Volun­
tary Program of the Commerce Department, programs of physical investment
have proceeded with relatively little delay or -interruption, although financing
has been shifted to other sources, thus reducing the United States deficit. There
is isome slack in European economies, and conditions are favorable for relatively
low interest rates and for policies on the part of European central banks that
should help to augment the supply of loanable funds in Europe banks, in the
Eurk)-dollar market and in the European capital market. Under these conditions,
the postponement of investments in most instances would be limited to those
marginal cases in which some added cost of raising funds abroad would make
the carrying out of the investment a questionable business venture.
Concerning the “repatriation of profits” the general principle under the pro­
gram is that foreign affiliates should continue to repatriate to the United iStates
the same share of their earnings as was repatriated during the 1964-66 base
period. There are a few instances in the Schedule C countries (most countries
of Continental Europe and South Africa) where a more rigorous standard may
apply. In these few instances firms may find that the amount of funds which may
be re-invested will be limited by an alternative rule which establishes a direct
investment ceiling at 35 percent of the average annual direct investment (capital
outflows plus re-invested earnings) during 1965-66.
While the objective of this provision is only to assure maintenance of the
historical rate of dividend disbursement, the Administration is aware that the
requirement for the repatriation of earnings might cause problems in the case of
some joint ventures with foreign nationals. The handling o f these cases will
depend upon the circumstances. For example, a United 'States direct investor
might be in a position to increase the repatriation from other foreign corporations
in the same Scheduled Area thereby meeting his area target.

The gold pool, which operates to maintain the price of gold in the free London
market in line with the official price, has been operating efficiently since 1961.
The countries which are providing this support are—in addition to the United
States—Belgium, Germany, Italy, the Netherlands, Switzerland, and the United
Kingdom. The only change in the membership since inception of the pool was
the withdrawal of France as a contributing member last summer. The extent
of the cooperation among the members of the pool has been amply demonstrated,
especially since the reaction in the market to the devaluation of sterling. On
November 26, they issued the following communique:
“The Governors of the Central Banks of Belgium, Germany, Italy, Netherlands,
Switzerland, United Kingdom and the United States convened in Frankfurt on
November 26,1967.
“They noted that the President of the United States has stated:
“ ‘I reaffirm unequivocally the commitment of the United States to buy and
sell gold at the existing price of $35 per ounce.’
“They took decisions on sp