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Statement by

Arthur F. Burns

Chairman, Board of Governors of the Federal Reserve System

before the

Subcommittee on International Finance

of the

House Committee on Banking and Currency

December 5, 1974

I am pleased to appear before this Committee to give
you the views of the Board of Governors of the Federal Reserve
System on H.R. 17475* This bill seeks to postpone the date, now
set by Public Law 93-373, when citizens of the United States can
again "purchase, hold, sell, or otherwise deal with gold. "
I respect the views expressed by the Secretary of the
Treasury in opposing H. R. 17475, and I also recognize that
there is considerable opposition in the Congress to any change
in the provisions of Public Law 93-373.

In the latter part of

my testimony, I shall therefore address myself to measures
that can and should be taken to limit the risks and minimize
some of the adverse consequences that may flow from implementation of this law.

With good management, I believe that

we shall be reasonably successful; but it is rny duty, nevertheless,
to point out that prompt removal of present restrictions on private
trading in gold could complicate a financial situation that is already
beset by strains and stresses.
In recent debates on the gold problem, members of the
Congress took the position that gold has ceased to serve as the
foundation of our monetary system, that indefinite continuance
of the prohibition of private gold holdings can no longer be

-2-

justified, and that the time has therefore arrived for restoring
the right and freedom of our citizens to buy or sell gold.

As I

understand the proposal of H. R. 17475, it in no way questions
the objectives of Public Law 93-373, but merely seeks to delay
the date for making this legislation effective.

That is also the

Board's position.
The Congress has set December 31 as the outside date
for ending the restrictions on private ownership of gold.

However,

the President was given the authority to end these restrictions
sooner, if he found that the international monetary position of
the United States would not be adversely affected by such action.
The language of Public Law 93-373 clearly indicates that although
the Congress wanted the prohibition on private ownership of gold
to end in the near future, the Congress was also concerned about
the adverse consequences that could result from an abrupt ending.
It is difficult to foresee with any confidence the effects
of removing the ban on private ownership of gold later this month.
True, there is considerable interest in the reopening of the private
gold market on the part of some businessmen and financiers; but
there is also great uncertainty about the extent to which our citizens
will actually want to acquire and hold gold.

-3-

Historically* gold has been regarded by many people
as a hedge against inflation,, or as a means of protection against
a decline in the exchange value of a country's currency*

At

present., some individuals also regard gold as an asset whose
value is more dependable than that of common stock or other
financial investments*

In the climate of uncertainty that now

prevails, with fears of inflation continuing to spread, the
opportunity to own gold might seem, attractive to large numbers
of people in the United States,
There is fragmentary evidence supporting this view,
As already noted, a lively interest has developed among banks,
stock brokers, currency and metals dealers, and commodity
exchanges in preparing for private gold trading.

Also, the

recent runup in the price of gold in European markets suggests
that market participants abroad anticipate the development of
an active market in the United States.
Some sources close to the gold market have attempted
to estimate the potential demand for gold in this country. We
at the Board have no estimate of our own and are skeptical of
the guesses being bandied about.

But we as well as others

recognize that when the gold market is reopened, people might
rush in with funds transferred from savings accounts, common

-4-

stocks, or other financial assets.

The financial wealth of

households, personal trusts ? and nonprofit organizations in
the United States is enormous.

Although we can be quite sure

that the transfer of accumulated savings to the gold market will
not be more than a tiny fraction of this total, the diversion of
funds from customary financial channels could still come to an
uncomfortably large sum in dollars.
The resulting disturbance of the money and capital
markets - - especially in the period immediately following
removal of the ban on gold ownership - - would tend to have
adverse effects on the sectors of the economy that are most
heavily dependent on credit.

Thrift institutions and commercial

banks have only recently begun to experience improved deposit
inflows.

Any sizable withdrawal of funds from savings accounts

would, of course, dim the prospects for a larger supply of mortgage
credit in corning months*

Recovery of the homebuilding industry

might therefore be retarded.
Money flows to the equity and debt markets may also be
reduced as investors move to acquire gold.

At present, prices

of common stocks are severely depressed.

The corporate and

municipal bond markets, meanwhile, are handling a huge volume

of new issues.

Borrowers in these markets are counting on an

ample supply of funds to refinance maturing debt and to raise
capital for new business ventures or new public undertakings.
To the extent that the public's savings are diverted from these
markets to gold, business firms and other borrowers would
find it more expensive and more difficult to carry out their
capital expenditure programs*
Besides these effects on credit flows, early removal
of the prohibition on gold ownership could lead to excessive
speculation in the gold market.

Since annual world production

of gold is rather small, and the gold market abroad has typically
been rather thin, changes in demand have often led to wide swings
in the price of gold.

Given these characteristics of the market,

removal of the ban on gold ownership might lead for a time to
exceptionally large movements in the price of gold, and therefore
encourage widespread speculation.

Speculative forces originating

in the gold market may spread to the markets for silver and other
precious metals, and from there to other commodity markets.
Eventually, a reversal of such a speculative development would
be practically inevitable, so that many investors in gold and other
commodities would suffer losses.
our economy could be injured.

If events took such a course,

-6-

The risks associated with a reopening of the gold market
extend also to the exchange value of the dollar in international
markets.

Apart from sales by the Treasury, any substantial

demand for gold by our citizens would have to be met by gold
imports.

The consequence might be a worsening of our inter-

national balance of trade and downward pressures on the dollar
in foreign exchange markets.
These pressures on the dollar could, of course, be
checked by sales of gold from our nation's monetary reserves.
But there are risks associated also with this course of action.
Since the precise role of gold in the international monetary
system is yet to be determined, it would hardly be desirable
to dispose of any sizable part of our reserve assets.
Clearly, therefore, various adverse consequences for
our financial markets and our economy may stem from a reopening of the gold market at the end of this month.

No one

can now say with any confidence how serious these consequences
are likely to be.

The risks associated with private ownership of

gold are, however, postponable, and I see no material advantage
to the nation in incurring these risks under present circumstances.
The prudent course of action would be to delay the reopening of

the gold market until a more propitious time.

In the Board's

judgment, therefore, the proposal of H.R. 17475 goes in the
right direction.
At the same time, the Board recognizes that the bill
presently before this Committee may not be greeted with
enthusiasm by the Congress, and that the development of
plans for implementing the provisions of Public Law 93-373
must go forward.
It will be important to do what we reasonably can to
minimize the risks associated with that statute.

I expressed

doubts earlier about the wisdom of disposing of any large amount
of gold at the present time.

We should be ready, nevertheless,

to make prudent use of the Treasury's holdings if demands for
gold threaten to have adverse economic or financial consequences.
For example, if large imports of gold exerted significant downward pressure on the exchange value of the dollar, prices of
imported products would rise, and this would tend to worsen
our inflationary problem.

Sales from the Treasury's gold stock

could lessen this difficulty, and I therefore endorse the Treasury's
intention to auction 2 million ounces of gold early in January.

Moreover, we will need to bear in mind that the proceeds
of any gold sales by the government would enable the Treasury
to reduce its borrowing compared with what it otherwise v/ould
be.

This reduced borrowing in turn would tend to lower interest

rates on government securities, and thus mitigate the adverse
effects on money and capital markets that would result from
large private purchases of gold.
Over the long future, however, it would be best for the
government to avoid frequent or sizable intervention in the
market,.

A principal reason for abandoning the existing pro-

hibition on gold ownership is the fact that it infringes on the
freedom of our citizens*

Periodic sales or purchases by the

Treasury to influence the price of gold would hardly be consistent
with return to a free market for that commodity.

All in all,

it would seem better to let the gold market find its own level,
and to let the cost of any excesses be borne by those investors
or speculators who choose to enter that market.
I would like to conclude with a brief comment on the
regulatory status of gold transactions by banks.

Since 1968,

banks have been able to buy and sell gold for industrial or
artistic uses under a Treasury license.

At present, only two

banks are actively engaged in such transactions.

If private

gold ownership goes into effect on December 31, 1974, banks
will no longer require Treasury licenses to deal in gold, and
many banks may become involved in gold transactions or in
providing gold-related services to their customers.
In anticipation of this possibility, the Federal Reserve
has been working jointly with the other bank supervisory agencies
to clarify the regulatory status of gold transactions.

It is expected

that the results of this effort will be made available to banks in
the near future.
The Federal regulatory authorities agree that our nation's
financial institutions must proceed cautiously in participating in
gold transactions.

Because of the risks inherent in gold trading,

some banks may prefer to act only as agents.

In cases where a

bank decides to trade in gold for its own account, it would be
appropriate to do so only in such amounts as may be required
to satisfy the needs of customers.

It will be particularly

important that banks offering gold for sale avoid promotional
efforts that could lead to unrealistic expectations by bank clients
or to adverse effects on public confidence in individual banks or
the banking system.

-10-

Th e bank examination process must play a role in assuring
that banks are not exposed to undue risks because of gold transactions.

Examiners will have to be concerned with a bank's

accounting practices in regard to gold, with its record-keeping
for the accounts of customers, with its management expertise
in this area, and with the additional risks that the bank undertakes
in relation to its capital.

Banks will need to understand that

excessive involvement in gold transactions, including concentration on loans collateralized by gold or otherwise related
to gold dealings, could constitute an unsafe or unsound banking
practice and therefore become subject to the cease-and-desist
provisions of the Financial Institutions Supervisory Act of 1966.

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