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R e m a r k s p r e p a r e d for the 1968
C o n v e n t i o n of the A m e r i c a n
M i n i n g Cong r e s s , L as V e g a s
O c t o b e r 9, 1968

INTERNATIONAL MONETARY DEVELOPMENTS
AND T H E M I N I N G I N D U S T R Y
H u g h D. Ga l u s h a , Jr., P r e s i d e n t
F e d e r a l R e s e r v e B a n k of M i n n e a p o l i s

It w a s m y friend E r w i n F r i z e l l e , P r e s i d e n t of the F i r s t M e t a l s B a n k
and T r u s t C o m p a n y of Butte, M o n t a n a , w h o o r i g i n a l l y c o n t a c t e d m e ab o u t j o i n i n g
y o u h e r e at y o u r 1968 conv e n t i o n ,

and I am, of course,

to y o u r c o n v e n t i o n o f f i c e r s for h a v i n g in v i t e d me.
agree,

g r a t e f u l to h i m and

As I am sure y o u w i l l

it w o u l d n o t be good for a F e d e r a l R e s e r v e B a n k p r e s i d e n t to be seen

s p e n d i n g time in the c a s i n o s that a b o u n d here.

This c o u n t r y m a y v e r y w e l l be

in the throes of a social re v o l u t i o n , but m o s t p e o p l e w o u l d still prefer, I
bel i e v e ,

that b a n k pres i d e n t s , e v e n F e d e r a l R e s e r v e B a n k pre s i d e n t s ,

c l e a r o f the g a m i n g tables.

st a y

And u n f o r t u n a t e l y I came a w a y from M i n n e a p o l i s

w i t h o u t an e f f e c t i v e disguise.

E v e n so, it is a p l e a s u r e to be in Las V egas,

and to h a v e a c h a n c e to talk to all of you.
I h a v e to b e g i n w i t h an apology.

W h e n Mr. F r i z e l l e first w r o t e to

me, he s u g g e s t e d that I talk about the i m p l i c a t i o n s of recent i n t e r n a t i o n a l
f i n a n c i a l d e v e l o p m e n t s for the m i n i n g industry.

And w i t h o u t s u f f i c i e n t

thought, I a c c o r d i n g l y chose " I n t e r n a t i o n a l M o n e t a r y D e v e l o p m e n t s and the
M i n i n g I n d u s t r y 1’as the title of m y talk.
and I q u i t e agree.

N o t v e r y o riginal,

y o u w i l l say;

But this title is u n f o r t u n a t e for a n o t h e r reason.

It

p r o m i s e s that I s hall be t a l k i n g abo u t the f u ture of the m i n i n g industry,
at least as it has b e e n a f f e c t e d by r e cent i n t e r n a t i o n a l f i n a n c i a l d e v e l o p ­
ments.




E v e n if there w e r e time enough,

though, w h i c h there is not, I w o u l d

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n o t be able to f u l f i l l this promise.

The simp l e t r u t h is that I do n o t k n o w

e n o u g h about y o u r i n d u s t r y to talk i n t e l l i g e n t l y a b o u t its future.

So I do

a p o l o g i z e for p o s s i b l y h a v i n g m i s l e d you.
I c a nnot claim, however,
industry.

to be c o m p l e t e l y ig n o r a n t abo u t our m i n i n g

O n l y last A u g u s t I w a s t r e a t e d to a f a s c i n a t i n g trip t h r o u g h the

H o m e s t a k e M i n e in S o u t h Dakota,
U n i t e d States.

so I do k n o w that gold is p r o d u c e d in the

A nd I k n o w that there are th o s e of y o u here, a s m a l l m i n o r i t y

p er h a p s , w h o are v i t a l l y i n t e r e s t e d in the f u t u r e p r i c e of gold.

I can t h e r e ­

fore f u lfill the p r o m i s e of the a n n o u n c e d title of these remarks,

if o n l y to

a v e r y small extent, by d i s c u s s i n g the i n t e r n a t i o n a l l i q u i d i t y problem, and
more particularly,

recent e f f o r t s to solve this problem.

Q u i t e obviousl y ,

h o w it is solved m a t t e r s v e r y m u c h to gold produc e r s , n o t o n l y in the U n i t e d
States, but a r o u n d the world,

for it h as b e e n s u g g e s t e d b y some that a s o l u t i o n

w o u l d be to i n c r e a s e the o f f i c i a l p r i c e of gold and the n h a v e the w e s t e r n
w o r l d s g o v e r n m e n t s su p p o r t this h i g h e r o f f i c i a l p r i c e in p r i v a t e gol d m a r k e t s .
As y o u are aware, I am sure,

the U n i t e d S t ates G o v e r n m e n t is c o m ­

p l e t e l y o p p o s e d to i n c r e a s i n g its o f f i c i a l gold p r i c e - - t h e price,

that is, at

w h i c h it sells go l d to and buys gold fro m o t h e r w e s t e r n w o r l d g o v e r n m e n t s .
And w i s e l y opposed,

it seems to me.

But this is n o t to say that the o u t l o o k

for g o l d p r o d u c e r s is n e c e s s a r i l y bleak.

E v e n if the o f f i c i a l p r i c e of g o l d

is n o t increased, gold p r o d u c e r s m a y in yea r s to come sti l l find t h e m s e l v e s
s e l l i n g at h i g h e r prices.

T h e r e is n o c o n t r a d i c t i o n

here,

as I h o p e I shall

be able to m a k e clear.
* * * " *
k
J u s t as firms and h o u s e h o l d s find it c o n v e n i e n t to h o l d spare cash,
so do g o v e r n m e n t s .

A nd just as the d e s i r e d cash b a l a n c e s of firms and h o u s e ­

h o l d s i n c r e a s e w i t h i n c r e a s e s in o u t p u t and weal t h ,
of governments.



so do the d e s i r e d b a l a n c e s

F o r a c o u n t r y such as the U n i t e d States, an i n c r e a s e in the

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d e s i r e d b a l a n c e s of firms and h o u s e h o l d s is n o problem.
o u r c e n t r a l bank,

is ab l e to s u p p l y a d d i t i o n a l cash to s a t i s f y p r i v a t e demands.

It does not a l ways do so in the short run.
o v e r a st r e t c h of years,

it does.

W h i c h is p e r h a p s just as well.
when appropriate,

The F e d e r a l Reserve,

But in the long run, or on a v e r a g e

The world, however, has n o c e n t r a l bank.

But we hav e had n o w a y of d e l i b e r a t e l y adding,

to the s t o c k of i n t e r n a t i o n a l m o n e y or reserves.

Thi s is

w h y as we looked a h e a d it seem e d w e w e r e i n c r e a s i n g l y r i s k i n g a s h o r t a g e of
i n t e r n a t i o n a l r e s e r v e s or liquidity, and a slo w e r rate of g r o w t h of w o r l d
o u t p u t and trade than w o u l d be possible.
T h r o u g h the e a r l y p o s t w a r years,
to p r a c t i c a l men,

it m a t t e r e d n ot at all, at least

that the w o r l d ’ m o n e t a r y a u t h o r i t i e s had n e v e r b o t h e r e d to
s

i n vent a w a y of d e l i b e r a t e l y s u p p l y i n g i n t e r n a t i o n a l r e s e r v e s - - o r of d e l i b ­
e r a t e l y s atisfying, w h e t h e r in w h o l e or in part, g o v e r n m e n t s 1 d e m a n d s for
i n t e r n a t i o n a l m o ney.

The U n i t e d S t ates w a s in d e f i c i t on i n t e r n a t i o n a l a c c o u n t

e v e n in the years before,

say,

1958.

And w h e n this c o u n t r y h a s a deficit,

it s u p p l i e s d o l l a r s to the rest of the world.

To put the point d i f f e r e n t l y ,

a U n i t e d States d e f i c i t m a k e s p o s s i b l e an i n c r e a s e in the w o r l d ’ s tock of
s
i n t e r n a t i o n a l money,
money.

Of course,

w o r l d re serves,

for dollars,

like gold bars,

serve as i n t e r n a t i o n a l

for a U n i t e d S t a t e s d e f i c i t to r e s u l t in an i n c r e a s e in

it is n e c e s s a r y that f o r e i g n g o v e r n m e n t s not use the d o l l a r s

s u p p l i e d t h e m to p u r c h a s e gol d from our Treasury,

and for m a n y y ears a f t e r

the en d of W o r l d W a r II, these g o v e r n m e n t s w e r e q uite h a p p y to a c q u i r e
d o l l a r s - - o r better,

d o l l a r a s s e t s such as s h o r t - t e r m T r e a s u r y o b l i g a t i o n s ,

w h i c h are k n o w n as T r e a s u r y bills.
as t h e y b e l i eved,

T h e s e assets e a r n e d t h e m interest, and,

could at a n y time be e x c h a n g e d for gold at a fixed price,

$ 3 5 per ounce.




I do u b t v e r y m u c h the U.S. b a l a n c e of p a y m e n t s d e f i c i t w as in

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i t s e l f a c o n s c i o u s l y and d e l i b e r a t e l y c o n t r i v e d i n s t r u m e n t of n a t i o n a l p o l i c y
to e a s e the p r o b l e m s of c e n t r a l ba n k s a r o u n d the world.

O u r d e f i c i t came

ab o u t for a n u m b e r of v e r y c o m p l i c a t e d r e a s o n s f l o w i n g out of the e f f o r t s of
this c o u n t r y to a s sist in s p e c i f i c w a y s the r e c o n s t r u c t i o n of the free w o r l d
a f t e r the Second W o r l d War.

It w as e n d u r a b l e b y e v e r y o n e b e c a u s e t h ese

p r o g r a m s had i n d e p e n d e n t e c o n o m i c and h u m a n i t a r i a n j u s t i f i c a t i o n s .
r e s e r v e s t h e y c o n t r i b u t e d to w o r l d liquidity,
of our n a t i o n a l effort, w e r e desirable.

The

although not primary objectives

But we h a v e h ad too m u c h of a good

thing.
T he t r o u b l e is that f o r e i g n g o v e r n m e n t s ,
p e r s e v e r e d in a cle a r p r e f e r e n c e for dollars.

t aken together, h a v e not

T h e y are m o r e i n c l i n e d n o w

tha n t h e y w e r e a d e c a d e ago to use n e w l y a c q u i r e d d o l l a r s to p u r c h a s e no t
d o l l a r ass e t s but gold bars.

And n o wonder.

The U n i t e d States go l d st o c k

h a s d w i n dled; and f o r e i g n o f f i c i a l h o l d i n g s of d o l l a r assets, w h i c h am o u n t
to c l a i ms on our T r e a s u r y ’ gold, hav e increased.
s

In brief,

it is tod a y m u c h

less a p p a r e n t than it w a s a d e c a d e ago to those f o r e i g n g o v e r n m e n t s w h i c h
ho l d d o l l a r a s s e t s that the U.S.

go l d s t o c k a s s u r e s t h e y can be c a s h e d in

for g o l d at a p r i c e of $35 an ounce.

W e are as c o n c e r n e d as t h e y in r e s t o r i n g

e q u i l i b r i u m to our b a l a n c e of p a y ments.

The c u r r e n t p r o g r a m is a d e l i b e r a t e

ef f o r t to b r i n g this about.
It m i g h t be a r g u e d that if c e r t a i n c o u n t r i e s had n o t m a d e large
p u r c h a s e s of gol d fr o m our Trea s u r y ,

t h e r e b y d e c r e a s i n g the U.S.

and r a i s i n g d o u b t s about d o l l a r - g o l d c o n v e r t i b i l i t y ,

gold sto c k

then s a t i s f y i n g the

o f f i c i a l d e m a n d for i n t e r n a t i o n a l m o n e y w o u l d no t h a v e b e c o m e a problem.
But this, I believe,

is wrong.

s h o u l d hav e got into a fix.

It w a s i nevitable,

it seems to me,

It w as o n l y a m a t t e r of time.

that we

For what happens

w h e n the U.S. h as a d e f i c i t and, as a result, w o r l d r e s e r v e s i n c r e a s e ?




The

-

l iqu i d l i a b i l i t i e s of the U.S.
(gold) r e m a i n unch a n g e d ,
tion.

-

increase;

and so, e v e n if its liquid a s s e t s

there is a d e t e r i o r a t i o n in the U.S.

liquidity posi­

A nd s u r e l y f o r e i g n g o v e r n m e n t s w o u l d n ot go on i n d e f i n i t e l y a c c u m u l a t i n g

d o l l a r assets,
whic h ,

5

if all the w h i l e the U.S.

of course,

is w h y the U.S.

liquidity position were deteriorating;

is m a k i n g a s t r o n g e f f o r t to r e d r e s s its

b a l a n c e of p a y m e n t s position.
•k /V "k k

it

If the w e s t e r n w o r l d * s m o n e t a r y a u t h o r i t i e s cann o t a n y l o nger count
on U.S. d e f i c i t s to i n c r e a s e i n t e r n a t i o n a l r e s e r v e s or liquidity, n e i t h e r can
t h e y count on cu r r e n t p r o d u c t i o n of gold.

Infect,

it has b e e n a long time

since the s u p p l y of n e w l y m i n e d go l d was s u c h as to a l l o w a s u f f i c i e n t i n c r e a s e
in i n t e r n a t i o n a l liquidity.

To be sure, e v e n just a few yea r s a go the s u p p l y

of n e w l y m i n e d gold st i l l e x c e e d e d p r i v a t e demand.
c e n t r a l b a n k s of the U.S.

F o r a long time,

the

and c e r t a i n E u r o p e a n c o u n t r i e s - - a c t i n g as r e s i d u a l

b u y e r s at $35 per oun c e t h r o u g h the gold p o o l - - w e r e able to add to t h eir
h o l d i n g s of gold.

But e v e n w h e n p r i v a t e s p e c u l a t i v e d e m a n d w as i n s i g n i f i c a n t ,

the m o n e t a r y a u t h o r i t i e s w e r e no t a d d i n g s u f f i c i e n t l y to th e i r g o l d res e r v e s .
O f late, m o r e o v e r ,

s p e c u l a t i v e d e m a n d ha s b e e n a n y t h i n g but i n s i g n i f i c a n t .

F o r a w h i l e the c e n t r a l ban k s of the s o - c a l l e d gold pool, ben t on k e e p i n g the
free m a r k e t p r i c e of gold f r o m g o i n g abo v e $35 per ounce, w e r e s e l l i n g gol d
to the p r i v a t e m a r k e t .

O f f i c i a l h o l d i n g s of gold w e r e a c t u a l l y d e c r easi n g .

W i t h the o f f i c i a l p r i c e of gol d fixed at $35 per ounce,
to h a v e b e e n e x p e c t e d that s u p p l y w o u l d k e e p pace w i t h demand,
western w o r l d ’ mo ne t a r y authorities,
s

it w a s n ot

or that the

a c t i n g as r e s i d u a l b u y e r s at this price,

w o u l d get s u f f i c i e n t gold to s a t i s f y t h e i r i n c r e a s i n g d e m a n d s for i n t e r n a t i o n a l
r e s erves.

And it h a r d l y takes a g e n i u s to figure out w h a t the fu t u r e holds,

w h a t e v e r h a p p e n s to the m o n e t a r y role of gold.




And I do n o t h a v e in m i n d

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6

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that s p e c u l a t i v e d e m a n d is g o i n g to r e m a i n wha t it has been.
Th e p o i n t is that the p r i v a t e n o n s p e c u l a t i v e d e m a n d for gold is
i n c reasing.

One e x p e r t has p r o j e c t e d an a n n u a l rate of i n c r e a s e of 12 percent.

I hav e no b a s i s for k n o w i n g w h e t h e r this is a r e a s o n a b l e p r o j e c t i o n ,
is p l a u s i b l e to a s s u m e some c o n t i n u e d g r o w t h of demand,
metal.

T h e r e is the p o s s i b i l i t y ,

be d e v e loped,

of course,

but it

for g o l d is a u s e f u l

that s u b s t i t u t e s for gold w i l l

and s u p p l i e d at r e l a t i v e l y low cost.

For myself,

I h a v e seen

too m a n y s t a t e m e n t s that s t a r t e d w i t h " t here is n o s u b s t i t u t e for . . ."
d i s c r e d i t e d b y A m e r i c a n t e c h n o l o g y to s tick m y n e c k out v e r y far in p r e d i c t i n g
fu t u r e d e m a n d for a n y t h i n g - - i n c l u d i n g ,
say, though,

I m i g h t add,

c e n t r a l banks.

I would

that for gold pr od u c e r s , n o n - m o n e t a r y , n o n s p e c u l a t i v e m a r k e t

f a c t o r s are on t h e i r side.
■ /V ic *
/
V

*V
>

It m i g h t seem as if I h a v e b e e n b u i l d i n g up to a r e c o m m e n d a t i o n
that the o f f i c i a l p r i c e of gold be increased,
i n c r e a s e in i n t e r n a t i o n a l reserves,

and that to e n s u r e an a d e q u a t e

the c e n t r a l b a n k s of the d e v e l o p e d

w e s t e r n c o u n t r i e s stand r e a d y to b u y all the gold o f f e r e d at the n e w h i g h e r
o f f i c i a l price.

Thi s is one w a y of i n c r e a s i n g i n t e r n a t i o n a l liquidity.

O v e r n i g h t the r e s e r v e s of g o l d - h o l d i n g c o u n t r i e s w o u l d increase.
p r e s e n t l y s u b - m a r g i n a l gol d m i n e s could be o p e r a t e d p r o f i t a b l y ,

Also,

sin c e

t here w o u l d

be m o r e g o l d a d d e d e a c h y e a r to the v a u l t s of E u r o p e a n and N o r t h A m e r i c a n
c e n t r a l b a n k s if that w e r e th e i r sole objective.
But t h ere is a s t r o n g case, I believe,
of gold,

for n o t i n c r e a s i n g the p r i c e

and I s h o u l d like to p r e s e n t it be f o r e g o i n g on to the pl a n for

i n c r e a s i n g i n t e r n a t i o n a l liquidity,

the s o - c a l l e d S p e c i a l D r a w i n g Rights plan,

w h i c h h as b e e n all but o f f i c i a l l y a d o p t e d b y the m e m b e r c o u n t r i e s of the
I n t e r n a t i o n a l M o n e t a r y Fund.




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7

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It h as b e e n s u g g e s t e d that if the U n i t e d S t a t e s w e r e to i n c r e a s e
its g o l d price, and o t h e r c o u n t r i e s w e r e to follow,

then the g o l d - p r o d u c i n g

count r i es, m o s t n o t a b l y S o u t h A f r i c a and Russia, w o u l d b e n e f i t h a n d s o m e l y .
And,

so the a r g u m e n t goes,

the U.S.

s u c h as R u s s i a and Sou t h Africa.
In reality,
suggests.

should do n o t h i n g w h i c h b e n e f i t s c o u n t r i e s

F or m y s e l f ,

I find this a r g u m e n t u n c o n v i n c i n g .

the i n e q u i t i e s are m u c h b r o a d e r than this s i m p l i s t i c s t a t e m e n t
But e v e n if o n l y So u t h A f r i c a and R u s s i a b e n e f i t e d , I do n o t b e l i e v e

the case a g a i n s t an i n c r e a s e in the p r i c e of gold s h o u l d be m a d e in these
terms, p r o v i d e d that the a d v a n t a g e to the U.S.

and the rest of the free w o r l d

w e r e in scale.
But the U.S. w o u l d n o t be d o i n g i t s e l f or its m o n e t a r y a l l i e s a
favor, great or small, by i n c r e a s i n g its gol d price.

Mos t importantly,

it

w o u l d be r e n e g i n g on a m o r a l c o m m i t m e n t to those c o u n t r i e s w h i c h t h r o u g h the
y e a r s h a v e a c c u m u l a t e d n ot gold but d o l l a r assets.
e m p h a s i z e that I am s p e a k i n g c o n j e c t u r a l l y here,

Of course, and I wan t to

if there w e r e to be an a g r e e ­

m e n t a m o n g I MF m e m b e r s that all s h o u l d incr e a s e t h e i r gold p r i c e s in p r o p o r t i o n ,
th e n the U.S.

c o u l d go ahead.

O t h e r c o untries,

w o u l d in e f f e c t be r e l e a s i n g the U.S.
s u p p l y i n g g o l d at $35 an ounce.

in s i g n i n g the agre e m e n t ,

from its m o r a l c o m m i t m e n t to c o n t i n u e

The p r o b a b i l i t y , however,

of such an

a g r e e m e n t is zero in the p r e d i c t a b l e future, g i v e n the e x c h a n g e s of s o l e m n
c o m m i t m e n t s this s p r i n g at W a s h i n g t o n and Stockholm.
In a n y case such an a g r e e m e n t w o u l d be a d i s s e r v i c e to the w e s t e r n
worl d .

Why ?

The a r g u m e n t is simple enough:

If the p r i c e of gold w e r e

i n c r e a s e d o n l y a little, t h e n there w o u l d be s p e c u l a t i o n on a f u r t h e r increase,
and the c e n t r a l b a n k s of the w e s t e r n w o r l d w o u l d end up g e t t i n g n o m o r e gold
th a n p r e s e n t l y t h e y are.

And if the p r i c e of g o l d w e r e i n c r e a s e d sharply,

e n o u g h so that n o one could b e l i e v e a n o t h e r i n c r e a s e w a s in the offing,




then

8

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i n f l a t i o n a r y p r e s s u r e s m i g h t result.

-

And s o m e t i m e in the fu t u r e a n o t h e r

i n c r e a s e in the p r i c e of go l d w o u l d be n e c e s s a r y .

S o m e t i m e in the fu t u r e

the w e s t e r n w o r l d w o u l d hav e to r e l i v e 1 966-68 all ov e r again.
This is a f u n d a m e n t a l a r g u m e n t a g a i n s t p r o p o r t i o n a t e i n c r e a s e s in
all o f f i c i a l gold prices.

P r o v i d i n g i n c r e a s e s in i n t e r n a t i o n a l l i q u i d i t y by

p e r i o d i c a l l y i n c r e a s i n g gold p r i c e s could be d e s t a b i l i z i n g .
in gol d prices,
time, though,

W i t h an i n c r e a s e

c o u n t r i e s are d r o w n e d in i n t e r n a t i o n a l liquidity.

the e x c e s s of l i q u i d i t y disa p p e a r s ,

Through

p a r t l y p e r h a p s as p r i c e s

increase; and th e n a n o t h e r i n c r e a s e in gold p r i c e s b e c o m e s n e c e s s a r y .

The

c e n t r a l problem, w h i c h is the o r d e r l y e x p a n s i o n of reserves, w o u l d n o t h a v e
b e e n solved at all.
Vc ic *

ic “
k

H o w m u c h b e t t e r to p r o v i d e r e s e r v e s at a r e a s o n a b l y s t e a d y rat e
o v e r the years, or at a rate a p p r o p r i a t e to c u r r e n t and p r o s p e c t i v e n e e d s
for reserves.

T h i s is w h a t the c o u n t r i e s w h i c h b e l o n g to the I n t e r n a t i o n a l

M o n e t a r y F u n d h a v e d e c i d e d to do.
likely,

T h i s is w h a t w i l l be done if, as seems

the S p e c i a l D r a w i n g Ri g h t s p l a n is a c c e p t e d as an a m e n d m e n t to the

A r t i c l e s of the IMF, and t h e r e a f t e r put into o p eration.

The U.S.

I m i g h t po i n t out here, has a l r e a d y r a t i f i e d the a m e n d m e n t ,
b y o t h e r c o untries, F r a n c e excepted,

C o n gre s s ,

and r a t i f i c a t i o n

is p r e t t y m u c h assured.

The p l a n is best desc r i b e d , I believe,

as a w a y of c r e a t i n g mon e y ,

or S p e c i a l D r a w i n g Rights, w i t h n o gold backing, w h i c h w h e n n e e d e d can be
u s e d b y g o v e r n m e n t s to fi n a n c e b a l a n c e of p a y m e n t s d e f icits.

W i t h i n limits,

p a r t i c i p a t i n g su r p l u s c o u n t r i e s w i l l have to accept SDRs in e x c h a n g e for
currencies,

and this is all that is r e q u i r e d to m a k e SDRs serve as money.

It m i g h t take time for SDRs to ga i n full a c c e p t a b i l i t y .

In the b e g i n n i n g

t here could be m i n o r d i f f i c u l t i e s e n c o u n t e r e d in t r a n s f e r r i n g them.




Careful

-

m a n a g e m e n t w i l l be required.

9

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Fortunately,

the I MF is e n t i r e l y capable.

the w i l l for the S D R p l a n to w o r k has, I believe, b e e n d e m o n s t r a t e d ,

But

and w i l l

is the sine q u a n o n of a ny i n t e r n a t i o n a l agreem e n t .
It m a y be that m e m b e r IM F c o u n t r i e s w i l l one day, m a y b e e v e n one
d a y soon, go a step further,

and create a n o t h e r n e w r e s e r v e a s s e t - - o n e b a c k e d

by all o f f i c i a l r e s e r v e s of go l d and dollars,
SDRs.

T h i s w o u l d s e e m a good idea.

and by countries* h o l d i n g s of

W i t h o n l y one r e s e r v e asset,

there w o u l d

be n o p r o b l e m of d e s t a b i l i z i n g ch a n g e s in o f f i c i a l asset p r e f e r e n c e s ,
t r a n s f e r r i n g SDRs.

And, of course,

or of

the stock of this n e w l y c r e a t e d r e s e r v e

a sset w o u l d in c r e a s e w i t h e v e r y i n c r e a s e in the s t ock of SDRs.
E d w a r d M. B e r n s t e i n ,

f o r m e r l y of the U.S. T r e a s u r y and the I M F and

long a d i s t i n g u i s h e d s p e c i a l i s t in i n t e r n a t i o n a l econ o m i c s , has p r o p o s e d the
c r e a t i o n of a n e w r e s e r v e a s s e t - - t h e " c o m p o s i t e r e s e r v e a s s e t , 1 as he calls
1
it, or for short the CRU.
all t h e i r reserves,
Account,

H i s s u g g e s t i o n is that m e m b e r I MF c o u n t r i e s e a r m a r k

in ef f e c t d e p o s i t i n g t h e m in an IM F Re s e r v e S e t t l e m e n t

and re c e i v e CRUs in return.

C o u n t r i e s w o u l d t h e n u se t h e i r c o m p o s i t e

r e s e r v e asse t s in m a k i n g final s e t t l e m e n t s on i n t e r n a t i o n a l account.
It m i g h t se e m to some, I suppose,

that e v e n s i m p l y e a r m a r k i n g

r e s e r v e s for an i n t e r n a t i o n a l a c c o u n t w o u l d in v o l v e a loss of n a t i o n a l s o v e r ­
eignty.

But this is wrong.

T h o s e w h o d r e w up the S p e c i a l D r a w i n g Ri g h t s

p l a n p r o v i d e d for w i t h d r a w a l ,

and u n d e r Dr. B e r n s t e i n 1s p l a n an i n d i v i d u a l

c o u n t r y w o u l d be able to w i t h d r a w its r e s e r v e s from the F u n d R e s e r v e S e t t l e ­
m e n t A c c o u n t at a ny time.

The i n d i v i d u a l c o u n t r y w o u l d be able,

g i v e up its o u t s t a n d i n g CRU c r edit at a ny time,
reserves contribution,

that is, to

and get back its o r i g i n a l

a d j u s t e d of course for any g a i n or loss a l o n g the way.

M o v i n g on to some k i n d of single r e s e r v e asset seems to me, as I
h a v e said, a good idea, and an e n t i r e l y n a t u r a l d e v e l o p m e n t .




But in ta l k i n g

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10

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a b o u t a n e w r e s e r v e asset I m a y h a v e got m y s e l f a long w a y into the future,
so let m e r e t u r n to t o d a y and SDRs.
T h e r e is a q u e s t i o n as to w h a t d o l l a r am o u n t of SDRs w i l l be c r e a t e d
e a c h year.

Thi s the p a r t i c i p a t i n g c o u n t r i e s w i l l d e c i d e - - i n light, howe v e r ,

of c u r r e n t and p r o s p e c t i v e n e e d s for r e s e r v e s .

U n d e r the plan,

therefor e ,

the s u p p l y of i n t e r n a t i o n a l r e s e r v e s w i l l i n c r e a s e at an a p p r o p r i a t e rate,
and t here sh o u l d be n o s u d d e n s h arp c h a nges in the rate.

This in the end is

w h y the w e s t e r n w o r l d w i l l be m u c h b e t t e r off if in s t e a d of r e l y i n g on g old
as i n t e r n a t i o n a l m o n e y and p e r i o d i c a l l y i n c r e a s i n g gold prices,

it goes a h e a d

and a c t i v a t e s the S p e c i a l D r a w i n g Rights plan, or in o t h e r word s ,

st a r t s

c r e a t i n g SDRs.
* * * * *
L o o k i n g ahead, I can see the d a y w h e n c o u n t r i e s w i l l n o longer use
g o l d to se t t l e their accounts.
this I am q u i t e certain.
o f f i c i a l use of gold.

T h a t d a y is, howe v e r ,

But if the w e s t e r n w o r l d co m e s m o r e and m o r e to use
some oth e r n e w l y c r e a t e d r e s e r v e asset,

gold and S D R s - - t h e y could b e c o m e less and less c o n c e r n e d

abo u t the free m a r k e t pri c e of gold.
reser v e s,

Of

A c t i v a t i o n of the S D R p l a n is n o t g o i n g to e nd the

S D R s--or, as w o u l d se e m n e c e s s a r y ,
b a c k e d by dollars,

a long w a y off.

U s i n g d e l i b e r a t e l y created,

or m a n - m a d e ,

the m o n e t a r y a u t h o r i t i e s could w i t h o u t c o n c e r n let free m a r k e t g old

p r i c e s i n c r e a s e as,

t h r o u g h time, p r i v a t e n o n s p e c u l a t i v e d e m a n d i n c r e a s e d

w i t h the g r o w t h of the w o r l d economy.

I am c e r t a i n l y n ot p r e d i c t i n g an

i n c r e a s e in p r i v a t e m a r k e t gold prices, but r a t h e r s i m p l y s p e c u l a t i n g about
w h a t c o u l d h a p p e n - - p r o v i d e d , however,

that the m o n e t a r y a u t h o r i t i e s come to

r e l y less and less on gold.
In summary,

1) it is r e a s o n a b l y clear m a r k e t p r i c e s of gold w i l l

f l u c t u a t e w i d e l y and q u i t e p o s s i b l y ar o u n d a r i s i n g t r e n d if the usa g e




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p r o j e c t i o n s are correct,

11

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u n l e s s t h e y are k e p t d o w n by s ales of go l d fr o m

o f f i c i a l stocks or s p e c u l a t i v e hoards.

As to the former,

t here is a p r e s e n t

a g r e e m e n t a m o n g g o v e r n m e n t s w h i c h w o u l d p r e c l u d e p r i v a t e m a r k e t sales by
o f f i c i a l h o l d e r s of g o l d - - a n d ponder,

if y o u will,

the pr i c e c o n s e q u e n c e s

if this w e r e n ot so.
2) In the p r e s e n t p o l i t i c a l and e c o n o m i c c l i m a t e th e r e is n o l i k e ­
l ih o o d there w i l l be an in c r e a s e in the o f f i c i a l p r i c e of gold.
e a r l i e r a c a v e a t to the s t a t e m e n t that starts,
w h i l e s u b s t i t u t e m a y be too strong,

I mentioned

"t h e r e is n o s u b s t i t u t e ;"

c e r t a i n l y the t e c h n o l o g i c a l b r e a k t h r o u g h

to SDRs has s t a r t e d us on the w a y to the h a l c y o n d a y w h e n i n t e r n a t i o n a l
r e s e r v e s w i l l gr o w p r e d i c t a b l y and r a t i o n a l l y to m e e t w o r l d needs.
3) If the d a y c o m e s - - a n d I h o p e it c omes s o o n - - w h e n the m a r k e t
p r i c e of gold w i l l h a v e n o g r e a t e r s i g n i f i c a n c e to c e n t r a l b a n k e r s than the
p r i c e of c o p p e r or jute,

then s p e a k i n g q u i t e p e r s o n a l l y ,

and as a f o r m e r

r e s i d e n t of a m i n i n g state w i t h st r o n g c o n v i c t i o n s a b o u t f r e e d o m of choice,
I h o p e the m a r k e t for gold w i l l b e c o m e at least as free as tho s e for c o p p e r
and j u t e - - w h i c h m e a n s U.S. n a t i o n a l s ,

if t h e y wish,

in a n y o t h e r w a y use this q u e e n of m e t a l s .




can buy, sell, bury, or