Category Archives: Historic

The PBOC Was Buying Gold in London In The Nineties

I couldn’t resist translating this must read from 1993 in Dutch newspaper NRC Handelsblad (h/t @frankknopers) about the gold sales by the Dutch central Bank (DNB). Presumably, “a part” of the 400 tonnes sold at the time through the Bank For International Settlements went to the Chinese central bank. Although we don’t know for sure what the Chinese central bank did with the gold – at the time the People’s Bank Of China was the primary dealer in the Chinese domestic gold market and in theory could have sold the gold to Chinese jewelry fabricators – we may assume it was kept for its official reserves.

The other week I published an article about the Chinese Gold Army that was established in 1979 to develop domestic gold mining and exploration. This signifies the People’s Bank Of China (PBOC) was laying the foundation for the Chinese gold market in the seventies. Later on, in 2002 the PBOC started to liberalize the gold market by launching the Shanghai Gold Exchange that took over gold allocation and the pricing mechanism from the central bank. Many of us thought that the PBOC only became active in the international OTC gold market to diversify its lopsided US dollar reserves after, say, 2009. But we were wrong, the PBOC was buying gold in London as early as 1992. No, we don’t know exactly how much or what they did with the gold, though for sure the PBOC has been designing its gold strategy decades ago along side its opening up policy.  

Remarkably, the article from NRC noted that the Dutch central bank sold gold “to equalize its holdings relative to other important gold holding nations” and “it’s known China is working to increase its gold reserves to bring it more in line relative to its GDP”. One of the theories about our current international monetary system – that was detached from gold in 1971 – is that it can only shift to a new gold anchored system when the power blocks have equalized the chips (Jim Rickards). In other words, if the US, Europe, Russia and China all have an equal ratio of official gold reserves to their GDP, the international monetary system could make a transition towards gold.

Global gold vs GDP

Within the aforementioned theory China should have about 6,000 tonnes to come to the gold/GDP ratio the EU and Russia have (the US has a little less gold proportionally). Although it’s impossible to know how much the PBOC really holds, it’s certainly more than what they disclose at the moment, which is 1,743 tonnes. In a forthcoming post we will discuss the most recent ins and outs regarding PBOC official gold reserves. For now, enjoy the full article.

Note, at the time the article was published DNB held 1,090 tonnes of gold.

DNB gold

Operation Gold

(NRC Handelsblad, 27 March 1993).

Last summer the President of the Dutch Central Bank, W. Duisenberg, persuaded the Minister Of Finance, W. Kok, of the need to sell a quarter of the Dutch gold reserves: “The time is right”. Part of the Dutch gold was probably sold at the end of last year to the People’s Republic Of China. The multi billion operation that has taking place in utmost secret is producing the state an annual 400 million guilders in extra benefits since 1994. “Part of the sale was handled outside the market.”

van Ewijk and L.J.R. Scholten: The profitability of De Nederlandsche Bank, in: ESB 1-7-1992. In ESB 19-8-1992 there was a sequel and in ESB 20-1-1993 both authors went on about the gold sales.

March 27, 1993

No. The gold of De Nederlandsche Bank [DNB] was not secretly loaded into a Chinese cargo plane at Schiphol and flown to Beijing. The gold of the Dutch Central Bank remained where it was, in the vaults of the Bank of England where it has been for years. Only the signs with the name of the owner of the gold bars were changed. A new name: for traders in the international gold market there is no doubt that the People’s Bank Of China (PBOC) has bought a part of the 400 tonnes of gold, a quarter of the Dutch gold reserves, which DNB has sold late last year in utmost secrecy.

“With 99 percent certainty we know that the People’s Bank of China has been one of the buyers of the Dutch gold”, said Philip Klapwijk from Goldfields Mining Services, an institute in London affiliated with the South African gold mines that specializes in research into the gold market. Also other London bullion dealers have a strong suspicion that China was involved in the gold sales of DNB. “We have noted that the Chinese central bank has bought gold in recent months”, said John Coley of the London bullion dealer Sharp Pixley and spokesman of the London Bullion Market Association.

At the Ministry of Finance in The Hague and at DNB in Amsterdam they know the story of the Chinese connection, but they remain tight lipped. “Everything is sold locally in London”, said the spokesman of DNB, JH du Marchie Sarvaas. The central bank is silent on the question of who was engaged in the sale and who the buyers were. “It is not in our interest to make announcements about it”, he said. Servaas will only tell us that the transactions have been set up in different ways and that DNB has not entered the market directly itself.

The spokesman of the Ministry of Finance, Dr. RP Florisson, stated not to know where the gold that was sold has gone. Some things, he added, you would rather not know. Members Of The House have neither any idea in what way the gold was sold. With the letter from 12 January by Kok that notified the Members Of the House about the gold sale came an attachment, though in it the ‘technical details’ from the original correspondence between Duisenberg and Kok were omitted. This was a crucial passage, which disclosed the name of the mediator in the gold sales, the Bank for International Settlements, the central bank of central banks.

BIS
Courtesy BIS.

The Seller

Perhaps the phrase “silence is golden” finds its origin in the world of central banks. Like is the case in Operation Gold. In April 1992 DNB developed the intention to sell part of its gold stock and add the proceeds to its foreign exchange reserves. The Board Of Governors of the central bank, consisting of President Dr. WF Duisenberg and three other Directors, approved the plan. Only a few other employees were notified. In June Duisenberg shared his plan with Kok during one of their weekly lunch meetings. Kok hesitated at first because he feared he would be remembered as The Seller of the national gold.

Duisenberg explained that it was the sound fiscal policies from Kok and the strong position of the guilder that made the gold sales possible. Kok was persuaded. At the Ministry Of Finance the Deputy Comptroller General and the Director were informed. On 29 September Duisenberg sent a letter to Kok in which he explained that the sale was intended ”to equalize our gold holdings relative to other important gold holding nations”. The sale should not lead to loss of confidence in the guilder, not serve to fill the state coffers and not lead to disruption of the gold market. “Therefore, a high degree of secrecy is warranted”, Duisenberg wrote. If unexpected complications would arise DNB would waive the operation.

Wim Kok China Construction Bank
Courtesy CCB. Coincidentally, the Minister Of Finance of the Netherlands, Wim Kok, in 1993 that approved the gold sale that ended up in China is now employed by China Construction Bank Corporation – the second largest bank in China after ICBC.

Kok agreed on 2 October and in the fall several sales transaction followed in the London forwards market. In addition, the Bank has for International Settlements (BIS) was involved as an intermediary. The BIS, which is based in Basel and was established in 1930 to administer the German reparations, is as closed as the Swiss banking secrecy. Who calls the BIS can enjoy the long version of Eine kleine Nachtmusik as on-hold music, to finally be told the BIS never releases any information.

Duisenberg expanded on the gold sales at a meeting of the BIS on 12 January 1993. The sale had already taken place, only the gold had yet to be delivered. Not all members of the BIS welcomed the Dutch move, nor were they consulted for its decision. That same day DNB published the news. A team from a TV news network was – under the pledge of secrecy –flown to Basel for an interview with Duisenberg. “The time is right” for the sale of part of the Dutch gold reserves, the President said.

The news dropped like a bomb. Rumors were circulating in the gold market late last year about possible Dutch gold sales, based on these rumors a reporter from news agency Reuters asked DNB for a response in November. It replied no announcements were ever made on market transactions. Gold traders were particularly surprised by the volume of sales: “It was very well done. I never knew that the market could absorb such an amount in such a short time without drastic price distortions”, said one gold dealer.

It was a huge deal. Four hundred tonnes is nearly a quarter of the total annual gold mine production. It is the equivalent to 32,000 gold bars of 12.5 Kg [400-ounce] and 26 centimeters in length, which placed end to end form of line of 8.32 kilometers. That is almost as long as the symbol of our national pride, the Oosterscheldedam.

With the sale DNB earned 7.5 billion guilders in US dollars, D-marks and Japanese yen that have been added to the foreign exchange reserves of the central bank. As these foreign exchange earn interest – unlike gold – the profit starting from 1994 is an annual 400 million guilders which will flow to the state coffers. Recent pleas from Members Of The House to invest this money in infrastructure have been rejected by Kok, who agreed with DNB that this amount, like other profits of the central bank, flow to the Treasury.

Economics Journal

Seldom a critical note is written about the policy of DNB. Coincidentally, last year, while Duisenberg was preparing the gold sales in secret, a remarkable article in the journal for economists, ESB, was published. Casper van Ewijk and Bert Scholten, both working at the economics department of the University of Amsterdam, questioned the profitability of DNB. They concluded that the central bank, with its relatively large reserves of gold and foreign exchange, yields an extremely poor result on its investments. With that, the annual profit payment to the Treasury is a lot lower than possible.

In a second article – after the gold sale – the two economists claimed that DNB had sold too little gold and had waited too long with the sale. Now the gold was sold for an average of 18,800 guilders per kilo, while ten years before it could have been twice that amount. In those ten years, the gold yielded not one cent and its value only declined. The addition of the gold to the foreign exchange reserves was in their opinion, “unnecessary and therefore undesirable”, as the Netherlands has more than enough foreign exchange reserves. And the revenue of the sale, according to Van Ewijk and Scholten, could be better used to reduce the national debt. That gives the government more financial benefit than an annual interest income.

The defense of DNB – as expressed in replies from the Minister Of Finance to questions by the parliament – is that a central bank is not a hedge fund. The gold and foreign exchange reserves are not intended to maximize returns but to conduct a proper exchange rate policy and to ensure confidence in the guilder. As a result, it is also necessary to hold currency that offers a low rate of return. The gold is not held for speculation, but is a cornerstone of the monetary policy of the Netherlands as a major gold holding nation. When deciding on the time at which it sold some of the gold, the gold price did not play any role whatsoever.

The suggestion to use the principal proceeds to flow to the treasury could no find grace: the change in the composition of reserves (gold was converted into US dollars, D-marks and yen) is not a reason to pour assets of the central bank into the hole of the national deficit. If DNB would give in to this temptation that would be a monetary sin: financing the government deficit by the central bank. That happens in South America, or in Italy, but not in countries that appreciate a hard currency.

Parity

Gold plays a vital role in finance since trade emerged. Late last century all European countries and the United States went on the classical gold standard. The direct link between the amount of money in circulation to gold reserves at central banks broke the economies of the industrialized countries in the economic depression of the thirties. The Netherlands held on to gold until 1936 as one of the last countries together with Switzerland and France.

After the Second World War the US dollar ruled. Under the Bretton Woods system, which was set up in 1944 under US-British leadership, all currencies were pegged to the US dollar. This provided stability and dynamics because the Americans constantly pumped new dollars into the world economy. The Bretton Woods system created unprecedented economic growth for a quarter of a century. The gold did not disappear completely. To increase the credibility of the system, the United States declared their readiness to ensure the conversion of dollars into gold at a fixed price of 35 dollars per troy ounce (31.1 grams). The Americans could easily make that offer, because in 1944 they were in possession of three quarters of all the gold reserves in the world.

The Dutch government in exile had largely spent its gold reserves during the war. During the reconstruction foreign exchange reserves piled up in the fifties and sixties and DNB happily took advantage of the opportunity to convert dollars that were earned through exports, for gold in the US. Together with France The Netherlands was in those years the largest gold accumulator. French President General Charles de Gaulle said, in a famous news conference on 4 February 1965, about the US dollar hegemony and gold, “Ah! Gold its nature never changes, not in any form, bars or coins. It has no nationality, it is held eternal and universal as the unchangeable and trustworthy value par excellence”. Also in The Netherlands gold was held as an article of faith.

During the sixties the US gold reserves in Fort Knox severely declined. Eventually, President Nixon decided in 1971 to temporarily suspend the convertibility of dollars into gold. The ‘gold window’ was closed; the world had spent well over twenty five years to tap into the US gold reserves.

Since 1971 the gold reserves of DNB hardly changed. The spectacular rise in gold price to $850 dollars per troy ounce in early 1980 led to a great gain in the books but that was all. However, politicians in the seventies had their greedy eyes on the gold stocks to use these for employment projects and other fun things for the people to finance. President of DNB at the time, Dr. Jelle Zijlstra, abhorred such ideas. Not a single gram of gold was sold from the vaults of DNB.

Zijlstra and his successor Duisenberg feared gold sales would affect the position of the guilder. Moreover, the government deficit was so huge in the eighties that sales would be interpreted by financial markets as weakness. Gold supported confidence in the guilder and provided an aura of invulnerability.

Drawbacks

During 1991 the gold inventories were casually mentioned in a conversation between senior officials of the Ministry Of Finance and DNB during the preparations for the Economic and Monetary Union (EMU) – the plan for a European central bank and a common currency, which was clinched in the Maastricht Treaty. It was clear that the size of the Dutch gold stock was well above average in the EC. This would be disadvantageous if in a few years DNB must transfer part of its reserves to the European Central Bank (ECB).

As a rich gold country the Netherlands is at a disadvantage, because it participates for a relatively small amount in the ECB. The Netherlands threatens to get stuck in the monetary union with a huge amount of gold – that doesn’t yield – because according to ECB rules participating central banks may only purchase or sell gold and foreign exchange reserves with approval by the ECB. After ratification of the Maastricht Treaty, the freedom of DNB would be very limited. “The Netherlands has no interest in a large amount of gold”, said a source familiar with the matter.

The Netherlands receives a 4.7 percent share in the ECB based on the size of the Dutch population and the national economy. That’s less than the Dutch share of 7.3 percent in total international reserves (gold and foreign exchange) of all central banks in the EC and much less than the share of 11.7 percent in gold reserves. Even after the sale of 400 tonnes the Netherlands retains a stake in the EC gold reserves of 9.4 percent. DNB is expected to sell another 685 tonnes of gold to bring their gold share in line with that of the ECB. To reassure the gold market DNB states it will not sell any more gold, though financial experts expect that the gold reserves by EC central banks, including DNB, will be further adapted within the framework of the monetary union. “Last year the Belgian and Dutch central banks sold gold. That made gold sales by central banks respectable. Additional sales threaten the market”, said a London bullion dealer.

In the beginning of 1992, still in the fuddle of Maastricht and nine years after the traumatic devaluation of the guilder in 1983, the position of the guilder was very strong and the Dutch budget deficit was considerably reduced. In The Hague no one advocated to do any more fun things with the Dutch gold stocks. The time was right to proceed to sale.

Small World

It was not possible that DNB would enter the gold market itself, because that would be known immediately in the closed world of gold trading. The few remaining Dutch players in the gold market are tiny. In London, there are four major gold traders, Sharps Pixley, Samuel Montague, Mase Westpac and Rothschild. According to John Coley, spokesman of the London Bullion Market Association, it was obvious that DNB would use the BIS as an intermediary. Duisenberg is very well known in Basel because he was President Of The Board of the BIS from 1988 to 1990.

duisenberg
W Duisenberg

The advantage of the BIS is, as “central bank of central banks”, that it guarantees anonymity and direct access to the central banks of the member countries in Eastern and Western Europe as well as Australia, Canada, Japan and South Africa. A London trader suggested that DNB used the central bank of another member state of the BIS to bring the gold to the market. That could have been the central bank of South Africa, whose gold offers would not surprise any traders. South Africa is always very active in the London bullion market. The BIS could have acted as an intermediary between DNB and the South African central bank.

“Part of the sale was handled outside the market”, says Philip Klapwijk of Goldfield Mining Services. He says he came to this conclusion because the price of gold last year, although down slightly, it should have shown much greater fluctuations if 400 tonnes would have been sold – even if the supply would be split into small tranches.

The BIS probably made contact with the People’s Bank of China as the buyer. Why precisely the People’s Republic of China? Chinese love gold, says an expert, and he refers to the huge Taiwanese gold purchases in 1987. Second, China has large dollar surpluses as a result of the spectacular economic growth. And third, China announced that it is working to build up its reserves in order to bring it more in line with the size of the Chinese GDP.

The weekly table of DNB, which is published every Wednesday in the newspaper, we can see since February a decline in Dutch gold reserves. Presumably, the increase in the gold reserves of China will never be visible. The statistics produced by the International Monetary Fund for China record the same amount of gold for a decade, coincidentally about 400 tonnes. China experts, however, know that the People’s Bank has second secret gold reserves, which are held outside the statistics in “non-monetary gold”. If part of the gold reserves of DNB have been added to these, as many suspect, no one will ever officially know.

The End Of Bretton Woods And The Race To The Bottom, 1971

I stumbled upon a few interesting reads about the end of the Bretton Woods system in August 1971. In those years there was a lot of monetary turmoil, just like now. Before 1971 the US dollar was pegged to gold, and foreign countries held dollars in reserve because the US had promised they were “as good as gold”. The dollar came under pressure because the US money supply grew, but they insisted to keep the gold price at $35. Many European countries were redeeming their dollars for gold, because the dollar was overvalued relative to gold.

Official gold reserves

This led to a drain in US official gold reserves (I you are wondering were the rest of the US gold stock went, consider reading this)

Note, due to technical reasons from here on this post might cause errors on tablet devices and mobile phones. I hope to solve this issue within 24 hours. In the meantime you can read this post on desktop/laptop browsers. 

The US wished to devalue the dollar against all currencies (in the hope to boost export and stimulate domestic industries) except gold. A higher gold price in dollars would increase the dollar value of European gold holdings. Additionally it would hurt the credibility of paper money in general and thus could destabilize the US dollar Hegemony. The US was keen to exploit the advantages of issuing the world reserve currency, without limitations being imposed by gold.

The French were the most critical on US’ monetary policy, in 1965 the French president De Gaulle made a speech in which he stated gold should be the base in the international monetary system, not the dollar.

The London Gold Pool, a group of nations controlling the price of gold at $35, collapsed in March 1968. Hereafter a two-tier system existed; a free market gold price and an international payment price under the Bretton Woods system (at $35). Central banks could actually buy gold from the US Treasury at $35 and sell it on the open market at $40. Subsequently the gold window was closed by Nixon in August 1971 – after pressure from his Treasury Secretary John Connally. In a TV presentation he announced to temporarily suspend the convertibility of dollars into gold (because “evil speculators” were attacking the dollar), and so the Bretton woods system came to an end.

Nixon also announced an import surcharge of 10 %, which made foreign goods 10 % more expensive for American consumers, to boost domestic growth. After the Nixon Shock negotiations started between the biggest economies about the value of their currencies relative to each other and gold. I will publish a few historical diplomatic documents from this era. Below you can read a phone call Nixon made with Kissinger on October 28, 1971.

Richard Nixon: US President

Henry Kissinger: US National Security Advisor

John Connolly: US Treasury Secretary

Arthur Burns: US Chairman Of The Federal Reserve

Peter Peterson: US Assistant To The President For International Economic Affairs

George Shultz: US Director Of The Office Of Management And Budget

Paul McCracken: US Chairman Of The President’s Council of Economic Advisors

Willy Brandt: Chancellor Of Germany

Georges Pompidou: President Of France

P stands for president, K for Kissinger

Nixon kissinger

Two months later Kissinger, pretending not to know anything about economics, negotiated these monetary affairs with Georges pompidou. On December 13 at Azores at Mr Pompidou’s residence.

And another meeting the next day at Azores between Kissinger and Pompidou.

Eventually, after the currency war, the dollar had lost more than 50 % of its value in 1981. Devaluation can be a short term fix but, but causes long term problems.

In Gold We Trust

Minutes Of Kissinger Meeting On Gold, 1974

After Nixon “temporarily” suspended the convertibility of dollars into gold in 1971, because evil international speculators were attacking the US dollar, some of the European countries were not amused the US broke its promise. In the years that followed a diplomatic battle ensued; the US wanted to completely phase out gold from the monetary system in order to preserve the US dollar hegemony, while other countries wanted a comeback and revalue their gold holdings. In the following minutes we can read how Henry Kissinger, National Security Advisor and Secretary Of State at the time, was discussing the matter with his team. Teaser:

 Mr. Enders: I think we should look very hard then at very substantial sales of gold—U.S. gold on the market—to raid the gold market once and for all.

Nixon kissinger

FOREIGN RELATIONS OF THE UNITED STATES, 1973–1976
VOLUME XXXI, FOREIGN ECONOMIC POLICY, DOCUMENT 63


63. Minutes of Secretary of State Kissinger’s Principals and Regionals Staff Meeting 1

Washington, April 25, 1974, 3:13–4:16 p.m.

[Omitted here is discussion unrelated to international monetary policy.]

Secretary Kissinger: Now we’ve got Enders, Lord and Hartman. They’ll speak separately or together. (Laughter.)

Mr. Hartman: A trio.

Mr. Lord: I can exhaust my knowledge of gold fairly quickly, I think.

Secretary Kissinger: Now, I had one deal with Shultz—never to discuss gold at this staff meeting—because his estimate of what would appear in the newspapers from staff meetings is about the same as mine.

Are you going to discuss something—is this now in the public discussion, what we’re discussing here?

Mr. Enders: It’s been very close to it. It’s been in the newspapers now—the EC proposal2

Secretary Kissinger: On what—revaluing their gold?

Mr. Enders: Revaluing their gold—in the individual transaction between the central banks. That’s been in the newspaper. The subject is, obviously, sensitive; but it’s not, I think, more than the usual degree of sensitivity about gold.

Secretary Kissinger: Now, what is our position?

Mr. Enders: You know what the EC proposal is.

Secretary Kissinger: Yes.

Mr. Enders: It does not involve a change in the official price of gold. It would allow purchases and sales to the private market, provided there was no net purchase from the private market by an individual central banker in a year. And then there would be individual sales between the central banks on—

Secretary Kissinger: How can they permit sale to the private market? Oh, and then they would buy from the private market?

Mr. Enders: Then they would buy.

Secretary Kissinger: But they wouldn’t buy more than they sold.

Mr. Enders: They wouldn’t buy more than they sold. There would be no net increase in gold held by the central banks that was held by the EEC. It could be held by others.

I’ve got two things to say about this, Mr. Secretary. One is: If it happens, as they proposed, it would be against our interests in these ways.

Secretary Kissinger: Have you accepted it or is this just a French proposal?

Mr. Enders: It’s an informal consensus that they’ve reached among themselves.

Secretary Kissinger: Were they discussed with us at all?

Mr. Enders: Not in a systematic way. They’re proposing to send over to Washington the Dutch Finance Minister and the Dutch Central Governor would talk to the Treasury.

Secretary Kissinger: What’s Arthur Burns’ view?

Mr. Enders: Arthur Burns—I talked to him last night on it, and he didn’t define a general view yet. He was unwilling to do so. He said he wanted to look more closely on the proposal. Henry Wallich, the international affairs man, this morning indicated he would probably adopt the traditional position that we should be for phasing gold out of the international monetary system; but he wanted to have another look at it. So Henry Wallich indicated that they would probably come down opposing this. But he was not prepared to do so until he got a further look at it.

Secretary Kissinger: But the practical consequence of this is to revalue their gold supply.

Mr. Enders: Precisely.

Secretary Kissinger: Their gold reserves.

Mr. Enders: That’s right. And it would be followed quite closely by a proposal within a year to have an official price of gold—

Secretary Kissinger: It doesn’t make any difference anyway. If they pass gold at the market price, that in effect establishes a new official price.

Mr. Enders: Very close to it—although their—

Secretary Kissinger: But if they ask what they’re doing—let me just say economics is not my forte. But my understanding of this proposal would be that they—by opening it up to other countries, they’re in effect putting gold back into the system at a higher price.

Mr. Enders: Correct.

Secretary Kissinger: Now, that’s what we have consistently opposed.

Mr. Enders: Yes, we have. You have convertibility if they—

Secretary Kissinger: Yes.

Mr. Enders: Both parties have to agree to this. But it slides towards and would result, within two or three years, in putting gold back into the centerpiece of the system—one. Two—at a much higher price. Three—at a price that could be determined by a few central bankers in deals among themselves.

So, in effect, I think what you’ve got here is you’ve got a small group of bankers getting together to obtain a money printing machine for themselves. They would determine the value of their reserves in a very small group.

There are two things wrong with this.

Secretary Kissinger: And we would be on the outside.

Mr. Enders: We could join this too, but there are only very few countries in the world that hold large amounts of gold—United States and Continentals being most of them. The LDC’s and most of the other countries—to include Japan—have relatively small amounts of gold. So it would be highly inflationary, on the one hand—and, on the other hand, a very inequitable means of increasing reserves.

Secretary Kissinger: Why did the Germans agree to it?

Mr. Enders: The Germans agreed to it, we’ve been told, on the basis that it would be discussed with the United States—conditional on United States approval.

Secretary Kissinger: They would be penalized for having held dollars.

Mr. Enders: They would be penalized for having held dollars. That probably doesn’t make very much difference to the Germans at the present time, given their very high reserves. However, I think that they may have come around to it on the basis that either we would oppose it—one—or, two, that they would have to pay up and finance the deficits of France and Italy by some means anyway; so why not let them try this proposal first?

The EC is potentially divided on this, however, and if enough pressure is put on them, these differences should reappear.

Secretary Kissinger: Then what’s our policy?

Mr. Enders: The policy we would suggest to you is that, (1), we refuse to go along with this—

Secretary Kissinger: I am just totally allergic to unilateral European decisions that fundamentally affect American interests—taken without consultation of the United States. And my tendency is to smash any attempt in which they do it until they learn that they can’t do it without talking to us.

That would be my basic instinct, apart from the merits of the issue.

Mr. Enders: Well, it seems to me there are two things here. One is that we can’t let them get away with this proposal because it’s for the reasons you stated. Also, it’s bad economic policy and it’s against our fundamental interests.

Secretary Kissinger: There’s also a fundamental change of our policy that we pursued over recent years—or am I wrong there?

Mr. Enders: Yes.

Secondly, Mr. Secretary, it does present an opportunity though—and we should try to negotiate for this—to move towards a demonetization of gold, to begin to get gold moving out of the system.

Secretary Kissinger: But how do you do that?

Mr. Enders: Well, there are several ways. One way is we could say to them that they would accept this kind of arrangement, provided that the gold were channelled out through an international agency—either in the IMF or a special pool—and sold into the market, so there would be gradual increases.

Secretary Kissinger: But the French would never go for this.

Mr. Enders: We can have a counter-proposal. There’s a further proposal—and that is that the IMF begin selling its gold—which is now 7 billion—to the world market, and we should try to negotiate that. That would begin the demonetization of gold.

Secretary Kissinger: Why are we so eager to get gold out of the system?

Mr. Enders: We were eager to get it out of the system—get started—because it’s a typical balancing of either forward or back. If this proposal goes back, it will go back into the centerpiece system.

Secretary Kissinger: But why is it against our interests? I understand the argument that it’s against our interest that the Europeans take a unilateral decision contrary to our policy. Why is it against our interest to have gold in the system?

Mr. Enders: It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically. Although we have still some substantial gold holdings—about 11 billion—a larger part of the official gold in the world is concentrated in Western Europe. This gives them the dominant position in world reserves and the dominant means of creating reserves. We’ve been trying to get away from that into a system in which we can control—

Secretary Kissinger: But that’s a balance of payments problem.

Mr. Enders: Yes, but it’s a question of who has the most leverage internationally. If they have the reserve-creating instrument, by having the largest amount of gold and the ability to change its price periodically, they have a position relative to ours of considerable power. For a long time we had a position relative to theirs of considerable power because we could change gold almost at will. This is no longer possible—no longer acceptable. Therefore, we have gone to special drawing rights, which is also equitable and could take account of some of the LDC interests and which spreads the power away from Europe. And it’s more rational in—

Secretary Kissinger: “More rational” being defined as being more in our interests or what?

Mr. Enders: More rational in the sense of more responsive to worldwide needs—but also more in our interest by letting—

Secretary Kissinger: Would it shock you? I’ve forgotten how SDR’s are generated. By agreement?

Mr. Enders: By agreement.

Secretary Kissinger: There’s no automatic way?

Mr. Enders: There’s no automatic way.

Mr. Lord: Maybe some of the Europeans—but the LDC’s are on our side and would not support them.

Mr. Enders: I don’t think anybody would support them.

Secretary Kissinger: But could they do it anyway?

Mr. Enders: Yes. But in order for them to do it anyway, they would have to be in violation of important articles of the IMF. So this would not be a total departure. (Laughter.) But there would be reluctance on the part of some Europeans to do this. We could also make it less interesting for them by beginning to sell our own gold in the market, and this would put pressure on them.

Mr. Maw: Why wouldn’t that fit if we start to sell our own gold at a price?

Secretary Kissinger: But how the hell could this happen without our knowing about it ahead of time?

Mr. Hartman: We’ve had consultations on it ahead of time. Several of them have come to ask us to express our views. And I think the reason they’re coming now to ask about it is because they know we have a generally negative view.

Mr. Enders: So I think we should try to break it, I think, as a first position—unless they’re willing to assign some form of demonetizing arrangement.

Secretary Kissinger: But, first of all, that’s impossible for the French.

Mr. Enders: Well, it’s impossible for the French under the Pompidou Government. Would it be necessarily under a future French Government? We should test that. 

Secretary Kissinger: If they have gold to settle current accounts, we’ll be faced, sooner or later, with the same proposition again. Then others will be asked to join this settlement thing.

Isn’t this what they’re doing?

Mr. Enders: It seems to me, Mr. Secretary, that we should try—not rule out, a priori, a demonetizing scenario, because we can both gain by this. That liberates gold at a higher price. We have gold, and some of the Europeans have gold. Our interests join theirs. This would be helpful; and it would also, on the other hand, gradually remove this dominant position that the Europeans have had in economic terms.

Secretary Kissinger: Who’s with us on demonetizing gold?

Mr. Enders: I think we could get the Germans with us on demonetizing gold, the Dutch and the British, over a very long period of time.

Secretary Kissinger: How about the Japs?

Mr. Enders: Yes. The Arabs have shown no great interest in gold.

Secretary Kissinger: We could stick them with a lot of gold.

Mr. Sisco: Yes. (Laughter.)

Mr. Sonnenfeldt: At those high-dollar prices. I don’t know why they’d want to take it.

Secretary Kissinger: For the bathroom fixtures in the Guest House in Rio. (Laughter.)

Mr. McCloskey: That’d never work.

Secretary Kissinger: That’d never work. Why it could never get the bathtub filled—it probably takes two weeks to fill it.

Mr. Sisco: Three years ago, when Jean 3 was in one of those large bathtubs, two of those guys with speakers at that time walked right on through. She wasn’t quite used to it. (Laughter.)

Secretary Kissinger: They don’t have guards with speakers in that house.

Mr. Sisco: Well, they did in ’71.

Mr. Brown: Usually they’ve been fixed in other directions.

Mr. Sisco: Sure. (Laughter.)

Secretary Kissinger: O.K. My instinct is to oppose it. What’s your view, Art?

Mr. Hartman: Yes. I think for the present time, in terms of the kind of system that we’re going for, it would be very hard to defend in terms of how.

Secretary Kissinger: Ken?

Mr. Rush: Well, I think probably I do. The question is: Suppose they go ahead on their own anyway. What then?

Secretary Kissinger: We’ll bust them.

Mr. Enders: I think we should look very hard then, Ken, at very substantial sales of gold—U.S. gold on the market—to raid the gold market once and for all.

Mr. Rush: I’m not sure we could do it.

Secretary Kissinger: If they go ahead on their own against our position on something that we consider central to our interests, we’ve got to show them that that they can’t get away with it. Hopefully, we should have the right position. But we just cannot let them get away with these unilateral steps all the time.

Mr. Lord: Does the Treasury agree with us on this? I mean, if this guy comes when the Secretary is out of the country—

Secretary Kissinger: Who’s coming?

Mr. Enders: The Dutch Finance Minister—Duisenberg—and Zijlstra. I think it will take about two weeks to work through a hard position on this. The Treasury will want our leadership on the hardness of it. They will accept our leadership on this. It will take, I would think, some time to talk it through or talk it around Arthur Burns, and we’ll have to see what his reaction is.

Mr. Rush: We have about 45 billion dollars at the present value—

Mr. Enders: That’s correct.

Mr. Rush: And there’s about 100 billion dollars of gold.

Mr. Enders: That’s correct. And the annual turnover in the gold market is about 120 billion.

Secretary Kissinger: The gold market is generally in cahoots with Arthur Burns.

Mr. Enders: Yes. That’s been my experience. So I think we’ve got to bring Arthur around.

Secretary Kissinger: Arthur is a reasonable man. Let me talk to him. It takes him a maddening long time to make a point, but he’s a reasonable man.

Mr. Enders: He hasn’t had a chance to look at the proposal yet.

Secretary Kissinger: I’ll talk to him before I leave. 4

Mr. Enders: Good.

Mr. Boeker: It seems to me that gold sales is perhaps Stage 2 in a strategy that might break up the European move—that Stage 1 should be formulating a counterproposal U.S. design to isolate those who are opposing it the hardest—the French and the Italians. That would attract considerable support. It would appeal to the Japanese and others. I think this could fairly easily be done. And that, in itself, should put considerable pressure on the EEC for a tentative consensus.

Mr. Hartman: It isn’t a confrontation. That is, it seems to me we can discuss the various aspects of this thing.

Secretary Kissinger: Oh, no. We should discuss it—obviously. But I don’t like the proposition of their doing something and then inviting other countries to join them.

Mr. Hartman: I agree. That’s not what they’ve done.

Mr. Sonnenfeldt: Can we get them to come after the French election 5 so we don’t get kicked in the head?

Mr. Rush: I would think so.

Secretary Kissinger: I would think it would be a lot better to discuss it after the French election. Also, it would give us a better chance. Why don’t you tell Simonthis?

Mr. Enders: Good.

Secretary Kissinger: Let them come after the French election.

Mr. Enders: Good. I will be back—I can talk to Simon. I guess Shultz will be out then. 6

Mr. Sonnenfeldt: He’ll be out the 4th of May.

Mr. Enders: Yes. Meanwhile, we’ll go ahead and develop a position on the basis of this discussion.

Secretary Kissinger: Yes.

Mr. Enders: Good.

Secretary Kissinger: I agree we shouldn’t get a consultation—as long as we’re talking Treasury, I keep getting pressed for Treasury chair-manship of a policy committee. You’re opposed to that? 7

[Omitted here is discussion unrelated to international monetary policy.]

1 Source: National Archives, RG 59, Transcripts of Secretary of State Kissinger’s Staff Meetings, 1973–1977, Entry 5177, Box 3, Secretary’s Staff Meeting, April 25, 1974. Secret. According to an attached list, the following people attended the meeting: Kissinger, Rush, Sisco, Ingersoll,Hartman, Maw, Ambassador at Large Robert Mc-Closkey, Assistant Secretary of State for African Affairs Donald Easum, Hyland, Atherton, Lord, Policy Planning Staff member Paul Boeker,Eagleburger, Springsteen, Special Assistant to the Secretary of State for Press Relations Robert Anderson, Enders, Assistant Secretary of State for Inter-American Affairs Jack Kubisch, andSonnenfeldt.

2 Meeting in Zeist, the Netherlands, on April 22 and 23, EC Finance Ministers and central bankers agreed on a common position on gold, which they authorized the Dutch Minister of Finance, Willem Frederik Duisenberg, and the President of the Dutch central bank, Jelle Zijlstra, to discuss with Treasury and Federal Reserve Board officials in Washington. (Telegram 2042 from The Hague, April 24, and telegram 2457 from USEC Brussels, April 25; ibid., Central Foreign Policy Files)

3 Jean Sisco was Joseph Sisco’s wife.

4 From April 28 to 29, Kissinger was in Geneva for talks with Soviet Foreign Minister Andrei Gromyko.

5 France held a Presidential election on May 19.

6 George Shultz’s tenure as Secretary of the Treasury ended on May 8, when he was replaced byWilliam Simon.

7 The summary attached to the front page of the minutes notes that “The Secretary is inclined to oppose the proposal on grounds of non consultation by the Europeans as well as on the proposal’s merits. The Secretary agreed to talk to Arthur Burns in this sense.”

(h/t Goudstudieforum)

Gold And The Monetary System: Potential US–EU Conflict (1974)

For anyone who is still in doubt if the US have been suppressing the price of gold in the past decades, this article might change your mind. I present a memo written in 1974 by Sidney Weintraub, Deputy Assistant Secretary of State for International Finance and Development, to Paul Volcker, Under Secretary of the Treasury for Monetary Affairs. It was originally published in Document 61, Foreign relations Of The United States, 1973–1976, Foreign Economic Policy, Volume XXXI found at the Office of the Historian website.

The memo addresses the problem of the US’ interest of banning gold from monetary system and capping the free market price (in order to push the USD as the world reserve currency – although the Americans among each other pretended they preferred the SDR for this role), while some European countries wanted to remonetize gold and revalue it market to market.

What I find fascinating is that there is anti-gold propaganda within this internal memo of the Americans. To me this illustrates how politicians operate; a proper lie must be embraced completely and the more often it’s repeated, the stronger it holds.

A long well worth read. Apart from the bold accents by me, this is an exact copy of the original.


61. Note From the Deputy Assistant Secretary of State for International Finance and Development ( Weintraub ) to the Under Secretary of the Treasury for Monetary Affairs ( Volcker )(1)

Washington, March 6, 1974.

Paul:

This is a paper which we prepared for Secretary Kissinger giving some of our views on the gold question. We discussed it at a meeting for his background, (2) without attempting to reach any conclusions. We would appreciate any reactions you have to the paper. The Secretary said he would most appreciate meeting with you and anybody else you wish to designate in about two weeks to talk out the issue and what might be done, using a revised options paper for this purpose.
One option that is not included in the paper, but which should be for various reasons, is how to deal with thwarting the Europeans if they were to go ahead without us in a way which we felt was inimical to our interests.

Sid


Attachment (3)

GOLD AND THE MONETARY SYSTEM: POTENTIAL U.S.–EC CONFLICT

Summary


The Foreign Policy Context


Within the next few months the long-standing U.S.-European dispute on the role of gold will probably be propelled from the back room to the main stage of our relationship. The stakes in this dispute are high, involving the long-run stability of the international monetary system and prospects for increased dissension within Europe and between Europe and the U.S.

The Problem


U.S. objectives for the world monetary system—a durable, stable system, with the SDR as a strong reserve asset at its center—are incompatible with a continued important role for gold as a reserve asset. These objectives are in apparent conflict with the EC desire to facilitate the use of gold in international transactions. There is a belief among certain Europeans that a higher price of gold for settlement purposes would facilitate financing of oil imports, although the argument depends on assumptions regarding producers’ attitude towards gold as an asset which may not be valid. Adamant U.S. insistence on maintaining the present fixed official price is likely to create international conflict with the EC, and may also lead to unilateral EC arrangements which would defeat our aims for the system.

The Conclusion


The U.S. objectives are important, and should not be given up, but they may be achievable without rigid adherence to the present fixed official gold price. Compromise proposals exist which would make adequate progress towards our objectives for the system while meeting principal EC needs. Since the EC is likely to set forth its proposals before the C–20 winds up its existence this summer, a U.S. position will be needed within the next several months. Tactically, it may also be preferable to discuss possible compromise proposals with one or more EC members before we are confronted with an EC position.

Pressures are building within the EC for settlement of intra-EC balances with gold valued at the market price (or some other price substantially higher than the current official price of $42.20 per troy ounce). Unilateral EC action in this direction would run directly counter to the stated United States position on international gold policy. The EC reportedly will try to avoid a direct conflict through pressing for rapid resolution of the problem within the framework of the multilateral monetary reform negotiations. Therefore, the U.S. position needs to be re-examined in light of present circumstances. This memorandum examines the foundations of this potential U.S.–EC conflict on the gold question, and considers which negotiating positions among various options would best serve U.S. interests.

Gold in the International Monetary System — The Issues


Agreementhas been reached in the C–20 monetary reform negotiations that the SDR should take the place once held by gold at the center of the world monetary system. However, there is still substantial disagreement on what the exact future role of gold should be—whether it eventually ought to be phased out of the system (the U.S. view) or retain an important function as a reserve asset and means of international settlement (the position of some European countries).

U.S. interests in this question are in the establishment of stable, durable world monetary system, based on a strong SDR, which would avoid future monetary crises and conflict, such as those that have plagued the Bretton Woods system in recent years. In our view a system which included gold as a major reserve asset alongside SDRs would be inherently unstable, just as bimetallism was in the U.S.

This inherent instability stems from the fact that gold is traded as a commodity on a private market at a variable price subject to the vagaries of world production (largely Soviet and South African) and sales, and of demands by hoarders and speculators. With a fluctuating, and generally rising, free market for gold, a permanently fixed official price is simply not credible, and becomes less so as the gap between private and official prices widens. If, however, the price at which official transactions in gold are made were to be periodically adjusted to the market price, then an unstable situation would rise as between gold and SDRs.

At the present time, the value of the SDR is fixed in terms of gold. However, it has been generally agreed in the C–20 that the new SDR should not be related to gold, but rather to a basket of currencies. In this case, a changing price at which official gold transactions take place would create capital gains (or losses) for gold holders as compared to SDR holders, stimulate speculative central bank demand for gold, and weaken the SDR. (4)

It is the U.S. concern that any substantial increase now in the price at which official gold transactions are made would strengthen the position of gold in the system, and cripple the SDR. If international liquidity were injected via gold, there would be little likelihood of new SDR allocations.(5) There also would be reduced incentive to sell gold on the private market even after an official price increase since central banks would cling to their gold in expectation of further official gold price increases. In addition, too large an increase in world liquidity might add to inflationary dangers. Finally, the distribution of the increase in world reserves would be highly inequitable, with eight wealthy countries getting three-fourths, while the developing countries would get less than 10 percent (see attached table). Producing countries (the USSR and South Africa) would benefit from the implicit floor put under the free-market gold price.

To encourage and facilitate the eventual demonetization of gold, our position is to keep the present gold price, maintain the present Bretton Woods agreement ban against official gold purchases at above the official price (6) and encourage the gradual disposition of monetary gold through sales in the private market. An alternative route to demonetization could involve a substitution of SDRs for gold with the IMF, with the latter selling the gold gradually on the private market, and allocating the profits on such sales either to the original gold holders, or by other agreement.

European views on the role of gold in the world monetary system vary considerably. The British and Germans, on one hand, generally agree in principle to the desirability of phasing gold out of the system. On the other end of the spectrum, the French have been the main proponents of a continued important role for gold in the system.

Support for a continued role for gold in the system is based in large part on the belief that “paper gold”—the SDR—does not command sufficient confidence and acceptability to replace gold completely in the system. There is, in fact, still a considerable emotional attachment to gold as a monetary asset, and a basic distrust of bank or paper money not having intrinsic value. On the other hand, most European officials recognize the basic problems involved in a combined SDR–gold reserve asset system. Belgian Finance Minister De Clerq, (7) for example, speaking at the IMF annual meetings in September stated:
Any redefinition of the role of gold must be based on the principle stated above: that SDR must become the center of the system and that there can be no question of introducing a new form of gold– paper and gold–metal bimetallism, in which the SDR and gold would be in competition.

Despite these differencesamong member countries, the EC position has begun to coalesce around their desire to free gold for use in settling intra-EC debts—a problem raised by the present “immobilization” of gold which has resulted from the wide disparity between the official and free market gold prices. Monetary authorities have been unwilling to use their gold holdings to settle official debts at a price far below the free market price. This has been a problem particularly for the EC, whose rules under the “snake” arrangement require that final settlement of debts arising out of intervention to support intra-EC exchange rates must be made in reserve assets in proportion to the composition of reserve holdings. (This “immobility” is, of course, an example of the difficulties inherent in a system in which gold retains a reserve currency role alongside another reserve asset.)

To some extent, the immobility of gold reserves as a means of payment is a result of self-imposed restraints. Countries are free to use reserve currencies and SDRs to settle debts. Moreover, countries are now free to obtain additional currencies (and realize substantial capital gains) through sales of gold to the private market. The EC problem is a result of their particular rules for settlement, which reflect the interest of creditor countries in receiving gold and applying discipline to deficit countries. It is also a result of their reluctance, so far, to sell gold on the private market. The reasons for this reluctance are probably related to the unsettled status of gold in the system, the basic attraction of gold, the expectation of future price increases, and the “thinness” of the private gold market.

Nor is it clear that European countries would give up gold even after a price increase, since one increase may lead to an expectation of further increases. Even under the Bretton Woods system, the Europeans did not often give up gold to settle deficits.
The “immobility” problem is of particular concern to the French and Italians, who have substantial outstanding EC debts and especially high proportions of their reserve assets in gold. Recently, with the private price continuing to rise, and final decisions on monetary reform apparently further off than previously thought, otherEC countries are coming around to the French-Italian view that this problem must be resolved. However,the Germans and British, in particular, are concerned that the solution be accomplished in a way which would not antagonize the United States. They wish to settle this issue in the C–20 multilateral context, if possible. Failing agreement there, the EC might feel free to unilaterally make some regional arrangement.

Various European proposals have been made to deal with the gold issue. The basic French proposal in the C–20 was simply to increase the official price of gold although this may have been made with tongue in cheek and received no support other than from South Africa. Other European proposals, and the stated French fallback position, have been variations on the idea that the official price of gold be abolished, leaving the SDR as the sole numeraire of the system, and that monetary authorities be free to deal at a negotiated price, or at a price related (perhaps at a discount) to the private market price. In the version reportedly recently proposed to the EC by the UK, such an arrangement would be combined with coordinated central bank sales to the private market. Another possibility reportedly being considered is to have the Italians, who have the greatest need, sell gold on the private market by themselves to avoid unduly depressing the market. The French version of this proposal would allow central banks either to buy or sell gold on the private market (obviously in order to avoid depressing the private market and to keep or augment the role of gold in the system).

In lieu of a general agreement permitting official transactions in gold at a price higher than the official price, some EC countries have proposed special arrangements to deal only with the intra-EC problem. Such proposals have heretofore been shelved by a combination of technical problems, and an unwillingness to take unilateral action of doubtful legality and offensive to the United States. Most recently, the EC Commission has proposed a system which would in effect set a higher provisional price, to be corrected when agreement is reached on a new price for gold.

Both the European C–20 proposal and the intra-EC proposals would fall short of a generalized increase in the official price of gold. However, each would amount to a generalized de facto, if not de jure, (8) official price increase, and strengthen the role of gold in the system. A system of sales, but no purchases, to the private market would mitigate this tendency.

The recent oil price increases have added a new dimension to the gold issue, and in the view of some European officials, relegated the intra-EC problem to a secondary position. Although mobilization of gold for intra-EC settlement would help in the financing of imbalances among EC countries, it would not, of itself, provide resources for the financing of the anticipated deficit with the oil producers. For this purpose, it would be useful if the oil producers would invest some of their excess revenues in gold purchases from deficit EC countries at close to a market price. This would be an attractive proposal for European countries, and for the U.S., in that it would not involve future interest burdens and would avoid immediate problems arising from increased Arab ownership of European and American industry. (The Arabs could both sell the gold and use the proceeds for direct investment, so that the industry ownership problem would not be completely solved.) From the Arab point of view such an asset would have the advantages of being protected from exchange-rate changes and inflation, and subject to absolute national control. Some European officials are thinking in terms of clearing the way for such transactions (which would now be forbidden by IMF rules). It has been argued that Arabs would only be interested in buying gold at near the market price if they could obtain assurances of some sort of floor price . We have received word that such a proposal is being floated within the German Government.

From the standpoint of international liquidity needs, a reasonable case can now be made for a generalized gold price increase, since the probable payments patterns stemming from the higher oil prices (overall deficits for Europe and Japan) may lead to a reduction in world reserve liquidity. However, from the U.S. viewpoint (as well as many countries without large gold holdings) substantial new SDR allocations would be preferable when new liquidity creation is needed.


Options for U.S. Negotiating Policy on Gold


Since the U.S. is likely to be presented with pressure to acquiesce in some arrangements to meet the European objectives sketched out above, it is important that we reconsider what our own negotiating posture should be.

At either end of the spectrum of possible negotiating positions are the following:

Option 1:Continue adamant opposition to any proposal involving an increase in price at which monetary authorities carry out transactions in gold. Advantages: If successful, we will keep gold from regaining strength as an international reserve asset, maintain the strength of the SDR, and probably eventually obtain the demonetization of gold and a more rational, stable international monetary system. Disadvantages: The EC may then go ahead with its own arrangements which would amount to a virtual de facto increase in the official gold price, with undesirable effects on the world monetary system and lead to increased U.S.–EC conflict and bitterness. 

Option 2: Acquiesce in a European-type plan involving abolition of the official price, permitting settlement of official balances at a negotiated price, with a “sales only” rule for transactions in the private market. Advantages: This would be somewhat preferable to a plan involving an outright increase in the official price, and would maintain an avenue for demonetization through one-way sales to the private market. The SDR would become the sole numeraire of the system. In the short run, tensions with Europe over monetary issues would be reduced. The increase in de facto liquidity might be helpful in present circumstances, and gold sales to the Arabs might help finance western balance of payments deficits. Disadvantages: This has most of the disadvantages discussed above of (and may in fact lead to) an outright increase in the official price of gold. We may thereby lose the opportunity to build a stable and rational world monetary system, with adverse long-term consequences involving monetary instability and conflict. The disadvantages to each of these options are such that a search for additional options is justified. Intermediate options do exist which have the potential of meeting EC objectives of mobilizing gold in the short run, while maintaining the desirable trend towards gold demonetization.

Option 3: Complete short-term demonetization of gold through an IMF substitution facility. Countries could give up their gold holdings to the IMF in exchange for SDRs. The gold could then be sold gradually, over time, by the IMF to the private market. Profits from the gold sales could be distributed in part to the original holders of the gold, allowing them to realize at least part of the capital gains, while part of the profits could be utilized for other purposes, such as aid to LDCs. Advantages: This would achieve our goal of demonetization and relieve the problem of gold immobility, since the SDRs received in exchange could be used for settlement with no fear of foregoing capital gains. (9) Disadvantages: This might be a more rapid demonetization than several countries would accept. There would be no benefit from the viewpoint of financing oil imports with gold sales to Arabs (although it is not necessarily incompatible with such an arrangement). The only important disadvantage of option 3 would be its likely unacceptability to countries who would prefer to cling to gold for traditional reasons. But it would show our sensitivity to the immobility problem, and be a good initial bargaining position. We might, in the end, have to fall back on a fourth option:

Option 4:Accept a European-type arrangement in which the official gold price was abolished, and official transactions at a market-related price were permitted, but with agreement that a certain portion of gold be given up to an IMF substitution facility, and that gradual further substitution of SDRs for gold would take place over a longer period of time. One possible rule among many could be that countries should keep the nominal value of their gold holdings fixed at present levels with any increases in value coming from price increases offset by substitutions. Another variant on this proposal would have countries agree to pre-determined, gradual direct sales to the private market. Again, profits could be shared between gold holders and others. Advantages: This would provide adequate momentum towards gold demonetization while providing relief to gold immobility problems. It seems somewhat more compatible with gold sales to the Arabs, if this is desirable. It may be negotiable. Disadvantages: It is somewhat less desirable for the medium-term workings of the system than option 3.

Conclusions

The U.S. objectives in reducing the role of gold in the world monetary system are worthwhile, but they may be achievable without insisting on adherence to the present fixed official price of gold. Moreover, such a stand might unnecessarily create international friction. Compromise proposals exist which have good prospects for achieving our objectives for the system while meeting the principal EC requirements. We should be prepared to use these compromises in the near future.

Tactics

Negotiation in a broader IMF forum is likely to be a very divisive and contentious process unless based on a prior U.S.-European understanding. The Europeans, however, are not united, although working on a common substantive position. We could wait for this position to develop further or proceed now with bilateral contacts with one or more EC members. Our waiting to be confronted with the EC position puts the French in a strong position through their veto over any departure from the agreed EC line. The gold issue would be an appropriate one to pursue in bilateral contacts with the Germans and British, both of whom could probably agree to options involving more modest flex in our traditional position than the French or Italians want. But there is, of course, no guarantee that the British and/or Germans could carry the resulting compromise in Brussels. Nevertheless, working out a compromise with some of the major Europeans could reduce the prospects for a U.S.–EC standoff, while leaving a substantial intra-EC disagreement to be bridged by the Europeans.

(1) Source: National Archives, RG 56, Office of the Under Secretary of the Treasury, Files of Under Secretary Volcker, 1969–1974, Accession 56–79–15, Box 1, Gold—8/15/71–2/9/72. No classification marking. A stamped notation on the note reads: “Noted by Mr. Volcker.” Another notation, dated March 8, indicates that copies were sent to Bennett and Cross.
(2) The paper was discussed with Kissinger at a Department of State staff meeting on March 6. The summary attached to the front page of the meeting’s minutes notes that Kissinger decided: “That a small State–Treasury group, to include Volcker be assembled to refine the choices in theEB paper and report back in two weeks. The revised paper should include the options of possible unilateral EC action vis-à-vis gold prices and in relation to oil import costs as well as US responses to abort or penalize such action (EB action).” (Ibid., RG 59, Transcripts of Secretary of StateKissinger’s Staff Meetings, 1973–1977, Entry 5177, Box 2, Secretary’s Staff Meeting, March 6, 1974)
(3) Confidential.
(4) If a fixed SDR–gold price were to be maintained, and periodic free-market related adjustments in the official prices of gold were to be made, then the currency value of the world’s primary reserve assets would be tied to a price set on a volatile, unstable market. [Footnote is in the original.]
(5) As can be seen from the table at the end of this memorandum, official gold reserves are now valued at $43 billion at the $42.20 per ounce price. The free market price is almost four times the official price. [Footnote is in the original. The table is attached but not printed.]
(6) The French have stated that they do not consider the IMF Articles as binding under present circumstances (the U.S. having suspended its convertibility obligation). We consider the Articles still binding. Other countries have not yet taken a position. [Footnote is in the original.]
(7) Willy de Clercq was the Belgian Minister of Finance and Deputy Prime Minister.
(8) Under the present IMF Articles of Agreement, a generalized gold price increase (uniform par value change) would require approval of countries representing 85% of the IMF weighted voting power. Thus we have the power to block any legal change. [Footnote is in the original.]
(9) The additional SDRs might be quite acceptable since, for a time at least, they would be “backed” by IMF gold holdings. Some gold “backing” could be maintained until prejudices against paper money waned—in a manner similar to the evolution of domestic monies. [Footnote is in the original.]

1974 Meeting European Ministers Of Finance On Gold

This one I had to share, a report on a meeting held by all European Ministers of Finance about gold, written to the American Ministry Of Foreign Affairs in 1974:

FOLLOWING IS TEXT OF STATEMENT MADE TO C-20 DEPUTIES’ MEETING ON MAY 7 BY DUTCH TREASURER-GENERAL OORT RE ZEIST MEETING OF EC FINANCE MINISTERS APRIL 22 AND 23 ON GOLD:

I HAVE BEEN ASKED TO REPORT ON AN INFORMAL DIS- CUSSION – AND I EMPHASIZE THE WORD INFORMAL, REPEAT INFORMAL DISCUSSION – WHICH THE MINISTERS OF FINANCE OF THE EEC HAVE HELD ON APRIL 22 AND 23 AT ZEIST ON THE SUBJECT OF GOLD.

BEFORE I REPORT TO YOU ON THE OUTCOME OF THE DISCUSSION I WOULD LIKE TO MAKE CLEAR THAT IT HAS RESULTED NEITHER IN A FORMAL DECISION ON THE PART OF THE EEC COUNTRIES NOR EVEN IN A FIRM PROPOSAL.

MADE IN A WIDER INTERNATIONAL CONTEXT, WHAT CAME OUT OF ZEIST WAS A CONSENSUS ON CERTAIN SUBSTANTIVE PROPOSITIONS THAT ARE TO BE FURTHER EXPLORED BEFORE THEY ARE SUBMITTED TO A NEXT MEETING OF THE COUNCIL OF MINISTERS OF THE EEC. IF AT A LATER STAGE THE COUNCIL REACHES AGREEMENT ON A CERTAIN POSITION, THE FURTHER PROCEDURE COULD BE THAT THE EUROPEAN COMMUNITY FORMULATES A FORMAL PROPOSAL ON HOW TO DEAL WITH THE PROBLEM OF GOLD IN THE PERIOD BEFORE THE REFORM OF THE INTERNATIONAL MONETARY SYSTEM.

IN ZEIST, MINISTERS HAVE AGREED ON TWO GENERAL PROPOSITIONS. FIRST, THEY HAVE RE-ASSERTED THAT THE SDR SHOULD BECOME THE PRINCIPAL RESERVE ASSET IN THE FUTURE SYSTEM, AND THAT ARRANGEMENTS FOR GOLD IN THE INTERIM PERIOD SHOULD NOT BE INCONSISTENT WITH THAT GOAL. SECOND, THEY HAVE AGREED THAT SUCH INTERIM ARRANGEMENTS SHOULD ENABLE MONETARY AUTHORITIES TO EFFECTIVELY UTILIZE THE MONETARY GOLD STOCKS AS INSTRUMENTS OF INTERNATIONAL SETTLEMENT.

THERE WAS A CONSENSUS AMONG MINISTERS THAT AN INCREASE OF THE OFFICIAL GOLD PRICE, ALTHOUGH IT MIGHT SERVE THE SECOND OBJECTIVE, WOULD BE INCONSISTENT WITH THE FIRST. IN ORDER TO MOBILIZE MONETARY GOLD AS AN INTERNATIONAL RESERVE ASSET, THEY HAVE AGREED THAT:

1. MONETARY AUTHORITIES SHOULD BE PERMITTED TO BUY AND TO SELL GOLD BOTH AMONG THEMSELVES, AT A MARKED-RELATED PRICE, AND ON THE FREE MARKET. THE MONETARY AUTHORITIES WOULD HAVE COMPLETE FREEDOM TO BUY OR TO SELL GOLD, AND WOULD HAVE NO OBLIGATION WHATEVER TO ENTER INTO ANY PARTICULAR TRANSACTION.

2. CERTAIN DELEGATIONS ARE OF THE OPINION THAT GOLD TRANSACTIONS WITH THE FREE MARKET SHOULD NOT, OVER A CERTAIN PERIOD OF TIME, LEAD TO A NET INCREASE OF THE COMBINED OFFICIAL GOLD STOCKS.

3. IN ORDER TO APPLY THESE PRINCIPLES, VARIOUS PRACTICAL SOLUTIONS CAN BE ENVISAGED. TWO WERE MENTIONED IN PARTICULAR. ONE IS THAT MONETARY AUTHORITIES PERIODICALLY FIX A MINIMUM AND A MAXIMUM PRICE BELOW OR ABOVE WHICH THEY WOULD NOT SELL OR BUY ON THE MARKET. THE OTHER CONSISTS IN CREATING A BUFFER STOCK TO BE MANAGED BY AN AGENT WHO WOULD BE CHARGED BY THE MONETARY AUTHORITIES TO INTERVENE ON THE MARKET SUCH AS TO ENSURE ORDERLY CONDITIONS ON THE FREE MARKET FOR GOLD.

4. THESE ARRANGEMENTS WOULD BE ADOPTED PROVISIONALLY AND WOULD BE REVIEWED IN THE LIGHT OF EXPERIENCE.

IN CONCLUDING, MR. CHAIRMAN, I WOULD LIKE TO EMPHASIZE ONCE MORE THAT WHAT I HAVE JUST SAID IS NOT REPEAT NOT A PROPOSAL BY THE EEC, BUT A REPORT ON AN INTERIM-STAGE IN THE DISCUSSIONS. MINISTERS HAVE PER- MITTED US TO MAKE THIS REPORT IN ORDER TO INFORM YOU AS EARLY AS POSSIBLE OF THE DIRECTION IN WHICH A CONSENSUS AMONG THE EEC COUNTRIES IS EMERGING. THEY EXPECT DEPUTIES TO INTERPRET THE STATUS OF THE INFORMATION IN THE LIGHT OF WHAT I HAVE JUST SAID.