Foreign Relations of the United States, 1950, Central and Eastern Europe; The Soviet Union, Volume IV

861.13/7–1250

Memorandum by the Director of the Office of International Trade Policy (Brown) to the Assistant Secretary of State for Economic Affairs (Thorp)

top secret

[Washington,] July 12, 1950.

The following comments are offered on an OFD paper, prepared for S/P,¹ which ITP has been permitted to examine.

Background

The USSR is a major producer of new gold; gold remains a generally accepted standard of value and can be exchanged for most foreign currencies, even if these currencies in turn are not readily convertible into gold. Under current conditions, therefore, new gold production sold either to national banks or to private traders is a source of some current and of even greater potential purchasing power for the Soviet Union. So long as gold is freely purchased in western countries, it is clear that the magnitude of Soviet purchasing power abroad and the countries in which it is utilized cannot be controlled. The U.S. Treasury policy of purchasing all monetary gold at a fixed price is of course an important factor in maintaining the universal salability of gold. Third countries can resell Soviet gold to the United States at any time in return for dollars, which are urgently needed by most countries to finance their current deficits on trade or invisibles account. Curtailment of the Soviet Union’s gold operations has been suggested as necessary to western security against the Soviet economic or political aggression that may be financed by such operations and as an economic warfare measure designed to weaken the Soviet Union’s position on international payments account.

The OFD paper under reference examines a proposal along these lines, namely, that the U.S. support a resolution in the International Monetary Fund, under which the Fund would issue identification certificates and maintain a register for the gold holdings of member countries (and possibly certain non-members). This system would be combined with an arrangement for certifying the newly mined gold of member gold producing countries (i.e. excluding gold production of the USSR). The United States might also spear-head the adoption of such a proposal in the IMF by altering the U.S. gold purchase policy: i.e. limiting U.S. “free” purchases at a fixed price to identifiable and certified gold. As a result, official gold transactions of member countries soon would be limited to trading in registered or certified gold and USSR new gold production would be barred from the world gold market, in so far as intergovernmental transactions are concerned.

The OFD paper does not recommend that this proposal be adopted since, as the paper explains:

(1) It would not be an effective means of restricting Soviet gold operations. Available evidence indicates that the Soviet Union sells relatively little gold through official channels, while its sales to private hoarders on premium gold markets may be as much as 10 times the annual volume of its official gold sales.

(2) It would not eliminate this private market for Soviet gold, although non-certified gold might be expected to move at a lower price than certified gold. Private hoarders purchase Soviet gold to evade taxes or secure a long-term hedge against inflation and are not primarily interested in the usual function of gold as a current medium of exchange.

(3) It probably would not meet with the approval of all other IMF members.

(4) It would constitute an attempt on the part of the United States to suborn an international organization to a specific U.S. objective in the cold war. Such an action might have serious implications for the future of these international organizations, including their present degree of independent action, their useful functions as supra-national organizations and as a frame work for east-west cooperation in international affairs.

(5) If the United States must encourage its adoption by altering U.S. gold purchasing policy the proposal will involve also a substantial deviation from the principles under which the United States operates a “limited international gold standard”. Although U.S. currency is no longer freely convertible into gold by private individuals, the U.S. policy of (a) purchasing all gold offered at a fixed price and (b) permitting gold to be used in settlement of its foreign balances is intimately related to the maintenance of gold as a limited international standard of value.

The OFD paper notes that since Soviet gold operations cannot be effectively limited by this IMF action alone, supplementary measures logically would be required to restrict Soviet gold sales through private channels. These might include, for IMF member countries, (1) suppression of free gold markets, (2) strengthening foreign exchange and gold control measures and (3) freezing Soviet bloc bank accounts. The OFD paper recognizes that United States advocacy of such measures would constitute a reversal of our present policy, which looks toward the reduction of governmental controls over international trade and finance as rapidly as circumstances permit.

As an alternative, therefore, the OFD paper suggests that unilateral action by the United States might be substituted for IMF action to obtain approximately the same results as the original proposal. Because of the importance of U.S. purchases on the world gold market, a U.S. directive making Soviet gold unacceptable for U.S. purchase would greatly affect the marketability of Soviet gold in official transactions throughout the world. As an alternative to advocacy of tighter financial controls by foreign countries, the OFD paper proposes that the United States strengthen its own economic warfare measures against the Soviet bloc, and especially measures affecting trade.

Discussion

The following comments reflect the views of ITP, based primarily on the security and trade aspects of the problem:

1. IMF Gold Policy

The OFD paper has presented valid arguments against the use of the IMF as a means of blocking Soviet gold operations.

2. Treasury Gold Policy

ITP does not concur, however, that the proposed unilateral U.S. action is a feasible alternative, in as much as this action would have some of the same objectionable features as the proposed IMF action, as noted in Background above, points 1 and 2. Unilateral U.S. action also would affect only official Soviet gold transactions and would leave untouched and uncontrolled the reportedly greater volume of Soviet gold sales to private hoarders.^*

Unilateral U.S. action also would require the United States to alter existing Treasury policy on gold purchases, and the maintenance of the limited international gold standard and these were considered objectionable in the OFD view, as indicated in part 5 above. In this connection, it may be noted that the current proposals, whether for IMF or U.S. Treasury action, are attempts to de-monetize a portion, i.e. the USSR share, of the world’s gold. As a security measure against the USSR, it would not be effective because it is not likely to restrict Soviet unofficial gold transactions. In economic terms, such action is likely to bring about some alteration in the role of gold as a universally acceptable medium of exchange in international payments relations. Some thought should be given also to the fact that any U.S. action in the direction of de-monetization of gold, will have its most adverse effects not on the USSR but on the United States, since it is the latter that holds the world’s largest stocks of monetary gold reserves. It raises the question also as to what effect such action may have on the volume and price of certified gold, with permitted monetary uses. Reportedly, premium prices for gold have dropped considerably; the current proposal may therefore create at this time a reverse price differential, with U.S. official purchases as the ceiling and private sales at a discount. A price differential between certified and noncertified gold holdings, in favor of the former, might dump all the world’s certified gold production on the United States, while countries using gold settlements in trade with partners other than the United States would find it convenient to purchase cheap gold on private markets.

A more sweeping economic warfare measure against the USSR, to which consideration might be given if U.S.-USSR relations deteriorate to “conditions short of war”, is the complete de-monetization of gold. It is possible that U.S. action alone could not achieve a world-wide de-monetization of gold. It is possible that the effects of such action also would seriously impair the stability and efficiency of financial systems throughout the non-Soviet world. Even with many current modifications of the traditional gold basis of international payments, gold is still being used as a long-term standard of value, store of value and medium of exchange.

On the other hand, it has been pointed but that over recent years the United States has been the principal purchaser of the world’s new gold production and the United States now holds the bulk of the world’s monetary gold reserves. It has also been alleged that world trade and payments relations could be conducted satisfactorily without the use of gold. In that case, action by the United States and other friendly governments might effect the complete de-monetization of gold. In the event of emergency, such action might be the only effective way of sterilizing Soviet gold reserves and new gold production. Before such a step is taken, however, there would need to be careful planning of an alternate system of international exchange and payments, e.g. the advisability of using such measures as dollar settlements, regional currency clearing schemes for dollar short countries and exchange rate computations based on the purchasing power of any given currency in terms of dollars or by means of an international price index for a “market basket” of goods.

3. Supplementary U.S. Measures

In the ITP view, the supplementary measures that are proposed by the OFD paper to accompany the proposed alteration of Treasury gold purchase policy are either undesirable in themselves (e.g. U.S. import controls) or are already being developed, in so far as they feasibly can be developed, within a separate context (especially export controls of the United States and OEEC countries).

a. Import Controls. The OFD paper proposes as one such supplementary measure “tighter trade controls including the introduction of import controls.” Both sales of gold and merchandise exports to the United States are methods by which the USSR has more or less free access to whatever dollars or other currencies it requires. Control of U.S. gold purchases without an accompanying regulation of U.S. imports therefore might divert but not limit Soviet access to dollars.

On the other hand, it is clear that (1) new legislation may be needed before U.S. import controls can be established by executive action,^† (2) as a security measure, U.S. import controls would accomplish little because of the relatively small volume of U.S. trade with the USSR and its satellites while (3) raising the question of import controls at this time will stimulate protectionist activity on the part of Congress, in the name of national security. A U.S. import control system, therefore, is likely to have its most adverse effect not on the Soviet bloc but on ERP countries and their current programs for expanding exports to the United States. It should be noted also that the United States could not justify its own imposition of import controls under GATT,^‡ under either balance of payments, security or development exceptions. Thus, on balance, the imposition of U.S. import controls is likely to result in injury to our objectives of European recovery and world trade expansion that is out of all proportion to its efficacy in curtailing Soviet access to free dollars.

b. The OFD paper also notes as possible supplementary measures an “increase of prohibited list items” (i.e. for U.S. export) and “insistence on more cooperation from friendly nations and tighter controls of go between traders in certain countries …² where we have the power to insist on such controls”. Presumably these are suggested as general economic warfare measures, since these are not measures for limiting Soviet financial resources. On the contrary, stricter control of U.S. or western European exports to the Soviet bloc, which may be expected to decrease the volume of western exports to that area, can even bring about an improvement in the Soviet balance of payments position. Thus, if Soviet exports are not decreased, the Soviet Union will acquire larger net balances of dollars of foreign currency credits than at present.

Security trade control programs are, of course, already in effect and in process of extension by the United States and other friendly governments.³ These programs differ from the OFD proposals in two fundamental respects: (1) commodities are selected for control on the basis of their strategic significance in developing Soviet war potential and (2) controls are paralleled by other friendly countries on the basis of U.S. and western European understanding of our mutual security interests.

c. Although it appears that the U.S. cannot influence the Soviet Union’s overall balance of payments position without taking both monetary and trade control measures, it is not at all clear that (1) such measures would succeed or that (2) their net effect would be economically desirable for the west. It should be noted that the various possible controls, over trade and financial relations, may work at cross purposes with each other, in so far as the Soviet balance of payments is concerned. It should be remembered also that the theoretical effect of a specific western control measure probably would not be allowed to work itself out “all other conditions remaining equal”. We must always take into account the likelihood of some negating action on the part of the Soviet Union, which is in a better position than the western world to control the volume, content and direction of its merchandise trade and which can continue to sell gold in private, if not in official, gold markets. Developments of the recent past indicate, if anything, the flexibility of the Soviet Union’s trade and financial policies, dependent upon expediency and its own political advantage.

(1) In illustration of the cross-currents that may be stimulated by control measures, it may be noted that controls over western imports theoretically could result in an unfavorable Soviet trade balance with the west. However, as noted above, stricter western export controls, in so far as these were not paralleled by decreased Soviet exports, would tend to improve the Soviet payments position with import restrictions, restrictions on gold sales might increase Soviet merchandise exports and not necessarily its most desirable exports. In the absence of restrictions on gold transactions, western import restrictions might encourage exports of Soviet gold. Western export controls that are not accompanied by import restrictions would seem to make gold controls unnecessary for Soviet balance of payments purposes unless the Soviet Union chose as a matter of policy to decrease its merchandise exports and to utilize its gold sales to finance invisibles or even some trade transactions.

(2) Under present conditions, a favorable Soviet trade balance with the western world would seem to be of certain benefit to western economic and long-term security objectives. It would require an expenditure of Soviet resources and productive effort in the current period in excess of the volume of goods being received in return; by the amount of that balance, goods would be subtracted from Soviet consumption and development efforts and made available for western consumption. In the current period, such trade balances would be financed by western countries’ acceptance of orders for future delivery or by Soviet invisible debts abroad. These invisible debts, however, may encompass the payments required to finance political activities and therefore a favorable balance of Soviet trade does have its unfavorable aspect from a security point of view. On the other hand, an unfavorable balance of Soviet trade might indicate that the U.S.S.R. was developing its industrial plant or stockpiling strategic materials at the expense of western productive effort and that this trade balance was being sustained by Soviet gold sales, private or governmental.

It may be noted that the present system of western trade controls does not propose to restrict the overall volume of peaceful east-west trade. In fact, restoration of eastern Europe’s dwindling favorable balance with west (i.e. an excess of eastern commodity exports to the west, that is now diminishing as east-west trade bilateralizes) probably would make a useful contribution to western European recovery. Even under conditions of balanced east-west trade values, an overall restriction on east-west volume is not desirable, since the development of western European export markets of non-strategic goods in the east is economically important. The viability and ultimate security of western price economies, it must be remembered, is intimately connected with the prospects for their expansion and development, including production, employment, sales and investment. If such prospects are not in evidence, or if they are restricted rather than promoted by government action, the downgrade of the business cycle is only too readily invoked.

(3) Until the past year, the Soviet Union had a decidedly favorable balance of merchandise trade with non-Soviet areas. It was not therefore forced to sell gold and apparently it did not make sizable gold sales. It was encouraged to sell some gold, not by its international payments problems, but apparently by the premium prices offered on some gold markets (and these reportedly are of declining importance).

In the past year, it has been noted that the Soviet trade balance has become less favorable; according to data presently available,^§ it is not believed likely that the Soviet, Union actually has debit on current account, mainly because the Soviet Union accumulated in previous year’s trade short-term balances in sterling and other western European currencies. These balances helped to finance 1949 purchases of raw materials and already had prepaid certain of the 1949 western deliveries of machinery and equipment. Export controls in the United States and to a lesser degree in western Europe during 1949 did not result in increasing the Soviet favorable trade balance. Rather, the Soviet Union decreased manganese shipments to the United States and reduced grain shipments to western Europe. In both cases, the goods could have been sold in western markets, although grain sales would have required a downward adjustment of Soviet prices, in line with the world-wide price trend.

In 1949, it is likely that Soviet actions were politically as well as economically motivated: Thus, decreasing its manganese exports to the United States was a form of retaliation against U.S. export controls. In direct trade relations with the United States, the Soviet Union could obtain fewer of the goods it desired with dollars and therefore had less incentive to export to the United States. In decreasing grain shipments to western Europe, the Soviet Union may have been retaliating against the stiffening attitude of western negotiators over their strategic commodity exports or over prices, or it may have been conserving grain for exports elsewhere. It should be remembered that the Soviet Union generally exports whatever volume of goods is needed to finance the level of imports it proposes (and is permitted) to obtain. It can always consume more and export less; it can export goods or gold or some of both.

Conclusions

In any case, the record of the recent past seems to indicate (1) that the Soviet Union’s actual gold sales probably have been induced by the attraction of premium prices; (2) that the Soviet Union is not actually in need of gold sales to balance its international payments; and (3) that unilateral U.S. action by the traditional types of economic control (i.e. by actions short of such drastic measures as complete de-monetization of gold or a collective western embargo of all trade with the Soviet bloc), is not likely to have very much effect at this time on the Soviet Union’s ability to pay for whatever goods and services it is permitted to obtain in foreign countries.⁴

The further we proceed in attempting to influence the Overall balance of Soviet international payments, by monetary or trade measures, the more implicated becomes any estimated effect of such action (e.g. a negative Soviet balance on international payments might tend to deplete Soviet gold reserves but also might call for an excess of western exports to the east in the current period). It is also more than likely that such attempts would be negated by Soviet counter measures, such as private gold sales, restriction or expansion of its own volume of trade or resort to trade through third countries.

1. This 13-page memorandum of March 31 is not printed. Its declared purpose was: “To formulate a position on a proposal that the US Government initiate and/or support a resolution in the International Monetary Fund that a system of certification of the gold reserves of member countries be established by the International Monetary Fund.” The memorandum pointed out: “The question of the desirability of immobilizing Soviet gold, to which this proposal is only one of a number of possible approaches, has been under consideration by the Department for some time.” Efforts had been made to acquire all available information on the gold operations of the Soviet Union and to evaluate their importance from the viewpoint of the cold war program. “The primary purpose of the proposal is ‘to destroy all monetary value outside the USSR of Soviet gold’, making it impossible for the Soviets to use such gold for the purchase of commodities on the prohibited list and for illicit political activities abroad. This aim is overambitious at least in terms of the present proposal.” (861.13/8–3150)
2. There is apparently some difference of opinion between OFD and DRE as to the magnitude and importance of current Soviet gold sales. The DRE opinion is that the USSR has not been selling substantial quantities of gold. [Footnote in the source text.]
3. Authority to license imports exists under the trading with the Enemy Act. It is believed however that the Congress would not favor use of this act for the purpose now being discussed. [Footnote in the source text.]
4. This statement assumes that the U.S. is not at this time prepared to declare economic warfare by the invocation of Art. XXI (b) (iii). [Footnote in the source text.]
2. Ellipsis indicated in the source text.
3. For documentation on the trade policy of the United States toward Eastern Europe and the Soviet Union, see pp. 65 ff.
4. DRE is preparing such an estimate for merchandise trade only. [Footnote in the source text.]
4. The conclusion reached in the original memorandum, in the preparation of which the Office of Eastern European Affairs had participated and with which it in general agreed, stated: “Soviet financing of its activities abroad by use of its gold reserves and/or production both currently and potentially represents a problem of considerable magnitude. The proposal for a sterilization of Soviet gold through certification by the IMF of members’ gold coupled with alteration of US gold policy terminating US purchases of gold not so certified would accomplish the desired objective Only to a very limited extent and would unavoidably provoke political reactions disproportionate to the results obtained.”