Foreign Relations of the United States, 1961–1963, Volume XIII, Western Europe and Canada

390. Telegram From the Department of State to the Embassy in the United Kingdom⁰

Washington, February 19, 1962, 7:46 p.m.

4433. For Ambassador from Secretary Dillon. For your information during past few days we have had what could be serious difference of opinion with British over gold purchases. They informed us about ten days ago that they wished to purchase an additional $350 million worth of gold within next 4 to 6 weeks. We were surprised because we did not see how British could possibly have accumulated this many dollars over and above their debt to the International Monetary Fund and their normal working balance of $300 million. We asked Cromer¹ for further information which was furnished us toward end of last week. This information shows that as of February 14 British had total foreign exchange holdings of all sorts amounting to $1292 million. Their current debt to Fund of $1080 million plus their normal working balance in dollars of $300 million total $1380 million which indicates that $90 million of the $350 million in gold which the British purchased from us since last fall came out of the proceeds of their drawing from the Fund. This is completely contrary to the very clear understanding which I reached with Parsons² last July prior to the British drawing.

Memorandum of conversation³ of that meeting prepared by British shows Parsons saying that after their dollar holdings increase above their normal level they would have “the alternative of continuing to hold these extra dollars for the time being or of starting to repurchase sterling in the Fund”. This fully bears out our understanding and leaves no room for use of Fund proceeds to buy gold from U.S.

Today Roosa⁴ outlined our view in detail to Pitblado who had originally raised matter with him. Hayes, President Federal Reserve Bank of New York, also talked on phone to the Deputy Governor of the Bank in absence of Cromer. In addition at the President’s direction I expressed my concern and surprise to Ormsby-Gore during course of small luncheon at White House today for Gaitskell. The President had earlier indicated his concern to Ormsby-Gore who told me that he had reported this to London.

While current balance of payments situation appears to be seasonally favorable as was the case during first quarter last year, official 4th quarter figures are about to come out which will show substantial losses of short term funds. The loss of several hundred million dollars in gold immediately after publication these figures would obviously be disturbing factor in exchange markets and is so regarded by all Central Bankers on continent who were given preliminary information regarding this matter at the last Basle meeting on February 11. It is also difficult for us to see what advantage there is for British to hold reserve in gold which they owe the Monetary Fund when they could as well pay the Fund off in dollars. This was also personal reaction of Ormsby-Gore.

While we are of course always ready to sell gold against dollars it is clear that if British pursue this matter contrary to their agreement with us last July the repercussions would be extremely serious as it would then become necessary for us to utilize every means in our power to reduce dollar holdings of sterling area since we would have had clear notice that these holdings are now a danger to the dollar. It is our assumption here that this whole matter probably arose as suggestion of certain members of staff of Bank of England and had not been thoroughly thought out at top level. I must say I am surprised at Parsons’ role in this since he was the individual who personally gave flat commitment last July.

This message is forwarded for your information since the President felt you should be informed in case matter was mentioned to you in London. No action is being requested as we are handling matter from here. Would appreciate it if you could inform Bean but otherwise should be held very closely because of obvious dangers involved in rumors regarding gold.

Rusk

0. Source: Department of State, Central Files, 841.13/2–1962. Confidential; Eyes Only. Drafted by Dillon.
1. George R.S. Baring, Earl of Cromer, Governor of the Bank of England.
2. Maurice H. Parsons, Director of the Bank of England.
3. Not found.
4. Robert V. Roosa, Under Secretary of the Treasury for Monetary Affairs.