Foreign Relations of the United States, 1969–1976, Volume XXXI, Foreign Economic Policy, 1973–1976

72. Letter From the Chairman of the Federal Reserve System Board of Governors (Burns) to Secretary of the Treasury Simon¹

Washington, August 9, 1974.

Dear Bill:

I am responding to your memorandum of August 5 on gold.²

I agree with your view, as expressed in the draft memorandum for the President, that we should be prepared to communicate a position on gold to the Europeans at the meeting in early September. But I still prefer the proposals outlined in your memorandum on the same subject dated June 1, 1974,³ to the current position suggested in the August 5 document.

For example, I agree that the IMF should be allowed, after appropriate changes in its Articles of Agreement, gradually to sell its gold in private markets (point 2 of the June 1 memorandum). And I continue to believe it would be desirable to modify the IMF Articles of Agreement to remove gold valuation and settlement obligations (point 6 of the June 1 memorandum). If inter-governmental transactions in gold at individually-negotiated, market-related prices were to be permitted, there should be a quantitative limitation on sales (point 1 of the June 1 memorandum).

I can agree with the general thrust of the provision in the August 5 memorandum against official purchases from the market that would increase total governmental holdings. But that provision as currently formulated would be extremely difficult to monitor and enforce, and in any case implies a first-come, first-served criterion that many governments may find objectionable. I would prefer to stipulate that each individual government would be permitted to buy from the market and from other governments, only as much gold as it had sold net to the market during the previous twelve months. Moreover, I see no need to limit this stipulation to the period of the next two years.

On a point not covered explicitly in your June 1 memorandum, I agree with your suggestion that there should be no inter-governmental effort of any sort to keep the market price of gold within any particular limits. It would be especially important to have such a prohibition in the event that other countries, acting individually or in parallel, were to revalue their official gold holdings at a market-related price.

I cannot concur in the recommendations in your draft memorandum of August 5 to approve private ownership of gold by U.S. citizens prior to the date required by legislation, and to make sales of gold out of the Treasury’s holdings via auctions to private citizens.

Allowing private ownership of gold could well add to the uncertainties affecting financial markets at a time when they are already seriously strained. For example, private gold ownership might give a further fillip to disintermediation and thus put further pressure on our financial institutions. Moreover, there are no reliable estimates of the potential demand of U.S. citizens; but given the present state of confidence in currency values and concern about inflation, there is a significant risk that massive purchases might be made. If this were to occur, our international accounts would be further unbalanced and the dollar could come under sharp pressure in the exchange markets. I see no offsetting advantage that would justify taking these risks at the present time. Indeed, depending on market developments, it might become desirable by, say, next October to seek repeal of the legislation requiring private ownership as of December 31, 1974.

I am equally concerned about the risks of auction sales of gold at the present time. In these times troubled by inflation, Treasury gold auctions might be misunderstood by some parts of the public. For example, some might mistakenly deduce either that the Treasury had given up in the struggle against inflation or that it had been forced as a last resort to highly unorthodox measures. Certainly the auctions would receive enormous, disproportionate press attention—which would intensify the risks of misinterpretation.

There is an additional consideration that leads me to this position. Despite some modest progress resulting from the Committee of Twenty deliberations, the role of gold and other reserve assets in the international monetary system is still quite uncertain. It would be premature, in my opinion, for the United States to act unilaterally and begin disposing of its reserve assets on a sizable scale prior to having reached a better international understanding on the respective roles of SDRs, gold, and reserve currencies as official reserve assets. Let us not lose sight of the fact that the auction of Treasury gold would cause a net reduction of our international reserves, while for other countries, the sale of gold for foreign exchange would merely change the composition of their reserves.

All things considered, it would seem preferable to postpone private U.S. ownership until the end of the year, and Treasury gold sales at least until the end of the year. And, as noted earlier, I would not want to foreclose the option of requesting Congress in the fall to consider altering the legislation requiring private ownership.

I shall be glad to have an opportunity, at the Monday meeting,⁴ to discuss these points further with you.

Sincerely yours,

Arthur F. Burns

⁵

1. Source: Ford Library, Arthur Burns Papers, Federal Reserve Board Subject Files, Box B52, Gold, June–Aug. 1974. No classification marking. Drafted by Bryant and approved by Wallich.
2. Document 70.
3. Document 66.
4. August 12. On August 12, Bennett sent a memorandum to Kissinger, Burns, Rush, and Stein that reads: “Attached is a suggested redraft of the Memorandum to the President and a suggested agenda of questions for the discussion scheduled for this afternoon.” According to Bennett’s memorandum, the meeting was scheduled for 5:30 p.m. (National Archives, Nixon Presidential Materials, White House Central Files, Staff Member & Office Files, Council of Economic Advisers, Herbert Stein, Box 106, Meetings Files, Meeting on Gold, Secy. Simon’s Office, 8–12–74) No other record of this meeting has been found.
5. Printed from a copy that bears Burns’s typed signature.