III. Gold Policy

International Monetary Fund
Published Date:
September 1948
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External Sales at Premium Prices

THE Fund is pledged to the promotion of exchange stability as one of its primary objectives. The par values of the currencies of all members are expressed in terms of gold as a common denominator or in terms of the United States dollar of the weight and fineness in effect on July 1, 1944, and variations may only be made in accordance with the Fund Agreement. The Fund has, accordingly, been concerned over external gold transactions at prices in excess of the gold values of member currencies.

Private gold transactions consummated in United States dollars have been reported at various times at prices ranging up to US $50 per fine ounce and occasionally reports appear of transactions at even higher premia. International gold transactions for which high premia are quoted frequently take place in inconvertible currencies, particularly in countries where confidence in the future value of the national currency is lacking or where political conditions are disturbed. When a United States dollar price is quoted for such transactions in inconvertible currencies, it is merely the figure arrived at by converting the local currency price at the official rate of exchange, regardless of the fact that the local currency proceeds can only be converted into hard currency through black markets at substantial rates of discount.

On June 18, 1947, the Fund addressed to all members a statement, reproduced in full in last year’s Annual Report, in which it deprecated external purchases or sales of gold at prices which directly or indirectly produce exchange transactions at depreciated rates. It was the Fund’s view that this practice if not checked might become extensive and might as a consequence tend to undermine the exchange relationships among the members of the Fund. Moreover, transactions of this kind involve a wasteful use of gold since much of the metal goes into private hoards rather than into central holdings. In reply to a member’s inquiry, the Fund has stated that its opposition to external gold transactions at premium prices extends not only to transactions between members of the Fund but also to transactions between members and non-members.

Some countries, including certain major gold producers, indicated that their practices were in accord with the Fund’s policy. Others explained that their gold sales had been authorized before the Fund denned its policy but that they were ready to change their policy to conform to the Fund’s views. Certain other countries revised their regulations in order to meet the Fund’s policy.

Mexico informed the Fund that in compliance with the Fund’s policy it had discontinued external sales of gold at premium prices. Canada’s Minister of Finance stated that the policy of his Government was to prohibit exports of gold to “free markets” and to refuse to permit exports at prices above parity. Immediately after the receipt of the Fund’s letter, the United States National Advisory Council on International Monetary and Financial Problems announced it was in full accord with the Fund’s views. After a public hearing, the United States Treasury Department announced that its Provisional Regulations under the Gold Reserve Act of 1934 would be amended, effective November 24, 1947, with a view to curbing international gold transactions at premium prices in accordance with the Fund’s request. The Bank of England advised bullion dealers that the prohibition on transactions at premium prices was extended to cover dealings as agents for non-residents. Transactions by London bullion dealers as principals had never been allowed except at prices within 1 per cent of US $35 per fine ounce.

In spite of the encouraging reaction of members to the Fund’s letter of June 18, 1947, there is ample room left for greater support of the Fund’s policy. There should be more vigorous enforcement of the gold regulations in certain countries, especially importing countries. It has been noted that international transactions in fabricated gold articles or jewelry with a fine gold content just below the minimum legal fineness of monetary gold have assumed increasing importance. Some countries have no legal basis for the effective supervision of trans-shipped gold; in most cases trans-shipped or bonded goods attract certain conditions and privileges which include freedom from import or export licensing, especially where it can be shown that the commodity is foreign-owned. In other instances, where exchange controls place little or no restrictions on gold dealings or shipments, a revision of existing gold regulations may be necessary in order that gold may be treated as a part of the potential national monetary reserves, rather than as an article of trade. Furthermore, some gold transactions at premium prices are being conducted by or through non-member countries or their nationals.

In order to enable the Fund to consider what further action may be called for, a letter has been sent to all members, requesting the text of their laws, decrees, and regulations (together with particulars of changes made since June 18, 1947), and a statement of the administrative practices they follow regarding international transactions in gold and in articles having a large content of gold, as well as data on international movements of gold.

Subsidies to Producers

The world production of gold (exclusive of Union of Soviet Socialist Republics) declined from a peak of about 37 million fine ounces in 1940 to about 21 million fine ounces in 1945, due largely to a deliberate shift of manpower and other resources from gold mining to industries more essential to the war effort. In 1946 world gold production recovered by about 500,000 fine ounces over the previous year and the increase in production continued in 1947, although production in the Union of South Africa declined, primarily as a result of labor difficulties. The postwar recovery in gold mining has been slow owing to substantial increases in mining costs, including the cost of labor, materials, and equipment which, taken in conjunction with the fixed price of gold, have reduced the profitability of gold mining. Wartime deterioration of mining equipment has had the dual effect of limiting output directly and of necessitating new investments at high prices which make production more costly. In some instances, the large-scale capital outlays which would have been required to rehabilitate the mines discouraged owners from reopening their mines after wartime shutdowns or caused them to resume operations on only a limited scale. Difficulties in recruiting efficient labor have been another retarding factor.

Countries in balance of payments difficulties have sought ways and means of encouraging gold production. After consultation with the Fund, Canada announced on December 11, 1947, its intention of instituting a new program to stimulate gold production. The Canadian proposal provides for a payment to individual gold mines, designed to assist the mines in defraying part of their increased costs of production. The subsidy payment will be determined by taking half of the amount by which the current cost of gold production of any mine exceeds $18 an ounce and applying this to the amount by which production in the current year exceeds two-thirds of the production in the base year July 1, 1946, to June 30, 1947. Assistance will be given for a three-year period, effective January 1, 1948.

The Fund issued a general policy statement regarding gold subsidies (see Appendix VI) and at the same time announced its views regarding the proposed Canadian measures(see Appendix VII). In its general statement the Fund asked member countries to consult with it prior to introducing any new measures to subsidize their gold production. The Fund took the position that a subsidy in the form of a uniform payment per ounce for all or part of the gold produced would constitute an increase in price which would not be permissible if the total price paid by the member for gold were thereby raised to any amount in excess of parity plus the prescribed margin of one quarter of one per cent. The Fund emphasized that other types of subsidy may constitute an increase in the price of gold and that each proposal for subsidy must be examined on its merits with regard to its specific provisions and in the light of surrounding circumstances. The Fund stated that any subsidy on gold production, regardless of its form, is inconsistent with Article IV, Section 4 (a) of the Fund Agreement if it undermines or threatens to undermine exchange stability. The Fund promised to study and review with its members their gold policies and any proposed changes with a view to determining if they are in accordance with the provisions of the Fund Agreement and conducive to a sound international policy regarding gold.

In March 1948, the Government of Australia, in conformity with the Fund’s general policy statement, consulted the Fund regarding a proposal to grant temporary assistance to certain gold mines in desert areas in Western Australia which were threatened with abandonment. The measure was designed to enable some marginal and isolated mines to continue operations despite rising costs, so as to sustain the population of certain communities whose existence is wholly dependent on the gold mining industry. The proposed aid was to be determined for each gold mine individually according to its costs, ore reserves, values, and dependent population, and would not affect the price of gold. The plan was not intended to increase gold production. The measures proposed by Australia were deemed not to contravene the obligations of members under the Fund Agreement to engage only in gold transactions at prices based on the par values of members’ currencies and to collaborate with the Fund in promoting exchange stability. Neither were the measures proposed by Australia considered to violate the policy enunciated by the Fund on December 11, 1947, regarding gold subsidies.

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