CHAPTER 8 Gold Transactions at Premium Prices

International Monetary Fund
Published Date:
February 1996
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Mary H. Gumbart

The obligations of fund members in connection with the price of gold are set out in Article IV, Section 2, of the Fund Agreement, which reads as follows:

  • Gold purchases based on par values.—The Fund shall prescribe a margin above and below par value for transactions in gold by members, and no member shall buy gold at a price above par value plus the prescribed margin, or sell gold at a price below par value minus the prescribed margin.

Because of this link between par values and the price of gold, the Fund’s policy on gold transactions at premium prices has sought to prevent international transactions in gold being effected at prices substantially above par values. (Transactions below par values have never been at issue.) The purposes of the policy were twofold: first to prevent such sales from undermining the stability of members’ exchange rates, and second to minimize the loss to monetary reserves resulting from private hoarding, which was the main source of demand in the premium market. The achievement of both aims required the prevention of premium gold sales.

The dilemma facing the Fund was as follows: If the premium market was kept supplied in order to lower or eliminate the premium, this would result in a larger portion of newly mined gold going into private hoards and, possibly, in the diversion of official gold holdings to hoards. As long as newly mined gold was sold at a premium above the margin set by the Fund, the monetary authorities of Fund members would be precluded, under Article IV, Section 2, from purchasing the new gold. This would reduce the amount of international liquidity (i.e., gold) available to monetary authorities. If, on the other hand, the supply to the premium gold market was not maintained, the premium would continue and might increase, thus possibly leading to instability of exchange rates. The reason that exchange rates might be undermined was that they are denominated in terms of gold, so that international transactions in gold at other than official rates must affect the established rates; premium transactions at least establish another rate for the currency in which the transactions take place.


History of first statement

The first time that the issue of premium gold sales was raised in the Board was in August 1946, when Peru inquired whether its Central Reserve Bank might, after the par value for the sol had been fixed, sell gold coins at a premium price in any market for the account of private concerns. The divergences of opinion on the economic, legal, and political aspects of the problem that characterized all considerations of it by Executive Directors emerged during a discussion of a draft reply to Peru. The minutes of the Board meeting include the following:

  • It was generally agreed that [Peru’s] project … was not specifically prohibited by any provision of the Fund Agreement. One view was that the Fund’s reply should not appear to condone the practices, which resulted in smuggling of gold against the laws of various governments…. such a position would give the impression that the Fund approved dual prices for gold, whereas such dual prices were harmful to exchange stability.
  • The other view was that in its infancy, the Fund should avoid any impression of rendering opinions on matters beyond its actual authority, and for the sake of its relations with members should not attempt to enforce a broad interpretation, where such might properly be disputed.
  • It was agreed that the Ad Hoc Drafting Committee should prepare a final draft letter indicating that while the proposed project could not be said to contravene the Fund Agreement, the Fund did not wish this opinion to be construed as encouragement of the proposed action.

Such a letter was produced and sent to Peru on September 11, 1946.

Six months later Colombia asked (a) whether the Fund Agreement would permit mine owners to sell their output at a premium price (i) on the free international market, or (ii) on the local market for industrial purposes, and (b) in either event, whether the Colombian central bank could intervene in the prospective markets for purposes of control and management.

At the first discussion of this request, Mr. Gómez (Mexico), who had been elected by Colombia, urged that the Fund should reply to Colombia, as it had to Peru, that, with appropriate qualifications, the proposed actions would not in themselves “be inconsistent with any particular provision of the Fund Agreement.” There was considerable opposition to Mr. Gómez’ proposal, mainly on the ground that the Fund Agreement enabled the Fund to intervene against a member’s permitting external gold sales at premium prices, if official rates of exchange were likely to be undermined. Any action that siphoned newly mined gold into private hoards and away from monetary systems where it could support exchange rates and finance world trade should be opposed. On the other hand, it was argued that the effects of premium gold sales might not, in fact, be as bad as assumed.

The discussion also touched on the problem of nonmember countries, which the Fund could not control, and on the question whether responsibility for stopping the trade should not rest with the buying nations rather than the selling. The discussion ended when, at the Managing Director’s suggestion, the Directors agreed to set up a Committee on External Sales of Gold to study the question. The committee members were Messrs. Luthringer (United States), Chairman, Bolton (United Kingdom), Bruins (Netherlands), de Selliers (Belgium), Gómez, and Rasminsky (Canada).

The committee’s first report to the Board, on May 19, 1947, was agreed by all members of the committee except Mr. Gómez, whose views were presented to the Board in writing by his Alternate, Mr. Martínez-Ostos (Mexico). The report made the following main points:

1. General policy. In the interest of world monetary stabilization and in view of the purposes of the Fund, the Fund should take a strong position deprecating external sales of gold at premium prices. It was recognized, as pointed out by Mr. Gómez, that the immediate value of the Fund’s taking such a position might be limited owing to the action of nonmember countries. But the moral and psychological effect of the Fund’s action would be internationally favorable. The committee felt that exchange stability would be undermined by continued external sales of gold at premium prices and there would be increased pressure by producers on governments of large gold producing countries to permit their production to be sold at premium prices.

2. Authority of the Fund. The Fund has authority under Article I and Article IV, Sections 2 and 4 (a), of the Fund Agreement to take action to prevent members from engaging in gold sale practices which would undermine exchange stability.

3. Recommended action. The committee was of the opinion that a general statement of policy should be prepared and circulated to the members recommending the adoption of effective measures by member countries to prevent exports and imports of gold at premium prices. It was felt that a legalistic statement of interpretation of the Articles of Agreement would not be desirable.

On the questions raised by Colombia, the report suggested that no reply should be sent until the general policy had been settled, and that Colombia should then be told that further consideration would be given to the question of intervention by the central bank if Colombian producers were allowed to sell their gold at a premium in the domestic market.

The committee’s report was twice discussed in the Board. At the first of these meetings, some Directors urged that the question of whether the Fund had the legal authority to prevent members and/or their nationals from engaging in external gold transactions at premium prices be referred to the Committee on Interpretation, and the discussion was confined to questions of substance. These questions included the following: whether continued sales of gold at premium prices would in fact undermine exchange rate stability; the status under the Fund Agreement, and the effects of, official versus private transactions in gold; the volume and character of the premium gold trade; and whether continued premium gold sales by some members would lead to irresistible pressures on other members to permit such sales.

The only two points on which Directors were generally agreed were, first, that official agencies of members would not be permitted, under the Fund Agreement, to engage in international gold transactions outside official rates; and, second, that (as the committee proposed) the Fund should not object to internal sales of gold above parity, provided that such sales did not in effect establish new rates of exchange or undermine existing rates of other members. Opposing views were expressed in the Board on the question whether members’ obligations under the Fund Agreement extended to private transactions in gold, as well as on the other points discussed.

However, at the next meeting of the Board it was decided to waive the problem of a formal interpretation of the Articles and instead to approve point 2 (Authority of the Fund) in the committee’s report.

Mr. Martínez-Ostos opposed the committee’s recommendations. He said that while he did not deny the obligation of members regarding exchange stability, this obligation rested on buyers of gold as much as on sellers, and premium sales were permitted under Article IV, Section 2. Perhaps as a result of these representations, the decision of the Board departed from the committee’s proposals by making no reference to Article IV, Section 2, and by altering the phrase “gold sale practices” to “gold transactions.”

The Board also approved points 1 and 3 of the committee’s report, and agreed that a statement expressing the policy of the Fund and recommending action to members should be prepared by the staff and transmitted to members after approval by the Board. It was also decided that, before the statement was transmitted, the Board should prescribe the margins for members’ gold transactions as required in Article IV, Section 2.

The decision setting the margin for members’ gold transactions at ¼ of 1 per cent, plus certain handling charges, was adopted on June 10, 1947. Colombia then requested that its inquiry be withdrawn, and the letter in which the inquiry had been made be returned. The Board noted the request for withdrawal, agreed to return the original letter to Colombia, and decided that the other records of the Fund on the matter would not be altered.

The Board then approved the drafts of the proposed general statement on premium gold transactions and the letter of transmittal to members. The discussion of the latter document was chiefly concerned with the question whether the Fund itself would make the statement public. The committee had previously suggested that the Fund should not do so, although the letter of transmittal would make it clear that members could make such use of the statement as they considered desirable. This position was the one finally adopted, being apparently influenced by Mr. Martínez-Ostos’ statement that Colombia’s withdrawal of its inquiry might have depended to a certain degree on his personal assurance that no public statement would be made by the Fund, and that if a Fund statement were to be made, he would want to make a general reservation on the whole problem.

Text of first statement

The text of the statement, which was communicated by the Fund to all members in a letter of June 18, 1947 from the Managing Director, is set out in Volume III of this history.1 The operative paragraphs were the following:

  • A primary purpose of the Fund is world exchange stability and it is the considered opinion of the Fund that exchange stability may be undermined by continued and increasing external purchases and sales of gold at prices which directly or indirectly produce exchange transactions at depreciated rates. From information at its disposal, the Fund believes that unless discouraged this practice is likely to become extensive, which would fundamentally disturb the exchange relationships among the members of the Fund. Moreover, these transactions involve a loss to monetary reserves, since much of the gold goes into private hoards rather than into central holdings. For these reasons, the Fund strongly deprecates international transactions in gold at premium prices and recommends that all of its members take effective action to prevent such transactions in gold with other countries or with the nationals of other countries….
  • The Fund has not overlooked the problems arising in connection with domestic transactions in gold at prices above parity. The conclusion was reached that the Fund would not object at this time to such transactions unless they have the effect of establishing new rates of exchange or undermining existing rates of other members, or unless they result in a significant weakening of the international financial position of a member which might affect its utilization of the Fund’s resources.
  • The Fund has requested its members to take action as promptly as possible to put into effect the recommendations contained in this statement.

That the statement is in the form of an expression of the Fund’s views and recommendations rather than a formal interpretation of the Articles of Agreement, reflects the fact that there were conflicting points of view among Directors as to the legal basis for the Fund’s authority. It should be noted also that, while external and internal transactions are distinguished, the statement makes no distinction between monetary gold and nonmonetary (processed) gold. This point was to be of importance later in connection with South Africa’s proposals for sales of semiprocessed gold at premium prices. However, Mr. Martínez-Ostos later commented that although he and Mr. Gómez had pointed out the problems that would arise from the exclusion of processed gold from the Fund’s statement of June 1947, the Fund had exempted such transactions in August of the same year. Other Executive Directors then recalled that processed gold had been excluded from the Fund’s statement because the Fund did not wish to curtail normal commercial enterprises. However, where it appeared that an increase in commercial activity was in reality a negation of the Fund’s policy statement, the Fund would have to be concerned.

The Mexican inquiry

Shortly after the statement was issued, Mexico asked (a) for the legal grounds of the Fund’s statement, and (b) whether members were required to suspend gold sales to nonmember countries.

When this inquiry was considered on July 28, 1947, the Executive Board approved a reply to (a) in the following terms:

  • The legal basis of the statement in connection with Transactions in Gold at Premium Prices is to be found in Article I (iii), and Article IV, Section 4 (a). Article I makes it the duty of the Fund to promote exchange stability, maintain orderly exchange arrangements, and avoid competitive exchange depreciation. Where the Fund finds a threat to exchange stability or orderly exchange arrangements, Article IV, Section 4 (a), gives the Fund the right to call for collaboration by members to eliminate the threat.

As regards (b), the Legal Department suggested that the reply might explain that “the reference to ‘other countries’ in [the Fund’s statement of June 18, 1947] was intended and should be interpreted to embrace both members and non-members.”

However, on this second issue the Board disagreed. In the discussion, Executive Directors raised two further problems. The first was whether the Fund’s statement covered transactions with nonmembers clearly and satisfactorily: nonmembers necessarily had no par value, which created a possible ambiguity as to the meaning of premium prices. The special case of a nonmember with multiple rates of exchange was also considered. The second problem was whether the June 18 statement applied or should apply to sales of gold for manufacture into jewelry, or sales of gold in the form of jewelry. It was agreed to defer an answer to Mexico until these matters had been further studied.

At a further Board meeting on August 26, Mr. Gómez observed that there was no indication that the gold which Mexico sold returned to international channels where it might affect par values. For that reason he could not support the proposed draft reply on this point.

Other Directors, however, pointed out that stable exchange rates could be weakened by premium sales even if the gold did not move out of the buying country. If Mexico sold gold at a premium for a particular currency, it would be getting that currency at a more favorable rate than other Fund members. Cross rates for member currencies might result which would be significantly different from the pattern of rates established by the Fund. Thus there might be a tendency to undermine the stability of members’ currencies. The Fund’s concern would certainly extend to such cases. Mr. Gómez accepted that the argument about disorderly cross rates was valid; it was therefore embodied in a reply sent to Mexico covering both points in the member’s letter.

Results of first statement

Parallel with the consideration of the letter from Mexico just discussed, the Board had under consideration a further inquiry from Peru. This described the adverse effect that the Fund’s statement would have on the prospects of gold mines in Peru, and asked advice on ways of protecting the industry. The Board decided to request the Committee on External Sales of Gold to study the question of what measures, acceptable to the Fund, could be taken to encourage domestic gold production. In preparation for the work of the committee, the staff was asked for “studies of the developments and results which had occurred since the Fund’s policy on premium transactions had been announced, the movements of gold in recent years, and the nature of the ‘underground’ gold traffic.” A further general statement about the price of gold which emerged from the committee’s work dealt primarily with subsidies to gold producers, and is therefore reported in the next chapter. However, it is appropriate here to set out the result of the staff’s studies, as summarized in a memorandum circulated in January 1948.

The staff found that the Fund’s requests had been anticipated in India, China, and Hong Kong, and had been followed by immediate action in Mexico and the Philippines toward ending gold exports at a premium. In the United Kingdom, the United States, and Canada, supplementary measures had been taken to tighten controls having the same purpose. Following these measures there had in general been an upward movement in the price of gold in Eastern free markets, and there might also have been a shrinkage in the volume of transactions in those markets.

During the discussion of this memorandum, Mr. Overby (United States) told the Board that U.S. mining and smelting interests had complained that they were at a disadvantage because the Fund’s policy was enforced in the United States, whereas it did not seem to be in certain other countries. Another Director pointed out that cooperation by the large producing countries was essential to any reduction of premium transactions in gold, as the number of receiving countries and their tendency toward lax administration made effective control unlikely at the receiving end.

Mr. Martínez-Ostos doubted that the Fund’s policy was having any beneficial effect. He believed that unless there was a noticeable drop in the volume of premium transactions, the Fund’s policy could be regarded as having increased the premiums and hence the incentives for trade in the black markets. The premiums had in fact continued to rise since the date of the Fund’s statement, and apparently the amounts involved in the transactions were not less than when the Fund made the statement.

The Director of Research replied that the volume of transactions had probably decreased somewhat. Measurement of the drop was difficult. However, the very fact that the prices for gold were going up in black markets was evidence that the Fund’s policy and members’ actions were having a noticeable effect.

Mr. de Largentaye (France) believed that the Fund would have done better to urge that gold be made available in plentiful supply at the official price. He felt that this would soon have eliminated the premium in terms of dollars on the free markets. The Director of Research said that sales above $35 an ounce probably could be eliminated in this way without excessive offerings. However, he doubted that the same would be true of the premium prices in inconvertible currencies.

At the conclusion of the meeting, the Board decided that the Fund should ask its members, through a letter from the Managing Director, for information on their laws, decrees, administrative practices, etc., concerning monetary, processed, and nonprocessed gold; those measures that were taken subsequent to the Fund’s first statement; recent data on trade in such gold; and other pertinent details relating to the implementation of the first statement. The letter together with a questionnaire was sent out on April 6, 1948.


The evolution of the Board’s policy on gold during the years 1948–51 was closely connected with developments in South Africa. In order not to interrupt the discussion of these developments, we may here mention briefly the Board’s attention to practices bearing on the price of gold introduced in Belgium and Chile during 1948 and 1949.

The Belgian Government informed the Fund in October 1948 that it was considering an arrangement for an internal free gold market. It gave two reasons: (1) it believed that the black market in gold which already existed and was tolerated should be legalized, and (2) certain gold producers in the Belgian Congo needed relief because of increased costs of production. After some discussion, the Board decided on a reply to Belgium which stated that sales in a member’s metropolitan territory of gold produced in a nonmetropolitan territory in respect of which the member had accepted the Fund Agreement were not international transactions, and that the proposed arrangement would not be in conflict with the Fund’s first statement on premium gold transactions because the Belgian Government intended to prevent international transactions. However, the reply also drew attention to a number of unfavorable comments by Executive Directors. Some doubted that international transactions could be entirely prevented. Furthermore, the establishment of a free market would divert gold from central reserves and put pressure on other countries to take the same step. The reply concluded by asking Belgium to consider these unfavorable views carefully before coming to a decision on the proposal.

As a result of this reply, the Belgian Government revised its proposal so as to limit sellers in the free market to Belgian Congo gold producers, and buyers to bona fide dentists, industrialists, and goldsmiths residing in Belgium or the Congo; the price in Belgian francs was to be fixed by the seller. Buyers would not be allowed to resell the gold except in processed form. No imports of semi-processed or fabricated gold would be allowed. When the Board discussed the revised proposal, Mr. Southard (United States) said that he believed the proposal represented an effort to bring a gold subsidy arrangement within a range to which the Fund would not object, and he appreciated the effort made to eliminate the monetary implications. His Government, however, believed that all premium sales arrangements would necessarily have monetary aspects, and it continued to oppose them. It was also concerned at the apparent intention to increase Congolese gold production by this means. Mr. de Selliers defended the plan, saying that it was not intended to expand output but to protect a major Congolese industry. The Board’s decision on the matter did not specifically approve the plan; after describing the revised arrangements it stated as follows:

  • 2. Considering its previous decision … the Fund notes the proposal and the revisions from the previous plan. It will expect to review developments under the arrangement from time to time and to receive current statistics on the operation of the market.

In November 1949 access to the market was extended to buyers of the specified occupations who were resident in the Belgian Trust Territory of Ruanda Urundi.

Another relevant decision taken at this time arose from a consideration of the multiple currency system of Chile, which included an import rate fluctuating around 125 pesos = $1 (compared with a par value of 31 pesos = $1) resulting from the method of marketing newly mined gold; this applied to authorized nonessential imports. The Board’s decision included the following:

  • 5. While it regrets that the gold practice authorized by the Chilean law of December 2, 1948, results in creation of a new effective rate of exchange for nonessential imports, the Fund approves this aspect of the gold practice. However, because of the inconsistency with the Fund’s established policy on external transactions in gold at premium prices, the Fund disapproves the practice of permitting exportation of gold from Chile at premium prices.


During 1948 and 1949 the Fund had a prolonged discussion with South Africa on a proposal to sell semiprocessed gold at premium prices. South Africa was in balance of payments difficulties at the time because of excessive import demand, and in fact drew on the Fund’s resources.

September-October 1948

In September 1948, South Africa requested an opportunity for Mr. M. H. de Kock, the Alternate Governor for South Africa, to discuss, at the time of the forthcoming Annual Meeting, a proposal made to the South African Mint that it sell for export, at a premium price, a considerable quantity of semiprocessed gold. The gold would be in the shape and form normally used by manufacturing goldsmiths and jewelers and would be alloyed to required standards and hallmarked to show the actual fineness. All the gold would be exported, and all payments would be made in dollars. The proposal had been made to the South African Mint by a London firm. It was the intention of the Government to share any financial benefit from the transaction with the producers of gold.

The Legal Department advised the Board as follows:

  • (i) External transactions in semiprocessed gold at premium prices are within the scope of the Fund’s Statement on Transactions in Gold at Premium Prices if such gold will be held, used, or disposed of for monetary purposes and not for industrial, professional or artistic purposes.
  • (ii) The contemplated profit-sharing with producers might involve a price paid for gold by the Government in violation of Article IV, Section 2, or, depending on the form of profit-sharing arrangements, constitute a subsidy which, under the Fund’s Statement on Gold Subsidies [see p. 205 below], would be regarded as an increase in the purchase price beyond that permitted by Article IV, Section 2. Even though the additional payments might not have these effects, they might be subsidies which, as pointed out in the Statement on Gold Subsidies, would, directly or indirectly, undermine or threaten to undermine exchange or monetary stability and thus be of concern to the Fund.

These two conclusions were incorporated in a letter that the Managing Director sent to the South African Government on October 5, 1948 following the Board’s discussion of the proposal with Mr. de Kock. In addition, the letter made further points that indicated, but did not state explicitly, the Fund’s general disapproval of the proposal. First, the letter stated that members of the Executive Board were “disturbed by the fear that the proposed transactions would involve considerable sales of gold for purposes other than legitimate industrial, professional, or artistic uses,” a consequence that would almost certainly occur if the scale of the proposed transactions was large enough to ensure an appreciable profit to South African gold producers. Accordingly, the letter went on to say that

in these circumstances, the Fund believes that South Africa should not engage in the proposed plan unless it is satisfied that it can take effective measures to ensure that gold sold under the plan will in fact be used for bona fide and customary industrial, professional or artistic purposes

Second, the letter noted the Fund’s pleasure at Mr. de Kock’s statement that South Africa had no specific plan in mind for sharing any profit with producers and would consult with the Fund before putting any plan into effect.

During the discussions that preceded the dispatch of this letter, the principal opposition to the South African proposal came from Mr. Overby and Mr. Tansley (United Kingdom). Mr. Overby believed that any substantial sales of semi-processed gold by South Africa would be destined for private hoards, because the United States and the United Kingdom were prepared to supply, at prices based on $35 an ounce, all the gold needed for legitimate industrial, professional, and artistic purposes. In reply Mr. de Kock said that his Government had been told that the sales by the United States and the United Kingdom were so restricted that the real demand for processed and semiprocessed gold was by no means met. He believed that “legitimate” demands were hard if not impossible to define. However, Mr. de Kock added that “the demand for gold in artistic forms had always included a large element of desire for gold as a store of value.”

Mr. Martínez-Ostos again stated his belief that the Fund had never given adequate consideration to the theoretical and factual background of its whole policy on premium gold transactions, and that a full study was necessary before action could be taken in the South African case. Some other Directors supported Mr. Martínez-Ostos by urging that a full review of the Fund’s gold policies be undertaken, and Mr. Martínez-Ostos said he would abstain from taking a position on South Africa’s question until such a general discussion could be held.

February-March 1949

On Saturday, February 5, 1949, the South African Legation in Washington handed to the Managing Director a cable from its Government in which the Fund was informed of the outline of a plan to sell for dollars 100,000 ounces of semi-processed gold at a price of $38.20 an ounce, over a period of eight weeks beginning on that day. The cable indicated that the gold would be sold to a firm of London bullion brokers, on the understanding that the gold would be used for specific and customary industrial, professional, and artistic purposes. The method of transferring the premium benefit to the gold producers would be settled later in a way that would not conflict with the Fund’s purposes. The arrangement was regarded as an experiment, and any subsequent sales would be subject to new negotiation.

The staff advised the Board that as South Africa appeared to be already fully committed to the initial transaction, no useful purpose would be served by asking the Government to consult further with the Fund before entering into the contract. Instead, South Africa might be requested to enter into discussions with the Fund before further negotiations for the sale of semiprocessed gold were undertaken. However, on February 9 the Managing Director circulated to the Board a memorandum that he had received from Mr. Tansley. This stated that the South African gold was to be sold for delivery in Switzerland (the London brokers acting as agents for a Swiss-French syndicate) and that such a transaction could not be carried out in the United Kingdom. Mr. Tansley added that unless the Fund took a strong position regarding premium sales, his Government would be compelled to open the London bullion market to unlimited transactions in industrial gold. He said that the British Government asked to be informed by the evening of the next day, i.e., Thursday, February 10, of the action the Fund proposed to take.

Accordingly, a Board meeting was held on Thursday morning. It revealed that the South African proposal aroused strong feelings, both pro and con. Two questions were raised: first, whether South Africa should have consulted the Fund before entering into the contract, and second, whether there was adequate assurance that the gold would in fact be used only for legitimate industrial purposes.

On the first question, Mr. McFarlane (Australia), who had been elected by South Africa, pointed out that the Fund had not asked the member to consult again before engaging in any premium gold sales, but had only asked that it satisfy itself on the proposed uses of the gold. Mr. Tasca (United States), on the other hand, thought that the spirit if not the letter of the Fund’s recommendation had been violated. He repeated Mr. Overby’s doubts that any gold sold would be used for legitimate industrial purposes, as the buyers would be paying a premium price whereas the United States and the United Kingdom would meet any such legitimate demand at a price of $35 an ounce. Mr. Parkinson (Canada) supported the U.S. view, but Mr. de Largentaye dissented, saying he was not satisfied that all bona fide demands were being met by the United States and the United Kingdom, especially as part of the demand for industrial gold had been supplied through the free market.

At the end of the meeting, the Board took a decision which expressed doubts similar to those which had been brought forward during the meeting, and asked South Africa to take all practicable steps to ensure that the gold sold was in fact used for bona fide industrial, professional, or artistic purposes.

At a further meeting that afternoon the Board approved a reply to South Africa and a press release. The reply, sent on the same day, incorporated the substance of the Board’s decision and also requested South Africa to provide the Fund with a copy of the contract or the text of the relevant terms. The press release referred to news reports about a gold sale at premium prices made by South Africa, and emphasized that the Fund had never approved any specific gold sale at a premium price. It then recited the Fund’s view of the undesirability of such sales as those which South Africa was making, and explained that the Government was being asked for further information to enable the Fund to judge whether the safeguards in the contract were adequate.

An answer from South Africa to the Fund’s inquiries, dispatched by airmail on February 16, failed to arrive. Meanwhile the South African Legation stated that Mr. Havenga would make a public statement on the premium gold sale in the South African Parliament before it recessed in the following week. On February 22 a copy of the letter of February 16 was received by cable and at the same time Mr. Havenga undertook to postpone his speech until February 24, the last day before the recess. On February 23 the Board met to consider a draft reply to South Africa. The Managing Director commented that consideration of the matter was urgent, since receipt of the member’s explanation had been delayed, and since the Fund had been informed that South Africa’s Finance Minister would make a statement in Parliament on the matter in less than twenty-four hours.

South Africa’s reply was summarized by Mr. McFarlane as follows:

(1) The text of the agreement South Africa had made with the London brokers was being sent to the Fund as requested.

(2) This agreement put into effect safeguards which were considered as meeting the requirements of the Fund’s letter of October 5, 1948. If any breach of the undertakings came to the member’s attention, the defaulting house would be debarred from further participation.

(3) In fact the legitimate and bona fide market for semiprocessed gold had expanded very considerably in recent years, so that an increased supply was appropriate.

(4) The contract could not be broken or postponed without exposing South Africa to action for breach of contract.

(5) South Africa would give serious consideration to any further practicable precautions that the Fund might suggest during the period of the present contract.

(6) The South African authorities would consult with the Fund regarding the plan for distributing the premium among gold producers.

The discussion that followed was concerned principally with the point that South Africa’s safeguards relied mainly on the argument that the use of the gold would be controlled until it was fabricated. Directors felt that effective safeguards against hoarding would control the volume of sales, not the form of the gold. Accordingly, the reply to South Africa approved by the Board stated that the Fund was still not satisfied with South Africa’s safeguards and recommended more effective procedures, citing regulations enforced by the United States.

Two days later, the Board met twice to consider a draft press release explaining the Fund’s position in reply to the Finance Minister’s statement to Parliament. The speech had included criticism of the Fund’s gold policies and the maintenance of the dollar price of gold, and stigmatized as a “fiction” that gold was worth only $35 an ounce. The press release, a long one, added further details to what had been said in the previous release, and defended the Fund’s position on premium sales and on the price of gold. Several Directors questioned the wisdom of the Fund’s issuing a press release, and Messrs. McFarlane, de Largentaye, and D’Ascoli (Venezuela) recorded their objections to its terms.

The Managing Director had become increasingly unhappy about the situation and accordingly, with Board approval, sent personal and private letters on March 9 to Mr. Havenga and Mr. Holloway (Secretary for Finance in the South African Treasury), proposing direct, face-to-face talks either in South Africa or in Washington. Mr. Havenga accepted the proposal and expressed his preference for a meeting in South Africa and his hope that the Managing Director himself would come.

April-May 1949

Before the Managing Director went to South Africa, the Board in April 1949 had two discussions on the $35 an ounce price of gold, on premium transactions in gold, and on the Fund’s gold policy, based on a number of staff memoranda. At the first discussion Mr. de Largentaye made a long statement in favor of increasing the price of gold, a proposal with which Mr. Southard disagreed, saying that his Government opposed a change in the price of gold. At the end of the second discussion the Managing Director summed up the views expressed, particularly as they bore on his coming talks with the South African authorities. He discerned no desire to stiffen the Fund’s policy on international gold transactions at premium prices. At the same time only one Executive Director had proposed a reversal of that policy. Thus the matter appeared to come down to presenting the Fund’s view that it was in the interest of all members, including South Africa, to carry out the spirit and purpose of the policy which had been established; also that there should be discussion on the arrangements that should govern any sales of semiprocessed and fabricated gold. Mr. Gutt believed that the aim of the talks should be to arrive at a full understanding on principles, so that both the Fund and the member could be assured of each other’s continuing cooperation.

During his ensuing visit to South Africa in May the Managing Director cabled to the Fund the terms of some further proposals for the sales of semiprocessed gold which had been communicated to him by the Government. These included additional precautions to ensure that the gold was confined to legitimate industrial uses. When the Managing Director’s cable was discussed at the Board, however, some Directors still had misgivings about the adequacy of these precautions, and the Board asked the Managing Director to convey these misgivings to the Government.

Mr. Gutt issued a public statement during his stay in South Africa, and Mr. Havenga made a statement in Parliament on their discussions. Mr. Gutt stressed the cordial atmosphere and desire of South Africa to reach agreement with the Fund, the safeguards that had been adopted, the undertaking of South Africa to keep a watch on developments, and the intention of the Fund to keep premium gold sales under review with all its members. Mr. Havenga referred not only to the discussions on premium gold sales (and subsidies), but also to the discussions held at the same time on South Africa’s economic and foreign exchange position, both of which he noted had been cordial. However, he also implied that the question of the price of gold would have to be taken up again in view of the world exchange position. These statements ended the matter until the Annual Meeting in September 1949, except for a short factual report made to the Board, in the absence of the Managing Director, by the Director of Operations, who had also been in South Africa.


At the Fourth Annual Meeting, in September 1949, Mr. Havenga, Governor for South Africa, introduced a resolution 2 that mentioned a number of factors, among them the long period during which the price of gold had remained fixed while prices of other commodities had risen, and proposed that the Governors resolve

that nothing in the Articles of Agreement of the Fund shall be interpreted to prevent the sale, by the Government of any member, of newly-mined gold in any market at such premium prices as may be ruling in that market provided the said member sells to the Fund or to one or more members of the Fund, or transfers to its own monetary reserves at least fifty percent of its newly-mined gold at the price from time to time current in terms of the Articles of Agreement of the Fund.

The Board of Governors referred this proposal to a Committee on Gold, which reported back to the Governors a resolution, which was adopted, that the

resolution of the Governor for the Union of South Africa be referred to the Executive Directors of the Fund for study of all relevant considerations and report to the Board of Governors.3

It will, of course, be realized that the devaluations which immediately followed the Annual Meeting, 1949, and included that of the South African pound, materially improved the position of the gold producers.

The Executive Board took up the Governors’ resolution at two meetings in October 1949, and at the second meeting directed the staff to prepare a study for Executive Directors’ consideration. The decision provided that a determination as to the scope of the phrase “all relevant considerations” should be reserved until the staff study was considered by the Board.

First staff report

A lengthy report by the staff and a draft of a public statement on the report’s recommendations were circulated to the Board on February 2, 1950. The report was in two parts: the first, an examination of the Fund’s policy on external transactions in gold at premium prices and related matters, and the second, a country-by-country analysis of premium gold markets and regulations on gold transactions. In a brief consideration of the appropriateness of the $35 price of gold, the report touched on the extent to which the purchasing power of gold and the profitability of gold mining had fallen out of line with that of other industries and other commodities, and reviewed the extent to which these were suitable criteria for determining the price of gold.

While in form the report was one by the staff to the Executive Board, it had been so written that it could be converted into a report from the Executive Board to the Governors. The principal alternatives confronting the Fund at the time were stated to be (1) continue the present policy; (2) strengthen the policy by calling on members to tighten their regulations covering international gold trade in a number of fields (i.e., exports of processed gold, gold transit trade and agency deals, re-exports of gold imported for refining, and gold imports); (3) adopt the South African proposal; (4) permit all newly mined gold to be sold in premium markets but continue the policy with respect to all other gold; and (5) modify the present policy.

The report concluded that the preferable alternative was to modify the present policy. The following summary of the principal arguments for this course is taken from a paper prepared by the staff working party at a later stage in the discussions:

(1) While the Fund’s policy helped to limit the flow of gold into hoards, it was not the only or the most important limitation, other limitations being the import restrictions and the exchange control machinery of importing countries, the demand in the gold markets in these countries, and the national policies of exporting countries to the extent that these would be maintained independently of the Fund’s premium gold policy.

(2) A relaxation of the Fund’s policy might be expected to lower the dollar price of gold in premium markets and thus to strengthen confidence in the basic parity between the dollar and gold.

(3) The limited extent to which the policy was implemented (or such degree of implementation as might reasonably be hoped to be achieved on the most optimistic assumption) left serious inequities, and the persistence of such inequities would be a source of international irritation and would be likely to set up increasing pressures within countries that might lead to the ultimate collapse of the policy.

The staff report proposed that the Fund’s policy should be modified so as to leave the countries exporting gold substantial freedom of action, subject to the provisions of Article IV, Section 2, of the Fund Agreement, and subject (1) to the undertaking of members to cooperate with the Fund to maintain orderly exchange arrangements with other members; (2) to the unenforceability in members’ courts, pursuant to Article VIII, Section 2 (b), of contracts involving the currency of any member which are contrary to the exchange control regulations of that member maintained or imposed consistently with the Articles of Agreement; and (3) to any accord between members under Article VIII, Section 2 (b), to cooperate in any further measures for the purpose of making each other’s exchange control regulations more effective.

Consideration of staff report

The Board first discussed the staff report, shortly after it was issued, at two informal sessions. The recommendations were given a generally cool reception, suggesting that Directors representing a majority would oppose changing the Fund’s policy.

The Board’s first formal session on the staff’s report was held on April 11, 1950, when the only speaker was Mr. Holloway, who made a statement as the representative of South Africa. Describing and defending South Africa’s position, Mr. Holloway made, inter alia, the following points: South Africa had understood at Bretton Woods that Article IV, Section 2, of the Fund Agreement gave members a legal right to sell gold at premium prices and had accepted this Article with that understanding. However, while South Africa still took the position that members had this legal right, it was prepared to reserve the legal question for the purposes of the discussion and deal instead with the policy. On this he stated that South Africa challenged not only the Fund’s policy on premium gold sales but also the official price of gold. The Fund had evaded this latter challenge, and if it could not prove that the present official price for gold was the right one, it would have failed to meet the challenge.

At the next discussion of the staff report, a number of Directors supported the continuation, or even the strengthening, of the Fund’s policy rather than its modification. Mr. Southard said that while there were admissible arguments for modifying the policy, the U.S. Government had decided that on balance there was no conclusive reason for changing the policy as it now stood. As to South Africa’s proposal for a uniform change in par values, he said that he believed that discussion by the Executive Directors was appropriate, but he made it clear that the policy of the U.S. Government was still the same as it had been a year earlier. Although the United States was mindful of the gains that a uniform change in par values would bring to gold producers and gold holding countries, it had decided against a change in the present period of struggle against disequilibrium and inflation. He added that the U.S. Government was aware of the imperfect enforcement of the policy and the loopholes in its own and other members’ regulations, which were the main reason for the recommendation of the staff report, but it believed that the present policy was still serviceable.

Mr. Crick (United Kingdom) indicated that his Government could not contemplate an abandonment of the Fund’s policy; he supported maintaining and, if possible, strengthening it. Messrs. Falaki (Egypt), Joshi (India), and Rasminsky also supported the policy.

On the other hand, Mr. de Largentaye favored modification of the policy because he thought it was legally untenable, and because he did not agree that premium gold transactions undermined exchange stability and tended to reduce official reserves. Mr. de Selliers supported Mr. de Largentaye’s position.

The Board’s decision

At a further meeting, on April 13, 1950, the Board decided to recommend to the Governors that they should not adopt the South African resolution. The votes were 51,740 for so recommending, and 7,280 against, seven Directors abstaining. Mr. de Largentaye was the only one to state his reason for abstaining, which was that he could not see any legal basis on which different rules could be applied to various parts of gold production.

Following the vote, Mr. Holloway made a number of criticisms of the Fund’s treatment of South Africa, and stated that he assumed that the Executive Board, in view of the trend of previous discussions, would reaffirm the 1947 policy. This, he said, would pose a question of high policy for his Government. The Government would have to decide whether, in the spirit of altruistic, international cooperation, it would still adhere to the Fund’s policy and its agreement of 1949, or whether it would act solely on the basis of self-interest. His Government had instructed him to inform the Executive Board that this question would be decided only after his report had been submitted; meanwhile South Africa reserved all its rights under Article IV, Section 2, of the Articles of Agreement.

At its next meeting, on April 14, the Executive Board, without further discussion of the staff report, voted against the recommendations in that report and decided by 55,290 votes to 16,530 that the policy expressed in the first statement (June 1947) should be continued. While no Director changed his position from the preceding vote, three who had previously abstained voted this time, one to continue the policy and two against the decision.

Discussion of uniform change in par values

Following the vote, the Board took up the question of a uniform change in par values. Mr. Holloway stated that discussion of this matter was called for if the Executive Directors were to meet the requirements of the Governors’ resolution. While South Africa accepted the provisions of Article IV, Section 7, which gave any member having 10 per cent or more of the total of the quotas the power to veto a uniform change in par values, it thought that the exercise of the power in the face of an approval of such a change by a majority of the Board of Governors would be undemocratic. Mr. Southard took exception to the word “undemocratic,” and said that the question could not be considered a substantive one in the light of the U.S. Government’s position.

In reply to a question, the staff representative said that Article IV, Section 7, had not been intended to grant undemocratic veto powers to any members but had merely recognized that exchange rates would move with those of the countries having the largest quotas, not because of votes but because of economics.

The staff then commented on the principal economic arguments used by the proponents of a uniform change in par values, as follows:

A premium price in gold markets did not prove that gold was worth more than $35 an ounce. The recent sharp fall in the dollar premium price of gold reflected much more the better pattern of exchange rates after devaluation. If the dollar premium price of gold should rise again, the fundamental reason for it would be further inflation in gold hoarding countries and a worsening of the balance of payments situation.

The argument that a change in the price of gold was needed to give the world more liquidity was generally advanced because the public ordinarily thought of liquidity in terms of gold. But national liquidity in terms of gold had not been a factor in any major country. As for other countries, the ratio of money supply and national income to gold would be inconsequential even if gold stocks were doubled.

International liquidity, however, was a more important element. With a uniform change in par values, the ratio of gold to total world liquidity would increase somewhat, but the countries with the greatest shortage of reserves would benefit least. In fact, it would be quite impossible to increase international liquidity substantially unless the balance of payments of countries outside the United States were improved simultaneously.

Those favoring a uniform change in par values argued that an increase in the price of gold would correct the present balance of payments disequilibrium of the world. However, the payments difficulties of the world did not arise from the $35 price of gold and a change in the price would merely postpone solution of the real problem, which could be satisfactorily met only by an increase in production for export at competitive prices.

Moreover, a change in the price of gold was not needed to do justice to the gold producers of the world. Profitability for gold producers, while lower than in 1934, was considerably higher than in the years prior to 1934. There was no special obligation to keep the return to gold producers constant.

Mr. de Largentaye, and Messrs. Holloway and Busschau, who represented South Africa, indicated at the next meeting that they did not accept the staff’s arguments. The Managing Director asked the Directors whether they wished to report to the Governors on the question of a uniform change in par values, and it was agreed that the Board would decide later the nature of its report to the Governors and what, if anything, should be included on the par value question.

The Board’s report

The Research Department then produced for the Board a revised draft of a report to the Governors. The Board’s discussions of this draft, from April 21 to 25, 1950, revolved principally around two questions: the extent to which dissenting or minority views should be given, and whether a reference to uniform changes in par values should be included. On the former point the Board decided that its report would contain the decisions on the South African resolution and on the continuance of the policy on premium gold transactions taken on April 13 and 14. It would also set out the various considerations which led to those decisions, but would not give a minority view or indicate that the decisions were not unanimous.

On the question of a reference to the Board’s consideration of a uniform change in par values, Mr. Parkinson proposed the omission of this paragraph in the report. When it was agreed to include the paragraph, in view of South Africa’s desire to have it and the fact that the South African resolution contained a reference to it, he expressed formal dissent. Further difficulties arose over the inclusion of the word present in the draft sentence giving the Executive Directors’ view of the par value question: “In their view there is no present economic justification for recommending such a change to the Board of Governors.” The word was deleted from the report as approved by the Executive Directors, but Mr. McFarlane asked at the following meeting that it be reinstated, saying that the deletion made the sentence unsatisfactory to the South African representative, who had not been in attendance when the report was adopted. However, the sense of the meeting opposed changing the previous decision.

The Executive Board’s report, as approved, quoted part of the Fund’s first statement on premium gold transactions, the resolution of the Board of Governors, and the resolution proposed by the South African Governor, recorded that after full consideration the Directors were not in favor of changing the policy, and then developed in full the arguments for that policy which have been indicated above.

The Executive Board decided that its report should be sent to the Governors without delay and released to the public on May 3, 1950. The report was reproduced as an Appendix to the Annual Report of the Executive Directors for 1950, and was discussed in a chapter on Gold Policy in that Report.4 At the ensuing Annual Meeting, in September 1950, Mr. Havenga, as Governor for South Africa, criticized the Executive Directors’ treatment of the matter in a speech on September 7.5 Four days later the Governors’ Committee on Gold discussed the report and the related chapter in the Annual Report. Some Governors agreed with the Executive Board and others did not.6 This divergence of views was reported by the committee to the Governors, who accepted the committee’s report without comment. The South African resolution, as such, was not formally considered by the Governors.


During 1949 and 1950 two minor questions concerning South Africa’s gold sales were dealt with by the Executive Board. Both involved, in somewhat different ways, problems created by the Fund’s policy.

Among the measures of control adopted by the United States, and recommended to South Africa, was a rule that not more than 80 per cent of the value of fabricated gold sold abroad might represent the value of the gold itself. Adapting this rule to local conditions, the South African Government prescribed that the elements of the cost of any fabricated gold article which represented labor and overhead must represent at least 25 per cent of the value of the gold (at $35 an ounce) included in it. This meant a minimum of £2 3s. 1½d. for labor and overhead added for each ounce of gold used. Announcing this to the Fund in August 1949, however, the South African authorities said that they regarded it as an unsatisfactory requirement because it put a premium on inefficient manufacturing processes, and because mark-ups arising from intercompany sales afforded an easy way of escaping it. They preferred to rely upon inspection of all consignments of gold articles by the police. Three months later, Mr. Holloway wrote to the Fund to say that the revision of the price of gold due to the devaluation of the South African pound had raised the value of 25 per cent of an ounce of gold to £3 2s. od. To require manufacturers to incur minimum costs of this order would, however, run counter to South Africa’s anti-inflationary policy. The Government had accordingly decided to change the requirement to a minimum of £1 10s. od. for labor and overhead per ounce of gold.

In May 1950, however, Mr. Holloway sent a further letter, announcing that his Government had decided to abandon the imposition of a minimum mark-up for labor and overhead, partly because it was so easily evaded and partly because of the inducement to inefficiency. South Africa intended for the future to rely solely upon police inspection. This letter was considered by the Board in July, and a reply was sent explaining that the purpose of the “80 per cent test” applied in the United States was to distinguish between fabricated gold and semi-processed gold, which was subject to export licensing. The reply expressed the hope that, in the absence of a similar test, South Africa would take special precautions to avoid semiprocessed gold being exported as fabricated gold.

The second question raised by South Africa’s gold transactions concerned a proposed sale of gold sovereigns equivalent to 1,800,000 ounces of gold to the Arabian American Oil Company for use in payment of oil royalties to the King of Saudi Arabia. Mr. Holloway consulted the Fund in December 1949 about the transaction, which involved payment by the company of handling, conversion, transport, and minting charges equivalent to $1.3175 per fine ounce. Following discussion of the matter in the Board, Mr. Overby (Acting Chairman) replied, drawing attention to Rule F-4 of the Fund’s Rules and Regulations. Inquiries made by the staff had shown that normal charges for the operations proposed by South Africa would be approximately $0.90 an ounce less than the figure quoted by Mr. Holloway. The Fund would therefore have to regard the proposed sale of sovereigns as a premium transaction.


Establishment of staff Working Party

The flow of gold to private hoards, after declining in 1949 and the first half of 1950, increased sharply in the second half of 1950, following the outbreak of the Korean War, to an annual rate of 60 per cent of world gold production. The staff became concerned about the possibility that gold from official reserves was reaching private hoards through the premium markets. The Managing Director therefore wrote to all members on February 9, 1951, requesting information on any sales made recently from their reserves to nonmonetary authorities.

Shortly after the inquiry had been sent, the staff circulated to the Board two memoranda on gold transactions. The first, dated February 14, 1951, drew the Board’s attention to the large increase in the volume of gold exports at premium prices authorized by South Africa since the outbreak of the Korean War. The second, dated February 26, described the large increase in hoarding, expressed the fear that continued hoarding on such a scale would in time lead to a complete breakdown of attempts to conserve gold for central reserves, and gave as the staff’s judgment that the amount of gold exported by South Africa at a premium far exceeded what was required for arts and industries. It therefore recommended that the Board should review the arrangement with South Africa reached in May 1949, and also that the Managing Director should be authorized to consult appropriate gold producing and gold importing countries to ascertain whether further steps could be taken to make the Fund’s policy more effective.

The staff memoranda and recommendations were discussed at a number of Board meetings in February and early in March 1951, at which the main points at issue were (1) the legal authority for the Fund’s gold policy, (2) whether there was, in fact, any agreed arrangement between the Fund and South Africa, and (3) whether any Board decision on the staff’s recommendations should single out South Africa.

The legal question was raised again by Mr. Martínez-Ostos, but he agreed to defer it for the time being to enable the Board to consider questions of substance. Mr. Melville (Australia), who had been elected by South Africa, on the other hand, asked that the legal authority should be clearly established, e.g., by Board interpretation, before any decision was taken that involved a question of a member’s compliance with the Fund Agreement. Mr. Melville sharply attacked not only the Fund staff for concentrating on South Africa in its memorandum of February 14, but also the Fund’s premium gold policy, stating that it was impracticable. He advocated flooding the premium markets to destroy them as the only possible policy, if the price of gold was not to be increased. Referring to the two countries that had elected him, he said, “As a South African I am, of course, in favour of premium sales of gold. As an Australian I must add that my instructions are to oppose them.”

After some discussion, in which differences of opinion were expressed as to the terms in which the decision should refer to South Africa, the Board decided on March 7, 1951 as follows, agreeing at the same time that the text should be made public:

  • Since the amount of sales and purchases in the world markets of gold for jewelry, artistic and industrial purposes has recently been increasing at a rate indicating that at least a part of it finds its way to private hoards, contrary to the gold policy of the Fund established in June 1947, the Executive Board considers the existing arrangements and practices of several countries, including South Africa, are no longer a satisfactory basis to implement the Fund’s gold policy and directs the staff of the Fund urgently to elaborate, after consultation with the countries concerned, more effective methods than the existing ones.

The Managing Director appointed a committee of four staff members to plan action to carry out the Board’s decision. However, the committee was unable to agree on a report, one plan being advocated by the Treasurer and a member of his Department, and another by the other two members of the committee, who were drawn from the Legal and Research Departments. The Acting Chairman (Mr. Overby) then appointed a staff Working Party on Gold with terms of reference which included the stipulation that the Fund’s gold policy was to be taken for granted. The Working Party was to have unlimited scope to investigate what measures might be taken to make the policy more effective. To this end, major gold producers and importers were to be consulted on existing practices and arrangements. Following such consultation, the Working Party might make recommendations to the Executive Board in accordance with its decision of March 7. The Working Party was also to consider the question of sales of gold from monetary reserves and, in this connection, was to study the replies received from members to the general letter of February 9.

Report of staff Working Party

The Working Party held discussions in Washington during April and May 1951 with technical representatives from Canada, France, Mexico, the Netherlands, South Africa, the United Kingdom, and the United States.7 The discussions, which included both separate conversations with the representatives from each member and joint meetings, were concerned with the members’ regulations and practices for dealing with gold transactions, and their experience in carrying them out. In addition to the discussions, the Working Party obtained statistical and other information from the representatives and supplemented its discussions with further studies and inquiries on the subject.

The Working Party’s report, which was prepared on the basis of all the information received, was issued on July 18, 1951. The report was circulated to the Board with a covering note by the Acting Managing Director, which emphasized that the Board’s decision required that the Fund’s gold policy as it stood should be the basis of the report and that the report therefore dealt with more effective measures for implementing the existing policy, which deprecated external premium gold sales. Accordingly, the main recommendations of the report were as follows:

  • Countries should permit exports and imports of gold only in accordance with the following principles:
  • (1) Except for movements of gold between monetary authorities, gold in whatever form, such as gold-bearing materials, raw gold, semiprocessed gold, bullion, coin, fully fabricated gold, or scrap gold, should not be imported into any country from any source except
    • (a) for the purpose of satisfying the demand for gold required for local industrial, professional, or artistic consumption, and not for re-export; or
    • (b) for the purpose of refining, processing, or fabrication of the gold for export in accordance with paragraph 2 below:
  • (2) Except for movements of gold between monetary authorities, no gold in whatever form should be exported from a country to any other country, whether a member or nonmember of the Fund, unless the importing country has agreed to subscribe to the principles outlined in paragraph 1 above.

The Board considered the Working Party’s recommendations on September 18, 1951. During the course of the discussions, it became clear that for a variety of reasons the Board was unwilling to recommend the adoption of the much more stringent measures that the Working Party’s report had shown would be necessary, if the Fund’s existing gold policy was to be better implemented. Among the reasons were that enforcement of the policy required the cooperation of all members and a general will to support the policy, whereas certain members were opposed to the policy and to the imposition of further controls. Also, more stringent measures would probably fail, especially in times of uncertainty; gold premiums were only a symptom of financial ills, and the Fund would do better to attack the disease rather than trying to control the symptoms.

Other Directors argued that the Fund’s policy was mistaken because a curtailment of premium markets raised the premium in them, and this reduced public confidence in currencies. Another view expressed again was that the proper course was for importing countries to stiffen their controls against gold imports, and not for exporting countries to be required to limit their exports. Finally, Mr. Melville made it clear that South Africa was still wholly opposed to the Fund’s policy, and was in any event unwilling to go beyond the arrangement reached in May 1949. However, Mr. Southard said that he did not believe that the Fund could solve the problem by throwing the gold policy overboard on the ground that it was unenforceable.

Accordingly, the Board decided that “the recommendations [of the Working Party report] are not adopted and the staff is asked to prepare further recommendations.”

Staff recommendation

In accordance with this decision, the Working Party prepared another memorandum which included a brief review of the premium gold policy and a new recommendation. The staff had considered whether it should explore alternative techniques of enforcing the policy that would be more acceptable to members, but had concluded that this would not be fruitful in the present circumstances. The fact was that the Fund’s policy was bound to be ineffective so long as there remained a strong demand for gold at prices above parity, with payment to be made in dollars. Accordingly, the staff’s new recommendation was that “the Fund, while reaffirming its belief in the economic principles underlying its premium gold statement, should withdraw its request to members to prevent external transactions in gold at premium prices” because it had become clear that the flow of gold into hoards could not effectively be checked except by much more extensive and hence much more onerous controls, which members did not feel able to accept. The memorandum also discussed briefly the likely consequences of the proposed change in policy, finding them not wholly adverse to the Fund’s objectives.

Second Board statement

The staff also prepared a draft statement incorporating its new recommendation. This proposal was not acceptable to Mr. Southard and was considered too drastic by other Directors. Mr. Joshi stated that his Government was completely opposed to scuttling the Fund gold policy. Accordingly, the Board’s discussions were mainly based on alternative drafts put forward by Mr. Southard and Mr. Saad (Egypt).

Mr. Southard’s draft was specific about the controls members should maintain to distinguish between transactions in monetary and nonmonetary gold, whereas Mr. Saad’s did not mention any, nor did the final statement. Both drafts contained the essential paragraph of the statement finally adopted on September 28, 1951, which read as follows:

… the Fund’s continuous study of the situation in gold-producing and -consuming countries shows that their positions vary so widely as to make it impracticable to expect all members to take uniform measures in order to achieve the objectives of the premium gold statement. Accordingly, while the Fund reaffirms its belief in the economic principles involved and urges the members to support them, the Fund leaves to its members the practical operating decisions involved in their implementation, subject to the provisions of Article IV, Section 2 and other relevant Articles of the Articles of Agreement of the International Monetary Fund.8

Mr. de Largentaye said he would have to object to the proposed statement and could take no responsibility for it, having never agreed with the Fund’s gold policy. He offered a different statement that he thought would be a better way out of the difficulty; this put the primary burden for preventing premium transactions in gold on importing countries and also stressed the need for tight monetary policies.

Mr. Rasminsky, in a statement highly critical of the proposed decision, said that it was misleading to suggest that members had obligations other than those imposed by Article IV, Section 2. The Canadian Government would not feel obliged to pretend otherwise, and would take the decision to mean that it would cover such actions as the Government thought necessary to pursue.

Mr. de Selliers disliked the fact that the paragraph did not clearly indicate what the Fund expected of its members, and said that he would have to reserve the position of Belgium because of the vague wording.

In reply to Sir George Bolton (United Kingdom), Mr. Southard said that he believed the intent of the new statement to be that members would make effective as far as possible an operating distinction between hoarding and non-hoarding sales. Other Directors indicated their views that the new statement meant that the judgment as to whether it was desirable to sell gold bars and coins was left to the discretion of each member.

The Managing Director stated his understanding of what the new statement involved so that those who would be working with it would know exactly what its implications were. His statement, on which no Director commented, read in part as follows:

  • I take it that we are not withdrawing the Fund’s gold statement of June 1947. What we are doing instead is to modify that statement in certain important respects. For example, where the original statement requested members to take effective measures to prevent external transactions in gold at premium prices, the new statement will urge members to support the basic principles underlying the policy under which, to the maximum extent practicable, gold should be held in official reserves rather than go into private hoards, so that it should contribute to monetary and exchange stability.
  • I understand that it is left to members to decide what measures they consider practicable. Some members may take strong measures, others weaker measures, and yet others, perhaps, no measures at all. Each member will be the judge of just how and to what extent it will implement this statement. So far as premium sales are concerned they do not come within the purview of the statement as long as they are not designed to direct gold into private hoards.
  • Finally, it should be clear that although the Fund will continue to study all aspects of gold transactions, and will remain the instrument of collaboration available at all times to its members to discuss any question relating, for instance, to gold, the Fund will not be expected to represent to any member which sells significant amounts of gold for any nonmonetary purpose that for this reason it is failing to support the statement. Of course, if at any time the failure of gold to enter or remain in official reserves threatens to become dangerous to its members or to some of them, the Fund will review the whole situation, and this statement will not prevent it from performing this normal function or from taking the initiative in consulting with members on any problems which may arise.

This was the last occasion during the period covered by this history on which the Board discussed the problem of the sale of gold at premium prices.


During the years 1947–51, the Fund was faced with the alternatives of attempting to maximize the accretion of gold to reserves, or attempting to drive down the price of gold in premium markets. Had the latter course been followed, it seems likely that most of the flow of newly mined gold ($800 million a year), apart from that needed for legitimate industrial or artistic demands, would have been absorbed by hoarders. In the event, the Board decided to disregard the possibility of reducing the premium, and concentrate on securing as much gold as possible for reserves. There is little doubt that this was the right choice. At least, some $1.5 billion of gold was added to world reserves in the four years 1948 through 1951, whereas if the Fund had been inactive it seems likely that little of this would have been secured.

It is arguable, also, that the contribution made by this increase in reserves to the stability of exchange rates itself helped, in the longer run, to lessen the premium in gold markets. Nor did this influence cease with the Board’s decision to leave the implementation of its policy to individual member countries. Its known views assisted members to continue to encourage the accretion of gold to reserves, and to discourage premium markets, so that as the demand for gold for hoarding diminished, reserves were able to benefit increasingly from the steadily growing output from the mines.


In their Annual Reports since 1951 the Executive Directors have continued to pay attention to the price of gold. The Reports for 1953 and 1954 recorded the gradual removal of restrictions on the sale and movement of gold, and a fall in the premium.9 The reasons for this fall were given in the 1953 Report as being the relaxation of controls and the creation of new marketing facilities; the continuance of the legal restrictions imposed in certain countries on the purchase and holding of gold; and the general tightening of monetary policy and the decline of inflationary pressures.10 The Report for 1954 recorded the reopening of the London gold market on March 22, 1954.11

In September 1954, at the instance of Lord Harcourt (United Kingdom), the Board agreed to amend Rule F-4, which set the margins above and below $35 an ounce outside which members may not buy and sell gold, because the existing margins made it impossible for the Bank of England to intervene to regulate the London market when the price moved outside $35 plus/minus ¼ per cent.12 The new rule, which was established for a month on a temporary basis and then made permanent, sets an alternative margin of 1 per cent including all charges.

The Annual Report for 1956 stated that there had been virtually no premium obtainable by several members that had previously obtained relief for their mining industries by selling part of their output at a premium, and the 1957 Report recorded that there had actually been some dishoarding during the year.13

After 1954 the price of gold on the London market remained within limits close to the gold points based on the buying and selling prices of the U.S. Treasury ($35.0875 and $34.9125) until the winter of 1960–61, when the price rose briefly to a maximum of $40. Recording this in its Annual Report for 1961, the Board also referred to the measures taken in several countries to reduce the abnormal demand for gold that had caused the increase.14 No other major disturbance occurred during the period covered by this chapter.

Prices in other markets, which continued to show substantial premiums above $35 an ounce, were recorded annually with some indication of the probable cause of fluctuations, but with no general comment.15


Below, Vol. III, p. 310.


Summary Proceedings, 1949, p. 34.


See ibid., pp. 34–36, for the text of the committee’s report.


Annual Report, 1950, Appendix II, pp. 90–95, and Chap. IV, pp. 70–74.


Summary Proceedings, 1950, pp. 93–98.


Ibid., pp. 42–43.


Italy and Egypt had also been invited to send representatives. However, Italy did not nominate a representative until after the discussions had been held, and the information supplied by him was received too late to be included in the Working Party’s report. Although Egypt stated that it would supply written information, this had not been received by the time the report was issued.


For the full text of the statement, see E.B. Decision No. 75-(705), September 28, 1951; below, Vol. III, p. 225.


Annual Report, 1953, pp. 58–60, and 1954, pp. 114–19.


Annual Report, 1953, p. 60.


Annual Report, 1954, p. 116.


Annual Report, 1955, pp. 97–98.


Annual Report, 1956, p. 112, and 1957, p. 109.


Annual Report, 1961, pp. 128–29.


See, e.g., Annual Report, 1966, p. 118.

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