Chapter 20: Gold: New Problems, New Policies
- International Monetary Fund
- Published Date:
- February 1996
In a Period Overflowing with international monetary events that made front-page news, some of the most exciting occurrences involved gold. For the first time since the founding of the Fund the subject of gold became of intense interest to monetary officials and even a source of contention among them. We have already seen in Part One that concern about the position of gold in the international monetary system delayed the advent of SDRs. After 1967, eruptions in exchange and gold markets began to take place frequently and discussions about gold became more and more heated. In fact, by the end of the period covered here, it had become almost impossible to mention gold without arousing emotion.
This chapter discusses the dramatic developments involving gold that occurred prior to August 15, 1971. What took place from August 15 to the end of 1971, including the developments relating to gold, is described in Chapters 26 and 27.
Calm Before the Storm: 1965
By 1965 a number of signs of impending trouble over gold already loomed on the horizon. It was becoming increasingly hard to accommodate the growing private demand for gold with the desire of national monetary authorities to build up their official gold holdings. Trends that were to become much more pronounced could already be discerned. Industrial demand for gold was rising swiftly because of advances in technology. Defense and aerospace industries were finding new uses for gold, and so was the medical profession. Higher incomes throughout the world also increased the demand for gold. The popularity of gold jewelry, for instance, was spreading. In times of inflation, gold was a relatively cheap metal, its price having remained fixed, for monetary purposes, at $35 an ounce since the early 1930s.1 Superimposed on these demands for gold was the traditional hoarding of gold by those who favored keeping their savings in that form. All in all, between 1951 and 1965 private users took some $12 billion of gold off the market.
On the other hand, for several years gold production had not been expanding much, if at all. In 1965 the gold output of the world (excluding that of nonmembers of the Fund) was about $1.45 billion. Although this was the highest annual amount ever recorded, the long-run outlook for increases in the supply of newly mined gold was uncertain. Old mines were being worked out and there were few new gold strikes. In fact, after 1965 the volume of gold production remained relatively stable. The U.S.S.R. at times augmented the gold supplies of the Western world by selling gold to pay for imports, mostly of grain, but these sales did not occur with any regularity.
As a consequence of an expanding private demand impinging on a relatively constant supply, the amount of gold flowing into official reserves was gradually diminishing. As we have seen in Part One, the decline in the gold holdings of national monetary authorities had raised the question whether the U.S. authorities would continue to make the dollar convertible into gold, and monetary officials had begun to fear that the narrowing of the gold base in the total of international reserves might constrict the growth of world liquidity.
The U.S. Treasury, through the Federal Reserve Bank of New York as its fiscal agent, continued to stand ready to buy gold at a price of $34.9125 an ounce and to sell gold for official monetary purposes at $35.0875 an ounce. But this policy was becoming costly. During 1965 the Treasury sold $1.5 billion to foreign countries and international institutions and another $118 million domestically for industrial, professional, and artistic uses. This decrease in the U.S. gold stock was much larger than the decreases of earlier years, and brought U.S. gold reserves down to $14.1 billion.
The Gold Pool, which had been formed in 1961 by the central banks of Belgium, France, the Federal Republic of Germany, Italy, the Netherlands, Switzerland, the United Kingdom, and the United States, continued successfully to intervene in the London gold market to keep the price of gold in that market at the officially fixed level. Because of the operations of the Gold Pool, the London market had become the leading international market for gold bullion. Consequently, prices for gold in other important markets, such as those in Paris and Zürich, or in Beirut, Bombay, or Hong Kong, were kept in line with the fixed price in London as long as there were no restrictions on the import or export of gold between these markets. The official price for gold was thus held fairly constant throughout the world, and without any loss of gold reserves by the countries operating the Gold Pool. On the contrary, on balance the operations involved some acquisition of gold for the reserves of those countries.
Among private traders, the counterpart of official concerns in the mid-1960s with regard to world liquidity took the form of speculation on the official price of gold. By 1966, traders were beginning to think seriously that the official price of gold might be raised, and private demand for gold, especially for hoarding, started to rise appreciably. On December 23, 1966, the price of gold in the London market, which was quoted in sterling, reached the equivalent of $35.19¾ an ounce, the highest in five years. In January 1967, after some monetary officials had voiced their support for a rise in the official gold price, the demand for gold in the world’s main markets became heavy. However, when the U.S. Treasury issued a strong statement rejecting any change in the official price, pressure on gold prices subsided quickly and remained light for several months thereafter.
Gold Pool Abolished
In mid-October 1967 an intense speculative crisis in gold markets erupted. In effect, a flight into gold took place because of expectations that there would be a change in the exchange rates of major currencies. Then, the actual devaluation of sterling on November 18, 1967 brought about widespread anticipations that the official price for gold would shortly be raised. A virtual gold rush was on.
Through the operations of the Gold Pool the price in the London market was being kept below $35.20 an ounce, but the prevention of premium gold prices through the sale of gold from the reserves of the seven participating countries was becoming extremely costly. (France was not active in the Gold Pool after June 1967.) The official gold stocks of all national authorities declined during 1967 by the equivalent of $1,580 million; the gold losses of the U.S. Treasury alone totaled over $1 billion. The management of the Fund was already cognizant of the fact that a major international crisis concerning gold was likely to develop, and that, within 3 to 12 months, two gold markets might have to be set up.
In the early months of 1968 the private demand for gold became even stronger. To help keep the price down, the members of the Gold Pool sold on a massive scale to the private market. Such sales came to $1.7 billion for the first quarter of 1968 and resulted in a further drop of $1.4 billion in official stocks of monetary gold. The U.S. Treasury alone sold $1.3 billion of gold, surpassing its sales for the entire year of 1967.
The Governors of the central banks of the participants in the Gold Pool, meeting at the bis in Basle on March 10, 1968, announced that the seven central banks contributing to that Pool would continue their support in the Pool based on the fixed price of $35 an ounce. But this did not allay the demand for gold. On the contrary, it lose to panic proportions, and on March 15, 1968 a decision was made to close the London gold market, thus stopping the drain on official monetary reserves.
In this atmosphere of emergency, the Governors of the central banks of the participants in the Gold Pool examined their operations at a specially called meeting in Washington on March 16 and 17, 1968 and decided to bring the Gold Pool arrangements to an end. In a communiqué following the meeting, they announced that the U.S. Government would continue to buy and sell gold at $35 an ounce but only in transactions with monetary authorities. In effect, there was to be no change in the official price of gold. Furthermore, gold from official reserves would henceforth be used only for transfers among monetary authorities: no longer would gold from official reserves be supplied to the London market or to any other gold market.
The Governors also agreed that, as the existing stock of monetary gold was sufficient in view of the prospective establishment of the Fund’s facility for special drawing rights, it was no longer necessary to buy gold from the market. Finally, they agreed that they would not sell gold to monetary authorities to replace any that had been sold in private markets.
The policies of the Fund toward the world’s markets for gold had for many years reflected concern about the possible consequences of activity in gold markets on exchange rate stability, one of the Fund’s primary objectives. The Fund had sought to proscribe transactions in gold at premium prices because such transactions might undermine official parities. And it had endeavored to channel maximum amounts of gold into members’ official reserves; increases in reserves would strengthen members’ means of supporting their parities.
On the occasion of the ending of the Gold Pool the Managing Director, who had attended the March meeting in Washington of the Governors of the central banks of the seven participating countries, issued a personal statement expressing his support for their actions and urging other members of the Fund to cooperate with them. He regarded the decision to conserve monetary gold as readily understandable and stressed that the countries that had participated in the Gold Pool were still maintaining the par values of their currencies, a consideration of importance to the Fund.
When Mr. Schweitzer notified the Executive Directors, in advance, of the statement he was planning to make, Mr. Plescoff (France) took some exception to it. He did not want the Fund to appear to be endorsing the operations of the Gold Pool, and, further, he questioned whether the U.S. authorities were any longer fulfilling their obligations under Article IV, Section 4 (b), of the Fund Agreement. The General Counsel replied that the primary obligation of the member under Article IV, Section 4 (b), was that regarding the exchange rate, and that the member could carry out this requirement in either of two ways. The United States was fulfilling that obligation, although it might no longer be fulfilling the obligation specified in the rest of Article IV, Section 4 (b). In any event, the principal obligation concerning exchange rates and gold was under Article VIII, Section 4, which required a member to convert balances of its currency tendered to it by the monetary authorities of other members. The United States was continuing to honor this commitment.
Two-Tier Gold Market
The immediate effect of the actions of the Governors of the central banks of the participants in the Gold Pool on March 16 and 17, 1968 was the emergence of two markets for gold. The first market was for official transactions only, and the price was to be maintained at $35 an ounce. The second was for private transactions, and the price was to be freely determined by demand and supply. This dual market was a device for permitting the simultaneous retention of an official price for monetary gold and a higher price for nonmonetary gold.
At the outset it was not at all certain how the private market would develop. As the dual market was being announced, the London market remained closed. Preparatory to the latter’s reopening, the Bank of England issued revised instructions for gold marketing operations. Forward transactions could take place only with the prior permission of the Bank of England, and authorized banks would not be permitted to finance purchases of gold by nonresidents by lending foreign currency or by accepting gold as collateral for loans in foreign currency. Gold dealers announced that, henceforth, the price of gold in the London market would be fixed twice daily, once at the traditional time of 10:30 a.m. and again at 3:00 p.m., and would be quoted in terms of U.S. dollars.
The U.S. Treasury announced that it would no longer buy gold from any private source nor would it sell gold to licensed domestic industrial and artistic users. These consumers would have to satisfy their requirements at home or abroad at the free market price within the limits of their licenses. A number of banks and commodity firms obtained licenses to acquire gold from private sources for resale to licensed industrial users and for export to foreign buyers. These authorized gold dealers began to quote various competitive daily prices based on the costs involved in obtaining gold.
A number of central banks took actions consonant with the decision of the central banks of the former Gold Pool participants. They announced that they, too, would not buy or sell gold in the free market and began to make changes in their regulations and gold marketing procedures that effectively separated their official gold transactions from other gold transactions.
Prices Up, Then Down
When gold markets reopened, prices in private markets tended to move upward. Initially, in the two weeks from mid-March to April 1, 1968, while the London market was still closed, prices in the private markets in Zürich and Paris rose to about $40 an ounce. On April 1 the first price fixed by the five bullion brokers in the reopened London market was $38 an ounce, a premium of almost 9 per cent above the official price. By May 21, as both the French franc and sterling came under pressure, the price of gold in the London market reached $42.60 an ounce. As Mr. Schweitzer remarked at the Twenty-Third Annual Meeting, the prices of gold in private markets had since March been consistently higher than the official price, for the most part by 10 to 15 per cent.2
After October 1968 prices in private gold markets surged upward even more sharply. Expectations in October–November 1968 and again in February–March 1969 of changes in the exchange rates for the French franc and the deutsche mark produced general activity in the major gold markets. At times the speculative buying of gold was large. By March 1969 the price in London had risen to $43.825 an ounce.
Strong demand was not the only reason for this rise in the free market prices for gold. Supply was unduly low because only a comparatively small amount of newly mined gold was being placed on the private market. South Africa, in the process of negotiations with the U.S. Government and with the Fund about official outlets for its gold (see below), had hung back from supplying the private markets. As a result, demand was being met mainly from stocks that private investors had accumulated during the crises of November 1967 and March 1968. These stocks had been estimated as of mid-March 1968 at almost 90 million ounces—the equivalent of over $3 billion at $35 an ounce and, of course, more than that at free market prices.
In the second half of 1969, however, gold prices in free markets turned around drastically, and in December 1969 prices in London fell back to the official price of $35 an ounce. In January 1970 they dropped even lower but then moved fairly closely around the official price throughout 1970 and the first several months of 1971. Declines in the prices of gold in the London market in the second half of 1969 and the continued low prices through early 1971 were paralleled by corresponding movements in prices in other gold markets.
There were several reasons for the decline in gold prices after the middle of 1969. Although industrial and artistic demand for gold continued to expand rapidly—from about 48 per cent of current production in 1965 to about 63 per cent in 1968—the rate of growth slowed somewhat in 1969. But what was more important was that gold hoarding fell to its lowest point in more than a decade. There had been a change in expectations concerning a possible revaluation of the official price of gold: it appeared possible that monetary authorities could now maintain the official price of $35 an ounce. This change in expectations was, to some extent, a consequence of the greater calm in exchange markets once the exchange rates for the French franc and the deutsche mark had been altered in August and October 1969. It also reflected the prospective activation of SDRs that had been agreed upon by the Board of Governors in September 1969. The activation of SDRs had dispelled fears of a shortage of world reserves and, it was believed at the time, ensured that any large additions to reserves would be in the form of an asset similar to gold rather than in any national currency. Finally, declines in gold prices reflected the agreement between South Africa and the Fund at the end of 1969 that South Africa would sell gold to the Fund, thus increasing the amount of gold held by monetary authorities.
Consequently, by the end of 1969 it appeared that the agreement made in March 1968 by the participants in the Gold Pool not to sell gold to the private market and to let the price of gold for nonmonetary transactions fluctuate in response to private demand and supply had effectively stopped the drain of gold from monetary stocks and had stabilized the price.
Attitudes Toward the New Arrangements
By the time of the 1968 Annual Meeting, some six months after the two-tier market for gold had been introduced, it was evident that the new procedures had been generally accepted. Canada, for instance, a producer of gold that had not been a participant in the Gold Pool or in the Washington meeting of March 16 and 17 earlier in the year, had associated itself with the arrangements agreed upon at that meeting, and its newly mined gold was being channeled into the private markets. Mr. Edgar J. Benson (Canada) observed that “the two-tier gold system appears to have worked out rather well, and to have introduced a greater degree of realism in attitudes toward gold.”3
Mr. Fowler, making the last of four appearances at the Annual Meetings as Governor for the United States, stated again the insistence of the U.S. authorities on keeping the official price of gold unchanged. Referring the Governors to a speech that he had made in the previous week, setting forth in detail the gold policies of the United States and their relation to the stability of the international monetary system, Mr. Fowler repeated the salient points. He said, in part:
The international monetary system has a vital stake in maintaining the value of gold in existing monetary reserves at $35 an ounce—neither less nor more. This provides assurance both to the countries who hold a large proportion of their reserves in gold and to those who hold a small proportion of their reserves in gold. It is clearly within the capabilities of the system to provide such an assurance, and the United States believes it is important to the stability of the system that this be done.4
Recognizing that certain problems still existed—an obvious reference to the unsettled question of what should be done about South Africa’s newly mined gold—Mr. Fowler stressed that any solution should strengthen and not weaken the two-tier system.
Mr. Jenkins (United Kingdom) supported the U.S. position. It was, he said, the firm view of the United Kingdom that the official price of gold should remain unchanged at $35 an ounce. To this end, Mr. Jenkins thought that the two-tier market had “succeeded very well—perhaps surprisingly well” and that the decision bringing about these arrangements had been “a wise one.”5
Mr. Colombo (Italy) also advocated maintenance of the two-tier gold system as long as the metal remained the main component of reserves. He expressed his reasoning, based on minimizing the impact of speculation on official gold holdings, as follows:
It has been fully proven that the communication between commercial and monetary sectors is a disequilibrating factor and that free gold markets do not play any useful role in the monetary system. Thus we succeed in avoiding a situation in which conversion of national currencies into gold by private operators reduces existing official gold holdings.6
The new arrangements for gold seemed to be a success. These speeches by the Governors strongly suggested that they attached crucial importance to retaining gold as a principal element, if not the fulcrum, of the international monetary system. Gold was not being “demonetized.”
Nevertheless, some Governors expressed serious concern about what would happen to gold in the future. Mr. Benito Raúl Losada (Venezuela), addressing the meeting on behalf of Argentina, Bolivia, Brazil, Chile, Colombia, Costa Rica, the Dominican Republic, Ecuador, El Salvador, Guatemala, Haiti, Honduras, Mexico, Nicaragua, Panama, Paraguay, Peru, the Philippines, Uruguay, and Venezuela, as had been prearranged by the Latin American Governors and the Governor for the Philippines in an effort to reduce the number of individual speeches, urged the Fund to study the prospects for gold:
The abandonment of the policy of supporting the price of gold in the free market and the introduction of the two-tier price system have given rise to fresh apprehension regarding the future role of gold in the functioning of the gold exchange standard system. Our countries believe that, whatever the ultimate fate of gold may be as a monetary standard, it will continue to play an important role for many years to come. We therefore consider it necessary that a study be undertaken in the International Monetary Fund of the collective measures that will prove most effective in maintaining an orderly situation in the gold markets, a primary aim being to obviate speculation in the free market.7
In addition, as explained in the next section, a number of Governors urged an early solution to the problem of South Africa’s gold.
By the Twenty-Fourth Annual Meeting, held from September 29 to October 3, 1969 in Washington, Mr. Schweitzer was able to draw attention to the stability of the gold market even amidst the many exchange crises that occurred between May 1968 and September 1969. The gold arrangements had, he noted, “proved to be workable.”8 But doubts that gold would have a secure role in the international monetary system in the future were being expressed. Mr. Colombo believed that “after the Washington agreement of March 1968—the success of which can hardly be put in doubt today—it is a certainty that in the future gold will play only a limited role in the system.”9
The Governor who most stressed that the world was continuing “to recognize the pivotal role of gold in the international monetary system” was Mr. Nicolaas Diederichs (South Africa). He pointed not only to the Governors’ speeches at the Annual Meeting the previous year but to the subsequent reluctance of monetary authorities to deplete their gold holdings and even their eagerness to augment them. These actions gave eloquent testimony, he thought, to their confidence in gold.10 Mr. Diederichs spoke as the problem raised by the two-tier gold market for South Africa’s gold was just about to be solved. We now turn to a discussion of this problem.
South African Gold: The Problem
Following the establishment of a two-tier gold market in March 1968, another chapter was written in the story of the Fund’s relations with South Africa in the matter of gold.11 With two gold markets in existence, there remained unresolved this question: In which of these two markets would newly mined gold be sold?
The answer was vital for South Africa. That member produced over $1 billion of newly mined gold each year, more than two thirds of the Western world’s output. The South African authorities, eager to restore the gold component of international liquidity, took the view that there should be a constant channeling of additional gold into official monetary reserves and that therefore they should be able to sell at least some of their gold to monetary authorities. They also took the view that they had a right under the Articles of Agreement to sell gold to the Fund.
On June 14, 1968, just three months after the dual market for gold came into being, the South African authorities brought this issue to a test by asking the Fund if they could purchase sterling in the amount of £14.5 million ($34.8 million) in exchange for gold.
The Managing Director took the position that the Fund was legally obliged to comply. The issue proved to be much less simple than that, however. The informal opinions expressed by individual Executive Directors to the Managing Director, the views voiced by the Governors of the central banks at their monthly meetings at the bis in Basle, any number of bilateral discussions between the monetary authorities of the United States and European countries with the monetary authorities of South Africa, and leaks to the press, all made it clear that there was no meeting of minds about what policy should be followed for purchases of gold from South Africa by central banks.
The U.S. monetary authorities felt strongly that countries should not acquire any more official reserves of gold, at least for the time being. These authorities were eager to maintain the official price of gold at $35 an ounce. To that end, they preferred that additional gold supplies be diverted into the free market to prevent the price there from rising too far above the official price. In fact, the U.S. Treasury refused to buy any gold from South Africa as long as the free market price was above $35 an ounce.
Some of the Governors of European central banks favored augmenting official monetary reserves. But they did not think that individual central banks ought to be buying gold for their own monetary reserves. Therefore, they considered it desirable for the Fund to increase international official holdings of gold by purchasing gold from South Africa.
Because of this lack of agreement, consideration by the Executive Board of South Africa’s request to buy sterling in exchange for gold was postponed, despite the appeal of Mr. Stone (Australia) that it be treated with the same speed as any other request to purchase currency. It was of no help to Mr. Stone’s position that South Africa had a sizable surplus in its balance of payments at the time. Executive Board consideration was at first postponed for a few days, then for a week. On June 24, 1968 Mr. Stone took the unusual measure of calling for a vote. The Executive Directors cast 177,717 votes (75.41 per cent of the total voting power) in favor of a decision to defer action. On September 6, 1968, just before the Annual Meeting, Mr. Stone again tried to get Executive Board consideration of South Africa’s request, but once more most of the Executive Directors favored postponement.
The meeting of the Executive Board early in September revealed some of the emotion engendered by the issue. Mr. Dale (United States) stated the U.S. view that there was no legal obligation for the Fund and that the question whether the Fund should agree to purchase gold offered to it by a member was a matter of policy. The disposition of this request, and of the question in general, involved important and far-reaching implications for the international monetary system. It appeared wise, therefore, to hold quiet and informal discussions to reconcile differing viewpoints. The forthcoming Annual Meeting offered a good opportunity for such discussion. On the other hand, Mr. de Maulde (France), reiterating the views expressed earlier by Mr. Plescoff, insisted that the South African request should immediately be approved for legal reasons. The Articles of Agreement had been openly breached and the proper functioning of the Fund was endangered. Mr. Diz (Argentina) and Mr. Phillips O. (Mexico), observing the importance of any decision for the role of gold in the monetary system, regretted that the decision on South Africa’s request was likely to be taken outside the Executive Board.
A few weeks later, during the 1968 Annual Meeting, the Managing Director held a number of informal meetings with Governors to get agreement on what policy the Fund should develop for purchases of gold from members. But no consensus was reached. Meanwhile, Mr. Diederichs appealed publicly to the other Governors not to regard the two-tier system for gold as a rigorous “two-circuit” system. By this he meant a sealing off of the existing stocks of monetary gold from other gold, which encompassed much more than allowing the private market price for gold to rise above the official price. The two-tier system, he said, at least had the advantage of checking the drain on stocks of monetary gold. The two-circuit system, however, stopped new inflows into monetary gold holdings and hence aggravated the world’s financial problems.12
His plea for some answer to South Africa’s question about the sale of its gold was supported by the Governors for Canada and the Federal Republic of Germany,13 but special support came from Mr. Ortoli (France). He urged the Governors to take action:
The provisions of the Articles are clear on this point, and I feel that they must be implemented as drafted. … In the absence of a jurisdictional institution—I would say even because of that absence—the Board of Executive Directors and the Board of Governors must provide fast, objective, and legally sound interpretation of the Articles, without letting considerations of opportunity or convenience interfere in the application of a text that constitutes an international convention. France’s position in this field finds its justification in the role of gold as the basis of the international monetary system.14
By the time of the 1969 Annual Meeting a decision had still not been reached. But a solution was imminent. South Africa was more eager than ever for a solution since its imports had gone up sharply and it was incurring fairly severe payments deficits. Lengthy and frequent bilateral discussions between the monetary authorities of South Africa and those of the United States had provided the ingredients of a compromise. The U.S. authorities were coming around to the view that, if the free market price should fall to $35 an ounce, the Fund, but not the monetary authorities of individual countries, might purchase gold from South Africa. Another part of the emerging U.S. view was that, should South Africa have a balance of payments surplus, the authorities might save current gold production for sale to the Fund at a later time when the country had a deficit. The evolving compromise seemed academic, however: neither member actually expected gold prices in the free market to fall back to $35 an ounce.
Contrary to expectation, at the end of 1969, as we have noted above, free market prices of gold did drop to the official price. Agreement between the United States and South Africa became a reality. Accordingly, Mr. Diederichs, on December 23, 1969, and Mr. Paul A. Volcker, Acting Secretary of the U.S. Treasury, on December 24, 1969, wrote to Mr. Schweitzer indicating the basis of their agreement. South Africa would offer gold to the Fund in certain quantities in specified situations. The United States would support the Fund’s purchases of gold offered by South Africa on these terms.
A basis had been laid for a decision by the Fund. On December 30, 1969 the Executive Board took a decision to the effect that, without prejudice to the determination of the legal position under the Articles as to whether South Africa had a right to sell gold to the Fund and whether the Fund was obliged to comply, the Fund would buy gold whenever South Africa offered it to the Fund and indicated that the offer was in accordance with the policy detailed in Mr. Diederichs’ letter.15 This policy specified the following situations in which South Africa might offer gold to the Fund and in what quantities:
First, South Africa might sell gold to the Fund when the market price fell to $35 an ounce or below, in amounts necessary to meet South Africa’s current foreign exchange needs for the period involved.
Second, South Africa might offer gold for sale to the Fund regardless of the price in the private market, to the extent that South Africa had a need for foreign exchange over a semiannual period beyond the need that could be satisfied by the sale of all of its current production of newly mined gold in the private market.
Third, South Africa might offer to sell up to $35 million of gold to the Fund in each quarter beginning January 1, 1970 from the stock of gold it had held on March 17, 1968 (with certain specified reductions from that stock). As an implementation of this provision it had been understood, and the Executive Board took a further decision to this effect, that the Fund would agree to purchase the gold from South Africa in return for sterling as South Africa had requested in June 1968.
A charge of ¼ of 1 per cent was to be levied by the Fund on its purchases of gold from South Africa, in accordance with the Fund’s Rules and Regulations.16
The procedure to be followed for these purchases was to be similar to that for gold tranche purchases.
South Africa was to continue to use gold for other Fund transactions—for example, to pay charges, to repurchase Fund holdings of South African rand, or to pay the gold subscription arising from any increase in South Africa’s quota. Furthermore, in connection with the newly introduced SDRs, South Africa was to be permitted to sell gold to the Fund to obtain currency when it was designated to receive SDRs from another participant in the Special Drawing Account. In a related Executive Board decision, the handling charges and costs ordinarily collected for a sale of gold to the Fund were waived for sales by a participant designated to receive SDRs that wished to obtain currency to provide to the user of SDRs. Rand drawn from the Fund by other members were also generally to be converted into gold when rand were included in drawings under normal Fund procedures. These Fund-related transactions, which might take place without regard to the market price of gold, were to be reflected in changes in the composition of South Africa’s reserves but were not to affect the volume of sales of newly mined gold in the market.
South Africa, in return, agreed to sell its current production of newly mined gold in an orderly manner on the private market to the full extent of its current payments needs. New production in excess of those needs during a semiannual period might be added to South Africa’s reserves. The South African authorities also agreed that they would, as a matter of practice, normally offer gold for official reserves only to the Fund, that is, not to central banks.
The letter to Mr. Schweitzer from Mr. Volcker had said that the United States was prepared to support decisions of the Fund to purchase gold from South Africa on these conditions, provided that there was an understanding among the Fund’s members generally that they would not initiate official gold purchases directly from South Africa.
The decision authorizing the Fund to buy gold from South Africa was to be reviewed whenever requested because of a major change in circumstances, and in any event after five years. Meanwhile, gold sold to the Fund might be used by it to replenish its holdings of member currencies.
As they took these decisions, the Executive Directors indicated that they welcomed this solution as a pragmatic way to handle the problem of South Africa’s newly mined gold within the two-tier gold marketing system, without the need to agree on the much more controversial issue relating to the status of gold in the international monetary system. Elaborating on the views expressed by Mr. Diederichs at the 1968 and 1969 Annual Meetings, Mr. de Kock (South Africa), without mentioning individual country positions, reiterated that there had been divergent interpretations of the two-tier gold marketing arrangement. Some monetary officials, favoring the early if not immediate demonetization of gold, had regarded the two-tier arrangement as a strict two-circuit system that neither provided a floor price for gold nor allowed any newly mined gold to enter official monetary reserves. Diametrically opposed were those monetary authorities who desired an immediate and substantial increase in the price of gold; they viewed the two-tier arrangement as an artificial and temporary gimmick, which could not provide a lasting solution to the problem of gold and which merely reflected the need for an upward adjustment in the official price.
Between these two groups was a growing majority who attached importance to the monetary role of gold at its official price ($35 an ounce at the time). In general they interpreted the two-tier system as a workable one, which promoted international monetary stability without the need to alter the official price of gold but which would not necessitate the sharp division of newly mined gold into two different circuits. This position did not imply the demonetization of gold. Mr. de Kock considered the Fund’s decision to be in line with this position: the two-tier system was maintained but the important part played by gold in the monetary system was also reaffirmed.
Mr. Dale emphasized that the U.S. authorities felt strongly about including in the decision a provision that the Fund’s members did not intend to initiate official gold purchases directly from South Africa. The Fund was the channel by which South African gold was to enter the monetary holdings of other members. The effect of the decision, Mr. Dale went on, would not be to provide a floor under the private market price for gold directly, although it would serve to provide a floor under the price at which South Africa would sell its new gold production. The institution of the two-tier system had not resolved the question of official purchases of gold from the market if the market price dropped below $35 an ounce. The U.S. authorities favored the abstention of monetary authorities from the market. According to Mr. de Kock, the South African authorities would accept this point, in practice, although they did not agree in principle.
Several Executive Directors expressed the concurrence of their authorities with the understandings on which the decision was based. It was a practical solution to a problem that had existed for a long time. As Mr. Palamenghi-Crispi (Italy) expressed it, the decision was a logical follow-up to the institution of the two-tier market for gold in March 1968. The quasi-monopoly involved for the Fund in respect of gold purchases from South Africa was not only useful but even necessary for the orderly working of the international monetary system.
Mr. Roelandts (Belgium) stressed that the decision would strengthen the role of the Fund in connection with gold transactions and, together with the activation of SDRs that was about to take place, would turn the Fund into a real central bank. Some Executive Directors commented that, as the Fund would be virtually the sole official buyer of gold from South Africa, they wanted to re-examine the Fund’s policy with regard to the selling of its own gold stocks to national monetary authorities when it replenished its currency holdings.
Fund Gold Purchases Begin
With the agreed arrangements in place, transactions began within a few days. Early in January 1970 the Fund took up the offer South Africa had made a year and a half earlier, and bought $34.8 million of gold in exchange for sterling. Because the price of gold in the London market was fixed at or below $35 an ounce during much of the first half of 1970 and because South Africa had a balance of payments deficit, South Africa in the first six months of 1970 offered to sell to the Fund $272.45 million of gold. The Fund accepted and the currencies sold to South Africa in return included U.S. dollars, pounds sterling, Netherlands guilders, Italian lire, Canadian dollars, and Japanese yen, selected in accordance with the principles of the regular currency budget. Within the Fund, a standing procedure for the selection of the currencies and, as necessary, for their conversion by the member issuing them was arranged to facilitate the technical execution of these gold purchases from South Africa.
In the second half of 1970 South Africa’s balance of payments deficit was several times larger than it had been in the first half of 1970 ($333.5 million as against $82.9 million), and South Africa sold $332.5 million of gold to the Fund. South Africa sold even larger amounts of gold (over $900 million) on free markets during the year. These sales, together with relatively small sales of gold to monetary authorities (including Fund-related transactions), exhausted by the end of 1970 the stock of gold South Africa had held on March 17, 1968. Hence, no further sales to the Fund from existing stocks, as authorized by the decision of December 1969, could be made.
During the first six months of 1971 South Africa continued to have a balance of payments deficit and offered gold for sale to the Fund amounting to the equivalent of $102.55 million. The Fund’s last purchase of gold from South Africa in 1971 took place in July, for the equivalent of $35 million. South Africa continued to have a sizable payments deficit but financed the portion of that deficit not financed by gold sales to the Fund by drawing down its official exchange reserves, by using its SDRs, and by selling gold on free markets.
The South African authorities seemed satisfied with the arrangements. In August 1970 Mr. T. W. de Jongh, Governor of the South African Reserve Bank, addressing the annual general meeting of that bank, indicated that the arrangements were working well, and a month later, at the Twenty-Fifth Annual Meetings of the Boards of Governors of the Fund and the World Bank in Copenhagen, Mr. Diederichs, Minister of Finance and Governor of the Fund and the World Bank for South Africa, stated that the agreement of December 1969 represented a “reasonable compromise” and expressed his appreciation of the part played by the Managing Director in making the agreement possible.17
Early in 1970 Austria, designated to provide currency to a user of SDRs, also offered gold for sale to the Fund, for $6.26 million, to obtain the necessary currency. The Executive Board agreed.
Fund Sells Gold
To Mitigate Impact of Quota Increases
In Chapter 16 it was noted that, in connection both with the fourth quinquennial review of quotas in 1965 and with the fifth general review in 1970, the Fund decided to sell specified amounts of gold to mitigate the secondary impact on the gold holdings of members when other members bought gold from them to pay their increased subscriptions to the Fund. On the occasion of the fourth quinquennial review the amount so authorized was $150 million, and in March and April 1966 five of the special purchases of currencies from the Fund made by members in connection with their quota increases led to corresponding sales of gold by the Fund, for $147.9 million, in exchange for the currencies drawn. Burundi purchased $937,500 of Belgian francs and the Fund sold the same amount of gold to Belgium for Belgian francs. Egypt, Pakistan, the United Kingdom, and Yugoslavia purchased deutsche mark in amounts of $7.5 million, $9.5 million, $122.5 million, and $7.5 million, respectively, and the Fund sold $147.0 million of gold to the Federal Republic of Germany for deutsche mark.
Sales not to exceed $700 million were authorized for the same purpose in connection with the fifth general review of quotas.18 By April 30, 1971, 75 members had bought $548 million of gold from the United States and $16 million from Austria. The Fund replenished its holdings of U.S. dollars and Austrian schillings by corresponding sales of gold. Some members bought very small amounts of gold, totaling only $95,000, from Italy and South Africa, for which there was no mitigation by the Fund. Later on, one other member bought from the Federal Republic of Germany $7.5 million of gold to pay its increased gold subscription, and the Fund replenished its holdings of deutsche mark by the sale of the same amount of gold.
To Replenish Currency Holdings
It was the Fund’s practice to sell gold whenever the General Arrangements to Borrow were activated, that is, when there were large drawings by countries participating in the Arrangements. On five occasions from June 1968 to February 1970 the Fund sold gold totaling $797 million to replenish currencies needed to help to finance large drawings by France and the United Kingdom.
The arrangements to purchase gold from South Africa beginning in 1970 made essential a review of the Fund’s policy governing sales of gold. Not only was the Fund acquiring large amounts of gold from South Africa, but by 1970 sizable repurchases had begun to take place and the proportion of these repurchases made in the form of gold had risen sharply. The Fund’s holdings of gold were consequently expanding by more than they ever had before. With members thirsting for gold, it was essential that the Fund reconsider the way in which it distributed its sales of gold among its members.
The Articles of Agreement limited gold sales by the Fund to the Fund’s need to replenish its holdings of currencies. Gold sales had, therefore, necessarily been related to the size of the Fund’s holdings of particular currencies. Gold sold for individual currencies, as on the occasions of activation of the General Arrangements to Borrow, had thus been allocated among members that had net creditor positions in the Fund, and in proportion to the size of these creditor positions at the time gold sales were made.
Some Executive Directors, Mr. Suzuki (Japan) in particular, regarded this allocation of the Fund’s gold sales among members as unfair. Mr. Suzuki contended that members that happened to have large creditor positions when big drawings by Group of Ten countries were made were eligible to buy more gold from the Fund than members whose creditor positions were then small but large at other times. He recalled the remarks at the 1969 Annual Meeting of Mr. Takeo Fukuda (Japan) about the “uneven distribution of monetary gold” in the world and the need for “a happy coexistence of gold with other kinds of liquidity,” and the necessity for the Fund to review its gold transactions policy.19
In May 1970, when the Executive Board began a review of the Fund’s overall policy on gold sales for currency replenishment, they had before them two staff suggestions of methods by which the Fund might do this. Sales of gold might be made at regular intervals, say, twice a year, on the basis of members’ net creditor positions in the Fund averaged over the preceding six months. This method, while an improvement over past practice for determining the allocation by country of the Fund’s gold sales, provided no guidance for the total amounts of gold that the Fund should sell. A second method might relate sales of gold for replenishment of individual currencies to the extent to which the Fund had increased its use of that currency in its transactions, especially the use of currencies since gold had been acquired from South Africa.
The Executive Board discussion, however, revealed that resolving the question would not be a simple one of choosing techniques. Mr. Suzuki thought that part of the Fund’s objective with regard to gold was to help to eliminate the uneven allocation of gold that existed between members. Hence, he wanted the Fund to sell rather considerable amounts of gold, certainly the unexpected and large accruals of gold from South Africa, and he favored a distribution technique that harmonized the ratios between gold and other reserves among the Fund’s members.
Most other members of the Executive Board, notably Mr. de Maulde, Mr. Lieftinck (Netherlands), Mr. Stone, and Mr. van Campenhout (Belgium), were worried that the second method was “too automatic,” and might lead to gold sales being undertaken when the Fund did not need to replenish its currency holdings. They were emphatic in their belief that the Fund should be most cautious in disposing of its gold. It was, they stressed, the most valuable asset the Fund had. Certainly, any gold that the Fund acquired through quota increases should be relinquished with caution. Even the gold being purchased from South Africa should not be considered as “excess gold.” The Fund should sell gold only if absolutely essential for currency replenishment. Thus, a policy for selling the Fund’s gold would have to take into account the nature and structure of the Fund’s liquidity.
In July 1970, in order to facilitate gold sales, the staff proposed that the Fund sell the equivalent of $250 million in gold to be allocated among members in accordance with the Fund’s use of currencies and the average net creditor positions of members for the previous six months. In September the amount proposed to be sold was raised to $325 million, with distribution on the same basis. The Executive Board approved this sale. Several Directors expressed reservations about the techniques used for determining the amounts for individual currencies, however, and accordingly, early in 1971, another effort was made to formulate a general policy for sales of gold for currency replenishment. The staff suggested a number of guidelines to the Executive Board. One policy would apply to sales of the gold acquired by the Fund under Article V, Section 6 (a), that is, basically the gold bought from South Africa, while another policy would apply to general sales of gold. Detailed rules were specified for the distribution of all gold sales among members.
After some relatively minor revisions, the Executive Board agreed that, for gold sales other than those designed to mitigate the effects of quota increases, the Fund should be guided by the following conclusions:
With respect to sales of gold acquired under Article V, Section 6 (a):
Such sales should be considered regularly at six-month intervals.
Unless there was no case for replenishment, it should be presumed that sales of gold would be justified in amounts roughly corresponding to the amounts acquired under that provision since the last preceding sale.
With respect to general sales of gold other than under A:
Such sales should be made at times and in amounts determined by the Fund’s need for replenishment.
In seeking to establish this need, account should be taken inter alia of the Fund’s stock of currencies that were currently considered suitable for drawings, relative to the amount of potential drawings on the Fund’s resources.
Where appropriate and feasible, the Fund should combine with sales of gold replenishment through borrowing.
With respect to the currency distribution of gold sales:
Sales under both A and B should be distributed among net creditor countries whose currencies were currently considered suitable for drawings, in proportion to their average net creditor positions, provided that the Fund would not purchase any currency beyond the point where its holdings of that currency equaled 75 per cent of quota.
For this purpose these averages would be calculated over a period ending at the end of the month preceding the date of the proposal, and beginning either six months before that date, or at the end of the period on which the distribution of gold sales was based on the occasion of the last preceding gold sale, whichever was the earlier.
From the amount of gold that would be sold to a member in a gold sale under A according to the calculation under this paragraph, there should be deducted the amount of any gold sold by the Fund to acquire that member’s currency in preceding replenishment transactions not made under A or B.
Pending the elaboration of a general policy on replenishment with SDRs, the Fund should normally on the occasion of each gold sale under A or B give members the option to have their currencies replenished with SDRs rather than with gold, provided the Fund’s holdings of SDRs were considered adequate at the time of such sale.
These policies should be reviewed not later than two years after their adoption, without prejudice to earlier reconsideration if that was requested.20
The decision to be guided by these conclusions was taken on March 22, 1971. In April the staff, pointing out that during 1970 the Fund had purchased from South Africa $646 million of gold but had sold only $325 million, proposed to sell virtually all the remaining gold that had been so acquired during that year. This gold was to be sold to 14 members (Australia, Austria, Belgium, Brazil, Canada, Finland, the Federal Republic of Germany, Italy, Japan, Kuwait, Mexico, the Netherlands, Norway, and Venezuela), the currencies of which met the definitions listed under C above. The Executive Board agreed. Similarly, in July 1971 the staff recommended, and the Executive Board agreed, that the Fund sell $135 million of gold to the same 14 members. That amount was what had been acquired from South Africa from January 1 to July 2, 1971.
General Deposits of Gold
Beginning in September 1965 the Fund from time to time deposited gold in the accounts opened with the Federal Reserve Bank of New York and the Bank of England. Such deposits, which were not to exceed $250 million in the United States and $100 million in the United Kingdom, had been agreed as part of the arrangements in connection with the fourth quinquennial review of quotas. They were to alleviate the loss of gold stocks by these two large gold-holding members when other members of the Fund purchased gold from them in order to pay gold subscriptions to the Fund. These deposits were to be demand deposits.
The amounts actually deposited were approximately equal to the gold purchased by Fund members from the United States and the United Kingdom to make subscription payments. By October 1, 1967, 62 members had bought gold from the United States and the United Kingdom to make such payments and the Fund’s gold on general deposit with the Federal Reserve Bank of New York had reached $233.1 million and that with the Bank of England $44.4 million. By mid-May 1969 gold deposited with the Federal Reserve Bank of New York under these arrangements had attained the maximum permissible total.
Debates on Usage
As gold markets became unsettled in late 1967 and thereafter, and as fears of some change in the status or price of gold grew, several Executive Directors became concerned about the Fund’s management of its gold stocks. The steps that the Fund took to disinvest the gold that it had invested in U.S. Government securities have already been spelled out.21 The considerations that led to that disinvestment applied as well to the gold on general deposit.
Questions about the gold that the Fund held on deposit first arose in December 1967, when the Executive Directors considered the ways in which a possible drawing by the United Kingdom under its stand-by arrangement of November 1967 might be financed. Mr. Plescoff wanted the Fund, instead of selling gold from its traditional gold holdings, to use the gold on deposit with the United States. The amount involved was small, but Mr. Plescoff objected to having the gold in these deposits, which was the property of the Fund, included in the figures for official reserves of the United States and the United Kingdom.
Mr. Stone agreed that the Fund ought to use the gold it held on general deposit. But other Executive Directors did not agree because of what they considered to be abnormal developments in the world’s financial markets following the devaluation of sterling that had taken place only one month before. For this reason, in June 1968, when the United Kingdom drew under the stand-by arrangement and the Fund sold gold to procure the necessary currencies, the Fund did not use gold from its general deposits.
Nevertheless, the Managing Director meanwhile had promised the Executive Directors that these deposits would be utilized more or less pari passu with the use of the Fund’s other gold holdings whenever the Fund sold gold in the future to replenish its currency holdings, and that the Executive Directors would soon have a chance to re-examine the Fund’s policy regarding these deposits. Accordingly, when the Fund sold gold to procure currencies in connection with drawings by France in June and September 1968 and in February 1970, the Fund withdrew gold from the deposits in both New York and London; in June 1969, when the Fund sold gold in connection with a purchase by the United Kingdom, it also withdrew some of the gold in its account in New York. On these occasions the transfers made from the general gold deposits were broadly in the same proportions that these total deposits bore to the total gold holdings of the Fund.
Eliminating the Deposits
Several Executive Directors were concerned that, unless some steps were taken to speed the transfer of gold from these deposits to the Fund’s traditional gold bar holdings, the deposits would remain in existence for too long a time. Hence, in April 1970 the staff suggested to the Executive Directors that, when the Fund sold gold for currency replenishment, it should withdraw from the general deposit in New York amounts equal to 10 per cent of the gold sold for replenishment and from the general deposit in London amounts equal to 2 per cent of the gold sold for replenishment. These percentages, 10 per cent and 2 per cent, respectively, were about the proportions of its total gold stocks that the Fund then held in these accounts, but they were well above the proportions that prevailed later in 1970 when the Fund’s gold holdings were enlarged following the fifth general review of quotas and the sizable gold purchases from South Africa.
On this basis the deposits, then about $210.5 million with the United States and $38.2 million with the United Kingdom, would be eliminated after the Fund had sold about $2 billion of gold. In order to liquidate these deposits even more quickly, the staff further suggested that any gold sold to the United States or the United Kingdom for currency replenishment that exceeded the amounts calculated by these percentages should also be taken out of the accounts; such gold sales would specifically include those that the Fund would make in connection with the mitigation arrangements for the fifth general review of quotas that had been worked out a few months before.
Mr. Dale objected to these suggestions, especially to the tie-in between the liquidation of the deposits and the gold mitigation operations under the fifth general review of quotas. Mr. Huntrods (United Kingdom), Mr. Lieftinck, and others sympathized with Mr. Dale’s position: it would not be correct to undo these features of the quota review that had already been agreed upon as necessary to avoid unduly heavy losses of gold by the United States and the United Kingdom. The Fund also had an obligation to those two members to withdraw gold from the general deposits in “appropriate proportions.” Mr. Stone, calling attention to the persistent payments deficits of the United Kingdom and the United States, queried the feasibility of the technique proposed: Was the Fund likely in the near future to be selling much gold to these members for replenishment of its holdings of their currencies?
In July 1970, on the next occasion when the management proposed to the Executive Board that the Fund sell gold to replenish currencies ($250 million, including $101.5 million for U.S. dollars), rules like those above giving percentages by which to draw on the deposits were suggested as a way to bring down the level of the general gold deposits. Gold would be withdrawn from the general deposit in London equivalent to $5 million and from the general deposit in New York equivalent to $101.5 million, and would be transferred to the Fund’s gold bar holdings. No action was taken by the Executive Board pending discussions by the Managing Director with the U.S. monetary authorities.
In September 1970 the Managing Director came back to the Executive Board with a package proposal. One, the Fund’s investment of gold in U.S. securities, four times the size of the gold on deposit in New York, was to be reduced by half. Two, the suggested amount of gold sales would be raised from $250 million to $325 million, including $131.89 million for U.S. dollars. Three, the Fund’s past practice of reducing the general gold deposits would be continued, at least for the time being—that is, whenever gold was sold, gold would be transferred from the two deposits in the same proportions as these deposits bore to the Fund’s total gold holdings. At the time, these proportions were about 7.25 per cent and 1.32 per cent for the deposits in New York and London, respectively. The Managing Director’s proposal did not preclude the Executive Board from considering a faster rate of reduction of these deposits and of their liquidation at an appropriate future date. The Executive Board, welcoming especially the reduction of the Fund’s gold investment, decided to continue the past practice for the general deposits.
In October 1970 this decision was further refined to obviate the necessity for frequent transfers of very small amounts (perhaps less than one gold bar) from these deposits. The transfer of gold from these deposits would take place either on the occasion of the sales of gold or shortly afterward, or when the amount of gold sold by the Fund in replenishment reached at least $100 million.22
When the Fund sold gold during 1971 to replenish its currency holdings, gold was transferred from the two general deposits in the proportions that those deposits bore to the Fund’s total gold holdings. By the middle of 1971 those proportions were about 3.1 per cent for the deposit in New York and about 0.6 per cent for the deposit in London.
Shortly after the end of 1971, when the U.S. Government requested the Fund to withdraw its gold investment entirely, they made the same request regarding the general deposit of gold. Mr. Dale reported that the initiative for this move came from the U.S. Government. His authorities wanted to “clean up the books” following their decision of August 15, 1971 to discontinue the general convertibility of dollars held by foreign monetary authorities into other reserve assets. At that time the Fund had $144 million of gold on deposit with the Federal Reserve Bank of New York and $26 million on deposit with the Bank of England. The Executive Board decided to close both these accounts. The items “Investments” and “General Deposits” were eliminated from the balance sheet of the Fund, with a consequential increase in gold bars held with depositories.
Gold Subsidies and Transactions Service
Two other subjects concerned with gold during the period 1966–71 were subsidies to gold producers and the gold transactions service.
Four members (Australia, Canada, the Philippines, and South Africa) continued after 1965 to subsidize gold production under programs that had been introduced between 1947 and 1963 and that the Executive Board had already deemed to be not inconsistent with the objectives of the Fund’s statement of December 11, 1947 on gold subsidies.23
On several occasions these members asked for approval for the continuation of their programs or modifications in them, or notified the Fund of changes which did not need the approval of the Executive Board. In August 1968, having earlier made minor amendments to its Gold-Mining Industry Assistance Act, Australia proposed that, when a producer sold gold at a price in excess of the official price ($A 31.25 an ounce), he would be required to deduct only 75 per cent of that premium from the subsidy otherwise payable. Previously he had been required to deduct the whole of such a premium from any subsidy he might receive. The Executive Directors deemed the change to be consistent with the Fund’s statement of 1947 on gold subsidies. In July 1970, when the Australian authorities asked for an extension of the Executive Board’s approval of its gold subsidy scheme for another period of three years, the Executive Board agreed.
Toward the end of 1967 Canada asked for, and received, the Executive Board’s approval for a three-year extension of its gold subsidy arrangement, which was due to expire at the end of the year. Toward the end of 1970, when this approval was about to run out, Canada requested an extension for two and a half years, until June 30, 1973, and the Executive Board agreed.
In March 1967 the Philippines asked for, and received, the Executive Board’s approval of an amendment of its Gold Industry Assistance Act. The act, as amended, would provide for increased financial assistance to various categories of gold mines. The amount of the assistance would be related to the productive capacity of each category of gold mine; and where the mine was not producing gold as a by-product, the assistance would be related to the differential between the costs of production and the official price of gold. Further amendments were introduced in September 1971. A subsidy would be given only to gold producers with 70 per cent Filipino ownership and that were mining gold as the principal product. Assistance would be withdrawn from producers that mined gold as a by-product. The amendments also provided that direct assistance would be effective only for the next five years. As it had in the past, the Executive Board deemed these arrangements to be not inconsistent with the objectives of the Fund’s statement of 1947 on gold subsidies.
The Executive Board approved the annual extensions of South Africa’s governmental assistance to marginal gold mines in the middle of 1966 and again in the middle of 1967. In April 1968 the Fund was advised that the South African Government had decided to continue the program, first introduced in June 1963, of financial assistance to marginal gold mines in connection with the pumping out of water from neighboring mines, but that it would discontinue assistance in the form of unsecured loans to certain mines to cover a proportion of their current working losses and approved capital expenditures. Instead, from April 1, 1968, a new plan to assist certain marginal gold mines would be implemented. In effect, the new scheme was to be based on more scientific principles to assist those mines that were likely to close down within eight years if not assisted. The Executive Board approved.
The gold transactions service, a procedure known within the Fund as “gold marriages,” was introduced in 1952. When requested, the staff endeavored, on a confidential basis, to bring governmental buyers and sellers of gold, as well as certain international organizations, into contact with each other. This service, for which the Fund levied a charge of 1/32 of 1 per cent, payable in U.S. dollars, on each partner to a completed transaction, enabled members to effect official gold transactions more economically than they could otherwise do. By the end of 1971 the central banks of 29 members and 5 international organizations had effected purchases or sales of gold with the Fund’s assistance. However, after 1965 there had been only two transactions, and the service was eventually ended.
The years 1966–71 were thus witness to the emergence of a number of important problems in the markets for monetary gold and to several changes in the Fund’s policies. A single fixed price for gold, one of the cornerstones of the postwar international monetary arrangements designed at Bretton Woods, was abandoned in March 1968 with the introduction of the two-tier system. The Fund radically altered its policies regarding purchases of gold, especially from South Africa, and its policies for selling gold so acquired. Anxiety about the status of gold in the international monetary system was also reflected in a disquietude concerning the Fund’s own gold holdings. In 1970 and 1971 steps were taken to reclaim the gold placed on deposit with the United States and the United Kingdom and the gold invested in U.S. Government securities.
As a result of these policy changes, the Fund’s transactions and operations in gold in 1970 and 1971 were the largest in its history. There were purchases from South Africa. New subscriptions were received following the fifth general quota review. The gold investments with the United States were reacquired. Deposits with the United Kingdom and the United States were reclaimed. And large amounts were sold for currency replenishment. As an indication of the magnitudes involved, during the fiscal year 1970/71 the Fund received gold equivalent to $2,684 million and disbursed gold equivalent to $1,109 million.
On December 31, 1971 the Fund’s holdings of gold, valued at $35 an ounce, were worth $5.3 billion, out of total assets of $29.6 billion. At the end of 1965, by comparison, the Fund’s gold holdings totaled just under $2.7 billion, out of aggregate assets of $18.6 billion. In these six years the Fund’s gold holdings had nearly doubled.
Basic Questions About Gold Develop
The period 1966 through 1971 marked the onset of profound questions about gold as the crux of the Bretton Woods system. As the events discussed in this chapter unrolled, concern mounted about the position of gold in the international monetary system, especially once the new reserve asset, the SDR, had been established. Expressions of this concern by some of the Governors at the 1968 and 1969 Annual Meetings have already been mentioned earlier in this chapter.
By the time of the Twenty-Fifth Annual Meeting, held in Copenhagen from September 21 to September 25, 1970, tensions in exchange and gold markets had lessened. Mr. Schweitzer gave credit for this to the successful launching of the SDR, to the substantial increase in Fund quotas, and to the adoption of a policy on purchases of South Africa’s gold, as well as to the realignment of the exchange rates for European currencies. Mr. Mario Ferrari-Aggradi, Governor for Italy, specified the same factors.24 Gold was consequently less of an issue than it had been earlier and certainly much less of an issue than that of exchange rate flexibility, the topic that had been thrust into the forefront by the many exchange rate crises of 1968 and 1969.25 In these circumstances, Mr. Diederichs cited the agreement between the Fund and South Africa and the subsequent large sale of gold by the Fund as evidence that the world’s monetary authorities recognized, and reaffirmed, the key role of gold in the international financial system.26
But, in the swift ups and downs of international financial events that characterized these years, calm was once more to be the forerunner of a storm. Important as were the events with respect to gold from 1966 through the early part of 1971, they were suddenly dwarfed by the more drastic changes affecting gold that took place in the last several months of 1971. The Twenty-Sixth Annual Meeting, held from September 27 to October 1, 1971 in Washington, took place just six weeks after the United States had suspended the convertibility of officially held dollars into gold and other reserve assets. Nearly every Governor raised questions or voiced opinions about gold.
The question of most intense and immediate interest was whether, in any realignment of parities, the dollar price of gold would be raised. Such a step was tantamount to devaluation of the dollar. Some of the Governors for the eec countries, notably Messrs. Ferrari-Aggradi (Italy), Giscard d’Estaing (France), and R. J. Nelissen (Netherlands), hinted at or spoke indirectly of the need for a change of parity of the U.S. dollar as an essential part of any currency realignment.27 And so did a few of the Governors for developing members, such as Mr. Tan Siew Sin (Malaysia).28
But the place of gold in any future international monetary arrangements was also at issue, as Mr. Wardhana (Indonesia) stated early in the session.29 Mr. Benson (Canada) likewise observed that modifications in the Fund’s practices or Articles of Agreement concerning reserve assets, and in the arrangements governing their interconvertibility, would be needed.30
As we have noted in Part Two, some Governors began to recommend a reformed international monetary system built around the SDR, with a reduced emphasis on gold. Mr. Anthony Barber (United Kingdom) outlined at length such a possibility.31 He saw as one of the advantages of stating all parities in SDRs rather than in gold that the United States would have the same freedom to adjust the parity of its currency as an instrument of economic policy as other members had with regard to their currencies.
The idea of de-emphasizing gold and moving in the direction of an SDR system was supported by Mr. Per Kleppe (Norway) and by a number of Governors for developing members, including Mr. A. A. Ayida (Nigeria), Mr. E. W. Barrow (Barbados), Mr. A. H. Jamal (Tanzania), and Mr. Gregorio S. Licaros (Philippines). Mr. Ayida suggested that “monetarily speaking, gold should now belong in the museum.”32
The strongest proponent of the opposite position was Mr. Diederichs. He argued not only that the dollar price of gold should be raised but that “gold must continue performing its important international monetary function.”33 But Mr. Connally (United States) believed that a change in the gold price was “of no economic significance and would be patently a retrogressive step in terms of our objective to reduce, if not eliminate, the role of gold in any new monetary system.”34 Mr. B. M. Snedden (Australia) was prepared to look at any schemes, with or without a link to gold, but urged that the present system not be abandoned until there was a better one to take its place.35
On December 18, 1971, as we shall read in Part Five, the official price of gold was raised to $38 for a troy ounce of fine gold.
However, the year 1971 closed with the gold story very much unfinished. As we shall also read in Part Five, developments after August 15, 1971 brought to the fore many questions with regard to the entire international monetary system, including fundamental questions about gold: What role should be given to gold in any reformed system? To what extent should gold continue to constitute a principal part of the world’s monetary reserves? Should par values be expressed in terms of gold? These and other similar questions centered, in effect, around the issue whether gold should or should not be “monetized,” that is, be the primary reserve asset in a reformed international monetary system.
The questions coming into the limelight late in 1971 were to remain unsettled for the next several years as reform of the international monetary system was debated. Meanwhile, the Fund’s gold transactions were to decline to negligible amounts as nearly all transactions in monetary gold came to a halt. Speculative demand for gold was to jump tremendously, taking with it the price of gold in private free markets to levels two and three times the official price of gold. The two-tier market was to be disbanded. South Africa, whose balance of payments position had improved markedly, was to begin to acquire in its monetary holdings a substantial part of its new gold production.
Despite the interesting problems about gold in the 1966–71 period, in many respects the most crucial discussions and decisions about gold were just beginning as the period came to a close.
An ounce of gold, according to the Fund’s practice at the end of 1971, meant a troy ounce of 31.1034768 grams of fine gold.
Opening Address by the Managing Director, Summary Proceedings, 1968, p. 20.
Statement by the Governor of the Fund and the World Bank for Canada, Summary Proceedings, 1968, p. 44.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1968, p. 53.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1968, pp. 128–29.
Statement by the Governor of the Fund for Italy, Summary Proceedings, 1968, p. 85.
Statement by the Governor of the Fund for Venezuela, Summary Proceedings, 1968, p. 106.
Opening Address by the Managing Director, Summary Proceedings, 1969, p. 9.
Statement by the Governor of the Fund for Italy, Summary Proceedings, 1969, p. 65.
Statement by the Governor of the Fund and the World Bank for South Africa, Summary Proceedings, 1969, p. 121.
Statement by the Governor of the Fund and the World Bank for South Africa, Summary Proceedings, 1968, pp. 195–200.
Statements by the Governor of the Fund and the World Bank for Canada and the Governor of the World Bank for the Federal Republic of Germany, Summary Proceedings, 1968, pp. 44 and 66.
Statement by the Governor of the World Bank for France, Summary Proceedings, 1968, p. 73.
E.B. Decision No. 2914-(69/127), December 30, 1969. The decision and the letters from Messrs. Diederichs and Volcker are reproduced in Vol. II below, pp. 203–206.
E.B. Decision No. 2916-(69/127), December 30, 1969; Vol. II below, p. 207.
Statement by the Governor of the Fund and the World Bank for South Africa, Summary Proceedings, 1970, p. 191.
E.B. Decision No. 3150-(70/93), October 23, 1970; Vol. II below, pp. 213–14.
Statement by the Governor of the Fund and the World Bank for Japan, Summary Proceedings, 1969, pp. 32–33.
E.B. Decision No. 3294-(71/22), March 22, 1971; see Annual Report, 1971, pp. 210–11.
See Chap. 19 above, pp. 383–85.
E.B. Decision No. 3150-(70/93), October 23, 1970; Vol. II below, pp. 213–14.
For the text of this statement, see History, 1945–65, Vol. III, pp. 225–26.
Opening Address by the Managing Director, Summary Proceedings, 1970, p. 21; Statement by the Governor of the Fund for Italy, ibid., pp. 119–20.
The issue of exchange rate flexibility is discussed in Chap. 24.
Statement by the Governor of the Fund and the World Bank for South Africa, Summary Proceedings, 1970, p. 191.
Statements by the Governor of the Fund for Italy and the Governors of the World Bank for France and the Netherlands, Summary Proceedings, 1971, pp. 37, 41–44, and 156.
Statement by the Governor of the World Bank for Malaysia, Summary Proceedings, 1971, pp. 51–52.
Statement by the Governor of the World Bank for Indonesia, Summary Proceedings, 1971, p. 21.
Statement by the Governor of the World Bank for Canada, Summary Proceedings, 1971, p. 25.
Statement by the Governor of the Fund for the United Kingdom, Summary Proceedings, 1971, pp. 32–35.
Statements by the Governors of the World Bank for Norway and Nigeria and the Governors of the Fund for Barbados, Tanzania, and the Philippines, Summary Proceedings, 1971, pp. 88, 169, 102, 64–65, and 118.
Statement by the Governor of the Fund and the World Bank for South Africa, Summary Proceedings, 1971, p. 84.
Statement by the Governor of the Fund and the World Bank for the United States, Summary Proceedings, 1971, pp. 218–19.
Statement by the Governor of the Fund and the World Bank for Australia, Summary Proceedings, 1971, pp. 131–33.