Abstract

During the past year, the Fund reviewed and decided to maintain the policy concerning external transactions in gold at premium prices, communicated to its members by letter dated June 18, 1947. In that letter, the Fund expressed its concern about such transactions on the grounds that they directly or indirectly involve exchange dealings at depreciated rates and thereby threaten to disturb exchange relationships among its members, and that they encourage evasion of measures designed to conserve monetary reserves. The Fund requested its members to take steps to prevent such transactions.

Sales at Premium Prices

During the past year, the Fund reviewed and decided to maintain the policy concerning external transactions in gold at premium prices, communicated to its members by letter dated June 18, 1947. In that letter, the Fund expressed its concern about such transactions on the grounds that they directly or indirectly involve exchange dealings at depreciated rates and thereby threaten to disturb exchange relationships among its members, and that they encourage evasion of measures designed to conserve monetary reserves. The Fund requested its members to take steps to prevent such transactions.

In the past year there has been an extension of premium markets for semi-processed gold. The Fund has made every effort in applying its policy to avoid interfering with the bona fide use of gold in the industries, professions, and arts. It has, however, recognized the ease with which semi-processed gold can be diverted from legitimate uses to hoarding, and has asked its members to limit or otherwise control the marketing of semi-processed gold so that it should not become a significant medium for hoarding, particularly in countries where the gold inflow is contrary to law and will result directly or indirectly in leakage or diversion of foreign exchange earnings.

It is expected that the satisfactory effort made by many members of the Fund to observe the policy announced in 1947 will be continued and that, where possible, the application of controls which discourage undesirable international transactions in gold will be strengthened. Some members have not yet succeeded in implementing fully the Fund’s policy. The Fund’s facilities for consultation and its technical assistance are available to them to help in devising effective means of implementing the Fund’s policy.

The Fund has, on several occasions, recommended to members certain steps which are believed to afford adequate protection against the unauthorized diversion of gold to private hoards. The principal exporting countries have adopted practices which, if effectively administered, should avoid such diversion. Exports of gold from these countries are screened by the monetary authorities in order to ensure that those on private account are in fact for legitimate use in the industries, professions, and arts.

Further steps might also be taken by members with respect to the importation of gold for re-export, a practice which complicates the supervision of sales by exporting countries. In some of the countries where there is still a significant hoarding demand for gold, more effective controls over imports would assist in cutting down the international traffic at premium prices. While for many of them smuggling is not easy to control, there are some which could, without encountering serious administrative problems, take further steps to make it more difficult for dealers to import gold for hoarding. In countries with legal internal gold markets, the problem is to avoid unauthorized exports or imports of gold at premium prices by way of these internal markets.

Several members have consulted with the Fund on the implementation of its policy on sales of gold at premium prices. The Government of the Union of South Africa has sought to find a means of permitting its gold producers to benefit from premium prices for gold for legitimate industrial, professional, and artistic purposes while avoiding external transactions for unauthorized or illegitimate purposes, particularly hoarding. After an initial experimental sale of semi-processed gold to a bullion dealer, the Union Government agreed with the Fund on a series of protective steps which are intended to secure these ends. The Union Government will keep the Fund fully informed of developments in this practice. The Statement issued by the Fund at the conclusion of these negotiations is reproduced in Appendix VI.

For many years there has been a free gold market in Hong Kong, an area in respect of which the Government of the United Kingdom accepted the obligations of Fund membership. In order to implement the Fund’s policy, it was announced by the Government that, as of April 15, 1949, dealings in gold in Hong Kong were prohibited and the possession of gold without permission forbidden. The purpose was to eliminate the undesirable international transactions at premium prices for which the free market had become a center. The conditions of the market, however, make it extremely difficult to enforce these regulations.

Belgium has also consulted the Fund with respect to a plan for benefiting gold producers in the Belgian Congo by permitting them to sell their gold in Belgium at premium prices in Belgian francs. The initial proposal involved a free market in Belgium. Following comments made by the Fund on this proposal, Belgium, during May 1949, announced a program which eliminates the free market, restricts sales at premium prices to those who are customary and legitimate consumers of gold, and is accordingly designed to prevent any external sales of gold at premium prices.

Subsidies to Producers

Subsidies by members to gold producers, like some of the external sales of gold at premium prices, have been a means whereby certain countries have sought to protect their gold mining industries against increases in the cost of production. It is the view of the Fund that subsidies on the production of gold regardless of their form are undesirable if they undermine or threaten to undermine exchange stability. A subsidy in the form of a payment by a member of a uniform amount per ounce for all or part of the gold produced would constitute an increase in the price of gold and is therefore not permissible. Any proposal for a subsidy in any other form must be examined on its merits. On several occasions in the year under review, members have consulted with the Fund on subsidy proposals designed to benefit gold producers without contravening the Fund Agreement.

The Government of Canada has consulted the Fund concerning possible changes in the application of the gold subsidy introduced in December 1947. The original subsidy provided assistance to mines whose production exceeds two thirds of their production during the year ended June 30, 1947. The contemplated change would apply the subsidy to not less than one third of the gold produced each year and thus permit assistance to a few mines producing at levels substantially below that of the base year. The Fund concluded that in the circumstances this proposal would be consistent with its statement on gold subsidies.

During 1948, a gold subsidy was introduced in Southern Rhodesia. This is a territory in respect of which the United Kingdom has accepted the obligations of Fund membership. After consultation with the Fund, the Governments of the United Kingdom and of Southern Rhodesia agreed that the subsidy was not in a form that was acceptable to the Fund. The Southern Rhodesian Government thereupon undertook to modify its legislation so as to conform with the Fund’s policy. Shortly after the close of the financial year under review, the Southern Rhodesian Government, through the Government of the United Kingdom, consulted the Fund concerning modifications in its subsidy legislation which the Fund found to be consistent with its statement on gold subsidies.

Gold Production and Hoarding

Total gold production outside the Soviet Union declined from a peak of nearly $1,300 million in 1940 to less than $750 million in 1945. During the war, resources in some gold producing countries had been diverted away from gold mining. Moreover, the war and postwar inflation of prices and costs reduced the profitability of gold production, which was doubtless the major reason why production did not return to the prewar level. Since 1945 there has been a slow recovery, and in 1948 world gold production was approximately $795 million. The decline in the volume and value of newly mined gold has intensified the payments problems of some countries. In real terms, newly mined gold could pay for less than one third as much import goods as in each of the years from 1938 to 1940.

Instead of being added to the gold reserves of many countries, most of the newly mined gold has had to be used, since the war, and, indeed, in the decade before the war, directly or indirectly to cover part of the payments deficits of the rest of the world with the United States. A significant part has also been absorbed since the war by hoarding demands in various parts of the world. On account of the disturbed conditions in international payments, the lack of confidence in some currencies, and administrative deficiencies, the monetary authorities of some countries with exchange controls have not been successful in checking the diversion of considerable sums in foreign exchange to finance the hoarding of foreign currencies or gold. It appears that a sum equivalent to not less than $200 million now finds its way annually from newly mined gold and central holdings into private hoards. The habit of hoarding has been particularly widespread in certain countries whose payments position is unusually weak, and the payment of premium prices has increased the loss of exchange resources to a figure considerably above the official value of the hoarded gold.

The Price of Gold

An increase in the dollar price of gold is sometimes suggested as a means of helping to meet the payments problem. The price paid by the United States Government is of unusual importance because the United States is by far the largest buyer of gold, is the major creditor country with its currency in general international demand and fully convertible, and freely buys and sells gold at $35 per ounce for the settlement of international transactions.

Presumably any change in the dollar price of gold would be part of a general and simultaneous change in the price of gold in all currencies. A uniform proportionate change in par values is permitted by Article IV, Section 7, of the Fund Agreement, if it is approved by a majority of the total voting power of the Fund, including every member which has ten per cent or more of the total of the quotas. The change would not, however, be binding on a member which did not wish the price of gold in its own currency to be altered.

Provided that there was no offsetting effect through higher prices, a uniform change in par values would increase the purchasing power of existing reserves and perhaps encourage some private dishoarding of gold. For some countries this would afford a temporary respite in their current international payments difficulties. The effect upon gold producing countries would be more far-reaching, since the measure would increase the profitability of gold production. Countries whose exports to gold producing countries are a significant part of their total trade would also benefit. Other effects of an increase in the price of gold in all currencies would be more complex and more difficult to estimate precisely.

Under present conditions, the predictable effect of such a measure upon the United States would merely be increased exports in exchange for further additions to its gold supply which is already about two thirds of the world’s reserves. Insofar as the United States is prepared to maintain a large export surplus to facilitate world recovery, it can do this more effectively through its foreign aid program than through an increase in exports to gold producing and gold holding countries. A rise in the dollar price of gold could have no positive effect in correcting the maldistribution of gold, unless and until the present payments difficulties have been met. A general increase in the price of gold cannot be a substitute for the measures in the sphere of exchange and payments policy which have to be taken if international balance is to be restored.