gold commission report volume i

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Report of the Gold Commission

Introduction and Recommendations

Establishment of the CommissionWe , the members of the Gold Commission, were appointed by Secre-tary of the Treasury Donald T. Regan on June 22, 1981, pursuant tosection 10 of Public Law 96-389 (9 4 Stat. 1555), to "conduct a studyto assess and make recommendations with regard to the policy of theU.S. Government concerning the role of gold in domestic and inter-national monetary systems."* The Commission was directed to transmitits report to the Congress no later than October 7, 1981, one yearafter the date of enactment. Due to the change in Administration andthe delay in appointment of members, it was not until July 16, 1981,that we met for the first time. We were in general agreement that asatisfactory report could not be prepared by the October 7 date.Accordingly, we requested an extension of the Commission's life.Legislation to that end was introduced to the Congress and enactedas P.L. 97-47 on September 30, 1981. The date for the reportof the Commission was thereby changed to March 31, 1982.

Commission MeetingsWe held 9 meetings, at two of which we heard testimony concerninggold Erom 23 witnesses, representing a wide spectrum of views on thepotential roles of gold. They commented on the use and effectivenessof gold in past domestic and international monetary systems, and of-fered varying proposals for a restored role for gold, or favored thecontinuation of the present system with no rol e for gold. In additionto the hearings, the Treasury Department invited written statementson the role of gold from organizations and individuals. Summariesof the testimony we heard and of the statements submitted to us arereproduced in Annex B to the Report.

*Congressman Chalrners P. Wylie -- Since many observers feel the GoldCommission became a "runaway" Commission in the --eport, I would like tocall special attention to the verbatim charge of Congress in creatingthe Commission. As the transcripts will show, many, many hours werespent dehatinq issues which were extraneous to the Congressionalassignment for the Gold Commission. The job assigned to the Gold Con-mission by Section 10(b) of Public Law 96-389 was as follows: "The Com-mission shall conduct a study to assess and make recommendations withregard to the policy of the United States Government concerning therole of gold in domestic and international monetary systems, and shalltransmit to the Conqress a report containing its findings and recom-mendations not later than one year after the date of enactment ofthis Act."


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C o n t e n t s o f t h e R e p o r t-The bo dy o f o u r Re p o r t r e f l e c t s t h e r a n ge o f i s s u e s w e d i s c u s s e dd u r i n g o u r d e l i b e r a t i o n s .C h a p t e r 1 s u r v e y s e co no mi c d e ve l op m en t s o f r e c e n t y e a r s t h a twere t h e b a c k g r o u n d t o t h e e s t a b l i s h m e n t o f t h e G ol d Co mm is sio n. * A

d i s t i n g u i s h i n g f e a t u r e o f t h e p e r i o d s i n c e t h e mid -1960s was r i s i n gand p e r s i s t e n t i n f l a t i o n w i t h o u t p r e c e d e n t i n p e a c e t i me i n t h eU ni te d S t a t e s . P u b l i c a t t e n t i o n t o t h e a c t i v i t i e s o f t h e C ommiss ionr e f l e c t s a d e s i r e f o r some i n s t i t u t i o n a l a r r a n ge me n t s t o e n s u r e ar e a s o n a b l e a p p r o x im a t i on o f p r i c e s t a b i l i t y i n a n economy whoser e s o u r c e s a r e r e l a t i v e l y f u l l y e mp l oye d i n a b a l an ce d a nd s u s t a i n a b l eway. The c h a p t e r p r e s e n t s t h e f a c t u a l r e c o r d o f t h e p e r f o rm a nc e o ft h e economy, a nd r e v i e w s e x p l a n a t i o n s t h a t h av e b ee n o f f e r e d t oa c c o u nt f o r t h e l a c k o f s u c c e s s o f s e v e r a l a t t e m p t s t o c u r b i n f l a t i o ni n t h e d e c a d e a nd a h a l f f r o m 1 96 5 .* *C h a p t e r 2 e xa mi ne s t h e h i s t o r i c a l e v i d e nc e on t h e e x p e r i e n c e o f

t h e U n i t e d S t a t e s w i t h g o l d . I n 1 8 34 , th ou qh l e g a l l y o n a b i m e t a l l i cs t a n d a r d , d e f a c t o t h e U ni t e d S t a t e s a d o pt ed a g o l d s t a n d a r d . Thec h a p t e r d e a l s w i t h s u c c e s s i v e ch a n g e s s i n c e t h e n i n t h e c h a r a c t e r o fo u r c o u n t r y ' s m o ne t a r y s ys t em .I n C h a p t e r 3 , w e e x p l o r e t h e s t r e n g t h s and we ak ne ss es o f a l t e r -n a t i v e m on e t ar y s t a n d a r d s , i n c l u d i n q d i f f e r e n t v e r s i c n s o f a g o l ds t a n d a r d , commodi ty s t a n d a r d s o t h e r t h a n g o l d , and t h e p r e s e n ti n c o n v e r t i b l e p a p e r syst-ern. I n t e r n a t i o n a l a s p e c t s o f t h e a l t e r n a t i v es t a n d a r d s r e c e i v e a t t e n t i o n .

* C o n g r e s s ma n C h a l me r s P . W y l i e -- C h a p t e r 1 s u r v e y e d e c o n o m i cd e v el o p me n t s f ro m a m o n e t a r i s t p e r s p e c t i v e a nd d i d n o t e mp ha s iz ea d e q u a t e l y t h e r o l e o f F e d e r a l bu dg e t d e f i c i t s and f i s c a l p o l i c y i nc r e a t i n g t h e e c o no mi c p ro b l em s o f t h e l a s t f i f t e e n y e a r s . S i n c es e c t i o n 3 o f P u b l i c Law 96-389 s p e c i f i c a l l y s t a t e d t h a t " Co ng re ssr e a f f i r m s i t s commitment t h a t b e g i n n i n g w i t h F i s c a l Y e ar 1 9 81 , t h et o t a l b u d ge t o u t l a y s o f t h e F e d e r a l G o ve r nme n t s h a l l n o t e x c ee d i t sr e c e i p t s " t h i s omm is s i on o f r e f e r e n c e s a s t o t h e r o l e o f f i s c a lp o l i c y a s a c a u s e o f i n f l a t i o n s h o u l d n o t b e o v er l oo k ed . I n de e d ,t h e f a c t t h a t t h e F e d e r a l G ove r n me n t i s r u nn i ng a d e f i c i t o f $1 00b i l l i o n w h i l e pa y in g a c o mp ar ab le sum i n i n t e r e s t on t h e t o t a l F e d e r a ld e b t d e t r a c t s f r o m t h e c r e d i b i l i t y a nd u t i l i t y o f t h i s R e p o r t .* * C on g r e ss ma n C h a l me r s P. W y l i e -- T h i s c h a p t e r d o e s n o t m e n t i o nt h a t t h e t o t a l F e d e r a l d e b t i n c r e a s e d f ro m $ 317 b i l l i o n a t t h e e ndo f 1 9 6 4 t o $ 1, 00 4 b i l l i o n a t t h e en d o f 1 98 1. I t a l s o d o e s n o tm en t io n t h a t t h e n e t i n t e r e s t p a i d b y t h e Un i t e d S t a t e s T r e a s u r y o nt h e t o t a l F e d e r a l d e b t i n 19 8 2 may w e l l e x ce e d 30 p e r c e n t o f t h et o t a l F e d e r a l d e b t f o r 19 64 . I n s h o r t , C h a p t e r 1 d o e s n o t p r e s e n t-h e f a c t u a l r e c o r d o f b ud ge t d e f i c i t s a nd t h u s d o e s n o t a d e q u a t e l ye x p l a i n t h e p er f or m an c e o f t h e economy d u r i n g t h e l a s t f i f t e e n t ot w e nt y y e a r s .


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In Chapter 4, we review the current role of gold and considerpossible changes. In relation to domestic monetary arrangements,the changes would affect the conduct of Treasury o r Federal Reserveoperations or both. Such changes, if adopted, would also affectprivate sector conduct. In relation to the international monetarysystem, the changes would affect foreign exchange rate arrangements,the settlement of the balance of payments, and the InternationalMonetary Fund.For each possible change in the current role of gold, we discussthe main elements of the change, transitional problems, if any, poten-tial legal and international implications, and assess the advantagesor disadvantages it presents.Chapter 4 also brings together material on the historical marketfor gold that was dominated by central banks until 1968, changes inthe location and operation of gold markets since then, the allocationof the stock of gold between monetary and nonmonetary uses, deter-minants of the demand for and supply of gold, and approaches to thedetermination of the equilibrium price of gold. In addition, thechapter provides a retrospective view on the record of gold productionover past centuries and its relation to trend movements in commodityprices. A statistical compendium gives time series of world andU.S. production and stocks of gold, world and U.S. industrial use ofgold, and the nominal and real price of gold.

Aims of the Gold CommissionPart of our mandate is to assess the role of gold in the domesticand international monetary systems. Assessments differ among membersof the Commission not only with respect to the costs and benefits inthe past when our monytary system was linked to gold but also withrespect to the pr!ospective costs and benefits, were such a linkrestored. Given the size of the Commission that the Congress speci-fied, and the diversity of our views, that result may not be sur-prising. We decided that the best service we could render the countrywould be to set forth in an objective way the complex issues involvedand give a fair hearinq to different points of view.Another part of our mandate is to make recommendations. Thoughit became apparent to us during our deliberations that we would notbe able to achieve a unanimous set of recommendations, on some issues,it was possible to form majorities. Even so, a majority vote in

favor of a specific recommendation did not signify that all so votinghad the same purposes and/or interpretations in mind. Moreover, ifeach of us had been reporting singly instead of as one of a body ofcolleagues, individual members would not necessarily have expressedthemselves in precisely the way the recommendations are stated.Differences in wording, emphasis and perceptions would have beenevident. In some instances our recommendations touch on technicalmatters, such as legal and tax considerations, that need to be studiedmore exhaustively than it has been possible for us to do. Suchtechnical questions should be given attention in any Congressionalhearings in connection with our recommendations.


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Recommendations and Dissenting ViewsWe report our recommendations on the following subjects:

The program of Treasury medallion salesTreasury issue of gold bullion coinsTreasury issue of gold-hacked notes or bondsThe gold stock owned by the United Statesa. The public accountinq for the gold stockh. The relationship between gold certificates held as an asset ofthe Federal Reserve System and the gold held by the Treasuryc. The appropriate size of the gold stockd. The price at which to value the gold stocke. r4anaging the gold stockDomestic monetary policy arrangements*International monetary policy arrangements*

With respect to most of these subjects, we first present the range ofviews expressed in our deliberations, followed by the Commission'srecommendation. Dissentinq views are given in footnotes.

1. The Droaram of Treasurv medallion salesIn July 1980, the Treasury began the sale of half-ounce and one-ounce gold medallions in accordance with the American Arts GoldMedallion Act of November 10, 1978 (P.L. 95-630). The legislationprovided that not less than 1 million ounces of gold be struck intomedallions each year for a five-year period and sold to the publicat a price covering the market value of their gold content plus allcosts. A different American artist is commemorated on each of thetwo sizes of medallions. In 1980, Grant Wood was honored on theone-ounce and Marian Anderson on the one-half ounce medallion. In1981, Mark Twain was honored on the one-ounce and Willa Cather onthe one-half ounce medallion. Under the 1980 program covering theperiod July 15, 1980, through February 28, 1981, less than 300 thousandmedallions of each size were sold, containing 434 thousand goldounces. Under the 1981 program, from July 15, 1981, through March 5,1982, about 60 thousand medallions of each size were sold, amountingto 95 thousand gold ounces.The price of the medallions varies daily with the market price oftheir gold content, based on the settlement price at the end of theprevious day for spot gold traded on the Commodity Exchange of New York,plus a surcharge in 1980 of $12 and in 1981 of $14 per ounce to cover

*Congressman Chalmers P. Wylie -- Omission of the phrase "the role ofgold in" before "monetary policy arrangements" in items 5 and 6 clearlywas technically appropriate considering the material included in thatsection but inappropriate given the charge to the Commission by theCongress as to what should have been discussed.Governor J. Charles Partee -- I wish to be associated with this view.


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t h e c o s t o f p r o d u c t i o n a nd m a r k e t i n g . The s u r c h a r g e a v e r a g e d u n d e rt h r e e p e r c e n t o f t h e u n d e r l y i n g g o l d p r i c e .T he Bu r ea u o f t h e M i nt s e l l s t h e m e d a l l i o n s d i r e c t l y t o p u r -c h a s e r s t h r o u g h m a i l o r d e r s p l a c e d a t U . S . p o s t o f f i c e s . D e l i v e r y

i s m a d e w i t h i n s i x weeks .T h e T r e a s u r y D e p a r t m e n t i s p l a n n i n g a s i m p l e r and w i d e r d i s -t r i b u t i o n o f t h e m e d a l l i o n# t o b e i n t r o d u c e d t h i s y e a r t h r o u g h an e t wo r k o f d e a l e r s . A lt ho ug h d e t a i l s a r e n o t y e t f i n a l l y d e c i d e d ,t h e e x p e c t a t i o n i s t h a t s a l e s t o d e a l e r s w i l l b e made o n t h e , b a s i so f t h e d a i l y New Y o r k g o l d p r i c e , p l u s a t h r e e p e r c e n t m ark u p t oc o v e r co s t s i n c l u d i n g p u b l i c i t y b y t h e M in t. The d e a l e r s would ad da c om pa ra b l e f e e i n s e l l i n g t o t h e p u b l i c a nd d e v e l o p a s e c o nd a r ym a r k e t for t h e m e d a l l i o n s .

R e co m me n da t io n . T he G o ld C o mm i ss i on s u p p o r t s t h e i m p r ov e m e nt o f t h ep r o g ra m o f m e d a l l i o n s a l e s a l o n g t h e g e n e r a l l i n e s t h a t t h e T r e a s u r yp l a n s . *2 . T r e a s u r y i s s u e o f g o l d b u l l i o n c o i n s

I n a d d i t i o n t o g o i d m e d a l l i o n s w e d i s c u s s e d p r o p o s a l s f o r aT r e a s u r y i s s u e o f g o l d b u l l i o n c o i n s o f s p e c i f i e d w e i g h t s t o b e o f f e r e dt o t h e p u b l i c a t a p r i c e n e a r m ar k e t v a l u e .Among t h o s e who s u p p o r t t h e p r o p o s a l , t w o c o n c e p t i o n s o f t h ec h a r a c t e r o f t h e bemand f o r s u c h c o i n s a r e e v i d e n t . Some o f u s e x p e c tt h e demand f o r s u c h c o i n s t o h e a n i n v e s t m e n t demand, s i m i l a r t o t h edemand f o r K r u g e r r a n d s , M a pl e L e a f s , M e xi ca n p e s o s , a nd o t h e r f o r e i g nc o i n s t h a t h a v e f o u n d a m a rk e t i n t h i s c o u n t r y . O t h e r s e x p e c t t h e

demand f o r s u c h c o i n s t o h e ( o r h a v e t h e p o t e n t i a l t o h e ) a d emand f o rt h e i r u s e a s money. T h e i r v a l u e w ou ld c h a ng e fr om d a y t o d a y a s t h ev a l u e o f t h e g o l d c o n t e n t of t h e c o i n f l u c t u a t e d i n t h e f r e e g o l dm a r k e t .Some a d v o c a t e s o f t h i s p r o p o s a l see s u c h c o i n s a s f a c i l i t a t i n gd e v e l op m e nt o f a d u a l n o n e t a r y s y s t e m , w h ic h w ou ld i mp os e a n a d d i -t i o n a l d e g r e e o f d i s c i p l i n e on d i s c r e t i o n a r y o p e r a t i o n o f m o ne ta ryp o l i c y . * *

* G o v e r n o r J . C h a r l e s P a r t e e - - T h e p r o c e d u r e s by w hi ch g o l d m e d a l l i o n sa r e ma rk et ed c a n b e s u b s t a n t i a l l y i mp r o v e d a s a n i n t e r i m me a s u r e , b u tt h e p r o g ra m s h o u l d be d i s c o n t i n u e d when an d i f t h e Co m m is s i o nt s g o l dc o i n r e c o m m e n d a t i o n i s i m p l e m e n t e d .M r . A r t h u r J . Cos tamagna -- I v o t e d f o r t h i s r ec omme nd at io n o n t h eu n d e r s t a n d i n g t h a t t h e new p ro gr am would n o t i n c r e a s e f e e s c h a r g e dt o t h e c on su me r .**Congressman Henry S . R e u s s -- I d i s a g r e e . A d u a l m o n e ta r y s y s t e mwould i mp os e c h a o s , n o t d i s c i p l i n e , o n m o ne t ar y p o l i c y .G o v e r n o r H e n r y C . W a l l i c h w i s h e s t o b e a s s o c i a t e d w i t h G ov er no rP a r t e e ' s a nd Co ng re ss ma n R e u s s t v i e w s a b o v e .


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However, those opposing the proposal believe that ample suppliesof gold in forms other than Treasury coins are available to satisfythe demand for gold in the private sector.*So that the new issues may compete with foreign coins, someproponents advise that the former be designated legal tender and as

coin of the realm bearing the great seal of the United States and themotto "In God We Trust." In addition, they advise that changes inthe dollar value of these coins should he exempt from capital gainstaxation.A Treasury issue of gold bullion coins involves technicalmatters, on some of which the Commission has adopted recommendations.Conqress should explore the following considerations more thoroughlythan was possible in our deliberations.

(a) Consideration of a quantity limit on the issue of the coins.This reflects concern that the demand for the coins might exhaustthe Treasury gold stock. One approach would be to specify a quantitylimit in any legislation to permit coinage. An alternative means oflimiting the demand would be to se t a seignoraqe fee well in excess ofcosts of minting.** Some who believe the demand for coins would bea demand for money oppose a limit. The y would view large scale demandas an indication of public dissatisfaction with the management of the(dollar) money supply and as leading to de facto establishment of agold coin standard.*** According to this view, establishment of anarbitrary quantity limit or a high seignorage fee would interfere withthis expression of public preferences. A few others of both persuasion

*Congressmen Henry S . Reuss and Chalmers P. Wylie -- We find thissentence to be an inadequate summary of our views in opposing thegold bullion coin and refer the reader to our dissenting views foran authoritative statement of the harm for the economy if this proposalwere to be enacted.**Congressman Chalmers P. Wylie -- A little known fact about goldbullion coins and other gold coins is that the gold alloys used incoinage are several times harder than silver, nickel, and copperalloys. The consequence of this is that entirely different machineryhas to be used for making gold coins than regular coins. This wasteand cost should be avoided.***congressman Chalmers P. Wylie -- Inadequate demand for the goldmedallions produced by the Treasury for the Arts Medallion programhas left the Treasury with many millions of dollars of unsold medal-lions. Concern about waste in government forces me to caution readersabout the fiscal perils of forcinq the Mint to turn our officialgold bullion into gold bullion coins when there isn't any evidenceof enough demand to absorb the official medallions we have beenproducing for the public for several years. At least, the goldmedallion program should be discontinued, if we are to start producinggold bullion coins in accordance with Commission's recommendation.Governor Henry C. Wallich wishes to be associated with CongressmanWylie's view.


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favor Treasury purchases of gold to replace gold it has coined.*Those who believe the demand for coins would be an investment demandassume that it would not be quantitatively significant, and on thisground would neither oppose nor support a legislated limit.(b ) Enabling legislation to mint coins. Section 5 of the GoldReserve Act of 1934 (31 U.S.C. sec. 315b) prohibits the minting ofUnited States gold coin.(c) The implications of legal tender status for newly minted coins.Treasury Counsel prepared for us a statement on this matter relatedto U.S. currency (see Annex C). Legal tender status essentiallyrequires that, in any contract that does not otherwise specify themeans of payment, a debt can be discharged by the tendering of anyform of U.S. legal tender, and the creditor must accept that form ofpayment in full discharge of the debt. However, whenever a contractspecifies a specific means of payment, such as gold, and the debtorbreaches that provision and is taken to court by the creditor, thecourt, as in most cases of contractual breach, normally awardsdamages rather than specific performance of the contract provision.

For some who regard the demand for coins to be an investmentdemand, legal tender status is an adornment for coins, but never-theless a -ine qua non for generating public acceptance of them.**For some who regard the demand as a demand (or a potentialdemand) for money, the implications of legal tender status requirefurther consideration.*** Legal tender status for gold coins couldcompel their acceptance by private creditors for debts or by the

*Mr. Herbert J. Coyne -- While I do not believe using one to twomillion ounces of our gold stock for a gold coin program would makeexcessive inroads into these stocks, any open-ended production ofcoins could in effect amount to unlimited Treasury gold auctions.Clearly most Commission members d o not desire this. Thus, I believethe Treasury should purchase gold in the open market to replace anylarger amount of gold used in minting a TJ.S. gold coin or to refrainfrom minting any larger quantities.**Congressman Chalmers P. Wylie -- I do not believe an adornmentcan be a sine qua non.***Congressman Chalmers P. Wylie -- This will be our first coinwithout legal tender status. It should have legal tender status ornot be called a coin.

I had the Congressional Research Service summarize the laws ofCanada and South Africa pertaining to the legal tender statusdomestically of their own gold coins which are useable in commercein their country of origin. Their experience should be consideredin evaluating questions pertaining to legal tender status for thegold bullion coins. The s u ~ m a r i e s y CRS can be found in an appendixto the "Dissenting Views of Congressmen Henry S. Reuss and ChalmersP . Wylie."


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Treasury in satisfaction of taxes. Formidable problems, involvingpotential profits and losses to private creditors and debtors, couldarise in assigning gold coins legal tender status at a fluctuatingmarket value.(d) The implications of capital gains exemption for changes in thedollar value of coins (a background paper on capital gains taxesprepared by the Treasury is part of the permanent record of the GoldCommission). Advocating such exemption for coins but not for goldbullion holdings or, for that matter, not for productive investmentsoverlooks the inducement the exemption would provide to shift fromsuch other assets to coins. Those who support the exemption, however,regard it as essential to the use of the coins as money. Legislationto prohibit local government imposition of sales taxes would involvesimilar considerations. It would clearly also deprive the states ofa source of revenue.*(e ) Issues by private mints. The majority of us oppose privateminting of official United States coins. We regard the productionof "official" coins of a country as a qovernmental function. Thegovernment in effect guarantees the weight and fineness of the"official" coins issued. Private firms are perfectly free to mintgold pieces of any shape and size, so long as they do not purportto be United States coins with a U.S. Government guarantee of weightand fineness. Permission for private firms to mint U.S. coins wouldopen possibilities for fraud and could involve the Treasury in anew and costly regulatory and monitoring function. Problems wouldbe compounded if the Treasury had a convertibility obligation or anobligation to accept the coins in payment of taxes.(1 Convertibility at Treasury of gold bullion coins. Of thosefavoring issue of coins, about half support assumption by the Treasuryof an obligation to stand ready to purchase coin ~f f e r e d o it at themarket price * * on the day of redemption, the conversion producingpotential profits (or losses) for the Treasury.

*Congressman Henry S. Reuss -- En October 5, 1981, bill, S.1704,cosponsored by Senator Helms, provides for the minting of gold coinsexempt from U.S. and state capital qains taxes -- exactly as in theGold Commission's recommendation below, which is supported by allof the Reagan Administration's Gold Commission members. SenatorHelms' National Congressional Club expended $4.5 million on the 1980Reagan campaign (see Congressional Quarterly, March 6, 1982, pp.499-505).""Congressman Chalmers P. Wylie -- "Market price" is determined inunique ways for gold which should be studied carefully before obliga-ting the Treasury to convertibility with its potential for losses tothe Treasury.Congressman Henry S. Reuss -- In other words, about one-third of theCommission supports this dangerous proposal which could provideexhorbitant trading profits to those foreign interests who fix thegold price.


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~ecommendation. We favor Treasury issue of gold bullion coins ofspecified weights, and without dollar denomination or legal tenderstatus, to be manufactured from its existing stock of qold and tobe sold at a small mark-up over the market value of the gold content,and recommend that the Congress implement this proposal. Furthermore,we recommend that the coins shall be exempt from capital gains taxesand that the coins shall be exempt from sales taxes.*

*Congressmen Henry S. Reuss and Chalmers P. Wylie -- We object stronglyto this recommendation and call the reader's attention to a statementof objection to the recommendation signed by 30 members (two-thirds) ofthe House Committee on Banking, Finance and Urban Affairs. The recom-mendation ignores national problems of diminishing incentives forproductive investment in plant and equipment, of confusion over whatis and is not money, and of depriving states of the revenue neededto cover obligations enhanced by Federal cutbacks.Governor Henry C. Wallich -- I would not object to a gold coin issuedwith a mark-up at least equal to that applying to coins like the MapleLeaf and the Krugerrand, issued in limited quantities, and subject tocapital gains tax. In the absence of these specifications, a gold coincould lead to excessive depletion of the Treasury gold stock and harm-ful diversion of resources to unproductive investment. I also opposeconvertibility of the coin at the Treasury.Governor Emmett J. Rice wishes to be associated with Mr. Wallich'sview. With respect to convertibility, no support for convertibilityat Treasury of gold bullion coins was ever explicitly voted for therecord. An amendment by Congressman Reuss to include specific mentionin the recommendation on the issue of gold coins that such coinsshould not be convertible into dollars on demand at the Treasury wasvoted down, but one cannot necessarily infer from this that thosewho rejected the Reuss amendment supported the assumption by theTreasury of an obligation to stand ready to purchase coin offered toit at the market price on the day of redemption.Governor J. Charles Partee -- I seriously doubt that the proposed goldcoin should be exempted from capital gains taxes. Careful and de-tailed study is needed, not only of the equity considerations involvedin such singular treatment, but also of the possibilities for unwantedspeculative maneuvers involving the new coin in conjunction with otherforms of gold and precious metals holdings. Such uses could in factdestroy the coin's value as a monetary indicator.Congressman Ilenry S. Reuss -- This tax exemption proposal was adoptedat the February 12 Gold Commission meeting, 8-6. Jerry Jordan, whocast in person and by proxy the decisive votes in favor, has sincetestified that he was merely recommending that Congress "consider"the tax exemption question. (See transcripts, Joint EconomicCommittee, February 18; Gold Commission, March 8.)Mr. Arthur J. Costamagna -- Since a majority (9 to 6) rejected theidea that "such a coin should not be convertible into dollars ondemand at the Treasury," by implication, I believe, a majority favoredconvertibility or redeemability of the gold coins at the Treasury.


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3 . T r e a s u r y i s s u e o f g o ld -b ac ke d n o t e s o r bondsS e v e r a l w i t n e s s e s a t t h e h e a r i n g s w e c o nd u ct e d s u gg e s t e d t h a tT r e a s u r y i s s u e o f go ld -b a ck ed n o t e s o r bonds would be a means ofi n t r o d u c i n g g o l d i n t o o u r mo ne t ar y s ys te m. A l i m i t e d i s s u e , f o rexainple, o f f i v e - y e a r T r e a s ur y n o t e s w i t h i n t e r e s t and p r i n c i p a lp a y a b l e i n gr am s o r o u nc e s o f g o l d , would p r o v i d e d e f e r r e d c l a i m s

on g o l d . I n i t i a l l y , ac c or d i ng t o t h e a d v o c at e s , t h e y i e l d s p r e a d sbetw een g o ld and i n c o n v e r t i b l e d o l l a r o b l i g a t i o n s o f t h e samem a t u r i t i e s m i gh t b e w id e. S u c c e s s i n r e s t o r i n g l on g- te rm c o n f i d e n c ei n mo ne ta ry d i s c i p l i n e would e v e n t u a l l y n ar ro w t h e y i e l d s p r e a d s .A t t h a t t i m e , f u l l g o l d c o n v e r t i b i l i t y o f a l l d o l l a r o b l i g a t i o n sm i gh t b e c o n t e m p l a t e d . T he se w i t n e s s e s e m ph a si z ed t h e s a v i n g s o ni n t e r e s t p ay me nt s by t h e T r e a su r y , a ss um in g t h e p r i c e o f g o l d r em ai ne ds t a b l e o r r o s e o n l y mo d er a t el y , and he nc e a p o s i t i v e e f f e c t on F e d e r a lb ud g et d e f i c i t s .

I n o u r d e l i b e r a t i o n s , i t was n o te d b y o p p o n en t s o f g o ld -back edT r e a s ur y s e c u r i t i e s t h a t a g ol d- ba ck ed T r e a s u r y n o t e o r bond, i fc o n v e r t i b l e a t m a t ur i t y a t t h e m ar k e t p r i c e o f g o l d a t t h e d a t e o fi s s u e , would i n e f f e c t be a wa rehouse c e r t i f i c a t e f o r g o l d . Such a ni n s t r u m e n t w ou ld p r o v i d e t h e o wn er t h e same c h a nc e o f g a i n o r l o s s a sowning g o l d , w i t h o u t h i s i n c u r r i n g t h e c o s t o f s t o r a g e a nd i n s u r a n c e .N o o bv io us g u i d e l i n e e x i s t s f o r p r i c i n g t h e i n s t r u m en t . A T r e a s u r yi s s u e o f g ol d- ba ck ed n o t e s o r b o n d s, p a y i n g e v e n a l o w r a t e o f i n t e r -e s t , would p e r m i t s p e c u l a t i o n on g o l d w i t h a s w e e t e n e r o f a c ou po n.S uc h i s s u e s w ou ld b e c o m p a r ab l e t o a b ond c o n v e r t i b l e i n t o t h e commons t o c k o f a c o r p o r a t i o n t h a t h a s a l o w c o up on b e c a u s e o f t h e p o s s i -b i l i t y o f s p e c u l a t i v e g a i n . P u rc h as e o f T r e a s ur y gold- ba cked i s s u e swould i n d i c a t e a n e x p e c t a t i o n t h a t t h e p r i c e o f g o l d would r i s e .The T r e a s u r y would t h e n be b e t t i n g a g a i n s t t h e ma r k et , w i t h noa s s u r a n c e of g a i n a nd a ma j or r i s k o f T r e a s u r y l o s ses . From a d e b tma nagement v i e w p o i n t , n o n ee d e x i s t s f o r g o ld - ba c ke d T r e a s u r y i s s u e s .Reccmmendation. W e o pp os e t h e i s s u e o f T r e a s u r y g ol d- ba ck ed n o t e s o rbonds.

4 . The g o l d s t o c k owned b y t h e U n i t e d S t a t e s Go ve rn me ntA s o f t h e e n d o f F e b r u a r y 1 9 82 , t h e T r e a s u r y D e pa rt me nt r e p o r t e dt h a t it h e l d 2 6 4 m i l l i o n t r o y o u nc e s o f g o l d . The b u l k o f t h e g o l d i s

* C o n t i n u a t i o n f ro m p r e v i o u s p a g e.M r . H e r b e r t J . Coyne -- The ma j o r i t y recommendat ion was made u nde rt h e m i s i m p r e s s i o n t h a t making t h e U.S. g o l d c o i n l e g a l t e n d e r wouldhave made it money o f t h e r e a l m a nd u s a b l e i n t h e p ay me nt o f d e b t s .The p u r p o s e o f d e s i g n a t i n g a U.S. c o i n " l e g a l t e n d e r " i s t o a l l o w i tt o compete e q u a l l y w i t h t h e f o r e i g n c o i n s t h a t a r e c u r r e n t l y s u p pl y in gt h e U.S. m ar ke t . P o p u l ar f o r e i g n c o i n s a r e d e s i g n a t e d l e g a l t e n d e ra nd t h e r e f o r e a U.S. c o i n must b e s i m i l a r l y d e s i g n a t e d i n o r d e r t obe s u c c e s s f u l . I recommend t h a t t h e U.S. C on gr es s c o n s i d e r t h i sm a r k e t f a c t when d e s i g n i n g t h e U.S. g o l d c o i n .


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tored in mint depositories: Fort Knox, Kentucky, and West Point,New York; U.S. Assay Offices in New York and San Francisco; and theDenver and Philadelphia Mints. In addition, the Federal Reserve Bankof New York is the custodian of a part of the gold stock.a. The public accounting for the gold stock

Citizens have written to us expressing concern about allegedunauthorized large withdrawals from gold depositories. They fearthat the actual amounts held by the Government are less than arereported officially. Stories in the press also have referred tomissing gold.

Public and Congressional inquiries relating to the accuracy ofthe accounting records and security of the gold stock were directed tothe General Accounting Office (G AO ) in the early 1970s. In response,the GAO conducted a partial audit of the gold stored at Fort Knox inSeptember and October 1974. In its report on the audit, the GAOrecommended cyclical audits of the gold in the custody of the Bureauof the Mint.During fiscal 1975, at the direction of the Secretary of theTreasury, the Fiscal Assistant Secretary of the Treasury establishedthe Committee for Continuing Audits of United States Government-ownedGold stored at various depositories, with the responsibility to con-duct audits at appropriate intervals. The Committee consists of onerepresentative each from the Bureau of the Mint, the Bureau of Govern-ment Financial Operations, and the Federal Reserve Rank of New York,with GAO representatives invited to observe the audits. As ofFebruary 1982, 80.5 percent of the U.S. Government-owned gold hadbeen audited and verified. The continuing audit program is planned

to provide a complete audit of all U.S. Government-owned gold by theend of the 10-year cycle in 1984.The Treasury has provided us with a detailed statement of theresults of the continuing audit (see Annex D). With one or twoexceptions, we are satisfied with the Treasury's continuing audit,find it thorough, and believe it should allay any public concernwith regard to the accuracy of the inventory, the related accountingrecords, and the internal controls governing the depositories. Oneof us, however, expressed a preference for a speedier completion ofthe audit.One member is not satisfied with an audit that spans ten yearsand contends that 31 U.S.C. 354 appears to require annual audits ofthe gold inventory. He disputes the Treasury's view that a 100 per-cent audit in a single year is not feasible, since on its own estimateof manpower requirements, 25 men could do it. The Treasury has pro-vided us with an opinion that 31 U.S.C. 354 requires not annualaudits but annual settlements of account, which are being performedregularly in compliance with this provision.

Recommendation. We are satisfied that the Treasury is meeting therequirements of 31 U.S.C. 354 regarding annual settlements of account


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an d t h a t t h e T r e a s u r y ' s c o n t i n u i n g a u d i t o f t h e Government-owned g o l ds t o c k p r o v i d e s an ad eq ua te b a s i s f o r f u l l v e r i f i c a t i o n o f t h e a cc u ra c yo f i n v e n t o r y r e c o r d s . "b . The r e l a t i o n s h i p be tween g o ld c e r t i f i c a t e s h e l d a s a n a s s e t o ft h e F e d e r a l R e s er v e Sy st em an d t h e g o l d h e l d by t h e T r e a s u r y

Some c i t i z e n s h av e e x p r e s s ed t h e v i ew t h a t f o r t h e T r e a s u r y t oc l a i m o w ne r s h i p o f t h e g o l d s t o c k a nd t h e F e d e r a l R e s er v e Sy st em t oshow g o ld c e r t i f i c a t e s a s a s s e t s a p p e a r s t o b e d o u bl e -c o u nt i n g o f t h esame a s s e t .T he qo l d i s t h e p r o p e r t y o f t h e U.S. G ov er nm en t. The c e r t i f i c a t e-d o n o t r e p r e s e n t F e d e r a l ~ e s e r v e w ne rs h i p o f t h e g o ld .Go ld c e r t i f i c a t e s , which a r e v a lu ed a t $ 42 .2 2 p e r o u n ce o f g o l d ,and a r e a l i a b i l i t y o f t h e T re as ur y , a r e i s s u e d t o t h e F e d e r a l Re se rv eby t h e Tr e a s u r y a g a i n s t i t s g o ld h o l d i n g s . The c e r t i f i c a t e s r e p r e s e n ta F e d e r a l R e s er ve c l a i m o n t h e a s s e t s of t h e T r e a s u r y , f o r w hi ch t h eT r e as u r y h a s r e c e i v ed a c o u n t e r p a r t d e p o s i t i n i t s a c co u n t w i t h t h eF e d e r a l R e s e r v e .A l l g o l d h e l d b y t h e T r e a s u r y h a s b e en mo ne ti ze d i n t h i s f a s h i o n .

N ew g o ld c e r t i f i c a t e c r e d i t s may b e i s s u e d o n l y i f a d d i t i o n a l go l di s a c qu i r ed by t h e T r ea su ry o r t h e s t a t u t o r y p r i c e a t which g o l dc e r t i f i c a t e s may b e i ss u e d i s i n c r e a s ed . S i m i l a r l y , g o l d c e r t i f i c a t e sm us t b e r e t i r e d by t h e T r e a s u r y upon t h e s a l e o f g o l d , w i t h a c o r r e s -p o n d i n g d e c l i n e i n t h e T r e a s u r y ' s d e p o s i t b a la n ce .Recommendation. W e b e l i e v e t h a t t h e T r e a s u r y and F e d e r a l R e se rv e a r ef o l l o w i ng a p p r o p r i a t e p r oc e d ur e s i n r e p o r t i n g F e d e r a l R es er ve c la imso n t h e T r ea s u r y r e p r e s e n t e d by g o ld c e r t i f i c a t e s and p a y ab l e i n- - -d o l l a r s .c . The a p p r o p r i a t e s i z e o f t h e g o l d s t o c k

At ye a r - e nd 1949 , t h e U.S. g o l d s t o c k was a l i t t l e o v e r 7 0 0m i l l i o n f i n e t r o y ou nc es . A t y e a r - e n d 1 9 6 7, t h e s t o c k was a b o u t 5 0p e r c e n t sm a l l e r -- 3 4 5 m i l l i o n o u n c e s . A s a l r e a d y n o t e d, i t i s now264 m i l l i o n o u nc e s .O n e q u e s t i o n w e d i s c u s s e d was t h e a p p r o p r i a t e s i z e o f t h e g o l d

s t o c k -- a n o n - i n t e r e s t b e a r i n g a s s e t o f t h e T r e as u r y. A l l o f u sa g r e e t h a t a z e r o s t o c k i s n o t t h e a p p r o p r i a t e s i z e and t h e r e f o r eo p p o s e a u c t i o n s a l e s which a r e i n t e n d e d t o d i s p o s e of T r e a s u r yh o l d i n g s o v e r some s t a t e d p e r i o d o f y e a r s .A m i n o r i t y p r e f e r s t h a t t h e T r ea s u ry m a i n t a in t h e s t o c k a t i t sp r e s e n t l e v e l a s a n i m p o r t an t s t r a t e g i c and m on et ar y r e s o u r c e . T h i s

*Congressman Ronald E . P a u l -- The T r e as u r y s ho ul d a s s i g n a d e q ~ i . ~ t ~ >manpower t o c o mp le te a 1 00 p e r c e n t a u d i t o f t h e g o l d s t o c k ev e r y y c k . - i ?


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view i sr o l e o fr e s e r v ec o n s i s t e n t w i t h t h e b e l i e f t h a t a n i n c r e a s e i n t h e m on et ar yg o l d i s n o t now t i m e l y b u t t h e s t o c k s ho ul d b e h e l d a s af o r p o s s i b l e f u t u r e u s e , s ho ul d a r e s t o r e d r o l e f o r a o l d

2 -t h e n ap p ea r f e a s i b l e , o r a g a i n s t o t h e r c o n t i ng e nc i es . I n s u p p o r to f t h i s v ie w, i t w as s ugges t ed t o u s t h a t s ho ul d an i n t e r n a t i o n a lm on et ar y co n f e r en c e o f f r e e w o rl d n a t i o n s be conven ed t o recommendc ha ng es i n t h e i n t e r n a t i o n a l m o ne ta ry s ys te m, i t w oul d be us e fu lf o r t h e U ni te d S t a t e s t o h o l d a s u b s t a n t i a l g o l d s t o c k t o i n f l u e n c ep o s s i b l e f u t u r e d e l i b e r a t i o n s a nd t o be i n a s t r o n g p o s i t i o n i f g o l d ' sr o l e were r e e s t a b l i s h e d .

A v a r i a n t of t h a t v ie w, h e l d b y t h e m a j o r i t y of u s , i s t h a t somed e p l e t i o n of t h e g ol d s t o c k , f o r ex am ple , f o r t h e i s s u e of m e d a l l i o nsor t h e recommended program of co in ag e , i s a c c e p t a b l e b u t t o a l i m i t e de x t e n t o n l y .Recommendation. be recommend t h a t , w h i l e no p r e c i s e l e v e l f o r t h eo l d s t o c k i s n e c e s s a r i l y " r i q h t , " t h e Tr ea su ry r e t a i n t h e r i g h t t oz o n d u c t s a z s o f g ol d a t i t s d i s c r e t i o n , p ro vi de d a d eq u a t e l e v e l s a r em a i n ta i n e d f o r c o n t i n g e n c i e s . *d . The p r i c e a t w hich t o v a l u e t h e g o l d s t o c k--The T re a s u ry c u r r e n t l y v a l u e s t h e g o ld s t o c k i t h o l d s a t $ 4 2 . 2 2p e r o un ce. S i n c e t h e f r e e m ar ke t i n g o l d was e s t a b l i s h e d i n 1 9 6 8 ,t h e p r i c e h a s f l u c t u a t e d b et we en $ 35 and $850 p e r o u n c e . I t h a sr e c e n t l y b ee n p r i c e d a t u n d e r $ 35 0 p e r o u n c e.

One ar gu me nt f o r r e v a l u i n g t h e g o l d s t o c k a t a p r i c e c l o s e r t ot h e m ar ke t p r i c e i s t h a t it w ou ld e n a b l e t h e T r e a s u r y t o r a i s er e ve n ue s by s a l e of p a r t o f i t s g o l d . The r e v e n u e c o u l d b e u s e d t or e t i r e d e b t , t h u s s a vi n g i n t e r e s t payments on o u t s t a n di n g T re a su r ys e c u r i t i e s , o r t o f i na n ce t h e c u r r e n t F e d e ra l bud ge t d e f i c i t . A l lt h e s e o b j e c t i v e s a r e a t t a i n a b l e s im p l y by s e l l i n g g o l d a t t h e ma rk etp r i c e , a nd s o t h e r e i s no cogency t o t h i s a rgument f o r r e v a l u i n g t h eg o l d s t o c k . The same comment a p p l i e s . t o t h e s u g g e s t i o n t h a t a na d v a n ta g e o f a n i n t e r n a t i o n a l a g r ee m en t t o v a lu e g o l d a t t h e m a rk etp r i c e i s t h a t it mi gh t be a s t e p t oward go l d becomi ng an accep t ed*Mr. Herber t J . Coyne -- I f a v o r t h e r ec om me nd at io n t h a t wasi n i t i a l l y v o t e d f o r by a l a r g e r m a j o r i t y o f Commission members t h a nt h e o n e t h a t was p a s se d . I b e l i e v e t h i s f i r s t r ecommendation morec l o s e l y r e p r e s e n t s t h e s e n t i m e n t s o f t h e Commiss ion: W e a r e opposedt o a u c t i o n s a l e s of g o l d s t o c k h e l d by T r e a s u r y and recommend t h a tu nd er c i rc u ms ta n ce s su ch a s t h o s e t h a t p r e s e n t l y e x i s t , t h e s t o c k bem a in t ai n ed a t i t s p r e s en t s i z e . "Governor Henry C . W a l l i c h -- While I would n o t r u l e o u t t h e s a l e oft h e g o ld s t o c k when a p a r t i c u l a r s i t u a t i o n may u r g e n t l y r e q u i r e i t ,a s a y en er a. 1 r u l e t h e T r e a s u r y s h o u l d a v oi d s a l e o f t h e g ol d s t o c k .Under c i r cu m s t a nc e s su ch a s t h o s e t h a t p r e s e n t l y e x i s t , t h e g o l d s t o c ks h o u l d be m a i n t a i n e d a t i t s p r e s e n t s i z e .M r . A r t h u r J . Costamagna -- The T r e a su r y sh o u ld r e t a i n t h e r i g h t t oc o nd u ct p u r c h a s e s and s a l e s o f g o l d a t i t s d i s c r e t i o n .


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i n t e r n a t i o n a l medium f o r payment o f b a l a n c e o f p ay me nt s d i s e q u i l i b r i a ,an d t h a t i t c o u l d a l s o be u se d f o r i n t e r v e n t i o n p ur po se s i n f o r e i g ne xc ha ng e ma r ke t s t o i n f l u e n c e t h e e x ch an ge r a t e o f t h e d o l l a r .A n o t h e r a r g u m e n t i s t h a t i t i s u n r e a l i s t i c t o va l u e t h e g o l ds t o c k a t a n o u t da t e d f i x e d p r i c e . Doing s o d i s t o r t s t h e t r u e

s i g n i f i c a n c e and c o s t o f t h e U.S. g o l d a s s e t p o s i t i o n .W e r e ga r d t h e c h o i c e o f a p r i c e a t which t o r e v a l u e g o l d r e s e r v ea s s e t s a s i nd ep en de nt o f a d e c i s i o n o n t h e p r i c e a t which t o r e s t o r ea g o l d s t a n d a r d . One p r o p o s a l was made d u r i n g o u r d e l i b e r a t i o n s f o ra g r a d u a l i n c r e a s e i n t h e s t a t u t o r y p r i c e o f g o l d t o a p r i c e c l o s e rt o t h e m ar ke t p r i c e . The p r o p o s a l w a s i n c i d e n t a l t o a p l a n t o r e q u i r eg o l d c e r t i f i c a t e r e s e r v e s b e k e p t b e hi nd F e d e r a l Re se rv e n o t e s . N oo t h e r p r op o s al w i t h r e s p e c t t o t h e d e t e r m i n a t i o n of a p r i c e a t w hicht o r e v a l u e g o l d r e s e r v e a s s e t s was b r o ug h t t o o u r a t t e n t i o n .

Recommendat ion . The Commiss ion recommends t h a t t h e Tr ea su ry and t h eF e d e r a l R es e rv e co nd u ct s t u d i e s o f i s s u e s t h a t would b e i n v o lv e d i na move t ow ar ds v a l u i n g g o ld r e a l i s t i c a l l y , a t so me th in g more c l o s e l ya p p r o x i m a t i n g m a r k e t p r i c e s . The c h an g e s h o u l d b e s u b j e c t t o t h el e g i s l a t i v e c o n s t r a i n t t h a t t h e p r oc e e d s o f t h i s new v a l u a t i o n n o tbe m o n e t iz e d b y t h e T r e a s u r y o r i n a n y way u s e d t o e n ha n ce t h e g o v er n -m e n t ' s s p e n d i n g power. The s t u d i e s s h o u l d d e v e l o p a f o r m u la a ndt i m e t a b l e f o r v a l u i n u U.S. u ol d s t o c k s i n a manner r e a l i s t i c a l l vr e l a t e d t o go l d m a rk e t V al &.* Le . M an ag in g t h e g o l d s t o c k

One g e n e r a l p r o p o s i t i o n t h a t w e examined i s t h e d e s i r a b i l i t yof f i n d i n g c o n s t r u c t i v e u s e s o f t h e g o l d s t o c k r a t h e r t h a n k e e p i ngit i m mo b i le , a s i s c u r r e n t l y t h e c a s e . S p e c i f i c s u g g e s t i o n s w e con-s i d e r e d i nc l ud e d :( 1 ) The U n i t ed S t a t e s s h o u l d o f f e r sw ap s, l e a s e s and make o t h e rc om m er ci al a r r an g e m e n ts w i t h r e s p e c t t o i t s g o l d s t o c k i n o r d e r t og e n e r a t e a mo d es t r e v e nu e f l o w.( 2 ) I f r e v a l u e d , g o l d s h o u l d b e u s ed f o r i n t e r v e n t i o n p u r p o s e s i nf o r e i g n ex ch an ge m a rk e t s and f o r t h e s e t t l e m e n t o f t h e b a l a n c e o fpa ym e n t s ( s e e s u b j e c t 4d . a b o v e ) .

*Governor Henry C . W a l l i c h -- Any r e v a l u a t i o n of t h e go l d s t o c k c a r r i ew i t h i t t h e d an ge r o f a n i n f l a t i o n a r y us e , d i r e c t l y o r i n d i r e c t l y , o ft h e r e s u l t i n g g o l d p r o f i t . Repayment, f ro m t h i s s o u r c e , o f p a r t o ft h e F e de r a l d e b t poses t h e s ame t e m p t a t i o n s a s would a more d i r e c t u s eo f t h e p r o f i t f o r gov er nment e x p e n d i t u r e . R e v al u at i on c l ose t o t h ep r e s e n t m a rk et p r i c e f u r t h e r r a i s e s t h e q u e s t i o n o f wha t s h ou l d bed on e i f t h e m ar ke t p r i c e s h ou ld f a l l be low t h e o f f i c i a l p r i c e .G ove rno r J . C h a r l e s P a r t e e -- Any s u c h s t u d y mu st g i v e i m p o r t a n tw e i g h t t o t h e need f o r r e t a i n i n g ample c e n t r a l bank f l e x i b i l i t y i nm e e t i ng t h e " l e n d e r o f l a s t r e s o r t " f u n c t i o n wh i l e a t t h e same t i m ea v o i d i n g un wanted o v e r a l l m o ne ta ry e x p a n si o n . T h i s r e q u i r e s t h em ai nt en an ce o f a n ad e q ua t e s t o c k o f p o r t f o l i o a s s e t s t h a t c o u ld bes o l d a s a ny s u c h l o a n s a r e b oo ke d.


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( 3 ) T h e F e d e r a l R e s e r ve S y st e m s h o u l dt i o n s u s i n g go ld a s w e l l a s g ov er nm e nt e n g a g e i n o pe n m a r k e t o p e r a -s e c u r i t i e s .I n o u r d i s c u s s i o n o f t h e g e n e r a l p r o p o s i t i o n , it was no t e d t h a tt h e p r op os ed u s e s were n o t e a s y t o a s s e s s a nd t h e a d va n ta g e oft u r n i n g ' t o u n co n ve n t i o na l u s e s o f g o l d was n o t o b v i ou s .M ore ove r, i f a ny o f t h e s u g ge s t e d u s e s o f g o ld y i e l d e d a p r o f i t ,u s e o f t h e p r o f i t t o r e t i r e p u b l i c d e b t or t o spend it f o r b u d ge t ar yp u r p o s e s m i g ht e n c ou r ag e f i s c a l i mp ru de nc e.

~ e c o m m e n d a t i o n . W e d o n o t f a v o r u n c o nv e n t i on a l u s e s o f t h e q o l d s t o c k ,s i n c e t h e o b j e c t i v e s s o ug h t by a d d in g go l d t o t h e p o l i c y i n s t r um e n t s o ft h e m on e t a ry a nd f i s c a l a u t h o r i t i e s a r e a t t a i n a b l e w i t h o u t s uc h us e andt h e s i d e e f f e c t s o f so u s i n g g o l d may b e u n d e s i r a b l e . W e d o f a v o r con-t i n u e d s t u d y o f t h e r o l e o f g o l d i n t h e m o n e t a r y s y s t e m a nd recommendt h a t C on gr es s h o ld h e a r i n g s o n t h e s u b j e c t . *5 . ~ o m e s t i cm on et a ry p o l i c y a r r a n g e m e n t s

C u r r e n t l y , t r a n s a c t i o n s i n g o l d a r e n o t us ed i n t h e i mp le me nt at io no f mo ne t ar y p o l i c y by t h e F e d e r a l Re s er v e S ys te m. G old c e r t i f i c a t e sa r e c a r r i e d a s a n a s s e t o f t h e F e d e r a l R e se rv e and t h e r e f o r e c o mp ri seo n e e l e m e n t i n t h e s o u r c e s o f t h e mo n et a ry b a s e . However, t h e F e d e r a lR e se r v e d o e s n o t u s e i t s h o l d i n g s of t h e s e c e r t i f i c a t e s a s a d e v i c e f o rc h a n g in g t h e b a s e .W e c o n s i d e r e d a number o f a l t e r n a t i v e s t h a t would s e r v e t o r e i n -t r o d u c e g o l d i n t o o u r d o m e st i c m on et ar y p o l i c y a rr a ng e me n ts . The

* Mr . He rb e r t J . Coyne -- T he F e d e r a l R e s e r v e a nd t h e T r e a s u r y s h o u l dc on du ct s t u d i e s t o c o n s i d e r d i f f e r e n t ways i n w hich g o l d c a n be u s eda s a h e l p f u l p o l i c y i n s t r um e n t . I t seems i m pl a us i b l e t o k ee p o u r v a s ts t o c k s o f g o l d c om p l e t el y i d l e , i f w o r t h w hi l e u s e s c a n be d ev e lo p edwhich d o n o t e n t a i l d e p l e t i n g t h o s e s t o c k s .Governor Henry C . W a l l i c h -- I d o n o t f a v o r u nc o nv e nt i on a l u s e s o f t h eg o l d s t o c k an d w oul d r e g a r d c o n t i n u e d s t u d y a nd C o n g r e s s i o n a l h e a r i n g so n t h e r o l e o f g o l d i n t h e m on et ar y s y s te m a s a n un p ro d uc t iv e u s e o fg o ve r n me n t r e s o u r c e s a nd a p o t e n t i a l s o u r c e o f m a rk et u n s e t t l e m e nt .Go v e rn o r E m m e t t J . Rice -- I b e l i e v e t h a t l i t t l e would be gained fromf u r t h e r s t u d y o f t h e r o l e of g o l d i n t h e m on et ar y s ys t em . The Commis-s i o n h a s examined a v a r i e t y of p o s s i b l e r o l e s f o r g o ld i n t h e m on et ar ys y s t e m . T he C om mi ss io n' s re c o mm e nd a ti o ns s t a t e t h a t i t sees no mer i ti n i s s u i n g g ol d- ba ck ed b o nd s , d o e s n o t f a v o r u n c o n v e n t i o n a l u s e s o ft h e g o l d s t o c k , d oe s n o t r e ga r d r e s t o r i n g a g o ld s t a nd a r d a s a f r u i t -f u l way t o d e a l w i t h i n f l a t i o n , and do e s no t f a v o r change i n t h eu s ag e o f g o l d i n ex ch an ge r a t e a r r a n g e m en t s . I t wo u ld ap p ea r i n co n -s i s t e n t t o re ac h t h e se c o n c l u s i o n s a nd t h e n c a l l f o r f u r t h e r s t u d yo f p r e s u ma b l y t h e s e same " r o l e s . "Congressman Henry S. Keuss -- I a g r e e w i t h G o v er n or s R i c e and W a l l i c h .


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o b j e c t i v e woul d be t o improve m on et a ry c o n t r o l t hr ou gh t h e d i s c i p l i n eo f g ol d f o r t h e p u rp o se o f r e d u c i ng i n f l a t i o n . L i nk in g c ha ng es i nt h e g r ow t h r a t e o f money o r of some component of money, su ch a sF e d e r a l Re se rv e n o t e s , o r of bank r e s e r v e s , t o t h e c ha ng e i n t h e g o l ds t o c k i s o ne a pp r oa c h w hi ch wa s c o n s i d e r e d f o r i m po si ng t h e d i s c i p l i n eo f g o l d .One way t o r e i n t r o d u c e g o ld would be t o r e q u i r e t h e F e d e r a lR e s e r v e S y st e m t o m a i n t a i n a minimum r a t i o be t we e n t h e U . S . Govern-m e n t ' s g o l d s t o c k an d t h e F e d e r a l R e s er v e mo ne t ar y b a s e ( i . e . , F e d e r a lR e se r ve n o t e s p l u s b ank r e s e r v e s ) o r some m o n e t a r y a g g r e g a t e . Av a r i a n t would f i x up p e r an d lower l i m i t s t o t h e r a t i o , so t h a t t h eS y st e m w ou ld b e r e q u i r e d t o t a k e e x p a n si o n a ry a c t i o n s when t h e r a t i owas a t i t s u p p e r l i m i t , o r c o n t r a c t i o n a r y a c t i o n s when t h e r a t i owas a t i t s l o w e r l i m i t . T he g o l d c o v e r r e q u i r e m e n t m i g h t b e v a l u e da t t h e p r i c e o f $ 4 2 . 2 2 , o r a d j u s t e d g r a d u a l l y , o r al lo we d t o f l u c t u a t ew i t h m a rk et p r i c e s .Along t r a d i t i o n a l g o ld - st a nd a rd l i n e s , t h e U ni te d S t a t e s c o ul d

d e f i n e t h e d o l l a r a s a s p e c i f i e d we ig ht of g o l d ( t h a t i s , f i x t h ep r i c e o f g o l d ) , s e t g o l d c o v e r r e q u i r e m e n t s f o r t h e F e d e r a l R e se rv eS ys te m, a nd a l l o w t h e v a l u e o f t h e g o l d s t o c k t o be d e t e r mi n e d byd o me s t i c and i n t e r n a t i o n a l g o l d f l ow s . I f t h e v a l u e o f t h e go l ds t o c k rose t h r o ug h a n i n f l o w o f g o l d , t h e F e d e r a l R e s e r ve would b er e q u i r e d t o u n d e rt a k e a c t i o n s t o e xpa nd t h e money s t o c k . I f t h ev a l u e o f t h e g ol d s t o c k d e c l i n e d , it would b e r e q u i r e d t o t a k ec o n t r a c t i o n a r y a c t i o n s .Most members o f t h e C om mi ss ion b e l i e v e t h a t a r e t u r n t o t h eg o l d s t a n d a r d i s n o t d e s i r a b l e . Even i f t h a t we re n o t o u r v i ew , f o rmost o f u s t h e r e a r e t w o m a jo r p ro bl e ms i n c o nt e m p l a ti n g t h e f e a s i -

b i l i t y o f a r e t u r n t o a d om es t i c g o l d s t a n da r d . One i s t h e a b se n ceo f a s ou nd gu i d e on how t o de t e r m i n e t h e f i x e d d o l l a r p r i c e o f g o l da t w h ich r e s u m p t io n o f a g o l d c o v e r r e q u i r e m e n t c o u ld be i n t r o d u c e d .The o t h e r o ne i s t h e a b se n c e o f a s oun d g u i d e o n t h e e x t e n t of f e a s i -b l e c o n v e r t i b i l i t y o f d om es t i c d o l l a r o b l i g a t i o n s .S i n c e t h e d ec ad e of t h e 1 97 0s , n o t o n l y i n t h e U n it ed S t a t e sb u t a l s o i n o t h e r i n d u s t r i a l i z e d n a t i o n s , mone ta ry a u t h o r i t i e s h avee x p e ri m e n t e d w i t h s el f - i m po s e d r u l e s of c o n d uc t o f m on e t ar y p o l i c y ,sometimes e x p r e s s e d a s t a r g e t r a t e s o f g r ow t h o f money. Long-t ermm on et ar y d i s c i p l i n e , n o t l i n k e d t o g o l d , h a s been t h e o b j e c t i v e . Av a r i a n t o f t h i s ap pr oa c h would impose su c h d i s c i p l i n e by l e g i s l a t i v e

p r e s c r i p t i o n , t h a t i s , a m on e ta r y r u l e .Al though some o b j e c t i o n was e x p r e s s e d t o c o n s i d e r a t i o n o fd o m e s t i c m on et a ry a r r a ng e m e n ts n o t l i n k e d t o g o ld a s o v e r s t e p p i n gt h e Go ld C om m is si on 's m an da te , i n f a c t w e d i sc u s s e d a l l t h e f o re g o i n ga l t e r n a t i v e s . * I n a d d i t i o n , w e c o n s id e r e d c o n t i n u a t i o n o f o u r p r e s e n t

*Governor Henry C . W a l l i c h -- N o d a t a o r s t u d i e s were p r e s e n t e d ,however , f o r t h i s p a r t of o u r d i s c u s s i o n , n o r d i d t h e d i s c u s s i o n c o ve rs uc h a s p e c t s a s t h e d e f i n i t i o n o f t h e money t o be t a r g e t e d , t h e


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d o m e s t i c m o ne t ar y a r r a n g e m e n t s , u n d e r w hi ch t h e F e d e r a l R e s e r v ee x e r c i s e s f u l l d i s c r e t i o n w i t h r e s p e c t t o m o ne ta r y a c t i o n s a nd c h o o s e st h e r a n g e s of g r o w th i n a v a r i e t y of m o n e ta r y a g g r e g a t e s , w hic h itb e l i e v e s a p p r o p r i a t e t o t h e e co no my 's n e e d s an d p r o p os e s t o s e e k ,r e p o r t i n g t o s e v e r a l C o n g r es s i o na l committees b o t h i t s p l a n s and t h e i rr e s u l t s .Recommendat ion. The Commission recommends t h a t th e Co ng res s and t h e---- -e d e r a l R e s e rv e s t u d y t h e merTts o f e s t a b l i s h i n g a r u l e s p e c i fy i n gt h a t t h e g ro wt h o f t h e n a t i o n ' s money s u p p l y be m a i nt a i ne d a t as t e a d y r a t e which i n s u r e s l on g- ru n p r i c e s t a b i l i t y . I n a d d i t i o n ,t h e Commission c o n c l u d e s t h a t , u n de r p r e s e n t c i r c u m s t a n c es , r e s t o r i n ga g o l d s t a n d a r d d o e s n o t a p p e a r t o b e a f r u i t f u l method f o r d e a l i n gw i th t h e c o n t i n u i n g p r o b l e m o f i n a t i o n . The Co ng res s aKd t h eF e d e r a l R e s e r v e s h o u l d s t u d y w ay s t o i m pr ov e t h e c o n d u c t o f m o n e ta r yp o l i c y , i n c l u d i n g su ch a l t e r n a t i v e s a s a d o p ti n g a m on et ar y r u l e . *t e c h n i q u e s by w hi ch s u ch t a r g e t i n g would b e co n d u ct e d , n o r t h e e f f e c t so f s t a b l e money g rowt h on p r i c e s , i nc ome s , a nd e mp loym en t.G o v e rn o r s P a r t e e a nd R i c e w i s h t o b e a s s o c i a t e d w i t h Governor w a l l i c h l scomment.*Governor Henry C. W a l l i c h - - T he Comm i ss ion ' s m a nda t e was t o a s s e s s" t h e r o l e of g o l d i n d o m es t i c an d i n t e r n a t i o n a l mo ne ta ry s y st e ms . "The o n l y p a r t o f t h e r ec om me nd at io n t h a t f o c u s e s on g o l d , a nd w i t hwhich I a y r e e , i s t h e c o n c lu s i o n t h a t r e s t o r i n g t h e g o l d s t a nd a r dd o e s n o t a p p ea r t o be a f r u i t f u l method of d e a l i n g w i t h t h e c o n t i n u i n gp ro bl em o f i n f l a t i o n . The r e m a i nde r o f t he r e com me nda t ion d e a l sw i t h a s p e c t s o f e co no mic p o l i c y t h a t a r e o u t s i d e t h e C om mi ss ion 'sterms o f r e f e r e n c e , and I , t h e r e f o r e , o p po s e t h i s r ec om me nd at io n.Gove rno r s P a r t e e and R i c e a nd Congre ssma n W yl i e wi sh t o be a s s oc i a t e dw i t h G o ve r no r W a l l i c h l s v ie w. C on gr es sm an W y li e r a i s e d a p o i n t ofo r d e r a g a i n s t t h e f i r s t and t h i r d s e n t e n ce s a s be i ng no t ge rm a ne .Congressman Henry S . Reuss -- S i n c e t h e S o l d C o m: ni ss io nl s j u r i s -d i c t i o n ( P . L . 96-389) i s c o n c e r n e d o n l y w i t h " t h e r o l e o f g o l d , "t h e f i r s t and t h i r d s e n t e n c e s i n t h i s r ec omm end ati on, commentinga b ou t a mo ne ta ry r u l e , a r e o u t s i d e t h e C o n~ mi ss io n ' s u r i s d i c t i o n .I n a d d i t i o n , t h e f i r s t and t h i r d s e n t e n c e s a r e re du nd an t.Governor E m m e t t J . R i c e -- B e s i d e s b e i n g o u t s i d e t h e m an da te o f t h eC omm is si on , t h i s r e co mm en da ti on d o e s n o t r e c o g n i z e t h a t t h e F e d e r a lK es cr ve a l r e a d y s p e c i f i e s r a n g e s f o r t h e a n n u a l g ro wt h of money andbank c r e d i t a g gr e ga t es w i t h a l on g -t e rm o b j e c t i v e o f p ro m ot i ng s u s t a i n -a b l e e co no mi c g r ow t h i n a n o n i n f l a t i o n a r y en v i r o n m e n t . A d op t io n o fa nd a dhe re nc e t o a r i g i d r u l e o f a p r e d e te r m i n e d p e r c e n t a g e r a t e o fmone ta ry g rowth t o be a ch i ev ed ( i f a t a l l p o s s i b l e ) r e g a r d l e s s ofde ve l opm e n t s i n t h e economy woul d l i k e l y l e a d , i n my j udge m e nt , t op r i c e a n3 o u t pu t i n s t a b i l i t y .


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C o n g r e s s m a n S t e p h e n L . N e a l -- I o f f e r e d t h e f o l l o w i n g r e s o l u t i o n :"W he re as t h e i n a j o r i t y o f t h o s e who s u p p o r t e d t h e c r e a t i o n o ft h e G o l d C o mm i ss i on d i d so w i t h t h e ho pe o f f i n d i n g a method f o rb e t t e r i n s u r i n g c o n s i s t e n t a n d p e r s i s t e n t p r i c e s t a b i l i t y * * a n d ;"Whereas t h e i n a t i o n a r y p r o c e s s i s u l t i m a t e l y r e l a t e d t oe x c e s s i v e g r o w t h i n money*** a n d ;"Whereas i t i s c l e a r t h a t i n f l a t i o n c a n n o t p e r s i s t o v e r t h e l o n gr u n i n t h e a b s e n c e o f e x c e s s i v e mo n et a ry g ro wt h t h e n ;"The C om mi ss io n recommends t h a t t h e C o n g r e s s b y l e g i s l a t i o ne s t a b l i s h a r u l e s p e c i f y i n g t h a t t h e g r o wt h o f t h e n a t i o n ' s moneys u p p ly b e m a in t a i n e d a t a s t e a d y r a t e w hi c h i n s u r e s l o ng -r un p r i c e

s t a b i l i t y . "****The members were e v e n l y s p l i t on t h e v o t e f o r t h e r e s o l u t i o n .

* * C o n g r e s s m a n C h a l m e r s P. W y l i e -- T h e p r e a m b l e t o t h e r e s o l u -t i o n i s n o t a c o r r e c t s t a t e m e n t . The r e a d e r i s r e f e r r e d t o t h eC o n g r e s s i o n a l R e co r d o f S e p t em b e r 1 8 , 1 9 8 0 , p a g e s H9136-7 f o r t h ee n t i r e t y o f t h e House d e b a t e e s t a b l i s h i n g t h e Go ld Commiss ion .N e i t h e r t h e c o n c e p t o f i n f l a t i o n n o r t h e p h r a s e " p r i c e s t a b i l i t y "were m en t i on e d i n c o n n e c t i o n w i t h t h e e s t a b l i s h m e n t o f t h e G o ldCommiss ion .* * * C o n g r e s s m a n C h a l m e r s P . W y l i e -- I w o u l d l i k e t h e r e c o rd t oshow t h a t I f e e l t h a t o u r i n f l a t i o n p ro bl e ms s i n c e a b o u t 1 96 5 a r eu l t i m a t e l y r e l a t e d t o e x c e s s i v e F e d e r a l s p e n d i n g and t o p e r s i s t e n td e f i c i t s i n t h e F e d e r a l b u d g e t s , r a t h e r t h a n " e x c e s s i v e g ro wt h i nmoney," a s t h e r e s o l u t i o n s t a t e s .* * * * G o v e r n o r H e n r y C . W a l l i c h -- I am opposed t o t h i s r e s o l u t i o nb e c a u s e i t i s o u t s i d e t h e m a n d a t e o f t h e C om mi ss io n. T he C o mm is si on ,m or eo ve r , d i d n o t ha v e b e f o r e i t f a c t s o r a n a l y s e s up on w hi c h t ob a s e a r e c o mm e n d at i o n , n o r d i d i t d i s c u s s t h e m e r i t s o f a r u l e f o rm on et ar y p o l i c y . My e f f o r t t o i n t r o d u c e m a t e r i a l t o d o c u m e n t t h ei n s t a b i l i t y o f t h e v e l o c i t y o f c i r c u l a t i o n o f money a nd , t h e r e f o r e ,t h e u n w o r k a b i l i t y o f a r u l e , d i d n o t l e a d t o d i s c u s s i o n o f t h i se v i d e n c e . E s t a b l i s h m e n t o f a f i x e d r u l e f o r m o n et ar y p o l i c y w ou ldi n v i t e t h e d a n g e r o f d e s t a b i l i z i n g o u t p u t , employmen t , p r i c e s , a ndt h e i n t e r n a t i o n a l v a l u e o f t h e d o l l a r .C o n g r e s s m a n S t e p h e n L . N e a l -- T h e m e r i t s o f a m on et a r y r u l er e g u l a t i n g t h e g r ow t h o f t h e money s u p p l y h a v e a l r e a d y b e en e x t e n -s i v e l y s t u d i e d a n d d e b a t e d . M o de r at e a nd s t e a d y g ro wt h o f t h e moneys u p p l y i s n e c e s s a r y , o v e r t h e l o ng r u n , for p r i c e s t a b i l i t y , lowi n t e r e s t r a t e s , r o b u s t p r o d u c t i v i t y , a nd f u l l employmen t . T he mone-t a r y h i s t o r y o f t h e p a s t d e c a de s u g g e s t s t h e n e e d f o r a l e g i s l a t e dr u l e t o e n f o r c e m o ne t ar y r e s t r a i n t . W e n e e d t o e n a c t s u c h a r u l e ,n o t e n d l e s s l y d e b a t e i t s me r i t s . A c c o r d i n g l y , 'I p r op o se d t h e r e s o l u -t i o n q u o t e d a b o v e , o n w h ic h t h e C om mi ss io n i s e v e n l y s p l i t . W hi le Is u p p o r t t h e r e co mm en da t i on f i n a l l y a d o p t e d b y t h e C omm is sio n, I


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6 . I n t e r n a t i o n a l mo ne ta ry p o l i c y a r r an g e me n t sWe d i s c u s s e d a number o f a s p e c t s o f i n t e r n a t i o n a l m on e ta rya r r a n g em e n t s d u r i n g o u r d e l i b e r a t i o n s .U nd er p r e s e n t c o n d i t i o n s , t h e e xc ha ng e r a t e o f t h e d o l l a r i sd e t e r mi n e d i n f o r e i g n e x ch a ng e m a r k e t s by t h e demand f o r an d s u p p l yo f d o l l a r s an d a l s o by t h e d emand f o r an d t h e s u p p l y o f o t h e rc u r r e n c i e s . The f o r e i g n e xc ha ng e v a l u e o f t h e d o l l a r f l o a t s , c hang-i n g f r o m d a y t o d ay a s m ar k e t i n f l u e n c e s ( o r g o v e r n m e n t i n t e r v e n t i o n s )d e t e r m i n e .A do pt in g a g o l d s t a n d a r d w i t h a f i x e d p r i c e o f g o l d i n terms o fd o l l a r s wo u ld f i x e xc ha ng e r a t e s b et w e en t h e d o l l a r a nd t h e c u r r e n c i e so f t h o s e of t h e U ni te d S t a t e s ' t r a d i n g p a r t n e r s t h a t a l s o f i x e d t h ep r i c e o f g o l d i n terms o f t h e i r c u r r e n c i e s . T ho se who s u p p o r t as ys t e m o f f i x e d p a r i t i e s a r g u e t h a t i t f a c i l i t a t e s i n t e r n a t i o n a lt r a d e a nd f i n a n c e a nd , a l o n g w i t h c o n v e r t i b i l i t y o f t h e U.S. d o l l a rt o g o l d , w ould p ro m o t e t h e g o a l of i n t e r n a l p r i c e s t a b i l i t y .U n der p r e s e n t c o n d i t i o n s , d e f i c i t s o r s u r p l u s e s may b e o b s e r v e di n o u r b a l a nc e o f pa ym en ts , a nd t h e d e f i c i t s o r s u r p l u s e s a r e s e t t l e di n d o l l a r s a u t o m a t i c a l l y . Even th o ug h d o l l a r s a r e n o t c o n v e r t i b l ei n t o g o l d a t a f i x e d p r i c e , t .hey a r e c o n v e r t i b l e i n t o U . S . g o o d s a n ds e r v i c e s i n c l u d i n g g o l d a t m ar k et p r i c e s . O t h e r c o u n t r i e s a nd t h e i rr e s i d e n t s c o n t in u e t o u s e d o l l a r s a s a n i n t e r v e n t i o n c u r r e n c y i nf o r e i g n ex ch an ge m a r k e ts , i n pa y m e n ts a nd r e c e i p t s f o r i n t e r n a t i o n a lt r a n s a c t i o n s , and a s a r e s e r v e a s s e t . W e d o n o t u s e o u r g o l d i np a y m e n t s an d r e c e i p t s f o r i n t e r n a t i o n a l t r a n s a c t i o n s a n d n e i t h e r doo u r t r a d i n g p a r t n e r s .Most o f u s b e l i e v e t h a t e v en i f o t h e r c o u n t r i e s w i t h s u b s t a n t i a lg o l d s t o c k s an d t h e major g o l d - p r o d u c i n g c o u n t r i e s were t o a g r e ew i t h u s o n a r e s t o r a t i o n o f a n i n t e r n a t i o n a l g o l d s t a n d a r d , t h eU n i t e d S t a t e s -- a nd t h e s y s t e m a s a w h ol e -- w ould c o n f r o n t a n a sy e t u ns o l ve d p r ob le m o f t h e v a s t q u a n t i t y o f d o l l a r s wo rld -w ide w i t hp o t e n t i a l c l a i m s t o g o l d c o n v e r t i b i l i t y . W e a r e n o t i n f a c t a w a r eo f i n t e r n a t i o n a l i n t e r e s t i n r e s t o r i n g a g o l d s t a n d a r d . I nd e e d , anumber o f f o r e i g n o f f i c i a l s h a ve e x p r e s se d n e g a t i v e v i e ws t o w ar ds ag o l d s t a n d a r d .

t h i n k t h a t , b y r e c o m m e n d i n g more s t u d y r a t h e r t h a n o u t r i g h t e na ct me nto f a mo n et ar y r u l e , w e m i s s e d a g o l de n o p p o r t u n i t y t o h e l p s e c u r el o n g -t e r m p r i c e s t a b i l i t y , l o w i n t e r e s t r a t e s a nd h i g h e mployment .I i n t e n d t o c o n t i n u e my e f f o r t s t o e n a c t a m on et ar y r u l e t h r o u ghl e g i s l a t i o n .M r . L e w i s E . Lehrman - - I f a v o r t h e r e s t o r a t i o n o f a g o l d s t a n d a r dw i t h a f i x e d p r i c e o f g o l d . I t i s t h e m e a n s t o a c h i e v e d i s c i p l i n ei n t h e U.S. m o n e t a r y b a s e wh i c h w i l l t h e n i n c r e a s e o r d e c r e a s e w i t hg o l d p u r c h a s e s an d s a l e s by t h e mo ne ta ry a u t h o r i t i e s .


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One o t h e r q u e s t i o ns t e p s t o s ee k a r e s t i t u w e d i s c u s s e d w a st i o n of t h e go l do t h e r member c o u n t r i e s s u b s c r i b e d t o t h et h e d e s i r a b i l i t y o f t a k i n gt h a t t h e U ni te d S t a t e s andI n t e r n a t i o n a l M onetar yFund ( I M F ) , The Un it ed S t a t e s would b e e n t i t l e d t o buy u p t o 2 3 . 6m i l l i o n o u n c e s o f g o l d f r o m t h e IMF a t SDR 3 5, o r a p p r ox i m a t el y $ 4 0 ,p e r o u n c e a t t i m e o f w r i t i n g , i f by a n 8 5 p e r c e n t v o t e o f t h e IMFmembership a d e c i s i o n were t a k e n t o s e l l g o ld f o r c u r r e n c y t omembers of t h e IMF i n p r o p o r t i o n t o t h e i r IMF q u o t a s a s o f A ug ust1 9 7 5 .

The ar gu me nt f o r s uc h a r e s t i t u t i o n o f IMF g o ld t o i t s membersi s t h a t c u r r e n t l y g o l d h a s no c e n t r a l r o l e i n t h e i n t e r n a t i o n a lm o ne t ar y s y s t e m a n d n o l o n g e r s e r v e s a s t h e common d e n o m i n a t o r o f ap a r v a l u e s y s t em o r a s t h e u n i t of v a lu e o f t h e SDR; i t s o f f i c i a lp r i c e h a s b e e n a b o l i s h e d ; members o f t h e IMF h av e n o o b l i g a t i o n t ou se go ld i n t r a n s a c t i o n s w i t h t h e IMF; a n d t h e IMF i s p r o h i b i t e dfrom a c c e p t i n g g o l d u n l e s s a pp r ov ed b y a n 8 5 p e r c e n t v o t e o f i t smembers. The 1976-80 program of IMF g o l d s a l e s a l s o a t t e s t s t o t h ei n t e n t i o n t o e s t a b l i s h a d im in is he d r o l e f o r g o l d i n IMF r e s o u r c e s .

T h e a rg um en t a g a i n s t s e e k i n g s u ch g o l d r e s t i t u t i o n by t h e IM Fi s e s s e n t i a l l y t h e same one t h a t u n d e r l i e s t h e b e l i e f t h a t t h e Un it edS t a t e s s ho u l d r e t a i n s i g n i f i c a n t g o l d h o l d i ng s . I f g ol d i s an i m -p o r t a n t s t r a t e g i c and m on et ar y r e s o u r c e f o r t h e U ni te d S t a t e s , i ts h ou l d a l s o be s o r e g a r de d b y t h e i n t e r n a t i o n a l c ommunity, an dr e t a i n e d by t h e IMF f o r p o s s i b l e u s e i n v a r i o u s c on t i n g en c i e s .Recommendation 1. We f a v o r no ch an ge i n t h e f l e x i b l e e xc ha ng e r a t es vs te m. I n a d d i t i o n , w e f a v o r n o c ha nu e i n t h e u s a u e o f u o l d i n t h eo p e r a t i o n o f t h e D r es e n t ex ch a na e r a t e a r r a n a e m e n t s . *Recommendation 2 . We o pp os e a c t i o n by t h e U n it ed S t a t e s t o s e e k a---r e s t i t u t i o n o f IMF g o l d t o member c o u n t r i e s . * *

*Congressman Chalmers P. Wylie -- I r a i s e d a p o i n t of o r d e r a g a i n s tr e f e r e n c e s t o t h e f l e x i b l e e xc ha ng e r a t e s y st e m s i n c e t h e H ouse o fR e p r e s e n t a t i v e s made no r e f e r e n c e t o t h a t s u b j e c t i n i t s c h a r g e t ot h e Gold Commission. I t i s no t ge r m a ne t o t h e r e p o r t .Congressman Henry S . R e us s a nd Gove r no r P a r t e e w i s h t o be a s s o c i a t e dwi th Congressman Wyl ie ' s comment .M r . Lewis E. Lehrman -- I s u p p o r t f i x e d ex ch an ge r a t e s f o r t h e U.S.d o l l a r t o be i n t ro du ce d a t t h e e a r l i e s t p o s s i b l e d a t e .**Congressman Ronald E . P a u l -- I s u p p o r t s t e p s t o s e e k a r e s t i t u t i o no f IMF g o l d t o member c o u n t r i e s . I would u s e t h e a d d i t i o n s t o U.S.g o l d s t o c k s f o r c o i n a g e by t h e U.S. T r e a s u r y .


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C o n c l u s i o nI n p r e s e n t i n g o u r r e p o r t , w e a r e c o n s c i o u s o f t h e c o mp l e x i t yo f a n a t t e m p t t o d e f i n e wh at t h e r o l e o f g o l d s h o u l d b e i n t h e

d o m e s t i c and i n t e r n a t i o n a l m on e ta r y s y s t e m s .The m a j o r i t y o f u s a t t h i s t i m e f a v o r e s s e n t i a l l y no c ha ng ei n t h e p r e s e n t r o l e o f g o l d . Y e t , w e a r e n o t p r e p a r e d t o r u l e o u tt h a t a n e n l a r g e d r o l e f o r g o l d may e me r ge a t some f u t u r e d a t e .I f r e a s o n a b l e p r i c e s t a b i l i t y an d c o n f i d e n c e i n o u r c u r r e n c ya r e n o t r e s t o r e d i n t h e y e a r s a h e a d , w e b e l i e v e t h a t t h o s ewho a d v o c a t e a n i m m e di a te r e t u r n t o g o l d w i l l g ro w i n n u m be r sa n d p o l i t i c a l i n f l u e n c e . * I f t h e r e i s s u c c e s s i n r e s t o r i n gp r i c e s t a b i l i t y a nd c o n i d e n c e i n o u r c u r r e n c y , t i g h t e rl i n k a g e o f o u r m on e ta r y s y s t e m t o g o l d m a y w e l l b e c o m e s u p e r e r o -

g a t o r y .The m i n o r i t y o f u s who r e g a r d g o l d a s t h e o n l y r e a l moneyt h e w o r l d h a s e v e r known h a v e p l a c e d o u r v i e w s o n record: t h e

o n l y way p r i c e s t a b i l i t y c a n be r e s t o r e d h e r e ( i n d e e d , i n t h ew o r l d ) i s by ma k i ng t h e d o l l a r ( a n d o t h e r n a t i o n a l c u r r e n c i e s )c o n v e r t i b l e i n t o g o l d . L i n k i n g money t o g o l d d o m e s t i c a l l y a n di n t e r n a t i o n a l l y w i l l s o l v e t h e p r ob le m o f i n f l a t i o n , h i g hi n t e r e s t r a t e s , and b u dg e t d e f i c i t s .W e h a v e made n o a t t e m p t t o c o n c e a l t h e d i v i s i o n s among u s .

I n t h a t r e s p e c t , o u r v i e w s p r o b a b l y r e p r e s e n t t h e r a n ge o fo p i n i o n s h e l d by t h e c o u n t r y a t l a r g e . W e h op e, n e v e r t h e l e s s ,t h a t o u r r e p o r t w i l l make a c o n t r i b u t i o n t o p u b l i c un d e r s t a n d i ngo f t h e i m p o r t a n t i s s u e s i n vo l v e d . I n t h a t e v e n t , t h e t i m e w eh a v e d e v o t e d t o p r e p a r a t o r y s t u d y b e f o r e o u r m e e t i n g s a nd t ot h e d e l i b e r a t i o n s t h e m s e l v e s w i l l h a v e b e e n w e l l s p e n t . * *

*Congre ssma n He nry S . R e u s s -- I d o u b t i t . More l i k e l y , t h o s e whoa d v o c a t e s e n s i b l e f i s c a l , m on et a r y , a nd a n t i - i n f l a t i o n p o l i c i e s" w i l l grow i n numbers and p o l i t i c a l i n f l u e n c e . "* * Y r . A r t h u r J . Cos ta ma gna -- W i t h i n t h r e e t o f i v e y e a r s , a newg o l d c o mm i ss i on s h o u l d b e a p p o i n t e d t o r e v i e w t h e e f f e c t s o f t h ef o r e g o i n g r e co m me n da t io n s a nd C o n g r e s s i o n a l i m p l e m e n t a t i o n t h e r e o f ,and t o make t h e i r own r e c om m en d at i on s a t t h a t t i m e .


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Chapter 1

Background to the Establishment of the Gold Commission*

The focus of this chapter is the period before October 1980when the provision to create the Gold Commission was enacted. Thatprovision was a product of growing concern in many quarters in thiscountry over the persistence and acceleration of inflation here since1964.** Many citizens believe that an expanded and more explicitrole restored to gold in the U.S. monetary system is the solution tothe problem of inflation, arguing that it will both promote monetaryand fiscal discipline and reduce inflationary expectations.***

*Governor Henry C. Wallich -- I dissociate myself from what seems tome a not sufficiently balanced and excessively monetarist interpre-tation of inflation.Congressman Henry S. Reuss -- I associate myself with GovernorWallich.**Congressman Chalmers P. Wylie -- This paragraph is in error, andthis chapter should have been omitted from the Report of the GoldCommission. The Congressional----- Record-- of September 18, 1980 pp.H9136-7 records the brief discussion between Representatives Pauland Neal prior to the unanimous consent acceptance of RepresentativePaul's amendment which created the Gold Commission. The word "infla-tion" was not used even once during the entirety of the considerationof the amendment in the House of Representatives which created theGold Commission.Congressman Henry S. Reuss -- The Gold Commission was established aspart of a legislative compromise to secure passage of a needed Inter-national Monetary Fund quota extension. It had nothing to do withconcern about inflation, a fact which is reflected in the Commission'srecommendations, which are irrelevant to the problem of inflation.***Congressman Henry S. Reuss -- Very few citizens believe anexpanded and restored role for gold would serve any useful purpose.But those few do have the wherewithal to make themselves heard.


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T he R e c o r d o f I n f l a t i o n

I n f l a t i o n may b e d e f i n e d a s a s u s t a i n e d r i s e i n t h e p r i c e1 e v e l . l I t c a n b e o b s e r v e d i n t h e p a t t e r n o f b e h a v i o r o f b o t ht h e p r i c e d e f l a t o r i m p l i c i t i n GNP a n d t h e c o n s u m e r p r i c e i n d e xp r e s e n t e d i n C h a r t 1-1. T h e r a t e o f i n c r e a s e i n t h e d e f l a t o rrose f r o m l e s s t h a n 1 p e r c e n t p e r y e a r i n 1 9 6 1 t o 9 p e r c e n t i n1980 , w h i l e t h e r a t e o f i n c r e a s e i n t h e c o n s u m e r p r i c e i n d e xrose f r o m 1 p e r c e n t t o 11 p e r c e n t i n t h e s a m e p e r i o d . W er e p o r t t h e m o v e m en t s o f t h e c o n s u m e r p r i c e i n d e x s i n c e t h e y a r et h e m e a s u r e o f i n f l a t i o n w i t h w h i c h t h e p u b l i c i s most f a m i l i a r .H o w e v e r , t h e r e a r e w e l l - k n o w n b i a s e s i n t h i s m e a s u r e , p a r t i c u l a r l yt h e e f f e c t o f h o u s i n g m o r t g a g e c o s t s , t h a t may o v e r s t a t e t h ed e g r e e o f i n f l a t i o n i n t h e e c o n om y . 2 T he r a t e o f p r i c ei n c r e a s e was n o t s t e a d y b u t r a t c h e t e d u p w a r d s w i t h f l u c t u a t i o n si n e c o n o m i c a c t i v i t y .

E c o n o m i s t s a re d i v i d e d o n t h e roo t c a u s e s o f i n f l a t i o n .Some a t t r i b u t e i t t o e x c e s s i v e w a g e d e m a n d s f o s t e r e d b y a g g r e s -s i v e u n i o n s , p r o f i t - p u s h p r i c i n g b y m o n o p o l i s t i c f i r m s , r a n d o mf a c t o r s l i k e p o o r a g r i c u l t u r a l h a r v e s t s , a n d i n s t i t u t i o n a la n d s o c i o l o g i c a l p a t t e r n s , e a c h o f g r e a t e r o r l e s s e r i m p o r t a n c ei n s p e c i f i c i n f l a t i o n a r y e p i s o d e s . O t h e r e c o n o m i s t s r e g a r di n f l a t i o n a s p r i m a r i l y a m o n e t a r y p he no m en o n , e x p l a i n e d b ym o n e t a r y g r o w t h i n e x c e s s o f t h e l o n g - r u n t r e n d o f r e a l o u t p u tg r o w t h . T he y r e c o g n i z e , h o w e v e r , t h a t o t h e r f a c t o r s mayt e m p o r a r i l y a f f e c t t h e i n f l a t i o n r a t e i n d e p e n d e n t o f t h e r a t eo f m o n e t a r y g r o w t h . " N o o n e h a s s t a t e d t h e s e p r o p o s i t i o n s m o r el u c i d l y t h a n C h a ir m a n P a u l A . V o l c k e r o f t h e B o a r d o f G o v e r n o r so f t h e F e d e r a l R e s e r v e S y s t e m who o b s e r v e d o n F e b r u a r y 1 , 1 9 8 0 :

" O u r p o l i c y , v i e w e d i n a l o n g - t e r m p e r s p e c t i v e ,r e s t s o n a v e r y s i m p l e p r e m i s e -- t h a t t h e i n f l a -t i o n a r y p r o c e s s i s u l t i m a t e l y r e l a t e d t oe x c e s s i v e g r o w t h i n m o n e y a n d c r e d i t . T h i s

* * * C o n t i n u a t i o n f ro m p r e v i o u s p a g e .C o n g r e s s m a n C h a l m e r s P. W y l i e -- I t i s m u c h more t r u e t o s a y t h a t t h ee v o l u t i o n o f t h e G o ld C o m m is s i o n w e n t t h r o u g h a s t a g e i n i t s d e v e l o p -m e n t a l p r o c e s s i n w h i c h i t s c r e a t i o n was o n e o f a n u m be r o f p o l i t i c a l" c a r d s " b e i n g p l a y e d i n a n a t t e m p t t o o b t a i n f u n d i n g t o i n c r e a s e t h eq u o t a o f t h e U n i t e d S t a t e s i n t h e I n t e r a n a t i o n a l M o n e t a r y F u n d .S e c t i o n 1 0 o f P u b l i c L a w 96-389 c r e a t e d t h e G o l d C o m m is s i o n . P r i o rs e c t i o n s g a i n e d v o t e s by t a k i n g p o l i t i c a l l y p o p u l a r p o s i t i o n s o nT a i w a n , t h e P a l e s t i n e L i b e r a t i o n O r g a n i z a t i o n , a n d E l S a l v a d o r . S e c t i o n3 a s s u a g e d f i s c a l c o n s e r v a t i v e s b y s t a t i n g , " T h e C o n g r e s s r e a f f i r m si t s c o m m i t m e n t t h a t b e g i n n i n g w i t h F i s c a l Y e a r 1 9 8 1 , t h e t o t a l b u d g e to u t l a y s o f t h e F e d e r a l G o v e r n m e n t s h a l l n o t e x c e e d i t s r e c e i p t s . "" C o n g r e s s m a n H e n r y S. R e u s s -- M any o t h e r e c o n o m i s t s h o l d d i f f e r e n ta n d more s o p h i s t i c a t e d v i e w s .


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r e l a t i o n s h i p i s o f c o u r s e a complex on e , andt h e r e a r e many f a c e t s o f i t t h a t a r e s e n s i t i v et o n o nm o ne t ar y e co n om ic v a r i a b l e s . B u t , i ns p i t e o f a l l t h e n u a n c e s , it i s c l e a r t h a ti n f l a t i o n c an no t p e r s i s t o v e r

gold commission report volume i

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