INTELLIGENCE MEMORANDUMFRENCH ACTIONS IN THE RECENT GOLD CRISIS

Created: 3/20/1968

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INTELLIGENCE AGENCY Directorate of Intelligence8

INTELLIGENCE MEMORANDUM

French Actions in the Recent Gold Crisis

Summary

French government attitudes, and ths actions of some French officials, were important factors contributing to the massive speculation against the dollar and the pound during the recent gold crisis- In the weeks immediately following the devaluation of the pound onhe French fanned the speculative flaires by leaking unsettling financial news to the press and may have encouraged some countries to convert their dollars into gold.* By mid-December, however, the French government had become concerned about the deepening crisis and subsequently has generally refrained from unsettling actions.

Under De Gaulle the French government hasopposed the dominant role of the dollar in international finance, has pressed forof the US balance-of-payments deficit, and has called for an increase in the official price of gold and the use of gold as the only international Over recent years, the French have converted

4 Tkrougnout the November-March oriels, the USSR, Communist China, and other Communist countriesmail role in Ueetern gold markets. Reported Communist purchases of gold wereillion for Communist China$ million for the USSR and Eastern Europe. However, the aosence of theee purchases would not havecandy diminished the intensity of the rueh against the monetary gold reserves of the gold pool members.

Note : This memorandum was produced solely by CIA. Ttwas prepared by the Office of Eoononia Research and was coordinated with the Office of Current Intelligence.

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nearly all their official reserves from dollars into gold, reduced their cooperation with the other financial powers by withdrawing from the Londonool, and delayed agreement on and adoption of US proposals for increasing world reserves through creation of new international assets under the International Monetary Fund.

The recent agreement among gold pool members to step buying and selling gold in the private market will not prevent the French from continuing to promote the role of gold or from attacking the dollar if they choose to do so. If they feel that US Treasures are inadequate, the French will almost certainly try to block reforms of the international monetary system through the issuance of special drawing rights by the International Monetary Fund. The effectiveness of French policy, however, will be limited by the small size of France's dollar holdings, and the disappearance of the French halanco-of-payments surplus. France's Common Market partners seem inclined to cooperate with the United States in international financial matters if the United States takes strong action to reduce its balance-of-payments deficit. Future French moves, moreover, probably will be inhibited by the desire to avoid international monetary disorganization.

The French View

De Gaulle the French governmentdisagreed with the United statesof the other major financial powers onthe cause, and the appropriate curesdifficulties which have beset thesystem. France's approach tois an extremely conservative one. France

is opposed to arrangements (the so-called goldstandard) whereby the dollar and the pound serve together with gold as major media ofsettlement and as international reserves. It opposes the domination of the world's financial markets by New York and London.

Important, France considersS balance-of-payncnts deficitby which the United states forcesto hold dollars that arethe invasion of US firms in Europeforeign policies distasteful to De Gaulle,the Vietnam War. France has consistentlyan increase in the official price of goldtoufficient increase in thepower of world gold reserves to permitof the dollareservethe French government has not desiredof the dollar in relation to thoit believes that the French balance ofcould not stand the shock. ollaralmost certainly be followed promptly bydevaluation of equal or greater size.

Early_ French Actions

De Gaulle government has expoundedviewsroper forum wasbegan taking actions to back them upago. French monetary and fiscalbeen designed to create surpluses in thoof payments most of the time and into build up French monetary reserves. Asgrew rapidly during tho early andwere converted increasingly from dollars This involved the purchase9 billion

in gold direct from the US Treasury. Direct purchases from the United States ended inhen the French balance-of-payments surplus almost disappeared

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and French dollar holdings had declined to about one-half billion dollars.

6 France no longeramounts of surplus dollars it couldgold, it continued to promote the worldgold. rance hademberinformal group known as the gold poolthe United States, the United Kingdom,Italy, the Netherlands, Belgium,the function of which was tofree market price of goldn ounce and

to distribute the burden of any losses" to agreed on proportions. The French shareercent. The arrangement worked wellith the pool members gaining as much gold as they lost. owever, sales to private hoarders and industrial users began to out-pace purchases from new production and diminishing Soviet gold sales. The members of the pool began to lose increasing amounts of gold to the free market. Inrance decided to withdraw from the pool in order to avoid continued easing of the strain on the US gold reserve and in the hope that its action would enhance the chances of an increase in the price of gold. By agreement among the pool members, French withdrawal was-kept from public knowledge.

attacking the dollar by buying goldcooperation through the gold pool,used its influence to prevent adoption offor reforms of the internationalwhich could supplement and eventuallydollars and gold. After lengthythe summer7 France joined in thecreation of additional reservespecial drawing rights" (SDR's) tothrough the International Monetary Fund.

3ut implementation of the agreement was left indefinite, presumably contingenteduction of the US balance-of-payments deficit. Moreover, at French insistence, the Common Market countrieseto power over the timing and manner of implementing the agreement. Although France has not been alone in insistingeduction in the US balance-of-payments deficitondition for implementing the agreement, it is clear that the French position has been the most negative and that French obstruction of negotiations has created lengthy delays. These delays in turn have contrib-uted to the severity of the recent gold crisis.

French Actions Subsequent to Devaluation of Sterling

a result of the7 war inEast which closed the Suez Canal andshut off some of the Unitedof petroleum,adly deteriorating

balance'of payments and serious economicat home, the British were brought inevitably to the point of devaluation.

devaluation of the poundreated serious uncertainties in the world's and foreign exchange markets. It was followed

erious acceleration in private hoarding of gold and parallel losses of reserves of gold pool members. French government attitudes and the actions of French officials in the weeks immediately

following the devaluation of the pound

greatly to the uncertainty and helped tothe ultimate goldt is unlikely that the French intended to create the crisis, however, and after mid-December they tried to disassociate themselves from it and to avoid unsettling

The Le Monde Incidents

inhe Parisian pressthe newspaper Le Monde, under the bylinerespected financial writer Paulublish accurate and unsettling newsfinancial developments. Theitem was news that France hadthe gold pool months before, with theshoulderingercent sharelosses as well as its own shareere other items as well: that SI billion

of theillion pledged through theMonetary Fund to .support sterling after devaluation had already been "mortgaged" and actually was not available to dispatch outstanding British obligations; gold pool salesigures on British and US drawings against the swap arrangements exchanged among the major centralhole series of reports on negotiations for additional loans to the United Kingdom; and exaggerated figures on increases in the members' contributions to the gold pool.

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9. All of this information had been closely held. In fact, scne of it was discussed only orally among the gold pool members at their periodic meetings in Basel, at which French representatives were present. It appeared that the closed society of central bankersar<

this news rapidly became publicthe leaks themselves, but also the The story was currentmalloverzcalous Gaullists was attempting toworld monetary machinery over the edgethe price of goldwhich, incould be the only possible result ofon the*-

Other Develooments

events roiled the waters as well,was learned in mid-December thatillion {inought withreserves in Paris, to buy goldthe United States

12. Most of these reports are probablycorrect. Theyontinuation of the general French policy of putting pressure on the dollar- But they do not substantiate the existencerench plot to bring .down the dollar ir. the wake of the devaluation of sterling. f the reports probably represent isolated ploys

or. the part of cvarzealous people -weight of evidence, on the

that by raid-December the French government had become apprehensive about the developing crisis. Presumably it feared that the crisis would lead to unsettled conditions and severe monetarywhich it wanted to avoid, even if the eventual result was an increase in the price of gold. Some reports even suggest that firmwere issued from high levels within the French govornment to cease any actions that might add to the speculative fever.

real importance of all thesehowever, lies in the attitude of thelarge, the public that actually bought thetho sterling and dollars, and fearedof the world monetary system. Thisconvinced of official Frenchtho notion was daily gaining groundoft-repeated Gaullist thesis was correct:

that the dollar could not hold out, that the USstock could be profitably assaulted, and

the dollar devaluation that soon would yield great profits to gold holders was indeed imminent.

the crisis, the positionFrench central bank, the Banque degovernor, M. Brunet, hasarticularof the United States, seemed ambivalent.strong inclination toward closeforeign monetary authorities is inconsistent

with soma of the actions attributed to

the crisis. Senior officials of the Bank were

apprehensive about French government policies,

although it was also clear that the Bank was at

all times under the control of the Finance Minister

in matters of1

announcement,Johnson's new balance-of-paymer.tsstemmed the tide of deepening crisiseight working days, after which thethe London gold pool resumed, slowly atwith .gathering intensity. From thishowever, reports of Frenchsignificantly. Moreover, on anthe French continued to act with perfect

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correctness. France even had an opportunity, as esult of substantial inflows of dollars during November and December, to buy some gold directly the United States, which it declined to do, preferring to label the dollars as "hot" money that might all too soon leave France again. Thereew statements reiterating the old Gaullist monetary line and calling for an increase in the price of goldome of these coming from De Gaulle's adviser on gold policy, Jacques Rueff.No solid evidence exists that the French government engaged in covert activity to intensify the last, most crucial phase of the gold/dollar crisis.

What Will France Do Now?

16. It is not likely that the agreementgold pool members to cease buying andin the free market will induce theto abandon-its long-held view thatof gold should be increased, that theshould put its balance of payments inthat the world should be put on somethinga full gold standard for international The French will continue to pressof international monetary policiesconsistent with its view. Thea number of ways to bring pressure onsterling and on the dollar in the -

a. Opposing the plan for setting Special Drawing Rights ISDR's)be taken up by the financethe ten largesteeting onarch toin Sweden. Tho SDR's wouldbalar.ce-of-payments problem ofStates and the United Kingdom, %they would give these two coun-as well as all other membersInternational Monetary Fund, tha to draw on additional amounts offoreign currencies for extended .- f

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on settlement ofsurplus withStates or the United Kingdom in and encouraging other nations to the same. Linked to thisbe France's insistence on the

right not to accept anotherif the International

Fund ratifieslan. At the

extreme, France could sell monetary gold obtained from the United Statesn ounce to private individuals, but this practice would createrisk of detection if carried out on any scale.

othor nationsFrance has financial orto minimize their holdings

of dollars and

advantage ofreserve position andleadership to replacepart with ParisenterSouth Africa's gold Substantial advantages, how- still accrue to London and arallel effort would be

to make Paris moreinancial center for Western Europe at the expense of London.

damagingrespect to the pound and

17. There are, however, some ma^orand barriers to French action. France wishes to avoid dismantling the international monetary machinery because this machinery plays an important role in promoting international trade, and in particular France does not want the dollarelation to the franc. France may, therefore, cooperateegree with the United States and other financial

powers to Unit speculation in gold and dollars. French leverage is limited by the fact that French collar reserves are now small and the French balance ot payments is unlikely to be in surplus for the next year or two. And France cannot count on having an effective veto power over adoption of the SDR scheme. If the United States takes sufficiently strong monetary and fiscal action to improve its balance of payments, the other Common Market countries may support the SDR scheme in spite of probable French opposition.

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