Did we give Gold for Oil?
The following proposal was made during the 1970s oil crisis by one Mordechai E. Kreinin, who later became an Economics Professor in the Department of Economics at Michigan State University, in a letter to the New York Times:
To the Editor:
If We Gave Gold for Oil
Much has been said in recent months about the"immense burden" on the balance of payments of Western Countries created by the quadrupling of oil prices. Yet to the extent that the producing countries are willing to accumulate Western currencies (especially dollars), that burden can be alleviated or removed in a noninflationary manner by gradually disposing of official gold reserves on the private market.
It is the coincidental occurrence of two events that makes this possible. The adoption of flexible exchange rates by the industrial nations eliminates the necessity of maintaining official gold reserves. And second, the price of gold on the private market rose to four and one half times its official value precisely during the four fold increase in oil prices. Thus the U.S. gold stock, officially valued at $11 billion, is worth nearly $50 billion on the private market.
Assuming that this market is rather thin, it cannot absorb massive quantities of gold at a given moment of time, without the price tumbling. For that reason, it would be easier if France and some other countries preferred to hang on to the cherished yellow metal and leave this field of operation open to the United States. In that event the U.S. gold stock should suffice to subsidize oil imports to this country over a ten-year period to the tune of $5 billion per year. By the end of that period, we should be on the way to self-sufficiency in energy production.
However, any combination of concerted Western action is possible, should Europe be interested. The unloading of gold on the private market can be distributed among the participating countries in preassigned proportions, depending on their oil imports and gold reserves. Such action has ample precedence in operation of the London Gold Pool, except that in the present case we are talking strictly of selling gold. To the extent that the Persian Gulf Sheiks are interested in accumulating their wealth in gold, the yellow metal will find its way indirectly to their hands and will relieve the world of its need to find adequate investment outlets for the accumulated funds.
Finally, the proposal would yield another important benefit: With official gold stocks completely unloaded, it would rid the international currency system of the cross of gold.
Mordechai E. Kreinin
"Gold for Oil," New York Times letter, March 18, 1974, included in Casebook of Economic Problems and Policies, R. Fels ed.
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