Dollars, Gold, and International Payments
Remarks of Wm. McC. Martin, Jr. ,
Chairman, Board of Governors of the Federal Reserve System,
before the
Annual Dinner Meeting of
The Bond Club of New York
New York City
February 11, 1965
"Two weeks ago, a proposal to modify our laws regarding the holding of gold as monetary reserves was put before the Congress by the President of the United States. In the interval since, we have had considerable discussion not only of that proposal but also of the entire subject of dollars, gold, and international payments.
To me, that is as it should be, for these are matters that deserve the interest and understanding of us all. Accordingly, I should like to add some comments on them tonight, though I realize that little that I might say could seem new to a group as well versed in finance as this..."
Source: http://fraser.stlouisfed.org/martin/record.php?id=5041
File: fraser.stlouisfed.org/docs/historical/martin/martin65_0211.pdf
Friday, August 9, 2013
FRASER - SOUTH AFRICAN GOLD AND THE TWO-TIER SYSTEM
Authors:
Solomon, Robert
Date:
07/16/1968
Citation:
Solomon, Robert, July 16, 1968, South African Gold and the Two-Tier System, from William McChesney Martin Jr. Collection, accessed Aug 9, 2013 from FRASER, http://fraser.stlouisfed.org/martin/record.php?id=4484
STRICTLY CONFIDENTIAL (FR) Robert Solomon
SOUTH AFRICAN GOLD AND THE TWO-TIER SYSTEM
The Problem
"The two-tier gold system, established at the Washington meeting of March 16-17, is threatened in two ways: (1) by South Africa's offer to sell gold to the International Monetary Fund and (2) by the desire of some European central banks to purchase gold from South Africa for addition to monetary gold stocks.
The U. S. response to this problem ought to preserve the essential character of the two-tier system as the U.S. views it, while avoiding either a breakdown of international monetary cooperation or a divisive battle in the IMF over its legal obligation to purchase gold from members.
The two-tier system may be said to have both a short-term and a long-term significance. For the short-run, it was intended to discourage upward pressures on the market price of gold, by saying to the market that central banks would not be contributing to the demand for gold. All the participants in the Washington meeting were in agreement that the smaller the margin by which the market price of gold exceeded the official price, the greater were the prospects for international monetary stability. If the market price of gold remained relatively low, it was less likely (1) that central banks would convert foreign exchange into gold out of fear of a rise in the official price of gold and (2) that private parties would speculate on a change in relative exchange rates by moving their funds into what they regard as strong currencies.
The longer-term significance of the Washington Agreement-- and on this there is less than full unanimity among the participants-- is that the two-tier system represents an important step toward diminishing the role of gold in the international monetary system. In particular, if monetary authorities would act upon the statement that, in view of the prospective creation of the SDR facility, the amount of gold in monetary stocks is sufficient, gold would play no significant role in the future growth of monetary reserves. In effect, gold would have been demonetized at the margin. This interpretation of the two-tier system has not been accepted by some European central banks and it is not possible at present to persuade them to accept it. In fact a public airing of this interpretation by U.S. officials' would probably lead some European central bank officials to disagree publicly. The best the United States can do in present circumstances is to avoid an open breakdown of the Washington Agreement while seeing to it that any new policy agreements are not inconsistent with our preferred interpretation of its longer-term significance.
Solution to Problem
It is believed, within the U.S. Government, that the best way to meet the present challenge to the two-tier system is to agree to provide through the IMF a floor price at $35 per ounce for newlymined gold that South Africa (and other gold producers) need to sell to meet their balance of payments requirements. As another concession, South Africa would be permitted to count its gold holdings as of July 1, 1968 as monetary gold.
In exchange for these concessions, South Africa would be expected to sell newly-mined gold in the market, as its payments position requires, and to avoid special efforts to withhold such sales. South Africa would not offer monetary gold to central banks or the IMF unless it had disposed of all of its supplies of newly-mined gold. Finally, South Africa would withdraw its present offer to sell gold to the Fund.
Advantages of this Solution
1. This solution provides for an accommodation with South Africa and makes it possible to end the existing uncertainties in South Africa's dealings with the market, monetary authorities, and the IMF. The alternative proposal for ending these uncertainties--agreement on central bank purchases of some amount of newly-mined gold even when the market price is above $35--would constitute an open break with the Washington Agreement and would make it much less likely that the longer-term significance of that Agreement would be realized.
2. The proposed solution assures the market of a resumption of South African sales and prevents South Africa from choosing between market sales and sales to monetary authorities or the Fund as a way of maximizing the market price.
3. Central bank purchases of newly-mined gold continue to be precluded. Additional gold can enter the monetary system only if and when the market price falls to $35 per ounce or below. An opening of the system to additional gold in these circumstances would clearly be consistent with the short-run significance of the Washington Agreement. Purchases by the Fund when the price is at $35 or below would not be in conflict with the objective of minimizing the margin between the official and market prices, since such purchases would occur only when this margin were zero (or negative). (It should be noted that while the proposal would provide a floor price for sales of gold by South Africa as its payments position requires, the proposal would not put an institutional floor under the market price and would not therefore assure speculators that there is no risk at all of the market price falling below $35.)
Additions to IMF gold holdings (and the possibility that the Fund would sell such gold to members) under this proposed solution would not be inconsistent with the desire to see a diminished emphasis on gold in the long run. Gold would enter the official reserve circuit only if and when the market is placing a valuation on gold equal to or less than the official price. In the longer run, present expectations are that the market price is likely to rise above $35, as private non-speculative demand grows relative to supply. Thus, little gold would be bought by the Fund over the years. As time goes on, the market price will have less and less significance for the monetary system, assuming the U.S. balance of payments improves and the SDR facility is activated. But during the present transition period, it is vital to avoid any sort of shock that would give the market price an upward push..."
Source: fraser.stlouisfed.org/docs/historical/martin/21_05_19680716.pdf
---
[MRT: AUGUST 01 2013 - FRASER digital library releases archival documents from the early days of the Federal Reserve]
Solomon, Robert
Date:
07/16/1968
Citation:
Solomon, Robert, July 16, 1968, South African Gold and the Two-Tier System, from William McChesney Martin Jr. Collection, accessed Aug 9, 2013 from FRASER, http://fraser.stlouisfed.org/martin/record.php?id=4484
STRICTLY CONFIDENTIAL (FR) Robert Solomon
SOUTH AFRICAN GOLD AND THE TWO-TIER SYSTEM
The Problem
"The two-tier gold system, established at the Washington meeting of March 16-17, is threatened in two ways: (1) by South Africa's offer to sell gold to the International Monetary Fund and (2) by the desire of some European central banks to purchase gold from South Africa for addition to monetary gold stocks.
The U. S. response to this problem ought to preserve the essential character of the two-tier system as the U.S. views it, while avoiding either a breakdown of international monetary cooperation or a divisive battle in the IMF over its legal obligation to purchase gold from members.
The two-tier system may be said to have both a short-term and a long-term significance. For the short-run, it was intended to discourage upward pressures on the market price of gold, by saying to the market that central banks would not be contributing to the demand for gold. All the participants in the Washington meeting were in agreement that the smaller the margin by which the market price of gold exceeded the official price, the greater were the prospects for international monetary stability. If the market price of gold remained relatively low, it was less likely (1) that central banks would convert foreign exchange into gold out of fear of a rise in the official price of gold and (2) that private parties would speculate on a change in relative exchange rates by moving their funds into what they regard as strong currencies.
The longer-term significance of the Washington Agreement-- and on this there is less than full unanimity among the participants-- is that the two-tier system represents an important step toward diminishing the role of gold in the international monetary system. In particular, if monetary authorities would act upon the statement that, in view of the prospective creation of the SDR facility, the amount of gold in monetary stocks is sufficient, gold would play no significant role in the future growth of monetary reserves. In effect, gold would have been demonetized at the margin. This interpretation of the two-tier system has not been accepted by some European central banks and it is not possible at present to persuade them to accept it. In fact a public airing of this interpretation by U.S. officials' would probably lead some European central bank officials to disagree publicly. The best the United States can do in present circumstances is to avoid an open breakdown of the Washington Agreement while seeing to it that any new policy agreements are not inconsistent with our preferred interpretation of its longer-term significance.
Solution to Problem
It is believed, within the U.S. Government, that the best way to meet the present challenge to the two-tier system is to agree to provide through the IMF a floor price at $35 per ounce for newlymined gold that South Africa (and other gold producers) need to sell to meet their balance of payments requirements. As another concession, South Africa would be permitted to count its gold holdings as of July 1, 1968 as monetary gold.
In exchange for these concessions, South Africa would be expected to sell newly-mined gold in the market, as its payments position requires, and to avoid special efforts to withhold such sales. South Africa would not offer monetary gold to central banks or the IMF unless it had disposed of all of its supplies of newly-mined gold. Finally, South Africa would withdraw its present offer to sell gold to the Fund.
Advantages of this Solution
1. This solution provides for an accommodation with South Africa and makes it possible to end the existing uncertainties in South Africa's dealings with the market, monetary authorities, and the IMF. The alternative proposal for ending these uncertainties--agreement on central bank purchases of some amount of newly-mined gold even when the market price is above $35--would constitute an open break with the Washington Agreement and would make it much less likely that the longer-term significance of that Agreement would be realized.
2. The proposed solution assures the market of a resumption of South African sales and prevents South Africa from choosing between market sales and sales to monetary authorities or the Fund as a way of maximizing the market price.
3. Central bank purchases of newly-mined gold continue to be precluded. Additional gold can enter the monetary system only if and when the market price falls to $35 per ounce or below. An opening of the system to additional gold in these circumstances would clearly be consistent with the short-run significance of the Washington Agreement. Purchases by the Fund when the price is at $35 or below would not be in conflict with the objective of minimizing the margin between the official and market prices, since such purchases would occur only when this margin were zero (or negative). (It should be noted that while the proposal would provide a floor price for sales of gold by South Africa as its payments position requires, the proposal would not put an institutional floor under the market price and would not therefore assure speculators that there is no risk at all of the market price falling below $35.)
Additions to IMF gold holdings (and the possibility that the Fund would sell such gold to members) under this proposed solution would not be inconsistent with the desire to see a diminished emphasis on gold in the long run. Gold would enter the official reserve circuit only if and when the market is placing a valuation on gold equal to or less than the official price. In the longer run, present expectations are that the market price is likely to rise above $35, as private non-speculative demand grows relative to supply. Thus, little gold would be bought by the Fund over the years. As time goes on, the market price will have less and less significance for the monetary system, assuming the U.S. balance of payments improves and the SDR facility is activated. But during the present transition period, it is vital to avoid any sort of shock that would give the market price an upward push..."
Source: fraser.stlouisfed.org/docs/historical/martin/21_05_19680716.pdf
---
[MRT: AUGUST 01 2013 - FRASER digital library releases archival documents from the early days of the Federal Reserve]
wikisource - Irving Fisher - 1922 Encyclopædia Britannica/Dollar Stabilization
1922
DOLLAR STABILIZATION. — Under the existing currency system, the so-called “level of prices” is largely at the mercy of monetary and credit conditions. The tide of prices will rise or fall with the flood or ebb of gold or of paper money or of bank credit. Evidently a rise in the level of prices is a fall in the purchasing power of the dollar or other monetary unit, and vice versa. The purchasing power of money has always been unstable because a unit of money, as at present determined, is not a unit of purchasing power, but only a unit of weight. It is the one inconstant unit of measurement left in civilization. Other units — the yard, pound, bushel, etc. — were once as unstable and crude as the dollar, sovereign or franc still are; but, one after another, the other units have all been stabilized or standardized. Short weights and measures cheat the buyer; long weights, the seller. So a unit of money which changes in value or purchasing power is always playing havoc between contracting parties. When prices are rising — in other words, when the purchasing power of the dollar is falling — the creditor and the creditor-like classes suffer injustice. The sufferers include savings-bank depositors, bond-holders, salaried classes and wage-earners. In the great upheaval of prices — i.e. in the United States, depreciation of the dollar — which took place between 1896 and 1921 such injustice amounted to over a hundred billion dollars. On the other hand, when prices fall, as they did between 1873 and 1896, it is other classes — debtors, stockholders, farmers and independent business men generally — which suffer the injustice. The indirect effects of falling or rising prices — i.e. of a rising or falling dollar — are equally bad. These indirect effects include industrial discontent (either over the “high cost of living” or unemployment) and economic crises and depressions.
Hitherto there was ample excuse for the unstable monetary units of various countries. No instrument for measuring their aberrations had been devised. Likewise, until weighing scales were devised, weights could not be standardized, and until instruments for measuring electrical magnitudes were invented, electrical units could not be standardized. But for many years the “index number” of prices has provided an accurate instrument for measuring the value of the dollar in terms of its power to purchase goods. An “index number” of prices is a figure which shows for a specific period of time the average percentage increase or decrease of prices. One of the most suggestive signs of the times is that this instrument for measuring changes in the purchasing power of money has recently been utilized in adjusting wages and salaries to the high cost of living, i.e. to the depreciated dollar. A number of industrial concerns and banks, and some official agencies, have amended wages by the use of an index number of the prices of commodities.
It has been contended by some economists that this principle may be utilized in the future more generally to safeguard agreements made at one date to pay money at another date. Such corrections of the dollar would gradually break down the popular superstition that “a dollar is a dollar”; for every time we correct the dollar, we convict it of needing corrections; and ultimately the correction might be applied, not, as at present, as a patch on the dollar from the outside, but by incorporating it in the dollar itself. Various methods for accomplishing this have been proposed. The one perhaps best known is Prof. Irving Fisher's proposal to vary the weight of the gold dollar so as to keep its purchasing power invariable. Instead of a gold dollar of constant weight and varying purchasing power, what is needed, he contends, is a dollar of constant purchasing power, and, therefore, of varying weight. It is not proposed, of course, to remint gold coins, but simply to count an ounce of gold bullion as being the equivalent not always of $20.67 ( as at present) but of as much more or less than that sum as is required from time to time in order to keep the purchasing power of the dollar constant. In other words, the proposal is to vary the price of gold according to its worth relative to other commodities, instead of, as at present, keeping it artificially constant at $20.67 an oz. pure or £3 17s. 10½d. an oz. 11/12 fine. In this way, Professor Fisher contends, we can control the price level, lowering it, raising it, or keeping it from fluctuating much, if at all. Thus, if Mexico should adopt the dollar of the U.S. (instead of its present dollar of half the weight of gold), the price level in Mexico would be disastrously cut in two. Again, if the U.S. should adopt the Mexican dollar, the price level in the U.S. would be disastrously doubled. That is, the more gold in the dollar, the greater its buying-power; and the less, the less. If, Professor Fisher contends, this principle be admitted, it follows that we hold, in the hollow of our hand, what the dollar's buying-power shall be — that is, what the level of prices shall be. It can be kept from changing greatly just as easily as it could be made to change, simply by periodical adjustments of the price of gold, each adjustment being made in accordance with the index number of prices. By this method, in conjunction with any of the sound systems of banking, Professor Fisher contends, variations of more than one or two per cent could easily be prevented except under the most extraordinary conditions. (I. F.)
Source: http://en.wikisource.org/wiki/1922_Encyclop%C3%A6dia_Britannica/Dollar_Stabilization
Full version: http://t.co/cHQXYGnu6v - THE QUARTERLY JOURNAL OF ECONOMICS FEBRUARY, 1913 A COMPENSATED DOLLAR
---
Continue - discussion about the Compensated dollar plan:
Source: http://ideas.repec.org/a/taf/eujhet/v20y2013i2p261-283.html
DOLLAR STABILIZATION. — Under the existing currency system, the so-called “level of prices” is largely at the mercy of monetary and credit conditions. The tide of prices will rise or fall with the flood or ebb of gold or of paper money or of bank credit. Evidently a rise in the level of prices is a fall in the purchasing power of the dollar or other monetary unit, and vice versa. The purchasing power of money has always been unstable because a unit of money, as at present determined, is not a unit of purchasing power, but only a unit of weight. It is the one inconstant unit of measurement left in civilization. Other units — the yard, pound, bushel, etc. — were once as unstable and crude as the dollar, sovereign or franc still are; but, one after another, the other units have all been stabilized or standardized. Short weights and measures cheat the buyer; long weights, the seller. So a unit of money which changes in value or purchasing power is always playing havoc between contracting parties. When prices are rising — in other words, when the purchasing power of the dollar is falling — the creditor and the creditor-like classes suffer injustice. The sufferers include savings-bank depositors, bond-holders, salaried classes and wage-earners. In the great upheaval of prices — i.e. in the United States, depreciation of the dollar — which took place between 1896 and 1921 such injustice amounted to over a hundred billion dollars. On the other hand, when prices fall, as they did between 1873 and 1896, it is other classes — debtors, stockholders, farmers and independent business men generally — which suffer the injustice. The indirect effects of falling or rising prices — i.e. of a rising or falling dollar — are equally bad. These indirect effects include industrial discontent (either over the “high cost of living” or unemployment) and economic crises and depressions.
Hitherto there was ample excuse for the unstable monetary units of various countries. No instrument for measuring their aberrations had been devised. Likewise, until weighing scales were devised, weights could not be standardized, and until instruments for measuring electrical magnitudes were invented, electrical units could not be standardized. But for many years the “index number” of prices has provided an accurate instrument for measuring the value of the dollar in terms of its power to purchase goods. An “index number” of prices is a figure which shows for a specific period of time the average percentage increase or decrease of prices. One of the most suggestive signs of the times is that this instrument for measuring changes in the purchasing power of money has recently been utilized in adjusting wages and salaries to the high cost of living, i.e. to the depreciated dollar. A number of industrial concerns and banks, and some official agencies, have amended wages by the use of an index number of the prices of commodities.
It has been contended by some economists that this principle may be utilized in the future more generally to safeguard agreements made at one date to pay money at another date. Such corrections of the dollar would gradually break down the popular superstition that “a dollar is a dollar”; for every time we correct the dollar, we convict it of needing corrections; and ultimately the correction might be applied, not, as at present, as a patch on the dollar from the outside, but by incorporating it in the dollar itself. Various methods for accomplishing this have been proposed. The one perhaps best known is Prof. Irving Fisher's proposal to vary the weight of the gold dollar so as to keep its purchasing power invariable. Instead of a gold dollar of constant weight and varying purchasing power, what is needed, he contends, is a dollar of constant purchasing power, and, therefore, of varying weight. It is not proposed, of course, to remint gold coins, but simply to count an ounce of gold bullion as being the equivalent not always of $20.67 ( as at present) but of as much more or less than that sum as is required from time to time in order to keep the purchasing power of the dollar constant. In other words, the proposal is to vary the price of gold according to its worth relative to other commodities, instead of, as at present, keeping it artificially constant at $20.67 an oz. pure or £3 17s. 10½d. an oz. 11/12 fine. In this way, Professor Fisher contends, we can control the price level, lowering it, raising it, or keeping it from fluctuating much, if at all. Thus, if Mexico should adopt the dollar of the U.S. (instead of its present dollar of half the weight of gold), the price level in Mexico would be disastrously cut in two. Again, if the U.S. should adopt the Mexican dollar, the price level in the U.S. would be disastrously doubled. That is, the more gold in the dollar, the greater its buying-power; and the less, the less. If, Professor Fisher contends, this principle be admitted, it follows that we hold, in the hollow of our hand, what the dollar's buying-power shall be — that is, what the level of prices shall be. It can be kept from changing greatly just as easily as it could be made to change, simply by periodical adjustments of the price of gold, each adjustment being made in accordance with the index number of prices. By this method, in conjunction with any of the sound systems of banking, Professor Fisher contends, variations of more than one or two per cent could easily be prevented except under the most extraordinary conditions. (I. F.)
Source: http://en.wikisource.org/wiki/1922_Encyclop%C3%A6dia_Britannica/Dollar_Stabilization
Full version: http://t.co/cHQXYGnu6v - THE QUARTERLY JOURNAL OF ECONOMICS FEBRUARY, 1913 A COMPENSATED DOLLAR
---
Continue - discussion about the Compensated dollar plan:
Origins and developments of Irving Fisher's compensated dollar plan
In 1911, Fisher published The Purchasing Power of Money . In chapter 13 of the first edition and in an appendix in the second section of 1913, he introduced a rule to maintain the stability of the level of prices, known as the “compensated dollar”. According to this rule, the legal definition of money is changed. In other words, the weight in gold of the dollar is modified once a month in order to impede the frequency of price changes on a basket of goods. According to Fisher, this plan would offer stability for the purchasing power of money. He sought to find an alternative system to the fixed price of gold under the Gold Standard. He wanted to introduce a dollar fixed in terms of its purchasing power, but variable in terms of its metallic weight. In this paper, we will focus on Fisher's analysis of the stability of money value and his position in the debate on the compensated dollar from 1909 to 1922. We will study the anticipations of Fisher's compensated dollar, the critical reception of Fisher's project and the evolutions it gave rise to, the gold exchange standard and the algebraic evidence. We also examine the debate's connections to the question of whether or not the compensated dollar plan is compatible with the quantity theory of money. We end with the analysis of the gold price elasticity of the net supply of gold, with an explanation of the relationship between the Yellowbacks and the varying price of the gold reserve.Source: http://ideas.repec.org/a/taf/eujhet/v20y2013i2p261-283.html
Tuesday, August 6, 2013
Buba - The Blessing letter
"The so-called Blessing letter, dated 30 March 1967,[1] forms part of the correspondence
between the President of the Deutsche Bundesbank at the time, Karl
Blessing, and the then Chairman of the Board of Governors of the US
Federal Reserve System, William Martin. In the letter, Blessing
addresses US concerns that the Bundesbank might convert US dollars into
gold on a huge scale.
Such US fears have to be seen against the backdrop of the Bretton Woods Treaty, which was still in force at the time and under which the US dollar was backed by gold. The terms of this Treaty meant that the United States had an obligation to convert dollars into gold on demand.[2] Since the end of the 1950s, however, there had been fears in the US that the right to convert dollars into gold could be used on a large scale, especially by European countries, where dollar surpluses had built up owing to the substantial US military presence and the expansion of investment by US industry.[3] Converting US dollars en masse could have used up US gold reserves and negated belief in the dollar actually being backed by gold. This risk became very acute in the mid-1960s owing to the economic situation of the United States at the time, which had already run up a large balance of payments deficit in the wake of the Vietnam War and the associated arms build-up.[4] This pressure was made more intense by increased inflation in the United States, which threaten to spread to countries in Europe on account of the Bretton Woods system of fixed exchange rates.[5]
However, an actual reduction in the US deficit could have prompted the US government to conduct a more restrictive trading policy, reduce investment or withdraw American troops from Europe – few politicians in Europe would have been prepared to bear the consequences of this. In order to keep confidence in the dollar stable, the Americans therefore relied on a policy of mutual agreements on both sides of the Atlantic. This policy had the aim of achieving perpetual surplus dollar holdings in Europe, thus allowing the US to maintain its own balance of payments deficit.[6]
The Blessing letter has to be seen in this historical context. In the letter, Karl Blessing promises, in effect, to refrain from a large-scale dollar conversion into gold. He stresses that such restraint represents the German contribution to international monetary cooperation and is intended to avoid any disrupting effects on the international foreign exchange and gold markets.[7] In connection with the Blessing letter, historians often refer to an interview which Karl Blessing gave to the German magazine “Der Spiegel” in 1971, in which he himself calls into question his earlier concessions – “I state to you now that I feel myself to be personally culpable in this matter. I should have been more rigorous with regard to the US. The dollars that we were accumulating should simply have been rigorously converted into gold.”[8] He explained that, at the time, has fears of the foreign policy implications, which would have led to the withdrawal of American troops from Germany, had been one of the factors that led him to give in to US demands.[9]
Source: http://www.bundesbank.de/Redaktion/EN/Standardartikel/Bundesbank/Views_Insights/archives_gold_blessing_letter.html
The file: www.bundesbank.de/Redaktion/DE/Downloads/Bundesbank/Wissenswert/schreiben_gold_blessing_brief.pdf?__blob=publicationFile
Such US fears have to be seen against the backdrop of the Bretton Woods Treaty, which was still in force at the time and under which the US dollar was backed by gold. The terms of this Treaty meant that the United States had an obligation to convert dollars into gold on demand.[2] Since the end of the 1950s, however, there had been fears in the US that the right to convert dollars into gold could be used on a large scale, especially by European countries, where dollar surpluses had built up owing to the substantial US military presence and the expansion of investment by US industry.[3] Converting US dollars en masse could have used up US gold reserves and negated belief in the dollar actually being backed by gold. This risk became very acute in the mid-1960s owing to the economic situation of the United States at the time, which had already run up a large balance of payments deficit in the wake of the Vietnam War and the associated arms build-up.[4] This pressure was made more intense by increased inflation in the United States, which threaten to spread to countries in Europe on account of the Bretton Woods system of fixed exchange rates.[5]
However, an actual reduction in the US deficit could have prompted the US government to conduct a more restrictive trading policy, reduce investment or withdraw American troops from Europe – few politicians in Europe would have been prepared to bear the consequences of this. In order to keep confidence in the dollar stable, the Americans therefore relied on a policy of mutual agreements on both sides of the Atlantic. This policy had the aim of achieving perpetual surplus dollar holdings in Europe, thus allowing the US to maintain its own balance of payments deficit.[6]
The Blessing letter has to be seen in this historical context. In the letter, Karl Blessing promises, in effect, to refrain from a large-scale dollar conversion into gold. He stresses that such restraint represents the German contribution to international monetary cooperation and is intended to avoid any disrupting effects on the international foreign exchange and gold markets.[7] In connection with the Blessing letter, historians often refer to an interview which Karl Blessing gave to the German magazine “Der Spiegel” in 1971, in which he himself calls into question his earlier concessions – “I state to you now that I feel myself to be personally culpable in this matter. I should have been more rigorous with regard to the US. The dollars that we were accumulating should simply have been rigorously converted into gold.”[8] He explained that, at the time, has fears of the foreign policy implications, which would have led to the withdrawal of American troops from Germany, had been one of the factors that led him to give in to US demands.[9]
Footnotes:
- See “Der Blessing-Brief”, 30 March 1967 (Source: Historical Archive of the Deutsche Bundesbank, Frankfurt am Main, Shelfmark: HA BBK B 330/10799). The Blessing letter is also archived at the Lyndon B. Johnson Presidential Library in Austin, Texas, http://www.gata.org/files/BundesbankLetter-03-30-1967.pdf
- Heise, Arne, Grundlagen der Europäischen Währungsunion. Theorie, Institutionen, Politik, Düsseldorf 1997, p 41.
- See Zimmermann, Hubert, Western Europe and the American Challenge: Conflict and Cooperation in Technology and Monetary Policy, 1965-73, in Journal of European Integration History 6:2 (2000), pp 85-110, p 88.
- Ibid pp 89-90. The possible implication of the US balance of payments deficit for the stability of the dollar, the leading currency in the Bretton Woods system, therefore shaped the debate on financial policy in the 1960s. See Schmidt, Heide-Irene,“The Embarrassment of Strength”: Die deutsche Position im “International Monetary System” 1958-1968, in Deutschland, Großbritannien, Amerika. Politik, Gesellschaft und Internationale Geschichte im 20.Jahrhundert (edited by Ursula Lehmkuhl, Clemens A. Wurm and Hubert Zimmermann), Stuttgart 2003, pp 155-194, p 164.
- See Zimmermann, Hubert, Western Europe and the American Challenge: Conflict and Cooperation in Technology and Monetary Policy, 1965-73, in Journal of European Integration History 6:2 (2000), pp 85-110, p 89.
- Ibid p 88.
- See correspondence on the Blessing letter. Among historians, there is some dispute about the precise significance of the letter. Hubert Zimmermann, for example, interprets the letter as the Bundesbank waiving its autonomy: “the Bundesbank (with the Blessing letter) deprived itself of an important aspect of monetary autonomy” (quoted from Hubert Zimmermann, Money and Security. Troops, Monetary Policy, and West Germany’s relations with the United States and Britain 1950-1971, Cambridge University Press, Cambridge 2002, p 227). Heide-Irene Schmidt, on the other hand, disagrees with this interpretation by pointing to German interests: “Der Blessing Brief beschreibt vielmehr die bisherigen Maßnahmen der Bundesbank und die zugrunde liegenden Intentionen internationaler monetärer Kooperation; er betont die Absicht, diese Politik fortzusetzen. Ein Autonomieverzicht kann daraus umso weniger abgeleitet werden, als die Bundesbank vor und nach diesem Brief Ansätze ablehnte, die USA über devisenpolitische Maßnahmen (d.h. Verkauf von Dollar gegen Gold) zu einer „vernünftigeren“ Zahlungsbilanzpolitik zu zwingen. Die damit verbundene Destabilisierung des Wirtschafts- und Währungssystems lag nicht im deutschen Interesse.” [=The Blessing letter in fact describes the measures taken by the Bundesbank hitherto and the underlying aims of international monetary cooperation; it stresses the intention to continue this policy. Inferring a waiver of autonomy is even less feasible given that, before and after this letter, the Bundesbank had rejected any attempts to use foreign exchange policy measures (ie the sale of dollars for gold) in order to force the United States into a “more reasonable” balance of payments policy. The associated destabilisation of the economic and monetary system was not in Germany’s interests.](quoted from Schmidt, Heide-Irene, “The Embarassment of Strength”: Die deutsche Position im “International Monetary System” 1958-1968, in Deutschland, Großbritannien, Amerika. Politik, Gesellschaft und Internationale Geschichte im 20. Jahrhundert (edited by Ursula Lehmkuhl, Clemens A. Wurm and Hubert Zimmermann), Stuttgart 2003, pp 155-194, p 164.
- See Der Spiegel (19). 1971: “Der Brief gilt leider noch heute”, published 3 May 1971, http://www.spiegel.de/spiegel/print/d-43257718.html (retrieved on 11 January 2013)
- Zimmermann, Hubert, Western Europe and the American Challenge: Conflict and Cooperation in Technology and Monetary Policy, 1965-73, in Journal of European Integration History 6:2 (2000), pp 85-110, pp 89-91. Quoted by Karl Blessing from his own recollection of a telephone conversation with John McCloy, who at the time was the US negotiator in the Trilateral Negotiations,“Und ich habe ihm gesagt: Mein lieber McCloy, Ihre Situation ist klar, das ist ein Zahlungsbilanzproblem bei Ihnen, nichts weiter. Sie haben gesehen, daß wir vernünftig sind und unsere Dollar nicht in Gold konvertieren.” [= And I said to him, my dear McCloy, your situation is clear; what you have is a balance of payments problem, nothing more. You have seen that we are being reasonable and not converting our dollars into gold]. And regarding his assessment of the external situation at the time: “Ich habe damals eingesehen, wenn die Amerikaner abziehen würden, dann hätten wir natürlich außenpolitisch unter Umständen eine Malaise riskiert. Ich habe die Dinge immer ernster gesehen als sogar die Bonner Regierung, mit Ausnahme von Schröder. Der hat mich immer gebeten, den Amerikanern zu helfen.” [= I realised at the time that, if the Americans were to withdraw, we would naturally have perhaps been risking a malaise in terms of foreign policy. I invariably viewed things more seriously than even the government in Bonn did, except for Schröder, who always asked me to assist the Americans.](quoted from Brawand, Leo, “Wohin steuert die deutsche Wirtschaft?”, Munich 1971, pp 61-62)."
Source: http://www.bundesbank.de/Redaktion/EN/Standardartikel/Bundesbank/Views_Insights/archives_gold_blessing_letter.html
The file: www.bundesbank.de/Redaktion/DE/Downloads/Bundesbank/Wissenswert/schreiben_gold_blessing_brief.pdf?__blob=publicationFile
Buba - Gold swaps in the 1960s
Thanks to the economic performance of West Germany, the Bundesbank
accumulated significant gold reserves over the years through
cross-compensation between central banks – in particular with partner
central banks in the major industrial countries.
Footnotes:
Gold swaps
Due to a surge in gold purchases in 1967 and 1968, the Fed amassed sizeable gold delivery obligations at the storage site in London. At the time, the Bundesbank provided the Fed with Good Delivery gold amounting to a total value of $1 billion in gold swaps at the London site.[1] In return, the Fed gave the Bundesbank “government stamped bars” of gold to the value of $350 million at the storage site in New York as well as Good Delivery gold in the amount of $650 million at the storage site in Ottowa (Canada). Overall, the swaps generated a return of $470,651.05 for the Bundesbank. The transaction was settled in seven instalments in the period from 5 April to 26 June 1968, with the Bundesbank holding the received bars at the storage sites in New York and Ottowa.Quality checks during the transaction
Initially, the Fed only repaid one quarter ($250 million) of the amount due from the gold swaps with Good Delivery bars, as its reserve of Good Delivery bars had fallen strongly. The remaining bars with a countervalue of $750 million were of a different quality. In agreement with the Bundesbank, these bars were initially retained on a gold suspense account, to be booked as Good Delivery bars only after their weight had been assessed and they had been melted to form Good Delivery gold. After melting, a discrepancy of 18.412 ounces was established in the weight of the bars, which corresponded to a countervalue of $644.44. The Fed compensated the Bundesbank for both the costs incurred from the melting process, which amounted to 4519£ 7s 8p, and the discrepancy in the weight of the bars.[2]Footnotes:
- Source: Historical Archives of the Deutsche Bundesbank, Frankfurt am Main, Signature: HA BBk B 330/20835
- A standard bar of gold that complies with the Good Delivery quality standard has a fineness of 995 ‰ and a nominal weight of 400 troy ounces, ie 12.44 kilograms, but it can vary in weight from 350 to 430 troy ounces. 1 troy ounce is equivalent to 31.1034768g.
Buba - The development of the Bundesbank’s gold reserves
- 1945 to 1950: the post-war years
- 1951 to 1968: Germany’s “economic miracle”, the European Payments Union and the Gold Pool
- 1969 to 1978
- 1979 to 1998: European Monetary System
- 1999 to present: European Economic and Monetary Union
Source: http://www.bundesbank.de/Redaktion/EN/Standardartikel/Bundesbank/Views_Insights/archives_gold_reserves_development.html
Buba - Cheap money – but at what price?
"Euro-area banks can now borrow money from the European Central Bank (ECB)
more cheaply than ever before. The ECB’s policy rate – also known as
the main refinancing rate – has stood at 0.5% since the beginning of May
this year. It was still above 4% in mid-2008 but has been lowered
progressively since then. At the moment, monetary policymakers have good
reason for setting the policy rate at that level. Yet their very
expansionary policy has also kept interest rates on the money and
capital markets low for a prolonged period now. This will chip away at
savings, steer banks towards riskier business and set the wrong
incentives for highly-indebted governments.
For central banks like the ECB, policy rates are the most important tool for keeping the value of their currency stable, in line with their mandate. The policy rate determines how much commercial banks must pay to borrow money from the central bank. A central bank also uses its policy rate to influence conditions on the "money market"; via various channels, this then affects demand in the economy as a whole and, ultimately, the price level.
So it is easy to see why the ECB has lowered its policy rate time and again in recent years: this is one of the many measures it has taken to alleviate the effects of the financial and sovereign debt crisis and stabilise economic developments in the euro-area countries. Given the limited risk of inflation, the ECB has been able to do this without jeopardising its objective of maintaining price stability over the medium term.
According to Bundesbank President Jens Weidmann, there should be "a timely rise in key interest rates if there are signs of increasing price pressures in the future".
Otherwise, savers in particular will suffer the ill-effects of low interest rates. Call deposit accounts or fixed-term savings accounts yield little profit if their interest rates are low. If interest rates on savings accounts are below the rate of inflation, savers will make a loss on their deposits: the real value of their savings will fall, making it less and less attractive to put money aside for the future.
Financial institutions therefore often look for more profitable investments. They move their funds from low-interest, comparatively safe investments to higher-yielding, riskier ones. This, in turn, can generate risks to the stability of the financial system.
Recent figures on developments in financial assets in Germany reflect a search for higher potential returns: in the period under review, households withdrew funds from fixed-term and savings deposits and from fixed-interest securities, channelling more money into stocks and mutual fund shares. Businesses also invested heavily in securities and reduced their bank deposits.
Yet all of this is apparently still being overshadowed by another effect: the ongoing crisis has shaken confidence in many quarters. If in doubt, investors are tending to go for comparatively safe options, in what economists dub a "flight to safety". Future developments in asset prices and risk-taking still warrant careful observation, however.
Reforms and structural change are needed in order to overcome the sovereign debt crisis. However, the low interest rates are easing the pressure on governments to actually tread the thorny path of change. They might be tempted to pressurise central banks into maintaining low policy rates for as long as possible to avoid any major changes to these attractive conditions.
According to Bundesbank President Jens Weidmann, low interest rates "tempt decisionmakers to delay reforms and necessary structural changes".
Footnote
1. "The stability of the financial system within European monetary union", speech held by Jens Weidmann in Munich on 11 July 2013."
Source: http://www.bundesbank.de/Redaktion/EN/Standardartikel/Bundesbank/Views_Insights/background_cheap_money
For central banks like the ECB, policy rates are the most important tool for keeping the value of their currency stable, in line with their mandate. The policy rate determines how much commercial banks must pay to borrow money from the central bank. A central bank also uses its policy rate to influence conditions on the "money market"; via various channels, this then affects demand in the economy as a whole and, ultimately, the price level.
Interest rate cuts make central bank money cheaper
By deciding to lower its policy rates, for example, a central bank initiates the following process. The lower policy rates make it cheaper for commercial banks to borrow central bank money. This enables the commercial banks to offer cheaper loans to enterprises or consumers, who are then more inclined to make investments and buy goods and services because of the favourable lending conditions. If investment and consumption increase overall, the aggregate demand in an economy rises and the economy gathers momentum.So it is easy to see why the ECB has lowered its policy rate time and again in recent years: this is one of the many measures it has taken to alleviate the effects of the financial and sovereign debt crisis and stabilise economic developments in the euro-area countries. Given the limited risk of inflation, the ECB has been able to do this without jeopardising its objective of maintaining price stability over the medium term.
Inflation chips away at savings
However, a sustained period of low interest rates poses the risk of a rise in prices after a certain length of time. If consumer prices increase across the board rather than just for some specific goods and services, a currency loses some of its value in a process called "inflation". Yet this does not merely affect day-to-day purchases. A lengthy period of low interest rates can also encourage investors to channel large amounts of money into assets such as real estate, stocks or precious metals, causing their prices to rise. This risks generating dangerous speculative bubbles. The central bank then has to raise its policy rate early enough to avoid losses in purchasing power and the emergence of price bubbles.According to Bundesbank President Jens Weidmann, there should be "a timely rise in key interest rates if there are signs of increasing price pressures in the future".
Otherwise, savers in particular will suffer the ill-effects of low interest rates. Call deposit accounts or fixed-term savings accounts yield little profit if their interest rates are low. If interest rates on savings accounts are below the rate of inflation, savers will make a loss on their deposits: the real value of their savings will fall, making it less and less attractive to put money aside for the future.
Risky investments become enticing
Banks and insurance companies face similar problems to savers. They have to make profits in the long term even when interest rates are generally very low. They tie up some of their customers’ money in long-term investments, such as ten-year Bunds (bonds issued by Germany’s central government), which are viewed as particularly safe. Once these securities mature (ie become due for repayment), banks and insurers have to reinvest these funds subject to new terms and conditions. In the present market environment, however, the return on these kinds of investment is so low that they only generate a small profit for banks and insurance companies.Financial institutions therefore often look for more profitable investments. They move their funds from low-interest, comparatively safe investments to higher-yielding, riskier ones. This, in turn, can generate risks to the stability of the financial system.
Recent figures on developments in financial assets in Germany reflect a search for higher potential returns: in the period under review, households withdrew funds from fixed-term and savings deposits and from fixed-interest securities, channelling more money into stocks and mutual fund shares. Businesses also invested heavily in securities and reduced their bank deposits.
Yet all of this is apparently still being overshadowed by another effect: the ongoing crisis has shaken confidence in many quarters. If in doubt, investors are tending to go for comparatively safe options, in what economists dub a "flight to safety". Future developments in asset prices and risk-taking still warrant careful observation, however.
The temptations of cheap money
Though a headache for investors, the low interest rates are a blessing for anyone taking out new loans: they have made borrowing extremely cheap, above all for governments. A sustained period of low interest rates is therefore very much in a government’s interests, all the more so if its existing debt is high: higher interest rates would increase the financial burden on indebted governments.Reforms and structural change are needed in order to overcome the sovereign debt crisis. However, the low interest rates are easing the pressure on governments to actually tread the thorny path of change. They might be tempted to pressurise central banks into maintaining low policy rates for as long as possible to avoid any major changes to these attractive conditions.
According to Bundesbank President Jens Weidmann, low interest rates "tempt decisionmakers to delay reforms and necessary structural changes".
Footnote
1. "The stability of the financial system within European monetary union", speech held by Jens Weidmann in Munich on 11 July 2013."
Source: http://www.bundesbank.de/Redaktion/EN/Standardartikel/Bundesbank/Views_Insights/background_cheap_money
CASACT - MONEY, CREDIT AND FEDERAL RESERVE POLICY CHANGES
Mr. Robert P. Eramo
INTRODUCTION
In October, 1979, the Federal Reserve Board instituted a sweeping policy change. This change of "policy is discussed in this paper, and the possible effectiveness of the new policy is evaluated.
The paper is addressed to an intelligent layman in the insurance industry who may not be familiar with operations of the Amerlcan banking system. As a result, the operation of the central bank, the definitions of money, the author's definitions of'price and monetary inflation, the relationships between measures of money and Gross National Product are all discussed before prospects of the new policy's success is discussed. If the paper appears to be too pedagogical in nature, the author does apologize to the reader. However, the author cannot over emphasize how grave a matter price inflation can be for the insurance industry. An understanding of how the central bank works and what we in fact use as money today can shed light on how price inflation may be controlled.
Inflation is indeed a world-wide problem. At no time in history has there existed a situation when no country is spared the declining purchasing power of its national currency. Even Swltzerland, over the past 15 years, has seen prices rise in terms of its currency. We have become victims of a fallacy that price inflation is an inherent part of civilization. This mistaken view is especially held by young people who have really had no other experience.
Countries affected by high rates of inflation see their middle classes progressively wiped out of their liquid assets. Any semblance of sound credit arrangements is destroyed; and, as a result, additional risk is incurred by business enterprises to finance growth and real productivity increases. In especially severe situations, with the economic voting power of the middle classes destroyed, the void of economic power of the middle classes is substituted with dictators of either leftist or rightist persuasions. Inflation can eventually ruin both individual freedom and democracy.
Keeping in mind the potential gravity of the situation, let us proceed. Please bear with the author through the details. If the paper's conclusions are correct, you will be able to determine from readily
available government data if price inflation is being controlled and to what extent.
INFLATION & INSURANCE
The Property & Casualty industry's indemnity contracts are basicall promises to reimburse parties with money usually after the payment of premium. The delay between receipt of premium and payment of loss can be quite long. Other services llke engineering inspection and risk management more closely resemble the activities of non-financlal corporations; services are more nearly rendered at the time of money transaction. The Life Insurance industry to a far greater extreme defers benefits. It's the deferral period between payment of premium and payment of benefit that gives the insurance industry a vital interest in the maintenance of the general population's confidence of the "store of value" function of money. Needless to say, a Reichsbank-type hyperinflation would destroy the insurance industry..."
Source: www.casact.org/pubs/dpp/dpp81/81dpp152.pdf
INTRODUCTION
In October, 1979, the Federal Reserve Board instituted a sweeping policy change. This change of "policy is discussed in this paper, and the possible effectiveness of the new policy is evaluated.
The paper is addressed to an intelligent layman in the insurance industry who may not be familiar with operations of the Amerlcan banking system. As a result, the operation of the central bank, the definitions of money, the author's definitions of'price and monetary inflation, the relationships between measures of money and Gross National Product are all discussed before prospects of the new policy's success is discussed. If the paper appears to be too pedagogical in nature, the author does apologize to the reader. However, the author cannot over emphasize how grave a matter price inflation can be for the insurance industry. An understanding of how the central bank works and what we in fact use as money today can shed light on how price inflation may be controlled.
Inflation is indeed a world-wide problem. At no time in history has there existed a situation when no country is spared the declining purchasing power of its national currency. Even Swltzerland, over the past 15 years, has seen prices rise in terms of its currency. We have become victims of a fallacy that price inflation is an inherent part of civilization. This mistaken view is especially held by young people who have really had no other experience.
Countries affected by high rates of inflation see their middle classes progressively wiped out of their liquid assets. Any semblance of sound credit arrangements is destroyed; and, as a result, additional risk is incurred by business enterprises to finance growth and real productivity increases. In especially severe situations, with the economic voting power of the middle classes destroyed, the void of economic power of the middle classes is substituted with dictators of either leftist or rightist persuasions. Inflation can eventually ruin both individual freedom and democracy.
Keeping in mind the potential gravity of the situation, let us proceed. Please bear with the author through the details. If the paper's conclusions are correct, you will be able to determine from readily
available government data if price inflation is being controlled and to what extent.
INFLATION & INSURANCE
The Property & Casualty industry's indemnity contracts are basicall promises to reimburse parties with money usually after the payment of premium. The delay between receipt of premium and payment of loss can be quite long. Other services llke engineering inspection and risk management more closely resemble the activities of non-financlal corporations; services are more nearly rendered at the time of money transaction. The Life Insurance industry to a far greater extreme defers benefits. It's the deferral period between payment of premium and payment of benefit that gives the insurance industry a vital interest in the maintenance of the general population's confidence of the "store of value" function of money. Needless to say, a Reichsbank-type hyperinflation would destroy the insurance industry..."
Source: www.casact.org/pubs/dpp/dpp81/81dpp152.pdf
Tuesday, July 30, 2013
CEMLA - International Reserves and Bank Reserves in Dollarized Economies
Mercedes Da Costa and V. Hugo Juan-Ramón
Washington, D.C., October, 2011
"This note analyzes the connection between a central bank holding of gross international reserves (or reserve assets) and reserve deposits form statistic and economic perspectives. We describe alternative procedures that countries use for recording those concepts."
Source: www.cemla.org/actividades/2012/2012-06-cam/2012-06-cam-02.pdf
Washington, D.C., October, 2011
"This note analyzes the connection between a central bank holding of gross international reserves (or reserve assets) and reserve deposits form statistic and economic perspectives. We describe alternative procedures that countries use for recording those concepts."
Source: www.cemla.org/actividades/2012/2012-06-cam/2012-06-cam-02.pdf
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