Wednesday, June 15, 2011

RM - Robert Mundell about "dollar IMFs" versus "gold BIS"

The European Monetary System 50 Years after Bretton Woods: A Comparison Between Two Systems

A Comparison Between Two Systems
R. A. Mundell
Columbia University
Paper presented at Project Europe 1985-95, the tenth edition of the "Incontri di
Rocca Salimbeni" meetings, in Siena, 25 November 1994.

"...In a presentation before the Subcommittee on International Exchange and Payments of the U.S. Congress, I presented, in a paper entitled "Rules of the Gold Exchange Standard," the first complete analysis of the gold exchange standard as coherent system:...


...The rules of the game of the system constitute a combination of laws, commitments, conventions and gentlemen's agreements by which the inner country (the United States) pegs its currency (the dollar) to gold and the outer countries (Let us call them Europe) peg their currencies to the dollar, either directly or indirectly through another currency (such as the pound sterling or the franc). This means that the United States acts as the residual buyer or seller of gold, whereas Europe acts as the residual buyer or seller of dollars. The U.S. has to buy up any excess supply of gold on world markets and satisfy any excess demand out of its own reserves; failure to do so would result in the dollar price of gold moving away from the dollar parity. Europe, on its part, has to take up any excess of dollars offered to it or supply any excess of dollars demanded; failure to do so would result in the exchange rate moving away from its dollar parity. 

 The boundary conditions are given by the U.S. stock of gold and Europe's stock of dollars; the United States cannot supply gold, nor Europe dollars, they lack. But there is an asymmetry in these conditions because, as long as gold and dollars can be supplied at the U.S. Treasury, Europe has access to additional dollars in exchange for gold. The total reserves (dollars and gold) of Europe therefore constitutes Europe's boundary condition, whereas the gold reserve of the United States represents the U.S. constraint.
Control of the system rests on U.S. monetary policy, on the one hand, and Europe's gold-dollar portfolio on the other. When the United States expands the dollar supply it puts upward pressure on world incomes and prices--directly, because of interest rate effects and spending changes in the United States, and indirectly because of increases in European reserves. Similarly, when the United States contracts the dollar supply, it puts downward pressure on world prices.

Europe's gold-dollar portfolio is the other control variable. When Europe converts dollars into gold it weakens the U.S. reserve position and stimulates or compels a monetary contraction(7) and when it converts gold into dollars it strengthens the reserve position and permits or compels a monetary expansion. Europe's goldpurchase policy thus influences U.S. monetary policy, while the latter "determines" world prices and incomes. When U.S. monetary policy is forcing inflation on the rest of the world, Europe can stimulate or compel a contraction by gold purchases; and when U.S. monetary policy is deflationary, Europe can entice an expansion by gold sales.

We may thus express the control mechanism of the system as follows: The United States expands or contracts its monetary policy according to whether its gold position is excessive or deficient, and Europe buys or sells gold from the United States according to whether U.S. policy is causing inflation or deflation. The gold exchange standard therefore constitutes a "system" and it is with its implications that we must now be concerned..."

[Mrt: This was past. Where are we today? What is likely to change into tomorrow?]

5. The Mounting Crisis

"...In the 1960s the United

...States and Europe were on a collision course with respect to the international monetary system--what Prime Minister Harold Wilson of the U.K. called a "monetary war." The risk lies that the variables would hit the boundary conditions determined by the stock and price of gold, bringing on a convertibility crisis. A higher price of gold--to make up for World War II and post-war inflation--would have provided more room for adjustment within the parameters of the system. But, in the 1960s, an increase in the price of gold was ruled out--mainly for political reasons...."

"...Beneath the threat-counterthreat struggle between the two continents, lay a powerful undercurrent of bluff. Neither-- and least of all Europe--wanted the system to collapse. Rather than bring on a collapse of the system, countries changed their mode of operation...."

...First, palliatives kept the system in operation for some years. Indeed, it was widely hoped that if the system could be kept in place for some years, efforts to modify it through the creation of SDRs--a kind of paper gold insofar as it was intended to be a gold substitute--would create a sounder basis for equilibrium. The palliatives were, first, mechanisms for reducing the excess demand for gold by economizing on it. The United States removed the 25% gold reserve requirement behind member bank deposits at the Federal Reserve in 1965, and behind Federal Reserve currency in 1968. These measures removed the internal gold reserve requirement and freed what was left of the US gold stock for the requirements of external convertibility. (14)..."


14. By 1968 the private market demand for gold had caught up with market supply and the gold
pool--composed of the few countries that were major gold holders--was disbanded. In March of
that year, the central banks made the decision to withdrew from the private market, allowing the
private market price to rise above the official price
. This measure prevented any further drain of
gold from official to private stocks.

[Mrt: Was it some time ago when I put a signature something like "Monetary systems, educate yourself!"]

Source: The European Monetary System 50 Years after Bretton Woods: A Comparison Between Two Systems (the link does not open straight file, search)


  1. Side Note: According to Mundell's analysis: Discipline under the Bretton Woods system was more due to the US Federal Reserve than to the discipline of gold. ~wiki

  2. ...cont: "...His analysis led to his conclusion that it was a disagreement between Europe and the United States over the rate of inflation, partially to finance the Vietnam War, and that Bretton Woods disintegrated because of the undervaluing of gold and the consequent monetary discipline breakdown. There is a famous point/counter-point over this issue between Mundell and Milton Friedman." ~wiki

  3. For anyone who would go those two steps further. It is good enlightening reading.
    Spoiler: In my view Mundell won big time, Friedman admitted indirectly :o)