Monday, March 26, 2012

BESSMA MOMANI - Gulf Cooperation Council Oil Exporters and the Future of the Dollar

"Since the mid-1970s, the value of the United States’ dollar has been upheld by a number of domestic and international factors. An often underestimated factor is that oil is sold and traded in US dollars. Arguably, having the dollar used as the ‘main invoice currency’ for oil makes the trade of this vital resource the new post-Bretton Woods’ Fort Knox guarantee of the dollar.1 The world’s continued confidence in dollar-denominated and US government debt is further supported by the use of petrodollars in oil trade and petrodollar recycling in the global financial system. It is argued that states have partial faith in the value of the dollar because the world’s lifeline of fuel and production is purchased and sold using petrodollars. After all, whether measured by value or volume, oil is the most traded good around the world..."


"Dollar-based invoicing of oil trade
The historic decision by the Organization of Petroleum Exporting Countries (OPEC) to invoice the trade of oil in dollars can be traced back to a set of bilateral deals between the United States and Saudi Arabia (the world’s largest oil exporter and producer). The first step towards this historic OPEC decision was taken in June 1974 with the establishment of the United States–Saudi Arabian Joint Commission on Economic Cooperation. Devised in part by US Secretary of State Henry Kissinger, the Joint Commission would facilitate annual meetings between Saudi Finance and US Treasury officials. This Joint Commission also included a special technical group that was staffed by American civil servants who helped US companies to increase their exports to Saudi Arabia. Financed by the Saudi government, the technical group’s objectives were to improve bilateral political and commercial relations, promote the export of US goods and services to Saudi Arabia and, most importantly, help recycle Saudi petrodollars
through the purchase of US goods..."

"In summary, OPEC, Saudi Arabia and the GCC no longer determine what currency to invoice their oil trade, because oil pricing is determined by oil markets.47 The latter are highly institutionalised capital markets that prefer to deal in US dollars. Similarly, oil producers would not be willing to incur currency risk to invoice oil trade in a currency not used in the oil markets.48 While the GCC may not be capable of undermining the dollar by changing the dollar-based invoicing of oil trade, this article examines two further possibilities: will the GCC uphold the dollar by continuing to recycle petrodollars in dollar investments, and will the GCC diversify its dollar reserve holdings?"
"Promoted by a young, entrepreneurial and Western-educated class of individuals, Gulf citizens are demanding that their governments invest more into their people.66 Moreover, Gulf citizens do not want a repetition of the 1970s when oil wealth was recycled into Western banks; this time, Gulf citizens are expecting their governments to invest in their future."


Thursday, March 22, 2012

Ossola Group - Report Of The Study Group On The Creation Of Reserve Assets

31st may 1965



Carol M. Connell, Associate Professor, Finance and Business Management
City University of New York – Brooklyn College

"This paper offers new research into the influence of Fritz Machlup and the Bellagio Group on world monetary reform. Taking an historico-biographical approach, this paper draws on the archives and published works of Fritz Machlup, Robert Triffin and their contemporaries"

"...Machlup (1982) admits, “In the discussions of dollar shortage, payments balance, trade balance, exchange rates and so forth, the terms equilibrium and disequilibrium were being banded about as if these were simple household words. Most economists innocently believed that disequilibrium was ‘a bad thing’, and equilibrium ‘a good thing’; many thought that there could be ‘chronic’ disequilibrium; and virtually all were convinced that one could ‘see’ or ‘observe’ an equilibrium if one looked at some data” (p. 19). “By imputing a value judgment, a political philosophy or programme or a rejection of a programme or policy into the concept of equilibrium designed for economic analysis, the analyst commits the fallacy of implicit evaluation or disguised politics”..."

"...As international trade increased, the fixed, gold-dollar exchange rate system could not keep up with the demand to exchange dollars for gold. Under such a system, where the US was investing in Europe and paying for NATO protection, while encouraging Europe to buy from itself, the US would argue that payments deficits were unavoidable. And Europe would counter: Just how stable can an international system be if the world’s largest economy and source of the world’s reserve medium of exchange runs persistent balance of payments deficits? The US and Europe shared a common fear: Because central bankers could cash in dollars for gold at any time, one day the ratio of dollar liabilities to American-held gold might increase to a level that might cause a loss of foreign confidence in the dollar and a run on the US Treasury gold window. American and European policy makers shared a common history: the global recession turned depression had unleashed monetary chaos and devaluations, which unleashed beggar-thy-neighbor policies and economic nationalism, which produced dictatorships, which unleashed world war (Gavin, 2004, p. 14). In fact, the preceding period 1914 to 1946 had seen widespread use of exchange controls among countries..."

"Note that discussion of gold-based systems and centralized reserves was not part of the first conference (largely because of the absence of Europeans more closely associated with goldbased systems and centralized reserves)."


IEHC - Richard Roberts - ‘Sterling and the End of Bretton Woods’

‘Sterling and the End of Bretton Woods’
Richard Roberts, University of Sussex

"The final phase of the Bretton Woods international monetary system was marked by a series of crises from November 1967 to March 1973. The four principal episodes, out of at least a dozen such events, were:

• November 1967 – devaluation of sterling
• August 1971 – suspension of the convertibility of the dollar into gold
• June 1972 – floating of sterling 

• February/March 1973 – second devaluation of the dollar and generalised floating

Thus sterling held centre stage twice, in November 1967 and June 1972. On both occasions, the sterling crisis was followed by bouts of instability in other major currencies and ultimately by the breakdown of the system: the Bretton Woods system in August 1971; and the modified Smithsonian Agreement parities, in February/March 1973.
There were two dimensions to these episodes: a political dimension and a market dimension. The involvement of senior politicians, sometimes in dramatic conflict with counterparts, and the attendant press attention, generated a public perception of a ‘crisis’ that was assigned to a particular country or currency. The market dimension was not so publicly visible and tensions in the foreign exchange markets are less straightforwardly attributable to a particular currency. The foreign exchange market is a zero-sum game: downward pressure on one currency means upward pressure on others, and vice-versa. In this sense, each of the international monetary crises was a crisis of the whole system, rather than a component currency.
Nevertheless, the term ‘sterling crisis’ was applied at the time to two of the key crises and the instability of sterling was plainly central to both episodes. Certainly policy-makers in the 1960s were convinced that the defence of sterling was essential for the stability of the dollar and hence the Bretton Woods system. ‘Whenever sterling might be devalued’, recalled Milton Gilbert of the Bank for International Settlements, ‘confidence in the dollar price of gold could be expected to evaporate and a large rise in the market for gold, as well as central bank conversions of dollars for gold, could be anticipated.’..."

"...As politicians and officials struggled to manage the increasingly unstable and dysfunctional international monetary system in the late 1960s and early 1970s, a countervailing development was taking place: moves towards the creation of a European monetary bloc and ultimately a European single currency. This endeavour was not successful, at least on the time-scale originally envisaged. Thus another question arises: Did sterling instability significantly impede the progress towards EEC monetary union?..."

"...US intervention in the foreign exchange market and participation in the inter-central bank swap network had ceased on 15 August 1971, with the suspension of dollar convertibility into gold, and had not been resumed with the 18 December 1971Smithsonian Agreement. ‘Benign neglect’ was a negotiating posture on the part of rumbustious Texan, John Connally, the US Treasury Secretary, to put pressure on the surplus countries ahead of the forthcoming negotiations on fundamental reform of the international monetary system. The US stance generated complaints from the IMF and other countries: the US embassy in Bonn reported that during the summit between Pompidou and Brandt on 3-4 July 1972 the French President had protested: ‘that the Europeans were now “defending the dollar” while the US sat by and did nothing.’ There were also critics at home, most outspokenly Arthur Burns, chairman of the Federal Reserve. And then on 16 May, 1972, out of the blue, Connally resigned..."



IEHC 2006XIV International Economic History Congress Helsinki, Finland, 21 to 25 August 2006
The International Economic History Association (IEHA) held its XIV International Economic History Congress in Helsinki, Finland, 21 to 25 August 2006. The local organising institutions were the Department of Social Science History and the Department of History at the University of Helsinki, in collaboration with the Finnish Economic History Association.
Almost 1400 participants from over 65 countries attended the congress. 123 sessions were held during the five day congress. The themes related to economic and social history such as: macroeconomic history, business history, labour history, monetary history, industrialization, trade and maritime history, demographic and family history, gender studies, urban history, and methodological issues. They covered periods from antiquity to the present day, and a variety of regions around the world. 



"...a basic factor in the losses of gold reserves’ over the entire period has been the shortage of new gold available to the monetary system. In effect, the demand for gold by foreign monetary authorities in a surplus position was larger than could be supplied by new gold availabilities. The tendency was for the shortage to be made up by net purchases from the United States. It seems to be more correct in these circumstances to say that gold and the system were in fundamental disequilibrium, rather than that the dollar itself was in fundamental disequilibrium. In any case, the remedy available to the United States was to negotiate a change in the gold parity of the dollar with the IMF. This seems to me to be the adjustment process called for in the Bretton Woods system. But, for what I believe to be political considerations, the United States has not chosen this course..."


Wednesday, March 21, 2012

RBI - Gold Prices and Financial Stability in India

RBI WORKING PAPER SERIES - Gold Prices and Financial Stability in India

 Rabi N. Mishra
G. Jagan Mohan


"There has been an almost sustained rise in the international gold prices since 2002, with just one deep correction in 2008. As gold is an integral part of savings of a large number of investors, this has raised apprehensions whether any correction in gold prices will have destabilising implications on the financial markets. In this backdrop, the paper makes an attempt to analyse the implications of the correction in gold prices on financial stability in India.
The paper covers empirical analysis on the inter-linkages between domestic and international gold prices and then it examines the nature of changes in the factors affecting international gold prices during the last two decades. While validating empirically the existence of complete inter-linkages between domestic and international gold prices, the paper goes on to conclude that there has been a structural shift in the factors affecting international gold prices in 2003. Short-run volatility in international gold prices used to be traditional factors such as international commodity prices, US dollar exchange rate and equity prices. However, since 2003, the same is largely due to the volatility in the US dollar exchange rate and mildly due to volatility in equity prices.
In conclusion, the findings of the paper show that domestic and international gold prices are closely interlinked. Based on empirical evidences, the paper also concludes that implications of correction in gold prices on the Indian financial markets are likely to be muted..."


Monday, March 19, 2012

New source: "Journal of Money, Credit and Banking"

The Journal of Money, Credit and Banking (JMCB) is a leading professional journal read and referred to by scholars, researchers, and policymakers in the areas of money and banking, credit markets, regulation of financial institutions, international payments, portfolio management, and monetary and fiscal policy. The JMCB represents a wide spectrum of viewpoints and specializations in its fields through its advisory board, associate editors, and referees from academic, financial, and governmental institutions around the world.

The Journal of Money, Credit and Banking is published seven times a year in February, March-April, June, August, September, October and December by Wiley-Blackwell on behalf of The Ohio State University.


GAUTI B. EGGERTSSON - The Deflation Bias and Committing to Being Irresponsible

"I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model. I show that one can analyze deflation as a credibility problem if three conditions are satisfied. First: The government’s only policy instrument is increasing the money supply by open market operations in short-term bonds. Second: The economy is subject to large negative demand shocks. Third: The government cannot commit to future policy. I call the credibility problem that arises under these conditions the deflation bias. I propose several policies to solve it. They all involve printing money or issuing nominal debt. In addition they require cutting taxes, buying real assets such as stocks, or purchasing foreign exchange. The government “credibly commits to being irresponsible” by pursuing these policies. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal since it curbs deflation and increases output by lowering the real rate of return."


"Can the government lose control over the general price level so that no matter how much money it prints, it’s actions have no effect on inflation or output? Economists have debated this question ever since Keynes’ General Theory. Keynes answered yes, Friedman and the monetarists said no. Keynes argued that increasing the money supply has no effect at low nominal interest rates. This has been coined as the liquidity trap. The zero short-term nominal interest rate in Japan today, together with the lowest short-term interest rate in the U.S. in 45 years in 2003, makes this old question interesting again, since the Bank of Japan (BOJ) cannot lower interest rates below zero. The BOJ has nearly doubled the monetary base over the past 5 years, yet the economy still suffers deflation, and growth is stagnant.1 Was Keynes right? Is increasing money supply ineffective when the interest rate is zero? This paper revisits this classic question using a microfounded intertemporal general equilibrium model and assuming rational expectations. The results suggest that both the Keynesian and the monetarist view can be supported under different assumptions about policy expectations. The paper has three key results..."


BIS - Yamaguchi, Yutaka, “Thinking behind Current Monetary Policy,”

Speech by Mr Yutaka Yamaguchi, Deputy Governor of the Bank of Japan, at the Japan National Press
Club, Tokyo, on 4 August 2000.

* * *
"I am honored to be invited today to the Japan National Press Club. I once heard a joke that a central banker can deliver a speech to members of this esteemed Club, who are well known for their barrage of sharp questions, only when the economy is performing satisfactorily and he is confident enough to answer any questions. I am here today, not because this is the case, but because I think it is a good opportunity to elaborate on our thinking behind current monetary policy and ask for your comments. The main purpose of my remarks today is to present an overview of the zero interest rate policy by reviewing various discussions at past monetary policy meetings with respect to the termination of the zero interest rate policy..."

On the current monetary policy
17 July 2000, Bank of Japan

(1) At the Monetary Policy Meeting held today, the Bank of Japan decided to maintain its “zero interest rate policy”.

(2) The Policy Board views that Japan’s economy is recovering gradually, with corporate profits and business fixed investment continuing to increase. The Policy Board also judges that the economy is likely to recover gradually led mainly by business fixed investment, unless there are major adverse external shocks.

(3) With regard to the prices, the Policy Board views that the downward pressure on prices stemming from weak demand is declining significantly while an economic recovery is expected to continue moderately.

(4) Given the above considerations, the majority of the Policy Board views that Japan’s economy is coming to a stage where deflationary concerns are dispelled, which the Board have clearly stated as the condition for lifting the zero interest rate policy.

(5) At the Meeting, however, some views were expressed that before reaching a final decision to lift the zero interest rate policy, it was desirable to ensure the judgment on the firmness of economic conditions including employment and household income. Besides, it was pointed out that the Board needed to see how the commencement of reconstruction proceedings of Sogo Co. could affect market developments and business sentiments.

(6) Taking account of these factors, the Policy Board decided, by majority vote, on the maintenance of the zero interest rate policy.


Wednesday, March 14, 2012

Why the Triffin Plan was Rejected and the Alternative Accepted? – A Heterodox Analysis

World Journal of Social Sciences
Vol. 1. No. 5. November 2011. Pp. 28-35

Carol M Connell

"When Burton Malkiel (author of A Random Walk down Wall Street and a member of the Bellagio Group) wrote his analysis of the Triffin Plan in 1963, those working toward monetary reform were coming down strongly in favor of a multiple currency approach. The Triffin Plan, which had attracted so much initial attention after the publication of Gold and the Dollar Crisis (1960), had been rejected. From the vantage point of history, we know that the multiple currency approach did not win the day. Robert Triffin would later claim that no one did more to ensure that floating exchange rates emerged the winner in the policy debate than Fritz Machlup because of his influence on academic economists and policy makers through the Bellagio Group conferences. This paper is motivated by the research question: what role did Fritz Machlup and the Bellagio Group play in the reform and development of the world monetary system? The findings tell a nuanced story of the move from fixed to flexible exchange rates, and discover the Triffin Plan alive and well in the scaffolding of the current hybrid system."


Tuesday, March 6, 2012


Robert Mundell and Milton Friedman debate the virtues—or not—of fixed exchange rates, gold, and a world currency.


Monday, March 5, 2012


Robert A. Mundell
Five Observations on the International Monetary System

"...Stabilization of the price of gold would be a gigantic step toward stabilizing the value of international reserves, and the creation of a suitable world central bank would be, over the future, an indispensable instrument for the resolution of the world debt crisis."


Thursday, March 1, 2012

ECB - Note concerning decision to be taken with a view to implementing the new European Monetary System

9 th December 1978


BIS - Central bank responses to financial crises

Central bank responses to financial crises
Michael Dooley

Was easy monetary policy in the United States the cause of the crisis?
For monetary policy – and Philip Turner mentioned this in his introduction (in this volume) – the obvious observation is that easy monetary policy cannot depress real interest rates for seven years. There is no model that tells you that a continuously expansionary monetary policy for seven years does anything else but cause inflation. Real interests rates were low leading up to the crisis, but the cause cannot have been monetary policy.
The second observation is that easy monetary policy does not have an imaginary evil twin called liquidity. We hear a lot that the crisis was caused by excess liquidity sloshing around the system for seven years. But nobody has a very good idea of what that is or where it came from. It kind of reminds me of ether. Scientists decided that light was a wave that had to travel through something. But there was a vacuum out there and we would all freeze in the dark if there was not something to get the light from the sun to us. So scientists invented ether. Economists did not know what was going on before the crisis, so they invented liquidity.
The final thing, which is just so obvious to somebody in the financial markets, is that leverage is profitable at any level of interest rates. Low interest rates do not cause people to reach for a higher leverage. Leverage simply multiplies profits from spreads. Excessive leverage did make the system vulnerable, but the link between leverage and the level of interest rates is weak at best.

International imbalances
At the G20 meeting that just concluded, the US position was that international imbalances were a big part of what led up to the crisis. Large net flows of credit from emerging markets – China, in particular – to the United States and other industrial countries can account for a low interest rate and expectations of future low real interest rates for a considerable time period. That is a perfectly sensible idea.
The associated sensible idea which gets a lot less attention is that equilibrium asset values will be high. If you have a lower real discount rate, and people expect it to continue for a very long time, asset prices are going to rise. It is in the denominator of every asset price that you can think of.
But the crisis that was predicted for that system was a stop in capital flows from emerging markets to the United States and to other industrial country markets. That predicted stop in net capital inflows was supposed to generate a spike in US real interest rates, a collapse in asset prices, a collapse in the dollar, and a crisis; but that did not happen. What I find quite astonishing is that even though the crisis that was predicted did not happen, the cure is still being touted as a proper policy response. This is not sensible.

Breaking down supervision and regulation and the need for improving supervision

BIS - Yves Mersch: After the EMU rescue – which way for Europe?

Speech by Mr Yves Mersch, Governor of the Central Bank of Luxembourg, at a lecture in memory of Mr Pierre Werner, organised by the Official Monetary and Financial Institutions Forum (OMFIF), London, 14 October 2010.

"Your Excellencies,
Ladies and Gentlemen,
Neither the European Coal and Steel Community Treaty of 1950, nor the 1957 Treaty of Rome dealt extensively with currency. This might have been because convertibility after World War II was not very wide-spread and capital controls were the norm.
Belgium was one of the first countries to establish free movement of capital but only within a dual exchange rate regime. This particularity had been one of the reasons for Luxembourg to emerge as a financial activities center for Europe.
The principle of fixed exchange rates had been a feature of the international framework for currency stability after World War II for the economies of Europe, North America and Japan. The Bretton Woods System was based on gold and the US dollar as the predominant monetary standard and worked for several years with almost no frictions. By 1968 a new era of currency instability threatened when market turbulence forced the revaluation of the German Mark and the devaluation of the French Franc. These developments clearly revealed the weaknesses of the Bretton Woods System as well as the threats to the common market and specifically the common agricultural policy.
Ideas of a new European currency framework gained momentum and Luxembourg’s Prime Minister Werner, also Minister of Finance, was asked to steer a Committee mandated to design the path to an increased economic and monetary integration of the six then members of the European Economic Community. That report, finished on the 8 October 1970 and sent to the Ministers of Finance in the first instance, laid down the achievement of Economic and Monetary Union by 1980....."


Wiki: Werner plan