Monday, December 31, 2012

KS - Multilateral Surveillance: the IMF, the OECD and G-20

Kumiharu Shigehara∗
Conference on
“Outlook for the European Union in 2030:
Between Emerging Countries and North America”
la Ligue Européenne de Cooperation Economique


KS - Monetary and Economic Policy Management, then and now

Kumiharu Shigehara
Deputy Secretary-General
Organisation for Economic Co-operation and Development

A key-note speech delivered at the Emile van Lennep Memorial Conference on "A Global Order for Sustainable Economic Growth" jointly organised by the Netherlands' Ministry of Finance, De Nederlandsche Bank, the University of Groningen and the Netherlands' Institute for Banking and Stockbroking Industry in Amsterdam, on 20 April 1998

I. Introduction

It is a great honour for me to accept Nout Wellink's invitation to participate in the Emile van Lennep Memorial Conference on a "Global Order for Sustainable Economic Growth". This invitation to be a key-note speaker presumably reflects the fact that, in addition to my service as a central bank economist and practitioner for 20 years, it happens that I have virtually had a "career" as an OECD economist, having worked in different positions on four different occasions.

Emile van Lennep was OECD Secretary-General during my first two periods of service there; the first one (1970-1974) included work as Head of Monetary Division in charge of servicing the Economic Policy Committee's Working Party N-3 for "the promotion of better international payments equilibrium", chaired by Otmar Emminger, then Vice-President of the Deutsche Bundesbank; and the second period of service (1980-1982) was again devoted, though not exclusively, to Working Party N-3's activities under the chairmanship of Sir Kit McMahon, then Deputy Governor of the Bank of England. Even after Emile van Lennep's departure from the OECD, I had the opportunity to communicate with him from time to time, both during my two most recent periods of service at the OECD (1987-1989 and 1992 to the present) and during my service at the Bank of Japan. He sent me his last personal letter in May 1996 to comment on my lecture at the Bundesbank's conference on monetary policy strategies (1). He recalled at that time the debates between the Americans and Europeans on US monetary policy during the 1960s when he was Chairman of the OECD Working Party N-3. His letter demonstrated his continued strong interest in monetary and economic policy debates. He was scheduled to visit the OECD to meet Secretary-General Donald Johnston and myself on 8 October 1996 which, sadly, turned out to be the day of his funeral in his home town of the Hague.


NBB - Monetary practices In ancient Egypt

"...The shat was linked to the value of gold; one shat was equivalent to 7.5 grams of gold. However, the Egyptians expressed large sums of money in debens, with one deben worth 12 shat and corresponding to 90 grams. So, the shat was worth one-twelfth of a deben. This mechanism could have led the Egyptians directly towards setting up a genuine currency based on gold, but it is interesting to note that from the reign of Ramesses II (Pharaoh from the XIXth dynasty, 1279-1212 BC) onwards, the shat disappeared altogether from accounting texts, which no longer referred to anything other than the deben.

Furthermore, it can also be seen that, from then on, the gold standard was replaced by the silver standard. In order to understand this phenomenon, it is necessary to consider the huge symbolic importance that gold had for the ancient Egyptians. It was considered as the skin or flesh of the gods, and, moreover, the most zealous servants and warriors received gold chains from the king himself, regarded as a veritable god on Earth, at ceremonies called the “gold reward”. Since it was mainly during the 18th and 19th dynasties that this almost metaphysical interpretation developed, this explains why the gold-based currency could never materialize. The administration could not actually afford to associate gold, so rich in divine symbolism as it was, with an object as common as money, which could be handled by ordinary mortals.

As for silver, being the material from which the bones of the gods were made, it, too, was hugely symbolic, although to a much lesser extent than gold. So, the Egyptians could have used it for monetary purposes. However, silver was an extremely rare commodity and it could only be obtained through import, making its use as a currency impossible. Therefore, it was largely symbolic and metaphysical reasons that prevented the Egyptians from adopting the use of money..."


NBB - Money and assets of our ancestors. New archaeological research


NBB - Money

...I tell my children, as you may tell yours: "when a thousand hungry lions fight for one scrap of food, small dogs should hide with what´s in their belly"...

“The usurer”, copper engraving by Conrad Meyer (mid 17th century) taken from a work on the Dance of Death.
National Bank of Belgium Collection


Sunday, December 30, 2012


Monetary Committee
of the
European Community

#...Early in 1976, the main international monetary issue for the Committee was the working out of a Community position on the question of the future role of gold in international monetary relations. The essential problem here was to balance the various interests within the Community itself and also, more particularly, outside the Community in such a way as to ensure, through minimum agreed standards of behaviour, that the international monetary system was spared further dislocation. The position worked out in the Community provided the basis for the subsequent gold agreement by the Group of Ten. This position has, as planned, been applied for two years and has, during this period of considerable balance-of-payments adjustment and heavy liquidity requirements in individual countries, helped to stabilize international monetary relations. It has now run its agreed course and consequently come to an end..."


"...The Monetary Committee is not comparable with any other group in the EC Not in its institutional embedding, not in its composition and nor in its functioning. The Committee was established in the Treaty of Rome as the only committee of experts. The Council decided two years later on the Statutes of the Committee. It enhanced its professional independence by determining that "... they shall be appointed in their personal capacity and shall, in the general interest of the Community,be completelyindependent in the performance of their duties." The Treatyof Maastrichtreconfirms and establishes even more firmly the role of the Monetary Committee. Even in the final stage of the Economic and Monetary Union, the Committee will continue to playa unique role in contributing to the economic and financial policy of the Community..."


CVCE - J.Delors III

Transcription of the interview with Jacques Delors — Part 3 — Jacques Delors, President of the European Commission from 1985 to 1995 (Paris, 16 December 2009)

"Transcription of the interview with Jacques Delors, President of the Commission of the European Communities from 1985 to 1995, conducted by the Centre Virtuel de la Connaissance sur l’Europe (CVCE) on 16 December 2009 at the Paris-based premises of the think tank ‘Notre Europe’, of which Jacques Delors is the founding director. The interview, conducted by Hervé Bribosia, Research Coordinator at the CVCE, particularly focuses on the following subjects: Delors’s appointment as President of the European Commission, the Single European Act, the accession of Spain and Portugal to the European Communities, the fall of the Berlin Wall, the negotiations on the Maastricht Treaty, the subsidiarity principle, the work of the ‘Delors Committee’ on Economic and Monetary Union, the coordination of economic policies and the 1993 White Paper, the non-participation of some Member States in the single currency, the ‘Delors Packages’, a review of the Delors Commission and the Delors method.

[Hervé Bribosia] So the IGC, the Intergovernmental Conference, opened.

[Jacques Delors] As regards the Intergovernmental Conference, we can say without bragging — well, there was a Luxembourg presence which was very accommodating, very remarkable, but it was us who drafted 80 % of the texts.

[Hervé Bribosia] By us, you mean the Commission?

[Jacques Delors] That’s right. It was the first time that had happened.

[Hervé Bribosia] So the Commission was very influential in the drawing up of that draft treaty.

[Jacques Delors] Oh yes, with the Single Act! I wanted there to be the single market and the possibility of extending qualified majority voting as well. But I also wanted there to be the social aspect. I also wanted there to be solidarity between poor regions and rich regions. I also wanted there to be a few words about the environment. It all went through apart from a few words about the single currency. And the Germans were against that.

[Hervé Bribosia] It was there in embryo, of course?

[Jacques Delors] Yes, it was, it was in the introduction, a little sentence, like Tom Thumb leaving a trail of white pebbles, you know the story … I’d put it there, having been a Finance Minister […]. So we arrived in Luxembourg, where the Council was chaired remarkably well by Santer. We should give Jacques Santer the credit he deserves. The commitment of the Luxembourgers to Europe is remarkable. From Jacques Santer to Jean-Claude Juncker, by way of Werner who inspired me … remarkable! So the day before, he didn’t want that little paragraph. I went to see Kohl and said to him: ‘Look, it’s quite simple, if we have a single market tomorrow, people other than you are going to raise the question of the single currency. So put a few words in and that can also be a way of showing that the EMS is useful, do you agree?’ He did. That left Mrs Thatcher. And I was able to talk to her while the sitting was suspended and she finally agreed.

[Hervé Bribosia] What did you do to convince her?

[Jacques Delors] Oh, it happened twice. In 1985 for what I’ve just said, and in 1988 when the German subpresidency secured the big budgetary agreement for me. I spoke to her in good faith, I didn’t spin her any yarns. I’m telling you, she’s a woman who was against my ideas but who was extremely courteous, extremely respectful of others. She said: ‘Right, environment and the single currency. So it’s a treaty I’m very fond of, because we got 80 % of it — due yet again to people like Émile Noël, François Lamoureux and others, and even people working for the other Commissioners, particularly Mr Perissich, who is still active. So it was a treaty we made ourselves. The Luxembourgers were very cooperative and very open to us, because agreeing to texts drafted by the Commission is not easy for a government. The Luxembourgers are very European. They didn’t do it out of carelessness but out of a European spirit. We worked well together and that was it. The treaty was agreed to — a miracle! — 12 months after I took office. It was adopted and then there was a referendum against it. But it was implemented in 1987.


VII. The work of the ‘Delors Committee’ on Economic and Monetary Union

[Hervé Bribosia] As regards Economic and Monetary Union, you’ve been described as the midwife of the euro, with Schmidt and Giscard as its forebears and Kohl and Mitterrand as its godparents. The Hanover European Council of June 1988 had made you chairman of a committee whose job was to make practical proposals. The committee was eventually named after you, the ‘Delors Committee’ — just like the report you submitted in April 1989, the ‘Delors Report’. How was the committee set up and how did it operate?

[Jacques Delors] To start with, hats off to Mr Werner! He’d been given the job of producing a report several years beforehand. He chaired a committee of senior officials and his report was a point of reference for us. So all credit to Mr Werner, a great European but a man who also, when he was President of the Council, agreed to chair a committee of technocrats.

[Hervé Bribosia] So you met him on many occasions?

[Jacques Delors] Yes, I did, and I really think … I was due to go to the Werner Foundation and I wasn’t able to go there. But we should pay tribute to him, because part of our report was borrowed from the Werner Report. That should never be forgotten. Secondly, before Hanover, Mr Genscher had talked about a single currency, and Mr Balladur, the Prime Minister, had talked about a common currency. I thought the atmosphere was right, I left them to it, Kohl first invited me to lunch at his house in Ludwigshafen and said to me: ‘So, we’re going to have to do something for the single currency.’ He said to me: ‘Right, there could be a committee of Finance Ministers.’ ‘Oh no,’ I said to him, ‘not the Finance Ministers, the governors of the central banks. Those are the ones: technical expertise and credibility!’ ‘So,’ he said, ‘could you chair it?’ I said to him: ‘Yes, I’ll take the risk.’ As President of the Commission, it was a risk. So I said to him: ‘OK.’ Up to the last minute, in Hanover, the President of the German Central Bank, the Bundesbank, wasn’t keen. He tried to prevent it, then later on he was in the group, he caused me a fair amount of trouble. But anyway he had his own ideas. And then Mrs Thatcher said: ‘As long as it’s about finding out how it could be done, let’s do it!’ So there was a committee of all the governors of the 12 central banks, plus three experts I had had appointed and who were good. So there we were, we set up this group, which was hard work … stormy at times. But we managed to get unanimity, including the Governor of the Bank of England, who prepared the ground for it politically. But he said to Mrs Thatcher: ‘They asked me how to do it, but not what to do.’ So the report was adopted unanimously, which gave it strength. But it was extremely difficult.

[Hervé Bribosia] The essence of the report is in the Maastricht Treaty, would you say?

[Jacques Delors] No, not the economic part.

[Hervé Bribosia] Not the economic part?

[Jacques Delors] It’s a bit out of balance as regards the monetary and budgetary aspects.

[Hervé Bribosia] You mean the report was more balanced from that point of view.

[Jacques Delors] That’s right, the macroeconomic policies and the monetary policies. And from then on, I fought to get it rebalanced, but to no avail, as you can see. To no avail, I’m telling you."


EP - Committee on Economic and Monetary Affairs (ECON)


CVCE - J.Delors II

Transcription of the interview with Jacques Delors — Part 2 — Jacques Delors’s career before becoming President of the European Commission (Paris, 16 December 2009)


CVCE - Oral history of European Integration


Friday, December 28, 2012

ChN - Christian Noyer on Fixing Europe's Financial Crisis - video

Published on Jul 26, 2012
Today there are few that would deny that there are major problems in the design of the Eurozone. One problem that Governor Noyer has identified is the lack of a financial union to accompany the Europe's monetary union. In his presentation at the IIEA, Governor Noyer will speak about proposals for a financial union for Europe and the other challenges in 'Fixing Europe's Financial Crisis'.


Thursday, December 27, 2012

WGC - Gold and the International Monetary System in a New Era

Proceedings of the Conference held in Paris
19th November1999

FOREWORD by Haruko Fukuda, Chief Executive Officer, WGC

INTRODUCTORY REMARKS by Robert Raymond, Chairman, CPR; former Director-General,
European Monetary Institute; former Executive Director, Banque de France

Robert Mundell, C. Lowell Harris Professor of Economics, Columbia University -
1999 Nobel Prize Laureate in Economic Science

Patrick Artus, Chief Economist, Caisse des Depôts
Geoffrey Wood, Professor of Economics, City University, London
Forrest Capie, Professor of Economics, City University, London
Christian de Boissieu, Professor of Economics, University of Paris
Harold James, Professor of History, Author of the official history of the IMF
Heiner Flassbeck, Former Deputy Finance Minister, Germany

Introduction by Antonio Casas Gonzalez, President, Central Bank of Venezuela
Leonard Tsumba, Governor, Reserve Bank of Zimbabwe
Radek Urban, Executive Director - Financial Markets, Czech National Bank
Marc Flandreau, Economist, Observatoire Français de Conjonctures Economiques
Dr D Ajit, Director, Economics, Reserve Bank of India

Senator Philippe Marini, Rapporteur Générale,Financial Commission, French Senate
Remarks by Valéry Giscard d’Estaing, former President of France

Introduction by Stewart Murray, Chief Executive, London Bullion Market Association
Tom Butler, Consultant, World Gold Council
Jessica Cross, Director, Virtual Metals
Stephen Smith, Treasurer, Placer Dome
Chris Thompson, Chairman and CEO, Gold Fields Ltd

Introduction by Jean-Pierre Patat, Executive Director, Banque de France
Edmond Alphandery, Chairman, CNP, former Minister of Economics and Finance, France
Yukio Yoshimura, Executive Director for Japan, IMF
Jean-Pierre Landau, Director, French Banking Association
Antonio Casas Gonzalez, President, Central Bank of Venezuela
Jean-Pierre Patat, Executive Director, Banque de France

CLOSING REMARKS, by Robert Pringle, Corporate Director: Public Policy & Research, WGC

"...I turn now to the role of gold as an anchor of stability and the criticism of it. We could have three currencies – the euro, the dollar and gold. They are not going to be fixed relative to one another. Which would be the best to hold as a reserve asset will depend on the stability of each one. If one of them is much less stable than the others – if gold was very unstable in terms of the other currencies and the other currencies were stable in terms of commodities, then that would be an argument against holding gold and people would accordingly want to hold a smaller amount of gold and the value of gold would correspondingly be lower. But the price of gold will always go down or up according to the worth of that as a commodity – as a commodity reserve, in this case.

What has happened to gold that makes it unstable? First of all, what made gold stable in the first place? Over the 2,500 years since coinage was created, gold became stable because it was widely distributed. The current production was a very small amount of the outstanding stock. After two centuries of production and accumulation, the 100,000-odd tonnes of gold that exist in the world today – the 35,000 tonnes official and then the non-official and jewellery and other holding of gold – that outstanding stock is very large relative to current production, so the changes in current production do not have a big impact on gold and changes in demand do not have an impact on gold.

That was especially the case when gold was widely used as a circulating medium as money. Since 1914 gold has been much less stable. After World War I there was an argument for raising the price and if we had raised the price in the 1920s we could have got a good standard back. Then, after World War II, Jacques Rueff in 1962 wanted to raise the price because gold had been unstable beforehand. Then you make the argument that if you have to change the standard because it is unstable, then it loses its patina as a standard.

My answer to that would be the answer given by Philip Cortney and published in the book of a conference that I organised in 1966 on the monetary problems of the international economy at the University of Chicago. Giscard d’Estaing came to give the opening keynote speech at that conference but Philip Cortney was also there. Philip wrote a little jewel of a paper: The price of gold after big wars. If you have a world war and prices all go up, it is silly to say that you should keep gold stable by dragging the world back into a depression just to prove that gold is stable. It is better, after big wars like World War I, to change the price of gold and hope that there will not be any future big wars. There was a future big war – World War II – and again the same argument holds: raise the price level if you want to maintain gold. So I do not think it is quite fair to use that argument as an argument against changing the price of gold after World War I or World War II.

The real issue, though, is if we were talking about going back to a gold standard again – not talking about gold as a fluctuating commodity used as a reserve, but if countries were to adapt and hold on to gold again – would this be a good currency to hang on to, or is it unstable? My argument right now against countries – let’s say small countries – adjusting to gold is that gold at the present time is not stable enough. It is better for smaller countries right now to peg to the dollar or have a currency board attached to the dollar or to the euro than to gold, because gold is subject to a lot of elements of instability, not the least of which is the attempt on the part of several big governments to make it unstable.

If you notice what happened in the past 20 years in government policy in respect to gold, nobody sold gold when the price was soaring to $800 an ounce. It would have been a good deal and it would have been stabilising if they had done so. But people sell it when it hits bottom; the British have been selling gold now that it seems to have hit the very bottom. That element - governments selling when the price is low or not selling when the price is high - makes it destabilising. Governments should act in the same way that officials act: they should buy low and sell high.

I just want to make a final little point here. If we want to have a new international monetary system and if we want to have gold as a major part of it, as I think it would be a part of a new truly international monetary system, then we need a device for making gold stable that would supervise gold sales and purchases to keep gold stable in terms of commodities and then it or its representative in paper would become a perfect international money..."

This meeting is very significant for me because of two features. One is the World Gold Council and the other one is your guest, Professor Robert Mundell. The World Gold Council. You know gold is at the same time a myth and a value. It is the only element that has this. The myth will last. In fact, it started with humanity and with the first creation, artistic creation, of mankind, we find gold. France, as you perhaps know - and if you don’t know then it would be an occasion for you to learn something fresh - France used to be the largest gold producer in Europe and all the gold you see in our culture – in which it is very important – came from French soil. Later our sources were exhausted and the gold that we used came from goldmines in other parts of the world.

Gold also is a value; a constant value. This is the reason for which you invited the Nobel Prize winner. He was the first advocate of stable values. We lived with its stable value for a long time. When you look at a quotation on the gold market now in France you will see the quotation of what we call the Napoleon - it is a coin which was used as currency until after the First World War. The value of this coin at the time was the same in gold as we had in 1757 with the Louis. It lasted for all that period.

It means that we need some value of reference. We need it for every human activity. There is no other reference value that will give the same guarantee of stability as gold. It doesn’t mean that its function is exactly equivalent to what it was before. I well remember when I was French finance minister in 1966 at the time President de Gaulle gave his press conference calling for a return to gold.

The idea was to have the gold at the centre and to have circles, a sort of currency first, and credit after that; the first circle being the SDR and after that international credit. I just mention this because you are here to debate the role of gold. The fact that gold has an international value that cannot be manipulated, and that cannot be affected by any political decision, is something that must be kept in an appropriate way in the world economic structures in the future..."
"...Alan Greenspan once said to me that the most important additional move that we should make is for us to give a constituency responsibility to the European Central Bank. And you know the famous quotation of Paul Volcker who said to me once, “it is very interesting for you to support an independent central bank for Europe when you have no government from which the central bank would be independent!” Well, you cannot expect a European Government in the near future. But at least we may have a structure, a committee, with responsibility for the European Central Bank..."

Jean-Pierre Patat (Executive Director, Banque de France):

"So ladies and gentlemen, I have the honour to chair this panel. Let me first say as the Banque de France representative that it was initially scheduled for Governor Trichet to do the welcome address for this session, but at the last minute this proved impossible. I cannot of course replace Governor Trichet and I will not replace him. At the end of this panel discussion and to conclude this very interesting conference, I will explain what the Banque de France view on gold and the gold markets is.

We have four very distinguished panellists. The first is Mr Alphandery, whom the Banque of France knows and appreciates greatly. Mr Alphandery was indeed the father of our Central Bank’s independence and I am very glad to thank him in public. He has been Minister of Finance and Economy, General Manager of Electricité de France and now he is President of La Caisse Nationale de Prévoyance. I give him the floor.

Edmond Alphandery (Chairman, CNP, former Minister of Economics
and Finance, France):

Ladies and gentlemen, when we look at the proposals on international financial architecture made by the IMF, academics, Dr Tietmeyer and others, we see that there is no longer faith in radical reform. What is striking, on the contrary, is that the more damaging the crises are all over the world, the more modest are the proposals for reform. There is a reason for that. The system is becoming so complex, the market forces in the financial sector are so strong, that only partial answers have any credibility.

Among the numerous proposals we see two approaches corresponding to two different attitudes. The first is built on the principle of responsibility and the other on the preference for stability. Both, of course, are not irreconcilable; in fact, they are complementary. But each insists on key points which give a framework for the analysis of this issue.

What I shall call the responsibility approach considers that crises depend on individual or political behaviour. With the development of financial markets in size and complexity, in the last crisis we often observed relaxed attitudes towards risk. Due to financial safety nets, “too-big-to-fail” policies, there was a build-up of vulnerabilities. Insufficient prudential rules and the lack of efficient regulators led the systemic process to develop.


Let me finish with a bet. What I call the responsibility procedures are much easier to implement one by one than an international stability framework, so in future the financial architecture will favour the private sector market processes. This is no doubt a good orientation, but insufficient mainly for emerging markets. The question will remain open for them for a more stable environment, for promising maximum economic growth – perhaps by financing the role of gold, but this is another story and I hope other panellists will enlighten us on this subject. Thank you for your attention..."

Yukio Yoshimura (Executive Director for Japan, IMF):

"Thank you, Mr Chairman. As the Chairman said, I represent the Japanese government at the IMF. Japan has a distinct and strong voice in international financial issues and now Japan is considering a candidate for the next managing director of the IMF. Japan has a distinct strong view. Today, however, I would like to explain the issues in my own capacity, so what follows is my opinion, my personal view. It is not to be taken as the Japanese view or the IMF view.
In the early part of last year when the new international financial architecture became a main issue among the financial community after the outbreak of the Asian crisis, Hans Tietmeyer, then President of the German Bundesbank, commented that we did not need an architect or a grand design; what we needed, according to him, were capable carpenters who could repair the damage and fix the broken parts of the existing structure.
At present the US economy is in very good shape. However, a sharp downturn adjustment cannot be ruled out in the future. If the US economy should start to drift, currencies tied to the US dollar through currency board arrangements would also start to drift. In other words we had better reflect whether the present dollar standard and bi-polar or tri-polar systems, which many believe will be our future system, is mechanically robust enough to support the global economy and global finance as a whole. As the global economy and global finance become more complicated because of the increased presence of the emerging market countries and economies in transition, the question of how effectively to impose policy discipline is one that has to be answered.

The introduction of a gold standard under such conditions could be devastating for the global economy as it would lead to strong economic contraction especially in the United States. We could also say that this deflationary pressure has adversely affected gold prices and as long as gold prices are weak, the role of gold in the international financial system may be limited.
I would like to add one final word. If governments and the central banks throughout the world wish to maintain their freedom to conduct economic management, they have to make the maximum effort not to invite a situation where the introduction of the gold standard would become meaningful. They have to pursue the goal of achieving sustainable growth while avoiding a resurgence of inflation in the global economy, find new rules of the game and establish policy discipline by themselves."



24-08-2015 adding

This reflects Mundell' s view of the past time, as seen in hostorical documents:

153. Paper Prepared in the Department of the Treasury1


The official dollar gold price would not change
The United States would make clear at the outset of negotiations that it does not regard any change in the official price of gold as part of the negotiations. This posture will be necessary because the French, with varying degrees of support from countries such as Belgium, Switzerland and certain elements in the United Kingdom, may seek a devaluation of the United States dollar in terms of gold. French private citizens hold large amounts of gold on which they would like to make a profit, and Swiss bankers have substantial holdings for their clients and have been managing South African gold sales and on occasion, trying to stimulate gold speculation by their actions and speeches. Both French and British financial interests hold large blocks of South African gold mining stocks. A rise in the official gold price would help the private holders by raising the private market price and enlarging the scope of that market, in the judgment of the French and Swiss.
Fortunately the Germans and Italians do not favor an increase in the gold price, so that the French are unlikely to achieve a unified position in the European Community. The Germans and Italians hold very large reserves in dollars, on which they would gain no profit if the official gold price rose. Their officials might even incur criticism because other countries had profited by holding a larger share of their reserves in gold. The Japanese and even the Canadians could also be embarrassed.
3) A moderate gold price increase would be unstable. A moderate increase in the official gold price would be analogous to the “Munich settlement”; it could quite likely last only a short time—perhaps less than a year. It would establish a strong presumption that the prescription would be repeated if speculative pressures again became strong, and dollar reserves built up abroad again. Because central banks holding gold would have gained a gold profit, while holders of dollars would not, many central bankers would face public criticism for holding dollars. This would be likely to induce substantial requests for conversion of dollars into gold, especially by smaller central banks. U.S. gold reserves could shrink fairly quickly, offsetting or more than offsetting the devaluation gold profit (which itself would be about matched by a write-up in our gold guaranteed liabilities to the IMF and other international agencies). This factor of additional drain on U.S. reserves for conversion arises from the re-emphasis on gold inherent in the change in the U.S. official gold price. It would not be present if exchange rates are adjusted without a change in the dollar price of gold.
10) A massive gold price increase would be generally rejected in a worldwide inflationary period. A doubling of the price of gold at one swoop, as recommended by Rueff of France for many years, is probably not likely to be put forward now. We understand Rueff himself no longer puts it forward, as it is too unrealistic. It would be resisted very widely as it would enlarge world reserves by about $40 billion all at once. The 1970 addition to world reserves was $14 billion. Such a large increment to world reserves, even though initially immobilized in central bank reserves, would have a marked inflationary potential. It would probably be resisted by most members of the Fund, and by U.S. public opinion. One danger of a moderate change in the gold price is that by a series of crises, the same result might be approached.

Friday, December 21, 2012

HEGEMONY OR VULNERABILITY? - Giscard, Ball, and the 1962 Gold Standstill Proposal

Giscard, Ball, and the 1962 Gold Standstill Proposal
Francis J. Gavin and Erin Mahan

"What was the character of America's international monetary relations with Europe during the early 1960's, and how were they related to the larger power political questions of the day? There is a standard interpretation of this question. During this pre-Vietnam war period, the argument runs, the United States strove to maintain hegemonic power visà- vis Western Europe "based on the role of the dollar in the international monetary system and on the extension of its nuclear deterrent to include its allies." Since this economic dominance resulted from the structure and rules of the Bretton Woods monetary system, the Americans had no interest in reforming arrangements that were "a prerequisite for continued American global hegemony."2 "Because it was interested in preserving the privileges it derived from the operation of the Bretton Woods regime," the United States would not "condone a structural reform" of the system that threatened "the continued preeminence of the dollar."3 And while most of "America's allies acquiesced in a hegemonic system that accorded the United States special privileges to act abroad unilaterally to promote U.S. interests," the French did not.4 The Fifth Republic government, led by Charles de Gaulle, deeply resented the privileges they believed the system conferred upon the American dollar and actively exploited America's balance of payments position in an attempt to force the United States to abandon the Bretton Woods system. The United States, the conventional wisdom holds, was able to thwart this French effort, until the American deficit ballooned in the late 1960's and early 1970's as a result of massive "guns and butter" inflation.

The real story is rather different. American policymakers had no great love for the Bretton Woods system. It was associated in their minds not with American hegemony, but with American vulnerability. The United States was running a payments deficit; the Europeans were in effect financing that deficit and were thus enabling the Americans to live beyond their means. But the Americans did not view this as a source of strength: the growing European dollar balances, which, under the rules of the system, could be cashed in for gold at any time, were a kind of sword of Damocles hanging over their heads. The U.S. government felt vulnerable and it did not like it. Kennedy feared that if the system was not reformed, then the Europeans might come to the conclusion that "my God, this is the time… if everyone wants gold we’re all going to be ruined because there is not enough gold to go around."

The most surprising fact to emerge from French and American documents is that for a brief period in 1962, the French appeared willing to help the United States out of its monetary difficulties. Instead of hostility towards the dollar, Minister of Finance Valéry Giscard d'Estaing, was, for a time, cooperative. Inspired by Giscard's hints of support, Undersecretary of State George Ball and key members of the Council of Economic Advisors (CEA) crafted a monetary plan that would have essentially ended Bretton Woods while providing the Americans with time and protection to end their balance of payments deficits. The key provision of this plan was a gold standstill agreement, whereby the European surplus countries would agree to hold US deficit dollars and formally limit their gold purchases from the American Treasury. In return, the United States would move aggressively to end its balance of payments deficit. At the end of the agreement (likely to be two years), a new international monetary arrangement would be negotiated with the Europeans. Surprisingly, many within the Kennedy administration were willing to sacrifice the central role of the dollar and its "seigneurage" privileges in any new system, a position that would have had much appeal for the Europeans. While elements of the administration were enthusiastic about Giscard's hints and Ball's plan, the more financially orthodox members from the Department of Treasury and the Federal Reserve vehemently opposed the arrangement. Given the poor state of Franco-American political relations in the summer of 1962, the President was himself unsure of French motives, and in the end formal negotiations never began. Was Giscard's offer a missed opportunity? U.S. officials at the time were perplexed and scholars since then have neglected it entirely..."

"...The key to any plan was getting the Europeans to maintain the same or a smaller proportion of their reserves in gold. James Tobin of the Council of Economic Advisers (CEA) produced a plan to accomplish this.63 To meet Giscard’s demand for similar conversion policies among the European nations, Tobin suggested that the leading industrial countries determine a uniform ratio of gold to foreign exchange to which all countries would have to adhere. This would require countries with gold in excess of this ratio to sell a part of their gold for foreign exchange. Instead of only using the dollar and sterling as the reserve currency, the currencies of all participating countries (assumed to be the Paris club) would be equally acceptable. That provision would satisfy French demands that the franc be treated as a reserve currency on par with the dollar. Each country would provide a gold guarantee for their currency against devaluation. Tobin laid out several different ways this could be done, but they would all involve the U.S. selling gold for foreign exchange and retiring dollar liabilities. Some European countries would also have to sell or buy gold. Over time, the non-gold component of reserves would decrease, and the currencies of the participating countries would increasingly share the burden borne solely by the dollar. Removing the wide variations in gold ratios would make the international monetary mechanism more predictable and manageable...."

"...The President was keenly interested in these plans, and commissioned a small, inter-departmental group from State, the CEA, and Treasury to come up with an outline of an interim international monetary agreement based on Ball's and Tobin’s ideas. The group produced a plan that focused on protecting the American gold supply and strengthening the dollar. The report claimed that cyclical forces would combine with measures already taken to bring America's balance of payments into equilibrium within a few years. The heart of the plan was a proposed standstill agreement between the ten members of the Paris club and Switzerland whereby the participants would agree not convert the official dollar balances they held at the start of the agreement into gold. In order to accommodate increases in the dollar balances of the participants over the two years of the plan, $10 billion would be mobilized from a variety of financial sources. This would include $1 billion of American gold sales, a massive $5 billion drawing on the IMF, $2.5 billion in swaps and direct borrowings from Europe, and up to $1.5 billion in forward exchange operations taken by the Treasury department. The purpose of this agreement was two-fold: to get the countries of Western Europe to “extend more credit to the U.S. than they might voluntarily” and to dampen speculative attacks on the dollar..." 

"Even with the plan in place, there were all sorts of potential difficulties. The two years had to be used to eliminate the “basic” deficit, and there would certainly be large-scale reshuffling and uncertainty when the arrangement ended. To make the plan work, it had to be acceptable to the Europeans, and in fact, had to be initiated by the Europeans, so that it did not look like an act of American weakness. The report did not suggest how the Europeans could be brought to accept let alone propose such a plan."


Technical aspects of Reserve Creation Throught Fund Investment

Prepared by J. Marcus Fleming
December 10, 1964


Ossola group report - Report of the Study group on the creation of the reserve assets



The Potential of a Caterpillar: or The Origins of European Monetary Integration

The Potential of a Caterpillar: or The Origins of European Monetary Integration
Harold James, Princeton
Paper for Yale Economic History Seminar, March 28, 2011

...There was inevitably an anti-American edge to the European reform debate at this moment. At the same meeting of the EEC Monetary Committee, van Lennep also proposed a European scheme to deal with the liquidity issues of the international monetary system. Since the influential articles of Robert Triffin in the late 1950s, policy-makers had worried about a dilemma in which on one side, there might be insufficient liquidity and a deflationary drag in the world, and on the other the U.S. might over-supply liquidity to the extent that there was a risk that dollar claims would be far greater than the gold and other liquid assets the U.S. had to cover them. 28 Triffin’s approach had always involved a call to European action. Van Lennep was acting in the spirit of Triffin when he proposed that the EEC Six should evolve their own system as an alternative to the further creation of dollars in the international system “in case the dollar can no longer fulfil its functions or if there is deflationary pressure.” But the suggestion divided the Committee, and de Lattre spoke very emphatically in favour of European rather than U.S. reserve creation, which “must not depend on the needs of an individual country but must be agreed collectively.” Otmar Emminger from the Bundesbank and Rinaldo Ossola from the Banca d’Italia were quite critical of the French suggestion, and Emminger reasoned that there was no need to replace the dollar with another reserve unit, and that if assistance was required, an expansion of the General Arrangements to Borrow (GAB) was the most appropriate mechanism. The GAB had been established by ten major countries in 1961, with the objective of providing credit of up to $6 bn., additional to the resources of the IMF. The fundamental eventuality that the G-10 might have to cope with lay in the increasing strains facing the major reserve centers: the United States and the United Kingdom. Switzerland joined this group in October 1963, although it continued to be known as the Group of Ten. A proposal for a collective reserve unit had already been made by the former head of the IMF’s Research Department, Edward Bernstein in 1963, and in October 1963 a G-10 Deputies’ Study Group began work on “the functioning of the international monetary system and its probable future needs for liquidity”. But it was only when the U.S. Treasury Secretary in July 1965 came round to an appreciation of the Triffin concerns and called for a major new international monetary conference that the intense negotiations began that eventually produced a very circumscribed possible new reserve asset, the SDR or Special Drawing Right..."

"...A dramatic move by the CCBG to an active lending policy occurred in July 1968. It was now the French turn to proffer the begging bowl. Given the harsh anti-American tone in the aftermath of de Gaulle’s press conference of February 4, 1965, and the persistent French criticisms of the American “exorbitant privilege” of imposing the dollar as the world’s leading currency, it is not surprising that French policy-makers did not want to crawl to Washington for additional credit. The Governor of the Banque de France, Jacques Brunet, explained that French reserve losses had required a drawing of $745 m. from the IMF, as well as gold sales to the Federal Reserve, the SNB and EEC central banks. By the beginning of July, the French reserves were nevertheless exhausted, and the Banque de France embarked on swaps of $600 with the Federal Reserve and with the EEC central banks. At Basel, the central bank governors resolved that the French situation met the mutual assistance conditions stipulated by Article 108 of the EEC Treaty. They agreed on a three month $600 m. credit, with half coming from the Bundesbank, $200 m. from the Banca d’Italia and the remainder shared by the Banque Nationale de Belgique ad the Nederlandsche Bank.46 The deal was linked with an agreement of the Banque de France to sell $300 m. gold to the participating central banks.47 At the next meeting, the Bundesbank explained that it was prepared to extend further credit lines to the Banque de France, in order to deal with speculative pressure against the franc, and in expectation of a Mark revaluation.48 These negotiations took place, in the European setting, in parallel with global (G-10) discussions of a parallel arrangement of up to $2,000 m. in support of Britain. The big move of the CCBG into financial support operations came not because the IMF was unable to provide a greater amount of resources, by because France was worried about the political implications of further drawing on the IMF..."


Monday, December 17, 2012

NBB - On the origins of the Triffin dilemma : Empirical business cycle analysis and imperfect competition theory

by I. Maes
December 2012 No 240

Robert Triffin became famous with his trenchant analyses of the vulnerabilities of the Bretton Woods system. These are still at the center of many discussions today. This paper argues that there is a remarkable continuity in Triffin's work. From his earliest writings, Triffin developed a vision
that the international adjustment process was not functioning according to the classical mechanisms. This view was based on thorough empirical analyses of the Belgian economy during the Great Depression and shaped by a business cycle perspective with an emphasis on the disequilibria and the transition period. His doctoral dissertation on imperfect competition theory and his Latin American experience further reinforced this basic view.


Thursday, December 13, 2012

FRB - The Reform of October 1979: How It Happened and Why

Finance and Economics Discussion Series
Divisions of Research & Statistics and Monetary Affairs
Federal Reserve Board, Washington, D.C.

David E. Lindsey, Athanasios Orphanides, and Robert H. Rasche


"This study offers a historical review of the monetary policy reform of October 6, 1979, and discusses the influences behind it and its significance. We lay out the record from the start of 1979 through the spring of 1980, relying almost exclusively upon contemporaneous sources, including the recently released transcripts of Federal Open Market Committee (FOMC) meetings during 1979. We then present and discuss in detail the reasons for the FOMC’s adoption of the reform and the communications challenge presented to the Committee during this period. Further, we examine whether the essential characteristics of the reform were consistent with monetarism, new, neo, or oldfashioned Keynesianism, nominal income targeting, and inflation targeting. The record suggests that the reform was adopted when the FOMC became convinced that its earlier gradualist strategy using finely tuned interest rate moves had proved inadequate for fighting inflation and reversing inflation expectations. The new plan had to break dramatically with established practice, allow for the possibility of substantial increases in short-term interest rates, yet be politically acceptable, and convince financial markets participants that it would be effective. The new operating procedures were also adopted for the pragmatic reason that they would likely succeed."

"Do we have the wit and the wisdom to restore an environment of price stability without
impairing economic stability? Should we fail, I fear the distortions and uncertainty
generated by inflation itself will greatly extend and exaggerate the sense of malaise and
caution...Should we succeed, I believe the stage will have been set for a new long period
of prosperity."

—Paul Volcker


Tuesday, December 4, 2012

RL - MU - The Decline and Fall of Bretton Woods

Robert Leeson

Economics Department
Murdoch University
Working Paper No. 178
November 1999
ISSN: 1440-5059
ISBN: 0-86905-722-7


In 1975, the US Treasury Secretary informed the IMF annual meeting that "We strongly believe that countries must be free to choose their own exchange rate system". As flexible exchange rates were legitimised, several leading countries began to experiment with monetary targeting. These two revolutionary policy changes were inter-related: a flexible exchange rate is a precondition for independent national monetary policy. Having lost one "sacred" symbol or anchor (fixed exchange rates), central bankers began to experiment with another. Both these developments were the successful culmination of 'campaigns' led by Milton Friedman during the previous quarter of a century. This essay examines the process by which Friedman's case for flexible exchange rates was transformed from heresy to majority academic recommendation and from there (via two Treasury Secretaries) to become the corner stone of the post-1973 international monetary order (or "non system"). The primary focus of this study of political economy is on the organisation and the dissemination of the intellectual and political forces which undermined the Bretton Woods system.
Journal of Economic Literature Classifications: B 20; F 31.

"...Yet as the system collapsed it commanded an almost mystical confidence. Kennedy's 1963 Message to Congress had referred to the fixed price of gold as the "foundation stone of the free world's trade and payments system" (Mayer 1981, 75). After the 1964 annual IMF meeting in Tokyo, a group of officials visited an ornamental Zen Bhuddist garden in which fifteen stones were arranged so that the viewer could never see more than fourteen stones at any one time. Roosa (1967a, 187-8) reflected that "It went without saying at Tokyo that the price of gold, having been fixed at $35 per ounce, is now taken as the cornerstone of the international monetary system ... as certain and secure as the fifteenth stone". Friedman (1968a, 244) believed that such phrases were "ritual incantations to conceal the emptiness of thought"...


Monday, December 3, 2012

M.B-A.S - The ECU -- An Imaginary or Embryonic Form of Money: What Can We Learn from History?

Michael D. Bordo
Anna J. Schwartz

Working Paper No. 2345
1050 Massachusetts Avenue; Cambridge, MA 02138; August 1987

"...ECUs are created on a temporary basis through 3-month revolving swaps with the European Monetary Cooperation Fund against the deposit of 20 percent of each central bank's gold and dollar reserves, The quantity of ECUs outstanding is variable since the market price of gold (valued at the average ECU price in the preceding six months or of the two fixings on the penultimate working day, whichever is lower) and the ECU value of the dollar (prevailing two working days before) have been highly volatile. Three—fourths of outstanding ECUs have been created against gold. Since shares of gold and dollars in reserves of central banks differ significantly, the distribution of ECU5 among them is strongly affected by change in the valuation of the two reserve assets. The volume of ECUs created by the revolving swaps amounted to ECU 23 billion at the start of EMS, reached just under 50 billion in April 1981, then fell back to 42 billion in December 1982, and increased to 51 billion in June 1985.
Neither debtor nor creditor central banks have found ECUs attractive since they are inconvertible into other reserve assets, and limits exist, though liberalized in 1985, on their usability within the EMS. Two-thirds of interventions were in U.S. dollars through June 1985 (Micossi 1985, 331—2). Most interventions were intramarginal, not at the compulsory intervention limits. The intramarginal ones were carried out in EC currencies.
To expand the international role of the official ECU, in 1985 EMS central banks were authorized to make a temporary exchange with the ECMF of ECUs for dollars or with other member central banks for EEC currencies. Holding of ECUs by non-EEC central banks and specified international monetary institutions was permitted. In addition, the interest rate calculation on official ECU holdings was raised from a weighted average of the official discount rate in member countries to the weighted average of money-market interest rates for the component currencies..."

"...An important development was the agreement the BIS signed with the ECU Banking Association in March 1986 to assume the functions of agent of the private ECU clearing and settlement arrangement. Sometime in 1987 the system is expected to begin operations. The BIS as agent of the clearing banks will open and operate clearing accounts in their names, each of a limited number of clearing banks having opened an ECU sight account at the BIS..."

"In this section we report historical antecedents based on three attributes of ECUs: a universal unit of account; a basket of currencies; a basis for monetary integration.

1. A Universal Unit of Account
The ECU serves as a numeraire or unit of account for the EMS. It provides a measuring rod into which the currencies and hence the price level in terms of different currencies of the member countries can be easily translated. Provision of a universal unit of account is indispensable in the creation of a common currency. The ECU, however, is not widely used as a means of payment, a second indispensable feature of a common currency.
A precedent for the separation of unit of account and medium of exchange is exemplified by the "imaginary" or "ghost" monies that were known in Europe between the ninth and the eighteenth centuries. From the reign of Charlemangne until the French revolution, across much of Europe a distinction was commonly made between actual coins in circulation and "imaginary" money -- the accounting system of pounds, shillings, and pence in which prices were stated. In the medieval monetary system, coins were minted in various weights and sizes, which had no value imprinted on them. The monarch gave the coins official value in terms of the unit of account.

This distinction between the unit of account and means of payment is not found in modern monetary systems where the two functions are embodied in the same vehicle. The modern system, originally based on the specie standard, defined the monetary unit as a fixed weight of some precious metal, either gold, silver, or both. All coins, which had their values imprinted on them, were multiples or fractions of this basic coin. Fractional currencies, bank notes and bank deposits were all defined in terms of the basic coin and were fully convertible into it. The present fiduciary monetary system derives from the specie standard. Though government-issued currency and bank deposits are no longer convertible -into specie, the public has grown to treat them as if they were.

In the middle ages conditions were very different. In each state many coins of different metals, of different weights and sizes, coined both at home and abroad, circulated in common use. The diverse character of medieval coinage reflected primarily the rudimentary nature of techniques of minting and fragmented political power.1 In these conditions an accounting system was necessary to translate values in terms of multiple currencies into a common denominator. The system used was based on the ancient Roman denominations of pounds, shillings, and pence. Hence arose the distinction between "real" and "imaginary" money."

"...(iii) Alfred Marshall (1923, 1926) proposed symmetallism to the Gold and Silver Commission in England in 1886 to solve the shortcomings of reliance on precious metals, either gold or silver alone or bimetallism.9 Under the scheme currency would be exchangeable for a combination of gold and silver bullion in fixed proportions. Marshall believed the scheme would provide a stable monetary standard because the value of legal tender money would vary with the mean of the values of both metals. The scheme was never adopted.10"

10Marshall (1923) also proposed a tabular scheme. Jevons (1875) earlier
proposed a similar scheme (Laidler 1982). Fisher proposed a scheme for a
compensated dollar (1922 [1965], 498). Einaudi argued that the system of
imaginary money could be used in a similar manner. He proposed that the
ruler cry up the currency when the price level fell below some stated limit
and cry it down when prices rose above it.