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
KEYNOTE ADDRESS: “THE INTERNATIONAL MONETARY SYSTEM AT THE TURN OF THE MILLENNIUM”
Robert Mundell, C. Lowell Harris Professor of Economics, Columbia University -
1999 Nobel Prize Laureate in Economic Science
STRENGTHS AND WEAKNESSES OF THE INTERNATIONAL MONETARY SYSTEM
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
GOLD, RESERVE MANAGEMENT AND EMERGING ECONOMIES
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
A NEW ERA FOR THE GOLD LENDING AND DERIVATIVES MARKET
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
THE NEW INTERNATIONAL FINANCIAL ARCHITECTURE - WHAT ROLE FOR GOLD?
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."
This reflects Mundell' s view of the past time, as seen in hostorical documents:
153. Paper Prepared in the Department of the Treasury1
Washington, May 9, 1971.
U.S. NEGOTIATING POSITION ON GOLD
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.
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