Monday, December 12, 2016

Global trend in - Evolution of International Monetary System

Most traders and businesses walk knee deep in sea of information moving markets, feeling daily movements of exchange rate waves and periodic business cycles like high and low tides. But to feel the stream of ocean to know the direction one must swim further and deeper far outside of well travelled monetary sea roads where movements are tracked in years or decades. Let me bring you few Thoughts.
Since the year 1971 and the day when Richard Nixon "broke the gold window" we live in a USD dollar dominated International Monetary system (IMS). Some say this is a non-system. Never the less the arrangement is very asymmetrical with only one debtor of international monetary reserves, the United States of America. So far it has proven to be rather very resilient but since seventies there are continuous discussions on a changeover and systemic improvements. Reserves of other states and monetary liquidity still depends on U.S. deficits - Itself a multilateral issue. Other possibilities like SDR have proven to be just a dead end, the complementary reserve asset is not to become major part of asset portfolios. The wider Triffin dilema is well present and still valid. It is to be seen if a shared responsibility in Multi polar multi reserve IMS would bring pareto-efficient solution of countries willing to share the burden. I do share thoughts, allegory of Tommaso Padoa-Schioppa on inventing a flying object, that inventing a fully aeroplane is another issue.
The system is evolving, it has never stopped nor started. The ascent of first truly modern currency the € brought gradually the end of the chronic dollar inflation exports. These famous words of Nixon-era US Treasury secretary John Connally "The dollar is our currency but your problem" are now in reverse. The move to Bipolarity (€-$) is slowly enforcing US fiscal discipline. The Exorbitant privilege becomes Exorbitant burden. The biggest bull market in government bonds is at its end, while interest rates have fallen in defence of the system. Lifting them too fast now could bring the whole system down. International cooperation has created safeguards, institutions like IMF changed its modus-operandi, new were created, like for example the Financial Stability Board (FSB), or regional Asian AIIB.
Many economists missed the 2002 Willem Frederik „Wim“ Duisenberg Aachen acceptance speech and do not understand its implications:
“The euro, probably more than any other currency, represents the mutual confidence at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.”
The Euro is simply irreversible. There are issues with fiscal rather than in monetary plane. Another issue many confuse. The Euro area may be seen not as Mundel´s optimal currency area but BoP surpluses are no more recycled into US Treasuries and US debt instruments but into deficit of close economic partners who need to implement structural reforms until then Target2 imbalances will still be with us.
The system is evolving. The end of 2014 experienced the change in the mode for oil exporters when financial intermediaries are loosing pricing power and "high volume" becomes again the predominant mode rather than the maximization of profit based on high price. The market cap of oil market experiences a drop from 2,5T $ to about 1,2T $. The global FX activity peaked at the same time. The whole energy complex went down, commodities bubble naturally came down as well as energy is often a major part of commodity direct expenses. Not surprisingly central bank forex reserves peaked in the same time as well. Central banks became providers of liquidity expanding their balance sheet and monetary base. Oil producers return to pre 1971 "floating dollar" of no shortages era where long term strategy with about 10% readily available reserves in case of disruptions are readily available instead of just-in-time deliveries as in volatile post Nixon world and they have now changed their dollar pegs due to new currency regime to floating.
€ and $ together represent over 40% of the world economy and China´s Renmimbi about 14+%. Multi polarity grows. Currency area-wise, the Euro area is growing while the USD currency area camp is shrinking on the background of China creating slowly its own currency area. The Euro area has both accounts positive, capital and balance of payment (BoP), invests outside and it simply exports more stuff than it imports and given the fall in energy prices, it implies improvement of Europe´s competitiveness as it is a net importer of energy. The opposite of what happened to Italy during the Oil shocks (artificial 400% increase of oil price).
Rules of the game are changing on the background of new economic system emerging. It is the surplus economies who direct the shape of monetary system. But in interdependent global system the win-win option is cooperation of debtors and surplus economies to bring inefficiency of surpluses and deficits with too high cost of holding reserves. Addressing the issue from int. reserves focus point of view the solution would be one world currency which is politically not reachable. Other more workable solution is fully functional floating rate world not requiring additional reserves but pure such system is just hypothetical. The world may even experience next gold fever would main reserve holders find workable solution for inherent undervaluation and two tier market, so this old asset may still be considered to bring IMS improvement. There are trends to be followed. One such is that all surplus economies EU, China, Oil exporters are located on EuroAsia continent while the system is underwritten by biggest debtor the US which lost its primacy as a major economical power.
In other words monetary affairs is after 50 years of dormant hibernation slowly becoming very interesting topic.
Now we watch together!                      

Friday, October 14, 2016

The French Factor in U.S. Foreign Policy during the Nixon-Pompidou Period, 1969–1974

by Marc Trachtenberg

"...The crisis, though long expected, came to a head in mid-1971. The new secretary of the treasury, John Connally, laid out the policy in May. The crisis would be allowed to develop “without action or strong intervention by the U.S.” At an appropriate time, the gold window would be closed, and trade restrictions would be imposed. This would lead, at least for the time being, to a system of floating rates. The main goal was to get the surplus countries to revalue their currencies, but the United States would make clear—both for bargaining purposes and as a fallback position if revaluation negotiations failed—that it could live indefinitely with the floating rate system.35 Nixon approved this course of action and wanted to “move on the problem,” not “just wait for it to hit us again.”36 The new measures were announced on 15 August. The gold window was closed, a border tax was imposed. Nixon had gone on the offensive. The tone of U.S. policy in this area was nationalistic. The emphasis was still on getting the Europeans and the Japanese to accept a substantial realignment of exchange rates, but the goal of systemic change had not disappeared entirely. According to Shultz, who was in a position to know, the 15 August package “was designed to be a signal that the United States was seeking a fundamental change not only in existing exchange rates but also in the monetary system itself.”37 Shultz’s influence at this time was on the rise. By late 1971, Nixon had evidently come to share the Shultz view that a major structural reform was needed and that it would be a mistake to go back to the “old system of parities, but with different exchange rates.”38 This was probably why the question of a devaluation of the dollar in terms of its gold price was now so important. If the price of the dollar could be set in terms of gold, then why should all the exchange rates not be set by international agreement? That was the old system, and the basic goal now for Shultz and, increasingly, for Nixon, was to move on to something better. But Connally, who was being criticized for his rough tactics, was under pressure to settle, and he in effect offered to devalue the dollar as part of a rate realignment package.39 Nixon, who had made clear he did not favor devaluation, was angry.40 But the Connally offer could not be rescinded. A series of negotiations between the West Germans and the French; then between Nixon, Kissinger, and Pompidou in the Azores; and, ªnally, in late December 1971 between all the major trading nations at the Smithsonian Institution in Washington—followed in rapid order, leading to an agreement that set new parities but did not restore convertibility. The United States, however, did little to “defend” the new rates.41 Shultz had taken over from Connally as secretary of the treasury in early 1972, and the choice not to defend the rates was in line with Shultz’s basic approach to the problem. His goals were more ambitious than Connally’s had been. He wanted a fundamentally new system in which the market would play the central role in setting exchange rates. But he was no Texas cowboy. His methods were subtle and indirect. He thought of himself as a strategist who sought to “understand the constellation of forces present in a situation” and tried to arrange them so that they pointed “toward a desirable result.” The aim was not to dictate the terms of a settlement but “to get the right process going” and allow things to take their course.42 Shultz’s style was thus not to force his views directly on other people. He was a “conciliator and consensus builder” and could “work with almost inhuman patience to bring a group into agreement upon a decision that all could support, at times submerging his own preferences.”43 The most striking example of this was his willingness in mid-1972 to accept a “par value system supported by official convertibility of dollar balances,” provided the burden of adjustment was shared equally by both surplus and deficit countries.44 A plan of that sort (which, however, would also allow countries to “float their currencies”) was announced in September 1972.45 The plan was well received because it showed that the U.S. government was serious about reform. For Shultz, however, a negotiation based on this kind of plan was not the only way to bring a new system into being. For him, the road to reform had two lanes, “one of negotiations and the other of reality. A conclusion would be reached only when these two lanes merged and the formal system and the system in actual practice came together.”46 A system of floating exchange rates came into being de facto with the collapse of the Smithsonian agreement in early 1973. The two lanes converged when the reality of the floating rate system was recognized by the Jamaica agreement of January 1976..."

35. Treasury Paper, 8 May 1971, in FRUS, 1969–1976, Vol. 3, pp. 423–427, esp. 425. 36. Huntsman to Connally, 8 June 1971, in FRUS, 1969–1976, Vol. 3, p. 443. The Nixon tapes provide some extraordinary insights into U.S. policymaking at this point. Some key passages were transcribed and presented in Luke Nichter, “Richard Nixon and Europe: Confrontation and Cooperation, 1969–1974,” Ph.D. Diss., Bowling Green State University, 2008, ch. 3. 37. Shultz and Dam, Economic Policy, p. 115. 38. Editorial Note, in FRUS, 1969–1976, Vol. 3, pp. 521–522. See also a letter of 8 September 1971 to Under Secretary of the Treasury for Monetary Affairs Paul Volcker from Shultz’s assistant director, Kenneth Dam (he and Shultz later wrote a book together), cited in FRUS, 1969–1976, Vol. 3, 179 n. 1, and warning (in the editor’s paraphrase) that “focusing on quantitative goals before agreeing on the type of international monetary system the administration wanted might constrain long-term options.” See also Nixon-Kissinger Telephone Conversation, 28 October 1971, in Kissinger Telephone Conversations Collection, DNSA/KA06727.

"So the whole point of an interventionist policy in this area was not to help the Europeans with their monetary problems, but to keep the Europeans from coming together as a bloc. The idea was that the United States might be able to achieve that goal by selectively intervening on a country-by-country basis. U.S. officials took for granted that they could not oppose the Europeans head on: “We couldn’t bust the common float without getting into a hell of a political fight,” Kissinger said. The United States had to do what it could “to prevent a united European position without showing our hand.” He emphasized that this policy was not based on an assessment of U.S. economic interests: his objection to what the Europeans wanted to do “was entirely political.” He had learned from intelligence reports that all of the administration’s enemies in the West German cabinet “were for the European solution,” a disclosure that pretty much decided the issue for him.76 A year later, at a time when U.S. problems with Europe were coming to a head, he laid out his thinking on the issue in somewhat greater detail. “We are not,” he said, “opposed to a French attempt to strengthen the unity of Europe if the context of that unity is not organically directed against us. So I am not offended by the ºoat idea as such, or by common institutions. If, however, it is linked to the sort of thing that is inherent in the Arab initiative [i.e., the Europeans’ plan at that point for a “dialogue” with the Arabs, which Kissinger viewed as a hostile move], as it seems to be, then we have a massive problem. Then we have the problem that we have got to break it up now.”77"

74. Nixon-Kissinger-Shultz Meeting, 3 March 1973, Tape Transcript, in FRUS, 1969–1976, Vol. 31, p. 79. 75. Brandt to Nixon, 2 March 1973, in FRUS, 1969–1976, Vol. 31, p. 49; and Nixon to Brandt, 3 March 1973, in FRUS, 1969–1976, Vol. 31, p. 92. 76. Kissinger-Simon Telephone Conversation, 14 March 1973, in DNSA/KA09752; and KissingerSimon Telephone Conversation, 15 March 1973, in DNSA/KA09779. Extracts were also published in FRUS, 1969–1976, Vol. 31, pp. 123, 126. The following month another intelligence report about Brandt was circulated to top U.S. ofªcials. “Apparently,” Federal Reserve chief Arthur Burns wrote in his diary on 3 April 1973 that “we know everything that goes on at German cabinet meetings.” Arthur Burns Journal II, p. 60, in FDPL. 77. Secretary’s Staff Meeting, 22 March 1974 (dated 26 March), p. 50, in DNSA/KT01079. Note also a comment Kissinger made in a 6 March 1974 meeting with Secretary of Defense James Schlesinger: “I am convinced we must break up the EC. The French are determined to unify them all against the United States.” See DMPC:Nixon/FDPL.


Thursday, September 15, 2016

On oil in ground

"Controlled Middle East oil, it would control the world. This oil represents 65 percent of world oil reserves. Therefore, America believes if it squashed Iraq, it would control the oil of the Middle East and consequently hold the oil in its hands [and] fix its price the way it likes."


An earlier report:

Keeping Iraq's Oil In the Ground

Did the U.S. invade Iraq to tap its oil reserves or to make sure they stayed under the sand?

"Did Dick Cheney send us in to seize the last dwindling supplies? Unlikely. Our world's petroleum reserves have doubled in just twenty-five years -- and it is in Shell's and the rest of the industry's interest that this doubling doesn't happen again. The neo-cons were hell-bent on raising Iraq's oil production. Big Oil's interest was in suppressing production, that is, keeping Iraq to its OPEC quota or less. This raises the question, did the petroleum industry, which had a direct, if hidden, hand, in promoting invasion, cheerlead for a takeover of Iraq to prevent overproduction?

It wouldn't be the first time. If oil is what we're looking for, there are, indeed, extra helpings in Iraq. On paper, Iraq, at 112 billion proven barrels, has the second largest reserves in OPEC after Saudi Arabia. That does not make Saudi Arabia happy. Even more important is that Iraq has fewer than three thousand operating wells... compared to one million in Texas..."

Saturday, September 3, 2016

DG - Negative Rates and Seigniorage: Turning the central bank business model upside down? The special case of the ECB

Author: Daniel Gros
Series: CEPS Policy Brief No. 344      No of pp: 7
"Negative rates have invalidated the normal business model of central banks, which consists of issuing zero-interest bearing cash as liabilities and earning a return on their assets (the resulting profits are called “seigniorage”). But many central banks are now earning a negative rate on their assets. Seigniorage, in fact, might now become negative in the euro area and in Japan.
Bond purchasing programmes (called usually QE for quantitative easing) offer central banks at least temporary profit opportunities since they can issue liabilities at lower rates than the long-term bonds they acquire. The resulting profits should be regarded in the same way as those of investment banks. For the time being, central banks are making large profits on their investment banking activities, but little in terms of traditional seigniorage.
The QE programme of the European Central Bank does not increase its seigniorage revenues, because 80% of the euro area’s sovereign bond purchase programme is done by the national central banks on their own accounts.
The policy implication of this assessment is that the seigniorage income of the ECB will be much smaller than many assume and one should thus not count on it as a source for any euro-area projects."

Source -

Thursday, August 18, 2016

FRB - AG - Remarks by Chairman Alan Greenspan - Currency reserves and debt

Remarks by Chairman Alan GreenspanCurrency reserves and debt

Before the World Bank Conference 

on Recent Trends in Reserves Management, Washington, D.C.

April 29, 1999

One way to address the issue of the management of foreign exchange reserves is to
start with an economic system in which no reserves are required. There are two.
The first is the obvious case of a single world currency.
The second is a more useful starting point: a fully functioning, fully adhered to,
floating rate world.

All requirements for foreign exchange in this idealized, I should say, hypothetical,
system could be met in real time in the marketplace at whatever exchange rate prevails.
No foreign exchange reserves would be needed.

If markets are functioning effectively, exchange rates are merely another price
to which decisionmakers--both public and private--need respond.
Risk-adjusted competitive rates of return on capital in all currencies would converge,
and an optimized distribution of goods and services enhancing all nations' standard
of living would evolve.

Only liquid reserves denominated in domestic currency would be required by public
and private market participants. And in the case of a central bank of a fiat currency regime,
such reserves can be created without limit.

But, clearly, the real world is not perceived to work that way..

Read in full here ->


Wednesday, August 17, 2016

OECD - Crisis Management in the International Monetary and Financial System

Crisis Management in the International Monetary and Financial System

OECD Working Party 3 (1961-1979)

by Kazuhiko YAGO

"The postwar international financial system went along with several “forums” of decision making, official as well as unofficial. Starting with the Bretton Woods Institutions, namely the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD, the World Bank), bi-lateral negotiations between the United States and the European countries took part in the “forum” for reconstruction; the Bank for International Settlements (BIS) and the European Payments Union (EPU) began to play important roles in the 1950s; several “Groups”, from the G10, C20 to the G5, G7, faced the reform of the Bretton Woods System. Of the above “forums”, one of the most enigmatic bodies was the Working Party 3 (WP3) of the Organisation for Economic Cooperation and Development (OECD). Set up in 1961 as a mere technical working group for the Economic Policy Committee (EPC) of the OECD, the WP3 soon became an important meeting place to discuss the overall strategies of the world economy. Chaired by Emile van Lennep (later Secretary General of the OECD), the WP3 brought together not only the brightest agents of the OECD member countries, but also representatives of the BIS and the IMF..."


Monday, July 25, 2016

Oldies 1969 goldies - 115. Talking Paper Prepared in the Department of the Treasury

VG/LIM/69-17 (Corr.)
February-March 1969
International Monetary System (for use in United Kingdom, Germany, Belgium, Italy; see separate talking paper for France)
1. We are both interested in improving the international monetary system.
2. In this context, it is essential to bring inflation under control in the United States. This is a major goal of my Administration.
3. We have been looking in a preliminary way at a number of proposals to see whether there are responsible improvements that can be made in the system. On most of these we have no final view. I would be glad to hear what is in your mind.
4. We have decided that an early and substantial activation of the Special Drawing Rights would be extremely useful. This would be a demonstration to the exchange and gold markets that we “mean business”, as we say in the United States. A hesitant approach in timing or magnitude would encourage those who profit from uncertainty. It would leave individual monetary authorities under political pressure to build up their gold reserves to an unnecessary and undesirable degree. I want to make clear that we do not regard activation of Special Drawing Rights as absolving us from the fiscal and monetary discipline needed to improve our balance of payments position.
5. (If the discussion proceeds to more specific questions as to where and how many Special Drawing Rights we would like to see created, the following might be added.) I understand that during the negotiations, illustrative figures were mentioned for activation at the rate of about $1.5-$2 billion a year for the initial period of five years. My advisers say it would be the part of wisdom to begin with a substantially [Page 304]higher figure, particularly in 1969 and 1970. Ideally we would like to see activation before August, to be announced at the end of September at the IMF Annual Meeting.
6. There is a second problem that concerns us. The process of international adjustment of balances of payments has become too dependent upon selective controls and restraints. We would like to stop the drift in this direction and search for other methods of reducing excessive and persistent deficits and surpluses.
7. We owe it to ourselves to explore every possible new proposal for improving the system, including those under discussion in academic circles. We must be careful to do so without upsetting confidence.
8. Whatever changes we might encourage in the monetary system, none will avoid periodic crises affecting individual currencies. As a result, we will continue to need intensive financial cooperation.
8a. (Only for Germany and Italy) We appreciate the efforts made by your country to channel excessive inflows of capital out of reserves and into international monetary and capital markets, as well as your participation in financial assistance for countries facing exchange difficulties.
9. I share the view that, unless we have reached a closer meeting of minds, it would be dangerous to undertake a formal international monetary conference.
10. Finally, you should know that I am not going to seek an answer to these problems through a change in the monetary price of gold.2 I do not see the need or reason for such action.
Final Note
11. If any interest is expressed in pursuing bilateral discussions with the United States, you might say that Secretary Kennedy would be [Page 305]glad to meet with representatives of the country concerned in Washington.
  1. Source: Washington National Records Center, Department of the Treasury,Volcker Group Masters: FRC 56 86 30, VG/LIM/1-VG/LIM/30. Confidential; Limdis. An attached cover note from Willis to members of the VolckerGroup, dated February 19, indicates that page 1 was a corrected copy. A February 17 draft, labeled “2nd draft,” indicates Willis prepared it. (Ibid., Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Current Problems and Contingency Planning 11/68-4/69) President Nixontraveled to Belgium, the United Kingdom, the Federal Republic of Germany, Italy, and France February 23-March 2. See Document 116 for a Talking Paper prepared for the President's use in France.
  2. On February 20 Chairman of the Council of Economic Advisers McCrackensent President Nixon a memorandum regarding De Gaulle and the price of gold. McCracken saw no need for the President to respond directly to an anticipated request, “on a metaphysical level,” to increase the price of gold but to emphasize “our interest in a better monetary system, and our concern about growing controls over trade and capital movements.”McCracken saw no advantage to increasing the gold price but concluded: “It is equally important not to allow the French, or anyone else, to see any signs of flexibility on gold except in the context of our general position. If we are to be cooperative on gold, there must be a total package that makes it worth our while.” (National Archives, Nixon Presidential Materials, NSCFiles, President's Trip Files, Box 442, Feb-March 69 Trip to Europe) On February 22 Arthur Burns also sent the President a memorandum on gold.Burns wrote: “you have been correctly advised to show no interest on our part in an increase in the price of gold… . By all means let us try to keep the official price as it is, but let us also watch carefully the costs that we may incur through such a policy. And whatever else we may do, let us not develop any romantic ideas about a fluctuating exchange rate: there is too much history that tells us that a fluctuating exchange rate, besides causing a serious shrinkage of trade, is also apt to give rise to international political turmoil.” (Ibid.

Wednesday, June 1, 2016

Two esseys by Jude Wanniski

1/ It's a Big World -December 1, 1998

"...The idea that mankind is cooking the earth by burning hydrocarbons makes sense when you hear an advocate explain it. When I heard opponents oppose it, I found they made sense too. If there is a political draw, the tendency is to split the difference. But I was not happy with this outcome and again went to Easterbrook, who covered the environment for Newsweek. I found in his book, A Moment on the Earth, that he comes down about 90% for the skeptics. I then decided to make some inquiries of my own. I began with ...

...That seemed like a lot of hydrocarbons. Holy smokes, billions of barrels!!! But I wanted to imagine it in one place. How much area would it cover if it were a giant pool of petroleum? After some simple arithmetic, I realized the pool was not as big as I thought it might be, and would not put a dent in any of the Great Lakes, I wondered how many Lake Tahoes it would fill. We called Tahoe and were quickly told they had a precise estimate of the number of barrels of water in that alpine lake on the Nevada/California border. Eleanor, can you believe 946 billion barrels? In other words, if you drained all the water out of Tahoe and filled it with all the oil ever consumer by mankind, it would not quite fill ONE FIFTH of the cavity!..." 


2/ One Energy Crisis After Another - December 8, 2004

"...The reason there were no shortages prior to the “floating dollar” that we are still living with is that the energy industry knew that if the dollar/price of gold was $35 oz today and would be $35 oz ten years from now, the price of oil at $2.50 bbl today would be in the ballpark of $2.50 ten years from now. The oil market, without having meetings to regulate supply in an attempt to fix the oil price, would automatically operate in a way that always kept a 10% surplus of an oil delivery system ready to go if there was an unexpected disruption… a worker’s strike, a hurricane, a war, tensions in the Middle East that looked like war, etc. There was never, ever any discussion about the United States having a “strategic petroleum reserve” on hand to meet such contingencies. If there was a disruption over here, our private oil companies could easily switch to the buffer supplies over there. The price of delivery might increase by a few cents a barrel, but once the crisis passed everything would go back to normal...."


Spiegel 1971 - Karl Blessing interview


Karl Blessing died during his vacation in southern France last week aged 71. He was the president of the Deutsche Bundesbank from 1958 to 1969. The last major interview before his death was granted to SPIEGEL editor Leo Brawand for a nonfiction book, under the title "Where is the German economy heading?" that will be released next autumn in Munich based publisher Kurt Desch.

From the interview we have extracted the following excerpt about inflation:

QUESTION: Mr. Blessing, it is possible to have full employment, price stability and a balance of payments equilibrium at the same time?
BLESSING: This is an idealism that is very beautiful, but not feasible in this world.

QUESTION: Other countries don't take it as seriously with monetary. You know the quote of the "Financial Times" in London, there is always the German hunter Schmidt, who does a false step?
BLESSING: I would assume the wrong step and would correct every time needed by a change in exchange rates, that is how far I am today.

QUESTION: That would ideally mean floating exchange rates or very large bands for exchange rates?
BLESSING: I would not introduce floating exchange rates, but I would ask: When does a balance of payments imbalance occur? If a fundamental imbalance is present, every two or every three years, you have to change the mark currency exchange rate.

QUESTION: What do you think of the Brussels proposals, to get closer to monetary union in Western Europe initially through a coordinated monetary policy for a transitional period from 1971 to 1973, and especially in budgetary policy with a binding coordination rule ?
BLESSING: It will be extremely difficult, a very difficult undertaking, the good Mr. Werner, I know him very well, I often had contact with him, is an idealist. If his plan were possible it would be wonderful. But the conditions are different. How do you want to force a national parliament to make certain things or not to do them?

QUESTION: Exactly, because all that has a domestic political effect
BLESSING: ... internal political effects that can lead to other election results or anything else. How can you do that? The French - the good Giscard d'Estaing is considered a monetarist. He wants to move forward through the currencies in the EEC. But when it comes to give up sovereign rights or to pool, then the French Government does not want to participate. So what is the logic in that. If a wage explosion comes as Italians did in the fall of 1969 or à la France in May 1968, how do you want to have a single currency, a monetary union? This is only possible if all the politicians are willing to waive sovereign rights and to transfer the sovereignty to a headquarters in Brussels.

QUESTION: At a central European central bank?
BLESSING: Yes, if one were to create a European central bank, a Federal Reserve System of Europe, which is autonomous from the governments - and within this system governments would only be able to finance budget deficits to some degree - then you could get it right.

QUESTION: It is to be expected, that the dollar flow to Europe because of the American Chronic payment deficit contributes to our inflation ...
BLESSING: ... it has contributed to a significant extent

QUESTION: ... that inflow could be slowed down through the construction of such a European currency, so to speak, as a counterweight to the dollar.
BLESSING: There is no doubt that we could, if we had really the political will in the EEC, to form a hard currency block whose rates could then fluctuate against the dollar. We could then leave the dollar standard, that we have today. Because in practical terms we a dollar standard.

QUESTION: Yes, sure, and is it not that we - for example, and also you during your time at the Bundesbank and still today - by retaining American US Treasury securities, and large dollar holdings and by not exchanging dollars to gold we substantially support the Americans ...
BLESSING: ... and have supported the Americans. I tell you today that I myself personally feel guilty regarding this question. I should have been more rigorous with America. The dollars that arrived in Germany should simply have been rigorously exchanged to Gold,

QUESTION: With the support of the central banks, the Americans have never come under pressure?
BLESSING: No, they have never come under pressure with their monetary policy. They always made promises: Well, next year it will be different, in the next two years we will get the budget and everything in order, we are strong. They are strong as an economic nation. But they never made it, there was always something else. Then came the Vietnam war, President Johnson and his financial policies, with a 25-billion-dollar budget deficit in one year. All those were reasons for the inflation. I often said to my American colleagues: It's always continues with you, then the story with the troops started.

QUESTION: You mean the threat of the Americans: If you do not support the dollar in this way, we pull the troops back from the Federal Republic?
BLESSING: It was never a verbal threat, but the threat was always there in the background. The former High Commissioner McCloy was once at the German Government and said: Listen, we had a Senate decision and there will be soon a majority that might want to get as back. We have to do something. He called me on a Sunday afternoon at half past three at home and said: "I have to fly back tonight, can we meet?" And I told him. "My dear McCloy, your situation is clear, you have a balance of payments problem and nothing more. You've seen we have been reasonable and have not converted our dollars to gold. I am willing to give you that even in writing for a certain period. Unfortunately the letter I wrote still applies today.


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