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The International Monetary Fund (IMF)
was set up in 1944 by the victorious allied powers at Bretton Woods, N.H. It
was designed to serve as the linchpin of the post World War II international
monetary system based on fixed exchange rates. It was well-understood that
there could be no fixed exchange rate system without a gold anchor. Thus gold
was retained as a bedrock, but multiple credit expansion was permitted, even
encouraged. The U.S. dollar was to be treated as equivalent of gold. This
meant that gold was double-counted in the system. Member countries were
called upon to subscribe their quota of IMF capital in gold, called the first
tranche, which set the limit of each member's line of credit with the IMF
called drawing rights. A second tranche was also available to members in good
standing in case of emergency (read: in case of a run on the central bank).
The system worked tolerably well for
some 25 years. But it was flawed on the strength of double-counting the gold
reserve. Every time a government imposes on the market two different
standards of value to be enforced as equivalent, the market hits back through
the operation of Gresham's Law. The postwar
international monetary system was no exception to this rule. The bad penny
(the dollar) drove the good penny (gold) out of circulation. Gold hoarding by
governments and individuals snowballed. By 1968 the dollar was being dumped
all over the world in anticipation of a dollar devaluation (the favorite bet was the doubling of the statutory price of
gold from $35 to $70 per oz. which was supposed to pacify the market at the
time.) It should be noted that the original IMF Charter provided for the
devaluation of the dollar in terms of gold (with all foreign exchange rates
remaining unchanged) in case of "fundamental disequilibrium".
On August 15, 1971, in a surprise move
President Nixon, instead of devaluing the dollar, defaulted on the obligation
of the U.S. to pay its debt to foreign governments and central banks in gold
at a fixed statutory rate of exchange. In turning the dollar into an
out-and-out fiat currency Nixon ignored monetary history and logic. The
dollar became vulnerable to open-ended debasement and depreciation. Nixon
also ignored moral considerations, as well as the long-standing commitment of
the U.S. enshrined in a number of international treaties, including the IMF
Charter, to keep the dollar convertible into gold on demand. Reneging on this
solemn commitment was in shocking disregard for international rights and
obligations. It released the genie of world-wide inflation from the bottle,
never to be able to put it back. Worse still, interest rates were
destabilized world-wide, a development without precedent. Like the wrecker's
ball, swinging interest rates were to demolish productive capital. The U.S.
and world economy were now sailing in uncharted waters with no compass, no
rudder, and no anchor; while the sea was growing stormy.
Nixon was badly advised. His mentor was
Professor Milton Friedman, the high priest of monetarism, a man who would
completely ignore things like good faith behind promises and the honor of governments in signing international treaties,
in a single-minded pursuit of his obsession with the Quantity Theory of
Money. This theory teaches, falsely, that the value of the dollar can be
maintained by a "quantity-rule" in the face of chicanery, default,
and reneging on promises, by means of keeping the annual rate of increase in
the stock of "high-powered money" at a moderate 3 percent. Apart
from the fact that it may not be possible to fix the rate at 3 percent
because of the tendency of debt- accumulation to accelerate under the regime
of irredeemable currency, the idea that the value of dishonored
promises can be maintained through the stratagem of restricting their
quantity is preposterous. If it were true, poverty could be abolished by
training the poor to ration lies.
Time has proved other theories of
Friedman wrong, too. His theory of equilibrating the balance of trade through
the floating exchange rate mechanism is utterly wrong. Friedman asserted that
there is such a mechanism which works analogously to that of the gold
standard. According to him, if the foreign exchange value of the dollar
falls, that will automatically decrease imports to the U.S. as well as
increase exports from the U.S., and the favorable
balance of trade will soon stop the fall of the dollar. Alas, that's not what
has happened. The exchange value of the dollar has kept falling ever since
1971, with the greatest part of the fall still in store, and the only
observable increase in exports being the export of the well-paid industrial
jobs due to outsourcing. Entire industries such as steel-making and
TV-manufacturing have been closed down, with auto-making likely to be the
next extinct industry in the U.S. The ordeal of American manufacturing is the
handiwork of Friedman. The fact is that the value of dishonored
promises cannot be artificially upheld by a "quantity rule".
Predictably, the floating dollar turned out to be a sinking
dollar, an insurmountable handicap on producers trying to compete in the
world market. Their terms of trade is deteriorating
while that of their competition is improving. Incredibly, mainstream
economists and financial journalists still find it possible to treat the
suggestion with respect that the weak dollar is a prop to the export
industry, even after the devastation of America's export industry through the
disastrous experiment with the falling dollar.
The IMF as the anti-gold war-horse in
the Treasury's stable
In 1971 the question arose what to do
with the IMF which had been conceived as the antithesis of floating. With the
advent of the New Brave World of flexible exchange rates the IMF lost its raison
d'etre as the mainstay of the fixed exchange
regime. The obvious course of action would have been to dismantle it and to
return the subscribed quota of capital, gold, to the rightful owners, the
member countries. However, it is easier to create a bureaucracy than it is to
dismantle it.
Policymakers at the U.S. Treasury (which
still controlled the world's largest hoard of gold ever assembled) were
girding up their loins to keep the gold price in check. The demand for gold
was increasing by leaps and bounds after the American default and there was a
clear and distinct danger that the dollar would in short order go the way of
the Assignat of 1790 France and the Reichsmark of 1923 Germany. Policymakers thought that it
would be a shame to dissipate the IMF gold by returning it to members. The
IMF gold could come handy in suppressing the price of gold. After all, the
IMF gold hoard was the second largest ever assembled in the world and the
threat of dumping it could be formidable.
The U.S. Treasury started dropping broad
hints that the scrap metal at the IMF should be auctioned off without further
ado. Soon it became clear that members did not have a stomach for the
Treasury's plan. They argued that the IMF gold belonged to them and was not
available, even for such a noble effort as to save the face of the dollar.
The dispute was not allowed to continue in public and a compromise was
reached. Member countries agreed not to press their claim to ownership.
Instead, they agreed to extending the life of the IMF under a modified
Charter, against U.S. commitment to auction Treasury gold instead of IMF gold,
after a one-shot deal of auctioning off a token amount of the latter with
part of the proceeds being restituted to members.
By the new Charter members had the right to sell gold to the IMF at the
official price of $42.22 per oz, but they were forbidden to buy gold in the
market at prices higher than the official price "at which the U.S.
Treasury and the IMF was committed not to sell gold". An
exception was made in the case of South Africa, a pariah member of the IMF,
which was deprived of its right to sell gold to the IMF at the official
price. Thus South Africa was forced to dispose of its huge gold production in
the market. This was done to scare the wit out of gold bugs threatening them
with the prospect that the gold price could fall below $42.22, or even below
$35. Needless to say that this was an empty threat based on the idiotic
notion that the price of gold could permanently fall below $35. The financial
annals fail to show a single instance in which the dishonored
paper of a banker went to a premium, instead of a discount!
Apparently, the compromise is still in
effect. Treasury-inspired hints are occasionally dropped about future IMF
gold sales trying to placate the stirring gold market, but no actual sales
are conducted. At one point the Clinton administration asked Congress to
approve an IMF gold sale, but it was voted down. In vain was the proposed
sale couched in the language of a grant to developing countries, an odd
combination of banking and charity. The puerile idea
that "barren" gold reserves ought to be replaced by
"productive" interest-bearing dollar reserves has been floated from
time-to-time, but did not fly, in view of a negative return to capital after
inflation is taken into account.
The old Treasury war horse of looming
IMF gold sales is trotted out from time to time more as a scare-tactic to
threaten gold bugs than a serious proposal. A public showdown with the
membership over the ownership claim is to be avoided at all cost. The latest
episode was the announcement in early February, 2008, that
the IMF plans to sell gold from its reserves. Another announcement from the
G-7 meeting in Tokyo confirmed that the sale may come as early as April. It
was not mentioned where the authority to sell would come from. These
announcements are hardly credible. The established pattern shows that the IMF
is maintained strictly as a paper tiger to prey on jittery gold bugs.
However, while the G-7 can press for the restitution of gold, the minority of
members have a veto power on the G-7 proposal to sell it. As the gold price
climbs, selling IMF gold becomes less and less appealing to members. It
appears that the U.S. Treasury is again flagging a dead horse for its
propaganda value. It is time again to plant fear into the hearts of the gold
bugs. But neither the probability that the sale plan will ever be approved,
nor the actual size of the proposed sale (13 million ounces worth about $12
billion) justifies fears that the price of gold will be shoved back down to
the $500 level by these announcements, as suggested by Mike Bolser in an interview published in the World Net
Daily.
When on Monday, February 25, the Bush
administration announced that it would give approval to the plan "to
sell gold bullion in order to stabilize the IMF's shaky finances", the knee-jerk reaction of the market was to push down
the gold price by $20. However, the lost ground was more than recovered in
the space of two days' trading. It is also revealing that the Bush
administration made its support conditional upon down-sizing the functionless
IMF, such as reducing the number of its executive board members from 24 to
20, and its $900 million annual budget by more than 10 percent to $ 800
million. The IMF is sinking further into limbo as its lending activities keep
shrinking. Many of its former clients have repaid their debts and spurned IMF
offers of further aggressive tutelage as they found IMF meddling in their
internal affairs intolerable.
Quite clearly, the only reason the
expensive IMF apparatus is maintained is the dubious proposal that gold bugs
can be kept in check forever with threatened periodic gold sales, even if
these sales never materialize. It is hoped that after a decent period of time
the threat can be repeated, will be believed, gold bugs will retreat and,
above all, the gold hoard will remain intact and could be used again and
again for intimidation purposes.
On the subject of Treasury gold sales,
they seem to be blocked by the top brass of the U.S. military, who know
something about the sinews of war. They are fully backed by remarks uttered
by Alan Greenspan while he was still in charge at the Fed reminding the
forgetful that Nazi Germany could secure war materiel from abroad only
against payment in gold after fortune has forsaken its armies in the field.
The U.S. Treasury is at the end of the
rope of its anti-gold crusade. It painted itself into a corner: whatever it
does will help gold and hurt the dollar. Its only way to escape from the trap
of its own making is to come clean and admit the foolishness of its gold policies
for the past 35 years, and open the U.S. Mint to the unlimited and free
coinage of gold and silver on customer account. It would be a coup that would
forestall the challengers of the U.S. monetary hegemony, the Russians and the
Chinese among others, provided that it was pulled
off before they did it. In this way the U.S. could retain its monetary
leadership in the world. Time also seems to be propitious in this election
leap-year when Congressman Ron Paul offers a sound and convincing blueprint
to the electorate about fiscal and monetary reform.
Still, I am not holding my breath. There
does not seem to exist a grain of intelligence or
wisdom in the Treasury how to meet the current financial and banking crisis,
not even to the extent of keeping a contingency plan on file for the
mobilization of Treasury and IMF gold in a reconstruction of the
international monetary system on the basis of fixed exchange rates.
Friedman's floating exchange rate system
has served the U.S. and the world badly. It's been an unmitigated disaster. A
return to the regime of fixed exchange rates should be considered most
seriously, in order to fend off the collapse of the international monetary
and payments system. The idea is resisted by a reactionary alliance between
the policymakers at the Treasury, the Fed, and mainstream economists in
academia, as such a plan would put gold back right into the center of the universe. These reactionaries have vested
interest to hang on to their usurped power, enriching themselves and their
friends in the process at the expense of the public at large.
However, there is silver lining to the
IMF gold saga. It does have some effect in slowing down the meteoric rise in
the price of gold. In my opinion this effect is positive. A sudden death of
the dollar is not desired by any serious observer, nor is it in the interest
of the savers and producers of the world. A more controlled decline may spare
many innocent people from utmost economic pain, and give a chance to
latecomers to the gold party to gear up for the ultimate showdown.
And, who knows, it may give a little
extra time to policymakers at the Treasury to wake up and prepare a
contingency plan at the eleventh hour, to open the U.S. Mint to gold and
silver, the only way to avert the coming of Armageddon.
References:
A.E. Fekete,
The Anti-Gold Gospel According to Kaletsky, www.professorfekete.com
A.E. Fekete, The Anti-Gold Gospel According to
Smith, Appendix: What Would Happen If We Adopted the Gold Standard? by Barron
Young Smith, www.professorfekete.com
A.E. Fekete, Fiat Currency, the Destroyer of
Capital, www.professorfekete.com
GOLD STANDARD UNIVERSITY LIVE
Session Three has just
concluded in Dallas, Texas. The subject of the 13-lecture course was Adam
Smith's Real Bills Doctrine and Its Relevance Today. (Monetary Economics
102). The titles of the follow-up conferences were: 1. The Economics of
Gold Mining and 2. Gold Profits in Troubled Times: Putting the Basis
to Good Use. Course material will soon be available in print and in DVD
format to all interested parties.
Session Four is planned
to take place in Szombathely, Hungary (at the Martineum
Academy where the first two sessions were held). The subject of the
13-lecture course is The Bond Market and the Market Process Determining
the Rate of Interest (Monetary Economics 201). Tentative date: June
27-30. For more information please contact GSUL@t-online.hu. Further announcements will be made at the website www.professorfekete.com.
Antal E. Fekete
Professor,
Intermountain Institute of Science and Applied Mathematics, Missoula, MT
59806, U.S.A.
Gold Standard University
aefekete@hotmail.com
Professor Antal E. Fekete was born and educated in Hungary. He immigrated to
Canada in 1956. In
addition to teaching in Canada, he worked in the Washington DC office of
Congressman W. E. Dannemeyer for five years on
monetary and fiscal reform till 1990. He taught as visiting professor of
economics at the Francisco Marroquin University in
Guatemala City in 1996. Since 2001 he has been consulting professor at Sapientia University, Cluj-Napoca, Romania. In 1996
Professor Fekete won the first prize in the
International Currency Essay contest sponsored by Bank Lips Ltd. of
Switzerland. He also runs the Gold Standard
University.
DISCLAIMER AND CONFLICTS
DISCLAIMER AND CONFLICTS
THE PUBLICATION OF THIS LETTER IS FOR YOUR INFORMATION AND AMUSEMENT ONLY.
THE AUTHOR IS NOT SOLICITING ANY ACTION BASED UPON IT, NOR IS HE SUGGESTING
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SOURCES BELIEVED TO BE RELIABLE, BUT THE AUTHOR MAKES NO REPRESENTATION THAT
IT IS COMPLETE OR ERROR-FREE, AND IT SHOULD NOT BE RELIED UPON AS SUCH. IT IS
TO BE TAKEN AS THE AUTHORS OPINION AS SHAPED BY HIS EXPERIENCE, RATHER THAN A
STATEMENT OF FACTS. THE AUTHOR MAY HAVE INVESTMENT POSITIONS, LONG OR SHORT,
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