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Emminger, Otmar

Article — Digitized Version The two-tier system—A permanent solution?

Intereconomics

Suggested Citation: Emminger, Otmar (1968) : The two-tier gold system—A permanent solution?, Intereconomics, ISSN 0020-5346, Verlag Weltarchiv, Hamburg, Vol. 03, Iss. 9, pp. 258-262, http://dx.doi.org/10.1007/BF02930024

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Recovery of the Monetary System

The Sterling , the dollar crisis and the gold speculation provoked a so far unique activity of the monetary authorities in recent months. The most important results thereof are the decisions for Special Drawing Rights and the Division of the Gold Price. The dangers for the monetary order have, however, by no means been removed as a result. A shortage of international liquidity still threatens, since the Special Drawing Rights will hardly be introduced before 1969, and it appears that Great Britain has definitely relinquished its role as a country following the most recent taking of a new credit. A joint currency of the EEC countries would have a good chance to assume the functions of a reserve currency.

The Two-Tier Gold System-A Permanent Solution? by Dr Otmar Emminger, Frankfurt (Main)

In March 1968, under the pressure market price from rising above ed States government in the Wash- of the gold crisis which followed $ 35.20 per ounce. At a conference ington communiqu6 of March 17, the devaluation of sterling, the hurriedly convened in Washington 1968. central banks of the seven gold on March t7 the governors of the The market price, which cooperating seven central banks pool members---United States, Unit- now results from the free play of ed Kingdom, Switzerland, Italy, announced their belief "that hence- supply and demand in non-mone- forth officially-held gold should be Germany, Belgium and the Nether- tary transactions, has fluctuated used only to effect transfers among lands--ceased to intervene in the .since the middle of March between monetary authorities" and they London gold market. From Novem- $37 and somewhat more than therefore decided "no longer to ber 1967 to March 1968 they had $42 per ounce, if the no longer supply gold to the London gold sold more than $ 3 billion worth entirely free gold market in Paris market or any other gold market". of monetary gold to this market, is .disregarded ~and only the major By this decision, the policy of in order to prevent the London markets in London and Zurich are pegging the London market price taken into account. For some time of gold which had been started in the price seemed to settle at AUTHORS 1961 by the then eight gold pool around ~ 41, later at around $ 39; central banks, was discontinued towards the middle of July it had Dr Otmar Emminger, and the free market price was temporarily slipped back to $ 38 Member of the Board of separated from the fixed gold price and even somewhat below. Governors of the Deutsche for monetary transactions. Bundesbank The cessation of The fixed monetary price of $ 35 Dr Wilhelm Hankel, intervention in the gold market, per ounce of gold is the official Director of the Department together with the ensuing price parity of the dollar and the basis "Money and Credit" in the rise, closed off the almost riskless of all the other currency parities Federal Ministry for Eco- "one-way street for gold specula- in the International Monetary nomic Affairs tors"; this has very quickly put a Fund. It is the price at which the damper on the speculative gold Dr h c Alwin Miinchmeyer, American Treasury "buys and sells rush. Thus it was mostly greeted President of the Federal As- gold in transactions with other with relief. The Italian central bank sociation of Priv,ate Banks monetary authorities"; this was in its latest Annual Report pub- expressly re-affirmed by the Unit- lished in May 1968 makes the point

258 INTERECONOMICS, No. 9, 1968 that from the monetary point of always exist the possibility of new the members of the Group of Ten view the London gold pool had monetary or political crises ac- arrd of Switzerland. not performed .any useful function companied by a revival of large- [] Third, after such a change so that its suspension had become scale speculative gold hoarding. in the price of gold it would be overdue. Other quarters, however, Therefore the central banks in difficult to prevent, alter a certain mainly South Africa and other their Washington communiqu~ of interval, a resurgence of gold price interested parties, consider the March 1968, rightly rejected any speculation unless the new price separation of the two gold prices future commitment with regard to were so high as to produce an as being a mere "gimmick" which the free gold market. oversupply in the market for a they do not believe will last for very long time ahead. very long. Thus the first question Some people, 'and in particular [] Fourth, altering the gold is: Will the separation of the two the gold lobby, would, of course, parity of the dollar would put the gold prices be only temporary or suggest that a new linking of the United States into a difficult situa- will it be of ,a permanent nature? two gold prices might become tion vis-&-vis the dollar-holding And in this context the more fun- feasible if the official price of gold countries in view of the unequivo- damental question arises: Is the were to be sufficiently increased. cal pledge of its government not setting free of the market price for But how large would such an in- to change the present dollar parity. gold a step forward on the long crease have to be so as to enable the central banks to re-assume the road of gradually demonetising From a monetary point of view, responsibility for a stabilisation of gold and what future role is gold an increase in the price of gold, the free gold price at the new likely to have in the international in view of its unavoidable excess level? It would have to be so monetary system? and its manifold inequities would, ample as to guarantee an over- as a method for creating inter- supply in the commercial gold Return to Price Pegging Unlikely national liquidity, be very much market for an unlimited period, inferior to a cautious end gradual At first many observers were even during periods in which mone- distribution of additional reserve inclined to think that such a two- tary or political crises would again drawing rights adjusted to the tier price system could not be generate ,a large hoarding demand. slowly rising reserve needs of the maintained for very long and that Only under such conditions could world, in the form of Special Draw- natural forces would exert pres- the central 'banks be sure of being ing Rights in the IMF. sures for an eventual re-unification permanent "residual buyers" in the of the two prices. gold market, a,s they used to be The dual nature of gold, which On a closer analysi,s, however, formerly. Only then would their is at the same time a commodity official buying price urrder all cir- the opposite view becomes much subject to speculation and a mone- more plausible. No convincing cumstances determine the gold tary reserve asset, exposes us to reasons can be found why the pres- price in the free market. an obvious dilemma: The mone- ent .dual price system coul~i not tary and the free gold price could be maintained indefinitely. It can Objections Against Increase be permanently re-united only by last as long as the le~ding central in Official Gold Price greatly raising the official as well .as the commercial gold price so as banks have sufficient confidence [] Fir s t, a sudden revaluation to make sure of an oversupply in in the present gold parity of the of the $ 40 billion worth of gold dollar and in the readiness of the presently held in official reserves the free market under all conceiv- US Treasury to convert foreign would create "with a stroke of the able circumstances. On the other hand, however, this would bring official dollar holdings into gold pen" a huge quantity of additional about an excessive rise in the at this parity. On the other hand, reserves and thereby a dangerous a re-unification of the two prices inflationary potential (even if one value of existing official gold .stocks (and private gold hoards as --in the sense that the central attempted to neutralise the coun- well). A re-unification of the two banks again assume responsibility terpart in national currencies creat- gold prices could thus be achieved for pegging the free gold price not ed by such action). Large-scale dis- far from the official price, as they hoarding of gold, probably un- only by artificially distorting the did from 1961 to 1967--seems highly avoidable after a very big increase free gold market a~,d--what is much more important--by a dan- unlikely in the foreseeable future. in the official price of gold, would gerous and inappropriate monetary Indeed, it is hard to imagine any greatly reinforce this inflationary decision as to the global supply of circumstances under which the potential. reserves, central banks would again commit [] Second, the additional in- themselves and their prestige to ternational liquidity created by a In view of the strong objections keeping the free gold price pegged substantial gold price increase against an--unavoidably exceso regardless of the cost involved. would be very inappropriately sive--increase in the price of gold, Even if the commerci,al price of and inequitably distributed over I doubt whether any responsible gold should temporarily drop to the world since about 85 per cent monetary expert would recommend $ 35 or lower--and this can by no of the total monetary gold stock such a move for the sole purpose means be excluded--there would are concentrated in the hands of of eliminating the alleged incon-

INTERECONOMICS, No. 9, 1968 259 sistency of the two-tier gold price reserves when this proved to he price hut rather an acceleration of system. necessary. The example of France the demonetisation of gold, and moreover demonstrates that a that in a way which would run Difficulties Are Surmountable country with high gold reserves counter to the interests of the can "mobilise" them quite easily world economy as a whole and to In comparison with the difficul- by using them as a backing for European interests in particular. ties involved in re-uniting the two foreign balance-of-payments loans. gold prices the difficulties and dan- Whether the present two-tier gers of preserving the present two- T h i r d, some people fear that price system will last or disinte- tier price system seem by far less a large spread between the official grate will therefore depend not on weighty. What do they consist of? and the free gold price might foster the size of the disparity between First, it is feared that a sub- monetary uncertainty 'and distrust. the two gold prices hut rather on stantially higher market price for In fact, the relationship is just the the major central hanks' confidence gold might tempt some monetary reverse: Whenever important coun- in the ability of the United States authorities to sell monetary gold tries are, over extended periods, to defend the present gold parity in the market .and to replace it not capable of maintaining order of the dollar. later on with gold obtained at the in their external accounts and as a lower official price from the US consequence monetary anxieties The Problem of South African Gold Treasury. To prevent this the gold develop, rising private demand for pool countries in their Washington gold and a higher gold price will It is not at all certain that the communiqufi expressly agreed "that he the result. Thus the higher gold free gold price will in future stay henceforth they will not sell gold price is a consequence and symp- substantially above the official to monetary authorities to replace tom, not a cause of the monetary gold price of $ 35, especially if the gold sold in private markets". Most unrest. If, however, the major cur- recent resurgence of confidence in of the other monetary authorities rencies, especially the US dollar, the dollar 'and sterling should gain have in the meantime made known are in a strong position, a spread further strength. If the additional their concurrence with the objec- between the official and the free private demand for gold which up tives of the Washington communi- gold price need not cause any to now has been caused by mone- que. It is difficult to imagine that alarm. In this respect the ex- tary fears should one day cease, central banks will sell monetary perience of the years immediately or should larger quantities of gold gold in the private market if by following World War II is in- come onto the market out of the doing so they will lose access to structive: between 1946 and 1953 huge private gold hoards or out of monetary gold at the official price. the price of gold in the free mar- Russian gold stocks, a sizeable Besides, minor gold leakages aris- kets of the world fluctuated greatly oversupply may emerge in the ing from evasions by smaller coun- and sometimes rose to as much as commercial gold market. At any tries could hardly amount to a $ 50 or above. But as the dollar was rate, under normal conditions the volume which would decisively very strong and in heavy demand, commercial gold market should be affect the overall picture. these fluctuations of the free gold more or less in fundamental equi- price did no harm to the inter- librium provided, however, that Second, it is feared---and national monetary system. all newly-mined gold or at least a these fears were emphasised in the substantial part of it is offered in latest Annual Report of the Bank At any rate, the durability of the this market. Normal demand for for International Settlements (BIS) present two-tier system is much gold, i.e. the requirements of in- --that a wider discrepancy between less dependent on the size of the dustry rand the arts and the tradi- the free and the official gold price spread between the free and the tional hoarding demand from India might "freeze" the go].d stocks of official price of gold than on con- ,and some Arabian and African central l)anks, as these could he fidence in the present gold parity countries, should at present hardly disposed of only at the lower of the dollar. Should this confi- be much more than $1 billion an- official price, and thus lead to an dence be severely impaired, not nually; the annual gold production immobilisation of liquidity that only would speculation on a rise of the western world, however, would be dangerous for the world in the gold price he revived and amounts to $1.4 billion. economy. Experience has in the the gold price once again he push- meantime shown that such an im- ed up hut the consequences could In this context, the recently mobilisation of the official gold be much more serious: central much discussed problem of the reserves is hardly to be feared. It banks might then want to convert South African gold cannot be left is several years since gold trans- their dollar holdings into gold with unmentioned. South Africa, which actions between monetary author- the US Treasury. Should the Unit- last year accounted for more than ities have been seen on the scale ed States, under the impact of such 75 per cent of the total western of recent months. Even a country a crisis, feel compelled to slap on gold production, is the decisive like France, which perhaps still a gotd embargo, the present gold factor on the supply side of the entertains hopes for an increase in price system might indeed break free gold market. At present it the official price of gold, did not down. The consequence would cer- seems to be South Africa's main hesitate to make use of its gold tainly not be a new official gold objective to obtain the r i g h t to

260 INTERECONOMICS, No. 0, 1968 sell gold at the fixed official price regardless of the repercussions on by no means automatically imply to the IMF at its own discretion. the free market price of gold. To- the same minimum price for other If this privilege were granted to .day, and for the foreseeable future, sellers in the free market; the com- South Africa it could decide at it is in the interest of international mercial gold price might very well will what share of its newly-mined monetary ,stability to bring ms much drop below $ 35 if large gold sup- gold to sell on the free market and newly-mined gold as possible onto plies from other sources, whether what share at the fixed official the free market, at least so long as from private hoards or from Eastern price. As ~ monopolist it could the free gold price is higher than 'bloc countries, should weigh on the thus reap the highest possible the official one of $35. In their market. The 1MF in turn could use profit. Much more important, and Washington communiqu~ of March the newly-mined gold it has pur- objectionable from a monetary 1968 the central banks of the gold chased either to replenish its own point of view, would be the pos- pool countries have explicitly gold stock or to acquire, in case sibility for South Africa, by manip- stated that Uthey no longer feel it of need, scarce currencies, thereby ulating its sales of gold on the necessary to buy gold from the directing gold to those countries free market in an erratic way, to market as the existing stock of where it belongs according to the keep the gold market in a state of monetary gold is sufficient in view basic rules for the international constant unrest and thus make the of the prospective establishment of ,distribution of gold reserves. gold price a subject of permanent the facility for Special Drawing discussion and speculation. South Rights ~. A Step Toward Africa's request to the IMF to the Demonetisation of Gold? convert its gold at the offici,al price The Demands of Gold Producers into convertible currencies has not South Africa and the other gold The gold producers, especially producing countries, too, should yet been decided upon. It is con- South Africa, are of course in- be interested in strengthening the troversial whether the IMF is under terested in a substantial increase international monetary system and an obligation to ~accept without of the official gold price (and con- especially in preserving the posi- limits not only monetary but also sequently also of the minimum newly-mined gol~d, and the latter tion of gold within this system by price in the commerci,al market). cooperating closely with the major even at a time when it could fetch The request for a higher official a better price in the free market. countries. South Africa alone can- gold price has been a standard not compel the rest of the world to It can be assumed that this con- item in South African statements make a massive increase in the troversy will eventually be decided 'at the Annual Meetings of the IMF on the basis of the general task of official price of gold. But by de- Governors. Apart from this more liberately provoking wide fluctua- the IMF to safeguard the stability ambitious goal, gold producers are of the international monetary sys- tions in the gold markets it may interested in selling their com- tem. well further discredit gold as a modity .at the free market price so monetary asset and thereby ac- Possible Conflicts long as it is above $ 35, but at the celerate its gradual demonetisa- in the Treatment of New Gold same time being protected against tion. the possibility of the free price It should not be too difficult to being pushed below $35 by an It cannot be denied that the find a satisfactory solution to this oversupply in the commercial mar- events of the last twelve months problem. The interest of the inter- ket. For these reasons the South in the gold market have already national monetary system ms con- African request for a substantial considerably discredited gold as cerns newly-mined gold may, de- increase in the official gold price the supreme measure of values and parading on the varying circum- cannot be met. But one might well as the basis of the present mone- stances, take two opposite and envisage a system in which gold tary system. The myth of the ~im- conflicting forms: on the one hand producers would be assured of a mutable u and "impartial" v~lue of it may be desirable to channel part minimum price of $ 35 (or $ 35 less gold has been badly shaken since of the newly-mined gold into the a small transactions fee), provided it has been demonstrated to the official reserves in order to in- they were willing to channel new- worki at large that the free market crease the monetary gold stock of ly-mined gold in 'an orderly way price of gold is arbitrarily tossed the world; on the other hand it into the free market whenever the up and clown by private specula- may be advisable to sell as much price in this market was higher tive forces. Moreover, it has in- of it .as possible in the free market than $ 35. The minimum price could creasingly been recognised that the in order to prevent the spread be- be guaranteed by an assurance on non-speculative forces of supply tween the official and the free the part of the 1MF to purchase and demand in the gold market, price from becoming excessive. In gold from South Africa and other such as gold discoveries and im- the years immediately following gold producers at the official price provements in mining tedmiques World War II the first of these two whenever the free market price or the fluctuating demand for in- considerations prevailed. At that drops (or threatens to drop) below dustrial and artistic gold, also can- time the IMF used its influence to $ 35 over a certain minimum pe- not be accepted as the determining direct as much newly-mined gold riod. Such a guaranteed minimum factors for the monetary price as possible into official reserves price for newly-mined gold would of gold and the value of the

INTERECONOMICS,No. 0, 1968 261 monetary gold stock of within the IMF and it is also to myth. The Italian centr~l bank ex- the world. After the spectacle of be the measure for the new Special pressed this idea in its latest An- the last twelve months, it will be Drawing Rights vis-&-vis national nual Report in the following way: difficult to accept the idea that the currencies. The present gold ex- "The Washington decisions ... supply of reserves to the world change standard, despite its imper- form part of the evolutionary pro- should depend on the ups and fections, is still preferable to a cess which has reduced the mone- downs of private gold speculation system without gold. The commit- tary functions of gold, first inside and on the above-mentioned non- ment, inherent in the gold ex- countries and then internationally". speculative factors. With the ap- change standard, to convert the proval of the Special Drawing key currency on request into gold In this sense, the separation of Rights scheme the principle has is a means, albeit an imperfect one, the commercial from the official been accepted that the provision of imposing some monetary dis- gold price may be considered a of global monetary reserves should cipline. Were gold to be removed landmark in the process of grad- be deliberately managed~by anal- from its present universal role the ually diminishing the role of gold. ogy with the deliberate manage- world economy would either have But the repercussions of this price ment of the domestic money supply. to fall back on a pure foreign ex- splitting on the evolution of the change standard, i.e. a pure dollar- world economy should not be over- Gold Cannot Be Replaced standard, or it would disintegrate rated. In this respect the setting free of the commercial gold mar- Nevertheless gold be into several currency blocs. cannot ket is likely to be of only second- easily dispensed with in the pres- The gold pool countries' decision ary importance. For the stability ent monetary system. Monetary of March 1968 to withdraw from of the world economy in the period gold stocks are still by far the the free gold market was taken ahead, the development of the most important part of the world's under the pressure of a concrete American balance of payments and monetary reserves, accounting for critical situation. The additional of confidence in the dollar are of nearly three fifths of the total; decision, however, not to expect nobody can be interested in de- any significant reserve contribu- far greater importance than the ups preciating this block of reserves tion from gold in the future de- and downs of the commercial gold worth roughly $ 40 billion. Gold is monstrates that a further step was price, notwithstanding the wide- the common measure for fixing the taken in the direction of detaching spread publicity which the latter relationships between currencies our system from an irrational gold have received up till now.

SDR Will Rationalise the World's Currency System

by Dr Wilhelm Hankel, Bonn

A few months of an unseasonally of SDR openly or secretly, quite as there was still much time left for a torrid spring and summer scorching keenly as the Duke of Wellington "true" reform of the system. Only the world of international curren- longed for the Prussians' arrival on when the storm broke, it became cies have been sufficient to revise the hills of Waterloo. possible, in the light of its thunder- judgment upon the Special Draw- flashes, to recognise the truly con- ing Rights (SDR) in their intended A Constructive New Development structive value of the new design. function as a new reserve instru- ment. It is not very long ago that Special Drawing Rights, as they What is the new system all most commentators looked down exist today, have been developed about? Special Drawing Rights their noses at this new child of by gradual steps at successive m a y transform the present cur- eager consultations and discus- currency conferences at The Hague rency system, which is based on sions, giving it the slightly abusive (June 25, 1966), Luxembourg (Sep- dollar and gold holdings, into a tember 12, '66), Munich (April 17, name of "paper gold", or suspect- multi-currency standard using as '67), London (August 26, '67), Rio ing it to be a more or less in- its basis all the most important de Janeiro (September 25, '67), and flationary homunculus bred in the national currencies, but they n e e d monetary alchemists' retort whose Stockholm (March 29 and 30, '68). not do it. Using SDR, countries "native hue of resolution is siddied Work on them was started at a will in future be entitled to draw o'er with the pale cast of thought", time when people had long realised any required currency directly but there is hardly an expert left the many weak spots of the tradi- against another one, which means today, and none of the people tional gold currency standard but that currencies will become direct- bearing actual responsibility, who when, in the absence of an actual ly convertible at fixed rates of ex- had not, in the thick of the mone- crisis, distant sheet-lightning pro- change. Looking at SDR from this tary battles, longed for the arrival duced the misleading feeling that angle, and in the long term, they

262 INTERECONOMICS, No. 9, 1968