30 April 1998
IPMI Stages Debate Between WGC and Federal Reserve Board
WGC carries the day in a lively public debate
on gold's role as a central bank reserve asset.
On Thursday, 23 April the New York Chapter of the International
Precious Metals Institute (IPMI) staged a debate between Dale Henderson
of the Federal Reserve Board and Dick Ware of the Council’s Centre
for Public Policy Studies (PPC). The debate centered around the
former’s controversial paper suggesting that global welfare would
be significantly enhanced if central banks were to sell off all their
gold. The paper claimed, completely implausibly, that the effect on the
price of doing so would be a mere $40.
The Council's Response
Replying to Dale Henderson, the PPC
pointed to the main omission in the paper - that the public sector is
assumed to derive no, or very little, utility from holding gold. It is
simply taken for granted that any income-earning asset other than gold
will generate net gains.
The Council posed the question why so many
countries - including the largest - continue to hold gold if they do not
think that they benefit from it. It could not simply be history, accident
or inertia.
The PPC stated that there are undoubtedly
a number of solid reasons why the official sector holds gold, regardless
of the return it makes on it (a return which, in any case, is currently
much higher than that available on Japanese government bonds). These include:
- Diversification - Gold is the only major asset negatively correlated
to the financial instruments held by central banks - and indeed often
to the dollar. Its ability to reduce portfolio volatility is therefore
valuable.
- Independence - Gold is not fiat money. It has a value independent
of the economic policies of any individual country. Equally, and assuming
it is held in an appropriate location, it cannot be subject to asset
freezes.
- Economic security - The advent of a crisis can lead to instant
withdrawal of credit lines. The possession of gold - to sell or perhaps
use as collateral - gives an extra dimension of freedom to a country
in balance of payments/reserve difficulties.
- Confidence in paper money - A number of the largest gold holders
are on record as saying that their citizens’ confidence in, and
willingness to use, their own national currency, benefits from the fact
that a substantial amount of gold is held in the reserves. There is,
of course, no longer a direct link between the two, as there was in
Gold Standard days. In a number of countries, however, it is quite clear
that an implicit connection between unreal (paper) money and (real)
gold is perceived.
- Systemic reasons - The international monetary system is not
static. In the last hundred years, there has been a move from a gold
standard, through a gold-exchange standard, to today’s freely-floating
world. Where the system will be in twenty years' time is uncertain.
Possession of gold - both at the heart of the system at the IMF and
in individual central banks - allows the major players to keep all their
options open for the future.
In sum, the PPC's main thesis was that
gold cannot be treated just like any other commodity. There are important
non-financial reasons why the official sector holds - and will go on holding
- significant amounts of gold. These reasons are not susceptible to modelling.
Broad Support for the Council's Argument
The meeting ended with a long and lively
question and answer session. The overwhelming majority of the comments
were supportive of the Council’s position and against Henderson’s.
In particular, there was general agreement that one could not trust governments
and central bankers always to pursue responsible anti-inflation economic
policies. Against such a background, holding something more solid than
paper money was the course of wisdom. |