- 25 February 1999
Gold’s role in the monetary system
The WGC recently urged IMF leaders to
lift their ban on member countries' ‘pegging’ their currencies
to gold.
In a speech to participants at a two-day
meeting in New York, organised by the Re-inventing Bretton Woods Committee,
and attended by senior officials of the IMF, the World Bank, the European
Central Bank and other national central banks, the Council said that efforts
by the IMF to demonetize gold had largely failed and gold was still the
second most valuable component in official sector reserves - behind only
the dollar - accounting for 16% of the total.
Excerpts from the Council's presentation
follow:
"The result of the demonetisation attempt
was to institutionalise the hegemony of the U.S. dollar. The advent of
the euro upsets this stability. In this new environment, some would say
that gold should be put back on the agenda of those seeking to
produce the blueprints for the new financial architecture. Our contention,
however, is that gold has never been away - you have only to
look at its continued role as a major central bank reserve asset to accept
that."
"Why should a Fund member not be allowed
to link its currency in some way to gold if it so wants? Currently Article
IV 2(b) forbids this. The move 25 years ago to "abolish" gold
was designed to enthrone the SDR instead. The SDR has not, however, succeeded
in establishing itself as a genuine international reserve asset. In such
circumstances there should surely be no reason why gold is precluded from
competing on all fours with other reserve assets. For the Fund to outlaw
it in the Articles is an outmoded restriction."
"One lesson from history was that international
monetary arrangements can and do change and the coming of the euro provides
an obvious opportunity to reconsider the whole system."
"For the last half-century the dollar
has been the hegemonic currency. Why? To start with - let us not forget
-because of its explicit gold link. Subsequently, because there was no
possible competitor and the U.S. was, after all, the strongest economy
- and possessed the most liquid capital markets - in the world."
"With a single hegemonic currency there
were not many choices to make. Now, there are two potentially equal reserve
currencies - the dollar and the euro. Although the combined capital market
of the EU-11 is not yet as large as that of the U.S., it is still dramatically
larger than any of the previously individual European markets. Any central
bank looking to diversify its reserves now has a real alternative."
"But one thing seems fairly clear.
Now that countries have a genuine choice between two global currencies,
there are likely to be significant moves in and out of them as sentiment
ebbs and flows."
"Can the world live with competing
currencies or will one eventually become supreme? Or might gold, as a
recognised store of long-term value, stage a comeback on the international
monetary scene? It is probably worth noting here that all previous reserve
currencies (including, at the outset, the SDR) had some kind of link with
gold."
"The problem with hegemonic currencies
(be it the dollar or the deutschemark) is that they are run purely for
the benefit of their own domestic economies, not for the benefit of any
other country which chooses to peg to them."
"Gold is the only external asset which
is no one else’s liability. Now that we have the euro, some countries
may decide to take the relatively simple decision to define their basket
as some weighted combination of that currency and the dollar in order
to hedge their bets. An even more effective hedge, however, can be constructed
by incorporating some gold. Studies suggest that the volatility of a central
bank's reserve asset portfolio is reduced, and the risk/return balance
enhanced, by holding anything up to 20% in gold."
"Most central banks do not see it as
their business to take risks. By incorporating gold into both a currency
basket used for exchange rate management purposes and a reserve asset
portfolio, volatility is reduced and the risk/reward picture improved."
"Which brings us back to the IMF and
- as we would contend - its no-longer-justified prohibitions on various
potentially useful roles for gold. The IMF's own gold holdings - 103 million
ounces, make it the world's third largest single holder. In 1995, the
Executive Board held a long and thoughtful discussion on the subject and
came to some important conclusions. These included the view that gold
provided a fundamental strength to the IMF's balance sheet, and the Board
felt that the Fund should continue to hold a relatively large amount of
gold among its assets, not only for prudential reasons but also to meet
unforeseen contingencies."
"Nothing has happened in the outside
world in the last 4 years to invalidate these judgements. Indeed, given
the systemic uncertainties caused by the arrival of the euro, there are
surely all the more reasons for the official sector to preserve its gold
holdings and actively consider ways in which its real value can be utilised
in this brave new monetary world."
Contact: Dick Ware, Centre for Public Policy Studies
World Gold Council, London.
E-mail: dick.ware@wgclon.gold.org
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