Thursday, May 18, 2017

Money Matters: An IMF Exhibit -- The Importance of Global Cooperation. Debt and Transition (1981-1989)

Countries Don't Go Bankrupt
"If you owe your bank a hundred pounds, you have a problem. But if you owe your bank a million pounds, it has." - John Maynard Keynes
"If you owe your bank a billion pounds everybody has a problem." - The Economist
During the 1970s, Western commercial banks had loaned billions of recycled petrodollars to the developing countries, usually at variable, or floating, interest rates. So when interest rates began to soar in 1979, the floating rates on developing countries' loans also shot up:
  • Higher interest payments are estimated to have cost the non-oil-producing developing countries at least $22 billion during 1978-81. At the same time, the price of commodities from developing countries slumped because of the recession brought about by monetary policies.
The time bomb was set.

What Went Wrong?
grotesquely high interest rates

  • Between 1979 and 1982, interest rates more than doubled worldwide, dramatically raising the cost of loans.
  • The U.S. dollar exchange rate improved, making the dollars needed to repay loans more expensive.
  • Widespread recession dried up the markets for the exports of developing countries.
  • Real prices for the export commodities that were essential to the developing economies fell to their lowest levels since the Great Depression.
"The time bomb was the debt burden and grotesquely high interest rates being carried by the Third World to the profit of the Western banks." - Les Gibbard
"Countries don't go out of business....The infrastructure doesn't go away, the productivity of the people doesn't go away, the natural resources don’t go away. And so their assets always exceed their liabilities, which is the technical reason for bankruptcy. And that's very different from a company." - Walter Wriston, Citicorp Chairman

Who Was to Blame?

Why did Western banks loan so much money to the developing countries?

Many developing countries were good loan prospects in the 1970s:
  • Many produced raw materials, foodstuffs, or manufactured goods that were in demand.
  • Growth rates looked even better than for industrial countries.
  • From 1960 to 1980, Latin America's economic growth rate was nearly twice the U.S. rate.
  • Even Eastern European countries seemed a good risk, because of the climate of detente and growing East-West trade.
Why did developing nations borrow such huge amounts?

As long as interest rates were low and inflation was high, the loans fueled their economies at little cost:
  • With high inflation, by the time the dollars had to be repaid, their real value had decreased.
  • Meanwhile, the borrowers could invest the money in economic development.

It worked. Between 1973 and 1980, the economies of oil-importing developing countries grew an average of 4.6%, compared with 2.5% for the industrial world.

Time Bomb Explodes

Poland found itself unable to pay the interest or principal on its massive loans in 1981. In 1982, the Mexican government declared it could no longer make payments on its debts. Argentina, Brazil and others soon followed. Thirty countries had fallen into arrears by the end of 1984. Billions of dollars were at stake.

The global monetary system was under threat. How could the world solve the debt problem?

Developing Countries: Just Don’t Pay?

If countries simply defaulted, everybody would suffer from the resulting economic and political instability:
  • The lending banks and investors would lose their money. For some, bankruptcy might follow.
  • Once it defaulted, a country would be unable to obtain future loans or investment, slowing economic growth and encouraging political instability.
  • Industrial countries that traded heavily with the debtor countries would lose those markets.
An individual or company that defaults on a loan goes bankrupt. But what happens if a country defaults? No one knew the answer.

Industrial Countries: Just Ignore It?

The banks that loaned the billions of dollars should have known better:
  • Why should the world bail out banks and investors who had made poor loan decisions?
  • If it should, who was to pay for the bailouts?
Both developing countries and banks found themselves in a difficult position. But could industrial countries afford to disregard the plight of the debtor countries?

Solving the Problem

With the Mexican crisis in 1982, the IMF took on the coordination of a global response. It realized that nobody would benefit if country after country failed to pay its debts.

The IMF had no magic remedy. The resolution of the crisis involved concessions from all concerned, to help debtor countries get back on track:
  • Industrial Countries: An immediate infusion of cash from industrial country governments
  • The Banks: Further lending and rescheduling of current debts by commercial banks, or "bailing the banks in"
  • The Debtors: An adjustment program, usually with IMF financial assistance
The IMF’s initiatives calmed the initial panic and defused its explosive potential. However, a long road of painful reform in the debtor countries, and additional cooperative global measures, would be necessary to eliminate the problem.

"Bailing the Banks In"

When the Mexican crisis struck, Jacques de Larosiere, the IMF's managing director, told the banks that the IMF rescue plan would not work without a sizable contribution from them. Instead of bailing out the banks, the IMF would "bail them in."

Mexico would need $8.3 billion in 1983:
  • $1.3 billion from the IMF
  • $2 billion from governments
  • $5 billion from the banks
The banks regarded the program as "forced lending," but all 526 of them paid up within a month.

Conditionality for Debtor Countries

To qualify for IMF financial assistance, a debtor country had to set up an adjustment program, which usually included:
  • Setting realistic exchange rates
  • Reducing fiscal deficits
  • Reducing inflation by restricting the creation of credit
  • Limiting external borrowing to reasonable amounts for growth-oriented purposes.
Some countries, such as Chile and Bolivia, responded remarkably to the stabilization plan in only a few years. However, for many countries, the process was more painful and prolonged. Unemployment, inflation, and stagnant growth persisted into the 1990s.

The Baker PlanAttempted Rescue

The Baker Plan, proposed by U.S. Treasury Secretary James Baker in 1985, envisioned further concessions by all three parties involved: commercial banks and multilateral financial institutions would increase lending, while indebted countries would make greater efforts at fiscal, financial, and monetary reform.

Initial enthusiasm for the Plan quickly faded. The Baker Plan had only limited success because it merely delayed payment of the debt, rather than reducing it.

Reducing the Burden

More radical action was deemed appropriate. In 1989, US Treasury Secretary Nicholas Brady proposed writing off some of the debt principal, rather than merely rescheduling it as had been done since 1982.

The Brady Plan was hailed as the beginning of the end of the debt crisis, which had plagued financial markets for nearly a decade. Still, many developing countries thought it did not go far enough toward reducing their burden.

Regional Economic Integration

Although regional trading blocs are not new, the enormous increase in trade alliances among neighboring countries have resulted in higher tariffs and trade restrictions for countries outside the group. Such regional protectionist measures during the 1930s prolonged the economic malaise of the Great Depression. Hence, region blocs had been initially regarded with suspicion.

Since 1948, over 150 regional trading associations have been formed. Over 65 of those came into existence during the 1980s and 1990s.

Why the rapid rise in the number of trade alliances? What benefits are there for individual member countries? Will the increase in these alliances improve or threaten the growth of world trade?

Regional Trading Associations

The purpose of a regional trade association is to protect and expand trade among neighboring countries through agreements that range from reducing trade barriers to harmonizing internal policies. Overall world trade will also benefit if regional trading associations help members grow without instituting protectionist policies that inhibit trade with outside countries.

Although not all regional trade associations have had positive outcomes, some have certainly thrived. These successes encourage confidence that regional associations will promote trade - both internally, among members, and externally, throughout the world.

The 1980s witnessed huge advances in the most ambitious of all regional integration efforts–the European Community. In the following decade this progress would result in the formation of an economic union that would rival the economic and political might of the United States.

The longest-lived example of a monetary union is Africa’s fourteen member CFA franc zone, which has used a common currency pegged to the French franc since 1948. The zone helped to support Africa’s most successful market integration.
The Asian Tigers
The Asian Tigers

During the 1980s the so-called "Four Tigers" - Hong Kong, South Korea, Singapore, and Taiwan Province of China - achieved astonishing economic growth. In addition, Japan, which already boasted the world's second largest capitalist economy by the 1970s, continued its impressive economic expansion.

Although all are located in East Asia, these areas have acted independently and never formed a regional trading bloc.

The Power of Private Capital

By the 1990s, transfers of private capital from one country to another had reached thousands of billions of U.S. dollars each year. Largely unregulated by governments and transmitted through cyberspace, international capital flows sought profit wherever it could be found.

Is Anyone in Control?

Although incoming capital flows helped countries develop, the sudden reversal of flows, or "capital flight," could cause panic and financial crisis.

Fearing that control over money had been transferred from national authorities to the private sector, many called for better monitoring of international capital flows (by institutions like the IMF) or even restrictions on these transfers.

Growth of Capital Markets

By the end of the decade, international capital markets had grown to an extent unimagined in 1980:
  • In the United States, transfers of stocks and bonds between domestic and foreign residents rose from 10% of GDP in 1980 to 93% in 1990.
  • Japan's corresponding figures were 7% and 119% of GDP.
  • Gross international equity flows - $800 billion in 1986 - had by 1990 exceeded $1.44 trillion.
So great was the growth that some feared control of the monetary system was shifting from monetary authorities to the private sector.

Growth of Foreign Exchange Markets

As a result of the unprecedented growth of international capital markets, foreign exchange markets (where one national currency is sold for another) also experienced a surge in activity.

Thaw in the East

With remarkable speed and surprisingly little violence, the Iron Curtain fell in 1989, radically changing the political and economic conditions that had been in place in Europe since World War II.

For years, Communist countries had been plagued by stagnant economies, low productivity, inefficient industry, and constant shortages of consumer goods. One by one, the Communist regimes of Eastern Europe collapsed in 1989. Was this the end of the centrally planned economies?

1989 Year of Anti-Communist Revolutions

In April, Poland’s Communist government legalized the Solidarity party. After elections in June, the Polish Communist party became the first to allow itself to be turned out of office. Nobel Prize winner and Solidarity leader Lech Walesa later became the first freely elected president.

In November, massive demonstrations by almost a million Czech citizens culminated in democratic reforms and the resignation of the country's Communist leaders. Dissident liberal playwright Vaclav Havel became president after free elections were held at the end of December.

The first real breach of the Iron Curtain occurred in May, when Hungary dismantled barriers on its border with Austria. In October, the Hungarian Communist party dissolved, after instituting democratic and economic reforms.

On November 9th, East Germany opened its borders and dismantled the Berlin Wall. Over the next month, 133,000 people moved west. To stem the flow, West Germany issued a plan on November 28 for Germany’s reunification. After economic union took place in July 1990, East Germany ceased to exist.

On November 10th, after over 35 years in power, Todor Zhivkov was forced to resign his positions as Bulgaria’s head of state and Communist party leader. Shortly afterwards, protesters obtained democratic reforms, including free elections and the repeal of the Communist party’s monopoly of power.

By International Monetary Fund

Source: International Monetary Fund

Thursday, May 11, 2017

Money Matters: An IMF Exhibit -- The Importance of Global Cooperation. Reinventing the System (1972-1981)

Would Floating Rates Sink the System?

In spite of the surprising U.S. decision in 1971 to take the dollar off the gold standard, the world still clung to the old system. In attempts to set more realistic exchange rates, the U.S. dollar was devalued and stronger currencies, like the German mark and the Japanese yen, were revalued. But even after two devaluations, the flight from the U.S. dollar continued. No new set of exchange rates could be sustained. Finally, in early 1973, fixed exchange rates based on gold were abandoned altogether and currencies were left to float. Although governments continued to intervene, market forces now determined exchange rates.

Could an international monetary system based on floating rates actually work?

Monetary Revolution

For thousands of years, "money" had been based on a tangible, valuable commodity such as gold or silver. In the early 1970s, the international community abandoned the security and discipline of a fixed-rate metal standard. In its place, the world adopted a system of "floating" exchange rates: each currency’s value moved up or down depending on international demand and the amount of confidence in its country’s economy.

Floating Rate Systems

Free Floating Exchange Rate

The currency's value is determined solely by supply and demand in the market, rather than official policy. Countries generally permit a free float only as a temporary solution, because it could result in excessive fluctuations. Such fluctuations disrupt international transactions by constantly altering the cost of goods and value of payments between companies in different countries.

Managed Floating Exchange Rate

Managed Floating Exchange Rate
This type is similar to a free floating exchange rate, but a government intervenes by buying or selling its own currency to minimize fluctuations. Australia, Canada, Jamaica, Japan, the Philippines, the United States, and others adopted this type of exchange rate.

Currency Peg

The currency's value is pegged to a basket of currencies or to another country's currency. Many developing countries pegged their exchange rates to the SDR or to the currency of an industrial country with which they traded heavily.

The European Snake

Beginning in mid-1972, the EEC stabilized its own currencies in relation to one another. This system was dubbed the "European Snake." Each country agreed not to allow its currency to fluctuate more than 1 1/8% up or down from an agreed central exchange rate. The EEC currencies floated jointly against the dollar. The Snake was the forerunner of the European Monetary System, which went into effect in 1979.

With the collapse of the Bretton Woods system, had the IMF outlived its usefulness?

Critics argued that the world no longer needed an organization designed to monitor a system that was now obsolete.

But the IMF adapted to the new circumstances and actually began to take an even more influential role in the world’s monetary system.
  • Instead of monitoring fixed exchange rates, the IMF took on the responsibility of exercising firm surveillance over its members' exchange-rate policies.
  • To help countries with balance of payments deficits, the IMF increased its lending activities.

OPEC Takes Center Stage

OPEC Takes Center Stage
The fourth Arab-Israeli conflict broke out in October 1973. Over the next three months, the price of crude oil shot up 300%! Global energy and financial crises ensued.

Did the war cause the oil crisis? The answer is yes, and no:

  • Because of the war, the Organization of Arab Petroleum Exporting Countries (OAPEC) declared an oil embargo against the United States and the Netherlands - countries judged too friendly to Israel. The embargo caused severe energy shortages over the winter of 1973-74.
  • At the same time, the Organization of Petroleum Exporting Countries (OPEC) sharply raised the price of crude oil. Although OPEC acted mainly for economic reasons, the war did serve as a catalyst. (OPEC includes the OAPEC countries, plus other non-Arab oil exporters such as Indonesia, Ecuador, and Venezuela.)

Ultimately, it was the steep oil-price increases of the 1970s, not the politically motivated 1973 embargo that intensified high inflation, caused a global recession, and drastically altered most countries' balance of payments.

OPEC's Point of View

  • The U.S. dollars OPEC received for oil fell in value during the early 1970s, because of devaluations and depreciation.
  • Oil prices had not kept up with other commodities. Between 1960 and 1973, the price of oil increased a mere 25% - far less than other commodities.
  • Underpricing had caused oil to be wasted. OPEC price increases and production cuts were necessary, to protect resources from depletion.

Dealing with the Energy Crisis

  • In December 1973, a large part of the British work force began to work a three-day week to conserve electricity.
  • In the United States, year-round daylight saving time went into effect in 1974, and the national speed limit was lowered to 55.
  • In Europe, stores could not keep up with a high demand for bicycles.
  • India's prime minister, Indira Gandhi, set an example in November 1973 by riding to and from work in a horse-drawn cart.
  • The oil embargo caused serious gasoline shortages in the winter of 1973-74.

Petrodollar Problem

While oil importers accumulated huge bills they could not pay, oil exporters accumulated large amounts of U.S. dollars - more than they knew how to use. These dollars were known as "petrodollars."

Is there such a thing as TOO MUCH money?

Oil-exporting countries found themselves with so much money, they could not spend it fast enough. Some had small populations; many were still at early stages of industrialization. They could not import enough from the countries that bought their oil to keep from piling up enormous dollar surpluses.

The world economy would contract if all that money was taken out of circulation (i.e., not spent or loaned to someone else to spend). Oil exporters needed investment outlets for their petrodollars.

Recycling Petrodollars

Borrowers' Market

The solution to one problem created another. Recycling petrodollars through the banking system slowed economic contraction, but did not alleviate massive payment imbalances. As a result the debts of oil-importing countries - especially developing countries - continued to pile up:

  • The foreign debts of 100 developing countries (excluding oil exporters) increased 150% between 1973 and 1977.

Could the economies of the debtors withstand the inflationary pressure of the sudden, enormous oil-price increase?

Without the discipline of a fixed standard, could the new floating-rate system cope with such massive trade and monetary imbalances?
"The international monetary system is facing its most difficult period since the 1930s."
H. Johannes Witteveen
Managing Director of the IMF
January 15, 1974


The 1970s ushered in many firsts: the first handheld calculator, the birth of the first test-tube baby, and the first personal computer. And, for the first time in history, high inflation joined a stagnant economy for a prolonged period of time. By 1979, this unprecedented combination had a new name: stagflation.

Inflation Unchecked

Inflation was already underway in the early 1970s because of increased commodity prices, as well as excess liquidity created by countries no longer disciplined by the gold standard. Inflationary pressures increased when the dramatic rise in oil prices raised the price of manufactured goods and food. The resulting decrease in demand and production led to fewer jobs and a stagnant economy.

Rush from the Dollar

The value of the U.S. dollar kept sinking, despite attempts by the U.S., German, Japanese, and even OPEC governments to halt its fall.

Why did the rest of the world care?

The U.S. dollar was still the primary reserve currency of the world. Countries holding dollars, instead of gold, as a reserve asset did not want to see the value of their assets fall.

Gold Rush

In 1979, investors, including Saudi Arabia and other oil-producing nations, backed away from holding U.S. dollars as reserves, since they could no longer count on them to retain their value. They sold their surplus dollars for alternative reserve assets, like German marks, Japanese yen, and Swiss francs. In addition, dollar holders increasingly wanted non-monetary assets such as gold and silver, as well as art and real estate. This pushed gold prices from $200 per ounce in early 1979 to $875 less than a year later.

Silver Rush

How Much Silver Does Your Money Buy?

The price of silver shot up, doubling in both 1979 and 1980. The cost of silver flatware followed suit. The money that bought an entire place setting in 1978 purchased only one utensil in 1980.

War on Inflation

Desperate times called for desperate measures. Governments around the world fought inflation in 1979 and the early 1980s by raising interest rates to record highs in order to tighten the money supply and reduce pressure on prices.

How Do Higher Interest Rates Reduce Inflation?

How Do Higher Interest Rates Reduce Inflation
Central banks control interest rates on funds that they lend to individual banks and on funds loaned between banks. If the central bank raises these interest rates, individual banks are forced in turn to raise the rates they charge their customers. Borrowing money becomes more expensive, so less is borrowed. Economic activity slows, less money is earned, and less money is spent. Demand for goods and services falls. To revive shrinking demand, providers of goods and services lower their prices, and inflation slows.

Cost of the War on Inflation

Stopping inflation came at great cost. In addition to decreasing the money supply, high interest rates reduced spending, output, and employment. The world economy was pulled into the deepest recession since the 1930s. World Trade fell in 1981 for the first time since World War II.

Stabilizing the Dollar

To slow inflation and stop the fall of the dollar, the U.S. government adopted a dramatic anti-inflationary policy in October 1979. It made borrowing money more difficult and more expensive. The policy worked, interest rates soared. By the end of 1981, inflation had been brought under control and the value of the dollar had stabilized. But the anti-inflationary policy also plunged the U.S. economy into recession.

Chain Reaction

Since capital now flowed across borders with ease, higher interest rates in one country attracted capital away from others. U.S. anti-inflationary policies pushed interest rates to record levels. As the high U.S. rates attracted capital, other countries were forced to raise their interest rates to compete. High interest rates around the world caused spending to contract sharply, throwing the global economy into recession.

By International Monetary Fund

Source: International Monetary Fund

Thursday, May 4, 2017

Money Matters: An IMF Exhibit -- The Importance of Global Cooperation. System in Crisis (1959-1971)

A Growing Economy Needs Growing Liquidity

Increased trade and interdependence accompanied the stunning economic growth of the 1950s and 1960s:

  • A typical 1960s U.S. telephone required 48 imported materials from 18 different countries. 
  • Foreign trade was a matter of economic survival for some nations. In 1960, Britain's imports and exports equaled 43% of its gross domestic product. West Germany's equaled 45%.

Growing Economy
The rapid expansion of production and trade in the 1950s and 1960s required a constantly expanding supply of monetary reserves to increase total liquidity. Gold, the primary reserve asset, could not be mined fast enough to meet this demand. As a result, the U.S. dollar, and to a lesser extent, the British pound, were used as reserve assets.

  • By the mid-1960s, a full third of the total market-economy reserves was held in U.S. dollars and British pounds, with the remainder in gold. 

As Good as Gold

How does a national currency like the U.S. dollar become a reserve asset, adding to the world’s total liquidity?

  • The United States runs a balance of payments deficit by spending more money in other countries (buying their products, investing in them, or giving them dollars) than they spend in the United States. 
  • The extra dollars are held by the countries’ central banks. The banks do not ask the United States to redeem them for gold or another currency. As long as foreign banks accept and hold dollars as if they were gold, the dollars act as reserves.

How long could the world rely on the United States and the United Kingdom to run balance of payments deficits and supply the necessary additional liquidity? Could the United States and the United Kingdom continue to create more dollars and pounds when their own reserves of gold were gradually declining?

The U.S. dollar fueled the growth of the world's economy, but at a price: inflation at home and reduced gold reserves.

"Too little liquidity could permit a crisis to develop in which most of the world would tend toward economic stagnation and would suffer from declining trade." 
Pierre-Paul Schweitzer
Managing Director of the IMF,
November 16, 1964

Decolonization and Development

Uhuru (Freedom)
"Yesterday's dream is today's reality: we now have our Uhuru. We will guard Uhuru with all our might."
Jomo Kenyatta
Prime Minister of Kenya, 1964
The colonies and dominions once controlled by European nations gained their independence starting in 1947, with India and Pakistan. In 1957, Ghana (formerly the Gold Coast) was the first African colony to achieve independence. Others in Africa and Asia followed rapidly over the next few decades.

The euphoria of independence quickly gave way to the sobering reality of the obstacles ahead. For many developing countries, independence brought civil war and economic chaos. Most developed "dual economies" - the majority of their people continued to live in poverty, while some urban, industrial areas achieved rapid economic growth.

"I am sure that every one of us will celebrate Independence Day with great joy. We are celebrating a victory. Yet it is essential that we remember even on that day that what we have won is the right to work for ourselves, the right to design and build our own future."
Julius K. Nyerere
President of Tanganyka (now Tanzania), 1962

The Foreign Exchange Famine

With independence came expectations of a better life. New governments promised modernization and prosperity. Leaders and citizens alike hoped to share in the economic success of the industrial Western world. To do this, they needed money, not just their own "soft" currencies, but foreign exchange in the form of internationally accepted "hard" currencies.

Where would the newly independent countries find the capital and additional liquidity needed to modernize and grow their economies?

The Dollar Glut
"Providing reserves and exchanges for the whole world is too much for one country and one currency to bear."
Henry H. Fowler
U.S. Secretary of the Treasury
Dollar Glut
Increasingly, the IMF and the international community realized that the Bretton Woods system - based on the gold standard and using dollars as the main reserve currency - had a serious flaw. The postwar "dollar gap" abroad had become a "dollar glut" by 1960.

Liquidity and Deficit

Continuous U.S. balance of payments deficits during the 1950s had provided the world with liquidity, but had also caused dollar reserves to build up in the central banks of Europe and Japan. As the central banks redeemed these dollars for gold, the U.S. gold reserves dipped dangerously low.

How could the threatened system be fixed?

If there were too many dollars out there, why didn't the United States simply stop spending so much abroad?

The United States enjoyed the benefits of being able to spend money freely, such as acquiring commodities and consumer products from abroad. In addition, the U.S. foreign-policy goal of containing Communism in the face of the Cold War and decolonization kept the dollars flowing.

Triffin's Dilemma

Testifying before the U.S. Congress in 1960, economist Robert Triffin exposed a fundamental problem in the international monetary system.

If the United States stopped running balance of payments deficits, the international community would lose its largest source of additions to reserves. The resulting shortage of liquidity could pull the world economy into a contractionary spiral, leading to instability.

If U.S. deficits continued, a steady stream of dollars would continue to fuel world economic growth. However, excessive U.S. deficits (dollar glut) would erode confidence in the value of the U.S. dollar. Without confidence in the dollar, it would no longer be accepted as the world's reserve currency. The fixed exchange rate system could break down, leading to instability.

Triffin's Solution

Triffin proposed the creation of new reserve units. These units would not depend on gold or currencies, but would add to the world's total liquidity. Creating such a new reserve would allow the United States to reduce its balance of payments deficits, while still allowing for global economic expansion.
"A fundamental reform of the international monetary system has long been overdue. Its necessity and urgency are further highlighted today by the imminent threat to the once mighty U.S. dollar."
Robert Triffin
November 1960
The Incredible Shrinking Gold Supply

While the total number of U.S. dollars circulating in the United States and abroad steadily grew, the U.S. gold reserves backing those dollars steadily dwindled. International financial leaders suspected that the United States would be forced either to devalue the dollar or stop redeeming dollars for gold.

The dollar problem was particularly troubling because of the mounting number of dollars held by foreign central banks and governments:

  • In 1966, foreign central banks and governments held over 14 billion U.S. dollars. The United States had $13.2 billion in gold reserves, but only $3.2 billion of that was available to cover foreign dollar holdings. The rest was needed to cover domestic holdings.

If governments and foreign central banks tried to convert even a quarter of their holdings at one time, the United States would not be able to honor its obligations.

Gold Supply

Searching for Solutions

In the early 1960s, the world searched for ways to remedy the flawed Bretton Woods system of a fixed dollar-gold exchange rate:

  • Western Europe and the United States cooperated to try to support the price of gold in the face of strains caused by speculators and hoarders. 
  • The United States adopted policies aimed at slowing the flow of dollars abroad. 
  • The IMF focused on adding liquidity without relying on gold or dollars. A new reserve asset, the SDR, was created to increase the total world money supply.

Could these efforts save the Bretton Woods international monetary system, or were its flaws so fundamental that a complete overhaul was needed?

The International Response

Europe and the United States Cooperate: The Gold Pool

In 1961, Belgium, France, West Germany, Italy, Switzerland, the Netherlands, the United States, and the United Kingdom agreed to contribute gold to a fund that could be used to support the price of gold at $35 per ounce, as decided at Bretton Woods. Gold could be sold from the pool if high demand threatened to raise its price on the open market.

The End of the Gold Pool

After 1966, dramatic increases in private gold buying by hoarders, speculators, and industrial users exhausted the gold pool supply. Member countries were forced to dip into their own gold reserves to meet the demand.

A rush to purchase gold from November 1967 to March 1968 finally caused the pool to disband.

The American Response

Decreasing the Dollar Drain

Alarmed at the flow of dollars abroad, the United States enacted policies designed to stem the flood.

  • Tied Aid: More aid dollars were required to be spent on U.S. exports. In 1960, less than half of U.S. laid money was spent on U.S. products and services. By the mid-1960s, the proportion was close to 90%.
  • Interest Equalization Taxes: Special taxes passed in 1963 and 1964 made it more expensive for non-U.S. citizens to buy U.S. stocks and bonds or borrow U.S. dollars.
  • Voluntary Capital Control Program: In 1965, President Johnson launched a program to discourage U.S. corporate investing and spending abroad.

Initially, these and other efforts helped reduce the U.S. balance of payments deficit. In 1965, it reached its lowest level since the 1950s.

U.S. Policy Failure

The balance of payments deficit continued, despite government efforts to eliminate it.

  • U.S. military spending abroad soared due to new involvement in Vietnam and continuing NATO responsibilities.
  • U.S. tourists were spending several billion more dollars abroad than foreign tourists spent in the United States.
  • U.S. private investment abroad continued to grow. Income from previous investment abroad continued to grow. Income from previous investments provided a substantial dollar inflow, but not enough to offset the overall balance of payments deficit.
  • The U.S. trade surplus was rapidly diminishing, finally becoming a deficit in 1971.

The IMF Response

The Debate

Beginning in 1963, discussions on how to solve the international liquidity problem took place within the IMF and among its member nations.

  • Some countries, such as France, wanted to set up additional international credit with strict rules for its use and payment - but continue to rely on gold as the main reserve asset.
  • Others, such as the United States and the United Kingdom, wanted to create a new reserve unit to be used as freely as gold or the reserve currencies.

Which countries would receive the new reserve unit?

  • The leading industrial countries favored a limited participation.
  • The IMF and developing countries advocated giving all members - industrial and developing - a proportional amount of the new reserve unit.

The Decision

The Special Drawing Right (SDR) that was finally adopted in 1968 represented a compromise. It was essentially a new reserve unit, rather than additional credit, but because of certain restrictions, it could not be used as freely as gold.

SDRs were to be allocated to all participating IMF members, according to the size of their IMF quotas.

The SDR: Mixed Success

The additional liquidity provided by the SDR was quickly assimilated into the international monetary system. However, by the time the first SDRs were allocated in 1970, the world did not need more liquidity, since the United States had not reduced its balance of payments deficit. In fact, precisely in 1970-72, a big jump in the U.S. deficit caused a tenfold increase in members’ currency reserves. The SDR was designed to offset a dollar shortage that never materialized.
"...the first creation of international paper money, literally out of thin air."
The Economist, 1970
Problem Persists

Flight from the Dollar

Flight from the Dollar
The efforts to mend the Bretton Woods exchange-rate system were no match for the severe exchange-rate crises of the late 1960s. Continual balance of payments deficits finally forced Britain to devalue the pound in 1967. People speculated that the dollar might soon follow. Private holders rushed to exchange their dollars for gold.

As a result, in 1968, the United States stopped redeeming privately held dollars for gold. Only central banks could still redeem their dollars at the fixed rate of $35 per ounce. Unable to get gold, private holders now sold their dollars for stronger currencies, such as the German mark, the Japanese yen, the Swiss franc, and the Dutch guilder.

For a time, many central banks, particularly the West German Bundesbank and the Bank of Japan, bought dollars to defend the U.S. currency and keep their own currencies from appreciating. This ended in May 1971, when the central banks began to redeem their dollar reserves for ever greater quantities of U.S. gold.

U.S. gold reserves were vanishing. If dollar redemption continued, they would soon be gone!

Bretton Woods System Collapses

On August 15, 1971, the United States stunned the world by declaring that it would cease redeeming dollars for gold from its reserves. With this, the dollar's link to gold was severed, dismantling the foundation of Bretton Woods. The financial system that had helped bring a quarter century of prosperity to the industrial world had finally collapsed.

With nothing concrete backing the U.S. dollar, would the world lose confidence in it? What would replace the Bretton Woods system?

By International Monetary Fund

Source: International Monetary Fund

Thursday, April 20, 2017

Money Matters: An IMF Exhibit -- The Importance of Global Cooperation. Destruction & Reconstruction (1945 - 1958)

The Post War World

The Most Destructive War in History

By the end of World War II, much of Europe and Asia, and parts of Africa, lay in ruins. Combat and bombing had flattened cities and towns, destroyed bridges and railroads, and scorched the countryside. The war had also taken a staggering toll in both military and civilian lives.

Shortages of food, fuel, and all kinds of consumer products persisted and in many cases worsened after peace was declared. War-ravaged Europe and Japan could not produce enough goods for their own people, much less for export.

What was needed to pull Europe and Asia back into the international economy? The answer was money - but what kind? The currencies of war-torn countries? Gold? Dollars?

The Most Expensive War in History

In addition to the toll in human lives and suffering, countries spent more money on World War II than in all previous wars put together. By 1945, exhausted countries faced severe economic problems that frustrated reconstruction efforts:

  • Inflation
  • Debt (mostly owed to the United States)
  • Trade deficits
  • Balance of payments deficits
  • Depleted gold and dollar supplies

The Dollar Gap

Dollar Gap
The devastated countries needed gold or U.S. dollars (the only currency considered to be "as good as gold") to pay for imports and make debt payments. However, both dollars and gold were alarmingly scarce in the war-scarred countries.

Many countries retreated from the market. Communist Eastern Europe abandoned it altogether. The world’s multilateral financial and trading system faced a serious threat. Only the United States had emerged from the war with the strength and resources to help. But would it step forward?

Worldwide Gold Shortage

By 1947, the United States had accumulated 70% of the world’s gold reserves. The United Kingdom had gone from being the world's greatest creditor to the world's greatest debtor. Countries had sold off most of their gold and dollar reserves, as well as their foreign investments, to pay for the war. What few reserves remained were now quickly running out. Trade deficits meant there was little hope of replenishing them.

Five cigarettes for an egg? A carton of cigarettes for a piano?

Severe inflation plagued the weakened economies. By 1948, wholesale prices were 200% higher in Austria, 1,820% higher in France, and a massive 10,100% higher in Japan than they had been before the war. In 1948, the French government devalued the franc by 80%, making a 5,000 franc note practically worthless. In some countries like Germany, the monetary system collapsed. People resorted to barter, often using cigarettes as money.

Cooperation Tested

Cooperation Tested
Cooperation Tested
The economic situation looked grim in 1947. Forty-four countries had agreed to international economic cooperation at Bretton Woods, but the IMF and the World Bank were not yet in a position to provide the needed expertise and financial assistance. Would countries return to the unilateral beggar-thy-neighbor policies of high tariffs and competitive devaluations?

Potential Solution

Many hoped that the United States would provide economic aid to help resolve the crisis. In contrast to the other combatants, the United States ended the war as the world's greatest creditor, with most of the world's gold, a substantial balance of payments surplus, and virtually no physical damage to its own land. Would the United States offer additional dollar aid? Could the European countries cooperate with one another and the United States to solve their persistent problems and return to prosperity?

Limited Options for Economic Recovery

Desperate countries could gain the dollars they needed only through:

  • Exporting more than they imported (balance of trade surplus)
  • Private investments or loans from the United States
  • U.S. government aid or loans

However, the devastation caused by the war eliminated any hope of a trade surplus. Chaos and uncertainty in the European economies discouraged private US investments. It seemed that only additional government aid or loans could work.


Trade Links Encourage Expansion:

  1. The United States gives dollars to Country A.
  2. Country A uses dollars to increase domestic production and pay for imports.
  3. Country A's economy expands by selling more domestic products to, and buying more imports from, other countries.
  4. Other economies (including the U.S. economy) expand by selling more domestic products to, and buying more imports from, Country A.


Without Trade Links, Economies Miss Out on Expansion:

  1. The United States does not provide dollars to Country A.
  2. Country A is unable to increase domestic production and unable to afford imports.
  3. Country A's economy fails to expand, with few products to export and little foreign exchange to buy imports.
  4. Other economies (including the US economy) fail to expand, unable to sell domestic products to, or buy imports from, Country A.

US Decision

The Case Against

Over $9 billion had been spent already on aid to Europe in the immediate postwar period:

  • The United States could not afford to give away more money to other countries. There were pressing needs at home.
  • Existing shortages in the United States would be exacerbated and wholesale prices would rise, causing inflation.
  • If the United States did nothing, Europe would solve its own economic problems.

The Case For

The United States must act for security, humanitarian, and economic reasons:

  • If the United States did not help, Soviet-supported Communists could make inroads into vulnerable Western European countries.
  • Innocent people in Europe were suffering from shortages of basic necessities.
  • The United States could lose its main export markets if Europe could not find dollars or gold to purchase US products.

"And yet the whole world of the future hangs on a proper judgment...What are sufferings?What is needed?What must be done?"
George C. Marshall,
US Secretary of State
Harvard University,
June 5, 1947

Cooperation for Recovery: The Marshall Plan

Dollar Catalyst

Dollar Catalyst
In his historic speech at Harvard's graduation ceremony in June 1947, George Marshall announced the U.S. plan to give additional economic aid to Europe. The offer was made to all of Europe, including the U.S. wartime enemies and the Communist countries of Eastern Europe. However, the recipients would be required to work together to formulate a unified recovery plan.

The European Response
"When the Marshall Plan proposals were announced, I grabbed them with both hands. I felt that it was the first chance we had ever been given since the end of the war to look at [the] European economy as a whole."
Ernest Bevin
British Foreign Secretary
Sixteen European countries responded by cooperating on a general reconstruction plan that was accepted by the United States. In the end, a total of $13.6 billion (equivalent to $88 billion in 1997 money) was appropriated to the plan. The Marshall Plan was a success. By 1950, the participating countries had returned to, or exceeded, their prewar production levels.

The European Recovery Program (ERP - The Marshall Plan) helped Europe to:

  • Finance its imports and debts without the burden of future repayment
  • Replace, rebuild and expand both private industry and public infrastructure
  • Eliminate bottlenecks in production
  • Restore consumption to a politically acceptable level
  • Establish and fund the European Payments Union to promote multilateral, rather than bilateral, trade
  • Eliminate the worldwide dollar shortage


Marshall aid came with "conditionality" - countries wishing to participate had to agree to:

  • Develop multilateral payment and trade within Europe
  • Move toward currency convertibility
  • Move toward eliminating discrimination against U.S. imports
  • Encourage reductions in public spending
  • Relax government controls such as rationing
  • Increase exports to the United States

U.S. Dollars: Fueling the Economy

Even after Marshall Plan aid ended, the United States continued to provide economic assistance to other countries. In addition, as the "Cold War" heated up, US military expenditures abroad rose, particularly during the country's involvement in the Korean War (1950-53). And even more important, US investment abroad grew substantially after World War II.

The outflow of US dollars provided liquidity, which fueled the growing world economy.

IMF Loans

Egypt's 1956 takeover of the Suez Canal provoked an unsuccessful and costly joint U.K.-French military operation. The United Kingdom and France suffered severe financial consequences as a result. They turned to the IMF, which provided them with its largest financial assistance to date.

  • $262 million to France
  • $1.2 billion to the United Kingdom

US Government Foreign Aid and Spending

Just as the Marshall Plan aid was ending, US military and nonmilitary aid picked up. The continuous outflow of US dollars helped reduce Europe's balance of payments deficit and the worldwide dollar shortage.
US Government Foreign Aid and Spending
US Government Foreign Aid and Spending

Economic Miracles in the 1950s

Europe had recovered its prewar productive capacity by 1950; Japan, by 1952. Their economies grew rapidly over the following decade. As a result, international financial accounts gradually moved toward balance. The dollar shortage had been eliminated.

The System Works

In 1958, the monetary system agreed upon at Bretton Woods was validated when eleven European countries declared their currencies externally convertible. Others were to follow in the next few years.

The dollar-gold exchange standard, based on fixed exchange rates and overseen by the IMF, could finally be realized.

Problems on the Horizon

Economic Miracles in the 1950s
After 1950, the United States began to register balance of payments deficits. At first, the deficits were welcomed, because the United States enjoyed:

  • A strong trade balance
  • Ample gold reserves
  • A small outflow of private capital

The U.S. government believed that the deficits demonstrated US leadership in providing expanding markets and finance. The US balance of payments deficits provided $7 billion of an $8.5 billion increase in world liquidity during the 1950s. The increase in liquidity enabled the international economy to grow at a record rate.

How long could the United States afford huge deficits without harming its own economy?

And if the United States reduced its deficits, who would provide additional liquidity to allow the world economy to continue growing?

By International Monetary Fund

Source: International Monetary Fund

Thursday, April 13, 2017

Money Matters: An IMF Exhibit -- The Importance of Global Cooperation. Conflict and Cooperation (1871-1944)

The Golden Era

From the 1870s until World War I, the United Kingdom served as the leading financial and banking center of the world, while gold ruled as the monetary standard of all the major trading countries. Each country pegged its currency to gold at a constant and unchanging rate. The international gold standard system ushered in a period of unprecedented stability and prosperity - at least for the middle and upper classes in the industrial countries.

Gold and Stability

Gold and Stability
The gold standard provided monetary discipline. Because governments were required to convert domestic currency into gold on request, the amount of currency they could print was limited by the amount of gold in their reserves.

Exchange rates never varied in the classical gold system. This made exchanging money much easier for travelers. American Express even printed the exact amount of foreign currency exchange right on its traveler's cheques.

Industrial Revolution

Technological advances in the nineteenth century produced more goods and created more efficient ways of transporting them across national borders. Governments increasingly recognized the need for easy and convenient currency convertibility. The United Kingdom, economic and financial leader of the world, had based its currency on gold since the early nineteenth century. In the 1870s, Germany and other major trading countries followed its lead and converted to the gold standard.


Economic Consequences of the PeaceWorld War I marked the end of an economic era. Faced with an urgent need for more liquidity, the combatant countries took their currencies off the stabilizing gold standard and printed more money. This triggered high inflation, which persisted after the war.

Economic Consequences of the Peace

The postwar settlement, known as the Treaty of Versailles, exacerbated tensions and economic instability rather than fostering growth and cooperation. The European allies, especially France and the United Kingdom, felt that the losers should compensate them for the cost of the war by paying reparations. In 1921, Germany's reparations alone were fixed at 132 billion gold marks almost twice its prewar national income.

Cost of the World War

Cost of the World War
As this contemporary illustration graphically shows, the cost of the "World War" was staggering when compared with the costs of earlier hostilities. Governments were forced to stop redeeming their currencies for gold, since they had to print so much paper money to pay for the war.

Postwar Conundrum

  • The defeated countries had no gold to pay their reparations. Their economies were exhausted, and the peace terms offered little hope of earning gold through exports.
  • Without the reparations money, the allies could not repay their war loans from the United States.
  • The United States refused to cancel the allies' debts, insisting that the loans represented commercial transactions. 

What will "the next war" cost?

Impossible Debt

Finally, the German, Austrian, Hungarian, Polish, and Bulgarian monetary systems collapsed under runaway inflation called hyperinflation. The United States loaned money to Germany through the Dawes Plan. This loan, along with private investment, enabled the defeated countries to make scaled-down reparations payments. However, the victors collected only a small fraction of the reparations, and the United States eventually had to cancel the remaining debts of its allies.

Global Depression

Normalcy returned with the reestablishment of the gold standard in the mid-1920s, but imbalances plagued the monetary system. The prewar fixed exchange rates no longer reflected the relative economic strengths of the major countries:

  • The U.K. pound was greatly overvalued.
  • The U.S. dollar and French franc were undervalued.

The Great Depression Arrives

Global DepressionBy the end of the decade, economic and financial troubles had spread around the world. Many factors contributed:

  • A decline in prices of primary products devastated the economies of such countries as Argentina, Australia, and Chile.
  • Beginning in 1928, Americans cut back on their investments abroad to capitalize on the booming U.S. stock market. The loss of capital hurt first Germany, which counted on US investments to pay its war reparations, and then the European victors, who relied on Germany’s reparations to repay their own war debts.
  • The 1929 US stock market crash left the United States in financial chaos and accelerated the withdrawal of capital from abroad.

Trade, production, and employment rates fell throughout the world in a dizzying spiral. The Great Depression had arrived. How would the world respond?

International Response:

Beggar-Thy-Neighbor Policies

Instead of cooperating with one another, countries tried to solve their economic problems unilaterally.

To protect domestic industry:

  • Governments devalued their currencies to make their exports cheaper for foreign buyers and to make imports more expensive for their own citizens.
  • Governments also raised tariffs to make imports more expensive for their own citizens.

By selling more and buying less abroad, countries should have created jobs at home and improved their balance of payments positions. But one country’s exports are another’s imports, so these policies, adopted by many countries at the same time, only succeeded in drastically decreasing world trade and worsening the depression.

Worldwide Financial Chaos

Austria’s largest bank, the Vienna Kreditanstalt, collapsed in May 1931. Banking panic spread into Germany and Hungary and eventually forced the United Kingdom off the gold standard. Other countries soon followed in abandoning gold.

Failure to Cooperate

A World Monetary Conference was held in London in the summer of 1933, in hopes that a cooperative effort to restore prosperity might succeed where unilateral attempts had failed. The organizers sought agreement on:

  • Restoring the gold standard
  • Reducing tariffs, import quotas, and other barriers to trade
  • General international coordination of economic policies

Unfortunately, the conference failed. Participants could not come to any significant agreement.

Depression Lingers

The results of the world’s failure to cooperate were devastating. Continued unilateral efforts by individual countries only succeeded in deepening and prolonging economic woe.

  • World unemployment peaked at nearly 30% in 1932 and remained in double digits through the decade.
  • German and US production dropped to 53% of their 1929 levels.
  • One nation after another abandoned the gold standard in the 1930s.
  • Regional trading blocs and bilateral clearing arrangements replaced multilateral trade, making international trade more difficult.
  • Closed currency blocs replaced the international gold standard, further inhibiting trade.

At its lowest point, total world trade sank to just 35% of its 1929 value.

Keynesian Revolution

To help alleviate the Great Depression, some countries adopted policies based on the theories of economist John Maynard Keynes. Keynes argued that during slow economic times, the government should jump-start the economy by spending money to create jobs and boost demand.

The Works Progress Administration (WPA) in the United States was an example of the Keynesian approach. In the end, massive military spending finally succeeded in stimulating the global economy and ending the Great Depression.

Political Consequences

The political consequences of the mistakes made after World War I and during the Depression included the rise of totalitarianism and the outbreak of World War II.

The End of the War is in Sight. . .

Road to Cooperation

The End of the War is in Sight
The desire for economic cooperation stemmed from fear of repeating the post-World War I mistakes that had led to inflation, financial instability, and the Great Depression. While World War II still raged, Allied policy makers debated several plans for international monetary stability:

  • The U.S. proposal by Harry Dexter White
  • The U.K. proposal by John Maynard Keynes
  • Proposals from France and Canada

Keynes called for an International Currency Union, which would function as a "central bank" for the central banks of each country. White, on the other hand, called for a fund to which all member countries would contribute. Both agreed on fixed, but adjustable, exchange rates based on gold.

Bretton Woods

Travel to the United States was difficult and treacherous in the midst of the war, but, incredibly, representatives from 44 countries managed to gather for a conference at Bretton Woods in New Hampshire. Their ambitious goal - to design the framework for postwar international economic cooperation. D-Day had taken place three weeks previously, giving the delegates hope that the war would soon end.

How Could Leaders Ensure a Future of Global Peace and Prosperity?

New Economic World Order

The Bretton Woods meeting was a smashing success. After much delicate negotiation and hard work, the delegates agreed on the fundamental principles of a new monetary system to encourage economic stability and prosperity. Two intergovernmental institutions were created to further these principles:

  • The International Monetary Fund
  • The World Bank

Soon after, delegates meeting at Dumbarton Oaks in Washington, D.C., set up the United Nations, the political counterpart to the Bretton Woods institutions.

International Monetary Fund and World Bank

Bretton Woods: July 1-22, 1944

The Bretton Woods meeting resulted in the founding of the IMF and the World Bank, twin intergovernmental pillars supporting the structure of the world's economic and financial order. The World Bank finances economic development, while the IMF oversees the international monetary system.


The founders felt that a fundamental condition for international prosperity was an orderly monetary system that would encourage trade, create jobs, expand economic activity, and raise living standards throughout the world. The IMF was charged with:

  • Helping each country set a fixed, but changeable, exchange rate for its currency based on gold
  • Assisting members that have temporary balance of payments difficulties by providing short- to medium-term credit
  • Overseeing the international monetary system

United Nations

Dumbarton Oaks: August 27-October 7, 1944

The Dumbarton Oaks meeting resulted in proposals to create the United Nations, an intergovernmental forum for solving international problems and disputes. The proposals were adopted at the subsequent meeting in San Francisco in 1945.

John Maynard Keynes (1944):
"All of us here have the greatest sense of elation. All in all, quite extraordinary harmony has prevailed. As an experiment in international cooperation, the conference has been an outstanding success."

By International Monetary Fund

Source: International Monetary Fund

Saturday, April 8, 2017

The Bretton Woods System and the golden age of capitalism

Bretton Woods System
By 1943, it became increasingly clear that WW2 was going to end in success for the Allied forces, and thus there was increasing interest amongst politicians and economists regarding post-war re-construction. In 1944 in the New Hampshire town of Bretton Woods, 44 allied nations agreed on a new system of international monetary management which, it was hoped, would promote stability and ultimately, peace.

A well-known and inescapable trade-off in monetary economics is that a country with its own currency can either choose a fixed value for its currency vis-a-vis other global currencies, or it can choose a floating value for its currency, whereby the market determines exchange rates relative to other global currencies. There are merits and drawbacks of both systems, with some countries having tried to establish a half-way solution with varying success. A fixed system is advantageous for trade as it reduces uncertainty around a country's values of imports and exports. A floating system however, allows monetary responses to shocks (such as recessions, or high demand during war). The norm since 1870/80 was for all major economies to have a fixed exchange rate system based on free convertibility to gold (this has become known as the ‘Gold Standard'). During the period 1870-1914, global trade tripled. The huge gains from international trade in the 19th century and an absence of stability costs (such as cyclical unemployment) resulted in the persistence of a global fixed exchange system.

The onset of the Great Depression, however, undermined this global consensus on the advantages of the Gold Standard. A collapse in global trade (assisted by the erosion of free trade and the adoption of protectionist policies) significantly reduced the trade gains of a fixed system. Furthermore, programs of fiscal and monetary expansions and competitive devaluations to combat the depression required a degree of flexibility which was not achievable within a fixed system. Thus, in the years running up to the beginning of WW2, many countries abandoned the Gold Standard which, arguably, further heralded the coming of global conflict.

John Maynard Keynes and his American counter-part Dexter White were the principal economists behind the design of a new fixed exchange system – the Bretton Woods system. There emerged a broad consensus amongst the allies that sustained peace would be brought about by eliminating high tariffs, trade barriers, and unfair economic competition so that no nation would become jealous of another's living standards which could ultimately breed the grievances that lead to war. The US also had an incentive to depart from the reparation policies and isolationist stance it had taken in 1918 and to provide liquidity and dollars to the war-ravaged countries of Europe to stave off a growing fear of communism sweeping the continent. The Bretton Woods system ultimately sacrificed capital mobility (the ability for investors to freely move capital from one country to another) so that countries could have a fixed exchange rate (all currencies were pegged directly or in-directly to the dollar, which in turn was pegged to gold). However, governments could also pursue expansionary monetary and fiscal policies by restricting trades in currency, so that effective Keynesian demand policies (such as public works programs) could be enacted in the post-war period.

The widespread adoption and acceptance of this system by the non-communist nations after WW2 helped to spur a so-called 'Golden Age' of capitalism, where rapid growth in productivity and living standards was witnessed across the developed world. The importance of global stability ensured by the functioning of the Bretton Woods system facilitated the prosperity of this period and indeed led UK Prime minister Harold Macmillan to proclaim in 1957 that the British people had 'never had it so good'. However, the Bretton Woods system was ultimately flawed, and would only last until the 1970s, ending any notion of a 'Golden Age' and plunging the global economy into a decade of low growth and recession.

By Philip Duffy

Source: ROM Economics

Saturday, April 1, 2017

An interview with a former Swiss banker

Here is an interview hosted by one of our representatives from the United States, Mr. Yves Jacques. ("YJ").

He recently spoke to Francois de Siebenthal. ("FS"), who is a former banker from Switzerland,

Interview Subject: The crisis in the financial world today and what solutions he would suggest to correct the chaos that is occuring.
The Interview Begins:

François de Siebenthal
François de Siebenthal
YJ: Francois, you are from Switzerland, trained as a professional banker and economist, is that correct?

FS: Yes.

YJ: And you’ve been an economist for how many years?

FS: For more than twenty-five years.

YJ: Some textbooks and other sources mislead people by saying that banks lend from the depositors savings. Can you tell us what really happens?

FS: The truth is that credit makes deposits, and not the other way around. This means that, for example, more than 90% of the money in circulation was created out of thin air. We can estimate that 99.99% of the United States dollar was created out of nothing. We call that Fiat Money, or Ex Nihilo. The problem is that, on the whole, they have been using the credit system to sustain the growth of the United States, to conserve the American economy at the cost of the poor of the world.

Recently the financiers even used the real estate market of the United States to uphold the credit industry. They have created massive amounts of credit (Ex Nihilo) as loans for real estate, and then sold the American mortgages to investors such as Fanny Mae and Freddie Mac at huge profits. They then used the massive import of funds and savings from all over the world to tell the American people that the value of the American industry is rising all the time. But now we have reached a limit in credibility and it (the American dollar) is starting to downslide. It has lost 60% of its value already since the beginning of the Iraq war. The entire system is a lie, and it is causing a massive lack of confidence, and of faith…

When credit is created only to sustain the virtual growth of the economy, there are various ways to get out of it. One of them would be to create a general war with millions of victims, or a bloody revolution, or even a credit crunch such as Japan experienced with its liquidity trap and massive depopulation, or then again, a general collapse of the economy such as what happened in 1929.

YJ: So, this is their solution?

FS: Yes, from my point of view the International Bankers are planning new wars and revolutions. I think that the best solution would be to do as the poor people of the United States did in 1929; establish local banks with 6,000 local currency systems. We can improve all those local systems and coordinate them, like a franchising chain of free and open local banks sharing the same values that are open to all people of good will.

You can find such a proposition at with all the details on how to function with this local system, as they are already doing in some poor countries.

The dollar will collapse for sure, and you need to persuade everyone to start local systems, improved LETS (Local exchange systems) with dividends and compensated discounts (see social credit on the internet). In fact, the dollar is collapsing faster now; its value is going down all the time. For instance, when I began in the banking business the dollar was nearly four Swiss francs to one dollar. Now, it is one Swiss franc to one dollar. So it is, in fact, a massive inflation. If a Swiss, for example, wants to buy a Chevrolet, he must convert it to cheese, watches, machinery and other goods. If an American wants to buy a Swiss watch, he pays in dollars. And what is a dollar? It is a piece of paper on which is printed, "One dollar: in God we trust" or just some bits in a computer.

YJ: Do you think that the reason they want the US dollar to collapse in the United States is because they want to change it for the Amero?

FS: Yes. What they are doing is the same as they did in 1929. The banks print and open more credits to buy more assets very cheap, that way they control more of the people and you can do nothing without their consent. The Patriot Act is a method of dictatorship and they suddenly wanted to change all the notes and put RFID devices in all the currency.

YJ: What do you think of people who say we should exchange US dollars to Euros or Japanese Yen?

FS: If the dollar is collapsing and the same people are behind the Euro or the Yen, it will all come to the same conclusion. Let’s talk about the Japanese Yen. In Japan there is a big, big problem with the population. One third of the Japanese population will disappear before 2050. It is already beginning. There will be a massive depreciation in the real estate markets and this will create a huge crisis, even bigger than the United States, because the Japanese will not allow immigration. The only solution I can foresee for the Japanese is a massive drop in the price of properties. Already I have information from Japan that they are pushing to establish euthanasia. You know the situation is really a war, a war against the weakest in society. They are buying a lot of robots to cope with this trend. The truth is that they want a massive reduction in the population; by the billions… Julian Simon said in his book "The Ultimate Resource 1" that he was paid by those people to prove that the earth was overpopulated, however he wrote books and articles proving exactly the opposite.

The Ultimate Resource (now The Ultimate Resource 2) and Population Matters discuss trends in the United States and the world with respect to resources, environment, population and the interactions between them. Simon concludes that there is no reason why material life on earth should not continue to improve, and that increasing population contributes to that improvement in the long run. Those popularly-written books developed positive ideas and foresaw the falling natural resource prices, increased world oil supply, and decline in farmland prices. His view of population economics is unique and persuasive. In the discussion, he covers resources, environment, population growth with analytical methods.

As said on Amazon, Julian L. Simon is the world’s greatest contrarian. The Ultimate Resource 2–an update, not a sequel–skewers the sacred cows of environmentalism, population control, and Paul Ehrlich. In the contest between resource scarcity and human ingenuity, Simon bets the farm on the ability of intelligent people to overcome their problems. Thankfully, he is not a theorist. This book lays out convincing empirical evidence for his prediction of a prosperous future. The keys to progress are not state-run conservation programs, he says, but economic and politicial freedom. Only then can talented minds properly apply themselves to their earthly dilemmas.

(To read his book, go to this link:

He wrote in his book "Population matters" how he was ostracized by the "rulers" of the new world disorder.

The last book about this type of manipulation is by Steve Mosher. The book is entitled Population Control and it does not simply outline the problems; it proposes a solution as well. Mosher dedicates his final chapter to possible ways that developed nations can avoid the demographic disaster that now threatens. Small tax credits and paltry child subsidies are not nearly enough. Young couples, he argues, need to be sheltered from taxes altogether. And population control programs need to be discontinued as soon as possible. Mosher ends by quoting the late Julian Simon: "Human beings are the ultimate resource." We need everybody to find good solutions.

(For more information see

The members of those Clubs hate poor people. Most of these wealthy New World Order people are racists, in fact they are racists of the worst kind. They condition people to believe that our earth is overpopulated. And so the poor are corralled like cattle into big cities such as Mexico, just to control them and prove that they are right. But in fact, the rest of the earth is empty. The world is huge and we can feed more people. Ramses of Egypt, in the Bible, had this way of thinking and he killed all the male Jews. Now we have "white" bankers living in New York, London and Paris doing the same well-paid job; killing millions or even billions of aborted children with financial soft Gulags to earn billions of dollars.

I recommend this film: "Freedom to Fascism" from the filmmaker Aaron Russo, who exposed his first-hand knowledge of the elite global agenda during a live video interview with Alex Jones’ nationally syndicated radio show.

Nick Rockefeller told Russo about the plan to microchip the population, (see Bilderberg and micro-chip on the internet) and warned him about "an event that would allow us to invade Afghanistan and Iraq" some eleven months before 9/11. Rockefeller foretold that the "War on Terror" would be a hoax where soldiers would be looking in caves for non-existent enemies. Rockefeller also tried to recruit Aaron Russo into the Council on Foreign Relations during the tenure of their friendship. A picture sent by the Russo family verifies that friendship, and strengthens evidence of a global agenda of which Rockefeller’s creation of women’s lib, and the elite’s ultimate plan for world population reduction and a micro-chipped society, played important roles.
Total America Debt

YJ: Can you explain to us briefly, how money is created today and how it should be created? Then maybe we can speak about the practice of interest.

FS: In the United States most of the money, as credit-bearing interest, is created by the Federal Reserve Board and other private banks. The Federal Reserve is about as Federal as the Federal Express. That means that it is a private company owned by a few people. I have a list of about 12 families who are the shareholders that own the Federal Reserve. These people are using this private business for their own personal gain, to generate private profits of trillions (yes, trillions) of dollars. If you add the amounts that are generated every year since Christmas of 1913, sums hidden in various foundations and trusts in tax haven "paradises," the profits are unbelieveable. Wars are for their own profit only and not for the benefit of the American people.

And on the credit base, which is called M zero, you have a massive creation of money, and this credit is based on nothing. Alan Greenspan said that they create the money out of thin air. You have the statistics published by the Federal Reserve (which is a private company) that show that it is allowing and emitting credit to the other banks or other financial vehicles.

A few months before his assassination, President John F. Kennedy was summoned by his father Joseph to the lobby of the White House. He said to him, "If you do this, they will kill you!" But the President was not deterred. On June 4, 1963, he signed Executive Order number 111 110, that repealed the Act and Executive Order number 10,289, calling the production of banknotes into the hands of the state and depriving the cartel of private banks of a large part of their power. After $4 billion of US dollars in small denominations called "United States Notes" had already been put into circulation, and while the state was preparing to deliver even larger cuts of Fed currency, Kennedy was assassinated on November 22, 1963. This happened 100 years after Lincoln’s death. He had created debt-free "Greenback" notes for the United States as well, and he was murdered by a sniper. Kennedy’s successor Lyndon B. Johnson suspended the printing of the notes for an inexplicable reason. The twelve Federal Reserve banks withdrew the Kennedy banknotes immediately from circulation and exchanged them with their own acknowledgements of debt. A few of those notes are still in the hands of Imelda Marcos because her husband was trying to escape the system.

And now with the sub-prime crisis, they are printing millions or trillions of dollars but we don’t know exactly where this money is going. Perhaps it is going to sustain the banks that are in bankruptcy. Crooks are sustaining crooks. And of course, all of this money is created with an interest rate. This interest rate is imposed on the American population mainly through taxes, on the backs of the poor people. For one example, see the LTCM 3 Trillion dollar scandal under Clinton, and other similar situations. The poor of the world cannot eat; they are starving. And the worse problem is that babies are not even allowed to live! Their goal is to have fewer people that are more easily controlled with laws that are becoming even more and more stupid. One such case is Monsanto, a plant that patents pigs or plants and ruins farmers; their goal is to raise the price of food, all the while saying that they are working for the good of humanity…

The Fed began with approximately 300 people or banks that became owners (stockholders purchasing stock at $100 per share–the stock is not publicly traded) in the Federal Reserve banking system. They make up an international banking cartel of wealth that has no comparison. The Fed collects billions of dollars annually in interest and distributes the profits to its shareholders. Congress illegally gave the Fed the right to print money (through the Treasury) at no interest to the Fed. The Fed then creates money from nothing, and loans it back to us through the banks, and charges interest on our currency. The Fed also buys Government debt with money printed on a printing press and then charges US taxpayers interest. Many Congressmen and Presidents have said that this is fraud.

Louis T. McFadden, Chairman of the House Committee on Banking and Currency from 1920-21, accused the Federal Reserve of deliberately causing the Great Depression. In several speeches made shortly after he lost the chairmanship of the Committee, McFadden claimed that the Federal Reserve was run by Wall Street banks and their affiliated European banking houses.

McFadden said: Mr. Chairman, we have in this country one of the most corrupt institutions the world has ever known. I refer to the Federal Reserve Board and the Federal Reserve Banks. The Federal Reserve Board, which is a Government board, has cheated the Government of the United States out of enough money to pay the national debt. The twelve credit monopolies that were deceitfully and disloyally foisted upon this country by the bankers who came here from Europe and repaid us for our hospitality by undermining our American institutions…

The people have a valid claim against the Federal Reserve Board and the Federal Reserve banks. For the text of his entire speech, see this website:

McFadden was killed in the same way as Kennedy and Lincoln and many other opponents to those who control this system of usury.

"Quid prodest scelus, is fecit" which means: "The one who takes profit from the crime, has done it."

An encyclical called "Vix Pervenit" a text stating what contracts are good or bad in business was eliminated from the bookshelves. This encyclical may be found at these addresses on the internet: and also at

So who owns the Federal Reserve Central Banks? The true ownership of the 12 Central banks, a very well kept secret, has been partially revealed. This is a list of some names:

  • Rothschild Bank of London
  • Warburg Bank of Hamburg
  • Rothschild Band of Berlin
  • Lehman Brothers of New York
  • Kuhn Loeb Bank of New York
  • Israel Moses Seif Banks of Italy
  • Goldman, Sachs of New York
  • Warburg Bank of Amsterdam
  • Chase Manhattan Bank of New York
  • Lazard Brothers Bank of Paris

These bankers are all connected to London Banking Houses in the totally free City which ultimately controls the Fed. When England lost the Revolutionary War with America (our forefathers were fighting their own government), they planned to control us by taking over our banking system, the printing of our money, and our debt.

The individuals listed below owned banks which in turn owned shares in the Fed. The banks listed below have significant control over the New York Fed District, which controls the other 11 Fed Districts. These banks also are partially foreign owned and control the New York Fed District Bank:

  • First National Bank of New York - James Stillman
  • National City Bank, New York - Mary W. Harnman
  • National Bank of Commerce, New York - A.D. Juillard
  • Hanover National Bank, New York - Jacob Schiff
  • Chase National Bank, New York - Thomas F. Ryan, Paul Warburg, William Rockefeller,
  • Levi P. Morton, M.T. Pyne, George F. Baker, Percy Pyne, Mrs. G.F. St. George, J.W. Sterling,
  • Katherine St. George,  H.P. Davidson
  • J.P. Morgan (Equitable Life/Mutual Life) - Edith Brevour, T. Baker

U.S. National Debt, 1930-2006

YJ: Well, I think this interview will help the people understand the system a bit more, and what is happening today.

FS: It is better to fight this way, and create a credit club or a local system with coupons free of interest as we wrote about in the "Michael Journal" with the example of Madagascar and the Philippines, than to take out your gun and fight a war!

YJ: The truth is blinding and people do not see it. They want a complicated system, but in fact the solution is very simple.

FS: During the Great Depression in the 30’s the citizens started 6,000 local systems, local credit systems all over the United States. Tell people to study the history of their country. While they were creating their own credits, the big banks were stopped. Do the same! Improve it with Social Credit systems and dividends to share the profits of the robots and computers! 90% of the workload will be done by computers and robots, the challenge is how is distribute the abundance.

YJ: Well, I think that’s the plan of the Pilgrims of St. Michael, we want to start the local exchange systems all over the world. I know that in Columbia they have several systems that are working very well.

FS: In the United States, your grandfathers were the organizers of the local systems. Ask them how it was done. You had more than 6,000 systems all over the United States. The WIR system in Switzerland has made our country one of the richest in the world. ( Just think of what happened in Argentina when the banks collapsed there. That can happen in the United States as well.

Maurice Allais, Professor of Economics at the National School of Mining Engineering in Paris, France and the 1988 Nobel Prize Winner in Economics, had this to say in his book "Les Conditions Monetaires d’une Economie de Marche" ("The Monetary Conditions of a Market Economy" p. 2): "In essence, the present creation of money, out of nothing, by the banking system is, I do not hesitate to say it in order to make people clearly realize what is at stake here, similar to the creation of money by counterfeiters so rightly condemned by law. In concrete terms, it leads to the same results."

We need to practice all five Shabbats and Jubilees, every 7 days, weeks, months, years and 49 years ( 7 times 7 years) and fight usury at all levels, because usury kills.

Please read this extract from Louis Even. "But what about the term ‘usury practiced under another form’ used by the Pope? Does it mean too high an interest rate? If so, of what percentage? Or is it something else, and under what form?"

An English priest named Father Drinkwater, wrote a book in 1935 that identified this "devouring usury under another form" that is the monopolization of credit, which was to amount more and more to a monopolization of money, although the workings of this monopolization of credit were still mysterious to almost everyone at that time.

Father Drinkwater recorded that a committee based at the University of Fribourg, Switzerland, had prepared some elements for the drafting of Rerum Novarum, and that among the members of this committee there was at least one person from Austria who was well aware of the money question and of bank credit. A text that this Austrian had prepared and that was apparently approved by the committee, showed clearly how mere bank money–which is created in banks and consists basically of figures written in bank-books and ledgers, and which was already becoming the major monetary instrument for trade and industry–was nothing but the monetization of the production capacity of the whole community. The new money thus created can only be social in nature (belonging to all of society), and not the property of the bank. This new money is social because of its basis: the community, or society, and because it can buy any good or service in the country. The control of this source of money therefore puts in the hands of those who exercise it, a discretionary power over all economic life.

The text of this Austrian expert also showed that banks do not lend their depositors’ money, but rather deposits that they create out of nothing simply by inscribing figures in bank-books. When banks lend money–no account is diminished in the bank–they do not have to extract one penny from their safes. So the interest charged on their loans is certainly usury: whatever its rate–it is actually more than 100%, since it is interest charged on a capital of zero, nil–the lender (the bank) does not have to do without the money he lends, he just creates it! This usury can rightly be described as "devouring", since banks require creditors to pay back money that has never been created, that has never been put into circulation. (Banks create the principal they lend, but not the interest.) It is therefore mathematically impossible to pay back all loans; the only way for the economy in such a system to keep going is to borrow again to pay the interest, which creates un-repayable private and public debts.

What was the exact wording of this text about the monopoly of credit? One cannot know, since there is no mention of it in the encyclical. Was it suppressed in Fribourg in the final draft sent to Rome? Was it stolen between Fribourg and Rome, or between its arrival in Rome and its delivery to the Sovereign Pontiff? Or was it Pope Leo XIII who decided to put it aside? Fr. Drinkwater raises these questions, but gives no answer. End of quote. This scandal is producing the same absurd situation as in Canada.

And finally let us quote Mackenzie King, who stated while he was campaigning to become Prime Minister of Canada in 1935: "Until the control of the issue of currency and credit is restored to government and recognized as its most conspicuous and sacred responsibility, all talk of the sovereignty of Parliament and of democracy is idle and futile." For more graphs depicting our financial situation see our webiste: and

YJ: We thank you for this interview with us, Mr. De Siebenthal; you are included in our prayers and our support for you and your family.

FS: You are welcome, be assured of our prayers as well, and all the best to you. If you need any further information, please do not hesitate to ask me. You may email me at: