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3:53p PT Saturday, June 12, 2004
Dear Friend of GATA and Gold:
Thanks to our friend Sean Corrigan of Sage Capital in
Zurich for discovering a most remarkable document
from 1930 -- a McGill University economics professor's
speech to the Empire Club of Toronto (which is still
going strong) about the plan then pending for the Bank
for International Settlements.
The professor, John Percival Day, remarks that the
BIS was meant not just to secure war reparations from
Germany but, more importantly, to corner the gold
market and mobilize central bank gold reserves quickly
to manipulate exchange rates in support of fiat
currencies amid an explosion in the worldwide money
supply, in the name of stabilizing prices generally.
Gold's eternal monetary function and the eternal
interest of central banks in monopolizing and defeating
a free market in gold lest it restrain their power could
not be better demonstrated.
Professor Day's speech is appended. While it notes
the reluctance of the United States to join the BIS in
1930, the United States finally did join a few years ago,
concurrent with an increase in coordinated central bank
intervention in the gold market.
Motive and opportunity for the gold price suppression
scheme are laid out here, and GATA is always working
to illuminate the mechanisms.
CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.
* * *
By John Percival Day
Associate Professor of Economics
McGill University, Toronto
Remarks to the Empire Club, Toronto
January 9, 1930
http://www.empireclubfoundation.com/details.asp?SpeechID=2809&FT=yes
I will speak to you about the Bank for International Settlements.
On September 16, 1928, the six governments most
concerned with reparation payments agreed at Geneva to
set up a committee of experts for the purpose of drawing
up proposals for a complete and final settlement of the
reparation problem. The chairman of this committee
was the American, Owen D. Young, and their
proposals are known as the Young Plan, without
implying that Mr. Young had any more to do with it
than any other member.
It was one of the proposals of the Young Plan that a
Bank for International Settlements should be
established.
Before discussing this bank, it is advisable to remind
ourselves of the outstanding features of the Young Plan
as contrasted with the Dawes Plan, which has been
operating since 1924. The Young Plan fixed -- which the
Dawes Plan did not -- the total amount of annuities
Germany has to pay and the period during which the
payments have to be made. According to the plan the
last payment will be made on March 31, 1988. This
definite fixing of the final payment is clearly a factor of
great importance; it gives Germany the
encouragement of seeing the end of the road, and an
inducement to co-operate, which were both formerly
lacking.
The second great change was the handing back to
Germany of the transfer problem. Under the Dawes
Plan, Germany's obligation was definitely limited to
providing the money in German reichsmarks, and the
business of getting it out of Germany into foreign
currencies was entrusted to the Transfer Committee
of the Allied creditors. Now under the Young Plan the
Transfer Committee vanishes and it is the
obligation of Germany herself to deliver the annuities
in foreign currencies to the value of 660 million
reichsmarks a year unconditionally, and, as to the
residue, with the safeguard of conditional
postponement of transfer for a period not exceeding
two years. It was also part of the plan that the
nonpostponable 660 million reichsmarks should be
mobilised or commercialised; that is to say, bonds
should be sold to the investing public to an amount
representing the capitalized value. This would enable
the creditor countries to receive the capital values at
once, leaving the annuity payments to be handed over
to the bondholders.
The Young Plan restores fiscal autonomy to Germany;
it involves the abolition of the various foreign
commissions at present operating in Germany -- the
agent-general for reparations, the Transfer Committee,
the Commissions for Industrial Debentures, and so forth
-- but it requires some external, financial, and
non-political authority to act on behalf of the creditor
powers in the receipt and distribution of the annuities,
in co-ordinating and controlling the arrangements for
the commercialisation of the unconditional annuities,
and for cognate purposes. It was for these
responsibilities that the Young Plan advocated the
establishment of the Bank for International Settlements.
The plan of the bank was outlined in the Young Report;
on November 14, 1929, a special Organization
Committee at Baden Baden drafted and published the
charter of the bank and we are now waiting for the
necessary treaties between the powers to provide the
basis for the application of the trust agreement. The bank
is to be located at Basle and to receive a charter from
the Swiss government; its capital is to be 500 million
Swiss francs, the subscription of which is guaranteed
in equal parts by the central banks of the seven powers
concerned; Britain, Germany, France, Belgium, Italy,
Japan, and the United States. Special arrangements,
however, had to be made to meet the case of the
United States. If that country is willing to cooperate
officially -- which is most improbable -- the bank's
charter definitely stipulates for the Federal Reserve
Bank of New York and not the Federal Reserve Board
to be the representative. But if the Federal Reserve
Bank of New York is not allowed to co-operate, an
invitation will be extended to some private banking
institution or group.
The management of the bank is to be vested in a
board of directors composed of the governors of the
seven central banks or their nominee substitutes,
also seven persons representative of finance, industry,
or commerce, one nominated by each governor. The
Bank of France and the Reichsbank have each an
additional appointee so long as the reparation
payments are incompleted. If any other country has
subscribed to the capital of the bank, its central bank
may submit the names of four candidates of that
nationality for a directorship. From the lists so
submitted the existing board may elect by a two-thirds
majority not more than nine persons. The only way,
therefore, in which Canada could be represented on
the board is for some person or institution in Canada
to receive and take the opportunity to subscribe toward
the capital. The board will then by a two-thirds majority
select some Canadian financial institution -- as we have
no central bank -- to nominate four candidates, and one
of them might be elected.
Strictly speaking, the shareholders as such have no
voting rights, but arrangements are made for a general
meeting to be attended by nominees of central banks
and these nominees have voting rights in proportion to
the number of shares subscribed in their country.
Thus the control of the bank is entirely in the hands of
central banks. That is an important point. The job of the
bank is mainly a technical job, and they want it kept in
the hands of technical experts, and to keep out the
politicians as much as possible. Important alterations in
its constitution are possible only by an act of the Swiss
government in agreement with the governments signatory
to the proposed international treaty.
What is the bank supposed to do?
Insofar as the bank is to be an organ of external
administration of the German annuity payments, it is
obvious that some such authority had to be established
and that, when established and handling such large
sums, it is bound to have considerable influence in the
money markets of the world.
The real interest of the new institution, however, does
not lie there. A much greater importance and a much
more powerful role have been forecast for it. It is the
logical result of banking progress and the coping
stone of the edifice of the financial organization of the
world.
Just as in most countries of the world the banking
system has been given coherence and leadership
and made stronger and more economical by the
establishment of a central bank -- or, at least, of
the central banking principle -- so in the world as
a whole is there to be this Super Bank,
co-ordinating, steadying, and strengthening --
perhaps eventually establishing a rational control
of the purchasing power of gold. These are big
claims and big hopes, but they are circumspectly
forshadowed in the Young Plan:
"The use of the bank's credit by central banks within
moderate limits, and over short periods, may in time
become a normal function scarcely different in its
exercise from the use of control bank credit by banks
and bankers."
"In the natural course of development, it is to be
expected that the bank will in time become an
organization not simply or even predominantly
concerned with the handling of reparations but also with
furnishing to the world of international commerce and
finance important facilities hitherto lacking.
"Especially is it to be hoped that it will become an
increasingly close and valuable link in the co-operation of
central banking institutions generally -- a cooperation
essential to the continuing stability of the world's credit
structure."
This bank is to be a great and promising experiment in an
untried field. The centralization of the world's gold reserves
in its keeping would render possible and safe, when
necessary, a greater expansion of credit and thus avoid
that indefinitely long stretch of falling prices, with all their
depressing influence on trade, which otherwise, and failing
the discovery of new gold mines, is thought by many to be
inevitable. People who refuse to believe that the central
banks of the world would be willing to trust part or most of
their gold to the keeping of such a bank overlook the fact
that much of the reserves of the central banks has since the
war been increasingly kept in foreign centers as earmarked
gold or as what the Germans call devisee: foreign credits
easily liquidated.
The Bank for International Settlements might be a great
and promising experiment, but like all innovations it
encounters opposition.
There are people who think that the bank has enough to do
as trustee for the reparation payments, that any ambitious
enterprise tacked on to that will endanger the bank's
success, and they are strenuously opposed to it being
made the field for experiments by the doctrinaire
advocates of price stabilization.
Some English people see in it a threat to the international
prestige of the Bank of England: some French fear it is a
device to bring about Anglo-American financial dominance;
and some Americans regard it as a consolidation of
European interests to oppose American financial power.
More serious, because more potent, are the suspicions
of the central banks themselves. Just as the commercial
banks of any country usually instinctively oppose the
establishment of a central bank, so the central banks
may dislike this Super Bank, fearing its encroachment
on their preserves.
It is for this reason that the organisation committee have
curtailed the proposed powers of the bank by inserting
the veto clause, which forbids any financial operation by
the bank in any market or any currency unless the central
bank directly concerned assents, though this does not
apply to the withdrawal of funds from any market if no
objection has been raised to the introduction of such
funds. It is for the same reason also that the new bank
is not to be allowed to issue bank notes, to accept bills
of exchange, or to lend to governments.
Obviously, the success of the bank will depend very
largely on its management. A board of 25 directors
representing seven or more nationalities and not all
familiar with each other's language does not sound too
promising, and will throw much of the responsibility on
the president, who is to be elected by the board for three
years and can be reappointed. It is rumoured -- I do not
know that this is right but I am passing it on to you -- that
the first president is to be an American, and the name of
a Chicago banker is mentioned -- somebody accustomed
to being shot at, I suppose -- (laughter) and that the first
general manager is to be a Frenchman. The chief danger
is that the bank may try to do too much too soon, but
there is no reason to suppose this danger is not realized.
Summarizing, the essential reparation functions of the
bank are such as to form a solid reason for its existence;
beyond that, if the central banks of the world keep deposits
with the bank, it can act as a clearinghouse for
international indebtedness, helping to stabilize the foreign
exchanges and going far to eliminate the costs and risks
now incurred in the shipping and reshipping of gold.
Beyond that again, the bank may in time provide a cure
for the one great fault of the gold standard: that gold does
not maintain a stable purchasing power. And away beyond
all that, let us hope a time may come when we shall be
willing to trust to the integrity and skill of the world's best
brains rather than to that somewhat mythical thing, the
intrinsic value of bullion.
I have said that the one great fault of the gold standard is
that gold does not maintain a stable purchasing power.
This is only another way of saying that the general level
of prices does not remain steady -- that, for example, in
1920 the American dollar could only buy you a little more
than a quarter of what it would have bought you in 1896.
Now, I have not time to argue out the case that
fluctuations in the general price level are an evil. Sir Josiah
Stamp has gone so far as to say they are the greatest
social evil of our time. They are an evil, a very serious evil,
and the World, by tying its monetary units to the value of
gold, has, while gaining many not-to-be-despised
advantages, let itself in for the evil of a fluctuating price
level.
For, as we advance in knowledge and power, the output of
wealth, of consumable commodities, is ever increasing
year by year. Unless our output of money keeps pace with
this enormous increase of trade, there is at once a
tendency to falling prices. A larger quantity of goods can
be exchanged for only the same amount of money as
before, if the goods are priced at a lower figure. When,
therefore, during the 19th century, there was a stupendous
increase in the volume of world trade, there would have
been a very great and very detrimental fall in the price level
but for the fact that there were a few fortunate gold
discoveries and, more important still, people invented
acceptable substitutes for gold: bank notes at first and,
later, cheques. And insofar as this volume of purchasing
power is not backed 100 percent by gold, we call it credit.
But there are limits to which this credit expansion can go:
limits which are really psychological in nature. So long as
people accept fiduciary money on the understanding that it
can be turned into gold on demand, so much gold must be
kept by all credit-issuing authorities that the amount will
be fully adequate to meet the demands of all who are likely
to demand it. It is obvious that these demands will vary
from time to time and from place to place, and when at
any time and place an increase has not been fully
anticipated and arrangements have not been made to
meet it completely, a financial panic results.
Now, if every bank keeps enough gold to meet all probable
demands at all times, it is keeping more than it needs at
all times except the worst emergencies. It could afford to
keep very much less if emergency supplies could be
easily obtained, and hence the fundamental advantage for
any country of centralizing gold reserves, rendering them
mobile and able to be utilized whenever there is a special
call upon them.
Centralization of reserves, of course, is of no help if all banks
equally and at the same time demand assistance, but this
seldom or never happens. The strain starts somewhere and
by support given there at once, the danger to the rest is
averted. It was found that, when the Federal Reserve System
had centralized the gold of the United States, the amount of
gold required as a reserve against liabilities could be with
safety very considerably reduced; the gold was economized.
That is the point I want to make: that the centralization of
gold reserves reduces the amount of gold that is necessary,
considering the psychological factors, to support a given
amount of credit.
Now let us look at the future. So far as we can see, man
will continue his wonderful progress in the development of
natural resources, more and more goods will be turned out
for the market year by year. Unless we can increase the
volume of purchasing power proportionately, prices will fall
and fall, with all the handicap to business activity which
falling prices inevitably bring. And this setback to trade
with its attendant unemployment and distress is largely
unnecessary. It would not happen if prices kept up.
Prices can be kept up if the purchasing power is
increased, but how can this be done if new gold mines
are not conveniently discovered just at the right time
and to the right amount? It cannot be done by an
extension of credit, since credit, generally speaking,
has already been extended as far as the existing basis
permits. Nor can it be done by the use of any further
substitutes for gold, which, even if one could think of
any, would only imply extension of credit.
The only solution seems to be to economize the gold we
have; in the first place by withdrawing it from domestic
circulation where it is not needed, and this has already
been done in most countries; in the second place, by
centralizing it all, not merely in the central reserves of
each country, but in one great central fund for the world.
If that were done -- and this new bank makes it at least
possible to attempt -- we could avoid to a large extent
that period of falling prices which otherwise is going to
be an unnecessary handicap to business enterprise and
to the progress of material welfare throughout the world.
This, putting it as briefly as possible, is how things would
work.
Suppose the output of goods in any country -- say,
Canada, if you like -- increases greatly. To prevent prices
falling, credit is extended. Under present conditions, this
would lead to a drain on Canadian gold reserves unless
other countries also maintained their own proper price
levels.
The assumption is that, if we develop the co-operation of
central banking authorities, they will all aim at keeping
their price levels steady. Insofar as mistakes are made
and price levels get out of gear, a country can be helped
out by the new bank. Instead of allowing Canadian dollars
going to a discount, the bank will lend its credit and provide
foreign exchange at the stable parity rate.
But the bank cannot lend its credit like this unconditionally
and permanently. The assumption behind the loan is that
as soon as, or even before, it became necessary for any
country to borrow from the bank, that country will take,
or will have taken, the necessary steps to correct what
went wrong. If they had extended credit too far so that
their price level, instead of remaining steady, had got
out of gear with the price levels of other countries, they
would have to restrict credit until the equilibrium was
restored and their indebtedness to the bank paid off.
The only theoretical difficulty is what would happen if a
country which had been borrowing from the bank refuses
to take the necessary steps.
What powers of compulsion can the new bank have?
And the answer is, so far as I can see, that it has none,
but that it would cut its loss and boycott the country. The
advantage, however, of belonging to the world system of
credit control would be so great that no country would
willingly face expulsion, and hence no powers of
compulsion are necessary.
For myself, I can only repeat that I regard the bank as a
great and promising experiment. I trust that it will not be
stillborn through a blind American abstention. A year ago
the governor of the Federal Reserve Board stated that he
had become convinced that participation in world affairs
was a matter of enlightened self-interest for the United
States, and he is right. I trust that the bank will not be
crippled by national suspicions or professional
jealousies, and I hope that, as it proves its worth and its
reliability, its powers may be so extended as to enable it
to fulfill completely the wonderful possibilities of service to
mankind that are already discernible.
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