Euro And Gold Price Manipulation Part I
Never in history was gold manipulated down as extensively as it was under Bretton Woods agreements. Signed on July 22, 1944, they actually created the International Monetary Fund and the World Bank, whose meeting in Prague this year was adorned with Professor Mundell's remarks that will be analyzed here.
Under Bretton Woods agreements, the currencies of the IMF member countries were to be defined pro forma in weight of gold, and those "gold parities" were to be translated into par values against US dollar, whose gold parity at $35 per fine troy ounce was 888.67 milligrams (or 15 and 5/21 grains 0.9 fine). The currencies of the IMF member countries became convertible to dollars at "fixed but adjustable par values", but only dollars were made officially convertible to gold. (Not to American nationals, only to foreign central banks.)
The $35-per-fine-troy-ounce dollar parity was originally introduced by Franklin Delano Roosevelt's proclamation of January 31, 1934, to replace gold standard parity of $20.67 per fine ounce, i.e, 1,504.63 fine milligrams (or 25.8 grains 0.9 fine), which was debased by massive legalized counterfeiting by the Federal Reserve System, a central bank that was imposed upon America by stealth during Christmas recess of 1913 to provide financing for the First World War, whose name I propose to change to: "The First War the British Empire Could Not Afford".
$35-per-ounce parity would have been adequate between 1922 and 1930. Consumer Price Index (CPI) averaged for those nine years at 1.716666 in terms of 1.00 in July 1914. This means that US dollar was worth in those years 58.25 cents in terms of $1.00 of July 1914, while Roosevelt Dollar was worth 59.06 cents. Because of the horrendous deflation in the years of the Great Depression, the Roosevelt Dollar was out of whack with the fiat dollar of January 1934. With Consumer Price Index for January 1934 reading 1.32 in terms of 1.00 in July 1914, the January 1934 dollar was worth 75.75 cents of gold standard dollar of 1914. For this reason, the fiat dollar of January 1934 was endowed with 128 cents in terms of its own foreign gold parity of $35 an ounce. (75.75 / 59.06 = 1.28)
Some people believe that the primary reason why FDR devalued gold standard dollar, parity of $20.67 per ounce, to $35.00 instead of to $27.28 per ounce was to make advance preparation for financing the Second World War, while others argue that he merely made the room for expansion out of the slump of Great Depression. But if he only made the room for expansion, why did he wait with that expansion until 1941? Why the people had to wait seven years in hunger and misery for the expansion he just couldn't wait to make possible? Congress passed the enabling Gold Reserve Act of 1934 on January 30, and FDR issued his devaluation proclamation on January 31, in less than 24 hours, and then he sat on his tool he so eagerly created for seven long years before he put it to its intended use. As late as February 1941, with CPI at 1.41 in terms of 1.00 in July 1914, purchasing power parity of the fiat dollar at home was still at 120 cents level in terms of $35 gold parity.
But whatever the underlying reasons were, the fact is that fiat dollar's purchasing power did not descend to 100 cent level in terms of its own foreign gold parity of $35 per ounce, or to 59 cent level in terms of gold standard dollar, until Christmas 1942. Consumer Price Index for December 1942, January 1943 and February 1943 reads 1.69 in terms of 1.00 in July 1914, which corresponds within one-half of a cent with 59 cents of gold standard dollar, and the parity of $35 per ounce.
Thus the Winter 1942/43 represents unique moment in the history of debasing of US currency under Federal Reserve System. It marks the return, however brief, however illusory, to the gold standard rule under which purchasing power matches gold parity.
The Roosevelt dollar was a schizoid, two-tier dollar, whose purchasing power at home did not match its gold parity abroad. At home, it was a fiat monetary unit, not convertible to gold; abroad, it was convertible to gold at $35 per ounce. When this "international gold bullion standard" was set up on January 31, 1934, the Roosevelt Dollar was worth 100 cents abroad and 128 cents at home in terms of its own gold parity of $35 per ounce. At home, it was loosing a cent at a time, while abroad it kept all 100, because at home it was not convertible to gold while abroad it was. At Christmas 1942, the fiat dollar, descending from 128 cents level of January 1934, finally met its foreign twin when it reached 100 cents level. But the reunion was to last three months only.
Domestic depreciation did not stop in November 1942, of course, and the schizoid Roosevelt Dollar, while standing still abroad, would resume in March 1943 the process of loosing pennies at home. While abroad it would continue to be worth 100 cents in terms of its gold parity of $35 per ounce, at home it would be worth less and less than 100 cents. To grasp the real meaning of the Bretton Woods system, it is necessary to adopt the dollar of the Winter 1942/43 as 1.00 reference point for further calculations.
We start from December-February 1942/43. In terms of its own parity of $35 per ounce of fine gold, US dollar is worth 100 cents at home and 100 cents abroad, and Consumer Price Index reads 1.00. (In terms of gold standard parity of $20.67 per ounce of fine gold, the same dollar is worth 59 cents at home and 59 cents abroad.)
It's July 22, 1944. Bretton Woods agreements are signed. CPI for July 1944 reads 1.05, in terms of 1.00 in December-February 1942/43, which means that US dollar is now worth only 95 cents at home, while abroad the same dollar is still worth 100 cents.
It's August 4, 1945. President Truman signs into law the Bretton Woods deal, approved by US Congress as a simple bill, not a treaty that would require 2/3 majority vote in the Senate. The next day, Harry Truman authorizes Hiroshima bombing. CPI for August 1945 reads 1.07 in terms of 1.00 in December-February 1942/43, which means that US dollar is now worth only 93 cents at home, while abroad it is still worth 100 cents.
It's September 1946. Secretary of the Treasury, John Snyder, certifies US dollar to the IMF at its 100-cent value of "15 and 5/21 grains of gold 9/10 fine". CPI for September 1946 reads 1.21 in terms of 1.00 in December-February 1942/43, which means that US dollar is now worth only 83 cents at home, while abroad it is still worth 100 cents.
It's August 1947. International Monetary Fund is now fully operational and member countries are pegging their currencies within 1 percent of their official par values to the 100-cent dollar, convertible to gold at $35 per ounce. CPI for August 1947 reads 1.33 in terms of 1.00 in December-February 1942/43, which means that US dollar is now worth only 75 cents at home, while abroad it is still worth 100 cents.
In economic terms, this was prima facie revaluation of the 75-cent dollar for purposes of foreign exchange upward 33.3% to 100-cent dollar level, but the New York Times never reported it as such. "Dollar Stays at $35 an Ounce" is not the same as "Dollar Revalued One Third". That's how the Bretton Woods rigged casino, in which 75-cent chips would be cashed for 100-cent gold-convertible dollars, was formally, officially and legally established.
From the position of American manufacturer, this two-tier dollar that was worth 75 cents at home and 100 cents abroad, translated into hidden export tariff of 33.3% and hidden 25% subsidy to imports from abroad.
A US-made product, priced at home $100 in 75-cent fiat dollars, was worth only $75 in 100-cent gold-convertible dollars, but the moment it was offered for sale abroad, its price would automatically go up 33.3% because the same dollar bill was worth 75 cents at home and 100 cents abroad.
The effect of selling a $100 product for $100 abroad was the same as selling it for $133.33 at home. This, of course, priced the US-made products out of the markets abroad, and discouraged US exports across the board, while the same two-tier dollar also worked in reverse to the advantage of the imports from abroad. Foreign products, priced in 100-cent dollars, were 25% cheaper when offered for nominally the same price on 75-cent dollar market.
To make the long story short, disparity between 100-cent Roosevelt Dollar and 75-cent fiat dollar was automatically pricing every foreign product one-fourth cheaper in America, and every American product one-third more expensive abroad.
All Nobel laureates in economics now living, including specifically Professor Robert Mundell, are hereby challenged to come up with a rational argument against this presentation. Nothing would please me more than to be proven wrong. But if the best of the best will not come forward and prove that I am wrong, then something will have to be done about it. And that something can only be the return to honest money, i.e., defining dollar and every other currency in weight of gold.
This challenge is especially compelling in view of the fact that present day manipulation of the price of gold in effect restores the original Bretton Woods set up. Half a century after it was created, Bretton Woods rigged casino is back in operation; imports from Europe again enjoy one-fourth subsidy in America, while American exports again face one-third tariff in Europe.
The initial Brretton Woods exchange disparity (with one-third tariff on American exports and one-fourth subsidy to foreign imports) would have been maintained symmetrically over the years by the same means the parity would have been maintained, i.e., by inflating foreign currencies in step with the US dollar. Countries with the higher rate of inflation than that of the United States would simply see the undervaluation of their currencies against dollar (and the corresponding foreign trade edge) diminishing. But only two years after the IMF began its operations, the initial "one-third from you, one-fourth for me" Bretton Woods new deal underwent major revision when British pound sterling was devalued 30.5 percent on September 18, 1949 by advance permission of the IMF (which for all practical purposes meant the United States Government's acquiescence).
The British of course knew that their pound sterling was seriously overvalued, because they maintained the illusion of solvency during World War II by way of that overvaluation. Now, to rip the full measure of dollar overvaluation benefits under Bretton Woods scheme, the pound had to be devalued, but this had to wait until the US Government would ratify the Bretton Woods treaty in the first place, until Britain's $20 billion Lend-Lease debt would be forgiven, until Britain would receive new $3.75 billion credit line, and until Britain would collect her share of aid under the Marshall Plan. The most fitting comment on this game of poker was made in "mischievous little verse" found by Richard Newton Gardner on "yellowing piece of paper salvaged from the Anglo-American financial negotiations" and quoted in the opening words of his book "Sterling-Dollar Diplomacy" (New York 1969, McGraw-Hill):
In Washington Lord Halifax Once whispered to Lord Keynes: "It's true they have the money bags But we have all the brains."
When the pound was finally devalued on September 18, 1949 from $4.03 to $2.80, the rate it was selling at that time on the Swiss free market, the entire sterling bloc and many other affected currencies would follow the suit. As a result of this massive adjustment of the dollar par values by the IMF currencies, the dollar structural overvaluation rate became higher. All these par values were reset in terms of the 100-cent, gold-covertible dollar, while the September 1949 dollar was worth 70.7 cents, 4.3 cents less than the 75-cent dollar of August 1947. The 1947 head-start of the IMF currencies, consisting of one-third tariff on US exports and one-fourth subsidy to foreign imports, was upgraded thereby to 41 percent tariff on US exports and 29.3 percent subsidy to foreign imports.
The value of all IMF currencies was depreciating over the years, as was the value of the US dollar, but because the IMF "gold parities" were fixed, it was gold that was made to depreciate thereby. In constant yen, pound, mark or franc, the foreign central banks were paying less and less for cheaper and cheaper dollar, while in current yen, pound, mark or franc, they were pretending to pay the same for the dollar that pretended to stay the same, when the only thing that was staying the same was that thirty-five paper dollars could be exchanged from abroad for one ounce of fine gold at the US Treasury.
By the time President Nixon finally closed the "gold window" in August 1971, the paper dollar sank to 41 cents in terms of $35-per-ounce dollar.
Not a single professor of economics, including all Nobel laureates, is known to have ever noticed that payment in 41-cent dollars of 1971 would ipso facto cut the $35 price of one troy ounce of fine gold down to $14.35. Only in the absence of the "gold window" where one ounce of gold could be had for thirty five 41-cent dollars, the price of the same ounce of gold in the same 41-cent dollars would go up to $85.36. (Gold Standard Index, i.e., inflation value of gold, as of August 1971 was actually $84.34. The 85.36 figure is imprecise because of rounding in prior conversions, particularly, because CPI for December-February 1942/43 was one-half cent off the exact parity of $35 an ounce.)
US gold reserves at Fort Knox have reached their all time peak on September 21, 1949 (just three days after sterling's devaluation) at $24,690,998,991. At $35 per ounce, this equaled 705,457,114 ounces. By June 30, 1973, of these 705 million ounces only 267 million ounces would remain, while combined gold stock of Germany, Switzerland, France, Italy, Holland, Belgium, England and Japan would reach 521 million ounces.
Formal introduction of the free float system in foreign exchange on March 19, 1973, quite naturally brought the price of gold to its inflation value (Gold Standard Index). I don't know if the term "Gold Standard Index" was ever used by anyone before, even though the concept appears to be essential. If this term is unknown in the profession, it will be now, and it will mean: "Mint Price of Gold under gold standard ($20.67183462) multiplied by Consumer Price Index from July 1914", or, less precisely, "Bretton Woods Price of Gold ($35) multiplied by CPI from December-February 1942/43". CPI reading for March 1973 in terms of 1.00 in July 1914 was 4.33. This meant that Gold Standard Index as of March 1973 (or inflation value of gold) was $89.51.
And so, when the price of gold went more than two and a half times up, the prices tied to gold, e.g. oil, had to go up too, and Yom Kippur War had little to do with it. In fact, the entire world had to adjust its bookkeeping to reflect the inflation of 1940s, 1950s and 1960s that was concealed by false price of gold. And once the inflation cat was out of the bag, gold, of course, would lead the chase.
When Jude Wanniski of www.polyconomics.com writes: "In the last 30 years, by a rough rule of thumb, the price of gold has gone up tenfold, the price of crude oil has gone up tenfold, the price of housing has gone up tenfold, the price of prescription drugs has gone up tenfold, the price of transportation has gone up tenfold, the price of tuition has gone up tenfold, and the Consumer Price Index has gone up fourfold" -- he does not realize, or refuses to acknowledge, that throughout the Bretton Woods gold manipulation period 1947-1971, CPI meter continued to record the increases in the cost of living, while the prices of gold and items tied to gold were frozen.
That was the secret of the cheap oil in those years!
Following the closing of the "gold window" on August 15, 1971, and formal return to free float on March 19, 1973, the prices of gold and gold-tied items had to catch up with CPI. That's why CPI increased fourfold since 1971 and gold tenfold. When counted from December-February 1942/43, both CPI and the price of gold show the same rate of increase, i.e., tenfold. By August 1971, CPI was already at 2.41, which meant that August 1971 dollar was worth only 41 cents of January 1943 dollar, but gold was still booked at $35 per ounce as in 1943.
As a result of sterling devaluation in September 1949, the decade of 1950s began with the following dollar rates in foreign currencies:
(* French Franc is adjusted from 350 to 3.50 to conform to 1959 currency reform (100 old francs for 1 new), and British pound is expressed in decimal fraction, even though the pound had twenty shillings, and shilling twelve pence at that time.)
The floating rates were finally sanctioned by the Paris accord of March 16, 1973, and on Monday, March 19, 1973, the US dollar was selling in New York at the following spot prices:
When we adopt 1950 for "100", we will get the following consumer price index readings for 1973:
The first column in the table below represents the 1950 IMF par values of the US dollar, the second column the same 1950 par values adjusted for inflation as of 1973, the third column the free float rates of March 19, 1973, and the fourth column the percentage of dollar's devaluation under float in real terms (percentage of decline from the second to the third column figures):
If the 1950 IMF par values would reflect purchasing power parities, the same par values adjusted for inflation as of 1973 should have matched the free float rates of March 19, 1973, but they did not. Instead, the differences did establish the actual percentages of the US dollar devaluation under float.
When these percentages are applied symmetrically to 1950 IMF par values, the purchasing power parities as of 1950 can be established. And since the across the board undervaluation of all IMF currencies against US dollar, resulting from disparity between gold convertible dollar and 70.7-cent fiat dollar of September 1949 is a known quantity (29.3 percent), we can state with precision by what percentage the par value of each currency was understated to the IMF:
The first column in the table below represents official 1950 par values of one dollar in the currencies listed, the second column represents the percentages of dollar devaluation as of March 19, 1973, the third column represents 1950 purchasing power parities obtained by applying the percentages from the second column to the official par values in the first, and the last column represent percentages by which the actual par value was understated to the IMF, obtained by subtracting 29.3 percent from percentages listed in the second column.
As we can see, dollar par values of the Belgian Franc, French Franc, and British Pound were not understated. Rather than to add on to the undervaluation that was conferred upon them by the two-tier dollar, they reduced it slightly by 5.5, 5.4 and 2.5 percent respectively.
Dollar par values of Swiss Franc, German Mark and Italian Lira were understated, but all within negligible margin of less than 5 percent.
Dollar par values of Japanese Yen and Dutch Guilder were seriously understated: Yen by 29.4 percent and Guilder by 14.9 percent.
When British pound was devalued 30.5% on September 18, 1949, Dutch Government elected to devalue Guilder by the same percentage, even though neighboring Belgium was satisfied with only 12.3%, and many Dutch officials considered 30.5% devaluation "excessive".
Yen's undervaluation resulting from two-tier dollar (29.3 percent) was virtually doubled by understating its dollar parity by 29.4 percent. With combined initial undervaluation of 58.7 percent, the effect of selling $100 US product in Japan was the same as selling it for $242 in the States, while Japanese manufacturer could sell similar product for $41.3 in the United States and still make a profit. This was the reason why the Japanese "economic miracle" surpassed all the other "economic miracles" after World War II. But to their credit, it weren't the Japanese, but the American icon, Douglas MacArthur, who set the par value of the yen so low.
Bretton Woods system was based on gigantic gold price manipulation, very much the same as now. The only difference is that then the manipulation was ultimately based on sellout of gold from Fort Knox (nearly 14 thousand tons) at prices suppressed by as much as... 58.5 percent (calculated from Gold Standard Index $84.34 at the time of "gold window" closing in August 1971 and the Bretton Woods official price of gold $35), and now it is based on writing naked gold derivatives by the bullion banks, backstopped by Exchange Stabilization Fund, at prices suppressed by as much as 26.8 percent (calculated from $252.88 London fixing of August 25, 1999, and Gold Standard Index $344.60). The Congress we now have is eminently incapable of ascertaining whether Fort Knox gold is being dumped on the market, or not; dumping of the British taxpayers gold is open, notorious and scandalous. (Years ago, when Queen Elizabeth II appointed Sir Alec Douglas-Home a Prime Minister, someone in England said, on account of Sir Alec's demonstrable ignorance of economics, that ever since Caesar Caligula appointed his horse a Consul no appointment has been equally unfortunate. But that was before Tony Blair and his gold selling program came in.)
January 10, 1977, ten days before President Carter's inauguration, was the last day when, at $121.00 per ounce, the market price of gold matched Gold Standard Index.
By January 21, 1980 it went up to $850
By March 18, 1980 it went down to $481.50
By September 23, 1980 it went up to $711.00
By June 21, 1982 it went down to $296.75
By February 15, 1983 it went up to $509.25
By February 25, 1985 it went down to $284.25
By December 14, 1987 it went up to $499.75
By September 15, 1989 it went down to $355.75
Under Bush administration and during the first term of Clinton administration, gold price volatility gradually died down until in 1995 the price of gold became nearly fixed at annual average of $383.79. With annual average of the monthly highs at $388.46 and annual average of the monthly lows at $380.52, the average bandwidth of volatility became as narrow as $7.94 or 2 percent. One percent on each side, that's like gold export-import points!
Then, early in the election year of 1996, the price of gold climbed to $414.80 on February 5, and from then on every rally was quickly beaten down until the price hit $252.80 on July 20, 1999. On the way, the Gold Standard Index level was crossed on July 4, 1997. (Even in its roller-coaster rides during Carter and Reagan years, the price of gold never went below the level of the Gold Standard Index.)
Why this gold-standard-like stability of the price of gold was abandoned, and the long term policy of suppression of the price of gold was adopted? How this policy actually evolved?
The answers will be presented in Part II.