Honest Money

Gulf Monetary Union does not require convergence

The last major hurdle for a GCC (Gulf Co-operation Council) Monetary Union (GMU) is the definition of the institutional and governance structure and design of the Gulf central bank, said Dr Nasser Al Saidi, Chief Economist at the Dubai International Financial Centre (DIFC), earlier this week. (1)

On 9 August 2008, the DIFC nevertheless released a report assessing the progress being made by GCC countries to achieve the convergence criteria for a GMU. (2)

The GMU is being modelled after the European Monetary Union (EMU). The Maastricht Treaty of 1992, setting up the EMU, also provided for convergence criteria.

It should however be remembered that EMU came into existence to replace the US dollar as the world reserve currency.

The first serious attempts of Europe to achieve EMU occurred in early 1971.

From the second half of 1944 to 15 August 1971, the Bretton Woods system was this planet’s currency regime. This system linked the US dollar to gold at fixed price, that is, made the dollar convertible into gold at fixed rate, and linked all other currencies to the dollar. This system was a stable and rational system which established a global monetary union.

The system did however not take human creativity into account. His creativity led man soon to discover that this system had a gold component and a paper component and that the latter could be expanded at will through the printing of more paper.

On 15 August 1971, US President Richard Nixon ended the dollar’s convertibility into gold. The Bretton Woods system of fixed exchange rates remained in place until 1973. Upon the latter’s collapse in 1973, this planet enjoyed its first oil crisis, oil being traded in dollar.

Prior to 1971, the apparent value of the dollar had indeed already begun to fall and prices of things began to rise in the US, despite the fact that each dollar still carried the government guarantee of fixed gold convertibility. This was due to the paper component of the system expanding under forces of human creativity. The relative dollar value dropped prior to 1971, even though the dollar conceivably was still convertible to gold.

At that moment, it became obvious that a new system should be developed. A new system which naturally employs a gold component and a paper component, but builds a firewall between the two such that gold’s valuation as a wealth-preserving asset cannot be pulled lower by human creativity which cannot but inflate the paper component of the circulating currencies. That’s why the EMU came into existence.

On 22 March 1971, the Council of the European Communities therefore adopted a Resolution saying that the EMU to be realised in the nineteen-seventies was defined in the sense that the principal decisions concerning economic policy will be taken at community level and that the powers required for this are therefore transferred from the national to the community level. This process may result in the adoption of a single currency, thus ensuring its irrevocability, said the Resolution. (3)

On 22 March 1971, this planet still lived under the economic convergence realised by the Bretton Woods system.

The efforts to realise an EMU in the nineteen-seventies failed due to the 1973 oil crisis resulting from the collapse of the Bretton Woods system of fixed exchange rates.

The Maastricht Treaty revived these efforts. Following the Maastricht Treaty, the EMU came into existence on 1 January 1999. The euro notes and coins came into circulation on 1 January 2002. The legal tender of the national currencies of euro-countries expired in the middle of 2002. The 1952 European Coal and Steel Community (ECSC)-Treaty also expired in the middle of 2002, that is, 30 years after 22 March 1971 EC Council Resolution transferring the powers concerning economic policy from the national to the community level.

In the same middle of 2002, that is on 9 May 2002, the late Dr Willem F. Duisenberg, President of the European Central Bank (ECB), said in a speech upon receiving, in name of the ECB, the International Charlemagne Prize of Aachen for 2002, that the euro is the first currency that has not only severed its link to gold, but also its link to the nation-state. (4)
Dr Duisenberg thereby merely repeated what had been said thirty years earlier, that is, that the euro had transferred the powers concerning economic policy from the national to the community level.

The old system was the system of the US Federal Reserve Bank (Fed), at present the US Treasury I think, which marks its gold reserves at fixed price. The old system marks these reserves to model on the basis of assumptions, on the basis of guesswork.

The new system which reached adulthood in the middle of 2002 built a firewall between the gold component and the paper component of the euro by marking its gold reserves regularly to market (–price). This concept of periodically marking to market (MTM) its gold reserves gives rise to the concept of FreeGold. Advocates of FreeGold do not view gold as a currency nor as a hedge against many possible calamities, but as wealth. Hence, they build, this firewall between wealth on the one hand and currency or hedge on the other, in order that gold’s valuation as a wealth-preserving asset cannot be pulled lower by human creativity which cannot but inflate the paper component of the circulating currencies.

In 2002, Duisenberg had to repeat the intentions of the drafters of the 22 March 1971 Resolution because what was clear in 1971 upon the dollar’s demise, that is, that EMU was intended as an alternative to the dollar regime, seemed to have been forgotten.

FreeGold ensures that the price of gold does not disappear in ever lower regions as a result of the inflation of the paper component of the circulating currencies.

When you think about it, Europe would like nothing better than for the dollar to get stronger as it inflates. That’s what’s happening now. If the US can keep the game going just a little longer while the GCC can get on board of FreeGold, this is good for everybody, right?

Ivo Cerckel
ivocerckel AT siquijor DOT ws

NOTES

(1)
GCC monetary union key to setting up a central bank
Shuchita Kapur on Monday, August 25, 2008
Emirates Business 24/7 – Dubai, United Arab Emirates

http://www.business24-7.ae/Articles/2008/8/Pages/08252008_f6bba7a81e29486c94bae4dc49e50b3d.aspx

http://www.zawya.com/story.cfm/sidZAWYA20080825030212

SNIP
A Gulf Monetary Union should be a stepping stone to the formation of a Gulf central bank, said Dr Nasser Al Saidi, Chief Economist at the DIFC.,

(2)
DIFC Report Assesses Progress towards GCC Monetary Union
9 August 2008
Report identifies key policy issues to be addressed before GMU launch
http://www.zawya.com/Story.cfm/sidZAWYA20080819104636The Dubai International
SNIP
Financial Centre (DIFC) today released a report assessing the progress being made by GCC countries to achieve the convergence criteria for a GCC Monetary Union (GMU) that were endorsed by the Supreme Council of the GCC at its 27th session held in Riyadh in 2006.

(3)
Kapteyn en VerLoren van Themaat, (Laurence Gormley, ed.), “Introduction to the Law of the European Communities”, Kluwer, 1998, 3rd ed., p. 953

(4)
International Charlemagne Prize of Aachen for 2002
Acceptance speech by Dr. Willem F. Duisenberg, President of the European Central Bank, Aachen, 9 May 2002.

http://www.ecb.eu/press/key/date/2002/html/sp020509.en.html

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