Latvian lessons for GMU
Posted by Ivo Cerckel on June 11th, 2009
The Gulf Co-operation Council Monetary Union should link its currencIES to its gold reserves hiding in oil
Gulf union advised to de-peg
Travis Pantin
The National, 11 June 2009
http://www.thenational.ae/article/20090610/BUSINESS/706109912/-1/NEWS
SNIP
Gulf states should use the planned GCC monetary union as an opportunity to de-peg their currencies from the dollar, two international banks said yesterday. UNSNIP
De-peg from the dollar and re-peg to a basket?
What’s the use?
The issuer of a currency needs reserves in order to determine the value of that currency.
Without reserves to that effect, the currency administered by the issuer has no value whatsoever.
Does Latvia have such reserves?
No apparently. Latvia has no gold reserves.
The issuer of the lat, the currency in Latvia
which is (still – for how long I don’t know) PEGGED to the euro,
has only foreign exchange, forex, reserves.
Forex reserves consisting of worthless paper money can only possibly be used for intervention on forex markets.
Such reserves are worthless, no, useless, to determine the value of the lat.
Only gold reserves can determine the value of a currency.
Latvia has no gold reserves.
The (intrinsic) value of the lat is ZERO.
Sweden is close to Latvia and Swedish banks have apparently extended loans to Latvians,
The European Central Bank is now supplying €3bn ($4.2bn) to the Swedish Riksbank to boost its FOREIGN RESERVES – increasing its firepower to help Swedish private sector banks if necessary, says the Financial Times. (1) Reuters says it’s to safeguard financial stability. (2)
The contraction of Latvia’s economy led to speculation that it would be forced to SEVER THE LINK between the lat and the euro. (3)
The euro is the first currency that has not only SEVERED ITS LINK TO GOLD, but also its link to the nation-state, said the late ECB-president Wim Duisenberg on 9 May 2002. (4)
Latvia must sever the link to the euro which has severed the link to gold.
Latvia must re-link to gold?
For the ECB, its gold reserves are freely floating
and marked to market (-price),
not marked to model of 40-something dollar an ounce like in the US of A,
on a regular basis.
Oil is the only commodity in the world that is large enough for gold to hide in. Gold reserves are therefore hiding in oil reserves.
The GCC Central Bank should therefore link its currencIES to its gold reserves hiding in oil.
But the architects of GMU want to link the currencIES to a basket of forex reserves.
Ivo Cerckel
honestmoney@maktoob.com
NOTES
(1)
ECB lends €3bn to Swedish bank
By Ralph Atkins in Frankfurt, Joshua Chaffin in Brussels and Robert Anderson in Stockholm
Published: June 10 2009 11:55 | Last updated: June 10 2009 23:59
http://www.ft.com/cms/s/0/ad578092-55a8-11de-ab7e-00144feabdc0.html
The €3bn ($4.2bn. £2.6bn) the ECB is supplying to the Riksbank will be used to boost the Swedish central bank’s FOREIGN RESERVES – increasing its firepower to help Swedish private sector banks if necessary.
(2)
Sweden cbank takes ECB loan; banks pass stress test
Reuters, Wednesday June 10 2009
Swedish cbank to take 3 bln euro loan from ECB
Swedish watchdog: banks can handle worst-case scenario
Says banks can absorb 150 bln SEK of losses in Baltics
Sees no need for capital strengthening by top banks
(Adds analyst comment, updates crown, shares)
By Niklas Pollard and Eva Odefalk
http://www.guardian.co.uk/business/feedarticle/8551024
SNIP
STOCKHOLM, June 10 (Reuters) – Sweden’s central bank said on Wednesday it would take out a hefty loan from the European Central Bank to safeguard financial stability, although a watchdog said local banks could cope with “extreme” pressures.
(3)
From The Times
June 9, 2009
Latvia budget cuts ease fears of Sweden’s nervous banks
Carl Mortished
http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article6458670.ece
(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
No related posts.
June 11th, 2009 at 17:20
It’s only about diversification of forex reserves.
Only forex reserves, no other reserves.
Gulf states ‘better off without dollar peg’
Middle East: 3 hours ago
http://www.ameinfo.com/200091.html
Nomura International has said in a note to its customers that Gulf Arab states would be better off without pegging their currencies to the US dollar as they move towards a monetary union, according to Bloomberg. ‘Gulf countries now have an opportunity to adopt a [more] flexible exchange rate system that would allow for the effective use of autonomous macroeconomic policies and also support diversification efforts,’ it said.
June 12th, 2009 at 08:02
The third world markets are the first to go as their currencies are crushed time and time again. Europe will be next, closely followed by the USA!
As for the US$ and T- bills held overseas, “they don’t really exist”!
http://www.asianews.it/index.php?l=en&art=15456&size=A
June 12th, 2009 at 09:33
Anonymous,
The URL you posted says:
US government securities seized from Japanese nationals, not clear whether real or fake
06/08/2009 15:18
ASIA – ITALY
Ivo:
What about the dollar itself?
Here’s some Wikipedia stuff RE: Latvia, of course.
http://latviaeconomy.blogspot.com/2009/06/more-green-shoots-latvian-exports.html
http://en.wikipedia.org/wiki/Hard_currency
Hard currency or strong currency, in economics, refers to a globally traded currency that can serve as a reliable and stable store of value. Factors contributing to a currency’s hard status can include political stability, low inflation, consistent monetary and fiscal policies, backing by reserves of precious metals, and long-term stable or upward-trending valuation against other currencies on a trade-weighted basis.
As of 2008, hard currencies could be argued to include the United States dollar, euro, Swiss franc, British pound sterling, Norwegian krone, Swedish krona, Canadian dollar, Japanese yen, and Australian dollar. However, varying theories of monetary policy preclude any such list from being called definitive.
The strong downward trend of the US dollar index (USDX) since its November 2006 peak has weakened that currency’s position as a hard currency. Before its replacement by the euro, the Deutsche Mark (German Mark) was considered one of the best hard currencies.
http://en.wikipedia.org/wiki/Money
, modern monetary systems are based on fiat money – money without intrinsic value, but declared by a government to be legal tender, that is, it must be accepted as a form of payment for ‘all debts, public and private’.
+
Usually, the government declares the fiat currency (typically notes and coins from a central bank, such as the Federal Reserve System in the U.S.) to be legal tender, making it unlawful to not accept the fiat currency as a means of repayment for all debts, public and private.
+
Fiat money or fiat currency is money whose value is not derived from any intrinsic value or guarantee that it can be converted into a valuable commodity (such as gold). Instead, it has value only by government order (fiat). UNSNIP
I accept from John because you accept from me.
I can’t find this in English nor in German:
Un agent accepte de la monnaie en échange d’un bien qu’il cède parce qu’il sait que les autres agents l’accepteront en échange d’un bien qu’il souhaite acquérir.
http://fr.wikipedia.org/wiki/Monnaie
If you find no Mary to accept from you, then you’ve got a problem.
except of course, if you have recourse to governmental guns to force the other to accept.
That’s legal tender, isn’t it?
I STILL BELIEVE THAT
For the European Central Bank, its gold reserves are freely floating
and marked to market (-price),
not marked to (the) model of 40-something dollar like in the US of A,
on a regular basis
HERE ARE TWO FACTS
ONE, The ECB announces annually how much gold it sold
http://www.ecb.int/press/pr/date/2008/html/pr080701.en.html
TWO, The ECB Monthly Bulletins indicate the weekly, monthly and quarterly values of the gold reserves
http://www.ecb.int/pub/mb/html/index.en.html
June 12th, 2009 at 13:02
The words were not me, but Another. Regarding the link, I do not believe those bonds are fake. But the US$ they are denominated in is intrinsically worthless, therefore fake. I think this is why a sovereign is trying to unload them surreptitiously. Bearer bonds are basically cash. Very high denomination cash. It appears to me that someone is willing to sell them for less than face value in order to do it quietly. This speaks volumes.
Regarding Latvia. WGC reports Latvia has 7.7 tonnes of gold reserves with a current market value of US$236m. With a population of 2.2 million, on a per capita basis, this is a little low. Perhaps it should be 20 tonnes if the CB’s of the world share 60,000 tonnes.
Does the ECB still require 15% gold reserves to join? 7.7 tonnes is only 3.3% of Latvia’s forex reserves per the WGC and IMF. Liquidity is the key. When gold is the most liquid of all forex reserves, we will have freegold. Liquidity requires buyers and buyers require confidence.
The US$ is hard currency? How liquid is the US$ if a sovereign nation-state is reduced to smuggling bearer bonds into Switzerland in order to dump them at sub-par?
June 12th, 2009 at 15:05
Anonymous,
One of your questions is;
Does the ECB still require 15% gold reserves to join?
Reply:
I am still struggling with this paper:
Harald Badinger and Barbara Dutzler “Excess reserves in the Eurosystem – an economic and legal analysis”
in: Fritz Breuss, Gerhard Fink and Stefan Griller, (eds.),
“Institutional, Legal and Economic Aspects of the EMU”,
Europainstitut Wirtschaftsuniversitat Wien Schriftenreihe /
Europainstitut Wirtschaftsuniversitat Wien, Volume 23,
Vienna and New York, Springer, December 2002. pp. 37 -65
Let me try to give my PRIOVISIONAL reading notes from the paper
which I still have to read again many times.
I don’t know how many messages I will need for that
because I don’t know how long replies can be on this blog.
THERE I GO
The editors Preface
Badinger and Dutzler analyse the economic and legal possibility how to deal with the UNDOUBTEDLY existing EXCESS reserves in the euro system (both capitalisations mine.)
p. 34 (that number is probably wrong)
Most previous studies argue that the introduction of the euro generated a considerable amount of excess reserves.
CONVERSELY
Eichengreen and Mathieson argue that there was a shortage of reserves in the Eurtosystem,
as a result of the elimination of former reser ve assetsa.
footnote p. 39,
The ECU was created by the EMS agreement of 1979 (Article 17) and issued to the central banks of the participating countries through revolving swaps against deposit of 20 per cent of their gold and dollar holdings with the European Monetary Co-operation Fund (later the European Monetary Institute (EMI), and then the European Central Bank (ECB)).
According to Article 23.2 of the EMI Statute and Article 20 of the EMS Agreement the mechanism for the creation of ECUs against gold and US dollars was unwound by the first day of stage three of EMU. [Ivo: that day was 01 January 1999]
p. 39,
The unwinding of ECU [...] led to a considerable increase in gold reserves by approximately 20 per cent in terms of the total (end of) 1998-value and a substantial decrease in foreign exchange reserves by some $37 billion.
The exchange of ECU against gold (valued at market prices), however, can only account for $ 20 billion of this reduction
which indicates that a reduction in reserves took place simultaneously and/or
that gold had been exchanged at a higher price.
The exchange of ECU against dollar led only to a change in the composition of foreign exchange reserves.
p. 40
However,
the reduction in the level of foreign exchange together with the exchange of ECU into US dollar further increased the DOMINATING role of the US dollar as a reserve asset of the European centrals banks.
footnote p. 40
Although the exact currency composition is kept confidentially by central banks, the dollar share at the beginning of 1999 can be approximated.
p. 42 T
The effect of the redefinition of reserves is reflected in the changes from December 1998 to January 1999.
Former reserve assets which were denominated in euro-currencies (e.g.: DM held by Banque de France) are excluded by the new reserve definition, which led to a decrease in foreign exchange reserves by some $ 30 billion\.
p. 42
Economic theory suggests that a substantial reduction in international reserves can take place after the formation of a monetary union,
Four arguments
1. the scale (of foreign trade) effect
2. the portfolio effect
3. elimination of the need to stabilise the exchange rate vis-à-vis the currencies of other members of the currency union
4. reduced costs of reserve management after pooling reserves
June 12th, 2009 at 15:06
FIRST ARGUMENT that a substantial reduction in international reserves can take place after the formation of a monetary union – the scale (of foreign trade) effect
after the formation of a monetary union no reserves are needed anymore to finance trade between EU countries which has become “domestic” trade from a monetary perspective
These are Ivo’s notes from a July 2007 Kuala-Lumpur-Summit on the Islamic gold dinar
presentation by Dr Mahathir bin Mohamad, former prime minister of Malaysia
increased oil prices
strengthen bankers in the west
they operate through proxies
We cannot move gold around to make payment
not good for domestic payments
==>
we use gold as savings
gold dinar will only be used in international trade
What is the amount is big?
The problem of transport
==>
promissory notes that one country is indebted
trade of countries
payments are made through central banks
==>
payment is NOT between buyers and sellers
but between central banks
Occasionally need to transfer the gold
but this will be small
the use will not be easy
we will limit the use to trade between countries and under efficient supervision
less fraud and manipulation
less oppression of the weak by the strong
False wealth will no longer be able to rule the world.
END OF MY NOTES FROM DR MAHATHIR
SECOND ARGUMENT that a substantial reduction in international reserves can take place after the formation of a monetary union – the portfolio effect
if the member states of the currency union are structurally diverse
==>
any balance of payments imbalances may be offsetting
==>
a pooling of reserves should allow the minimum reserve level to be reduced
THIRD ARGUMENT that a substantial reduction in international reserves can take place after the formation of a monetary union – elimination of the need to stabilise the exchange rate vis-à-vis the currencies of other members of the currency union
FOURTH ARGUMENT that a substantial reduction in international reserves can take place after the formation of a monetary union – reduced costs of reserve management after pooling reserves
p. 43
In order to estimate the likely reserve savings as a result of the euro,
we will set up a dynamic panel with fixed effects for reserve DEMAND of the 12 euro area countries.
p. 46 (
In the estimation and simulation, gold is valued at the official price, which clearly understates its actual value.
p. 47
Summary
the current level of international reserves in the Eurosystem could be reduced substantially.
Approximately one third of the existing reserve level can be regarded as excessive and ison the disposal of the Eurosystem.
The not only the question of ECONOMIC OPTIMALITY, but also of LEGAL ADMISSIBILITY.
==>
we will go on to investigate the legal framework in the next section
June 12th, 2009 at 15:10
THE LEGAL FRAMEWORK p. 47
art 105 (2) 3rd indent EC Treaty
it is the role of the ESCB to hold and manage the official foreign reserves of the Member States
p. 48
this provision gives rise to a number of interrelated and complicated questions
which could be categorised as matters relating to horizontal and vertical aspects
HORIZONTAL ASPECT
1. the structure of the ESCB
2. distribution of reserves between ECB and NCBS
3. the ECBs share
VERTICAL ASPECT
1. ownership by the member states or by the NCBs p. 54
2. limits on ownership
HORIZONTAL ONE the structure of the ESCB p.48
ESCB manages the foreign reserve assets
but the System is not a legal person and theregore not entitled to acquire or dispose of movable and immovable property
footnote
don’t confuse the ESCB with the Eurosystem
Eurosystem = the inner circle of the 12 participating NCBs
end of footnote
Legal capacity was given exclusively to the ECB, with the NCBs remaining subject to the relevant provisions in their respective national laws
==>
a two level system with the NCBS and ECB as “integral part” of the ESCB
NCBs are subordinatred under the ECB.
p. 48- 49
When carrying out the tasks of the ESCB,
the NCBs which in this capacity are called “OPERATIVE ARMS” of the ECB are bound by instructions and guidelines of the ECB
and can be taqken before the ECJ if they fail to fulfil an obligation under the statute
p. 49
The treaty says it is the NCBs which form the the System
==>
the NCBs are still part of the organisational structure of the Member States.
NCBS may fulfil public authority functions in matters relating to money, credit and banking under the respective laws – for instance, as an agent of the Member State
as long as these tasks do not interfere with the objectives and tasks of the ESCB
HORIZONTAL TWO distribution of reserves between ECB and NCBs p. 49
p. 49-50
Article 31 ESCB Statute is a lex specialis,
Art 31 Foreign reserve assets held by NCBs
Article 31
Foreign reserve assets held by national central banks
31.1. The national central banks shall be allowed to perform transactions in fulfilment of their obligations towards international organizations in accordance with Article 23.
31.2. All other operations in foreign reserve assets remaining with the national central banks after the transfers referred to in Article 30, and Member States’ transactions with their foreign exchange working balances shall, above a certain limit to be established within the framework of Article 31.3, be subject to approval by the ECB in order to ensure consistency with the exchange rate and monetary policies of the Community.
31.3. The Governing Council shall issue guidelines with a view to facilitating such operations.
Article 23
External operations
The ECB and national central banks may:
— establish relations with central banks and financial institutions in other countries and, where appropriate, with international organizations;
— acquire and sell spot and forward all types of foreign exchange assets and precious metals; the term ‘foreign exchange asset’shall include securities and all other assets in the currency of any country or units of account and in whatever form held;
— hold and manage the assets referred to in this Article;
— conduct all types of banking transactions in relations with third countries and international organizations, including borrowing and lending operations.
p. 49
These institutional aspects shed some light on the distribution of competence regarding the official reserves among the component parts of the System
p. 49 -50
Now,
the task to hold and manage the official CURRENCY reserves of the Member states has been transferred to the European SYSTEM Of Central Banks, NOT to the European Central BANK
==>
the remaining competence of the NCBs, as part of the ESCB,
are being determined by the lex spoecialis, article 31, ESCB Statute
http://everything2.com/title/Lex%2520specialis%2520derogat%2520lex%2520generalis
Lex specialis derogat lex generalis
Lex specialis derogat legi generali
When two or more laws contradict, the more specific law has precedence over the general law.
http://answers.yahoo.com/question/index?qid=20070305191215AA5QVWe
“A lex specialis is a special law that supersedes a lex generalis (general law). This special law displaces the general law. This law can result from the fact it governs only a special field, while the general law applies to several fields. For example, the law governing public gatherings is a lex specialis (special law) with respect to the general police law.”
Source(s):
http://de.wikipedia.org/wiki/Lex_special...
the task to hold and manage the official CURRENCY reserves of the Member states has been transferred to the European SYSTEM Of Central Banks, NOT to the European Central BANK
==>
the remaining competence of the NCBs, as part of the ESCB,
are being determined by the lex spoecialis, article 31, ESCB Statute
Still,
the remaining national discretionary power should NOT be OVER estimated.
The NCBs remain subordinated to the ECB in reserve management
==>
except for the right of the NCBs to perform transactions, in fulfilment of their obligations towards international organisations,
all other operations in foreign reserve assets above a certain unpublished threshold are subject to the ECBs approval.
The justification for the ECBs exclusive decisional power of the use of reserves is the need to guarantee the effectivenessd of the exchange rate and monetary policy of the Community as formulated by the ECB.
After all, only a small fraction of the official reserves was transferred to the ECB,
HORIZONTAL THREE the ECBs share p. 51
Article 30. 1 ESCB Statute
Transfer of foreign reserve assets to the ECB
30.1. Without prejudice to Article 28, the ECB shall be provided by the national central banks with foreign reserve assets, other than Member States’ currencies, ECUs, IMF reserve positions and SDRs, up to an amount equivalent to ECU 50 000 million.
The Governing Council shall decide upon the proportion to be called up by the ECB following its establishment and the amounts called up at later dates.
The ECB shall have the full right to hold and manage the foreign reserves that are transferred to it and to use them for the purposes set out in this Statute.
Article 28 Capital of the ECB
p. 51
Art 30.1 ESCB Statute specifies
that the ECB is provided by the NCBS with foreign reserve assets
and
that it has the ”full right to hold and manage” them
and to “use them for the purposes set out in this Statute”
The need for the ESCB to operate as one system in which all legal persons have the same rights, regarding the foreign reserves at their disposal
CAN NOT HAVE THE EFFECT THAT
to give the ECB full rights regarding ALL reserves regardless of whether they are managed by the ECB or the NCBs
This interpretation follows from both a literal and a systemic interpretation of article 30.1
p. 52
The precise legal character of the transfer to the ECB remains an open issuer.
The terms which were agreed upon, “manage and hold’.
are interpreted as avoiding a sign of a transfer of ownership.
It is doubted through, that this fraction of the reserves remain in the ownership of the national entities.
p. 53 B
Although in the last resort, the reserves transferred to the ECB by the NCBs are the official foreign reserves of the Member States,
the NCBS received a corresponding claim denominated in euro,
so that the member States with the transfer to the ECB effectively lost any rights in this regard.
June 12th, 2009 at 15:13
VERTICAL ASPECT
1. ownership by the member states or by the NCBs ? p. 54
2. limits on ownership p. 56
VERTICAL ONE ownership by the member states or by the NCBs? p. 54
The ECB holds and manages the reserves
==>
not that the NCB are owners of the official reserves of the Member States
nor that the Members States are the owners of the reserves
This was and remains a question of national law
Even if a NCB OWNED the reserves under national law,
these reserves remain, from an economic perspective, the official foreign reserves of the respective member state
p. 54- 55
Ivo turns Badinger and Dutzlet upside down, i.e. first I give p. 55 and then p. 54
It is in the general interest of a country to have a currency with which to PAY
(Ivo: no, to save, to have a store of value
==>
it is not possible to have excessive reserves)
Similarly,
the management of the foreign reserve assets by the central banks
is done in the general interest of the nation
==>
formally, the ownership of the reserves lies with the nation as a whole,
but is vested in the public authorities (state body or central bank)
p. 56
Control, however, is not the same as ownership.
since a precondition for an effective transfer of ownership is the intention to transfer legal property.
Does the ultimate ownership of the reserves by the ember States mean that they could compel the central bank to sell an important fraction of this?
Is a Member State free to sell all or part of the reserves?
VERTICAL TWO limits on ownership rights p. 56
First restriction on the use of the reserves by the Member Stes
=
the independence of the NCBs
==>
this concerns the relationship between the NCB and the government on the national level.
p. 60 summary of THE LEGAL FRAMEWORK which started p. 47
EC law does not prohibit national utilisation of reserves and of proceeds out of the sale of reserves
but the ECB enjoys discretion under art 31 of ESCB Statute
over the usefulness and appropriateness of such a move
CONCLUSION OF THE CHAPTER p. 60
The excess reserves are no “free lunch’ that could be used arbitrarily/
The economic effects of their alternative uses are relevant for an evaluation of therir legal admissibility
==>
the lower the impact of such proposals on the liquidity situation in the euro area and on the ESCB’s monetary policy,
the easier approval without modification in the timing or manner of the proposal will be gained.
It is conditional, of course, on national and international CONSENSUS, that the proposed use of the assets is more economically efficient and in the public interest than if they remain with the NCBs
p. 61
It is for the governing council to decide on a request by a NCB on behalf of a Member State
to proceed to a large sale of reserves
==>
from a political perspective also, the balance of power and alliances in the ECB governing council has to be taken into account.
THE END
June 12th, 2009 at 15:16
Henry Hazlitt, “Economics in One Lesson”, New York: Arlington House Publishers, 1978, 2nd ed. (first ed. published 1946 by Harper and Brothers)
Chapter 12 The Drive for Exports
http://jim.com/econ/chap12p1.html
There is no reason to go into the technical details of all this, which can be found in any good textbook on foreign exchange. But it should be pointed out that there is nothing inherently mysterious about it (in spite of the mystery in which it is so often wrapped), and that it does not differ essentially from what happens in domestic trade. Each of us must also sell something, even if for most of us it is our own services rather than goods, in order to get the purchasing power to buy. Domestic trade is also conducted in the main by crossing off checks and other claims against each other through clearing houses.
It is true that under the international gold standard discrepancies in balances of imports and exports were sometimes settled by shipments of gold. But they could just as well have been settled by shipments of cotton, steel, whisky, perfume, or any other commodity. The chief difference is that when a gold standard exists the demand for gold is almost indefinitely expansible (partly because it is thought of and accepted as a residual international “money” rather than as just another commodity), and that nations do not put artificial obstacles in the way of receiving gold as they do in the way of receiving almost everything else. (On the other hand, of late years they have taken to putting more obstacles in the way of exporting gold than in the way of exporting anything else; but that is another story.)
Roland Leuschel and Claus Vogt, “Das Greenspan Dossier, Wie die US-Notenbank das Weltwährungssystem gefährdet. Oder: Inflation um jeden Preis”, http://www.finanzbuchverlag.de, 2006, 3rd ed., p. 299
Banks used to have the right to issue receipts for the gold they held in reserve in warehouse.
This right was taken away from them by the institution of central banks.
Murray N. Rothbard, “Man, Economy, and State – A Treatise on Economics”, Auburn, Alabama: Ludwig von Mises Institute 2001, (originally published 1962)
p. 701 B
The practice by warehouses to issue pseudo-receipts is outright fraud
Someone else’s property is taken by the warehouse and used for its own money-making purposes/
p. 701-702
If spurious receipts are printed, evidences of goods are issued and sold or loaned, without any such goods being in existence.
p. 702
Money is the good most susceptible to the practice.
Since it is convenient to transfer paper in exchange rather than carry gold , money warehouses (or banks) that build up public confidence will find that few people redeem their certificates.
The banks will be particularly subject to the temptation to commit fraud and issue pseudo money certificates to circulate side by side with genuine money certificates as acceptable money-substitutes.
The fact that money is a homogeneous good means that people do not care whether the money they redeem is the original money they deposited.
This makes bank frauds easier to accomplish,
–> it is difficult to see the economic or moral difference between the issuance of pseudo-receipts and the appropriation of someone else’s property or outright embezzlement or, more directly, counterfeiting.
Most present legal systems do not outlaw the practice, In fact, it is considered basic banking procedure
To part with goods or money held in trust to issue spurious warehouse receipts is, of course, dangerous business, even when the law permits it.
If the warehouse once failed to meet its contractual obligations, its fraud would be discovered and a . a general panic “run” on the warehouse or non-central bank would ensue. This would lead to bankruptcy for the non-central bank.
Ivo rewrites p. 702
Most central banks then only continued to issue more receipts for gold than they had gold in reserve. Those fraudulent receipts were dangerous business for the non-central banks because if the warehouse failed to meet its contractual obligations, its fraud would be discovered and a general panic “run” on the warehouse or non-central bank would ensue. This would lead to bankruptcy for the non-central bank.
==
Ivo;
When I write B after a page number, that means bottom of the page.
NCB was National Central Bank.
June 12th, 2009 at 15:38
Anonymous,
You said also;
When gold is the most liquid of all forex reserves, we will have freegold. Liquidity requires buyers and buyers require CONFIDENCE. unquote
I cannot resist
QUOTE
A SOCIAL CONTRACT
What is money? Economists know that money is defined by the functions it performs, as a means of exchange, a unit of account and a store of value. But, just as importantly, money is also defined by the community for whom it performs these functions. Because it is an economic instrument for each of its users, it is also a political and cultural bond between them. Consider this simple fact: we engage in an exchange of goods and services everyday by using money as the means of exchange; and we offer our labour in exchange for money, which, in itself, has no value. We only do this because we believe that we will, in turn, be able to exchange that money for more goods or services. This fact tells us much about the confidence that we place in money itself. And it tells us much more about the confidence that we place in each other. Hence, money is, in essence, a social contract.
The euro, probably more than any other currency, represents THE MUTUAL CONFIDENCE at the heart of our community. It is the first currency that has not only severed its link to gold, but also its link to the nation-state. It is not backed by the durability of the metal or by the authority of the state. Indeed, what Sir Thomas More said of gold five hundred years ago – that it was made for men and that it had its value by them – applies very well to the euro.
Every currency is a symbol of the community it serves. It is a symbol of the society as a whole, but also represents the political and cultural bonds between the members of that society. Surely this uniting power must have been felt – I am even tempted to say, physically – by those who have travelled from one euro area country to another this year.
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
Ivo;
stupid question: what is liquidity?
June 12th, 2009 at 15:54
Those bank officials and others with direct knowledge of policymaking said a ratings cut would not cause China, Japan, India and South Korea to change their reserve policies, at least in part because there are no alternatives to the LIQUIDITY afforded by the dollar. [ID:nSP412010].
(BRICs won’t break dollar’s supremacy, for now
Reuters, Thursday June 11 2009
By Mary Angela Rowe and Nick Olivari
http://www.guardian.co.uk/business/feedarticle/8553981
June 12th, 2009 at 16:30
I reply to my own question:
The late Harry Browne defines “liquidity” as
[1] the ability to turn an asset into cash quickly without a penalty for haste.
[2] the relationship of a firm’s liquid assets to the liabilities that might have to be paid in the near future.
June 12th, 2009 at 16:47
Assets are a derivative of currency. So liquidity helps turn assets into currency. Currency is a derivative of real things. Therefore, liquidity in the realm of currency is the ability to turn currency into real things without a penalty for haste. Let’s just say, without a penalty, period. At par. On demand.