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A Blueprint for the New World Bank?

David Chuhran
February 23, 2004

Responsibility and Accountability, two words I'm sure most of you reading this had drummed into your head from the time you were children. I certainly did and they go hand-in-hand. During my time as an officer in the military, those were some of the key fundamental ideals upon which everything was based. I guess that's what makes it so frustrating when I see someone with Command, Authority, and Responsibility but without any Accountability. All the alarm bells rang when I researched this piece.

The Chairman of the Federal Reserve commands our $10+ trillion economy. A select few, that comprise the Board of Governors, have the sole responsibility for guiding our economy through their power to inflate the money supply and their control of interest rates. As a group, they're accountable to virtually no one.

In response to my last editorial about Alan Greenspan, I had several readers ask, "Who then, do you think would make a good Fed Chairman?" One respondent asked specifically about Dr. Robert A. Mundell. I haven't seen much written by Dr. Mundell since he won the Nobel Prize for Economics in 1999. As one of the cofounders of Supply-side economics, which moved to center stage in the 1980's, my immediate feeling was positive. To be sure, I needed more recent confirmation to adequately answer the question with more than just a "Yes, he'd be great!" As it usually goes for me, what starts as a simple search for answers to simple questions, turns into a quest for deeper meanings, motivations, and answers to broader questions that were only asked by me to myself.

My primary interest in our economy always centered on my disbelief that a monetary system built solely on fiat paper could prove stable over the long term. It appeared obvious to me that inflating would be a power too tempting for the central bankers. This temptation is compounded when you consider the politicians' dependence upon support from citizen/voters increasingly enamored with government sponsored programs. The power to inflate is the power to control and direct wealth. It was also obvious an economy could become stagnant if the government relied solely on tax revenue to provide increasing levels of legislated compassion. Unrestrained fiat expansion, absent any external leash to force discipline into the system, will eventually lead to either hyperinflation or currency debasement followed by deflation and collapse, or both. I've always understood the risks associated with a manual re-introduction of a gold-based standard, but to this day I think those risks outweigh the likely results of a prolonged period of natural, market driven re-monetization of gold. I believe the latter process is underway.

Since gold is in a secular bull market, I went in search of Dr. Mundell's vision of gold's role in the monetary system. In 1997 he wrote: The International Monetary System in the 21st Century: Could Gold Make a Comeback? click. In this work, Dr. Mundell relates:

"When the international monetary system was linked to gold, the latter managed the interdependence of the currency system, established an anchor for fixed exchange rates and stabilized inflation."

These are the very things showing signs of distress in our current fiat dollar-based, floating exchange rate system. Under the gold standard, a natural, market driven solution was preeminent with no question as to which currency reigned supreme. It was gold; and with its finite supply, that could not be printed, counterfeited, or inflated, gold managed the monetary system by providing a natural leash and discipline. With that leash came inflation stability as the central bankers were inhibited from printing fiat paper at will. In addition, we currently have no anchor forcing countries like Japan to spend a record ¥7.15 trillion ($67+ billion) in January alone as they desperately try to keep a relative yen/dollar trading range in what amounts to a pseudo-peg. Moreover, this January's intervention alone nearly equaled the full year expenditure for 1999 and was more than one third of last year's total.

When you look back at history, you can see the effects the gold standard had on countries as they went on and off the discipline. Dr. Mundell points this out when he says,

"From 1914 to 1924, we had an anchored dollar standard because the United States was the only major currency on gold and the other countries started to base their currencies more on the dollar than on gold. Then in 1924, Germany went back to gold in its stabilization plan to stop its hyperinflation. In 1925, Britain, not wanting to be left behind by Germany, went back to gold. In 1926, France went back to gold more or less because Britain and Germany had gone back to gold; and it went back at a rate that left the franc undervalued."

So, as we passed through the 1920's, the major European powers all found it necessary to reattach themselves to the gold leash. World War I was long over and the necessity to inflate, to pay for national defense, had abated. Also, Germany was under the punitive reparation articles from the Treaty of Versailles which certainly played a large part in the advent of their hyperinflation.

This follow-the-leader return to the gold standard had some unintended consequences for Germany, France, and Great Britain. Dr. Mundell relates,

"Just as in 1914, when countries went off the gold standard, creating inflation, when they went back to gold this created an excess demand for gold, causing deflation."

This excess demand for gold created a tightening effect, as money flowed out of the general economy to rebuild gold reserves, absorbing the much needed liquidity through the end of the 1920's. It's important to note this lesson in history. Simply stated, absent any changes or additional stimulus, coming off the gold standard creates an excess supply of gold and inflation; going onto the gold standard creates excess demand for gold and deflation. In my opinion, we will see the latter, but the egg may be preceding the chicken today as deflation is already evident in some sectors. In addition, the excess demand for gold may follow as people, who are presently unaware, panic into gold as things unravel and gold reasserts its own standard.

Gold is still at the forefront of the leading economists' minds. As a matter of fact, there is more than just concern about the price relationship of gold relative to the fiat currencies and especially the World's reserve currency, the dollar. Dr. Mundell reminds us that there are 3.5 billion ounces of above ground gold with,

"One billion ounces is in the central banks, more than another billion ounces is in jewelry, and the rest is in speculative hoards. This last holding is why Alan Greenspan says he looks at gold whenever he gets a chance. I (Dr. Mundell) look at three things for signs of inflation in the economy: I look at the money supply, I look at interest rates, and I look at gold." 1

This is a very straightforward and important lesson as it relates to today. As the price of gold rises, signaling the likelihood of future inflation, investors have historically moved out of bonds sending yields (interest rates) higher. So why is that not the case now? More than likely it's directly related to foreign bank intervention as evidenced by last months purchase of a record $67+ billion by the Bank of Japan in their desperate struggle to keep the Yen from strengthening. That unnatural demand is holding our interest rates artificially low. This year's intervention war chest is a staggering ¥61 trillion ($580 billion total or $48 billion per month).

Is Japan acting in its own self interest or is there a larger system in play?

I wouldn't rule out intervention at some level by the European Central Bank, nor would I discount covert actions by our own Fed. The problem remains that all this shows the high regard they have for gold as it's naturally re-monetizing itself in the marketplace. Their game cannot go on forever. Their choices are to either embrace gold or suffer a worse fate as gold imposes its will as the supreme currency. If this happens, it will likely result in collapse as we experience (like the lesson in the paragraph above) a round of excess demand for gold and deflation. Don't underestimate the effect that printing another couple trillion dollars and euros along with a couple hundred trillion yen will have on the global economy and the price of gold. It will delay the inevitable outcome while also deepening and lengthening the ensuing period of retrenchment.

It's important to note, this next clip was written by Dr. Mundell in 1997:

"The more countries start to think about gold as an index, as a warning signal of inflation, the more the monetary authority will try to keep the price of gold from rising. Imagine that tomorrow the price of gold rises from $350 to $400. Don't you think that immediately the Fed will see that as a signal of an increase in inflationary expectations and the need to tighten?" 1

With a few exceptions, this is an amazingly perceptive view of the future, our now recent past, from a 1997 vantage point. Dr. Mundell appears unaware that gold price manipulation was well underway at that time. It's becoming increasingly plausible that the Clinton/ Rubin/ Summers/ Greenspan "Strong Dollar" policy used the full range of options including gold leases, swaps, physical dumping, shorting, and derivative action, through the gold and interest rate carry trade, to ensure the price of gold remained in check. Also, he understandably didn't foresee the dynamics, through Bank of Japan intervention and Chinese willingness to gobble up our debt, which allowed the Fed to keep "real" interest rates in negative territory for more than a "considerable period". This is a key point that facilitated the American consumer's ability to continue the rising trend of personal consumption paid for with this "cheap debt". It also provided stimulus and stability for the massive $170 trillion derivative market. Can low interest rates last forever in conjunction with a rising price of gold? And, what happens if the yen printing press overheats and seizes?

In what appears to be one of the last published works by Dr. Mundell in 2000, "Currency Areas, Exchange Rate Systems and International Monetary Reform" click, he discusses a subject that I consider rather disturbing---One World Currency. Dr. Mundell says that,

" ...dollarizing the world economy... " ...is... " ...the quickest and most effective way to produce a world currency."

He acknowledges that politics would likely preclude this and recognizes that,

"It would greatly increase the power of the United States and leave the world at the mercy of potentially aggressive unilateralism."

I happen to agree with Dr. Mundell. It might be great for the country with the World's currency, but based on more than 30 years of observing the undisciplined actions of both the Fed and our politicians, I think it would end in a tragic collapse after a series of abuses that would prove unfair to the majority.

Then I read something absolutely chilling...

Dr. Mundell continued:

"Imagine an agreement for the world economy modeled after the monetary union forged by the eleven countries of the euro area. Instead of doing it for 11, do it for 200 countries. If everyone used the same currency, wouldn't that make a great improvement in the way in which prices are compared, transactions are effected, and payments are made?" 2

While this would likely streamline and simplify things, who would administer our new currency? Would this "New World Currency" also be based on fiat paper, have intrinsic value by decree, and represent a false promise to pay? Who would become the World's central bank? Would it be the IMF? Would they be controlled by the United Nations or some other centralized World government?

Is this the "New World Order?"

Dr. Mundell answers with,

"It would be necessary for the Board of Governors to designate a few leading countries to manage the new system and the new currency."

I can't begin to tell you how strongly I feel about this. Our currency is our sovereignty. It's our economic border to be defended just the same as our physical border; and this same right should be extended to any other legitimate government. Can we support any move toward centralizing the World's economy solely for the purpose of economic expediency? The creation of the Fed centralized control of the U.S. economy; and while it may have promoted dollar hegemony over the course of the 20th century, it has also caused distortions and imbalances to rise to their currently unsustainable levels. In my opinion, the creation of the Federal Reserve, in its current form, was a complete mistake.

The creation of a New World Federal Reserve would be an even bigger mistake!

It's not without due consideration that I refute the ideas of a Nobel Laureate with such a long résumé of brilliant works, but no accolade, prize, or reward elevates anybody's concepts, ideas, or theories to a level beyond reproach. My suspicions are confirmed as Dr. Mundell takes it one step further,

"But in the absence of closer political integration, a single-currency monetary union, requiring that national currencies be given up, would probably not be successful on the world stage."

In other words, One World Government would be necessary to enforce One World Currency.

Dr. Mundell may be simply brainstorming as he acknowledges doubts about the possibility of implementing these utopian ideals. He brainstorms another possibility,

"Let's be more modest and consider a multiple-currency monetary union for two or three of our three islands of stability, the dollar, euro and yen areas, and then consider how this union might be generalized to accommodate the interests of the rest of the world."

Is this system in the implementation phase?

Here are the basics condensed from Chapter 9. Towards a World Currency

1) Converge inflation rates
2) Lock exchange rates
3) Align interest rates
4) Currency with the most mass (dollar) is the pivot currency
5) Bank of Japan buy/sell dollars to maintain 100Yen=$1
6) European Central Bank buy/sell dollars to maintain 1Euro=$1
7) Create a New World Fed (4 Americans, 2 Japanese, and 3 Europeans)
8) New World Fed members should be independent from the governments
9) New World Fed would control tight/loose credit
10) Target world inflation
11) Continue to move toward One World Currency governed by One World Government

In my opinion, Japan is already onboard and performing their assigned duties as evidenced by their intervention at record levels. I'm not so sure the Euros are on board as their internal policy appears confused. It looks like they're unconvinced as the dollar/euro drifts further away from the 1 to 1 target inflicting increasing amounts of economic pain into Euroland. It also appears the Euros may have ideas of their own based on their actions prior to Gulf II when Saddam began (or was about to begin) selling oil in euros. Also, OPEC and Russia appear to be luring them away from this plan by dangling reserve currency status in front of them with the repeated rumblings of euro denominated oil. The enticement of reserve currency status can be an evil, greed provoking elixir.

Is a New World Fed really under consideration or implementation?

The best way for the average citizen to stop this is to buy physical gold and gold stocks as well as silver and silver stocks. They fear and despise gold and they have precious little, if any, silver! It's the only thing that blocks their way, because they don't have the power to control all of it.

Gold's rise will ensure this plan's demise!


Will this looming crisis provide the excuse necessary to unite the World under One Government, One Bank, and One Currency?

These are the most dangerous ideas I've ever heard. Why would a Nobel Laureate advocate centralization of the global economy? Then I remembered seeing something that caught my eye and seemed out of place during my speed browsing. I went searching again. I looked over Dr. Mundell's biography on his website and, while it does mention he was born in 1932, it almost seems as if life began in 1956 when he graduated MIT with his PhD. Then I found it, right on the Nobel's biography page under his picture:

Robert A. Mundell
Columbia University
New York, NY, USA
b. 1932

First, both my wife and I have Canadian ancestors and close relatives residing in Canada. I hold the Canadian people in the highest regard. This is not about individual rivalries between countries; it's about radical ideas concerning the shape and form of our future World together, as separate, independent, and sovereign nations. Was this academic exercise about Dr. Mundell as Fed Chairman moot from the start based on his citizenship? He was born and raised in Canada receiving an undergraduate degree from the University of British Columbia. I think it's highly unlikely that a Canadian citizen could occupy the Fed Chairman's seat, but I don't think that would be the case for a New World Fed.

To whom would they be accountable?

Is it just me? Take the time to reread those quotes. Am I off base here, or is this...

...A Blueprint for the New World Bank?

If so, I hope I can still fit into my uniform.

[1] Robert A. Mundell
The International Monetary System in the 21st Century: Could Gold Make a Comeback? 1997

[2] Robert A. Mundell
Currency Areas, Exchange Rate Systems and International Monetary Reform 2000

David Chuhran
Copyright ©2004 David Chuhran. All Rights Reserved.

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