Memo To: President William Clinton
From: Jude Wanniski
Re: An International Monetary Conference
When you were in Moscow early this month, Jack Kemp sent you a letter with suggestions on how to help Boris Yeltsin and Russia work their way out of the economic and financial maelstrom in which they find themselves. At the heart of the letter was the idea of linking the ruble to gold at an exchange rate that would be neither inflationary or deflationary. The idea is one former Federal Reserve Gov. Wayne Angell and I recommended to the Gorbachev government on a visit to Moscow we made in September 1989, at the invitation of their government.
In his letter to you, Jack also urged you to consider calling an international monetary conference soon after the November elections, along the lines of the Bretton Woods conference of 1944. Bretton Woods set the stage for the postwar financial stability that lasted until President Richard Nixon was persuaded to abandon it in order to devalue the dollar in 1971. To help you understand where Jack and many supply-siders are coming from, I append a letter I wrote September 23 to the NYTimes in response to an op-ed that day by Yale's Jeffrey Garten, a former member of your administration. Prof. Garten wrote about the pressing need for a world central bank such as we have in the Federal Reserve.
Russia's problems as well as those in Asia and Latin America all are related to the fact that the U.S. dollar has been fluctuating in a major way against gold and commodities since late 1993. Fed Chairman Alan Greenspan has testified that the peso crisis in Mexico would not have occurred if gold were linked to the dollar. He said the same during the recent Asian financial crisis and I believe he also would agree that the New York Fed would not have had to help rescue the Long Term Capital Management hedge fund last week if there had been the stability that a gold link would give the dollar at the center of the global financial system.
Obviously, if Jack Kemp were to run for President and win in 2000, he would undertake this critical mission, but he seriously believes the nation and the world do not have the time to wait another three years to make this fix. If nothing else, the world financial chaos of the Y2K computer problem would be enormously alleviated if all the world's currencies were linked together, anchored to gold. As it is, the only way the global floating monetary system works at all is because of high-powered computers. The idea is not as fantastic as it may sound at first, Mr. President, as there were serious discussions in the 1960s of a "paper gold" system that would be managed by the International Monetary Fund. There is no reason why there should be disruptive, partisan divisions over this initiative.
The NYTimes ran an edited version of my letter on Sunday. Here is the longer version I sent:
September 23, 1998
The New York Times
229 W. 43rd Street
New York, N.Y. 10036
Yale's Jeffrey Garten is on the right track in recommending a world central bank, given the turbulence we see throughout the world of floating currencies ("Needed: A Fed for the World," 9/23/98). The 1944 Bretton Woods Agreement that President Nixon ended in 1971 when he cut the dollar's link to gold essentially had made the U.S. Federal Reserve the world's central bank. Under the agreement, the United States would maintain the dollar price of gold at $35 and the participating nations would peg their currencies to the dollar. While Bretton Woods lasted, the world's currencies were as good as gold and interest rates were roughly the same in the bonds of all governments.
When President Clinton was recently in Moscow, where the ruble has been caught up in the dollar's current monetary deflation, Jack Kemp wrote to him recommending an international monetary conference along the lines of Bretton Woods. A new international monetary system would avoid the weakness of Bretton Woods, which enabled the Federal Reserve to unilaterally inflate the dollar in an unworkable attempt to gain trade advantages.
Mr. Garten correctly notes that it is extremely difficult to build a new international institution, but the International Monetary Fund actually is much better suited to serve in that role than it is in its present function as collection agent for the bad loans of the multinational banks. In fact, in the mid-1960s, there were serious plans to create a "paper gold" unit of account that would be supervised by the IMF. Gold would retain its role as the truest signal of liquidity demand, thereby avoiding the sovereignty issue that would otherwise discourage U.S. participation.
The turbulence that gave rise to Mr. Garten's suggestion could of course be dealt with immediately. The turbulence is almost entirely due to the Fed's failure to take seriously the decline in the dollar price of gold during the past 20 months, an error that starved a world asking for dollar liquidity. Both Mr. Kemp and Steve Forbes have urged Fed Chairman Alan Greenspan to add liquidity until the gold price rises to at least $325 -- I prefer $350 -- as the only conceivable way to end the world commodity deflation that threatens the world's financial architecture.