HAK-Draft#1

Sept. 4

MOCATTA LECTURE

It is with great pleasure that I accepted the invitation
to deliver the first Mocatta lecture. I am told that
the Mocatta company dates its history back at least
300 years. Having read a recent speech by Dr. Jarecki
who claims a lifespan of at least 313 years I have begun
to wonder whether we are not faced with the problem of
the geologist who told a friend that the Grand Canyon
was exactly 1,000,007 years old. When asked to explain
such a remarkable precision he replied. "When I visited
there 7 years ago a Park Ranger told me its age was
1 million years." Be that as it may it is not often
that I find myself before a captive audience of economists
and bankers--for reasons some of my former colleagues will
be happy to enumerate and consider compelling. I have sought
to avoid the temptation of making up for lost time. I am not
a critical expert on economics. My preoccupation is

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with international order: what makes an international system
function, the causes of its dislocation and the possible
remedies. The basic theme of my remarks is that the
political and economic global systems are no longer congruent.
As a result there is lacking, in enough countries to
upset the equilibrium, both a consistent domestic discipline
or an economic strategy compatible with global growth.

The nineteenth century was a period of growth
unprecedented in history. The principal reason was the
congruence between political and economic philosophies in the
countries that shaped world affairs. Governments proceeded
from the premise that the economic sphere was beyond
its power or even competence. The accumulation of capital
was left to the operation of the market. International
economic relations were based on the principle of free
trade. The mechanism of adjustment was provided by the
gold standard to which all major trading nations subscribed.

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The chronic movement of gold out of a country had an
immediate deflationary affect; it imposed the discipline
to remedy the imbalance. It had the advantage of automaticity;
no political decision was required to bring about necessary
reform. Economic historians will argue endlessly about
cause and effect and about the relationship between the
discipline of gold and the mix of economic policies.

But the key political characteristic of the 19th century
system was that the gold standard forced automatic policy
adjustments. Politicians had the option to accept the
gold standard or to reject it. But once that decision
was made, they were forced to conform spending, taxing,
and monetary policies to its discipline.

There were of course commensurate costs. The severe
unemployment of periodic deflation was considered "natural";
the business cycle was believed to follow laws beyond
the ability of government to affect. Free trade was
relatively straightforward so long as it was the policy

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of a country (Great Britain) which first had a near
monopoly on industrialization and then was confined to
a small group of European countries with a restricted
suffrage and comparable economies. Paradoxically automaticity
in coordinating economic policies occurred when it was--
from the political point of view--least needed. Since
all governments believed in laissez-faire economies and
accepted no responsibility for social welfare, there
were few political obstacles to permitting markets to
operate free of interference--a course which is certain
over time to make adjustments automatically, if necessarily
painful.

But these are not the current conditions. Two large
differences exist between our world in the economic expansion
of the 19th century. The first is that the countries
relevant to the international economic order are governed
by a kind of popular democracy unknown in the 19th century.

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Suffrage is universal; the public consensus insists that governments have a responsibility to allieviate suffering and to improve the quality of life, if necessary even at the cost of inhibiting economic growth. The survival of governments depends on their performance, usually measured over a very short timeframe. Few excuses are tolerated; the political landscape of the last ten years in Europe and in the United States is littered with the remains of politicians and governments who have failed to produce economic results acceptable to the political process. No political leader in office in a major democracy, when the fall of the Shah triggered a new inflationary spiral, survived the next election.

For this reason alone the present international political environment is hostile to any automatic mechanism. Politicians who must live with the discipline of the ballot box, refuse to accept the automatic discipline

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of gold or some other commodity. Unlike their 19th century counterparts office holders today are not willing to limit themselves to "on or off" decisions; they insist on controlling the economic policy levers directly to conform to immediate political goals.

This process encourages short-term approaches to economic policy problems, a tendency to wait for crises to emerge removing any doubt about the need for action, and a temptation for political leaders to shift their problems to other countries.

The growing political nationalism runs counter to the dominant *economic* trends of our country. For the first time in history the world economy has become truly international. Today no geographic region is excluded from international commerce. The major economic actors, including many developing countries, are not only spread around the world, but are closely linked by commercial

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and financial ties. Markets for financial assets, commodities, and even information increasingly bind the disparate parts of the world economy more closely together. The sharp political differences between the Soviet Bloc and the West have proved no obstacle to economic pressure. A conservative American administration has avidly wooed the Soviet market. Many European industrialists seek a market somewhat sheltered from Japanese and US competition in the relatively less developed economies of the Soviet bloc.

The incongruity between the internationalization of the world economy and the dogged persistence, indeed enhancement, of traditional political structures insisting on autonomy in economic decision-making is sticking. (?)

The insulation of national tax, spending, social employment, industrial and trade policy behind national borders occurs despite the fact that such decisions inherently have

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global consequences in direct proportion to the economic
importance of the country involved. A case in point
is the unilateral decision by the United States in 1971
to suspend the convertibility of the dollar into gold
and to impose a 10 percent import surcharge. The effect
of the decision was to revolutionize the global economic
structure; to force a change from the gold exchange standard
to a floating system. A decision affecting the world
economy was undertaken without consultation, indeed without
prior notice. A comparable unilateralism has characterized
the Japanese handling of the yen's exchange rate and
European agricultural policy.

In other words we face the paradox of a global economy
unable to generate a global economic system. Automatic
mechanisms to force coordinated decisions have proved
politically unacceptable. But the alternative of political
coordination of the final and monetary policies of the

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major economic powers has been unattainable as well.

There are of course forums where national economic policy makers meet: the Bank for International Settlements, the International Monetary Fund and most dramatically the economic summits. But these occasions provide little more than an opportunity for an exchange of views; there exists no mechanism for a serious coordination of policy.

The closest approximation to a coordinating mechanism
is the International Monetary Fund whose annual meeting
provides the occasion for this lecture. In recent years
the architects of international monetary arrangements
have tried to create a system which, on the one hand,
recognizes the dominance of the dollar and the U.S. economy--
implying a disproportionate degree of policy independence
for the U.S.--and, on the other, establishes the International
Monetary Fund as the disciplinary force for the rest
of the world. The 1976 amendment to the Fund's Articles

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of Agreements, which grew out of discussions at the
Rambouillet Economic Summit, clearly identified the IMF
as the "policeman" of the monetary system.

The Fund's authority emanates from the commitment
of all member countries to "promote stability by fostering
orderly underlying economic and financial conditions
and a monetary system that does not tend to produce
erratic disruptions "and to seek orderly economic growth
with reasonable price stability." The Fund is empowered
to oversee countries' compliance with these commitments,
which, at least in theory, means reviewing national economic
policies for their international compatibility.

This attempt to introduce a kind of "technicians'
automaticity" has been difficult to implement on a general
basis. The U.S. and other major industrial democracies
have generally been unwilling to modify their policies
in accordance with IMF criticism. In fact IMF discipline

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has proved most insistent with countries whose effect
on the world economy is the result of their economic
weakness: developing countries facing a mounting burden
of international debt.

In theory, of course, no mechanism is necessary.
The market should be an even more incorruptible judge
of the appropriateness of economic policies than the
Fund or a commodity such as gold. In practice, however,
the dominance of the United States and the dollar in
economic affairs and the ability of major countries to
delay adjustment through borrowing from public and private
sources has meant that, the market can be ignored at
least for a while. The United States did so in the late
1970's (admittedly paying a high price in economic well
being and political power) and France did so in 1981-
82. To be sure the ultimate reckoning is all the more
severe. But the temptation of modern government to

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push the bitter medicine of adjustment beyond their
electoral period is often overwhelming. This tendency
to delay adjustment has led to wide fluctuations in exchange
rates, interest rates, and prices and to uneven and inadequate
domestic and international economic growth.

The result is that concerted international action
emerges generally from crises; the economic system lacking
guiding principles operates--if at all--as crisis management,
at least since the collapse of the Bretton Woods system
over a decade ago. The challenge then becomes whether
it is possible to design a global economic system combining
voluntary cooperation and long range perspectives.

In what follows I will discuss this in relation
to three issues: Trade, exchange rates and international
debt.

## Trade

The theory on which international commercial activity
is carried out is that free trade benefits everybody.

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The stated objective is therefore to remove political
obstacles to trade and to rely on comparative advantage.
But the gap between theory and practice is extensive
and not by accident. According to free trade theory,
tariffs and other trade barriers reward inefficiency,
restrict commerce and lower the general standard of living.
Nevertheless many nations, while paying lip service to
these propositions, systematically violate them in practice.
This suggests the presence of important political realities.

(Fix)

For one thing Adam Smith wrote when Britain had
in effect a monopoly in industrialization and a large
advantage in the generation of energy then based on coal.
There is no doubt that free trade benefits the society
of a country enjoying such a position. Inefficient
industries are replaced by more efficient ones within
the same national borders. The effect on productivity,
income and growth is certain to be beneficial. This

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situation still obtained to a considerable extent after
the emergence of other industrial states. Since these
were largely European there were no significant differences
of culture or economic practice to produce a unilateral
advantage for one country. In any event, colonial empires
providing protected markets and sources of raw material
cushioned the shock of competition. And even with these
safety valves the German-British trade rivalry surely
contributed to the tensions that ultimately produced
the first World War.

Current conditions are radically different. The
original European trading nations are joined by major
economic powers like Japan and growing exporters such
as Brazil, Korea, Singapore and Indonesia. The cultural
background and wage scales of the major trading nations
are radically divergent. With the best efforts to improve
productivity, some European nations will be unable to

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compete with the newly industrialized nations, especially
on the rim of Asia. This is particularly true of those
European nations like Greece or Spain or Portugal that
are themselves in the process of industrialization. Thus
whole sectors of industry move to other countries, compounding
the problem of unemployment that is fostered by a combination
of automation and rigid management-labor relationships.
Governments seek to stop the drain or to ease the shock
of these changes and they have at their disposal a whole
array of weapons which directly or in a disguised manner
inhibit the free flow of trade.

Second, some countries, especially in Europe seek
to escape this dilemma by fostering trade with the Soviet
bloc. But the Soviet bloc operates its economy by essentially
political criteria. It almost invariably demands some
form of credit, distorting whatever "normal" trade patterns
might emerge.

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Third, countries seek to recover from recession
by limiting imports and encouraging exports. This is
indeed a key provision of every IMF recovery program
for the major debtor nations. But it stands to reason
that it is impossible for *every* nation to pursue the
same strategy. The limitation of imports must be at
*somebody's* expense, especially if coupled with an attempt
to foster exports. Such a basically mercantilist strategy
inevitably gives rise to increased protectionist pressures
in the developed countries. This is especially the case
in the low and medium technology sectors which are most
vulnerable to competition from developing countries and
which tend already to be in decline. And chronic unemployment
problems, which are particularly severe in Europe, make
politicians even more willing to grant relief than normal.

Two results are inevitable. Either the mercantilistic
approach will collapse of its own weight because there

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simply will not be enough demand to fuel the required
level of exports. Or it will be sustained by very unfavorable
trade balances in a very few countries. At present the
United States is playing this role. The U.S. trade deficit
is officially forecast to exceed $120 billion--a level
unimaginable even five years ago. Such a situation cries
out for remedial action. Hence whatever course is chosen,
protectionism is the likely outcome.

The reaction to this state of affairs is demonstrated
at the opposite poles by the United States and Japan.

The United States affirms its commitment to free trade.

We therefore lack a coordinated policy either to protect
our home market or to capture privileged access to foreign
markets. On the other hand, we react to the distortions
caused by the gap between the theory and practice of
international trade by a series of ad hoc decisions taken
in response to domestic political pressures. The immediate
objective is to minimize individual pain. Hence it would

be accidental if the result were the promotion of the common good of either the United States or of the world economy as a whole. There is no strategy because theory cannot guide practice and much of the practice is contrary to theory.

By contrast the Japanese make no pretense that their foreign economic policy is guided by a commitment to the free play of market forces. Their policy is more or less explicitly geared to manipulate the trade system as it really operates to their national advantage. Japan is therefore widely criticized for acting counter to existing economic theory. In fact it is possible to argue that it is simply playing the de facto game more systematically and with greater coherence than anyone else.

Such a state of affairs cannot possibly continue indefinitely. When theory and practice diverge one or

the other must give way. The trading system is inter-
national and global by definition. My own preference
would be for an act of statesmanship that would move
the world towards free trade. My sense of the reality
is that our children are more likely to live in a mercantilistic
environment. We will either achieve a real and general
application of GATT rules or we will be forced to recognize
explicitly that trade is distorted by deliberate attempts
to maximize national advantages. In that case we should
play the same game and prepare our competitive position
for a world of unilateral trade practices and bilateral
agreements. In the end a new equilibrium will emerge
which will have to be maintained by conscious acts of
statesmanship. Sooner or later the United States will
have to make a choice and in either case it requires
an unprecedented degree of coordination of national policies.

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Exchange Rates

Ever since the United States abandoned the Bretton
Woods agreement by unilateral decision in 1971 there
has been a debate about the relative merit of a floating
system as against fixed parities and at the margin even
of a return to the gold standard. I will not enter into
the debate over the economic merit of the two schools
of thought. The original argument that the floating
system would automatically produce stability proved to
be wrong. Countries, it was held, would not accept an
overvalued currency because it would reduce the competitiveness
of exports or an undervalued one for fear of generating
inflationary pressures. Hence, almost like the gold
standard, the floating system would nearly automatically
force adjustment and reform on countries conducting
irresponsible policies.

This has not happened because the impact of the

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market has proved less immediate than expected. Countries
could ignore the market's warning signals and borrow
to finance current account deficits. They could at least
for a while escape the need to change internal economic
policies. Countries relying on exports have, to put it
mildly, avoided strenuous efforts to correct undervalued
exchange rates.

In a sense, of course, the debate about exchange rate systems
misses the fundamental point. The advocates of fixed
rates (or of gold) really aim for a system that automatically
harmonizes national economic policies. If that coordination
does not happen neither system can really work. Fixed parities
imply the convergence of underlying economic conditions
or a coordination of national economic policies. Failing
that, no exchange rate system will be able to withstand
the loss of confidence inherent in the inevitable crises
produced by incompatible national economic policies.

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The United States is surely right in arguing that exchange
rate stability can fundamentally emerge from correct
economic policies. Where the United States causes confusion
is in its insistence that it is the sole judge of what
is the right mix of economic policies and that it has
the strength to establish them unilaterally.

As a consequence American domestic economic policy
has been blamed for global consequences at least since
the collapse of the Bretton Woods agreement. Five
years ago at the annual IMF meeting in Yugoslavia the
overriding concern was the weakness of the dollar. Today
it is that the strength of our currency enables us to
use the capital of the rest of the world to finance the
deficits which stimulate our economy. In the Seventies
the "market" corrected the imbalance, if belatedly. The
market's reluctance to finance large current account
and trade deficits was not overcome until the Federal

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Reserve Bank pushed up interest rates. Today the market appears very eager to invest in U.S. dollar assets because of high interest rates, attractive capital appreciation possibilities and political stability. As a result what the United States gives with one hand in increasing imports, it takes away with the other by higher debt service costs and lower commodity prices. The issue is whether this willingness will disappear at some point. If it does, as argued in the speech draft, then there could be sharp consequences for the rest of the world economy.

A sharp and sustained drop in the dollar could--as it did in the seventies--have disruptive effects on international trade and finance, exchange rate arrangements in Europe, and (probably) global economic prospects. In economics as in other fields the gods sometimes punish humanity for presumption by fulfilling its wishes too completely.

This is not the occasion to review the economic

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merits of the post-1973 exchange rate system. Whether
floating exchange rates encourage or retard investment,
trade and growth is wrapped in too much ideology and
the actual experience has been affected by too many extraneous
circumstances to permit a clear-cut answer. Three political
consequences of existing arrangements seem to me relevant:

-- One of the principal virtues of floating exchange
rates--economic policy flexibility--too often has been
turned into a vice. Countries have been able to ignore
market signals by large-scale borrowing or other support
of overvalued exchange rates, or to encourage undervalued
rates to foster exports. In practice, the system has
allowed too much flexibility at times.

-- Exchange rate arrangements have been a profound
source of political controversy among the industrial
democracies. The political impact of unilateral economic
decisions mortgages all relationships.

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-- Disagreement over exchange rates reflect the mechanism by which disagreements over broad economic policy goals and methods become explicit. The exchange rate regime now in place tends to magnify these differences but it does not cause them.

The fundamental issue for long-term stability is that an international economic system cannot be sustained indefinitely by unilateral American decisions, however advantageous these might be to us in the short run. Some new exchange arrangement will have to be the basis of a systematic review of the international economic system. But its test will not be its technical aspects but whether the industrial democracies are able to agree on economic policies, other than beggar-thy-neighbor. No international system can meet everybody's maximum demands; but it must meet enough of the common aspirations so that maintaining the system seems more important to its members than any

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specific dissatisfaction. A system that does not meet
this test--as the present system fails to do--is inherently
volatile.

## International Debt

I have expressed myself on other occasions on the
international debt problem--not always to the entire
satisfaction of banking audiences. Let me begin by stating
three fundamental propositions:

-- I do not blame the banking community for the
debt crisis. In the Seventies the banks played an indispensable
role in cushioning the financial consequences of the
sudden and dramatic rise in oil prices. Had they not
done so a financial crisis would have occurred much
earlier and under much worse circumstances. Nor did
the banks go beyond conventional wisdom when they geared
their lending policies to the expectation of a continued
rise in oil prices and hence continued inflation.

(v)

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-- However we reached the present situation I believe
that to rely on the banking system alone to resolve it
is to run undue risks. The debt issue has become political:
a system of debt management based on purely financial
criteria threatens the political survival of too many
governments in developing countries. In a conflict between
banks and governments it is foolhardy to assume that
governments will never follow the populist demand to
challenge foreign financial institutions. Such a system
is therefore inherently precarious. The necessary domestic
reform of the debtors should therefore emerge not from
an arrangement with the banking system but from a political
compact with the industrial democracies.

-- The issue is political as well on the creditor's end. Nothing would help the debtors more than a reduction of interest rates which is however beyond the capacity of debtors to bring about and which requires internal

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political decisions by the industrial democracies.

I realize that increasingly the conventional analysis--
particularly in the United States--holds that the worst
is over, that the most heavily indebted countries are
on the way to recovery.

There has indeed been considerable progress over
the past two years. The external deficit of the developing
countries has contracted markedly, at first through
the reduction of imports leading to austerity; more recently
due to an expansion of exports as well. The increase
in debt has slowed. Massive amounts of public and private
debt have been rescheduled. Corrective economic policies
have been put in place in most of the debtor countries,
sharply reducing the hemorrhage of capital flight caused
by financial motives. There are even some faint signs
of economic growth in countries like Mexico and Brazil.

Many of the bankers in this room would also add,

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I am sure, that no significant debtor has defaulted or unilaterally rescheduled on non-market terms.

All this represents a great achievement in crisis management. Jacques de Larosiere and Paul Volcker have earned the gratitude of the international community for their courageous and farsighted handling of the emergency that has been thrust upon them. The lending banks have cooperated with them to an extraordinary degree.

In the absence of political decisions to deal with global growth especially in the developing countries on a comprehensive basis, the financial system has performed amazingly well. Still, I believe it is reaching the limit of what can reasonably be asked of it. Measures to overcome an emergency may not be politically sustainable as a nearly permanent feature of the international scene.

This year the major Latin American debtors will spend at least $40 billion on interest, some 35% to 40% of

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their export earnings; they are supposed to repay more
than $100 billion before 1988. Almost all of the principal
will, of course, be rescheduled. But the interest burden
will continue to represent a burden on economic recovery,
at least as long as interest rates remain so high.

The financial approach to the debt problem has produced
considerable improvement in balance of payments conditions.
It has had much less success in restoring dynamic economic
growth. Even optimistic projections anticipate little
chance of real per capita incomes in Latin America in
1990 even reaching 1980 levels. Partly as a result,
the social and political fall-out has been severe and
seems to be increasing. Many governments, politicians,
and political parties in the debtor countries are adopting
harshly nationalistic, anti-IMF, anti-bank rhetoric.
And if only one major country kicks over the traces it
will be difficult for the rest to sustain the course.

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I am not suggesting that the financial terms which now seem to be emerging from commercial bank debt renegotiations are inappropriate. On the contrary, I have the impression that the banks have made a huge efforts to meet the concerns of debtor countries. My concern is that the political dynamics of the process goes beyond what even the wisest and most farsighted financial institutions have been designed to handle.

The leverage in debt negotiations seems to be shifting from creditors to debtors, as the former behave increasingly like they have more to lose than do their borrowers.

Today banks are asked to make concessions which six or twelve months ago would have been unthinkable.

I am concerned about a process in which the commercial bank creditors give a little more in each round of an unending negotiation. Rescheduling agreements are reopened; terms negotiated in good faith yesterday are renegotiated

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today. Inevitably, it seems to me, they may be viewed
as adjustable tomorrow as well. The negotiations on
debt rescheduling bear an uncomfortable resemblance to
the negotiations with OPEC immediately prior to the price
explosion in October 1973. For a period of years the
companies had to give ground grudgingly never facing
the fact of a fundamental change in bargaining power
until an unexpected political crisis eroded all restraints
and showed the Emperor without clothes.

My sense is this uncertainty--coupled with worries
about what future international economic and financial
conditions might be--has much to do with the apparent
fragility of international capital markets.

I do not predict that the situation will explode
or that the debt strategy will fail. But I do want to
point to what I see as increasingly urgent indications
that the existing approach to the debt problem may be

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too risky; it gambles too much on the permanent rationality
of too many volatile actors.

The next phase of the debt problem has an inevitable
political component. It consists of two parts:

- To bring about the adjustments in the debtor
countries without which no program of assistance private
or public can have any long-term impact.

- To bring about a recognition in the creditor
countries that the accumulation of excessive indebtedness
was in most cases only a symptom of more fundamental
economic imbalances. These must be rectified as a concerted
cooperative effort between the industrial democracies
and the principal debtor countries. The common goal
must be development. Debt service is not an end in itself.

The adjustment programs demanded by the IMF are
not unreasonable in themselves; what they lack is a political
context beyond the capacity of the IMF and which the
IMF has had to improvise because of the abdication of

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governments. It would be dangerous to base the stability
of the international financial system on the gamble that
every major debtor will sustain the necessary adjustment
programs for the required length of time in the name
of paying interest to foreign banks. At the first sign
of improvement in the balance of payments, regardless
of how achieved, there will tend to be a political perception
that the debt problem is solved. This will weaken the
political dynamic behind the adjustment effort--even
though in many cases the underlying economic imbalances
will continue for a long time. Adjustment programs might
be abandoned for reflation programs, however ill-fated
those efforts would be in the absence of improved economic
policies. Industrial countries do this all the time;
why should developing countries be expected to be more
prudent?

In short, just as the U.S. and other major industrial

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democracies seem unable to divorce economic policy from
short-run political concerns, developing countries--
many of whom, especially in Latin America, are themselves
moving toward mass democracy--could become caught in
a dilemma that bad economics seem to make good politics,
at least in the short run.

For the long-term relationship between the developed
*and* the developing world, the debt management strategy
should be redefined as a development problem instead
of as a debt service problem. The real problem is the
inability to grow without large amounts of (typically
borrowed) foreign savings in a world which apparently
wants to invest less and less of its available savings
in developing countries. Seen from this perspective
the economic and political elements of the strategy would
change dramatically. So would the role of the banks,
who throughout the Seventies were asked to play a role--

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that of development financiers--for which they were ill-equipped from the political point of view. Long-term development finance, which is what most of the highly indebted countries need today, involves a major governmental responsibility--however unpopular such a view is in most industrial democracies, including our own.

There are here the elements of a political bargain that could put the relationship between the industrial democracies and the developing world on an entirely new basis. The issue is not the bail-out of financial institutions or of debtor governments. Rather it is the creation of a dynamic economy in which bail-outs are unnecessary. The economic cost of such a program would be minor compared to the consequences of a global financial crisis. The political benefits of an economic global order dedicated to growth would give a new sense of direction to the cause of free institutions in the world.

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Conclusion:

We meet at a period of substantial American economic
recovery. The economies of most other industrial
democracies are improving as well, if more slowly. There
seems to be at least some breathing room with respect
to the debt problem. It gives us the opportunity to
point the world economy towards greater coherence and
brighter vistas.

An obstacle to this goal is the tendency of U.S.
policymakers and their constituents to make economic
policy almost exclusively in a domestic context. Most
of the American public still view this country as being
relatively unaffected by international economic developments,
at least in the sense that they can be safely ignored
in domestic policy debates. For the rest of the world
this produces acceptable results only if U.S. economic
policy is consistently aimed at achieving stable, long-range
growth.

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Our political process has not yet adjusted to the
reality that the U.S. is steadily becoming _more_ integrated
into an international economy that is becoming _more_ global.
We must resolve the dilemma if we are to overcome chronic
international economic instability--and the only resolution
possible requires dramatic U.S. leadership, domestically
and internationally and a strongly expanding world economy
which is integral to U.S. economic and political interests.

For the United States, especially, the benefits are
clear. "Internationalization" of our economic policies
is the best way to preserve the advantages of the dollar-
based system. It is also the best way to achieve sustained,
strong economic growth not only for the U.S. but for
the world.

How to achieve this harmonization would require
a prolonged analysis which might test the already strained
patience of this audience. Nor is it essential at this

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moment. For if we agree on the definition of the problem
the solution will be a partly technical problem. For
now it is enough to understand that the prospects of
a stable and growing global economy are bounded only
by our vision.

KISSINGER ASSOCIATES

SUITE 1100
55 EAST FIFTY-SECOND STREET
NEW YORK, NEW YORK 10055
(212) 759-7919

August 9, 1984

Bill,

Please read the revised Mocatta speech outline which
follows. I think I have captured HAK's various
arguments, although the IMF gets pretty short
shrift. Of course, gold gets an even shorter
attention which may not endear him to his hosts.
Personally, I think this approach makes sense.

I particularly need counsel on the end. What should
he propose, if anything? The line of argumentation
ends in a Gordian knot, cut only by "leadership",
"political will", etc. Potentially pretty sleep-
inspiring stuff. Any ideas? Is this the right
place for a "solution" to the debt problem per se?
(I don't think so.)

I want to have a working draft on Monday so any
help will be more than appreciated.

Alan

SUITE 1021 • 1800 K STREET, N. W. • WASHINGTON, D. C. 20006 • (202) 872-0300

REVISED MOCATTA OUTLINE

1. For the first time in history, the world economy is truly global in scope. No geographic region is excluded from international commerce. The major economic actors are not only spread around the world, but are closely linked by commercial and financial ties. Although sharp political differences obviously exist between East and West, even these are in some respects transcended by economics.

2. At the same time, all of the major Western economies are mass democracies. This means that economic policy is produced through a fundamentally political process which must be responsive to near-term political conditions. Moreover, economic policy decisions and conditions have major political consequences.

3. The international monetary system--in effect, the linkages between national economies--has changed as the underlying reality has changed. For example, in the nineteenth century governments were willing and able to accept the discipline of the gold standard which tied domestic economic management to fluctuations in the demand and supply of gold.

4. However, the political reality of the late twentieth century is that an international economic system in which economic adjustment is highly automatic is not compatible with our political preference for mass democracy. We have tried to overcome this by creating a system which, on the one hand, recognizes the dominance of the dollar (and the US economy) and, on the other, establishes the IMF as the disciplinary force (through IMF Article IV

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commitments). This is an attempt at a kind of automaticity but seems to be no more acceptable politically than a gold or silver or other commodity standard. Put another way, the US and the other major industrial democracies are generally unwilling to accept IMF prescriptions on their economic policies, ironically at the same time that IMF discipline is viewed as integral to the debt strategy.

5. International economic conditions--the debt problem, growing protectionist pressures, the apparently overvalued (at least by traditional measures) dollar-- and the poor growth record since the breakdown of the Bretton Woods system raise doubts about the adequacy of present monetary arrangements. The key question, then, is how to develop international monetary rules which are compatable with democratic forms of government and which promote economic growth.

6. Must begin with an examination of the key present day international economic problems. At least in the first instance, decisions about the evolution of the system will be made in reference to these issues.

There are two inter-related issues which are most likely to bring pressure for systemic change: debt and trade. The continuing debate over whether more or less freely floating exchange rates encourage or discourage stable economic and political relations among countries remains on many agendas. It has recently been made more urgent by the rise in dollar interest rates and the dollar, despite (or, more likely, because of) the very large domestic and international deficits of the U.S. But only five years ago, when the IMF meetings were in Yugoslavia, a similar degree of urgency emanated from dollar weakness.

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7. I know that increasingly the conventional analysis of the _debt_ problem is that the worst is over, that the most heavily indebted countries are on the way to recovery. And there _has_ been considerable progress over the past two years. Most importantly, of course, the deficit of the developing countries has contracted markedly--largely through import reduction but now due to export expansion as well--and the growth in debt has slowed. There is even some very faint signs of economic growth in countries like Mexico and Brazil.

8. But consider some facts:

- This year the major Latin American debtors will spend at least $40 billion on interest, some 35% to 40% of their export earnings.

- During 1985-87 these same countries are supposed to repay more than $100 billion. These payments inevitably will have to be rescheduled; that process is already beginning.

- Inflation remains excessive in many of the debtor countries; in some cases it is even higher than when the debt crisis began.

- Real per capita Gross National Product in Latin America--one measure of average living standards--has dropped by at least 12% since 1980. Even the most optimistic projections indicate the per capita decline has continued in 1984 and that by the end of the decade per capita incomes will still be below 1980 levels.

- Although the debt problem is most generalized in Latin America, similar financial and economic conditions exist in Asia and Africa. Many small countries have entirely lost access to private capital flows and the bulk of available official capital is largely being absorbed by the largest debtors.

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The leverage in debt negotiations seems to be shifting from creditors to debtors as the former behave increasingly like they have more to lose than do their borrowers. Thus bankers are today making concessions which six months or one year ago would have been unthinkable. Where will they be in six or twelve months more?

9. I do not want to argue that the financial terms which now seem to be emerging from commercial bank debt negotiations are inappropriate. As a non-professional they actually seem more appropriate to debtor country circumstances than those negotiated during 1982-83.

But I am concerned at a process in which the commercial bank creditors seem to give--grudgingly--a little more in each round of negotiation. Rescheduling agreements are reopened; contracted terms negotiated yesterday are renegotiated to reflect today's conditions. Inevitably they will be adjustable tomorrow as well.

My sense is this uncertainty--coupled with worries about what those conditions tomorrow might be--has much to do with the apparent fragility of international money markets.

10. There may be an analogy to the oil company--OPEC negotiations a decade ago. During 1971-73, the oil companies tended to give in each round of negotiations, not only on price, but--more importantly--on control of oil supplies. Price increases were small in nominal terms but large in percentage terms. Because small dollar changes had limited economic impact, most policymakers did not pay much attention--until too late. The sharp price escalation may have been inevitable in light of the underlying demand and supply balance, but I suspect the process had something to do with the final outcome. And policymakers, with greater crises commanding

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immediate attention and comforted by small changes in
prices as well as an apparently acceptable negotiating
process, did not really notice.

11. Is there an analogy in the debt negotiations? I do not know, but believe we should be aware of the possibility.

12. What is needed--and it may already be too late--is an entirely different frame of analysis: one which recognizes that excessive indebtedness in most cases is only a symptom of more fundamental economic imbalances. The real problem is growth or rather the inability to grow without large amounts of (typically borrowed) foreign savings in a world which apparently wants to invest less and less of the available savings in developing countries.

13. The present approach to the debt problem makes austerity and debt service ends in themselves. But no country will be able to sustain a long-term adjustment program--however necessary--in the name of paying interest to foreign commercial banks. Moreover, at the first sign of improvement in the balance of payments there will tend to be a political perception that the debt problem is solved. This could further undermine the political dynamic behind the adjustment effort--even though in many cases the real underlying economic imbalances remain.

14. In short, the present framework of debt management may not be viable politically--which means it may not be viable. Just as the U.S. and other major industrial democracies seem unable to divorce economic policy from short-run political concerns, developing countries--many of whom, especially in Latin America, are moving toward mass democracy--could become caught in a dilemma that bad economics seem to make good politics, at least in the short run. Ultimately, that could

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threaten the stability of the international banks
and the fabric of the international system--as well as
the long-run recovery of the debtor countries themselves.

15. The *trade* problem is clearly related: the standard prescription for rebuilding economic vitality is to export more and import less. This has two flaws. First when too many countries do it simultaneously it is either self-limiting or results in the accumulation of large trade imbalances in a very few countries (which itself is probably unstable). Second, it inevitably gives rise to protectionist pressures in the developed countries especially in the low and medium technology sectors which are most vulnerable to LDC competition and which tend already to be in decline (with the consequent pressures on unemployment, etc.).

16. This is not only a U.S. phenomenon--where the list of trade actions before the President and Congress is long and potentially extremely serious--but a worldwide one. Free trade has probably been a myth for some time, but the risks of a significant deterioration in the global trading environment (after several years of virtually stagnant trade and only modest recovery in 1983-85) seem greater than they have been in years.

17. Finally, the adequacy of the *exchange system* itself needs to be reviewed. The rise of the dollar this year reflects both high interest rates and the attractiveness of investing in an economic expansion of almost unprecedented strength. But the consequences in other countries have been mixed. More importantly, if confidence in the dollar, US economic policies and the economic outlook erodes, a sharp drop in the dollar would have yet different and again pronounced effects on the international economy.

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18. I will not repeat the economic arguments for and against floating exchange rates (or, rather, the post 1973 exchange rate system); whether exchange rate fluctuations encourage or retard investment, trade and growth is wrapped in too much ideology and the actual experience has been affected by too many extraneous circumstances for a clear cut answer. But I will make two observations which do seem clear to me:

- One of the principal virtues of floating exchange rates--economic flexibility-- too often turns into a vice. Large countries (defined by combined political and economic weight) have been able to avoid the "discipline of the market" at least long enough to create significant internal and external economic disturbances, e.g. the US in 1978-79 and France in 1982.

- Exchange rate arrangements have been a profound source of political tension among the industrial democracies. Admittedly, this probably reflects more fundamental disagreements over broad economic policy goals and methods, but the exchange rate system we have today tends to magnify these differences.

19. Ultimately, the international financial system needs to be viewed from the perspective of whether it promotes sustainable economic growth better than possible alternatives. In my view, the present system reinforces the natural political tendencies to delay action until a problem becomes a crisis (which inevitably reduces the range of options), to deal with each aspect of related problems as unique (e.g., trade and debt), to operate with relatively short time horizons, and to discourage the consideration of international consequences in the formulation of domestic policies. While endemic in the

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U.S. case, these tendencies are not unique to this
country. But they do seem to discourage rather than
promote the achievement of long-term economic stability.

20. The system also needs to be reviewed from the perspective of U.S. economy as it exists today. The current mix of economic policies, which were adopted as a remedy to the economic deterioration of the late 1970s, at least temporarily, has made the U.S. a user of the world capital stock (instead of its traditional role as supplier) and the U.S. government a major consumer of domestic savings.

21. The consequence for the U.S. has been very strong economic recovery, job creation, low inflation. But there is a growing perception--share by both U.S. political parties-- that neither the budget nor the current account deficits are not sustainable. Of course, the proposed cures are dramatically different. Internationally, high interest rates and the very strong dollar have had enormous consequences--some good (higher exports), some bad (higher debt service, higher domestic energy costs, tighter domestic financial conditions, maybe lower growth).

22. Moreover, policies which produce extreme results inevitably produce extreme adjustments. In short, the existing system accomodates the U.S. proclivity to run policies which at various times produce *international* (balance of payments) or *domestic* (inflation) disequilibria. The consequences for the international economy are severe.

23. Part of the problem is that U.S. policymakers and the U.S. public prefer to make economic policy in a domestic vacuum. This is yet another consequence of the dichotomy between the democratic political process

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as it exists today and the reality of a truly global
economy. For the rest of the world this works only if US economic
policy is aimed at long-run stability. However, our
political process does not encourage this.

24. There are two broad alternatives for organizing the international monetary system; either one would necessarily impose more external constraints on the economic policy-making process. This is always difficult politically--look at the problems which the Europeans have in trying to manage a common market that necessarily implies some reduction in national independence. But if an alternative helped to create political conditions which consistently promoted the implementation of growth oriented economic policies and which helped to reduce political tensions among the developed countries as well as between developed and developing, then the trade-off would be justified.

Alternatives:

-- Policy co-ordination. Requires political commitment to adjust promptly and to make domestic policy in an international context. This is intrinsically easier for small, open economies than for large country with relatively small foreign sector because the political constituency for adjusting to international pressure is greater in the former. The reality is that the bulk of U.S. public and politicians still view this country as being relatively unaffected by international economic developments at least in the sense that we can safely ignore them in our domestic policy debates. But a commitment to better integrate the domestic policies of major economic actors--policy harmonization--would inevitably produce a healthier and more

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stable international economy.

-- Gold or commodity standard. Such a system injects a major degree of automaticity into the system. In effect it ties economic policy to market demand/supply of the standard; by definition reduces policy flexibility of key currency country. This is both virtue and vice.

25. Review history of gold as monetary standard (combine Mocatta and Reynolds materials), emphasizing that gold at or near the center of the system has a long and largely successful history.

26. Why not gold? The first answer is that it is not compatible with our political system; politicians in a mass democracy will not permanently surrender to an automatic adjustment process. Moreover, from the perspective of the United States--a dollar-based system (as we have today) maximizes our advantages, unless we abuse it. It gives us the greatest flexibility and allows us to reap the considerable benefits of controlling the printing presses.

27. But the inevitable consequence is to encourage further the economic integration of the U.S. into the world economy. If this process proceeds faster, in fact, than does the political awareness of it, then we run the risks of not only wasting the advantages but also letting loose political forces which could adversely affect long-term U.S. interests. The present debt situation may be an example: high interest costs--in the context of the existing debt management process--could contribute to an economic and political confrontation with debtor countries harmful not only to our banks but to our long term relationships in Latin America.

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28. This is the underlying dilemma. The US is steadily becoming *more* integrated into an international economy that is becoming *more* global. But our political process seems to work against the development and maintenance of sound, internationally consistent economic policies. If we do not resolve the dilemma--and the only resolution possible leadership, domestically and internationally-- then we condemn ourselves to international economic instability. Over the long-run this cannot be consistent with a strongly expanding world economy (which is integral to US economic and political interests).

29. Unfortunately, there are few practical proposals to achieve this objective. We could devise additional policy co-ordination machinery within the IMF or OECD or G5 or Economic Summit framework. But this would just be another technical solution to what is fundamentally a political problem. The leaders of the US and the other industrial democracies have to understand the importance of economic policy harmonization and its benefits. And they have to understand that its benefits, economic and political, outweigh the costs.

30. For the US especially, the benefits are clear, if poorly understood. "Internationalization" of our economic policies is the best way to preserve the advantages of the dollar-based system. It is also the best way to achieve what any economic system is supposed to achieve: unsustainable, strong economic growth.

/ddb

# Introduction

Having dealt in gold for some three hundred years it is natural for Mocatta to show keen interest in all problems related to gold and/or the gold standard as a system. Having witnessed the de facto establishment of the standard, its abandonment by England during the Napoleonic wars, its reinstatement in 1821, its suspension again in 1914, its restoration for six years in 1925 and the string of postwar devaluations of the pound, one cannot help but wonder, in the face of the new uncertainties which are presently threatening the banking system if once more the solution will not be found in the reestablishment of a gold standard.

A gold standard will obviously imply fixed parities between currencies. Fixed parities, however, do not automatically imply a gold standard so that the virtues and problems of fixed rates should be viewed and analyzed first and as distinct from a gold standard; in a second part, the standard itself could be independently scrutinized along with the inherent problems that it poses.

## Part One: Fixed Parities

### 1. General Background

Any fixed parities scenario between a group of nations implies, if it is to work, a blind obedience to a certain discipline. This very discipline in turn is often resented and perceived as an abdication by a sovereign nation of its right to inflate at a faster rate than its neighbors and therefore to conduct its domestic policies as it pleases. Prior to 1914 the members of the governing bodies of the Western democracies largely shared in common economic tenets which did not differ in any way from the beliefs held in the financial circles of Central European empires. After World War II the faith and

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credit of the U.S., along with the gold amassed after its price was hiked from $20 to $35 an ounce, permitted the gold exchange standard to survive unthreatened until the early sixties when a brief speculative attempt against the dollar failed to defeat the system. It took a few more years to bring about a de facto dollar devaluation which was finally sanctioned de jure in 1971 by the Nixon Administration.

Now let's underscore the fact that fixed parities did not work during the period. Between 1944 and 1971 the pound was officially devalued twice against the dollar and the French franc seven times, while the Dutch guilder was devalued twice and revalued once. We could therefore assert that the experiment in maintaining fixed parities failed to succeed as it had in the years prior to 1914, steady and unquestioned when the gold standard was in force.

## 2. Monetary and Political Cooperation

Unnecessary before 1914, monetary cooperation between central banks started in 1919 and had to continue after Bretton Woods. It did not, however, succeed in maintaining fixed parities. Now, any contemplation of fixed parities in the future among developed nations will require such cooperation with the hard currency nations supporting the weaker ones. Such support will not come forth without conditions and promises by the debtor nations to undergo belt tightening measures of a deflationary nature. So what is the difference between such pledges of frugality and the discipline that would automatically stem from a true gold standard? At least one thing comes to mind: a discipline imposed by gold may be perceived by the masses in the debtor countries as either a natural calamity or as an intellectual absurdity but not as measures imperialistically imposed from abroad by "foreigners", be these foreigners ugly Americans or gnomes from Zurich.

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### 3. Less Developed Countries

In a fixed currency scenario the LDC's will obviously not be part of the broad scheme. The best that could be aimed at would be for most of them to attempt to link their currencies to the dollar, the pound or the French franc. That's fine for Chad or the Ivory Coast. But what about immense and powerful countries like Brazil, India or Indonesia, who in fact do not have a currency. It would be impractical to ask India to link its rupee to the pound or suggest to Jakarta the pegging of its rupiah to the Dutch guilder.

And what about today's debt structure. The bulk of the present indebtedness was largely incurred in the mid- and late seventies when it was thought that the dollar would weaken forever. In the theoretical game of lending and borrowing it is commonly assumed that the winner will be the borrower in case of large and unforeseen inflation and that lenders will benefit from deflation or lesser than expected inflation. The truth of the matter is that the borrower always wins because in case of deflation he won't be able to pay back his debt.

How could an all encompassing agreement be struck with the debtor countries within the framework of a gold standard is anybody's guess. The present problems are acute enough without fixed parities or the discipline of gold. Let's now assume that all debts are suddenly cancelled. Could these countries survive without a handout? Was the loan extended to them a veiled tribute offered for political support like in late Roman times? Maybe. These thoughts, however relevant, are bringing us away from the fixed parity topic.

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4. Whither Europe? Local dislocations

The subject of fixed parity is almost endless. Viewed in a macrocosm,
Europe may be looked upon as a solid developed entity one step behind the U.S.
or Japan. The real world is somewhat different. As a whole, and judged some
ten years ago, Europe looked as the leader of the smokestack industry while
the U.S. pioneered in novelty and the Third World excelled in textiles and
handmade crafts.

Things are different today. The smokestack leadership has now shifted to South-
east Asia. In Taiwan and South Korea the steel industry is booming. Japan
itself feels threatened by the aggressive efficiency of its neighbors. What
is then Europe's niche? The smokestack industries are being phased out and
high technology has failed to flourish. Can France survive by exporting perfume
or the U.K. English breakfast tea?

Within Europe acute differences have been developing. Should the guilder be
pegged to the Deutschemark a Dutch emigration to Germany may take place --
and a brain drain. A similar braindrain could be expected from France and
the U.K. into Canada and the U.S. Is that desirable?

5. The Threat of Seigniorage Abuse

Fixed parities imply uniform interest rates among member countries. Different interest rates would entail different forward foreign exchange rates (which would then be arbitraged by those who believe in the stability of the system).

At any rate, if the domestic policy of the U.S. dictated high interest rates which in turn adversely affected the economies of Europe how would the conflict be solved? Without fixed parities misgivings as to U.S. policies were expressed time and again in the recent past by several members of the European community.

Rightly or wrongly, the U.S. is likely to be taken as a scapegoat -- whatever its monetary policies -- by opportunistic demagogues.

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## 6. Balance of Payments Problems

Balance of payments problems will stem from two sources. The first one that we have alluded to is of a chronic nature and caused by the lack of vitality in a given country; the second may be temporary like the French minirevolution of May '68 which did weaken the franc, or the mere expectation of a Socialist victory in elections to come. In our world of floating currencies balance of payments problems are automatically solved by a shift in currency values. The U.S. trade deficit is compensated by large foreign investments, whether a foreigner buys into the U.S. stock market, the real estate market or into a farm in Iowa, all things which will give him the illusion of a security that he lacks in his own country.

All of the above ideas have dealt with the pitfalls of fixed parities. The nemesis of these pitfalls is a certain stability, a sense of permanence and all the benefits that accrue from such feelings. Let's now talk about the gold standard.

### Part Two: The Gold Standard

#### 1. Gold Standard

The gold standard is that form of absolute convertibility of paper into gold that prevailed before 1914. Under the gold standard gold coins are legal tender.

In this system of exchange whenever there is the perception by the people that gold is underpriced or whenever a lack of confidence in the system arises paper is redeemed for gold and the money supply shrinks, bringing about deflation until such a time that paper (which can be lent at interest) becomes dear enough as to make gold look overvalued or less desirable. This point marks the end of the crisis and expansion starts again.

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## 2. Gold Exchange Standard

Under such a system as was adopted by the U.S. in 1933 the citizens are not allowed to own gold. The dollar is pegged to gold but only foreign central banks have the privilege of demanding conversion. As in the gold standard any imbalance between imports and exports results in a gold drain which forces the country with the deficit to tighten its belt.

## 3. Implementation of the Standard

The political difficulties are seemingly almost insurmountable today. First there is the myth that scientifically proven economic policies are possible and that through these policies any ills could be corrected. A gold standard would be opposed by the great majority ranging from labor leaders to bankers. Therefore such a system could only arise from a deep sense of crisis. Now, if implemented what would be the criteria which will determine the fixed price of gold?

A very simple solution could be to raise the price high enough so that the U.S. may be able to redeem all of its obligations with the stock presently at hand. But then what about future obligations built into the entitlement system, the social security and the mere guarantees extended to various institutions?* At $5000 an ounce the system may survive for twenty years (see chart).

* Recently including large banks

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Another solution would be to price gold slightly above current quotations.

The danger here is credibility.

### 4. The Problem of Other Countries

We have said a word about how jealous every nation is of its independence. The risk of plunging the LDC's into a greater crisis will be a deterrent to the acceptance of a gold standard. Prior to 1914 the LDC's were under colonial control and their policies were therefore dictated by the colonial powers who underwrote their obligations. Should the U.S. adopt the gold standard its universal acceptance could only be purchased at the cost of such a guarantee or by the promise to lend gold to poor nations in need which negates the principal purpose of the standard which is to impose self discipline on the members.

What is so obvious of LDC's is to some extent true of European countries. Gold backing would be needed for SDR's and rules for redistribution agreed upon.

### 5. Political Problems

It has been said by many who oppose any link of the currency to gold that the countries which stand to benefit the most from an increase in the gold price would be the large producers like the U.S.S.R. and South Africa. Such considerations whatever their merit make our first solution (a high gold price) more difficult to endorse.

And, no doubt, a gold standard will certainly accentuate present trends whereby Western Europe is plagued by increasing unemployment and Southeast Asia is booming because of the closing technology gap and the large gap in the cost of labor.

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6. How Could It Come To Pass?

The gold standard was not born suddenly one day as the result of a conference among interested parties. It developed slowly and spread out. It started and was made possible because it served the best interest of British mercantilism. From Britain it spread to the rest of the world as joining in was practical and lent prestige to the member who now belonged to a respectable club. Gone today is the sense of respect and the belief in the usefulness of discipline.

Only the U.S. can initiate the change. It is unlikely that such a step would ever be taken without the strong approval, complicity and understanding of the people. Such a state of affairs could only emerge as the only alternative to a quite desperate situation like rampant inflation and economic collapse.

Prior to August 1948 the Germans were ready to do anything to end the general collapse. And they did. And thus started the so-called miracle. In such a context a blueprint should be useful to have and would save time. This talk is a modest step in this direction.

***

KISSINGER DISC
060584

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# GOLD AND THE INTERNATIONAL MONETARY SYSTEM

## Overview

In order to talk about Gold and its evolving role in the world monetary system, one must have a theory of how monetary systems operate and evolve. Without a theoretical framework, analysis degenerates into a motley collection of partly related gold facts and partial equilibrium observations. At worst, such analysis can turn into a "snake oil" recommendation of a Gold Standard as a universal panacea for everything from soft money policies to lax morality - or the obverse belief that Gold is a barbaric relic which it is possible for Governments to exorcise by the simple rite of legal, i.e., fiat demonetisation.

Throughout the last two decades, the official U.S. position has been very hostile to an enlarged role for gold. Although I believe the U.S. can no more, nor less, demonetise gold than impose a new political system on an independent country, the fact is that gold has been intellectually demonetised. In other words, conventional academic theories do not provide a framework, even for posing, let alone answering, the crucial questions regarding the future role of gold. There are two reasons for this.

First, academic theorising over the international monetary system has been largely, and increasingly, undertaken by economists who have never had any direct experience of the full range of international monetary transactions. The situation is akin to the early stages of Western medicine when the human body was considered inviolable - and thus doctors developed an extremely sophisticated theory of five essences and the balance of bile, phlegm, etc. Analysing the abstract qualities of e.g., fire and wind, led to specific forecasts and remedies of supposed ills.

This leads to analysis of a situation where two experts will have diametrically opposing diagnoses, forecasts and remedies. Equally, it leads to general pronouncements ("floating exchange rates will lead to a smooth adjustment of exchange values on the basis of the differential advantage and will return to countries control over their own monetary policies"), specific statements ("the forward exchange rate is an unbiased predictor of future spot rates") and very specific forecasts ("the dollar will decline and oil price rise") - all of which have proved to be impossible to reconcile with the observable facts and have caused massive bankruptcies on a global scale.

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[L.C]

The ex-post solution is that economists augment their models by unobservable variables (e.g., inflationary expectations or information costs) to fit the past. It is truly amazing how well conventional theories explain the wild swings - in the past...

The second problem is that conventional analysis is almost exclusively a theory of the behavior of the monetary system. What is required to answer the questions of interest is a *Meta-Theory* of the behavior of monetary systems: A theory of how monetary systems evolve and behave. To give a homely example: a man may be an expert on analysing the mechanics of a Model-T Ford, but such expertise is irrelevant to the question of how the car will respond in different conditions or what new transport vehicles or transport needs will emerge. The world monetary system is part of an enormous and rapidly evolving transport system which is increasingly transferring knowledge and risks rather than goods. In other words, even the most hardened academic will recognize that the monetary system is evolving - if two financial centers are linked with enormous arbitrage flows via telephone, then the linkage and dynamics of monetary policy will be different from two countries which are not connected or are connected via a three month sailing trip. Two hundred years ago London was the one dominant financial center and there was only intermittent feedback. Now the interactions are very tight and global monetary policy clearly has a very major N-player game aspect.

Thus, I am starting with a radically different epistemology from conventional analysis: I am looking for a set of useful lies with which to analyse the evolving monetary systems and the possibility of change in the evolutionary path. Such a Meta Analysis has different concepts from conventional analysis, and answers questions at a Meta level (e.g., what will be the future role of the dollar) not facts (e.g., what will be the level of dollar deutsch mark). Such an analysis is not as airy fairy as one might suspect: "Facts" such as Okun's Law or the 1980 definition of M1 are no more useful now than knowledge of how the choke operates on a Model-T Ford. In all fields of human knowledge, ignorance is buried in the concepts themselves. In the long run, concepts are dead.

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A Meta Theory

The first point is that in analysing an evolving
system, the definition of concepts must be operational. In
other words, something is defined by what it does - *not* by
what it is. This Positivist position avoids the first inanity
of economists who tend to define money (or GNP or inflation,
etc.) as the arithmetic sum of certain arbitrary numbers,
i.e., liabilities of certain institutions legally defined as
Banks.

A money fulfills a number of functions. Almost
anything can provide these functions - but some monies
(notably the dollar) are better than others.

With this viewpoint there can be no concept of
absolute money (such as one might be led to if one believed
that Governments define what is legal tender. Which in turn
would lead to the view that liabilities of the Central Bank -
money "base" or "high powered" money - was the absolute
standard). Thus, one has only a relative concept of
moneyness. Bonds are a relatively poorer money than Central
Bank currency currently because of their poorer store of value
qualities.

Worse still, even this relative concept of money is
not atomic. In high energy and stressful monetary
environments, "money" can split up into its correspondent
functions. Money avoids the barter problem - and in so doing
fulfills more functions than textbooks suggest. When the
stresses reach a critical point, the binding energy no longer
holds these separate functions in one instrument and there is
an explosive growth in new financial instruments. This is
shown in the explosive growth over the past five years in FX
futures, Interest rate futures and EuroYen.

Note that such developments have two aspects. First,
they indicate enormous financial stress coming from
somewhere. Second, they represent a major disequilibrium in
process (in modern jargon, a bifurcation). Such a
disequilibrium cannot continue indefinitely.
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In any monetary system, one numeraire of money will dominate. This is because - for the world economy - the surpluses and deficits in the different markets must all sum to zero. In many markets there is little feasibility of short run adjustment - thus we currently have a global surplus of oil, of commodities and of dollar debt. As imbalances in these markets are fixed in the short run (i.e., at least two years) - leading to payment surpluses and deficits - the adjustment comes in the most flexible and elastic markets, (i.e., those in which rapid relative price changes can occur and in which these price changes will lead to equilibrating surpluses and deficits manifesting in other markets within a short time period). This is one aspect of the dollar's supremacy - a large swing in the dollar can and has lead to a massive swing in the global balance of payments in non-dollar markets. The Swiss Franc rose 50 percent over the year in 1978 - yet this had a negligible impact on global balance of payments. Thus the Swiss Franc could never become the world's equilibrating money, i.e., the reserve currency.

There are two immediate corollaries of this view of the dominant reserve currency as the principle "stress bearer" of imbalances in global payments flows. First, it means that the reserve currency must have many parallel markets - between which there is a high degree of substitutability. For the dollar we have Fed funds, Eurodollars, TBills, CD's, BA's, CP, etc. These are, so to speak, the tethering lines or "stays" for the dollar which lays off the stresses into a large base of markets. In contrast, the Swiss Franc only has one market of depth - the Euro Swiss deposit market - and thus this market must take all the strain of flows. This explains why Euro Swiss rates went negative in 1978 and have been pulled up by over 50 bps (equal to 10 percent) during the last four weeks.

The second point concerns the substitution of one reserve currency for another. Taking the analogy a step further, when enormous stresses buffet the current reserve currency, then other competing monies will start to play a role. The dollar markets - the tethering lines for global imbalances - will become intermittently lax and overtaught (in Economists' jargon, "unstable expectations") and there will be a major increase in volatility that we have clearly observed over the past year.

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On this view, the Central Bank at this point no
longer has control over the reserve currency, as it is being
driven by the mammoth disequilibria in the other markets.
Thus, during the first seven months of 1984, the Federal funds
rate has risen by 175 bps (a 9.50 average in January to a
current 11.25). Yet, the market has raised the twelve month
Eurodollar rate by over 350 bp.

Intervention is totally useless because this would be
trying to set prices in all the markets in disequilibrium -
and thus the resources of the Central Bank are dwarfed. If
the stresses continue, then - eventually - another currency
will develop parallel markets and supplant the dollar. Once
this starts to happen, the transition - as from Sterling to
the Dollar at the end of the fifties - is very rapid because
of the very low substitution cost.

Looking forward, the Yen is clearly emerging as the
world's second reserve currency, while the Deutsch Mark is
declining because a swing in the value of the Deutsch Mark is
having a diminishing impact on world payments positions.

Seigniorage and Hegemony

The next issue is the seigniorage rights on the
reserve currency and hegemonial power it gives to the reserve
currency country. The first point is that the reserve
currency is demanded as a world transaction and investment
vehicle. If you wish to purchase major amounts of any
commodity, a dollar balance is required - as the numeraire is
dominantly dollars. If you wish to have a liquid investment
or borrowing of over $500 MM, then the dollar is the only low
cost (in terms of flexibility) vehicle available. Because of
this global demand for the dollar - not experienced by other
currencies - the U.S. enjoys a major seigniorage benefit. In
other words, if the U.S. issues dollar liabilities
internationally, then the dollar's external value will not
decline in the short run, because overseas dollar liability
holders will be crowded out - but cannot switch into other
currency liabilities without major exchange rate movements.
Thus, if the U.S. Government issues long term debt
internationally, the LDC's - or their financers - are forced
to try to borrow other currencies. If they try to borrow, say
Yen, then the ultimate exchange of the borrowed Yen for the
LDC's imported goods depresses the Yen exchange value as the
Yen markets are not deep enough to dissipate this. What this
means is that the U.S. can, for two to three years, finance an
enormous employment gain and spending gain that is subsidised
by the high dollar. For a non-reserve currency country, like
France, a similar increase in Government spending as a percent
of GNP lead immediately to a devastating capital outflow and
loss of employment.

0130R

- 6 -

For the U.S., the current gains will reverse with a vengeance over the next five years - but this control indicates the crucial political element of the monetary system: control of any form over the world's reserve currency gives short run control of overseas monetary policy, employment and income.

## Gold

Viewed in light of the above remarks, Gold is just another competing money. Its primary defect is its heterogeneity - which severely limits its use as a transactions vehicle - and the lack of secondary markets - which means that Gold price movements only have modest (and highly distributional) impact on global surpluses and deficits - which means that Gold cannot currently act as the reserve currency. The way to eliminate both of these problems is by the activation of Gold as a financing medium for both short and long term transactions. Thus, if a gold price rise enables non-producing (or consuming) countries to alter their balance of payments in a major fashion (i.e., more than a 25% change in its balance of payments), then Gold will be a feasible reserve currency.

The obvious way to try to shortcut this process is to monetise gold by fiat by fixing its price against the dollar, but this does not secure or enhance its longer term monetary status - rather the reverse.

This is for two reasons. First legal, fiat monetisation is essentially the same as supporting a puppet regime overseas. The U.S. lost half its Gold reserves attempting to demonetise Gold, trying to support globally unacceptable Dollar Gold prices.

The point is that such a Gold puppet regime would be unreal - Gold becomes a numeraire for the transactions which are actually executed in the dollar markets. The ultimate political control of global liquidity - with the accompanying hegemonial power to distort the distribution of global employment - still lies in the deepest money markets, which are the parallel dollar markets. Alterations in supplies of Gold from South Africa will not be allowed to impact the Gold-Dollar Fed funds rate.
0130R

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[L.C]

Second, as the scheme is artificial - with the Gold/Dollar price not dictated by the market - noone would engage in any long term Gold: Other Currency transaction, unless they were making an explicit bet on the continuation of the scheme. History shows that fixed Exchange Rate relationships can only persist when - by accident or design - there is collusion on global monetary policy and objectives.

In practice, fixing a given Gold Dollar exchange rate can be very tempting as an instrument of hegemonial or monopoly power. Doing this takes the monopoly power of the dollar and enables the power to be used in the Gold market. If done correctly, this can give an enormous windfall gain to the monopoly holder. This is, of course, exactly what OPEC did by taking its monopoly over the oil market into the dollar market by fixing a high Dollar oil exchange rate.

These are four unfortunate corollaries of such action. First, it is deflationary because if the monopoly holder "wins", e.g., sets the Gold Dollar price high enough to wipe out his debts, then there is an equal immediate loss overseas which will contract activity on a global scale very rapidly. This is because the U.S. Government does not alter its spending based on the size of its outstanding debt - because it is printing the world's money. If the U.S. debt were given to the world by de facto fixing Gold at, say, $4000 per ounce, then many countries - let alone individuals - would sharply contract their spending because of this debt.

Second, Fiat remonetisation is very distributional in its impact. Clearly, Russia and South Africa would enjoy major gains. This would lead to a very rapid build up in Gold/Dollar indebtedness to these countries.

Third, unlike oil, alternative monies to supplant the Dollar are relatively easy to obtain. The supply of these competing monies would very rapidly supplant the dollar. There would not be the eight year window that OPEC bought.

Fourth, as shown by the current role of Sterling and the 30 percent global excess oil capacity, ultimately there will be an irreversible loss of role and value from abuse of monopoly.

0130R

- 8 -

## Conclusion

The reserve currency enjoys a dual and dichotomous role. It is the money of one country and it is the money of the world. The country which has the reserve currency thus has "white man's burden": to maximize domestic monetary policy objectives will cause severe disruption overseas and will ultimately lead to revolt. When revolts occur, control is temporarily lost - as A. Lamfalussy put it, "Monetary control is an Anglo Saxon problem".

In the U.S. - which is isolationist by nature - it is politically impossible to accept responsibility for the international consequences of dollar policies until a crisis occurs. Further, the seigniorage role of the dollar enables the Government to artificially boost U.S. living standards - at the expense of overseas standards - for one electoral cycle. The cost is loss of future control over the dollar, loss of the artificial - cyclical - employment gains and - ultimately - loss of leading reserve currency status.

On this view, fixing the price of Gold will merely exacerbate and accelerate this process. On the other hand, the volatile dollar policies of the last decade are already leading to a wholesale movement into other monies. Gold is one of these monies and thus - like the Yen, Futures or ECU - has seen an enormous growth in parallel markets. These markets lay the base for an increasing role for Gold. However, the increased role cannot come from Fiat, but by the creation of new Gold markets and deepening of existing markets for Gold. This can be aided enormously by Government action on structure - but not price fixing. To give one example: The U.S. Government is currently issuing 30 year bonds at 13 percent. The inflation rate is 5 percent. Neither the U.S. nor the world economy is expected to grow at 8 percent in real terms. Thus, this rate of real return cannot be maintained by the U.S. Government (with the 20 year call provision an investor would get back over 5 times his real investment). Debt interest is the fastest growing item in U.S. Government spending - rising by over 20 percent per annum.

This implies that either the inflation rate is going to rise very sharply - which is not a desired policy objective - or alternatively, U.S. taxpayers are going to be faced with a crippling burden. Either way the Government is acting inconsistently and should seek cheaper finance. One option would be to issue term gold debt or debt with a gold dollar price benefit.

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Such schemes come to the political heart of the matter. A stable world monetary system can only arise from cooperative, global monetary policies. Cooperative monetary policies implies a short term loss for one group of countries and gain for another group combined with a loss of national control over short run domestic policies. Thus global cooperation is a political impossibility. Even if it were possible, politicians deviate somewhat from their announced goals. Thus, the U.S. budget was supposed to be balanced in 1984. The fact that it is not balanced has led to losses of billions of dollars on investments in U.S. bonds - actual losses which dwarf potential losses on LDC lending (which in turn are due to high dollar interest rates).

Because of lack of political will to cooperate, economists have recommended money growth targets for the major countries based on quantity (nominal money growth target) or price (money stock adjusted to maintain the price of gold/cpi/commodity basket in some range). Quantity targets are unworkable as new monies appear once the announced upper growth limits are reached. Plus this ignores the exploding problem of offshore deposits and currency substitution (if there is no room for dollar M3 growth then everyone borrows Swiss francs to finance themselves. Price targets are impossible because special events can always be conceived which force - at best temporarily - abandoning or redefining of the rule.

At heart, however, these ideas are all flawed because they are fiat solutions to control political greed. Any system created by politicians to stop themselves from abusing monopoly power is always reversible - and is always reversed. The solution then is to help the private capital markets become so strong that - with an ability to activate Gold and all other quasi-money assets - they can rapidly and effectively block such abuse. This constraint already exists for smaller countries, but the U.S. has an effective monopoly control of global monetary policy - as had the UK early this century ("Four Percent Consols will pull money off the moon"). On this view, Gold borrowing and lending and the nascent EuroGold market form initial steps toward an external discipline on U.S. monetary policy. This process would be accelerated dramatically if the U.S. actively encouraged this process by Gold borrowing, lending and debt issues. But trying to fix a Gold Dollar exchange rate could only give temporary U.S. gain and insure global disruption.

0130R

DR. HENRY G. JARECKI

TALK AT GOLDSMITHS HALL, LONDON

April 11, 1984

Ever since I first worked with Mocatta I heard what all of us at Mocatta always heard: the firm was founded in 1684. So as the year 1984 drew near we resolved to have a big, year-long, 300th anniversary party of which this dinner tonight is one major part.

Another part was to ask Tim Green to research and write a 300-year history of the company. Being market people, we were naturally a bit worried. What if Tim found that we were actually formed in 1926 in a small delicatessen on the outskirts of Bombay? And yet, being market people, we had to give it a try. And, sure enough, Tim rapidly demonstrated that there was no 1684. That date derived from the vague oft-repeated comment that we had been formed "about 10 years before the Bank of England", which, as you know, dates back to 1694. And so, we were greatly relieved when, after cumbersome research, he found us here, in the City of London back in 1671. Therefore, when we say that we are 300 years old it is not quite true: we are at least 313 years old.

But the research continued until earlier and earlier centuries came into view. Now we don't know when or where to start. We could start with my namesake Henry the Navigator of Portugal who stayed on land all his life but pushed his seaportains further and further West to such colourfully-named places as the Spice Islands and Trincomalee until his country's trade routes made it the most powerful in the world. Seen from a distance of 500 years, it is hard to tell whether merchants like the Mocattas and the trade in which they engaged were the cause or effect of the prosperity that ensued. Suffice it to say that the countries in which they lived, first Portugal, then Holland, and then England were successful in trade. The reason may well have been their merchants ability to point the way towards meaningful profits untainted by any ideology except the belief in hard work.

Portugal's dominance was, however, undone when it came under the rule of an aged cardinal without heirs for it then had to merge with Spain whose enemies -- the long persecuted Dutch for one -- started with surprising success to raid Portugal's overseas possessions. This weakened Spain and Portugal and strengthened their chauvinism. The Inquisition triumphed. The Mocattas, who can be traced to Oporto and Portugal since the early 15th century (and were thus in the bullion trade the way all merchants were) left Portugal for Holland where economic and personal freedom was more likely to be found. They then moved to England after a visit following which young Mocatta went back to Holland to marry a Dutch girl and bring her to live with him in England.

In short, we don't know our exact founding date. We could say the 1430's which would make us 550 years old, we could say 1671 which would make us 313 years old. But the one thing we do know is that 1684 is not as special a date in our history as this gathering might suggest. Still, we are at least 300 year old and we are here to celebrate that tonight.

It is in any case long enough that any one interested in business generally is tempted to ask why. Very few firms survive that long. Our friends, Spinks the coin-dealers; and Hedges and Butler, the wine merchants whose Managing Director is with us and whose merchandise we are drinking tonight are among the world's few. Chipperfields Circus is another but there wasn't room here at Goldsmith's Hall for the elephants. Most firms fail within the first year or two and almost none survive 50 years. And so, both as market people and as business people, we think about why we have lasted so long.

HJ TALK AT GOLDSMITHS HALL/2

I think there are four main reasons.

1. First, the relevance of our product to man's most permanent desires: freedom from economic or political risk for himself and his family.

2. Second, the way we have traditionally dealt with our customers, namely, as brokers whose interest has been in the customer achieving what he wants. As a result, we have been on the same and not the opposite side of the transaction -- an attitude which has caused such institutions as the Bank of England and the East India Company and the Royal Mint to use us as their exclusive brokers for centuries and has protected us from the risks incurred by those who think they know -- as we do not -- whether prices are going up to down.

3. The third factor is the longevity of our leadership which, though a 13th generation Mocatta director sits with us here tonight, gave us four leaders each of whom led us for more than 50 years and a number of other leaders including my friend and teacher, Keith Smith, who have led us for more than 25 years.

4. The last element that has helped in the firm's longevity is what I call Shavian Undershaftery. You will recall how George Bernard Shaw in his play Major Barbara, describes the repeated passing of a firm's leadership to an adopted foundling named after the ancient City Church of St. Andrews Undershift. You may wonder how a firm like ours with 13 generations of Mocattas can find this relevant. And so you will be interested to learn that our leadership has repeatedly alternated between conservative bullion money-oriented Mocattas and more adventurous paper money-oriented partners like the Keysers, the Goldsmids, and Hector Hay.

This alternation has fused productively with man's ever-changing attitude towards money. Over the past 300 years -- and in the 2000 years before that as well -- public opinion has repeatedly swung from trust and optimism in regard to life, the currency, and the King at the one extreme to the other extreme of cynicism, distrust, and a desire to own tangible goods and not paper backed by the faith and credit of the Crown.

Mocatta's era began in trust. Soon after Mocatta was formed, William Patterson and his friends deposited 10 tons of gold with the King and, in return were permitted to form a bank called the Bank of England, which soon became the only bank in London that could issue paper money. Some distrust was seen a few years later and a Great Recoinage was undertaken that pacified the populace.

For most of the next century, the Bank kept enough gold in its vaults to redeem most of its notes. True enough, Governments of the day occasionally used the gold that was meant to be backing for the peoples' money for political purposes. For example, Pitt the Elder used the Bank's gold and fresh gold he got from Mocatta to encourage Frederick the Great to harrass the French to such an extent that the French had to bring troops back from Canada which Pitt promptly occupied. "I won Canada in Germany" he boasted.

Again, when Bonaparte threatened Europe's balance, gold was sent to the Continent, so much indeed that the Bank had to suspend specie payments for 24 years. During this period the firm was led by the Goldsmids, paper money specialists par excellence whose non-bullion brothers were financiers to so many Governments that

HJ TALK AT GOLDSMITHS HALL/3

[L]

Repeated defaults ultimately caused their bankruptcy and suicide. The firm returned to Mocatta hands during the subsequent period of monetary calm which lasted until the 1876 Latin Monetary Union Conference which signalled the monetary dominance of gold and the demonetisation of silver. Once again, a city person -- nector Hay -- came to preside over the firm's fortunes and helped the Deutschebank (whose representatives we are pleased to have here tonight) to sell that country's silver currency in an orderly way. At the turn of the century, Edgar Mocatta -- a hard money leader -- took charge again: one of his early duties was to help the Bank of England to dispose of the silver that the suicidal and bankrupt Chunilal Saraya, Chairman of the India Specie Bank had bought in that era's unsuccessful effort to corner the Silver Market. This alternation of leadership that met the needs of each day between the hard money Mocattas and their paper money partners is what I call Shavian Undershaftery.

So much for the question of how we got so old. More interesting for all of us here is whether we're all going to get much older. The dismantling of the regulatory distinctions between brokers, and the changing arrangements about who can do what, who can own whom, and what commissions can be charged all call to mind the disagreements that existed in the early 19th Century over Mocatta's bullion monopoly at the Bank of England. The rate of change is however far greater today than it was for Mocattas. Members of the Stock Exchange have only two years to complete their deregulation compared to the 30 it took to open the doors of the bank's Bullion Office to upstarts like Sharps, Rothschilds and Johnsons. Needless to say, the doors were eventually opened and the friendly rivalry that exists today amongst the five bullion houses in London began. We are proud that the representatives of all these companies are with us tonight.

Deregulation, wars, catastrophes, booms, and busts have, then, failed to leave their mark but what if the business dies down? As my comments and your experiences will demonstrate, active times have throughout history alternated with periods of quiet. In many of our 300 years, the business has seemed asleep. In 1917, not a single ounce of gold was traded -- but that was a time of war and controls. The current market demonstrates how quiet even a free market can be. Deflation and the number of 1979-induced competitors that are today struggling for the little business there is give rise to that nagging question: will the bullion business ever come back? And it is to that question that I now wish to address myself.

The question should not be confused with the question: will public enthusiasm for bullion come back? There, I think, only one answer is possible: an unqualified yes. Unless one believes that popularly-elected governments will ultimately come to live within their means or that the people will stop asking for roads and schools and circuses without being willing to pay their taxes, inflation and episodic panic about its consequences are inevitable. The fact that an ounce of gold in the City of London bought as much bread or as many pairs of shoes in 1560 as it did in 1960 is a piece of history we cannot ignore. And so I do not ask myself if today's paper money equivalents for gold will ultimately replace the metal itself. I think they will not.

But I do think it is fair to ask if our business -- the bullion business -- as we know it will have the same permanence. 300 years ago the gold/silver ratio was 18-1 in Brazil, 15-1 in London, and 12-1 in India and that was what moved the bullion along the queue. As little as 15 years ago, one could buy 1-year silver for delivery in London at a price that amounted to a 10% discount on the one year price in New York. Those days are, I think, gone forever, largely as a result of

[L]

today's rapid and efficient communications, transportation, and computers. The Bombay merchant knows the London price as quickly as the New York merchant does and a shipment is almost as cheap as a location swap. What is more, 15-year olds who were playing with motor cars in a garage ten years ago can today in a half hour on a video game PC create a computer program that does the sterling forward arbitrage 1000 times faster than we could ever do it by hand. Brokers and new competitors are persuaded that fortunes are still to be made. I hope they are right.

Is, then, the bullion business finished? I think not. I think that the road from the mine to the wrist-watch will still need expertise and finance; I think that the public will repeatedly try to prevent itself from being destroyed by inflation and will want investment vehicles to achieve this, with the lowest possible risk; and I think that governments will need merchants to lend them money on their reserves, to help them dispose of their reserves and, soon enough, to acquire them once again.

If we think that numbers alone can make all of this happen, our business is indeed finished for we will be replaced by machines. I believe, however, and I think that this room full of experts is my proof, that our customers will continue to need guidance and protection as they do what they want in the gold market and that all of us here, working with them and working in friendship with each other will be needed to carry it out. And so, not surprisingly, I come to the conclusion that proves I am talking my book: I think our firm will be here, in this business and from time to time in the paper money surrogate business, for the next 300 years.

And so I conclude by attributing our longevity not only to a great deal of luck but also

* the permanence of man's need for protection that made our profession -- unlike lamplighting, sedan chairmaking and the stage coach -- a permanent task.

* the right products and services for the times by which I mean yesterday's silver dollars, louis d'or, and fixing services and today's bullion leasing, bullion options and bullion arbitrage;

* the right leaders left long enough in place but not so long they cannot respond to their times; and

* the right customers treated as if they would be our friends forever

This and a free and friendly environment -- the City of London -- of which you are all a part and to whom we at Mocatta now offer our thanks and our wish to stay with you for the next 300 years.

Our proudest and longest commercial friendship is, of course, with the Bank of England. Ever since, early in the 18th Century Mocatta was admitted to the Royal Exchange, our friendship with the then newly formed Bank of England has been a mainstay of our activity and our pride. Then, as now, the management of exchange rates and of the money supply was important to the Bank. The only difference then was that it was the exchange between paper money and precious metal which concerned them. Those of you who have read Tim Green's book *Precious Heritage* will know the history of the silver corner of 1717 and of Mocatta's role in it. This was the event which set the seals on the bond of commercial and personal friendship which has survived to the present. And so I am happy to welcome as our guest here tonight Derek Byatt, Chief Manager at the Bank of England and our liaison for bullion trading.

And finally, it is for this reason that we are so honoured by the presence of Lord Richardson -- former Governor of the Bank of England -- the chief among all our friends. I offer you then on behalf of our firm a toast to the next 300 years and to all of the friends who will make it possible.

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041884

JUN. 19 '84 14:19 KISSINGER ASSOCIATES, WASH. DC

MOCATTA METALS CORPORATION

FOUR WORLD TRADE CENTER • NEW YORK, N. Y. 10048

DR. HENRY C. JARECKI
CHAIRMAN

TELEPHONE: (212) 938-9600
TELEX (INT'L): 235554
TELEX (DOMESTIC): 12-5053
CABLE: METAMOC NEWYORK

1 August, 1983

Mrs. Suzanne McFarlane
1800 K Street, N.W.
Suite 400
Washington, D.C. 20006

Dear Mrs. McFarlane:

Thank you for our good talk concerning the possibility of Dr. Kissinger holding the Mocatta Lecture in Washington, D.C. in the week of September 26th, at the time of the International Monetary Fund meetings in Washington, D.C.

We would expect the attendees to be drawn from the list of delegates to the International Monetary Fund, presumably with press in attendance as well. As I have told you, we think that there would be very substantial interest in Dr. Kissinger's thoughts about the gold standard and its relevance to current international monetary and political affairs. As bullion dealers, we have no doctrinal view at all about whether the gold standard is a good thing or a bad thing and thus no wish to participate in forming the direction of his thinking. On the other hand, it might prove helpful if one had a chance to chat with Dr. Kissinger about general issues concerning this which might form the basis for the thoughts he would develop and I would be honored for the opportunity to participate in such a discussion. It might be useful for me to bring a practically-oriented economist along if that were thought helpful.

As I mentioned to you, our desire to have a Mocatta Lecture is closely linked with the possibility of having Dr. Kissinger hold it. It may well be that the lecture proves so successful that we would subsequently make it an annual lecture but this has been by no means decided by us. Because we would in all likelihood not have such a Mocatta Lecture at all if Dr. Kissinger were not available, it is probably premature to reflect on the precise format for such a lecture. Perhaps a dinner would be appropriate; perhaps it would be at a lecture hall. We would want your guidance on this question and probably that of our public relations consultants, Valin Pollen of London, who would be available to work with your group on the question.

For your information and interest, I take pleasure in sending you

a copy of a brochure describing our companies;
last year's Annual Report of Mocatta & Goldsmid; and
the just-published Annual Report of Mocatta & Goldsmid's parent, Standard Chartered Bank, PLC, an overseas British bank with seventeen hundred offices in seventy countries which is one of the world's largest twenty-five banks.

AUG 05 1983

JUN. 19 '84 14:22 KISSINGER ASSOCIATES, WASH. DC

DR. HENRY G. JARECKI

April 11, 1984

JUN. 19 '84 14:23 KISSINGER ASSOCIATES, WASH. DC

P.06

HJ TALK AT GOLDSMITHS HALL/2

JUN. 19 '84 14:25 KISSINGER ASSOCIATES, WASH. DC

P.07

HJ TALK AT GOLDSMITHS HALL/3

Repeated defaults ultimately caused their bankruptcy and suicide. The firm returned to Mocatta hands during the subsequent period of monetary calm which lasted until the 1876 Latin Monetary Union Conference which signalled the monetary dominance of gold and the demonetisation of silver. Once again, a city person -- nector Hay -- came to preside over the firm's fortunes and helped the Deutschebank (whose representatives we are pleased to have here tonight) to sell that country's silver currency in an orderly way. At the turn of the century, Edgar Mocatta -- a hard money leader -- took charge again: one of his early duties was to help the Bank of England to dispose of the silver that the suicided and bankrupt Chunilal Saraya, Chairman of the India Specie Bank had bought in that era's unsuccessful effort to corner the Silver Market. This alternation of leadership that met the needs of each day between the hard money Mocattas and their paper money partners is what I call Shavian Undershaftery.

JUN. 19 '84 14:26 KISSINGER ASSOCIATES, WASH. DC

P.08

Our proudest and longest commercial friendship is, of course, with the Bank of England. Ever since, early in the 18th Century Mocatta was admitted to the Royal Exchange, our friendship with the then newly formed Bank of England has been a mainstay of our activity and our pride. Then, as now, the management of exchange rates and of the money supply was important to the Bank. The only difference then was that it was the exchange between paper money and precious metal which concerned them. Those of you who have read Tim Green's book Precious Heritage will know the history of the silver corner of 1717 and of Mocatta's role in it. This was the event which set the seals on the bond of commercial and personal friendship which has survived to the present. And so I am happy to welcome as our guest here tonight Derek Byatt, Chief Manager at the Bank of England and our liaison for bullion trading.

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041884