[Congressional Record Volume 145, Number 52 (Thursday, April 15, 1999)]
[Senate]
[Pages S3773-S3774]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]
IMF GOLD
Mr. REID. Mr. President, I rise today to insert into the
Congressional Record an analysis by the noted economist, Michael Evans.
This information regards the poorly considered effort by the
International Monetary Fund to sell all or part of their gold reserves
to ostensibly help poor countries. Dr. Evans is a professor of
economics at the Kellogg School at Northwestern University of Illinois.
In this detailed analysis, Dr. Evan's reviews the history of recent
gold sales and cautions that selling gold often degrades economic
performance. Based on this empirical research, Dr. Evans states that
countries that have resorted to gold sales have found their currency
depreciated, their real growth rate down and their unemployment up
relative to countries that did not sell gold.
The IMF has established a policy to ``avoid causing disruptions that
would have an adverse impact on all gold holders and gold producers, as
well as on the functioning of the gold market.'' The proposal that the
IMF is now contemplating would directly conflict with this well-founded
rule. In fact, the suggestion of gold sales has already adversely
impacted gold holders and gold producers by causing an alarming drop in
the price of gold.
Currently, the price of gold is at its lowest point in twenty years.
This is significant because the low price of gold is now nearing the
break-even point for even the larger mines. Therefore, these mines will
be forced to either operate at loss or shut down entirely. With mining
and related industries accounting for 3 million jobs and 5 percent of
the gross domestic product, this would have a serious impact on our
nations economy.
The IMF should abandon this initiative and pursue alternatives to
assist these poor nations.
I ask unanimous consent that the article be printed in the Record.
There being no objection, the article was ordered to be printed in
the Record, as follows:
[From the Washington Times, Apr. 6, 1999]
(By Michael Evans)
In the rarefied atmosphere of Davos, Switzerland, Vice
President Al Gore fired his opening salvo in the 2000
Election Year campaign, in an attempt to demonstrate his
expertise in international finance.
Specifically, Mr. Gore suggested the International Monetary
Fund should sell some of its gold reserves and use the funds
to reduce foreign debt of impoverished Third World nations,
following through with one of his favorite plans discussed in
his 1992 magnum opus, ``Earth in the Balance.'' Such a plan,
he claimed, would help alleviate ``the insanity of our
current bizarre financial arrangements with the Third
World.'' (``Earth in the Balance,'' p. 345).
Forgiveness of foreign debt would certainly not be a unique
step. The United States forgave most foreign debts after both
world war for Allies and foes alike. The Brady plan in the
1980s reduced Latin American debt. The United States also
forgave much of the foreign debt of Eastern European
countries after the demise of the Berlin Wall. Forgiveness of
debt is not necessarily a bad idea; in many cases it has
worked quite well.
Yet the Gore plan is questionable on two major counts.
First, before these debts are forgiven, these countries need
to provide some evidence they have started to improve their
own economic programs. Second, selling gold, far from being
the best way to proceed, is close to the worst.
[[Page S3774]]
With the IMF throwing $23 billion down the Russian drain
because that country failed to institute necessary economic
reforms, the case for requiring some moves toward economic
stability seems strong enough that an extended analysis is
not necessary. On the other hand, the negative impact of gold
sales on economic performance is not well understood, and
deserves further discussion.
Suppose the countries targeted to receive aid from the Gore
program do indeed get their economic policies in order. Then
it does make sense to reduce their foreign debt, allowing
them to improve their economic lot instead of being
permanently saddled with debts that, for practical
purposes, can never be repaid. But why raise this money
through IMF gold sales?
The cheap, cynical answer is this method doesn't require an
actual outlay of U.S. funds, so it doesn't appear in the
budget. However, cheap tricks like that are precisely the
reason so many voters have come to distrust their elected
officials. If reducing Third World debt is worth doing, let's
debate the issue, vote on it, and pay for it, not disguise it
in some underhanded way that the average voter won't notice.
Yet there is a deeper, more important reason. Selling gold
often degrades economic performance. Most countries that have
resorted to gold sales have found their currency has
depreciated, their real growth rate has declined and their
unemployment rate has risen relative to countries that did
not sell gold.
Now that the inflation rate has remained low in the United
States, even with the economy at full employment, and the
dollar has strengthened, it has become fashionable to
proclaim that gold reserves are no longer needed to stabilize
the price level and the value of the currency. In fact, there
are many reasons why the inflation rate has remained so low,
including a credible monetary policy, the budget surplus, and
the beneficial impact of rapid growth in technology. However,
the most important factor is the widespread realization that
the U.S. government is committed to keeping the rate of
inflation low and stable. Massive gold sales would undermine
that commitment.
In this regard, it is instructive to look back and see how
the U.S. economy fared during the last major round of gold
sales. The IMF held several gold auctions from 1976 through
1980. In the five 1976 auctions, the average price of gold
was $122 per ounce. By the five 1980 auctions, the average
price had risen to $581 ounce.
Of course, one of the reasons gold prices skyrocketed was
that the rate of inflation in the United States surged,
rising from 4.9 percent in 1976 to a peak of 13.3 percent in
1979. While one can argue that higher oil prices boosted
inflation, the fact of the matter remains that the inflation
rate rose to 6.7 percent in 1977 and 9.0 percent in 1978
before oil prices started to increase. Furthermore, the CPI
for all items, excluding energy, also moved up from 4.8
percent to 11.1 percent in 1979, and the continued rising to
11.7 percent in 1980.
How could a relatively modest amount of gold sales have
boosted inflation so much? Most economists now agree that
inflation is driven largely by expectations. If labor and
business believe fiscal and monetary policy will continue to
fight inflation vigorously, the inflation rate will remain
low, as is indeed the case today. Conversely, when the
government sends the unmistakable signal by selling gold that
higher inflation is OK, labor and business quickly raise
wages and prices, and inflation is off to the races.
Of course, the Carter administration did not come right out
and say ``we favor high inflation,'' but their actions
convinced private sector economic agents that is what they
meant. When the signaled their disdain for a stable price
level by selling gold, the U.S. government encouraged prices
to rise more rapidly in the late 1970s.
Other countries have also had negative experiences
following gold sales. On July 3, 1997, the Reserve Bank of
Australia announced it had sold 69 percent of its gold
reserves of the previous month, resulting in a net gain of
$150 million per year in interest. However, it is more than
coincidental that the month before this announcement, the
Australian dollar was worth 75.4 cents, but it then started
to fall steadily to a level of 58.9 cents a year later.
Thus in the year following the announcement of goal sales,
the Australian dollar lost 20 percent of its value. As a
result, Australian consumers had to pay an additional $10
billion per year for imported goods, almost 70 times the $150
million in interest earned from interest-bearing securities
purchased with the money generated from the sale of gold
reserves.
The Canadian economy was also damaged by the decision of
the central bank to sell 85 percent of its gold reserves
since the early 1980s. The sharp decline in the value of the
Canadian dollar relative to the U.S. dollar also led to a
lack of investment opportunities by local firms and a
substantial rise in the unemployment rate. Indeed, before the
gold sales, the Canadian unemployment rate tracked the U.S.
unemployment rate closely; in recent years, it has been about
5 percent higher. Canada paid a very high price for this
decision to sell gold and reduce the value of its currency.
It is also worth mentioning that Russia sold most of its
gold reserves shortly before the collapse of the ruble last
summer. It is likely that if Russia had not sold its gold, it
would not have been forced to devalue the ruble. Seldom has a
decision to sell gold reserves been more ill-founded and
untimely.
Thus the weight of the evidence clearly suggests that when
central banks decide to sell gold, the currencies of those
countries often depreciate and their economies suffer slower
growth and rising unemployment, far outweighing any small
gain that might occur from the return on interest-bearing
securities.
Given this track record, it seems remarkable that anyone,
let alone the vice president, would suggest weakening the
current stability in the U.S. economy by selling gold and
raising the expectations that inflation was about to return--
which would also result in a degradation of current economic
performance.
If impoverished Third World nations can demonstrate they
have taken steps to put their economic houses in order, fine.
Let's reduce their foreign debt, just as the United States
has done for so many other foreign countries over the past 80
years. But having made that commitment, there is absolutely
no reason to risk boosting the rate of inflation and
weakening economic performance by funding debt reduction with
ill-advised gold sales.
____________________