[Congressional Record (Bound Edition), Volume 145 (1999), Part 5]
[Senate]
[Pages 6698-6699]
[From the U.S. 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.

[[Page 6699]]

  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.
       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.

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