"Money : whence it came, where it went" by Economist J.K. Galbraith

Discussion in 'Economics' started by harrytrader, Feb 4, 2004.

  1. I have read it a few years ago I recommand it


    It's an history book about economy and money but as you know I constantly affirm that one cannot understand today's economy without knowing the history of economy. Although Galbraith's point of view is of course deformed by his democrat tendancy - as I am republican - it is all the more interesting when he critics them: it is all the more objective.
  2. Xenia


    By Richard Duncan

    Financial Times; Feb 10, 2004

    The most aggressive experiment in monetary policy ever conducted is now under way. Japan is printing yen in order to buy dollars in such extraordinary amounts that global interest rates are being held at much lower levels than would have prevailed otherwise. In essence, the Bank of Japan is carrying out the unorthodox monetary policy that the US Federal Reserve intimated it was considering in mid-2003. In other words, the BoJ is creating money and buying US Treasury bonds, which is helping to drive down US interest rates and underwrite US economic growth - and, by extension, global growth.

    It is inconceivable that economic policymakers in Tokyo and Washington do not understand the impact that this unprecedented act of money creation is having on global interest rates and economic output. The amounts involved are staggering. Since the beginning of 2003, monetary authorities in Japan have created Y27,000bn with which they have acquired approximately $250bn - that amount is equivalent to more than 4 per cent of Japan's gross domestic product. It also represents $2,000 for every person in Japan. In fact, it would amount to $40 per person if divided among the entire population of the world. Most importantly, it is also enough to finance almost half of America's $520bn budget deficit this year.

    The amount of new yen that Japan "printed" and converted into dollars during January 2004 alone was enough to finance 13 per cent of the US budget deficit. The investment of those dollars into dollar-denominated debt instruments clearly explains why the yield on the 10-year US Treasury bond fell last month in spite of the 10 per cent upward revision in the Bush administration's budget deficit projections.

    By accident or by design, Japan is carrying out the most audacious endeavour to conjure wealth out of nothing since John Law sold shares in the Mississippi Company in 1720. So far, the results have been impressive. Japan's monetary alchemy has been the most important factor in allowing the US government to finance a $700bn deterioration in its budget over the past three years without pushing up US interest rates to levels that would pop the wealth-creating property bubble there.

    US tax cuts have fuelled domestic consumption. In turn, growing US consumption has shifted Asia's export-oriented economies into overdrive. China has played an important part in this process. With a trade surplus vis-à-vis the US of $125bn, equivalent to 9 per cent of its 2003 GDP, China has become a regional economic growth engine in its own right. China has used its large trade surpluses with the US to pay for its trade deficits with most of its Asian neighbours, including Japan. This recycling of China's US dollar export earnings explains the incredibly rapid "reflation" now under way across Asia. Even Japan's moribund economy has begun to show signs of export-oriented growth.

    These developments highlight a fundamental question that has been debated over centuries: can governments create money and make the population richer without setting in motion a chain of events that ultimately ends in monetary chaos? We may be about to find out as Japan tests the hypothesis on an unprecedented and global scale. If this experiment in unorthodox monetary policy succeeds, then we have arrived at a new international monetary paradigm. Governments will have discovered how to finance limitless deficits through the creation of paper money, and we all can look forward to an age of great prosperity. If it fails - as have all past attempts to create wealth from thin air - then the world may not be able to avoid a severe and protracted economic slump as the extraordinary imbalances in the global economy (caused by the explosion of fiat money in recent years) begin to unwind.

    In mid-2003, economists at the US Federal Reserve published a paper explaining why the Fed was not "out of bullets" despite having cut short-term interest rates to 1 per cent. That paper stated that "the Fed could even implement what is essentially the classic textbook policy of dropping freshly printed money from a helicopter," if necessary, to stimulate the economy.

    Today, that helicopter is in the air. But, strangely, it is not the Stars and Stripes that is painted on its side, but rather the Rising Sun. That much is clear. What still is not quite discernible, however, is who is actually in the pilot's seat.

    The writer is a financial analyst based in Asia and author of The Dollar Crisis: Causes, Consequence, Cures (John Wiley & Sons, 2003)
  3. They are alltogether in that helicopter :

    Ten times a year— once a mouth except in August and October— a small elite of well dressed men arrives in Basel, Switzerland. Carrying overnight bags and attache cases, they discreetly check into the Euler Hotel, across from the railroad station. They have come to this sleepy city from places as disparate as Tokyo, London, and Washington, D.C., for the regular meeting of the most exclusive, secretive, and powerful supranational club in the world. Each of the dozen or so visiting members has his own office at the club, with secure telephone lines to his home country. The members are fully serviced by a permanent staff of about 300, including chauffeurs, chefs, guards, messengers, translators, stenographers, secretaries, and researchers. Also at their disposal are a brilliant research unit and an ultramodern computer, as well as a secluded country club with tennis courts and a swimming pool, a few kilometers outside Basel.

    The membership of this club is restricted to a handful of powerful men who determine daily the interest rate, the availability of credit, and the money supply of the banks in their own countries. They include the governors of the U.S. Federal Reserve, the Bank of England, the Bank of Japan, the Swiss National Bank, and the German Bundesbank. The club controls a bank with a $40 billion kitty in cash, government securities, and gold that constitutes about one tenth of the world's available foreign exchange. The profits earned just from renting out its hoard of gold (second only to that of Fort Knox in value) are more than sufficient to pay for the expenses of the entire organization. And the unabashed purpose of its elite monthly meetings is to coordinate and, if possible, to control all monetary activities in the industrialized world. The place where this club meets in Basel is a unique financial institution called the Bank for International Settlements-or more simply, and appropriately, the BIS (pronounced "biz" in German).

    THE BIS was originally established in May 1930 by bankers and diplomats of Europe and the United States to collect and disburse Germany's World War I reparation payments (hence its name). It was truly an extraordinary arrangement. Although the BIS was organized as a commercial bank with publicly held shares, its immunity from government interference, and even taxation, in both peace and war was guaranteed by an international treaty signed in The Hague in 1930. Although all its depositors are central banks, the BIS has made a profit on every transaction. And because it has been highly profitable, it has required no subsidy or aid from any government.

    Since it also provided, in Basel, a safe and convenient repository for the gold holdings of the European central banks, it quickly evolved into the bank for central banks. As the world depression deepened in the Thirties and- financial panics flared up in Austria, Hungary, Yugoslavia, and Germany, the governors in charge of the key central banks feared that the entire global financial system would collapse unless they could closely coordinate their rescue efforts. The obvious meeting spot for this desperately needed coordination was the BIS, where they regularly went anyway to arrange gold swaps and war-damage settlements.

    Even though an isolationist Congress officially refused to allow the U.S. Federal Reserve to participate in the BIS, or to accept shares in it (which were instead held in trust by the First National City Bank), the chairman of the Fed quietly slipped over to Basel for important meetings. World monetary policy was evidently too important to leave to national politicians. During World War 11, when the nations, if not their central banks, were belligerents, the BIS continued operating in Basel, though the monthly meetings were temporarily suspended. In 1944, following Czech accusations that the BIS was laundering gold that the Nazis had stolen from occupied Europe, the American government backed a resolution at the Bretton Woods Conference calling for the liquidation of the BIS. The naive idea was that the settlement and monetary-clearing functions it provided could be taken over by the new International Monetary Fund.

    What could not be replaced, however, was what existed behind the mask of an international clearing house: a supranational organization for setting and implementing global monetary strategy, which could not be accomplished by a democratic, United Nations-like international agency. The central bankers, not about to let their club be taken from them, quietly snuffed out the American resolution.


    Occasionally there is an extraordinary situation, such as the decision to sell gold for the Soviet Union, which requires a decision from the "governors," as the BIS staff calls the central bankers. But most of the banking is routine, computerized, and riskless. Indeed, the BIS is prohibited by its statutes from making anything but short-term loans. Most are for thirty days or less that are government guaranteed or backed with gold deposited at the BIS. The profits the BIS receives for essentially turning over the billions of dollars deposited by the central banks amounted to $162 million last year.

    As skilled as the BIS may be at all this, the central banks themselves have highly competent staffs capable of investing their deposits. The German Bundesbank, for example, has a superb international trading department and 15,000 employees— at least twenty times as many as the BIS staff. Why then do the Bundesbank and the other central banks transfer some $40 billion of deposits to the BIS and thereby permit it to make such a profit?