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Thread: Federal Reserve advised gold standard for Russia

  1. #1

    Federal Reserve advised gold standard for Russia

    I ran across this information by accident (providence?) while looking for something else. The first link is an essay from Jude Wanniski who went with fed governor Wayne Angell to Moscow right after the collapse of the soviet union. Note that Angell advocated the new Russia to go to a gold backed currency! The second link is an online Google book from the Mises institute that talks about the same essay. I've excerpted the essay bellow. (It's too long to post directly). It's interesting to note that the tension in the Baltics really resulted from monetary policy. (It really is the economy stupid). Also note that the writer advocated an eventual international gold backed standard! Is that what we are facing? Remember Medvedev recently showed the prototype international coin. Is the plan to finish off the dollar and advocate a new gold backed international currency? Why not simply back the dollar with gold and keep our own currency? Anyway, interesting read. I may write this up for a blog post at some point.

    Mission to Moscow
    Jude Wanniski
    September 14, 1989

    Executive Summary: Fed Governor Wayne Angell and I spent the first ten days of September in the Soviet Union at the invitation of the government, to offer advice on the deteriorating state of the economy. We went thinking Moscow had a year or two to work things out, but quickly realized the economy is on the verge of a serious inflation that could accelerate geometrically. We advised an immediate government commitment to gold convertibility of the ruble, at a gold/ruble exchange rate that would have immediate credibility with the Soviet people and international community. The USSR has neither a central bank, in our sense, nor a bond market, so cannot manage the forces that have ironically been put into play by Gorbachev's moves toward market socialism. Receptivity was very high because the economic and financial officials in Moscow are despairing of the approaches they have taken thus far. Angell argued that a gold-convertible ruble, a credible unit of account, is the first thing the government must do, not the last in a chain of policy moves. It could then issue gold/ruble bonds that would be in such demand in the USSR and foreign markets that the budget deficit could be financed with 3% interest rates instead of printing press money. There is no alternative we could recommend if they wish to prevent either the break-up of the Soviet Union, civil war, or a return to a fascist command economy. Fed Chairman Alan Greenspan's October trip to Moscow now becomes extremely important.

    Mission to Moscow

    Federal Reserve Board Governor Wayne Angell and I spent the first ten days of September in Moscow and Leningrad at the invitation of the Soviet Government and state bank, Gosbank. We were urged to speak frankly with economic advice, and as the visit unfolded, the central theme became our insistence that only by going immediately to a fully convertible gold ruble can the nation avoid economic disaster, which is almost upon it.


    We told them in separate meetings that we found the situation worse than we anticipated, the state enterprise ruble economy on the verge of collapse. Its arithmetic deterioration is approaching geometric deterioration, as a result, ironically, of the market forces Gorbachev put into play in the last eighteen months.


    The political unrest in the Baltic states is directly related to this banking issue, with Estonia recently asking for its own central bank and currency. Estonia, Lithuania and Latvia, where there is still a "market memory" compared to the rest of the USSR, are angry at seeing their shelves stripped by Soviets coming from other republics with the increasingly worthless rubles. The Soviets in Moscow insist the Baltic states are able to produce more because their raw materials are so heavily subsidized by the state. The Baltics have specialized in clothing co-ops, pulling in subsidized fabrics and threads from the other republics and peddling apparel at prices only other co-opers can afford. Petroleum, for example, is sold by the state at 3 rubles per barrel, which at the street exchange rate would be the equivalent of 30 cents a barrel. The high-income co-op employes and black marketeers pay the same 35 cents a gallon at the state gas pumps as the low-income state employes.


    Angell also observed that the Soviet Union has no history at all of a "full-bodied money," as he put it. The United States has its roots in a gold standard, with elaborate mechanisms now in place to manage the dollar value of other currencies and commodities, including gold. Except for a very brief period in 1921-22, when the USSR had side-by-side gold notes and fiat rubles, the entire Soviet experiment over 72 years has been burdened by the absence of a predictable unit of account. In this connection, I advised our hosts that a gold convertible ruble might permit perestroika to proceed without privatization of property, as Gorbachev now insists. Angell emphatically agreed, although we of course said we were biased toward private property. Our relative neutrality on this point was a great relief to our hosts, who had been hearing from other visiting "conservatives" from the U.S. that private property was the essential key.

    But neither a capitalist system nor a socialist system can do without a recognized, predictable money, we insisted. Operating without one, I said to several of the dozen groups we met with, was like trying to build a building with a meter that meant different things to the architect, the engineers, and the construction workers, sometimes six inches, sometimes between 15 and 30, sometimes 39 or more. Angell used as a metaphor a thermometer with lines but no numbers and no mercury. Such is the current uselessness of today's ruble, he said. Instead of being the last thing on the list of things to do, the cherry atop the cake, he urged the gold ruble be the first. He did so with great passion and intensity, believing after several days in Moscow that the Soviet Union is now on a course fraught with danger to its own citizens and the rest of the world. "You have to excuse my passion," he told Gosbank officials. "I'm becoming a little bit audacious and I'm almost embarrassed at my audaciousness, but I want you to know how strongly I feel about your present position."

    In a speech Gorbachev delivered Saturday, September 9, which we read about upon our return, he himself warned of the prospect of civil war in the Soviet Union should the ethnic regions persist in pressing for independence. We addressed this specifically in our Soviet audiences, pointing out that the one economic tool a central government cannot decentralize is the value of its money. A gold ruble would set up centripetal forces, binding the outlying regions to Moscow, offsetting the centrifugal forces now working to tear the Soviet Union apart.


    There were questions to us on how we could be recommending gold to Moscow while the United States has demonetized gold. I advised that I favored monetization of gold for the United States, and said I believed we have been moving toward a new international gold-based system in recent years. The Fed has increasingly paid careful attention to the price of gold, Treasury Secretary James Baker in 1987 proposed a currency link to a commodity basket that would include gold. Angell simply argued that it was far easier for the USSR to achieve immediate credibility in its monetary unit by tying it to gold. The US already has a mature bond market and mechanisms to manage money. There is no way for the Soviet Union to replicate these quickly, even within years. A gold standard is the only realistic option.


    The better solution is Wayne Angell's supply-side prescription. Is there time? Can it happen? We will know more in October, when our Mission to Moscow is followed up by Fed Chairman Alan Greenspan's. Leonid Abalkin, who stood up Wayne Angell, has promised to meet with Greenspan. Greenspan, at one time a fervid advocate of a gold standard may in fact advise that he agrees with Angell, that a gold standard may not be quite appropriate for the U.S. at the moment, but that it is the only monetary option open to Moscow. Angell hopes he will do just that. It would be nice if the Fed Chairman did.
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  3. #2
    LaFalce brought up Russia's gold reserves

    [also, I can't find it online or on this harddrive, but Dr. Paul submitted written question to Ariel who answered approvingly of Russia adopting a gold standard. Wayne Angell had a WSJ commentary on it too, if I remember that right.]

    Mr. LAFALCE. Thank you very much, Mr. Chairman. I am very pleased that you are holding this hearing on international economic, financial, and national banking issues. I think this hearing is especially important for these two reasons: First, the vast array of problems facing Russia directly, which could affect its own stability; second, the fact that Russia's economic situation has been and will continue to be such an important factor in the global economic problems we have not yet overcome. Russia's economic situation could adversely impact the highly complex international geopolitical situation.

    I also compliment the Chairman for the timeliness of this hearing. With the meeting of the G–7 heads of state and finance ministers next week in Cologne, Germany, it is vital for the Congress to be kept informed of all aspects of these delicate discussions.

    The last two years brought severe economic and financial problems in many parts of the world and the real prospect of global economic recession. Happily, we got past that situation with relatively little discomfort. But problems remain in many parts of the world; some countries not in difficulty previously are now showing signs of weakness, and the global problems have revealed faults in our international financial architecture.

    The economic, social, and political situation in Russia is especially bleak. After all of our efforts, as well as those of the multilateral banks, and some of those efforts may have been very misguided, Russia is still in a situation where it must borrow simply to service its debt. The Russians seem to have all but given up on the debts of the former Soviet Union. With Russia's incredibly small levels of foreign currency reserves and gold, and poor export prospects, it seems only a matter of time before they will again default. My only hope is that when this happens, other countries are not systemically affected as Brazil was last year. Moreover, I am worried that countries such as Germany, whose banks are the major lender to Russia and whose government has guaranteed most, if not all, of those loans to Russia, and whose economy itself appears to be in recession, are not further hurt by Russia's economic and financial difficulties.

    One particular concern I have is whether the considerable efforts of the U.S. Government and the multilateral banks were the best approach we could have achieved. We must consider whether we should continue on that same path, or make minor or even major changes in our approach. The great number of reports of corruption, diversion of funds by the Russian Central Bank, and other malfeasance raise questions about all assistance efforts. Certainly I will have questions on this issue for the members of the two panels today, and I regret very much that one of the panelists, I understand, Ambassador Taylor, could not be present today. Mr. Chairman, perhaps we should explore the possibility of requesting that the General Accounting Office review what has been done for Russia, both by the United States Government and the multilateral banks, so that they might offer an evaluation and critique.

    Today's hearing is also particularly timely because on Tuesday our committee is going to hold a hearing on international debt relief. Initiatives on international debt relief, such as H.R. 1095, which Chairman Leach, Ms. Waters, Mr. Frank, Mr. Bereuter, Mr. Bachus and I introduced, are targeted for highly indebted, poor countries. As bleak as the situation is in Russia, it does not fall into the HIPC category. Yet, in many ways, Russia is receiving more debt relief than is acceptable for poor countries.

    I realize that the United States has a special interest in Russian economic recovery, social progress, and achieving political stability. However, if we truly are out of the global financial crisis, then now, more than ever, is the time for the United States to take the lead on international debt relief to the world's poorest countries as well. Moreover, one thing I have learned in my many years of advancing international debt relief truly applies to Russia, and that is although economic and financial conditions must be imposed on countries receiving debt relief from our Government and the multilateral banks, we must also include social and humanitarian conditions as at least equally important requirements for relief.

    With that, Mr. Chairman, I thank you.
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  4. #3
    "Is that what we are facing? Remember Medvedev recently showed the prototype international coin. Is the plan to finish off the dollar and advocate a new gold backed international currency? Why not simply back the dollar with gold and keep our own currency? Anyway, interesting read. I may write this up for a blog post at some point."

    I believe that is what we are facing. Why would the people who have stripped almost 99% of the dollars wealth want to return it? They want to close it out, like a losing stock, and start a new stock (gold based currency) that the banks can start to inflate immedietely. And if it's an international currency, then the rest of America's wealth, what is left, will flow like water to that currency and make them all the richer...G. Edward Griffin's "The Creature from Jekyll Island" explains why the banks would NEVER want to back US currency with gold again. The only way to save America's currency and to save American investments would be IF and WHEN the People wake up and just start using other currencies (any currency) that just ignores the US FRN. When too many people are doing that, big brother just will not be able to keep track. Actually, people who have nothing to lose, and who are having to pinch pennies, so to speak, are already doing this. Free-cycle is very popular. People are swapping, selling, trading, sharing, exchanging, anything they can do without FRNs involved. It's the wave of the future if you want to just avoid the pitfalls that are coming. Start working on your circle of friends. Someone brewing beer? Make something to trade with them for beer. Someone does wine every year (perfectly legal!), trade something for a case. Work on your own local economy and good things will come out of that. Sorry, starting to ramble.

  5. #4
    Quote Originally Posted by jmdrake View Post
    Federal Reserve advised gold standard for Russia

    Interview with Wayne Angell
    March 1994 | The Federal Reserve Bank of Minneapolis

    Region: Speaking of commodities, Milton Friedman and Anna Schwartz, when you traveled to the former Soviet Union, you urged that they adopt a gold standard. Do you still feel that same way?

    Angell: Well, that was the proper way for me to approach the Soviet Union as they had a serious problem. Those who had the naive view that deregulating prices prior to fixing the value of money did not realize that it would throw the Soviet Union into a depression and jeopardize democracy. I mean it really has been criminal for us in the West to advocate commodity price liberalization—that is, freeing prices—and at the same time not fixing the value of money. In a sense, the dog is chasing its own tail to the death of the people, and the death of economic growth and democracy. You must first fix the value of money and then you can let prices go to their equilibrium level.

    But to turn oil prices loose without first constraining the money stock simply meant that you were on an oil standard with constant devaluation. And, as I said to them, the Soviet Union was intact at that time, in September 1989, "If you will take aggressive steps in regard to the value of money, then you will find the transitional market system will work. If you do not," I said, "you will then end up with a rate of inflation of 1,000 percent and your country will divide itself into a thousand pieces." I have no regrets with regard to the straightforward call.

    I was looking to Russia's history. I could have easily said, "Tie the ruble to the dollar." But, I thought that would be inappropriate advice for a great power and so I said, "Tie it to gold." They said, "But gold and the dollar may fluctuate." I said, "Watch gold and the dollar, their volatility will become less and less as we approach price level stability." Yes, I advocated for them, not a gold coin standard, but a gold targeting standard. I'm very sorry that they weren't willing to listen and make that hard choice. But, it was a very hard choice.

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  6. #5
    I tend to think that with all of the negative press about the dollar, it should have collapsed by now. This shows that what will back any currency is not gold, but oil. That is why our government is heavily invested in Middle eastern affairs. The life blood of the world's economy is oil; not gold, and our dollars are used to purchase oil. When the oil producing countries renounce the dollar, then the dollar will face collapse. Until then, our government can continue business as usual.
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  7. #6
    Correct. With Russia and Iran starting to exactly that, the process has already begun...It's just not tipping the scales YET.

    Quote Originally Posted by YumYum View Post
    I tend to think that with all of the negative press about the dollar, it should have collapsed by now. This shows that what will back any currency is not gold, but oil. That is why our government is heavily invested in Middle eastern affairs. The life blood of the world's economy is oil; not gold, and our dollars are used to purchase oil. When the oil producing countries renounce the dollar, then the dollar will face collapse. Until then, our government can continue business as usual.

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