The Jamaica Agreement Demonetized Gold

Rueff`s interpretation of the failure of the tripartite agreement contrasts sharply with the British view and is instructive about French intentions in the 1960s. Rueff (1963) congratulated Britain for leaving gold in 1931. France had to give up its parity in 1936, but did so "unfortunately without turning the tap of inflation - thus exposing itself to a gradual devaluation of its currency" (Rueff, 1963, p. 19). The problem for Rueff was that the French lived beyond their means, in the late 1930s as in the 1950s. In his 1963 book, Rueff drew parallels between the two periods and pointed to the problems associated with the budget deficit, inflation, and the currency crisis. The report recommended significant cuts to social programs and public subsidies to balance the budget. By achieving an internal equilibrium, the government could credely establish a new exchange rate parity. In Rueff`s eyes, in 1958, France achieved what it could not do in the 1930s.

The mis-orientation of exchange rates and the resulting accumulation of dollar balances, which quickly exceeded U.S. gold inventories, caused increasing tension in the monetary system. The dangers have not only been recognized in academic circles. When the author arrived at the Fund`s headquarters in early 1969 to begin his new duties and pay tribute to the members of the Executive Board, his visit to Mr. Kafka was interrupted by a telephone call. The British director of Brazil had agreed to give a speech in a few weeks. What would be its subject? "Oh," Mr. Kafka replied with his usual unwavering humor, "the imminent collapse of the international monetary system, I think. During the year 1969, it was decided to create ten billion DDS during the three-year period 1970-1972. This allocation of SDRs has in principle made the system independent of the gold exchange standard for access to reserves, although the first SDRs are only intended as a "complement to existing foreign exchange reserves." Nevertheless, some had argued that the U.S.

balance of payments deficit was due to the willingness of other countries to accumulate additional reserves. Before the CSD program, their only way to achieve this goal was to get dollars from surplus payments, forcing the U.S. into deficit. According to these theories, the creation of SDRs would quickly eliminate the US deficit. According to this document, gold is transferred at a price of 100% on the bank capital of Tier-1 and banks have the option of replacing their paper assets (mainly US Treasury bonds) with this metal. According to Basel standards, the subsidized equity consisted only of cash (which belongs to the category of legal rates in all countries) and government bonds (mainly government bonds and US Treasury bonds). Switzerland is supporting a project to introduce a parallel currency in the country in the form of the gold franc. After the United States decided to increase the rate of monetary growth, the best French response was to implement its strategy of converting its reserves into dollars into gold. The transition to this new equilibrium has opened a new phrase in Franco-American international monetary relations.

The French believed that an equilibrium in which they systematically converted U.S. dollar reserves into gold would quickly undermine the United States` leading position in international monetary systems by depriving it of its gold reserves and having it agree on a revision of this system. The French rules governing the international monetary system were consistent with a cooperative system in which the decision to create new liquidity would have to be taken jointly by Western Europe and the United States. Any new liquidity should be distributed in fixed units to existing gold reserves. . . .

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