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Show The Paper That Dares To Take A Stand Page 6 The Utah Independent March 13f 1975 The Paper That Dares To Take John Exeter Report on Golds Future Continued From Page free market price of gold simply rises along with the expansion of the paper money here and elsewhere in the world. The American people are not dumb. MONEX: Some people have suggested that cans are interested in owning gold, and this was reflected bv the lack of any rush into gold when it was legalized. Do you agree? few Ameri- EXTER: No. Not at all. I think that on the day that Americans could legally own gold the price of gold was unusually high. There had been a buildup in the price, in my view, as a result of speculative buying by those who could own gold in the hope that a great American gold rush would develop. But the American people are not dumb. They realized that a price in the $ 190's at the time was rather high, and I feel they've just temporarily held back. I dont think that means Americans are going to ignore gold. Far from it. I would rather think of this as just another step in the whole process of American appreciation of the importance of gold in the monetary system. In other words, the demand for gold by the public is rising at a slow but steady rate, and I think it was unrealistic to expect there would be a great surge of demand the minute we could hold gold bullion. Weve been able to own gold coins for years, and those people who really wanted gold could buy gold coins sometimes at remarkably small premiums over the price of bullion. Now that theyre able to buy bullion, I think theyre going to go at it very gingerly because ve had so many warnings from various sources they about its being a risky investment. MONEX: Why do you feel the U.S. Treasury decided to sell some of the gold reserves at public auction in early January? EXTER: Well, the U.S. Treasury is one of the last important holdouts among those central banks and governments that have been trying to play down the role of gold. Many other central banks have long since begun to see that gold has a more important role to play than paper gold, or special drawing rights. But the U.S. government is still trying to play up the dollar by playing down gold. They decided to sell gold to drive down the price and thereby frighten the American people from buying it. MONEX: Do you expect the Treasurv to make additional sales? EXTER: They may. But if they do, I believe there wont be many because, to my mind, sales are a verv shortsighted policy. In fact, Im surprised that the Pentagon permitted the Treasury to make these sales m the first place. Imagine the situation this countrv would be in if a Middle Eastern war broke out and oil again became very short. We might be unable to buy more oil with our paper dollars and would have to use gold. assets. ... a growing public demand to own gold. MONEX : Why do you feel the Administration changed its position and did not oppose the endlaws of ing restricting gold ownership? EXTER : I think the main reason was that the Administration could not resist the pressure any longer both the pressure from Congress and the public. Congress, as you know, passed several bills to allow Americans to hold gold, and the Senate -- where there was particularly strong pressure passed more than one bill with overwhelming majorities. I think Congress is probably more responsive to public opinion than the Administration in a matter like this, and their action simply reflected a growing public demand to own gold that the Administration could no longer resist. Further, I think its a trend around the world to end gold ownership restrictions. The Japanese legalized the private ownership of gold in 1973, and the British government has relaxed regulations concerning the ownership of gold coins. Without this growing trend here and abroad, I dont think the U.S. would have legalized gold at this time. Finally, the Treasury found itself boxed in by its own unsound position on gold. How could it demonetize it, and make it just another commodity without allowing the public to hold it? long-standin- g - MONEX: The U.S. Treasury has consistently tried to phase gold out of the world monetary system, or to demonetize gold, despite the fact that the U.S. has the worlds largest gold hoard. What do you think is behind the Administrations anti-gol- d stance? EXTER : One reason is that we are in a 20th Century attempt to substitute paper money for commodity money, which means a substitution of paper money for gold. Our government and our Federal Reserve System are trying to foist their paper money on the world, and theyre having increasing difficulty doing so. It used to be that people accepted this paper money because for years everyone talked about the almighty dollar that was as good as gold. But all of this is manifestly un- true today. Now that the dollar is rapidly losing value, our government is having trouble getting people around the world to accept paper dollars simply by talking up the dollar. Instead, the Treasurys emphasis is to talk gold down. So thats why they have talked about demonetizing gold, phasing gold out of the monetary system, substituting paper gold -I- nternational Monetary Fund Special Drawing Rights for gold, and selling gold out of our reserves in order to try to knock the price of gold down and frighten people from owning it. There is another important reason for the govern- ment s anti-gol- d stance. When gold is tied to paper money at fixed exchange rates and the paper is convertible into gold, you have a restraint on the amount of paper money than can be issued, and hence a brake on inflation. When President Nixon closed the gold window on August 15, 1971, it spelled the end of convertibility of our paper dollars into gold and also an end to the fixed relationship between golrl and paper dollars at $35 an ounce. This action meant that the Administration can go on today printing paper money without the restraint of a fixed price for golrl. Governments dislike restraints. We now have a world of floating exchange rates, so the IinJ)th,Gr wor?s tr'inS to fight a war on paper is very difficult, particularly when paper money is in such disrepute as it is today. So I would the Pentagon to begin to put stronger pressure expect on the Treasurv to desist from future gold sales. Another reason why I doubt that there will be additional sales is that selling gold from our reserves weak-en- s the dollar The Treasury thinks it strengthens the dollar they hope to drive the price of gold down in terms of the dollar. But reducing the gold reserves behind the dollar in the eyes of the people of the world actually weakens the dollar. I think the present weakness of the dollar against some of the stronger European currencies can be traced in part to Secretary Simons sales of some of the gold Hacking of our dollar. bank like the Bank of Italy is particularly sensitive on this point, and I think well sec more pressure from these banks against future U.S. sales. I m confident the price of of paper must golden terms continue to rise and rise dramatically. MONEX: What major factors do vou see affecting the price of gold in the future? EXTER: I see two principal factors. First and perhaps most important in the months and years ahead will be the relationship between the quantity of paper money in the world and the quantity of gold. Paper is becommore abundant all the time because the central ing banks of the world are increasing the amount of paper practically day by day, week by week, month by month. This, of course, is hv we have worldwide inflation. There have been many attempts to substitute paper for gold in past history', but every other attempt has been in single countries and in individual currencies. The attempt were witnessing today, however, is worldwide. It is in all countries and in all currencies. So we have inflation everywhere. Now gold, on the other hand, is scarce. Its fixed in quantity and no matter how hard the gold mines of the entire world work to produce more gold, they can only increase the supply of gold by a very small percentage in any one year. Central hanks and the banking and currency systems of the world, however, are increasing 10 O', 150, paper at very high percentage rates-5- G, 200 , and 250 each year. So the supply of paper is growing very rapidly relative to the rather fixed supply of gold in the world. Thus Im confident paper must continue to price of gold in terms of and rise dramatically. As a matter of fact, my guess would be that we are only at the beginning of this rise in the price of gold. Were in the midst of the greatest rush out of paper into gold that the world has ever known. the rise The reason for this growing rush into gold is that people are slowly waking up to the important functions of money. The most important function of money is to serve as a store of value. This is the reason we work for money. Its not only the reward for our labor, but its the reward for our thrift, our enterprise, our initiative, our imagination, the employment of our capital and our land. And if money does not serve as a good store of value which paper money is not doing today this destroys the incentive to work for money. You can see this happening in countries like the United Kingdom, for instance, where there is an increasing reluctance to work because sterling is very rapidly losing its value in terms of goods and services -at the present time at roughly the rate of 20 ri a year. On the other hand, gold has served as a good store of value for thousands of years and will continue to do so simply because it has the two basic characteristics of a good store of value money -- scarcity and desirability. - - There s also a third factor against continued US gold sales -t- he pressure on the U.S. government from w?,Rnnientra banks to. kcep the price of Bold high. all, we were committed to support the dollar bv selling gold at 3;i an ounce. We closed the gold window to these foreign central banks in 1971, but now we are opening it again to the general public, but not at a fixed price, of course. Secretary Simon even went so far as to prohibit central banks from tendering for our gold. These central banks don I appreciate that action. Furthermore when these central hanks want the of gold high on he,r hooks to improve their own price with great disapproval at our sale of liquidity, they ok gold totrv lo'dr he the price down and make them less liquid. A central 1 Stand March 13, 1975 The Utah Independent Page 7 John Exeter Report on Golds Future 1 International Foundation , and the American Institute for Economic Research. A graduate of the College of Wooster and the Fletcher School of Law and Diplomacy, Mr. Exter also did graduate work at Harvard University. He has taught at Tufts College, Western Reserve Academy, and Harvard. In 1972, Mr. Exter retired from Citibank. He is presently a consultant and speaker on domestic and international money. He is also writing a book on monetary and economic matters. Mr. Exter was interviewed at his home in Mountain Lakes , New Jersey, in early January. In our interview, Mr. Exter tells why he believes the price of gold has only begun to rise. He gives his opinions on government actions concerning gold, on the state of the world economy, what economic conditions he believes lie ahead, and the steps he recommends that investors should take to protect and preserve their A This central bank interest in the price of gold is to my mind the most bullish factor of all. MONEX :And the second factor that you feel will affect, the price of gold? EXTER : This factor concerns the role of central banks with respect to gold. So far, the price of gold in the free market has been determined principally by the demand by private people for newly mined gold and this demand has been growing as paper money has been losing its value. But we often forget that roughly half the gold in the world is held by central banks as the original backing for all this paper money, and its still there as backing. But, so far, central banks have not entered the free market for gold because of the two-tisystem that allowed both, a free market price for gold and an official price for central banks at $42.22 an ounce. The two-tie- r system was abolished in November 1973, which meant abolishing the official tier, and to date there is no agreement among nations as to the role of central banks in the free gold market. er Now central banks, however, are beginning to be- come aware that they have an enormous stake in a high price for gold. As long as economic activity is brisk, the economies of the world at full employment, and no serious problem of illiquidity, central banks are quite content to sit back and pay very little attention to the free market price of gold. They have even been content to leave the price of gold on their books at $42.22 an ounce, while the free market price soared to $180 or $190 an ounce. But as the world economy gets into increasing trouble and economic activity slackens and world trade begins to slow in its expansion, and maybe even shrink, and unemployment begins to rise and problems of illiquidity begin to grow, central banks become much more aware of the value of the gold on their books. Weve seen this happening over the past ear or so. j First it was the Bank of Italy that ran out of paper dollars to pay for oil and other imports. They found that their only remaining good asset was gold, and they were forced to borrow $2 billion against it in early September by pledging about a fifth of their gold reserves at a price of $120 an ounce. This Italian loan from the West German Bundesbank was the first major breakthrough in the official price of gold after the two-tisystem was abolished. er Another major breakthrough came when President Ford met with French President Giscard dEstang on the island of Martinique in December and Giscard persuaded Ford to let central banks raise the price of gold on their books. The French immediately proceeded to announce to the world that they were going to do just that. So, I give all this as evidence that central banks are at last becoming aware of the importance of the price of gold. Its true our own Treasury is selling gold on the free market. But a lot of central banks are interested in buying gold on the free market. So this central bank interest in the price of gold is to my mind the most bullish factor of all because central bank gold owners are going to want the price of gold to rise as much as private gold owners. The world economy is deteriorating at a very rapid rate.1 : currencies. MONEX : Why do you feel the dollar is headed for de- flation? EXTER : In brief, too much debt. I think were in the later stages of U.S. dollar inflation now. As you know, each piece of paper is a debt obligation an I.O.U. So the expansion of paper is an expansion of debt in the dollar or in any currency. But debtors have not gone into debt at the same rate some are liquid and some are very illiquid. The most illiquid debtors are those and lent long-terwho have borrowed short-terparhave borrowed or fixed interest at short rates, ticularly and invested long, or in plant and equipment or real estate. And the most illiquid of all are those who have borrowed dollars short, sold those dollars for foreign currencies, and then lent or invested the foreign currencies long. There are far more illiquid debtors in the dollar than in any other currency because the dollar has been a world currency. It is the principal currency, for example, in which the oil producing countries will accept payment they will not accept payment in lira or yen, and theyre increasingly reluctant to accept payment in sterling. m I am expecting at some point a major failure that the Federal Reserve and the federal government will not be able to contain. MONEX: When do you see these failures and debt liquidations happening? EXTER : I cannot know w hen they are going to happen. So far the major failures have been contained. Penn Central was contained by enabling other illiquid debte ors to borrow from the banking system. When failed, Lockheed almost failed, and even the bankers couldnt help. So the federal government had to come along and guarantee $250 million of Lockheed bank credit. When Franklin National Bank failed, other banks were the first to leave Franklin. So the Federal Reserve had to come in and act as lender of last resort. It lent Franklin National $1.7 billion, but it still couldnt save it, and it failed. Nonetheless, w'ith the help of the Federal Deposit Insurance Corporation and the Federal Reserve, the Franklin National failure was contained. I am expecting at some point a major failure that the Federal Reserve and the federal government will not be able to contain. But I dont know where that failure will be nor when it will come. I simply have a sense of imminence about it now. MONEX: In what sector is a major failure likely in your view'? EXTER: I think the Eurodollar market is the most vulnerable area. As you know, a Eurodollar is a dollar deposited in any commercial bank outside the United States. The depositors of such dollars are principally big, sophisticated lenders central banks, multinational corporations and other large corporations. First of all, almost all of the deposits in that market are short-termostly 30 days or less. Further, a great deal of the oil money, for instance, is being call. But a great many deposited in banks on loans by these banks are rather long-terin that market the British government, for instance, is in the process of borrowing 2a billion dollars for five years and yet much of that money has been borrowed by the Eurodollar banks at very short-terMONEX : Do you think that the nations, serious a to then, pose the Eurodollar potential threat market stability through the possibility of a massive withdrawal of their funds? EXTER: Yes, I do. The Eurodollar market has been a very rapidly growing market for many years. And for a long time the principal depositors wrere other than the oil producing nations. Its only within the last year and a half, since the oil producing nations began to raise the price of oil, that deposits of oil producers have been a major factor, and, indeed, it is the most important factor today. In the first half of 1974, I understand that the Eurodollar market grew at an annual rate of about Rolls-Royc- m, Turning now to a related subject, what is your evaluation of the world economy today? EXTER : The world economy is deteriorating at a very rapid rate. Many commodity prices have already fallen the price of copper has fallen roughly in half and copper is quite a good leading indicator. But almost all other commodities have fallen from their peaks. In addition, unemployment is rising in many countries of the world, not just in the U.S. I believe the deterioration is a consequence of this enormous expansion of paper money and the resulting worldwide inflation, rising prices and costs. I think its going to go on because the governments and central banks of the world are committed to more and more rapid expansion of paper. The result, I believe, is that the world economy is going to go into not only a recession but probably a depression. While I feel were headed for a deflationary depression in dollars, falling prices and costs, at least for a while, we may see an inflationary depression, or stagflation, in many other MONEX Because there are far more illiquid debtors in dollars than in any other currency, there will be more failures of illiquid debtors in dollars than in any other currency. So when these failures begin to snowball as I expect they will at some time then the dollar will go into net debt liquidation instead of net debt expansion. m, 48-ho- ur m m. oil-produci- ng 50G . Now, if theres a lack of confidence in that market, and any big depositor whether its an oil producer or not tries to get his money out, there will be problems and the problems will be compounded because there are very few small depositors in the Eurodollar market. As I said, they are big and sophisticated and will act quickly. A further problem is that there is no clear lender of last resort in case of trouble. The lender of last resort should be the Federal Reserve, and it certainly will be if an American bank in the Eurodollar market is in trouble. But there are many more banks in that market than American banks, and I think that central banks of the world dont have any clear understanding about who the lender of the last resort to them should be. As an example I give the Herstatt Bank of Cologne that failed last year. Herstatt had to go to the Bundesbank, but the Bundesbank did not save it, so it failed. Perhaps the Bundesbank w'ont save the next German bank that gets into trouble either. The point is that the Bundesbank is the lender of last resort in deutschemarks, not in dollars. But a lot of these problems are in the dollar market; not in the market of other currencies. non-Americ- Continued on page 9 an |