As initially reported here yesterday, in what is the biggest news of the week, and possibly the year, the Bundesbank has broken away from its “all is well” posturing exhibited as recently as three months ago, and in a dramatic reversal of its diplomatic position, has demanded repatriation of some of its NY Fed and all of its Paris-domiciled gold. We applaud Herr Wiedmann for this move, although we hope that the German people are allowed to witness, and verify, the arrival of the actual gold as opposed to simply empty crates. Of course, at the end of the day the actual delivery is irrelevant: what matters is this first shot across the bow of the current monetary system – one which juxtaposes sound money versus infinitely dilutable electronic fiat more than ever before – by a major conservative central bank, one in possession of the second largest official gold reserve, second only to the Fed itself. That said, we can only hope that the German request for gold repatriation is not met with the same enthusiastic response that France encountered when it too attempted to repatriate its gold held by London back in the 1930s, just before a whole lot of things in the global economy went horribly wrong…
Specifically, in 1965 The Economist interviewed Jacques Rueff, a French economist and advisor to the French Government. In the following exchange (caught on pages 84-85 of the pdf “Monetary Sins of the Past“, which are required reading to anyone who thinks what is going on now is in any way new or different), the Economist blames France for exerting pressure on London during the 1930s, through the withdrawal of sterling balances held at the Bank of England. We thank Martin Sibileau for the reminder about this key exchange.
What is disclosed is enlightening and entertaining, and may well serve as the basis for what the response Buba may encounter today.
Jacques Rueff: In 1930 I was financial attache in the French Embassy in London, and in that capacity I was responsible for the deposits of the French Treasury with British banks. They were the direct result of eight years of the gold-exchange standard, because we had kept the pounds sterling in London, as my colleagues in New York had kept in the American market the dollars that had been pouring into the French Treasury from 1927 onward. Then, in 1931, the failure of the Austrian Creditanstalt caused successive waves of repatriations; and it was this collapse of the gold-exchange standard that, without any possible doubt, transformed the depression of 1929 into the Great Depression of 1931.
The Economist: While you are on this historical episode, what would your comments be on the very widespread view that it was to a substantial extent French pressure on London at that time, through the withdrawal of sterling balances, that was in part responsible for the general collapse later on?
Jacques Rueff: Let me tell you that, unhappily for the world, the French pressure did not exist, or was so mild that it had no effect. There is a very interesting document from this period, a letter from Sir Austen Chamberlain, who was then Foreign Secretary in London, to M. PoincarÃ©, who was Prime Minister and Finance Minister in France; it must be of 1928. Sir Austen said, “We know that you are entitled to ask gold for your sterling, but in the frame of the close friendship between Britain and France we ask you, so as to avoid trouble for the City of London, not to do that.” And we were, I must say, weak enough to comply with this request and not ask for gold. The fact that I had such important sterling deposits in London shows that we did not use this right to ask for gold. The adjustment, which would hardly have been felt if carried out on a day-to-day basis, was not made, and we had the fantastic boom of 1927, 1928, and 1929. This explains the depth of the collapse and of the depression, because the adjustment was so long delayed. We were too gentle in complying with official appeals not to convert our sterling balances into gold.
Fast forward to today, and we can’t help but wonder if some 30 years from today, an advisor to the Bundesbank will not rewrite the above to something as follows:
BUBA Advisor: …There is a very interesting document from this period, a letter from [William Dudley], who was then Foreign Secretary in London, to Herr Weidmann, who was Head of the Bundesbank; it must be of 2013. Sir Austen said, “We know that you are entitled to ask gold for your sterling, but in the frame of the close friendship between the United States and Germany we ask you, so as to avoid trouble for the Wall Street, not to do that.” And we were, I must say, weak enough to comply with this request and not ask for gold. The fact that I had such important sterling deposits in New York shows that we did not use this right to ask for gold. The adjustment, which would hardly have been felt if carried out on a day-to-day basis, was not made, and we had the fantastic boom of 2013, 2014, and 2015. This explains the depth of the collapse and of the depression, because the adjustment was so long delayed. We were too gentle in complying with official appeals not to convert our sterling balances into gold.
We can only hope that the Bundesbank is not quite as “gentle” as Paris was some 80 years ago in complying with London’s gentle denial to comply with the French repatriation request. In fact, quite the opposite: we hope Bundesbank pulls all of its gold, as do all other nations because in the aftermath of the “collapse and depression” that will soon follow, he who defected first, will have defected best. Everyone else will be left with paper promises of repayment by a broke and insolvent government which went as far as suggesting the minting of a trillion dollar coin to absolve it of its own particular monetary sins.
h/t Martin Sibileau