Found money? No, mined money

It’s a comet that breezes by periodically, and inevitably it brings talk of the world’s end. Gold prices took a dive in early February on news that the Group of Seven industrialized countries were looking hard at gold sales or revaluations as a means of funding debt relief for Heavily Indebted Poor Countries (HIPCs).

The usual idea is that the International Monetary Fund, which administers debt relief through the HIPC program, can finance additional relief through revaluing its large (103-million-oz.) gold reserves, which are on the books at US$82 per oz., or by selling some of its gold on to the physical market. Recent proponents of this idea include development agencies, non-governmental organizations (NGOs), and finance ministers of wealthy countries. The most recent champion of the idea is Gordon Brown, the U.K.’s Chancellor of the Exchequer, who earlier this month was among the finance ministers asking the IMF to report back on sale and revaluation proposals by April.

Opposition to the idea is most often characterized as coming from wealthy gold-producing countries like Canada and Australia. In reality, the heavyweight opponent is the United States, which has large official-sector gold holdings. The argument made against IMF gold sales or revaluations is that they will tend to depress the price of gold (incidentally harming gold-exporting Hipsies, of which there are many) and that a revaluation would deprive the IMF of a source of strength on its balance sheet.

Some observers look for alternatives. Let’s consider some of them. NGOs are immoderately fond of a tax on international currency transactions (the “Tobin tax,” named after economist James Tobin), which they are anxious to see implemented to fund “urgent global priorities.” So is the United Nations apparatus, which has seen it as a cash cow for UN projects. Whether the Tobin tax is a good or bad idea for international currency markets might be debatable; but its status as an international tax, levied on people without direct representation, is an affront to democracy. And using it to put money in the hands of politically driven NGOs and the corrupt bureaucracy of Turtle Bay is wholly bad.

So should a Tobin tax be used instead for the Hipsies? No, at least partly because of the danger of giving in on international taxes of any sort. Moreover, the HIPC problem, which, according to the IMF, clocks in at somewhere around US$55 billion, is dwarfed by the projected revenue from Tobin taxes.

Proposed “global environmental taxes” are a bad solution too; not only do they distort the economy in pursuit of debatable goals, but they will disproportionately fall on industry and individuals that had little or nothing to do with the HIPC problem. The idea of a global lottery, with the house cut taken to clear the debts of the Hipsies, is even more outlandish, using, as it does, a tax on the poor and the stupid of the First World to bail out the poor of the Third.

We recognize something that most experts on Third World debt keep coming back to: the IMF holds plenty of gold at a book value well below market. Revaluing it, by some mechanism, is supposed to free IMF cash reserves for debt relief.

It would probably cover a large part of the bill, too. Writing in April 2002, when gold was only US$300 per oz., development economist Nancy Birdsall suggested that a “mobilization” of IMF gold would be worth about US$14 billion. But the main part of the relief would come from First World governments as development aid.

We’d suggest that the gold idea comes around as often as it does largely because governments have big plans that they’d rather see someone else pay for. In this case, larger foreign-aid budgets are a burden on taxpayers, who — regrettably for some — are also voters. And while we sympathize with gold producers, we have to sympathize with taxpayers more.

So let’s come down on the side of some use of IMF gold to finance relief of HIPC debt, even if it seems the politicians are treating gold holdings like coins found under cushions.

What effect might revaluation or an outright gold sale have on the bullion market now? This isn’t 1999, when every time a truck rolled up to the door of a central bank, gold prices fell five bucks an ounce. Except for brief panics, such as the sudden drop in price early this month, the psychology of the gold market has reversed completely since then.

Gold bulls are fond of telling us that physical demand is high and supply is tight, which might mean that even a Bank of England-style gold auction would not drive prices down very hard. If the IMF sold gold under the umbrella of the existing sale agreement between the major European central banks, the effect might be smaller still; and a swap transaction, such as the IMF did with Brazil and Mexico in 1999, might pass with hardly a ripple.

A minimum of disruption to the gold market would be a relief for such Hipsies as Ghana, Mali, Burkina Faso and Tanzania, whose export economies are strongly bound to a healthy gold industry. And take note: these are all countries that have performed well in meeting the IMF’s economic goals and have earned the chance to succeed without more prosperous peoples or governments talking down the price of one of their exports.

Gold is an IMF asset. It should make that asset work. It should also treat it carefully.