– June 22, 2012

By Julian D. W. Phillips

Contributions to the I.M.F. Come with Conditions

While the B.R.I.C.S nations are contributing to the I.M.F.’s funding with the purpose of shoring up the global financial system, they’ve stipulated that they want more power in the I.M.F. China is contributing $43 billion, so as it races to become the world’s leading economic and financial nation it wants a bigger part of the decision making process, commensurate with its rising power. So the first question to be asked is, “Will it get it?”

The emerging countries –China, Brazil, Mexico, India and Russia— announced contributions to the IMF’s global firewall, nearly doubling the fund’s resources to $456 billion, at the G-20 summit in Mexico this last weekend as global efforts to restore confidence in the euro were discussed. The others will contribute $10 billion each and South Africa $2 billion.

I.M.F. Structure of Power

The International Monetary Fund is subject to the will of the U.S. Some may have believed that it’s a truly Democratic institution where true consensus has to be reached on issues before the body can agree. This is not so. For any Resolution to be passed, 85% of the members must be behind it.

The U.S. has 16.75% of the votes at the I.M.F. So for an 85% agreement to bereached, the U.S. must agree. If they don’t, the Resolution will not be passed.

It’s true that if all the members of the E.U. have around 25%+ of the votes, but this is irrelevant if the U.S. opposes the Resolution. To emphasize the point –all the member’s votes of the I.M.F. amount to 83.25% of the votes and an 85% of votes must be achieved to get a Resolution through.

This reflects the Balance of Global Power going back to the last World War. To most observers that may still be the case in terms of global financial power, but in the emerging nations, we don’t have supportive, subordinate economic powers. They walk their own road. As economic power grows in China and it finds ‘satellite’ nations becoming dependent on it, so it’s growing a substantial power base, one that will have to be recognized in global financial institutions such as the I.M. F.

Don’t expect the U.S. to willingly hand over their voting dominance, but to draw off voting rights from other nations, if they wish to accommodate China in theirdemands. Indeed, until China and its ‘satellite’ nations are the dominant economicpower, we don’t see the U.S. budging on the issue.

When, If at All, Will This Change?

Right now, the B.R.I.C.S. are setting up an alternative to the World Bank, focusedon their interests alone. This appears to precede the full internationalization of the Yuan. China is acting away from the developed world on this. It does set a precedent we can expect China to follow in the future and on other issues.

Once it has established a economic power base rivaling that of the U.S. (not necessarily the developed world in total) it may well challenge the U.S. at the I.M.F. or set up a developing world equivalent, as it is doing with the potential rival to the World Bank. China, as always, will be driven by its own interests, solely.

Current I.M.F. View of Gold

The IMF holds 2814.1 tonnes of gold [90.5million ounces of gold] valued at today’smarket prices at over U.S. $165.44 billion. The I.M.F. values these at $4.9 billion in terms of their rules. The I.M.F. acquired its holdings from member states throughthe original Articles of Agreement. The Articles were amended in 1978 eliminatingthe direct use of gold in the exchange rate system. These holdings are after the 403.3 tonnes were sold.

It currently holds this view on gold:

“It is an undervalued asset held by the IMF, and provides a fundamental strengthto its balance sheet. Gold holdings provide the IMF with operationalmanoeuvrability both as regards the use of its resources and through addingcredibility to its precautionary balances. In these respects, the benefits of the IMF’sgold holdings are passed on to the membership at large, to both creditors and debtors. The IMF should continue to hold a relatively large amount of gold amongits assets, not only for prudential reasons, but also to meet unforeseencontingencies.”

Mobilization of Gold

In the last century, Mexico and Brazil sold their gold to the I.M.F. This totaled 403.3 tonnes and was sold over time, recently, both directly to individual central banks and in the open market under the auspices of the Central Bank Gold Agreement (after those signatories to the Agreement had completed their sales). At the time of selling it to the I.M.F. it was to allow them to get the full market price of their gold by paying them this price directly. Thus the I.M.F. acquired gold in itsown name –not as part of member’s holdings at the I.M.F.—enabling it to improveits own funding and ongoing finances.

But the I.M.F. did not agree that this mobilized gold in their hands. The initial purchase from Brazil and Mexico was called a “one-off” exception to their rules that had effectively removed gold from the monetary system. 

So the current policy of the I.M.F. is that gold is no longer freely traded betweennations but simply held for the purposes stated above. There’s no visible reason why the U.S. or other members would want to change this policy as it stands; however, in the case where a member State needs support to continue trading internationally, then on the decision of the I.M.F. they may get added support by way of loans or indirectly through the guarantee from the I.M.F. whose credibility is enhanced by the gold held by them.

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Gonzalo Schwarz

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