A Brief History of their Interrelationship and Importance in the International Economic System. To explain how John Maynard Keynes, Bretton Woods and the Prime Bank Instruments Programme, created Offshore Banking for Private Placement Platform trading (PPP).
Prime Bank Instruments Programme – Private Placement Platform
Picture the world at war in 1944. All of Europe, except for Switzerland, is pounding its infrastructure, manufacturing base and population into rubble and death. Asia is locked into a monumental struggle which is destroying Japan, China, and the Pacific Rim countries. North Africa, the Baltics, and Mediterranean countries are clutched in a life and death struggle in the fight to throw off the yoke of occupation. A world gone mad! Economic destruction, ruin, human misery and dislocation exists on a scale never before experienced in human history. What went wrong? How could the world rebuild and recover from such devastation? How could another war be avoided?
This was the world as it existed in July 1944 when a relatively small group of 730 of the western world’s most accomplished economic, social and political minds met in upstate New Hampshire at a small vacation town called Bretton Woods. John Maynard Keynes, the man who had predicted the current catastrophe in his book, The Economic Consequences of the Peace, written in 1920, was about to become the principal architect of the Post World War II reconstruction. Keynes presented a rather radical plan to rebuild the world’s economy, and hopefully avoid a third world war. This time the world listened, for Keynes and his supporters were the only ones who had a plan that in any way seemed grand enough in foresight and scope to have a chance at being successful. Yet Keynes had to fight hard to convince those rooted in conventional economic theories and partisan political doctrines to adopt his proposals. In the end, Keynes was able to sell about two thirds of his proposals through sheer force of will and the support of the United States Secretary of the Treasury, Harry Dexter White.
At the heart of Keynes proposals were two basic principals: first, the Allies must rebuild the Axis Countries, not exploit them as had been done after WWI; second, a new international monetary system must be established, headed by a strong international banking system and a common world currency not tied to a gold standard. Keynes went on to reason that Europe and Asia were in complete economic devastation with their means of production seriously crippled, their trade economies destroyed and their treasuries in deep debt. If the world economy was to emerge from its current state, it obviously needed to expand. This expansion would be limited if paper currency were still anchored to gold.
The United States, Canada, Switzerland and Australia were the only industrialised western countries to have their economies, banking systems and treasuries intact and fully operable. The enormous issue at the Bretton Woods Convention in 1944 was how to completely rebuild the European and Asian economies on a sufficiently solid basis to foster the establishment of stable prosperous, pro-democratic governments.
At the time, the majority of the world’s gold supply, hence its wealth, was concentrated in the hands of the United States, Switzerland and Canada. A system had to be established to democratise trade and wealth; and redistribute, or recycle, currency from strong trade surplus countries back into countries with weak or negative trade surpluses. Otherwise, the majority of the world’s wealth would remain concentrated in the hands of a few nations while the rest of the world would remain in poverty.
Keynes and White proposed that the United States, supported by Canada and Switzerland would become the banker to the world, and the U.S. Dollar would replace the pound sterling as the medium of international trade. He also suggested that the dollar’s value be tied to the good faith and credit of the U.S. Government, not to gold or silver, as had traditionally been the support for a nation’s currency. Keynes’ concept of how to accomplish all of this was radical for its time, but was based upon the centuries-old framework of import/export finance. This form of finance was used to support certain sectors of international commerce fostered by the import/export trade. Banks using forfeit finance to underwrite trade did not use gold as collateral, but rather their own good faith and credit, backed by letters of credit, avals or guarantees which is essentially a Private Placement Platform.
Keynes reasoned that even if his plans to rebuild the world’s economy were adopted at the Bretton Woods Convention, remaining on a gold standard would seriously restrict the flexibility of governments to increase the money supply. The rate of increase of currency would not be sufficient to insure the continued successful expansion of international commerce over the long term. This condition could lead to a severe economic crisis, which, in turn, could even lead to another world war. However, the economic ministers and politicians present at the convention feared loss of control over their own national economies, as well as run-away inflation, unless a “hard-currency” standard were adopted.
The convention accepted Keynes’ basic economic plan, but opted for gold-backed currency as a standard of exchange. The “official” price of gold was set at its pre-WWII level of $35.00 per ounce. One U.S. Dollar would purchase 1/35 of an ounce of gold. The U.S. dollar would become the standard world currency, and the value of all other currencies in the western, non-communist world would be tied to the U.S. dollar as the medium of exchange.
MARSHALL PLAN, IMF, WORLD BANK AND BANK OF INTERNATIONAL SETTLEMENTS
The Bretton Woods Convention produced the Marshall Plan, the Bank for Reconstruction and Development known as the World Bank, the International Monetary Fund (IMF) and the Bank of International Settlements (BIS). These four would reestablish and revitalize the economies of the western nations. The World Bank would borrow from rich nations and lend to poorer nations. The IMF, working closely with the World Bank, with a pool of funds, controlled by a board of governors, would initiate currency adjustments and maintain the exchange rates among national currencies within defined limits. The Bank of International Settlements would then function as a “central bank” to the world use as a Private Placement Platform.
INTERNATIONAL MONETARY FUND
The International Monetary Fund was to be a lender to the central bank of countries which were experiencing a deficit in the balance of payments. By lending money to that country’s central bank, the IMF provided currency, allowing the underdeveloped country to continue in business, building up its export base until it achieved a positive balance of payments. Then, that nation’s central bank could repay the money borrowed from the IMF, with a small amount of interest, and continue on its own as an economically viable nation. If that country experienced an economic contraction, the IMF would be standing ready to make another loan to carry it through.
By giving all countries access to a pool of international currencies, exchange rates could be stabilised, and nations could receive lines of credit to help them expand their economies. The purpose of the Bretton Woods Programme, utilising the IMF and the World Bank, was to give debtor nations an opportunity to continue smooth growth without sudden contractions (depression) when balance-of-payments deficits went up. The idea was to avoid the “boom/bust” economic cycles of pre-WWII.
BANK OF INTERNATIONAL SETTLEMENTS
The Bank of International Settlements (BIS) was created as a “central bank” to the central banks of each nation. It was organized along the lines of the U.S. Federal Reserve System and is principally responsible for the orderly settlement of transactions among the central banks of individual countries. In addition, it sets standards for capital adequacy among the central banks and coordinates the orderly distribution of a sufficient supply of currency in circulation necessary to support international trade and commerce and oversee all Private Placement Platform banking.
The Bank of International Settlements is controlled by the Basel Committee which, in turn, is comprised of ministers sent from each of the G-10 nation’s central banks. It has been traditional for the individual ministers appointed to the Basel Committee to be the equivalent of the New York “Fed’s” chairperson controlling the “open market” desk.
The World Bank, organised along more traditional commercial banking lines was formed to be “lender to the world”, initially to rebuild the infrastructure, manufacturing and service sectors of the European and Asian Economies, and ultimately to support the development of Third World nations and their economies. The depositors to the World Bank are nations rather than people, and the borrowers are governments rather than individuals. However, the Bank’s economic “ripple system” uses the same general banking principals that have proven effective over centuries.
THE TIE THAT BINDS : THE BANK OF INTERNATIONAL SETTLEMENTS AND THE WORLD BANK
The directors of both banks are controlled by the ministers from each of the G-10 countries : Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Canada, Sweden, Switzerland, the United Kingdom and Luxembourg.
BRETTON WOODS UNDER PRESSURE = PRIVATE PLACEMENT PLATFORM
By 1961, the plans adopted at the Bretton Woods Convention of 1947 were succeeding beyond anyone’s expectation, proving that Keynes was right. Unfortunately, Keynes was also right in his prediction of a world monetary crisis. It was brought on by a lack of sufficient currency (U.S. dollars) in world circulation to support rapidly expanding international commerce. The solution to this crisis lay in the hands of the Kennedy Administration, the U.S. Federal Reserve Bank and the Bank of International Settlements. The world needed more U.S. dollars to facilitate trade. The U.S. was faced with a dwindling gold supply to back such additional dollars. Printing more dollars would violate the gold standard established by the Bretton Woods agreements. To break the treaty would potentially destroy the stable core at the centre of the world’s economy, leading to international discord, trade wars, lack of trust and possibly to outright war. The crisis was further aggravated by the fact that the majority of the dollars then in circulation was not concentrated in the coffers of sovereign governments, but, rather in the vaults or treasuries of private banks, multi-national corporations, private businesses and individual personal bank accounts. A mere agreement or directive issued by governments among themselves would not prevent the looming crisis. Some mechanism was needed to encourage the private sector to willingly exchange their U.S. Dollar currency holdings for some other form of money.
The problem was solved by using the framework of a forfeit finance a method used to underwrite certain import/export transactions which relied upon the guarantee or aval (a form of guarantee under Napoleonic law) issued by a major bank in the form of either documentary or standby letters of credit or bills of exchange which are then used to assure an exporter of future payment for the goods or services provided to an importer. The system was well established and understood by private banks, governments and the business community world wide. The documents used in such financing were standardised and controlled by international accord, supported by well established international law, and best of all, administered by the members of the International Chamber of Commerce (ICC) headquartered in Paris. There would be no need to create another world agency to monitor the system if already-approved and readily available documentation, laws and procedure provided by the ICC were adopted. The International Chamber of Commerce is a private, non-governmental, worldwide organisation, that has evolved over time, into a well-recognised, organised, respected and, most of all, trusted association. Its members include the world’s major banks, importers, exporters, merchants, and retailers who subscribe to well-defined conventions, bylaws, and codes of conduct. Over time, the ICC has hammered out pre-approved documentation and procedures to promote and settle international commercial transactions.
In the ICC and forfeit systems lay the seeds of a resolution to the looming crisis. Recycling the current number of dollars back into world commerce would solve the problem by avoiding the printing of more U.S. dollars and would leave the Bretton Woods Agreement intact. If currency, dollars, could be drawn back into circulation through the private international banking system and redistributed through the well known “bank ripple effect”, no new dollars would need to be printed, and the world would have an adequate currency supply. The private international banking system required an investment vehicle which could be used to access dollar accounts, thereby recycling substantial dollar deposits. This vehicle would have to be viewed by the private market to be so secure and safe that it would be comparable with U.S. Treasuries which had a reputation for instant liquidity and safety. Given the “newness” of whatever instrument might be created, the private sector would prefer to exchange their dollars for a “proven” instrument : U.S. Treasuries, but selling new Treasury issues to the world would not solve the problem. In fact, it would exacerbate the looming crisis by taking more dollars out of circulation. The world needed more dollars in circulation.
The answer was to encourage the most respected and creditworthy of the world’s private banks to issue a financial instrument, guaranteed by the good faith and credit of the issuing bank, with the spectre of support from central banks, IMF and Bank of International Settlements. The world’s private investment and business sector would view new investments issued in this manner as “safe”. To encourage their purchase over Treasuries, the investor yield on the new instruments would have to be superior to the yield on Treasuries. If the instruments could be viewed as both safe and providing superior yields over Treasuries, the private sector would purchase these instruments without hesitation.
The crisis was prevented by encouraging the international private banking sector to issue letters of credit and bank guarantees, in large denomination (Private Placement Platform), at yields superior to U.S. Treasuries. To off-set the increased “costs” to the issuing banks due to the higher yields accompanying these prime bank instruments, banking regulations within the countries involved were modified in such a way as to encourage and/or allow the following :
- Reduced reserve requirements via off-shore transactions called Private Placement Platform.
- Support of the programme by the central banks, World Bank, IMF and Bank of International Settlements.
- Off-balance sheet accounting by the banks involved.
- Instruments to be legally ranked “para passu” (on the same level) with depositors’ funds.
- The banks obtaining these depositor funds would be allowed to leverage these funds with the applicable central bank of the country of domicile in such a way as to obtain the equivalent of federal funds at a much lower cost. When these “leveraged funds” are blended with all other accessed funds, the overall blended rate cost of funds to the issuing bank is substantially diminished, thus off-setting the high yield given to attract the investor with substantial funds to deposit. The bank instruments offered to investors were sold in large denominations (often $100 million) through a well-established and very efficient market mechanism, substantially reducing the cost of accessing the funds. The reduced costs offset the higher yields paid by the issuing banks.