 Private Placement Platform History
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 revitalise 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 and start of managed buy/sell, bank to bank trading programs.
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 organised 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.
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.
WORLD BANK
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 and Private Placement Platforms
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, 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.
- 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.
For an introduction to a Private Placement Platform representative, contact Invest Offshore
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