Robert Roosa and the Ups and Downs of the Dollar

Paul Volcker, a former president* of the U.S. Federal Reserve and the main economic advisor to President Obama, is straightforward: Everything should be done so that the euro does not become a rival to the dollar. Logical rhetoric for someone who began his career with the U.S. Treasury during the Kennedy administration under the command of Robert Roosa, whose name is associated with the affirmation of the dollar’s supremacy and the chronicle of the predicted death of gold.

Robert Roosa was born June 21, 1918, in Michigan. He graduated with a Ph.D. in economics in 1942 and immediately left for Europe to fight the war. He was discharged in 1946 and joined the services of economic study at the New York branch of the Fed.

In 1961, he became undersecretary to the Treasury. At the time, the U.S. budget on current account was balanced, but the movements of long-term capitals were not so. U.S. companies were increasing their investments abroad, mainly in Europe. Dollars poured out of the United States, not, as it is now, to ensure American consumption, but to take advantage of European labor, which was then of good quality and inexpensive.

The result was that in 1950, the U.S. gold stock was worth seven times in dollars the holdings of foreign central banks; by 1960, it just managed to cover them. Roosa took the bull by the horns. He declared that the problem was not an exclusively American issue — it was beneficial for everyone that U.S. companies were raising the level of global investment. Hence, the problem was with countries — mainly Germany and Japan — which refused to share their growth by accumulating external surpluses.

Consequently, he imposed a 5 percent revaluation of the German mark and called for fiscal stimulus plans in Germany and Japan. He then organized the creation of the “gold pool,” a mechanism for merging gold reserves by major central banks to counter possible speculation. Finally, he invented the “Roosa Bonds,” U.S. Treasury bonds offered for purchase by central banks that have reserves in dollars. These bonds are non-negotiable, but offer two advantages: a higher rate than those prevalent on the bond markets; and the interest is paid in the currency of the investing country, which provides protection against any devaluation of the dollar or against the outcomes of a revaluation of its currency.

In fact, Roosa believed in two key concepts regarding the international monetary system, which he reiterated continually: The system must be based on a reference, because a floating exchange rate system penalizes growth by the constant uncertainty that it sustains; and the reference shall be the dollar because it is the currency of the world’s leading economic and political power.

When he left his governmental duties for a career as a private banker in 1965, the U.S. gold stock covered only 85 percent of the central banks’ dollars. But when he died in December 1993, he seemed to have succeeded: The gold had disappeared, and the Louvre Accord of February 1987 was expected to keep the dollar at the center of a controlled floating exchange rate system. Nevertheless, as the recent G-20 showed, monetary turmoils are — more than ever — still present.

* Editor’s note: Paul Volcker became president of the Federal Reserve in 1975 and served as the Federal Reserve chairman from 1979 until 1987.