The
Foundation for the Economics of Sustainability (FEASTA) believes
that the present world and monetary system is so gravely dysfunctional
that it makes the achievement of sustainability impossible. We have
three main reasons for this belief:
a). The earth is finite, and as all economic growth requires some
use of the Earth's resources, perpetual growth is not compatible with
sustainability.
Unfortunately, most of the money used around the world is created
on the basis of debt and ceases to exist if that debt is repaid. This
means that if the world economy is not to collapse because a lot of
the money required to make trading possible has disappeared, it needs
to grow continually by enough to ensure that investors can always
find attractive opportunities and consequently always borrow more
than they repay. In other words, as things stand, the money system
is always in direct conflict with social and environmental limits
and has to take precedence over them.
b). National and multinational currencies created by some of the
wealthiest countries in the world are used as if they were world currencies.
The countries issuing the pseudo-world currencies gain enormous
power and advantages at the expense of the rest of the world.
c). Individual governments cannot afford to take account of whether
the growth required to stop the global system from collapsing is socially
or environmentally sustainable because current account money flows
are lumped together when the market determines their currencies' exchange
rates.
This gives the owners of mobile capital an excessive amount of
power over exchange rates and hence over governments. It also creates
instability by allowing speculative financial flows to destabilise
the 'real' economies of the countries concerned.
The proposals for reforming the world's financial architecture we
have seen circulated so far in the run up to the World Summit on Sustainable
Development have only dealt with the symptoms of these problems, rather
than their root causes. Accordingly we present our proposals for changes
at the Global, National and Sub-National levels in the hope that they
will influence the debate. The proposals should be considered as a
package. However, the three National and Sub-National level proposals
could be adopted by countries in the absence of change at the international
level.
Our seven proposals are:
Global
1. A genuine world currency should be established.
2. This new world currency should be issued by being given into circulation
rather than lent.
3. The initial distribution of the new currency should be on the basis
of populationrather than economic power.
4. Over the years, the supply of the new currency should be limited
in a way whichensures that the overall volume of world trade is compatible
with whatever is considered to be the most crucial area of global
sustainability.
National
5. Each country or monetary union should operate two currencies,
one for normal commercial exchanges, the other for savings and capital
transfers. Each of these currencies would have its own floating exchange
rate with the new international currency, and hence a variable exchange
rate with the other.
6. The new national exchange currencies would be spent into circulation
by their governments rather than being created through the banking
system on the basis of debt.
Local
7. The establishment of regional (i.e. sub-national) and local
exchange currencies should be encouraged.
We'll look at these in turn:
1. A genuine world currency should be established.
The dollar, the pound sterling, the euro, the Swiss franc and
the yen are all 'reserve currencies' - in other words, they are the
currencies which the world's central banks keep in reserve against
the day they might have to intervene in the markets to support the
exchange rates of the national currencies for which they are responsible.
When gold was the world currency, wealth was created wherever gold
was found. Today, wealth is created in the reserve currency countries
when their banks approve loans. The amount of this wealth is considerable.
According to IMF figures, the dollar holdings of the world's non-US
central banks increased by approximately $145 billion in 1999. This
means that the US leant or spent these extra dollars in the rest of
the world during that year, gaining either goods and services or interest
payments for them, but that during the year it did not supply anything
in return. By accepting the dollars without getting anything back,
the rest of the world was giving the US a massive subsidy. In the
eight years between 1992 and 2000, the world's central banks increased
their dollar holdings by around $800 billion, effectively giving America
a cost-free loan of the same amount. We say cost-free rather than
interest-free because this money was, in fact, deposited by the central
banks with financial institutions in the United States and interest
was paid on it. However, that interest was paid in dollars created
by a bookkeeping operation and added to the total amount of dollars
held by the rest of the world. A cost to the US would only have arisen
if the dollars paid in interest had actually been used to buy American
goods or services but, in fact, no such cost had been paid since the
country went into mild recession in 1991, the only year in the past
20 in which the US supplied more goods and services to the rest of
the world than it took. In the other 19 years, the US has run a deficit
on its import-export account and become increasingly indebted internationally.
These debts will remain cost-free for as long as the US is able to
continue to pay interest in dollars and increase the amount it owes.
A good idea of how big a subsidy this $800 billion is can be gained
by recalling that in 1998, the UNDP estimated that half that sum,
the expenditure of only $40 billion a year for ten years, would enable
everyone in the world to be given access to an adequate diet, safe
water, basic health care, adequate sanitation and pre-natal and post-natal
attention. But, huge though it is, the sum is just a small fraction
of the advantage the US gains by having a reserve currency. In addition
to central banks, dollars are also held by companies, institutions
and millions of people around the world, either in notes in a wall
safe, as deposits in a US bank account, or as some form of security
- perhaps as a bond such as a Treasury bill or in shares traded on
Wall Street.
The total gain from having a reserve currency (the technical term
is seignorage) is the cumulative balance of payments deficit on the
import-export account that the issuing country is able to run up.
At present, the $2,500 billion net debt owed by the US to the rest
of the world would take the total income from its export sales for
thirty months to pay off. Looked at another way, seignorage currently
enables the US to import half as much again as it exports.
A handful of other countries benefit from seignorage too but to a
much more limited extent. Britain does best amongst these runners-up.
It gained goods and services worth $31 billion from the rest of the
world between 1992 and 2000 thanks to the increase in the central
banks' holdings of sterling. This was just 5.7% of the US gain from
the same source over the same period. Britain has also been able to
run up a debt with the rest of the world - the UK balance of trade
has been negative in every year since 1985 with the result that the
country's net financial liabilities stood at £69.8 billion at
the end of the third quarter of 2001. The government statistics office
described this as 'a relatively large figure historically speaking'
although it was only 4% of what the US owed. Britain's present current
account deficit is around 2.5% of its Gross Domestic Product.
The other beneficiaries from seignorage did not run up current account
deficits and so failed to take advantage of their position. Japan,
for example, which got 4.5% of the US gain between 1992 and 2000,
has run up a trade surplus for many years. The same applies to Switzerland
(0.6% of the US gain) and the countries which now make up the eurozone
(a miniscule 0.25%).
At present, countries without reserve currencies lack the freedom
to refuse to earn increasing amounts of dollars, pounds, yen or euro
only to lend them back to the countries which issue them. This is
because while the volume of world trade is growing, they need to increase
their reserve currency - perhaps because they think it's about to
fall in value compared with the others - and to increase their balances
of the others to compensate.
For as long as world trade continues to grow, the indebtedness (and
thus the seignorage gains) of the reserve currency issuing countries
is likely to increase. But if world trade declines or a world currency
is introduced, surplus reserve currencies would begin to return to
their countries of issue in exchange for goods and services. On the
basis of the figures above, only the US would be seriously affected
by this. The value of the dollar would fall and American living standards
would fall sharply as a higher proportion of everything being produced
in the US would have to go abroad in exchange for the returning dollars.
The cost of everything produced and consumed locally that could be
exported would rise by the extent of the devaluation.
Some economists are concerned that such a collapse in US living standards
might be imminent because they believe that the US current account
deficit is reaching unsustainable levels. In 1999, Catherine L. Mann,
a professor at Vanderbilt University, investigated previous current
account corrections in industrialised countries in the past twenty
years. She concluded that a current account deficit of over 4.2% was
unsustainable and that a correction in the US was likely in two or
three years.
"The US cannot live beyond its long-term means forever, nor will
US assets always be so favoured by global investors" Mann wrote
in an article 'Is the US Current Account Sustainable?' published by
the IMF in March 2000. "When a change in investor sentiment comes,
it could be dramatic. What would happen if the dollar depreciated
by a significant amount, say 25%?" she went on, only to answer
her own question:"US consumers would shift from buying imported
goods and services to buying those made domestically and US labour
markets would tighten further. The combination of rising wages and
a falling dollar likely would drive up prices." Then, she believes,
the Federal Reserve would try to choke the developing inflation by
raising interest rates, thus disrupting financial markets around the
world.
Caroline Freund of the Federal Reserve researched the same ground
as Mann and also found that the US deficit was unsustainable except
that she reckoned that the markets normally bring these corrections
about when the deficit rises above 5% of GDP rather than 4.2%. As
the US deficit is expected to exceed 5% at the end of this year, Mann
and Freund's work has led economists employed by stock brokers and
merchant banks to alert their clients to the dollar's potential fall.
For example, Steven Roach, chief economist at Morgan Stanley, warned
several times earlier this year of 'a US balance of payments crisis
by 2003' and 'America's looming current-account adjustment' while
his colleague, Eric Chaney, talked of 'a massive devaluation'. Their
predictions will certainly help bring the crisis they warn of about
since they will be used by Morgan Stanley's 61,000 employees around
the world to encourage clients to switch out of the dollar into sterling
or the Euro. In short, the present system of world money creation
is both unfair and unstable.
A true world currency
Rather than allowing a select group of countries to provide the
world with its money, it would be fairer to have an international
institution do so in order to share the seignorage gains among the
currency's users.
Remarkably, such a currency already exists. The press called it 'paper
gold' when it was first issued by the IMF in 1969 since it's official
name Special Drawing Rights (SDR's),was somewhat boring.
SDRs came about because it did not make sense to mine gold and keep
it in bank vaults to use as the basis of the world's money when account
book entries could do just as well. Each SDR's value was based on
a weighted average of the value of the currencies of the largest exporting
IMF members and each issue was shared out among IMF members according
to a quota based on the country's national income and the amount of
international trade it did.
No SDRs have been issued since 1981 although a majority of the member
countries of the IMF would have liked to see that happen. Each country's
vote in the IMF is weighted according to it's quota and 85% of the
total weight of votes has to be in favour of a proposal before it
is considered passed. As the US has 17% of the total voting weight,
SDRs cannot therefore be issued without its approval. That will never
be given because if the reserve currency system carries on as it is,
the US can expect to be able to get an indefinite cost-free loan of
perhaps 70% of the world's new money. If, on the other hand, SDRs
are issued, the US share of the money given out internationally will
be its quota, a measly 17%.
Essentially, SDRs are a version of the international currency, the
bancor, (i.e. bank gold) proposed by John Maynard Keynes and the British
delegation at the Bretton Woods Conference in 1944. Like SDRs, bancors
were to be reserved for exchanges between central banks but, rather
than their value being fixed in terms of a basket of other currencies,
they were defined in terms of gold. The US also went to Bretton Woods
with a plan for a world currency, the unitas, but as the Nobel-Prize
winning economist Robert Mundell once put it "academic international
idealism fell prey to economic national self-interest" and both
rival schemes were dropped. Instead, the US imposed a system under
which the liquidity required for world trade was to be provided by
gold and by dollars linked to gold at a fixed rate, $35 an ounce.
By so doing, America effectively made itself the world's bank.
The link between the dollar and gold was, of course, broken unilaterally
by the US in 1971 after it had spent many more dollars into circulation
internationally to pay for the Vietnam war than it had gold in Fort
Knox to back them. Fearing that the dollar's value had become unsustainable,
holders led by the French under President de Gaulle rushed to convert
them to gold before a devaluation could happen. A run on the bank
began and the manager, President Nixon responded by refusing holders
of the promissory notes he has issued what they were due. He defaulted
by 'closing the gold window', thus ending any fixed relationship whatever
between the dollar and gold. This destroyed the key feature of the
Bretton Woods system which, in retrospect, seemed to have served the
world reasonably well. What emerged in its place was a totally-unthought-through
arrangement which allowed the defaulter, the worlds richest and most
powerful country, to reap a massive benefit by creating the majority
of the global money supply with no formal constraints at all. This
has to be corrected.
2. The new world currency should be issued by being given into
circulation rather than lent.
There are three ways in which the new currency could be put into
circulation. It could be lent, spent, or given away. The disadvantages
of lending money into use are that:
(i) The new money would only go to 'sound' borrowers. In other words,
it would go to the financially strong.
(ii) As the loans were repaid, the amount of money in circulation
would shrink, reducing the size of the world economy unless new loans
were taken out. But new loans would not be taken out unless the world
economy was buoyant. As a result, issuing the new money this way would
reinforce the present system's growth imperative, the prime cause
of its unsustainability.
(iii) The interest charged on the loans would reduce the amount of
money in global circulation. If the world economy was not to contract,
additional loans would have to be taken out. This would cause the
ratio of debt to gross world product to increase, eventually to unsustainable
levels, unless the world economy grew, in real terms, at the same
percentage rate as the rate of interest charged. This would heighten
the growth imperative. The new currency could certainly be spent into
use over the years at a rate which would not cause a global inflation
by being used to pay for, say, greatly expanded activities by the
United Nations and to relieve Highly Indebted Poor Countries of their
debt. However, this approach would make it unlikely that the new currency
would displace the present reserve currencies entirely. All it could
hope for would be to capture the seignorage gains resulting from rising
levels of world trade which would otherwise go to the reserve-currency-issuing
countries. Very little of the new money would trickle down to the
poor.
FEASTA's strong preference is for a once-off currency give-away on
a scale that would immediately make it the main world currency and
allow the reserve currencies to be returned to their countries of
origin to clear international debt and for the purchase of goods and
services.
3. The distribution of the new currency should be on the basis
of population rather than economic power.
SDR's were given into circulation but, as we noted, they were
allocated on the basis of a country's IMF quota which is related to
its importance in world trade. This was scarcely equitable as the
strong got the lion's share of the new money. The FEASTA proposal,
for reasons which will become apparent in the next section, is that
any new international currency issue should be distributed to countries
on the basis of their populations on some agreed date.
4. The supply of the new currency should be limited in a way which
ensures that the overall volume of world trade is compatible with
the most crucial area of global sustainability.
To deliver the maximum level of human welfare, every system should
try to work out which scarce resource places the tightest constraint
on its development and expansion. It should then adjust its systems
and technologies so that they work within the limits imposed by that
constraint. In line with this, an international currency should be
linked to the availability of the scarcest global resource so that,
since people always try to minimise their use of money, they automatically
minimise the use of that scarce resource.
What global resource do we most need to use much less of at present?
Labour and capital can be immediately ruled out. There is unemployment
in most countries and, in comparison with a century ago, the physical
capital stock is huge and under-utilised. By contrast, the natural
environment is grossly over-used especially as a sink for human pollutants.
For example, the Intergovernment Panel on Climate Change (IPCC) believes
that 60-80% in emissions of one category of pollutants - greenhouse
gases, which come largely from the burning of fossil fuels - are urgently
needed to lesson the risk of humanity being exposed to the catastrophic
consequences of runaway global warming. FEASTA believes that this
is the most serious resource threat facing human kind at present,
and that, consequently, the basis of the new world currency should
be selected accordingly.
Contraction and Convergence (C&C), a plan for reducing greenhouse
gas emissions developed by the Global Commons Institute in London
(GCI), provides the way of linking a global currency with the limited
capacity of the planet to absorb or break down greenhouse gas emissions.
Under the C&C approach which has gained the support of the majority
of the nations of the world, the international community agrees how
much the level of the main greenhouse gas, carbon dioxide (CO2), in
the atmosphere can be allowed to rise. There is considerable uncertainty
over this. The EU considers doubling from pre-industrial levels to
around 550 parts per million (ppm) might be safe while Bert Bolin,
the former chairman of the IPCC, has suggested that 450 ppm should
be considered the absolute upper limit. Even the present level of
roughly 360 ppm may prove too high though, because of the time lag
between a rise in concentration and the climate changes it brings
about. Indeed, in view of the lag, it is worrying that so many harmful
effects of warming such as melting ice caps, dryer summers, rougher
seas and more frequent storms have already appeared.
Choosing a concentration target.
Whatever CO2 concentration target is ultimately chosen automatically
sets the annual rate at which the world must reduce its present emissions
until they come into line with the Earth's capacity to absorb the
gas. This is the contraction course implied in the Contraction and
Convergence name.
Once the series of annual global emissions limits have been set, the
right to burn whatever amount of fuel this represents in any year
would be shared out among the nations of the world on the basis of
their populations in an agreed date, say, 1990. In the early stages
of the contraction process, some nations would find themselves consuming
less than their allocation, while others would be consuming more,
so under-consumers would have the right to sell their surplus to more
energy-intensive lands. This would generate a healthy income for some
of the poorest countries in the world and give them every incentive
to continue following a low-energy development path. Eventually, most
countries would probably converge on similar levels of fossil energy
use per head.
But what currency are the over-consuming nations going to use to buy
extra CO2 emission permits? If those with reserve currencies are allowed
to use them, they would effectively get the right to use a lot of
their extra energy for free because, as we have discussed, much of
the money they paid would be used for investing and trading around
the world rather than purchasing goods from the countries which issued
them. To avoid this FEASTA worked with GCI to devise a plan under
which a new international organisation, the Issuing Authority, would
assign Special Emission Rights (SER's, i.e. the right to emit a specified
amount of greenhouse gases and hence to burn fossil fuel) to national
governments every month according to their entitlement under the Contraction
and Convergence formula.
Special Emission Rights
SER's would essentially be ration coupons, to be handed over to
fossil-fuel production companies in addition to cash by big users,
such as electricity companies, and by fuel distributors such as oil
and coal merchants. An international inspectorate would monitor fossil
energy producers to ensure that their sales did not exceed the number
of SER's they received. This would be surprisingly easy as nearly
80% of the fossil carbon that ends up as man-made carbon dioxide in
the Earth's atmosphere comes from only 122 producers of carbon-based
fuels. The used SER coupons would then be destroyed.
The prospect of this happening is not a fantasy. A considerable amount
of work has already been done towards the development of an international
trading system in carbon dioxide emission rights both at a theoretical
level and in practice in the United states, where trading permits
entitling the bearer to emit sulphur dioxide into the atmosphere has
led to rapid reduction in discharges at the lowest possible cost.
Besides the SER's, the Issuing Authority would supply governments
with the system's new money, energy-backed currency units (ebcu's),
on the same per capita basis , and hold itself ready to supply additional
SERs to whoever presented it with a specific amount of ebcus. This
would fix the value of the ebcu in relation to a certain amount of
greenhouse gas emissions and through that to the use of fossil energy.
The issue of ebcu money would be a once-off, to get the system started.
If a buyer actually used ebcus to buy additional SERs from the Issuing
Authority in order to be able to burn more fossil energy, the number
of ebcus in circulation internationally would not be increased to
make up for the loss - the ebcus paid over to the Issuing Authority
would simply be cancelled and the world would have to manage with
less of them in circulation. This would cut the amount of international
trading it was possible to carry on and, as a result, world fossil
energy consumption would fall. In other words, the level of international
trading at any time would always be compatible with achieving the
CO2 concentration target. If renewable energy output grew or the efficiency
with which fossil energy was used was improved sufficiently rapidly,
it would be possible for world trade to increase.
Governments could auction their Issuing Authority allocation of SERs
at home to major energy users and distributors and then pass all or
part of the national currency received to their citizens as basic
income. They could also sell SERs abroad for ebcus. The prices set
by these two types of sale would establish the exchange rate of their
national currency in terms of ebcus, and thus in terms of other national
currencies.
Essentially, the system is a version of the Bretton Woods arrangement
which President Nixon destroyed except that the right to burn fossil
energy has replaced gold and ebcus play the role of the US dollar.
Its introduction would meet fierce opposition from oil and gas exporting
countries because, since many of their rich customers would have to
buy SERs before they could purchase fuel, less money would be available
to spend on the fuel itself. This would deny the fuel producers the
huge profits they can expect to make when oil and gas become increasingly
scarce in the near future. According to one of the world's leading
petro-geologists, Dr Colin Campbell, the world's oil output is expected
to peak somewhere between 2005 and 2008, and the production of gas
around 2020. In the absence of some system of demand limitation such
as SERs, the importing nations will have to offer higher and higher
prices for - or go to war over - the rapidly declining amounts that
the wells will be able to deliver.
On balance, however, most other countries, even fossil energy over-consumers
like those in the EU, would do well out of the new system for the
very reason that the oil and gas producers would oppose it. Issuing
a fixed amount of SERs would mean that over-consumers did not squander
their money pushing up the price of fuel in a bidding war against
each other. Instead, the ebcus they spent to buy extra SERs would
go to the poorer nations selling them where they would create much
better markets for their products.
5. Each country or monetary union should operate two currencies,
one for normal commercial exchanges, the other for savings and capital
transfers. Each of these currencies would have its own floating exchange
rate with the new international currency, and hence a variable exchange
rate with the other.
This proposal involves keeping flows of money from imports, exports,
tourism and interest payments - current account flows - apart from
flows of investors' capital. It does this by operating two foreign
currency exchanges, with independent exchange rates, one for each
type of flow, exactly as was done in the Sterling area from the late
1940s to the late 1970s and more recently in South Africa between
September 1985 and March 1995. The point of keeping the flows apart
is that, at present, if there is an inflow of capital to a country
- perhaps to buy a company there - the increased availability of foreign
currency means that the strength of the national currency increases
and that, as a result, the country's exporters get less national currency
for the foreign currency they bring home. This naturally hurts them.
It also hurts companies producing for the home market, because competing
imports become cheaper.
If the flows are kept separate, however, each exchange rate adjusts
so that export earnings always equal the cost of imports, and inflows
of capital always equal outflows. This gives the government much more
freedom of action. It means, for example, that if something happens
which causes a lot of people to to try to move their capital overseas,
the exchange rate in terms of ebcus they will get for their money
will rise to discourage them without putting up the exchange rate
that other people have to pay to get foreign currency to buy imported
goods.
Consequently, this proposal would allow governments to adopt policies
that benefit their own people even if these policies upset international
and domestic investors. It would cease to matter whether a foreign
company decided to invest in a country as all its decision to do so
would mean would be that people who wished to move their capital out
of the country would get more foreign currency in exchange. It would
be the same with foreign loans - they would simply improve the terms
on which the better-off could move their capital offshore. The separation
of capital and current account flows could be adopted by countries
even if the ebcu/SER arrangements do not proceed.
6. The new national exchange currencies should be spent into circulation
by their governments rather than being created through the banking
system on the basis of debt.
Sustainability requires a money supply system that can run satisfactorily
if growth stops. Money created through the banking system on the basis
of debt only exists because people have borrowed it and ceases to
exist if they pay their loans off. Such a supply is therefore incompatible
with sustainability since circumstances could easily arise - an ageing
population, for example, as in Japan at present - in which people
decide not to borrow enough to maintain a circulating money stock
of sufficient size to permit the desired level of trading to go on.
The smaller money supply that results causes the level of trading
to shrink, further deterring borrowing and causing a further decline
in the money supply and hence in the level of trading. In short, a
debt-based money system is fundamentally unstable.
Instead, FEASTA believes that money should be created by being spent
into circulation by the government. This brings the following advantages:
a.If the state spent the required amount of new money into
circulation each year, either taxes could be reduced, or public expenditure
increased, or both. The benefit would be substantial. In the 1998-9
period in Britain, for example, it would have amounted to a sixth
of all state spending. Statutory controls on the amount of money a
government could issue are highly desirable, however, as in the past,
many governments have found it easier to print money and spend it
rather than raising it in taxes.
b. Allowing the banks the privilege of money creation constitutes
a massive subsidy to the financial sector. It thereforedistorts the
way the economy operates.
c. The necessity to pay interest on all the money required
to keep the economy running bears
more heavily on the poor than the rich. It is effectively a regressive
tax.
d. Spending money into circulation creates a sustainable economic
system which does not have to be kept constantly growing regardless
of the environmental and social consequences.
If firms in a particular industry get into difficulties and go into
liquidation, their departure leaves the money supply intact, and thus
the same potential level of purchasing power to be shared among the
rest of the economy. Demand in other sectors would therefore increase
and profits rise, tending to counteract the decline, Such a system
is therefore much more compatible with with the achievement of sustainability.
e. Because a high volume of bank lending is required to keep
the present money system functioning, the banks shape the way the
economy develops. They determine who can borrow and for what purposes
according to criteria which favour those with a strong cash flow and/or
substantial collateral. As a result, the present money system favours
the rich and multinational companies and discriminates against smaller
firms and poorer individuals. The proposed system of money creation
would lesson this bias.
f. Another advantage of the proposed system would be that the
exchange currency could be allowed to inflate gently as people would
no longer rely on it as a store of value for their savings. A mild
inflation - up to 8%, some economists think - creates a flexible,
benign business climate and allows the government to reap seignorage
gains as it spends the additional money the inflated volume of trading
requires into circulation.
7. The establishment of regional (i.e. sub-national) and local
exchange currencies should be encouraged.
Except in the tiniest of countries, regional - that is sub-national
- exchange currencies might be better than national ones in meeting
users' needs. The drawback which can arise with a national exchange
currency - and is almost inevitable with an international currency
such as the euro - is that if a major crisis, such as the collapse
of an important industry, takes place in one region of a country and
leaves other regions unaffected, it is very difficult to attract or
grow replacement industries to the affected region unless its price
levels - and in particular, its labour costs - come down. The price
levels which needed to fall were, of course, set before the industry
collapsed but are now too high to make the depressed area the most
profitable location for a new expanding business. Pushing price levels
down is difficult because the newly unemployed in that region will
fight tooth and nail against accepting lower wages to 'price themselves
back into work' since many will have taken out mortgages and made
other commitments on the basis of their present wages and could not
make ends meet at lower rates of pay. Consequently, it could be years
before the region is able to restore its competitiveness in relation
to the rest of the country (or, with the euro, the rest of Europe)
and for its unemployment to begin to fall. Great social stress could
arise.
Sub-national exchange currencies would overcome this problem because
the fact that the region was exporting less and importing more after
the industry collapsed would mean that its exchange rate would fall
in relation to the ebcu, and thus in relation to the currencies used
in the rest of the country. This would restore its competitiveness
in a matter of months. If regional currencies had been in operation
in Britain in the 1980s when London boomed and the North of England
was on its knees after the closure of its coal mines and most of its
heavy industries such as shipbuilding, the North-South gap which developed
would have been prevented. The North of England pound could have been
allowed to fall in value compared with the London one, saving many
of the businesses which were forced to close.
The value of national and regional exchange currencies in relation
to the ebcu should be determined solely by the market and central
banks should not maintain ebcu and foreign currency reserves to support
their currencies. Speculators ought to be able to the job of moderating
the rate of change of the currencies and preventing them overshooting
their new values at least as well as any central bank. In addition,
leaving the determination of relative exchange rates strictly to the
market would make the establishment of regional currencies a much
simpler process as there would be very little financial infrastructure
to put in place.
Conclusions
Anyone who has money has power - over people, resources, governments
and arms. Surprisingly, however, the world has paid little attention
to how money is created and the power structures that result from
creating it and issuing it in a particular way. We have worked until
now on the assumption that there is only one type of money and that
only one type of global and national money system is possible. One
size has to fit all because we are not aware of any other possibilities.
Thus, SDRs apart, we have to work with one type of international money,
the debt-based reserve currencies, which become more abundant when
people are happy to borrow and scarcer when potential borrowers become
afraid. Such currencies inflame economic booms and worsen depressions.
Moreover, they require the economic system to grow continually to
avoid collapse, so bringing it into conflict with society and the
natural world.
These conflicts will run on until the monetary system is changed.
The environmental movement should therefore demand that the reserve
currencies be replaced with a global currency whose availability is
determined by the availability of the scarcest available environmental
resource. FEASTA believes this to be the ability of the Earth to absorb
greenhouse gases. National and regional currencies should then be
linked to the new global currency by floating exchange rates in a
system which prevents capital inflows and outflows distorting rates
determined by trading in goods and services which would otherwise
ensure every country's imports and exports were always in balance.
Last revised, 16th April, 2002.
End Notes
(i) Economic update, 12/02/2002
http://www.statistics.gov.uk/themes/economy/electronic_articles/eu/exports.asp
(ii) Is the US Trade Deficit Sustainable? Institute for International
Economics, Washington DC, 1999.
(iii) See Finance and Development, Vol 37, No. 1, March 2000.
Can be downloaded from http://www.imf.org/external/pubs/ft/fandd/2000/03/mann.htm
(iv) 'Current Account Adjustment
in Industrialised Countries' International Finance Discussion Paper
No. 692, Board of Governors, Federal reserve Board, Washington DC,
December 2000.
Available at http://www.federalreserve.gov/pubs/ifdp/2000/692/ifdp692.pdf
(v) 'When the Tide Goes Out', European Investment Perspectives,
Morgan Stanley,13th February 2002. Also 'Global Decoupling' Global
Economic Forum , Morgan Stanley, 30th January, 2002.
(vi) Europe Economics:Global Decoupling: Chaotic or Orderly?, Global
Strategy Bulletin, Morgan Stanley, 17th February, 2002.
(vii) The International Monetary System in the 21st Century: Could
Gold Make a Comeback?, lecture delivered by Robert Mundell at St Vincent
College, Letrobe< Pennsylvania, March 12th, 1997.
Available at http://www.columbia.edu/~ram15/LBE.htm
(viii) Kingpins of Carbon:How Fossil Fuel Producers Contribute
to Global Warming, Natural Resources Defense Council and others,
New york, july 1999.
(ix)
The Imminent Peak of Global Oil Production, FEASTA Review, No.
1, Dublin, 2001, pp 88-97.
