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.
