Monetary Reform!

Chapter 46
BUILDING A BRIDGE: TOWARD A NEW BRETTON WOODS

Suddenly they came to another gulf across the road. . . .[T]hey sat down to consider what they should do, and after serious thought the Scarecrow said, “here is a great tree, standing close to the ditch. If the Tin Woodman can chop it down, so that it will fall to the other side, we can walk across it easily.”
      “That is a first-rate idea,” said the Lion. “One would almost suspect you had brains in your head, instead of straw.”



John Maynard Keynes had an idea. Instead of pegging currencies to the price of a single commodity -- gold -- they could be pegged to a “basket” of commodities: wheat, oil, copper, and so forth. He did not elaborate much on this idea, perhaps because the world economy was not then troubled by wild devaluations from speculative currency trading, and the statistical calculations for such a standard would have been hard to make on a daily basis in the 1940s. But Michael Rowbotham has elaborated on the proposal, calling it “a profound and democratic idea” that is “vital to any future sustainable and just world economy.” He writes:

Today, wheat grown in one country may, due to a devalued currency, cost a fraction of wheat grown in another. This leads to the country in which wheat is cheaper becoming a heavy exporter -- regardless of need, or the capacity to produce better quality wheat in other locations. In addition, currency values can change dramatically and the situation can reverse. Critically, such wheat “prices” bear no relation to genuine comparative advantage of climate, soil type, geography and even less to indigenous/local/regional needs. Neither does it have any stabilising element that would promote a long-term stability of production with relation to need. . . .By imputing value to a nation’s produce, and allowing this to determine the value of a nation’s currency, one is imputing value to its resources, its labourers and acknowledging its own needs.

An international trade unit could be established that consisted of the value of a basket of commodities broad enough to be representative of national products and prices and to withstand the manipulations of speculators. “With today’s sophisticated trading data,” says Rowbotham, “we could, literally, have a register of all globally traded commodities used to determine currency values.” Although this unit for measuring value would include the price of gold and other commodities, it would not actually be gold or any other commodity, and it would not be a currency. It would just be a yardstick for pegging currencies and negotiating contracts. A global unit for pegging value would allow currencies to be exchanged across national borders at exact conversion rates, just as miles can be exactly converted into kilometers, and watches can be precisely set when crossing date lines. Exchange rates would not be fixed forever, but they would be fixed everywhere. Changes in exchange rates would reflect the national market for real goods and services, not the international market for currencies. Like in the Bretton Woods system, in which currencies were pegged to gold, there would be no room for speculation or hedging. But the peg would be more stable than in the Bretton Woods system; and because it would not trade as a currency itself, it would not be in danger of becoming scarce.

Private Basket-of-Commodities Models

To implement such a standard globally would take another round of Bretton Woods negotiations, which might not happen any time soon. In the meantime, private exchange systems have been devised on the same model, which are instructive in the meantime for understanding how such a system might work.

Community currency advocate Tom Greco has designed a “credit clearing exchange” that expands on the LETS system. It involves an exchange of credits tallied on a computer, without resorting to physical money at all. Values are computed using a market basket standard. The system is designed to provide merchants with a means of negotiating contracts privately in international trade units, which are measured against a basket of commodities rather than in particular currencies. Greco writes:

The use of a market basket standard rather than a single commodity standard has two major advantages. First, it provides a more stable measure of value since fluctuation in the market price of any single commodity is likely to be greater than the fluctuation in the average price of a group of commodities. The transitory effects of weather and other factors affecting production and prices of individual commodities tend to average out. Secondly, the use of many commodities makes it more difficult for any trader or political entity to manipulate the value standard for his or her own advantage.

In determining what commodities should be included in the basket, Greco suggests the following criteria. They should be (1) traded in several relatively free markets, (2) traded in relatively high volume, (3) important in satisfying basic human needs, (4) relatively stable in price over time, and (5) uniform in quality or subject to quality standards. Merchants using the credit clearing exchange could agree to accept payment in a national currency, but the amount due would depend on the currency’s value in relation to this commodity-based unit of account. Once the unit had been established, the value of any circulating currency could be determined in relation to it, and exchange rates could be regularly computed and published for the benefit of traders….

Valuing Currencies Against the Consumer Price Index

Money reform advocate Frederick Mann, author of The Economic **** of America, had another novel idea. Writing in 1998, he suggested that a private unit of exchange could be valued against either a designated basket of commodities, or the Commodity Research Bureau Index (CRB), or the Consumer Price Index (CPI). Using standardized price indices would make the unit particularly easy to calculate, since the figures for those indices are regularly reported around the world.

Mann called his currency unit the “Riegel,” after E.C. Riegel, who wrote on the subject in the first half of the twentieth century. For the “basket” option, Mann proposed using cattle, cocoa, coffee, copper, corn, cotton, heating oil, hogs, lumber, natural gas, crude oil, orange juice, palladium, rough rice, silver, soybeans, soybean meal, soybean oil, sugar, unleaded gas, and wheat, in proportions that worked out to about $1 million in American money. This figure would be divided by $1 million to get 1 Riegel, making the Riegel worth about $1 in American money.

Another option would be to use the Commodity Research Bureau Index, which includes gold along with other commodities. But Mann noted that the CRB would give an unrealistic picture of typical prices, because individuals don’t buy those commodities on a daily basis. A better alternative, he said, was the Consumer Price Index, which tallies the prices of things routinely bought by a typical family. In the United States, CPI figures are prepared monthly by the U.S. Bureau of Labor Statistics. Prices used to calculate the index are collected in 87 urban areas throughout the country and include price data from approximately 23,000 retail and service establishments, and data on rents from about 50,000 landlords and tenants.

When Mann was writing in 1998, the CPI was about $160. He suggested designating 1 Riegel as the CPI divided by 160, which would have again made it about $1 in 1998 prices. Converting the cost of one Riegel’s worth of goods in American dollars to the cost of those goods in other currencies would then be a simple mathematical proposition. The CPI’s “core rate,” which is used to track inflation, currently excludes goods with high price volatility, including food, energy, and the costs of owning rather than renting a home. But to be a fair representation of the consumer value of a currency at any particular time, those essential costs would probably need to be factored in as well.

A New Bretton Woods?

These proposals involve private international currency exchanges, but the same sort of reference unit could be used to stabilize exchange rates among official national currencies. Several innovators have proposed solutions to the exchange rate problem along these lines. Besides Michael Rowbotham in England, they include Lyndon LaRouche in the United States and Dr. Mahathir Mohamad in Malaysia, two political figures who are controversial in the West but have large followings and substantial influence internationally.

LaRouche shares the label of “perennial candidate” with Jacob Coxey, having run for U.S. President eight times. He also shares a number of ideas with Coxey, including the proposal to make cheap national credit available for putting the unemployed to work developing national infrastructure. LaRouche has launched an appeal for a new Bretton Woods Conference to reorganize the world’s financial system, a plan he says is endorsed by many international leaders. It would call for:

1.  A new system of fixed exchange rates,

2.  A treaty between governments to ban speculation in derivatives,

3. The cancellation or reorganization of international debt, and

4. The issuance of “credit” by national governments in sufficient quantity to bring their economies up to full employment, to be used for technical innovation and to develop critical infrastructure.

LaRouche’s proposed system of exchange rates would be based on an international unit of account pegged against the price of an agreed-upon basket of hard commodities. With such a system, he says, it would be “the currencies, not the commodities, [which are] given implicitly adjusted values, as based upon the basket of commodities used to define the unit.”

Dr. Mahathir is the outspoken Malaysian prime minister credited with sidestepping the “Asian crisis” that brought down the economies of his country’s neighbors....The Middle Eastern news outlet Al Jazeera describes him as a visionary in the Islamic world, who has proven to be ahead of his time. As noted earlier, Islamic movements for monetary reform are of particular interest today because oil-rich Islamic countries are actively seeking alternatives for maintaining their currency reserves, and they may be the first to break away from the global bankers’ private money scheme. In international conferences and forums, Islamic scholars have been vigorously debating monetary alternatives.

In 2002, Dr. Mahathir hosted a two-day seminar called “The Gold Dinar in Multilateral Trade,” in which he expounded on the Gold Dinar as an alternative to the U.S. dollar for clearing trade balances. Islamic proposals for monetary reform have generally involved a return to gold as the only “sound” currency, but Dr. Mahathir stressed that he was not advocating a return to the “gold standard,” in which paper money could be exchanged for its equivalent in gold on demand. Rather, he was proposing a system in which only trade deficits would be settled in gold. A British website called “Tax Free Gold” explains the proposed Gold Dinar system like this:

It is not intended that there should be an actual gold dinar coin, or that it should be used in everyday transactions; the gold dinar would be an international unit of account for international settlements between national banks. If for example the balance of trade between Malaysia and Iran during one settlement period, probably three months, was such that Iran had made purchases of 100 million Malaysian Ringgits, and sales of 90 million Ryals, the difference in the value of these two amounts would be paid in gold dinars. . . .From the reports of the Malaysian conferences, we deduce that the gold dinar would be one ounce of gold or its equivalent value.

At the 2002 seminar, Dr. Mahathir conceded that gold’s market value is an unsound basis for valuing the national currency or the prices of national goods, because the value of gold is quite volatile and is subject to manipulation by speculators just as the U.S. dollar is. He said he was thinking instead along the lines of a basket-of-commodities standard for fixing the Gold Dinar’s value. Pegging the Dinar to the value of an entire basket of commodities would make it more stable than if it were just tied to the whims of the gold market. The Gold Dinar has been called a direct challenge to the IMF, which forbids gold-based currencies; but that charge might be circumvented if the Dinar were actually valued against a basket of commodities, as Dr. Mahathir has proposed. It would then not be a gold “currency” but would be merely an international unit of account.

The Urgent Need for Change

Other Islamic scholars have been debating how to escape the debt trap of the global bankers. Tarek El Diwany is a British expert in Islamic finance and the author of The Problem with Interest (2003). In a presentation at Cambridge University in 2002, he quoted a 1997 United Nations Human Develop Report underscoring the massive death tolls from the debt burden to the international bankers. The report stated:

Relieved of their annual debt repayments, the severely indebted countries could use the funds for investments that in Africa alone would save the lives of about 21 million children by 2000 and provide 90 million girls and women with access to basic education.

El Diwany commented, “The UNDP does not say that the bankers are killing the children, it says that the debt is. But who is creating the debt? The bankers of course. And they are creating the debt by lending money that they have manufactured out of nothing. In return the developing world pays the developed world USD 700 million per day net in debt payments.” He concluded his Cambridge presentation:

But there is hope. The developing nations should not think that they are powerless in the face of their oppressors. Their best weapon now is the very scale of the debt crisis itself. A coordinated and simultaneous large scale default on international debt obligations could quite easily damage the Western monetary system, and the West knows it. There might be a war of course, or the threat of it, accompanied perhaps by lectures on financial morality from Washington, but would it matter when there is so little left to lose? In due course, every oppressed people comes to know that it is better to die with dignity than to live in slavery. Lenders everywhere should remember that lesson well.

We the people of the West can sit back and wait for the revolt, or we can be proactive and work to solve the problem at its source. We can start by designing legislation that would disempower the private international banking spider and empower the people worldwide. To be effective, this legislation would need to be negotiated internationally, and it would need to include an agreement for pegging or stabilizing national currencies on global markets.

A Proposal for an International Currency Yardstick That Is Not Currency

That brings us back to the question of how best to stabilize national currencies. The simplest and most comprehensive measure for calibrating an international currency yardstick seems to be the Consumer Price Index proposed by Mann, modified to reflect the real daily expenditures of consumers. To show how such a system might work, here is a hypothetical example. Assume that one International Currency Unit (ICU) equals the Consumer Price Index or some modified version of it, multiplied by some agreed-upon fraction.

On January 1 of our hypothetical year, a computer sampling of all national markets indicates that the value of one ICU in the United States is one dollar. The same goods that one dollar would purchase in the United States can be purchased in Mexico for 20 Mexican pesos and in England for half a British pound. These are the actual prices of the selected goods in each country’s currency within its own borders, as determined by supply and demand. When you cross the Mexican border, you can trade a dollar bill for 10 pesos or a British pound for 20 pesos. On either side of the border, one ICU worth of goods can be bought with those sums of money in their respective denominations.

Carlos, who has a business in Mexico, buys 10,000 ICUs worth of goods from Sam, who has a business in the United States. Carlos pays for the goods with 2,000,000 Mexican pesos. Sam takes the pesos to his local branch of the now-federalized Federal Reserve and exchanges them at the prevailing exchange rate for 10,000 U.S. dollars. The Fed sells the pesos at the prevailing rate to other people interested in conducting trade with Mexico. When the Fed accumulates excess pesos (or a positive trade balance), they are sold to the Mexican government for U.S. dollars at the prevailing exchange rate. If the Mexican government runs out of U.S. dollars, the U.S. government can either keep the excess pesos in reserve or it can buy anything it wants that Mexico has for sale, including but not limited to gold and other commodities.

The following year, Mexico has an election and a change of governments. The new government decides to fund many new social programs with newly-printed currency, expanding the supply of pesos by 10 percent. Under the classical quantity theory of money, this increase in demand (money) will inflate prices, pushing the price of one ICU in Mexico to around 22 Mexican pesos. That is the conventional theory, but Keynes maintained that if the new pesos were used to produce new goods and services, supply would increase along with demand, leaving prices unaffected….Whichever theory proves to be correct, the point here is that the value of the peso would be determined by the actual price on the Mexican market of the goods in the modified Consumer Price Index, not by the quantity of Mexican currency traded on international currency markets by speculators.

Currencies would no longer be traded as commodities fetching what the market would bear, and they would no longer be vulnerable to speculative attack. They would just be coupons for units of value recognized globally, units stable enough that commercial traders could “bank” on them. If labor and materials were cheaper in one country than another, it would be because they were more plentiful or accessible there, not because the country’s currency had been devalued by speculators. The national currency would become what it should have been all along -- a contract or promise to return value in goods in services of a certain worth, as measured against a universally recognized yardstick for determining value.