Note from author: I wanted to write a relatively short article on an international currency that dealt with trade imbalances and foreign debt. The concepts for such a currency were to be easy to understand and also very easy to implement in practice. However I realised that to explain the background for why such an international currency is needed, I had to explore other subjects. Those readers who want to get straight to the ‘juicy bits’ in which I describe such an international currency can go straight to the last section titled An easy to understand, highly workable international currency.

 

A brief introduction

The need for an easy-to-understand and workable international currency is greater than ever. The domination of the global economy through a single currency – US dollars – must cease. Currently, and I would say terminally, the U.S. economy is dependent on ongoing global demand for US dollars to prevent its economy from tanking over. The huge U.S. public debt can only be prevented from blowing out to even greater astronomical proportions if treasury bills yields (interest rates) are kept low. This requires, amongst other things, that oil producing countries keep buying treasury bills with the earnings from their oil exports, which in turn requires them to ask for payment for their exports in U.S. dollars. To maintain this state of affairs occasionally requires military interventions and probably a lot of CIA type perfidy – actions which play a great part in the destabilization of global society and cause enormous grief to millions of people. (A permanently low interest rate environment creates another set of problems because speculative bubbles thrive on low interest rates.)

​

On a separate but related issue: in principle all countries should be able to insulate themselves from the depredations of international capital. No country would sanely wish to sabotage its trade in goods and services, but its monetary and fiscal policies, industrial relations, and so on should not be subject to the activities of profit-seeking speculative capital. The advocates of ‘free market’ are correct if the market in question is actually in goods and services; but speculative capital should not be roaming around and destroying economies. A proper international currency can achieve both aims: not interfere in the trade of goods and services, and totally inhibit inter-national speculative capital.

​

Countries (i.e. citizens of all countries) can insulate themselves from international capital by promoting and using an international currency unit which gives absolutely no advantage to any country, no matter how rich, nor to any other parties such as the banking conglomerate that makes up the Federal Reserve.

 

The two kinds of exchange rate mechanisms and their effect on trade imbalances.

There are two kinds of currency exchange mechanisms – a fixed exchange rate, or a floating exchange rate. The former describes a country’s currency being pegged against another currency, usually that of a country which is an economic powerhouse; a gold standard means the currency is similarly connected to gold. A floating exchange rate is a market determined exchange rate where the buying and selling of that currency determines its value against other currencies. Most currencies’ value are measured by their exchange rate to a handful of major currencies in the world – such as the U.S. dollar or Euro. These are called reserve currencies.

​

The idea of trade imbalances is only really applicable with a fixed exchange rate. Imagine the Mexican peso is pegged against the U.S. dollar. If Mexico as a whole consistently imports more than it exports, it finds itself running out of US dollars. This puts the U.S. in a financially stronger position because Mexico might soon need to borrow U.S. dollars with interest if it wanted to do any more purchases in US dollars. This is the only way if Mexico wanted to maintain the exchange rate. When currencies were on a gold standard and imports were paid in gold credits, this situation was even more acute – countries had to borrow gold credits.

​

(In principle, central banks could loan their currency to other governments/central banks at zero interest without any harm to the lending country. Even more: central bank could make interest free loans to their own government at zero interest instead of the latter borrowing money from the money market (bond market). It is in the interest of the public to borrow from itself (via the central bank) rather than from private wealth and private banks – but this is not in the interest of the private banking/finance industry. Because central bank ideology is controlled by private banking interests, this course of action is never considered seriously – they do not want it known that central banks can displace private banks in any kind of lending.)

​

The above problem does not happen with a floating exchange rate. If Mexico has a tendency to import more from the US than export to it, the peso depreciates on the currency market as the peso demand for dollars becomes stronger than the dollar demand for pesos. The peso depreciation makes for more expensive imports into, and cheaper exports from, the Mexican side so that the movement of the currency value self-corrects any trade imbalances. In physiology, this would be called homeostasis.

​

This matter can be looked at in another way: when a floating exchange rate is operating, an import into Mexico from the U.S. entails two parties – one holding pesos and another holding dollars - exchanging credits with each other. The Mexican importer pays with his pesos which is then exchanged for dollars; the dollars are then transferred to the exporter’s bank account. After the transaction, one cannot claim that there is more money in the dollar economy, nor any less in the peso economy. What has happened is that the U.S. dollar, relative to the peso, is in a stronger position because the supply and demand process (pesos buying dollars) has increased its value. Thus, in a floating exchange mechanism, when a currency is used to buy another currency, there is a currency swap.

​

The common perception that a country earns money from its exports and loses money on imports is an error in logic called fallacy of composition, which is to say that the sum of the parts is the same as the whole. When private parties sell something, they really do earn money – money in the bank as the saying goes. But when a nation as a whole sells something, it doesn’t earn any money; instead it ‘earns’ a stronger currency.

​

There is a corollary to this point, and that is that any attempts by governments to induce a favourable trade balance (i.e. trade surplus) or protect jobs are misguided. Assume a country wants to protect its citrus industry. It then puts up its tariffs on citrus products. This action artificially restricts citrus imports and consequently, artificially appreciates the currency, i.e. the currency would have depreciated without the tariffs. Consequently it becomes cheaper to import products (other than citrus based ones) and dearer to export. The jobs that are protected in the citrus industry through the citrus tariff entail a sacrifice in jobs in other industries which compete on the import and export market. In other words, the rest of the national import/export economy suffers just a little - cheaper imported competitive products, or dearer exports. The gain for the citrus industry is obvious but the compensation in the rest of the economy is not because the impact is spread very thinly over a large number of import/export industries.

​

This matter may be clarified by an analogy. Imagine a pool with a large surface area. Imagine drawing out a bucket of water. The change in the water level of the bucket of water is very obvious but in the pool is very hard to detect. The bucket of water is similar to the citrus industry in this analogy; and the aggregate of the other export/import industries is like the rest of the pool. The impact on the latter is very hard to detect but it is there – and the total volume of water (in bucket and pool) is the same.

 

The Global Policy Forum asserts that in 2011 only 0.6% of foreign exchange could be traced to genuine international trade in goods and services. The rest was for speculative purposes. This means that the impact of imports and exports on the value of a currency is made negligible by the volume of speculative trade or ‘investment’ trade (money seeking interesting bearing loans, shares, land and natural resources, or just money dodging national taxes). Using the pool analogy again, imagine filling and draining a swimming pool with a half-inch garden hose and that the depth level of the pool somehow represents the relative value of the currency against other currencies . The impact of the half inch hose may be likened to the effect that imports and exports have on the exchange rate of a currency. Imagine that a four inch pump driven hose is doing the same thing but on a different schedule. The garden hose is making a difference to the pool level but its effect is negligible and probably immeasurable against the action of the four inch hose. In this analogy, the effect of the four inch hose on the depth of the pool against the half inch hose is like the comparable effects that speculative activity has against real trade in the value of a currency.

​

I will explore an easy way to get rid of the four inch hose – i.e. speculative trade in currencies – later on in this article.

 

The danger to any fixed currency of short selling

Any currency which is fixed, or pegged, to another currency or to gold faces the danger of short selling, and any country that tried it today is just plain dumb. Imagine currency X is on a gold standard. Imagine that the government’s treasury is sound, there is no public debt, and there is no foreseeable need to run budget deficits. Nonetheless some speculators take it upon themselves to start a rumour that the currency is overvalued against other currencies or against gold. These speculators then borrow that currency (from private banks), turn it over to the central bank in exchange for gold or another currency; use the newly acquired holdings of gold or foreign currency for another round of borrowing and selling of that currency. Other speculators see the writing on the wall and get in on the act. The whole process is exacerbated in speed and severity with options and derivatives. This process will repeat itself until at some point the central bank will run out of its gold or foreign currency reserves and will have to readjust its exchange rate (down) or float the currency. The central bank will have depleted its reserves of gold or foreign currency just because it tried to keep its exchange rate fixed. The speculators meanwhile, buy back into the devalued currency and pay back their loans with a handsome profit.

​

No matter how much gold reserves a country has – and this includes the U.S. – if it is on a gold standard, and if there is enough of a stampede by speculators (including nobodies working from their home computer), no central bank will be able to hold out against them. At some point the reserves will run out and the currency will have to be devalued or floated.

 

Countries do not need to borrow foreign currencies

Foreign debt is a major tool of economic imperialism. Within the context of a floating exchange rate it should never happen. When I say that countries should never need to borrow foreign currencies, I mean the state or the collective public of that country. If a private party wants to borrow foreign currency, that is its business. If the party in question fails on its debt, the citizens of that country are not left holding the can; the lender is left with a failed loan and is now holding the can.

​

What the post WWII experience showed is that if the private banking system of the developed world loaned money not just to private enterprises but also to governments of developing countries; and if the government could not repay the debts; then the banks could (with the generous assistance of the World Bank and IMF) strip the country of its assets (mineral resources etcetera) and use the government, through its taxing ability, to act as debt collector. People like John Perkins (Confessions of an Economic Hitman) have shown that loans were systematically contrived to be made to undeveloped countries with the knowledge or intention or contrivance that governments would not be able to pay the loan back, and hence suffer an interminable loss of natural resources and exported goods and services.

​

Assume a government needs to create some infrastructure such as a series of highways or electricity supply network; or perhaps it is ‘human capital’ such as educational institutions. Assume that the country cannot provide those things for itself yet. Such a country does not need to borrow money from private banks to finance it.

​

The country does not need foreign currency – it needs the goods and services that foreign countries can supply; and that can be accessed without borrowing foreign currency. Quite simply – and assuming that the government (and not private banks) actually controls the central bank – it can draw on the central bank to issue some of its own currency, convert that money into foreign currency on the currency exchange market, and then use that money to buy foreign goods and services, and pay for contracts etc.

As noted above, this action results in the depreciation of the local currency; imports get more expensive, exports get cheaper. The country now pays for its ‘free meal’ by having to export more than it imports; a process made possible and necessary with the depreciated currency. The critical thing is that there is no compounding debt – loans that grow in size on account of interest charges, and often become unserviceable. Foreign debt and ‘debt imperialism’ becomes a thing of the past.

​

For those concerned with the inflationary argument, the remedy is simple: the government – and therefore the people – accepts a temporary higher price level (on account of the bigger money supply); and later, through a series of budget deficits, bring the money supply back to its original level and thereby lower price levels. Alternatively, it can just accept a permanent but stable higher price level; there is nothing to say that the money supply has to be any particular amount.

​

One last thing: there may be good reasons to interfere in ‘market forces’ in trade with the use of tariffs and export subsidies etcetera, namely environmental and social considerations (e.g. a ban on the import of products containing palm oil grown on cleared rainforest) but the notion of trade advantage should not be one such reason.

 

The case of Greece in the Euro trap

If a nation does not have its own currency but is part of a supranational currency like the Euro, it finds itself in the potentially vulnerable position that individuals and private parties find themselves: it can get into serious and unserviceable debt in its own currency. The debt compounds faster than the country’s ability to repay it through export earnings. Its government does not have the luxury of bailing itself out in its own currency; nor does the country have the luxury of a floating exchange rate to save it from going into debt in the first place. Had international capital not interfered in the Greek democratic process, the Greeks should have opted out of the Euro, re-established an independent currency (on a floating exchange rate) and work its way out of that. Better than borrowing more euros on compounding interest. There is, I would argue, an argument for supranational currencies but it cannot be based on a capitalist banking system. (If the Euro Central Bank was not actually run by private bankers, the ECB could easily loan euros to Greece without interest charges or maybe, at most, interest rates indexed to inflation. This could be done without any disadvantage to the Eurozone countries. The inflationary effect would be reversed and cancelled out as the debt got repaid.)

 

The curious case of China

The ongoing ‘trade war’ between China and the U.S. is not only based on China’s ability to draw on cheap labour for its manufactured products. It is only possible because China’s currency, the renminbi, is more or less on a fixed exchange rate to the US dollar. China sells its products and the government receives US dollars directly, and then credits the exporter with renminbi. There is no currency swap as with a floating exchange mechanism. The US dollar is not exchanged for the renminbi on the currency market. This means the renminbi never appreciates in value as it would on a floating exchange rate. There is no self-correcting mechanism in the balance of trade. The Chinese government takes the US dollars but mostly does not buy foreign goods and services with it (which would create jobs in other countries); instead it has been buying US treasury bills. This is an action which theoretically gives the Chinese government the ability to collect an income from American taxpayers which could rival federal taxes in its quantity.

​

Is the Chinese government playing unfairly? In a sense it just found a glaring chink in the armor of western banking and is simply exploiting it. However, the Chinese are also in a bind. They know that they will never be paid out in full on their loans to the U.S. government and that if they were to sell off a sizeable portion of their treasury bills, the bills would quickly lose a lot of its market value; interest rates in the US dollar economy would rise sharply, and a major financial crash would happen which would also affect China adversely. Capitalism, given a chance to run its full course, will lead to unbelievably absurd and dangerous situations.

​

The potential selling off of US treasury bills is of great concern to U.S. banking and corporate circles. To maintain the fiction that U.S. bonds are a safe thing, extreme measures must occasionally be taken. If a ‘madman’ like Saddam Hussein or Muammar Gaddafi proposes to sell its oil in another currency (and proposes to its oil exporting friends to do likewise) then it becomes a serious cause for concern. U.S. financial elites need the world to have a big demand for US dollars, so that the dollars are recycled back to US treasury bills, so that interest rates stay low. Both these madmen did tout such seditious ideas and both were eliminated by military invasion. The reasons given by US authorities for these invasions (of Iraq and Libya) remain unconvincing to this day.[1]

 

Killing off the speculative trade in currencies

As pointed out earlier, only 0.6% of currency exchanges is for trade. The rest is for currency speculation. These speculations distort the appreciation/depreciation effect that imports and exports have on the value of the currency, because such currency trades dwarf the trade in imports and exports.

​

Firstly, it should be pointed out that none of these trades, not even when they are for ‘investment’ purposes, actually help any of the countries concerned. If a currency trade is made in order to buy land, the land is there before and after the trade – it has just changed ownership but there is no real investment. If the money is used for buying shares, the same principle applies. (As for government bonds, I will argue that governments should always be borrowing from their central bank rather than borrow money from the bond market – but that’s another discussion).No ‘service’ is provided by such ‘investments’; nor is there any improvement in ‘market allocation of resources’ effected.

​

One could look at this issue from another point of view. When foreign ‘investment’ money comes into a country (as the saying goes) foreign currency is traded for the local currency at the currency market. No extra money comes into the country as I pointed out earlier. In other words, the money used for investment purposes was already within the banking system of the currency - it was only in different hands. The country, or the currency, did not need foreign investments.

​

It is very easy for any government to unilaterally kill off speculative trade in its currency. The idea is not a new one, although I would like to build on it: the Tobin tax, if set at a low rate of just 0.1% will stop a considerable amount of speculative currency trade.[2] I would suggest a 3% rate. 3% might sound outrageously high but compared to current GST or VAT rates, it is minor. Such a tax will have no deleterious effect on the trade of goods and services. It is also very easy to implement: the government just dictates to the banks that handle currency exchanges to collect it. [3],[4]

 

Bancor: Keynes’ proposal for an international currency

Even though, as I pointed out earlier, a country should not suffer from trade deficits or surpluses when a floating exchange rate mechanism is operating, there is still a strong argument for an international currency. Nay, I would say that there is an urgent need for an international currency because, as pointed out earlier, a big part of the reasons behind some U.S. military interventions all over the world is due to its need to protect the U.S. dollar as the recognised reserve currency of the world.

​

Part of the more philosophical argument for an international currency centers around the fact that one country, or super-national entity like the Eurozone, enjoys the right to print a world reserve currency. It means that the reserve currency’s value is subject to the fiscal and monetary policies of that currency. Within this framework one can see the need for an international currency.

​

Another problem with a floating exchange rate is that, as it stands, it is dependent on speculators to determine a ‘market value’ for each currency. Some people might be fine about the ‘technical efficiency’ of this process but there is something morally absurd that speculators determine the value of a thing that we use every day.

​

The idea for an ‘artificial’ international currency is not new (in fact all currencies are artificial things). John Maynard Keynes put forward the idea of such a currency, called Bancor, as part of the Bretton Woods conference of 1944 that was to shape the financial and trade order of the post war world. I have a proposal that I believe is a modification and extension of his Bancor that is both: 1) very easy to understand and 2) very easy to implement - on the assumption that central banks are institutions for-, by-, and of the people. This assumption is patently untrue at the moment but if a simple workable alternative exists in the minds of some people, then the powers behind the finance/banking system cannot say ‘There is no alternative’.

​

Under Keynes proposal, the Bancor would be managed by a new institution — the International Clearing or Currency Union. All international trade would be measured in Bancors. Exporting would accrue Bancors, importing would expend Bancors. Nations were to maintain a Bancor account close to zero, with a small amount of interest charged on surpluses and deficits to discourage such trade imbalances. The Bancor would be related to national currencies through a fixed, but adjustable, exchange rate.

I have a few problems with this proposal as it stands:

1. For nations to maintain a close-to-zero Bancor account, they may have to resort to drastic short term policies to adjust their imports and exports – taxes, tariffs, subsidies, interest rates, central bank purchases and sale of foreign currencies, etcetera. These measures are clumsy and some will be very disruptive to commerce and trade.

2. There is no suggestion that is simple and straightforward for establishing the initial value of Bancor and maintaining it thereafter. It has been suggested that the IMF Special Drawing Rights (SDR) be used as such a currency but SDRs are complicated, being based on a basket of international reserve currencies. It is also morally problematic that a national currency makes up a part of the value of the SDR.

 

An easy to understand, highly workable international currency

My proposal, I believe, solves the above issues attendant with the Bancor. Firstly, consider the notion that that there is no need at all to base an international currency on an existing currency. When Abraham Lincoln needed to finance the costs of the Civil War, he found the interest rates charged by private bankers exorbitant. His solution was to create a fiat currency that had no relationship to gold. This was the famous Greenback, and the Greenback served the Union very well.

​

As an aside, it should be pointed out that the Greenback meant that the US government never needed to borrow money from private bankers again. (Why borrow money from private bankers if in the first place you have the central bank which issues it, to loan it to you interest free?) This explains why the bankers contrived to terminate the Greenback after Lincoln’s (convenient?) death. It is also related to why the Federal Reserve is a private bank and the US dollar is not a government issued currency.

​

Like any other currency, an international currency can be created ex nihilo. I shall show how it can actually be effected without creating chaos at its birth.

​

Let’s say the international currency is simply called the international currency unit – ICU. The average volume of trade in each national currency for a certain period – say 30 days – is tracked and noted. Assume that ICU will be implemented on midnight of New Year’s Eve of 2024. At that very minute (or second), a designated reserve currency – let’s say the Euro – is nominated as the benchmark for the initial value of ICU. In other words, the ICU is given the same initial value as the Euro. The European Central Bank is credited with 30 trading days’ worth of Euro in ICU equivalent. Let’s call this quantity of ICU credits the ‘float’ – not unlike the float that businesses have in their cash register at the start of each trading day.

​

The ICU is initially on parity with the Euro, i.e. one-to-one. All other central banks will also be credited with 30 trading days of their currency in ICU, so that they have their own float. The initial exchange rate will be set using the value of that currency against the Euro at midnight of New Year’s Eve 2024. Thus for example, if the Australian dollar is 2.156 against the Euro at that moment, the Australian dollar will start off at that exchange rate against the ICU. The 30 day trade in the Australian dollar will now be credited to the Reserve Bank of Australia in ICU as the float, with the exchange rate of 2.156 dollars against the ICU.

​

After the initial valuing of the ICU at parity with the Euro, the ICU is now not pegged to any currency including the Euro. If the Eurozone has a tendency to import more than export over a given period and its holding of ICU is substantially lower than its float, then the exchange rate must be adjusted down, i.e. the Euro devaluated against the ICU, in order to correct its trade imbalance. The European Central Bank and all other central banks have to adjust their exchange rates so that their ICU account comes back to somewhere near the float.

​

A few points to note:

#  In the past, governments and central banks have tinkered around with all kinds of measures to keep their exchange rate fixed. These measures included buying and selling currencies, and then borrowing them from other central banks if they ran out. With ICU, the reverse happens: the exchange rate is adjusted to maintain the same quantity of reserves in ICU. Unlike Bancor, no government or central bank has to urilise fiscal or monetary policies to maintain a trade balance. They can simply let private enterprise (the market) buy and sell as they wish, and adjust the exchange rate as needed.

​

#  Such an exchange rate is neither wholly a floating exchange rate, nor a fixed exchange rate. Currencies are devalued or revalued as the need arises.

​

#  The power to devalue/revalue each currency may be taken out of the hands of central banks and handed over to an ‘exchange rate management group’ of the ICU board. Working on a commonly agreed formula, the management group devalues or revalues a currency in proportion to its deviation from the float. So for instance, a 1% deviation will entail a certain measure of de/revaluation; a 2% deviation entails a stronger correction, etcetera.

​

#  If periodically it is seen that a country’s 30 day currency trade is considerably more or less than its ICU float, the float level can be adjusted. For example, country X has a float of 100 bn ICU but it now has an average 30 days trade of say 120 bn. Country X also currently has credits of 105 bn ICU, i.e. a 5 bn surplus. The float is adjusted to 120 bn ICU, and country X is also credited with its original surplus so that it now has total credits of 125 bn ICU.

​

#  Only central banks can have ICU credits. Private banks and individuals never hold it. ICUs can never be used for speculation or lending. ICUs can never be used for purchasing goods and services. ICUs can only be used to buy currencies

​

#  ICU would make the Bank of International Settlements (BIS) obsolete. The BIS has been seen by many, including this author, as “a private bank owned and controlled by the world’s central banks which were themselves private corporations”. [5] The ICU board would not have to make many important decisions of international importance, but if it did, voting rights would be allocated to nations proportionate to population, and not to financial and economic power. (The same principle of proportional voting should apply to the U.N.)

​

#  Exporters may choose to price their goods in their local currency; or they may choose to price in ICU even if they never receive any ICU in payment; or, if they want to provide a service to a potential customer, convert the ICU price again to the customer’s currency. (A real time posting can show the exchange rate between any two national currencies.)

​

#  A transaction tax can be collected on all ICU transactions. The tax will be collected in ICUs. Developing nations could get a pass on the ICU transaction tax on their currency. The tax can be spent on agencies like the U.N. or any international projects - after the ICUs are converted to the desired national currency. For example, U.N. staff will be paid in their own currency or any currency they choose. The funds to stop world poverty and reverse global warming are easily there for the global society if the transaction tax is set at 3%.The ICU Treasury, run as a truly international entity, will also have its own float to which the ICU tax goes. Broadly speaking, it will be spending as much money as it collects in taxes.

​

#  A 3% rate of transaction tax will prevent any remaining vestige of currency speculation. One would have to anticipate a greater than 3% change in a currency’s value to bother thinking about buying a currency on speculation (6% if a round trip is considered).

 

 

 

Notes

 

[1]      The Centre for Research on Globalization has a number of articles on this topic. Try:

http://www.globalresearch.ca/the-gold-dinar-saving-the-world-economy-from-gaddafi/24639

 

[2]     At 0.1% round trip (where a currency is purchased and then resold back to the original currency) equates to a 0.2% tax. If interest rates stand at 4%, 0.2% equates to over 18 days of interest. The high turnover of currencies in the speculative currency trade cannot tolerate these kinds of losses. Tobin’s original off-the-cuff suggestion of 0.5% tax rate would equate to three months’ worth of interest foregone. See endnote 3.

 

[3]      A Tobin Tax of only 0.1% would raise, it has been calculated, something over $50 billion a year in revenue - even assuming that the number of current foreign exchange transactions fell by half, that 20% were exempt and that another 20% of the tax was evaded. This is over double the total now spent on stabilisation programmes, development and humanitarian aid, peace-keeping operations and other activities by the UN and its agencies. – From a paper issued by the European Parliament, http://www.europarl.europa.eu/workingpapers/econ/107_en.htm

 

[4]      Based on digital technology, a new form of taxation, levied on bank transactions, was successfully used in Brazil from 1993 to 2007 and proved to be evasion-proof, more efficient and less costly than orthodox tax models. https://en.wikipedia.org/wiki/Tobin_tax#Is_there_an_optimum_Tobin_tax_rate.3F

 

 [5]     Dr. Carroll Quigley, from Tragedy and Hope: A History of the World in Our Time, The Macmillan Company, 1966. Dr. Quigley was Professor of History at Georgetown University, where he was President Bill Clinton’s mentor.  He was also an insider of a powerful clique he called “the international bankers”.