Pushing for a World Currency
by Llewellyn H. Rockwell, Jr.
Pick up a college text on sociology nowadays, and chances are it will promote collectivism, just as a text on psychology or religion will attack Christianity, and a text on labor economics will promote unions. So it is with international monetary economics. Pick up a graduate text on the subject, and chances are it will promote a world paper currency and a world central bank.
Why is this? First, economists -- with the exception of those of the Austrian School -- have failed to consider the great moral hazard of allowing government to print money. Second, a world currency has been a longtime goal of the international planning elites. In the monetary wars of the 20th century, one side has consisted of the world planners and their allies in central banking. On the other side have been the millions of people in finance and business making voluntary, purposeful decisions in the market economy. Working in tandem with nationalist sentiments, the market has foiled even the most carefully laid plans for a global currency.
In economics, one-world advocates seek international government agencies to manage the value of currencies in relation to each other, to inflate, to regulate international trade, and to control individual industries and consumer goods and services.
Keynes' Blueprint
To understand the background to the economics of the new world order, we must return to a conference that took place half a century ago. As the Second World War was winding down, the architects of the post-war international system gathered at the Bretton Woods Hotel in New Hampshire. The date was July 1, 1944. The ideology of comprehensive planning was all the rage in academia. The apparent success of wartime planning inspired U.S. intellectuals to hope that such planning could extend into peacetime, and be done on a global scale.
Three main goals animated the Bretton Woods conference: 1) the creation of a manageable system of exchange rates and international payments; 2) the establishment of an authority to govern international trade; and 3) the creation of a global central bank to coordinate worldwide inflation and to serve as a source of liquidity during any future monetary crisis. It would also issue the world money.
Economist John Maynard Keynes enjoyed the greatest influence at the Bretton Woods conference. His preparations began as early as 1941, when he circulated his blueprint for a world central bank. His second draft in 1942 also called for a new international money, which he called "bancor."
Of this proposed currency, Keynes wrote in a memo during the conference:
We need an instrument of international currency having general acceptability between nations ... that is to say, an instrument of currency used by each nation in its transactions with other nations ....
Keynes argued that the value of the currency ought not to be determined "in an unpredictable and irrelevant manner as, for example, by the technical progress of the gold industry .... "His proposal was for a "Currency Union ... based on international bank-money, called bancor, fixed (but not unalterably) in terms of gold and accepted as the equivalent of gold by the British Commonwealth and the United States...."
American Position
The official U.S. position at the conference was in favor of a scheme to allow the U.S. to inflate domestically and export its inflation to the rest of the world. The U.S. plan was presented by Assistant Secretary of the Treasury Harry Dexter White, whom President Truman later picked to become the first head of the International Monetary Fund. (It came out shortly before his death in 1948 that White was also an agent of the Communist Party.)
Britain and the U.S. battled it out at Bretton Woods over which plan would prevail, Keynes' or White's. In the end the U.S. prevailed, partly because of the sentiment of the American people at the time. Despite New Deal propaganda, war propaganda, and the fashionable anti-capitalism of the intellectual class, the American people were wedded to their own institutions and had no inclination toward world government. The British public, long acclimated to empire, might have gone along with a world currency and a world central bank. Americans still had a little of the old isolationism left in their bones.
To dispel the rumors that the meeting at Bretton Woods was designed to create a world government, Roosevelt had to reassure Congress. "It is time for the United States to take the lead in establishing the principle of economic cooperation," he offered. "We propose to do this, not by setting up a supergovernment, but by international negotiation and agreement. It does not create a single money for the world. Neither we or anyone else is ready to do that," Franklin lied.
One of the outcomes of Bretton Woods was the setting of the price of gold at $35 per ounce -- that is, defining the U.S. dollar as 1/35th of an ounce of gold, and pegging the rest of the world's currencies to the dollar. Because other countries would be pyramiding on top of the U.S. dollar, it would be in constant demand as a world reserve currency, allowing the U.S. to turn up the printing presses with relatively little effect in the home market.
But under this "gold exchange standard," didn't we need to worry about huge dollar balances therefore stacking up abroad? The Keynesians assured us that these dollars would never be cashed in for gold. But they were wrong, and the system was officially abolished on August 15, 1971, when President Nixon "closed the gold window," i.e. ceased exchanging one ounce of gold for 35 paper dollars.
Though internationalist plans did not come to full fruition at Bretton Woods, we got inflation and the destruction of the dollar at the hands of a mixed up system of international exchange. By 1971, many industrialized nations would no longer accept U.S. dictation of global macroeconomic policies. They were unwilling to accept the level of domestic inflation necessary to maintain a fix against the rapidly depreciating dollar.
Most of the blame for ending the remnants of the gold standard has gone to Richard Nixon and his Treasury Secretary, John Connally, and they certainly deserve blame. But the real villains were Keynes, Harry Dexter White, and the Bretton Woods bunch. They had set up a system that couldn't last, especially with the inflation that Lyndon Johnson engaged in to finance the Vietnam War and the Great Society.
Monsters Survive
Surviving Bretton Woods to the present, however, are the monstrous bureaucracies of the International Monetary Fund (IMF) and the World Bank. From the outset, the stated purpose of the IMF was inflation and global wealth redistribution. It was also supposed to promote the Keynesian goal of "full employment," as well as to manage international currency relations, preparatory to becoming -- along with the World Bank -- the sort of institution of which Keynes dreamed.
To the eternal disgrace of the economics profession, 90 percent of economists polled by the American Economic Review favored the Bretton Woods system. A major exception was Henry Hazlitt, who even sacrificed his prestigious position as an editorial writer for the New York Times for the sake of hard money. In 1944, Hazlitt wrote, "I found myself almost alone, particularly in the journalistic world, in calling attention to" the grave defects of Bretton Woods. He later wrote that his one regret was not making his editorials tougher.
The IMF was supposed to rectify so-called "balance of payments" problems, Hazlitt said. But he pointed out that such problems are usually the result of domestic disorder. A country may be pegging its currency too high, and thus making imports too cheap. It may be holding up wages through unionism or the minimum wage. It may be imposing mandated benefits. It may be over-taxing corporations and individuals, redistributing income, or following other anti-capitalistic programs. What is not needed is a supergovernmental organization designed to give out foreign aid to balance trade. That only subsidizes bad economic policies.
The IMF remained a subsidized lending institution for about 25 years, wasting billions of dollars and promoting statism. All the while, various attempts were made to make the IMF the foundation of a world central bank. That was the advice of the Rockefeller-financed Commission on Money and Credit in its 1961 report. The U.S., said the Commission, should turn over a percentage of its reserves to the IMF, which in turn would provide banking services. Every industrial country would participate and eventually a world central bank would be created.
New Money Attempt
The Commission assured skeptics that such a plan was technically feasible, and perhaps it was. But like other attempts, it foundered. The year 1968 was another watershed for new world money. The monetary elites attempted to resurrect Keynes' original proposal for an international money. This time, learning from history, they bypassed all disputes over names. Instead they chose to give the new currency a technical and purely descriptive designation: Special Drawing Rights (SDR).
The SDR was made the official unit of account for the IMF, and was designed, in the words of an IMF statement, to "become the principle asset of the international monetary system." When President Johnson signed the U.S. Special Drawing Rights Act in 1968, he was appropriately millennial: "For the first time in the world's financial history, nations will be able to create international reserves by deliberate and joint decision -- and in amounts needed to support sound growth in world trade and payments."
Many economists predicted that the SDR would replace gold as the foundation of the world's money system. We would live under the glories of a single world currency. But as the years went by, other than wasting lots of taxpayer money and creating a convoluted accounting system, the SDR amounted to nothing. The reason this happened should be obvious to anyone familiar with the works of Austrian economist Ludwig von Mises; von Mises explained that money must be a commodity, or originally based on one. The SDR was based on nothing more than wishful bureaucratic imagination. The IMF created money and declared: "let there be value." But no one took them seriously.
When the gold exchange standard collapsed, most mainstream commentators -- including those who favored going off the gold standard--predicted that the gold price would fall. Henry Reuss, chairman of the House Banking Committee, said Bretton Woods had artificially propped up the price of gold at $35, and it would fall to $6. To the shock of all these experts the price of gold went through the roof. Gold became an inflation hedge for every investor in the world. It became an alternative money in itself.
One Europe Currency
In the 1980s came yet another attempt to create a world currency, this time through the back door. Burned by the SDR, world financial elites realized it would be much easier to create a world currency out of pre-existing monies. They sought to create a European currency that would combine with the U.S dollar and the Japanese yen in a new Trilateral money. Bringing this plan about was a major preoccupation of the Reagan Treasury Department.
But not even the first stage of this plan worked. Europe's currencies were never united into a single unit, and without that building block, the world currency can never come about. The European Currency Unit, or Ecu, was a composite of 12 European currencies designed to function as a single money, which was supposed to happen through an eventual fixing of exchange rates among currencies. European governments and multinational corporations issued bonds denominated in the Ecu, and American Express even had an Ecu credit card. But the made-up money never caught on at the consumer level. And rather than becoming increasingly fixed, Europe's currencies continued to float wildly, thanks to differing rates of inflation, and the prospects for the Ecu were doomed.
The so-called Exchange Rate Mechanism of the European Community was an ambitious attempt to override market preferences. In this scheme, central banks were to adopt monetary policies that would keep their currencies within prescribed limits or "bands." But when France and Italy, for example, had looser money than Germany, the system proved untenable. Speculators and German discipline were blamed, but it was a great victory for market forces and nationalism over government planning.
The end of the European Monetary System was a devastating setback for the new world order money crowd. There was no European currency or European central bank to unite with the dollar and the Fed, and the yen and the Bank of Japan.
Chaotic World Economy
Today we find ourselves back to some extent in the old world order. And since the U.S. went off the gold standard, the results have been chaotic, in balances of payments, debts, inflation, wild price swings, volatility in the stock market, and decline in the standard of living. We have created a world economy with chaotic exchange rates and monetary policies that are more confused than ever.
This confusion and instability continue to help drive the demand for a single world currency. And indeed, it would be much better if everyone did use the same base currency. But that currency should be gold. That is the way the world worked in the 19th century. Every country had its own individual currency, of course, but if that country wanted to be part of the international division of labor, it had to define its currency in terms of gold. There were no fluctuating exchange rates to reintroduce elements of barter into the system. One ounce of French gold equaled one ounce of American gold equaled one ounce of Russian gold.
If such a real international gold standard existed today, the market for currencies as we know it would no longer exist, since the present currency market is a creation of fiat paper money. More than 20 years after the dollar's link to gold was cut, gold still remains the world's most important reserve currency, with every central bank in the world owning some. The price of gold is still, generally speaking, moving in the opposite direction of paper.
But the dream of a world currency refuses to die.
As proof, consider the example of the International Trade Organization. Going back to the early post-war days, the Council on Foreign Relations campaigned hard for the creation of a world system to govern international trade. The mechanism one hears of most often in connection with this is the General Agreement on Tariffs and Trade (GATT), created in 1947. In fact, GATT was the fall-back position of the Bretton Woods elites.
The creation of GATT was a disappointment for the Establishment. What they actually wanted was to resurrect Woodrow Wilson's idea of an international trade tribunal as part of a League of Nations. The 1940s' version was to be the International Trade Organization (ITO). Its charter appeared long before anyone had heard of GATT.
ITO was yet another Keynesian monster, endorsing fiscal planning, and enshrining the ideal of full-employment monetary policies (which means inflation) and global planning for all trade. And it was slain. There were two major sources of opposition: the small business class and the free-market theorists of the Austrian School.
Defeating the New World Order
Just as this free-market coalition defeated ITO, it can effectively oppose ITO's '90s incarnation, the World Trade Organization (WTO). Global planners are attempting to recover through the WTO what was lost in 1947 when the Senate refused to ratify the ITO. They are attempting to create what they have always wanted: an international body empowered to manage the daily affairs of international trade, complete with a labor and environment charter.
Consider the words of C.R. Neu, a RAND Corporation economist, who writes in his book, A New Bretton Woods: "The end of the Cold War and the collapse of the Soviet bloc have provided an impetus for a general reconsideration of all international relations -- political, military, and economic. We are at a crossroads not entirely unlike the one perceived by the Bretton Woods conferees. Confronted with a new world, we have a chance to shape a new system of international economic institutions as part of a new system of general international relations -- as part of a new world order."
Besides the WTO, the most imminent threat we face is that of fixed exchange rates. So long as we have a fiat dollar, any attempt to fix exchange rates will be a dangerous undertaking. If currencies were linked to each other, individual central banks would no longer pay a price for inflation. Like price setters in a cartel, they could command almost any price for currency. Money is the most highly valued good in the economy. No matter how inflated the currency, there is no where else for people to turn. People still used the German mark in the 1920s even when they had to carry wheelbarrows full of it to the market.
What about the monetarist proposal of floating rates of exchange between currencies of the world? We should always remember that the monetarists are inflationists too. That is why they do not represent an effective challenge to the push for a world central bank. Ultimately, they too have to grant that a world central bank is the key to seeing their policy prescriptions imposed.
It is important to realize that, in both policy and academic debates, there is no dispute among members of the Establishment about what is needed. As Neu writes, "Both proponents and opponents of formally fixed exchange rates would agree that some international institutions, arrangement, or forum for fostering international macroeconomic coordination or cooperation would be useful. They may disagree on the nature, the extent, the specificity, and the targets of this coordination or cooperation, but there is consensus that there really is an international public good here that cannot be obtained solely through unilateral national actions."
The IMF was supposed to fill such a role. It did not. Instead, it became an international credit-rating agency for the Third World, a manager of capital flows, and a purveyor of bad advice to formerly socialist economies.
But there has been no slackening of the effort that brought the negotiators together at that original Bretton Woods conference. The campaign continues to create a world central bank, a world reserve currency, a world trade authority, and a world regulator of finance and industry. All that stands in the way of global planners is political and economic reality. The public will resist efforts to subvert national sovereignty, and the economy will resist control from above.
Economist Charles P. Kindleberger of MIT has been a longtime advocate of international money. He says in his textbook International Money that a world central bank would be the extension of the principle of the Federal Reserve. Just "as the Federal Reserve Act of 1913 took monetary policy from the New York banks and transferred it to a national body, in which New York, along with Washington, had a powerful voice," he writes, "it is important now that rates of interest in the international capital market be determined internationally, on the basis of conditions in Europe and Japan, as well as in the USA. Instead of the Federal Open-Market Committee, which makes monetary policy for the USA, we need an Atlantic Open-Market Committee."
Kindleberger was a member of President Johnson's Advisory Committee on International Monetary Affairs, and has been pushing a world central bank for 40 years. Reflecting on his life and the failures of the designs for such banks, even he admits that "the basic dilemma, of course, is that the market, rather than the ivory-tower designs of monetary economies, shapes the monetary evolution of the world economy."
Crisis Point
May it be always so. In Kindleberger's view, the only way to overcome this "unfortunate" state of affairs is through a monetary crisis. He looks forward to such an event, hoping it will unite the central bankers and the treasury officials of the world to impose a world currency.
Conservatives and free market advocates have a different hope for the next monetary crisis: They hope people will recognize that the world cannot return to economic sanity so long as governments use the monetary system as a means of intervening in the market economy. That is why the IMF should be abolished, along with the Bank for International Settlements, the World Bank, the World Trade Organization, the Federal Reserve System, and every other engine of inflation and statism in the world.
Henry Hazlitt was once asked what kind of international conference he would have preferred after Bretton Woods. His answer: The heads of government would get together. They would swear to cut their expenditures, balance the budget, and restore the gold standard. Then they would toast world peace, go home, and keep their promises.
Mr. Rockwell is president of the Ludwig von Mises Institute, a free-market educational organization in Auburn, Alabama.
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