The Free Market 6, no. 10 (October 1988)
International statists have long dreamed of a world currency and a world central bank. Now it looks as if their dream may come true.
European governments have targeted 1992 for abolishing individual European currencies and replacing them with the European Currency Unit, the ECU. Next they plan to set up a European central bank. The next step is the merger of the Federal Reserve, the European central bank, and the Bank of Japan into one world central bank.
The ECU is a basket of ten European currencies weighted according to their respective country’s economic strength. The German mark gets the highest weight while the Irish pound, the Danish krone, and the Greek drachma get lower. The ECU doesn’t qualify as a working currency yet, but it is already being used by international banks and multinational corporations. And traveler’s checks denominated in ECU’s are also popular in Europe.
The ECU first appeared in 1979. Its creators quickly found that its usefulness was limited without a clearing system, so Credit Lyonnais of Paris and Morgan Guaranty Bank of New York formed the ECU Banking Association, made up of top central bankers and government officials. In March 1986 they set up the European Investment Bank and SWIFT (the Society for Worldwide Interbank Financial Telecommunications) to process ECU transactions. Within a few months, all major central banks had signed on, and today, ECU transactions represent the fifth largest trading volume in international currency markets.
The big push for the European central bank began after the October 1987 stock market crash as politicians seized the moment of crisis to advance their agenda. “The logic of developments... demand that the European currency takes over from the national ones,” argued socialist French President Francois Mitterrand.
In November 1987, European politicians, businessmen, and bankers formed the Action Committee for Europe to promote the European central bank, arguing that Europe needs one currency and “a common authority to manage it.”
The European central bank (ECB) will be modeled after the Federal Reserve. Like the Fed in 1913, it will have the institutional appearance of decentralization, but also like the Fed it will be run by a cartel of big bankers in collusion with politicians at the expense of the public.
Margaret Thatcher is the only influential holdout in Europe. And she objects because she thinks the influence of Germany’s central bank will allow less inflation than she wants! But like all central banks, the ECB is designed to inflate. And it will have a particularly free hand. With twelve separate currencies, exchange rate fluctuations allow people to sell more inflationary currencies for the stronger ones, providing some constraint on inflation. That will no longer be the case with the Ecu.
The head of the European Monetary System, former French President Valery Giscard d’Estaing, says Thatcher will join when the ECU becomes “a real currency.” However, no government or group of governments can create a currency out of thin air. They must pay attention to the economic laws that Ludwig von Mises proved with his “regression theorem,” namely, that currencies must originate in the free market. But unlike the International Monetary Funds Special Drawing Rights (SDRs), European governments did not create the ECU out of nothing. It is composed of existing currencies which in turn had their origins in gold and silver.
The plan for the transition has central banks fixing the trading range of the ECU relative to. other currencies while allowing them to freely circulate side by side. Then governments will overvalue the ECU relative to other European currencies, and people will sell their pounds, lira, and marks for the ECU, putting into effect a kind of backwards Gresham’s Law.
“There is one hitch,” says Forbes magazine. “Although currencies that make up the ECU maintain a balance relative to one another, the entire currency basket fluctuates against the dollar, so cashing in ECU’s for dollars could result in a gain or a loss.”
One of the few constraints now operating on the Fed is that if it inflates too much, people will dump the dollar for a more stable currency. That’s why there is a push to achieve international monetary “stability” (that is, equal rates of inflation) by cartelizing what will then be three remaining central banks of the indutrialized world into one world central bank charged with manipulating one world currency.
The Economist of London says that “Thirty years from now, Americans, Japanese, Europeans, and people in many other rich countries” will be “paying for their shopping with the same currency. Prices will be quoted not in dollars, yen, or D-marks” but in terms of a new world currency.
Central banking is a horrendous idea to begin with. Merging central banks will be even worse. The resulting institution would become, as Dr. Edwin Vieira has remarked, “the biggest agent of economic and political irresponsibility the world has ever seen.” Today, if the u.s. Congress has a sudden fit of economic sanity, it could restrict the Fed’s power. The mere threat of that serves as a limit. But the world central bank would be subject to no authority.
The world central bank might be based on the International Monetary Fund or the World Bank, says the Economist. But I think the more likely candidate is the Bank for International Settlements (BIS), the “central banker’s bank” in Basle, Switzerland. World central bankers have been holding “consultative meetings” there once a month for over a year. Recently, the meetings have concentrated on giving the BIS “lender of last resort functions and responsibilities. “ That means the power to create money and credit out of thin air.
They all want, as Banker magazine noted, “a world in which national policy authority is greatly reduced, and replaced by more powerful international policy-making bodies.”
Finance Minister Edouard Balladur of France writes in the Wall Street Journal that we should “entrust a small group of distinguished people of unquestionable moral authority” with the job of designing “a world order” that is “binding on all.” But such an elitist idea would only produce a monster. That is why those of us who believe in individual liberty and free markets must actively oppose this plan, despite the proponents’ use of free-market rhetoric. (One free-market publication praised the Ecu as “an extension of Hayek’s work on competitive currency.”)
None of this is to say that I approve of the status quo. The world monetary system is shaky. The system of floating exchange rates between fiat currencies only adds to the volatility. And we do need more international cooperation. But we want economic integration without political integration.
We all know the troubles we have dealing with city hall, let alone the state house or Washington, D.C. A world system would be unimaginably worse. Internationally as well as domestically, the answers to economic problems are free markets, free trade, free labor, and a gold standard. All would build the only kind of world economic order consistent with sound economics and individual freedom.
