The Global Currency Plot

It is no coincidence that the century of total war coincided with the century of central banking.
– RON PAUL

Central banks have a long tradition of working together—and it usually happens unnoticed by the public.97 The most obvious form of cross-border cooperation today is certainly the Bank for International Settlements (BIS). It was founded in 1930—mainly at the insistence of the governor of the Bank of England, Montagu Norman (1871–1950), and the president of the German Reichsbank, Hjalmar Schacht (1877–1970)—with its headquarters in Basel, Switzerland. The tasks of the BIS were to settle German reparations payments after the First World War and to promote cooperation between central banks.

As the “bank of central banks” and because of its not always publicly visible activities, especially during the Second World War, the BIS has always been the subject of critical observations and questions, as well as many a conspiracy theory.98 This general skepticism toward the BIS is not unfounded. The history of central bank cooperation is undoubtedly shady. We only have to think of the granting of loans, which in the period of the “classical gold standard”—which can rightly be described as a phase of the “fake-” or “pseudo–gold standard”—occurred time and again between central banks.

Not only did the commercial banks issue more money by lending than they were able to redeem in gold, but the central banks did the same thing. It is no wonder that the markets have repeatedly expressed doubts that even the central banks were not in a position to fully redeem the money they spent in gold as promised. In order to prevent the cover on the whole fraud being blown, other central banks felt compelled to help out their central bank friends with loans in the event of a bank run; this was particularly pronounced, for example, in the time of the gold exchange standard in the late 1920s and early 1930s.99

It is therefore not surprising that the central banks—and the interest groups behind them—pushed for cooperation in times of the pseudo–gold standard. And so it is anything but astonishing that, in the age of fiat money, the urge of central banks to work together has not diminished, but has even increased,100 because the worldwide fiat money system which exists in the world, and for which the central banks with their money monopoly are responsible, has produced a very specific dynamic of its own.

The coexistence of many state fiat currencies represents a kind of inhibited competitive situation. Every money holder can more or less easily exchange his or her home currency for other currencies; for example, he or she can change euros into US dollars and then hold them with US banks as a time deposit or money market certificate. At the same time, however, the states are very effective in ensuring—above all by means of tax laws—that in their respective territories only their own fiat money is used for payments, not other money or money that other states issue.

In every currency system—whether in a free market for money or in a juxtaposition of state fiat currencies—sooner or later the desire for a single currency takes off. Even in a global economy, it is economically advantageous for as many people as possible to use the same currency. In this to date hampered competition between state fiat currencies, the “greenback” is still ahead: the US dollar is the currency of the world’s largest and most efficient economy; it is the currency of the largest and most liquid financial market.

This is primarily due to the internationalization of the banking business, which has taken place in recent decades under the dominance of the US dollar. The financing of trade and financial transactions across borders, time zones, and currency areas is preferably carried out in US dollars. Export and import-oriented companies are also more dependent than ever on the US dollar. This is a reason why the Fed’s monetary policy has a decisive influence on interest rates and liquidity conditions in the global financial markets.

In addition, the US dollar is the number one international reserve currency. In many other currency areas, the greenback serves as “base money.” Whether the euro, Japanese yen, Chinese renminbi, Swiss franc, or British pound, all currencies today are more or less based on the US dollar. The US dollar and US government and bank debt denominated in US dollars are the most important foreign currency positions almost everywhere.

It is above all the banking business that is working in a special way toward a globally unified monetary policy and is thus preparing the ground for a single global currency. Banks are known to operate with a fractional reserve. This means that they hold only a very small fraction of their payment obligations to their customers, due at any time, in the form of central bank money.101 In the worst-case scenario, they would not be able to fully meet their customers’ disbursement requirements. In view of such latent illiquidity, banks are indeed vulnerable to loss of confidence.

This is particularly explosive in an increasingly internationalized financial world. After all, banks finance themselves not only in domestic currency, but also in foreign currencies. For example, euro banks need not only euros but also US dollars for their operations. Problems in a bank or problems in a currency area therefore have a rapid impact on the global banking system. The “contagion effects” therefore prompt the national central banks to coordinate particularly closely with each other and to act in unison, particularly in times of crisis.

This was unmistakably evident in the financial and economic crisis that began in 2007. As early as December 2007, the US Federal Reserve concluded a liquidity swap agreement in US dollars. In the course of a liquidity swap, for example, the Fed lends US dollar balances to the ECB. The ECB can lend the received US dollar balances to its domestic banks, which are no longer receiving US dollars on the credit markets. Consequently, by means of liquidity swap agreements, central banks are in a position to prevent payment defaults by banks engaged in the international market for foreign currency loans.102

CREATING MONEY OUT OF NOTHING WITH MONEY OUT OF NOTHING

Let us assume that euro banks have taken up debt in US dollars in order to be able to grant a loan in US dollars. Now the loans taken out by the banks are due. The banks have prepared themselves to refinance their maturing loans with new loans. But unexpectedly, a crisis breaks out and the banks find no more investors to lend them new US dollars. The banks thus run the risk of becoming insolvent. The ECB can provide the banks with unlimited amounts of euros, but not US dollars. However, if the ECB has access to a liquidity swap agreement with the US Federal Reserve, it is in a position to avert the insolvency of the euro banks in US dollars: The Fed lends the ECB the desired US dollar amount, and the ECB lends the greenbacks to the euro banks. A simple example can illustrate this.

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(1) The ECB “draws” its swap line as granted to it by the Fed. This means that it sells to the Fed a euro amount (e.g., €100 billion), which it creates “out of nothing,” at the given EUR/USD exchange rate (e.g., 1.00). In return it receives a corresponding US dollar amount (in this case $100 billion), which the Fed also creates “out of nothing.” (2) The ECB undertakes to repurchase the €100 billion in the future (say, in three months) at the unchanged exchange rate.

An exchange rate risk is thus excluded. The ECB lends the US dollars to the banks on terms (interest rate, collateral, maturity, etc.) which it can determine itself. Consequently, the ECB, or the euro taxpayer, is liable to the Fed for the US dollar amount it has lent to the euro banks. The ECB and the euro taxpayers become debtors of the Fed. At the end of the liquidity swap, the ECB also pays the Fed the interest income it has earned from lending US dollars to the banks. The Fed does not pay interest on the euro amount it has received from the ECB. The Fed undertakes not to invest the euro amount and to hold it in a current account with the ECB. Economically, the liquidity swap agreement is a money creation out of nothing, based on money created out of nothing.

The liquidity swap agreements reveal the cartelization of the central banks, which de facto enforces the maintenance of the fiat money system. As a reminder, a cartel forms at the national level between central banks and domestic commercial banks. In this way, commercial banks are enabled—with the express approval of the state—to create money out of nothing by granting loans. The domestic central bank holds its protective hand over the financial institutions that operate with a fractional reserve and serves the banks as lender of last resort, thus ensuring that the systemically relevant banks in particular remain solvent at all times.

At the international level, a similar cartel of national central banks emerges. The fiat money system not only causes crises at the national, but also at the international level: the increasing trade and capital links between the national economies are ultimately financed with national fiat funds. And because economies are increasingly interdependent, especially through bank-financed credit links, national central banks must also be increasingly willing to help each other protect themselves: defaults at the national level can all too quickly trigger defaults at the international level.

This protection assistance not only involves the case-by-case coordination of policy measures between central banks. Under the heading of technical central bank cooperation, it has long since taken on a systematic, permanent character. The central banks maintain broad-based training and experience platforms with which the central bank staff in the various currency areas can be brought into line with each other in terms of expertise and, above all, monetary policy. This strengthens the ability and willingness of central banks to extend their cooperation; it facilitates cartel formation and makes cartelization into something natural.

But even the closest monetary policy cooperation between the central banks remains far behind the (monetary) political influence and control possibilities that a global central bank with its own single global currency would offer. Monetary cooperation between still sovereign states, based on voluntarism, is a fragile and unreliable affair. Let us recall the example of the liquidity swap agreements. The Fed takes a credit risk here when lending US dollars to the ECB: the ECB might not be able to repay the loan amount. The US Federal Reserve therefore holds the US taxpayers liable. It is they who must answer for the Fed’s losses.

As long as the national central banks only have a mandate to conduct monetary policy for the domestic economy, there is a possibility that international rescue operations such as liquidity swap agreements could come under public criticism. Angry citizens and those elected by them are against subsidizing foreign banks. The central bank councils could counter this by saying that liquidity swaps, which supply foreign banks with domestic currency, would help fend off an even greater crisis, which would then also affect the domestic economy. But what if the electorate cannot be convinced?

There is no doubt that it will be difficult at this stage to politically convince voters in the various countries of the world to exchange their own currency for a supranational currency. This statement may apply in “normal times,” but not necessarily in “times of crisis.” In times of crisis, the scope for political leeway and action grows immensely. Financial and economic crises in particular have repeatedly proved to be a particularly fertile breeding ground for popularizing the idea of a world currency. As early as the 1930s, Fritz Machlup (1902–1983) wrote: “In times when the procurement of foreign means of payment is associated with difficulties, many businesspeople, who value highly the advantage of a foreign trade that is as unimpeded as possible, repeatedly raise the question of why a single world currency has not yet been introduced.”103

The compelling solution for the democratic socialists is to merge the many national fiat funds into a single fiat world currency, which is then controlled by an all-powerful world central bank: in this way, a global fiat money system can be established with the greatest possible stability—a money system that can be perfectly controlled by the state, that exploits the inflationary potential for state financing to the greatest possible extent, and that contains the financial and economic crises that it inevitably causes in the best possible way. Is it, then, surprising that a whole series of concrete proposals have already been made on how to create a (fiat) world currency? Some of these proposals are presented in the following chapter.

• 97An overview is provided by Gianni Toniolo and Claudio Borio, “One Hundred and Thirty Years of Central Bank Cooperation: A BIS Perspective” (BIS Working Paper No. 197, Feb. 24, 2006). One example is the Deutsche Golddiscontbank, which was founded in 1924 to promote German foreign trade and generate the necessary foreign exchange. This became possible because the Bank of England, at the request of the Reichsbank, was prepared to grant pound sterling loans to the new bank. See Andrew Boyle, Montagu Norman: A Biography (New York: Weybright and Talley, 1967), pp. 172–73.
• 98For example, see Adam LeBor, Tower of Basel: The Shadowy History of the Secret Bank That Runs the World (New York: Public Affairs, 2014).
• 99 On the role of the Bank of England during this period, see Paul Einzig, Montagu Norman: A Study in Financial Statesmanship (London: K. Paul, Trench, Trubner, 1932), chap. 6.
• 100On this topic, see Toniolo, “One Hundred and Thirty Years of Central Bank Cooperation: A BIS Perspective,” table 2, p. 4.
• 101In March 2019, for example, the euro banks’ sight liabilities, which are due at any time, amounted to €7,281 trillion. However, the balances held by the euro banks at the ECB—which could be exchanged for cash—amounted to only €1,972 trillion.
• 102Further central banks were subsequently included in the scope of the US dollar liquidity swap agreement: the Reserve Bank of Australia, Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the Bank of Japan, the Bank of Korea, Banco de Mexico, the Reserve Bank of New Zealand, Norges Bank, the Monetary Authority of Singapore, and Sveriges Riksbank. In November 2011, the Fed also entered into foreign currency liquidity swap agreements with the Bank of Canada, the Bank of England, the Bank of Japan, the European Central Bank, and the Swiss National Bank. This ensured that US banks had easy access to foreign currencies. On October 31, 2013, a brief press release was issued on the subject: the central banks announced that they had converted their existing liquidity swap agreements, which had previously been limited in time, into open-ended agreements.
• 103Machlup, Führer durch die Krisenpolitik, p. 160.