The Global Currency Plot

To get the full benefits of the monetary union, countries might want to have a currency reform that would make the national franc, or lira, or peso equivalent to one INTOR.
– ROBERT MUNDELL

The Bretton Woods system, which lasted from 1945 to 1973,104 was based on two proposals: the Keynes Plan and the White Plan (see chapter 16). Both had the goal of creating a single world currency for the period after the Second World War. It was obvious in the Keynes Plan. But the White Plan also tended in this direction. It is instructive to first familiarize oneself with these two proposals—especially with the question of how (from a purely technical point of view) a world currency could be established in the future.

In September 1941, the economist John Maynard Keynes submitted a proposal to the British Treasury to establish a currency union, which he called the International Clearing Union (ICU). According to the Keynes Plan, the ICU’s central task is to issue the international means of payment called bancor. The bancor is defined in gold. The currencies of the countries participating in the ICU are fixed against the bancor with a fixed parity. This creates a system of fixed exchange rates. Exchange rate adjustments vis-à-vis bancor are possible under certain conditions. Each participating country receives bancor credit by transferring its own gold reserves to the ICU. It is indeed possible for a country to obtain bancor against gold. But subsequently it cannot exchange the bancor received from the ICU back into gold. Seen in this light, the bancor is designed as a “mousetrap”: once you’re inside, you can’t get out.

The total bancor quantity that the ICU can dispose of is determined on the basis of the foreign trade of all participating countries. Keynes recommends the following formula for determining the initial bancor supply: the sum of a country’s exports and imports on average over the last three years before the outbreak of war. Under the Keynes Plan, participants grant each other book credits. For example, if country A achieves a trade surplus (i.e., exports exceed imports) over country B (which imports more than exports), the ICU grants country A a bancor credit, and country B a bancor loan. However, there is a limit on the overdraft on the bancor account: 25 percent of a country’s quota of the previous year.

In this way, the ICU enables international trade to continue even if the importing countries have to finance the goods on credit. The ICU acts de facto as a supranational central bank. It issues its own gold-backed currency, which can be used for international trade. Although countries with a trade surplus temporarily receive bancor credit balances with the ICU, countries with a trade deficit are granted bancor loans. However, the ICU should ensure that there are no countries with trade surpluses or deficits in the long term. The Keynes Plan essentially aims to remove the dependence of international trade on the gold standard—so that countries with little gold (such as the UK) are not forced to restore their international competitiveness through falling commodity prices (deflation).

Unlike the Keynes Plan, the White Plan does not seek to establish a de facto supranational central bank that issues its own book money and grants credit and loans to countries. Rather, it provides for the creation of a fund to which the member states make payments according to their quota before they can draw on loans to finance balance of payments problems. The quota of a country is determined by gold and foreign exchange reserves, national income and foreign trade volume. Fifty percent of this quota must be paid in gold (12.5 percent), national currency (12.5 percent), and debt securities (25 percent).

Under the White Plan, the credit balances of the participating countries are reported in a uniform unit of account called unitas (1 unitas equates to 8.88687 grams of fine gold and thus 10 US dollars). The fund determines the parities of the national exchange rates with unitas. This results in fixed exchange rates. Their changes are only allowed in the case of fundamental external imbalances. In contrast to the Keynes Plan, the White Plan does not formally provide for an expansion of international liquidity. On the contrary, a country can only receive payment from the fund to finance balance-of-payments deficits in accordance with its quota.

The ideas of the White Plan prevailed in the Bretton Woods system. But they were not enough to create a single world currency. When the system failed and ended in the early 1970s, a worldwide monetary system followed that had never existed in monetary history before: all the world’s major currencies are unbacked paper money whose exchange rates fluctuate more or less freely among themselves. This has repeatedly prompted the critique from many (mainstream) economists that such a global currency system would be detrimental to the increase in prosperity. Why is that?

Freely floating nominal exchange rates do not necessarily ensure that the correct real exchange rate is always achieved. Fluctuations in exchange rates may disturb the balance between economies, to the extent that it is determined by different price levels. The reason: in the short term, exchange ratios between the national currencies usually change faster and more strongly than the prices of goods and wages. If this is the case, the global division of labor will be disrupted, as it will no longer be ensured that international production takes place where it can be done at the lowest cost.

DETERMINING THE CORRECT EXCHANGE RATE

The purchasing power parity theory is often used to explain the exchange rate between two currencies. It states that the prices of the same good in different currencies must be equal to each other. Consider this equation:

P = P* / W

P (P*) is the price of the goods in domestic currency (foreign currency). W is the nominal exchange rate, expressed as the price of the domestic currency in units of the foreign currency (as is usual, for example, for euro rates). A nominal appreciation (depreciation) of the domestic currency is reflected in an appreciation (depreciation) of W.

If the nominal exchange rate between home and abroad is fixed once and for all at, for example, W = 1, then the prices of goods must be equal to each other: P = P*.

In addition to the nominal exchange rate, there is also a real exchange rate (R). It results from this equation:

R = W × (P / P*)

Let us assume that P = 100 and P* = 200. For R to be 1 (i.e., the purchasing power parity applies), W must be 2. And let us assume that domestic inflation rises so that P = 120. For the purchasing power parity to continue to apply, the exchange rate of the domestic currency must devalue against the foreign currency, in this case to W = 1.67.

The economic criticism of fluctuating exchange rates cannot be dismissed—and democratic socialism with its claim to worldwide validity knows how to make use of it. The demand that it derives from its criticism is that we should create a single world currency under the sovereignty of the international community. The financial and economic crises that have become increasingly severe in recent years are grist for the mills of this proposal. The creation of a single world currency is being expedited on the grounds that the international coordination of monetary policies must be promoted and intensified in order to effectively prevent new crises. Many plans have already been drafted for the implementation of the project.

The American economist Richard N. Cooper (b. 1934) published the essay “A Monetary System for the Future” in 1984, which received great attention. Cooper argues that the global division of labor will intensify in the future—especially through technical innovations—and that for this reason changes in real exchange rates could disrupt global production and employment to a particularly large extent. This is why he calls for an exchange rate system that ensures reliable fixed exchange rates—which is the case when only one currency is used worldwide.

Cooper argues that nation-states should give up their monetary sovereignty and transfer it to a global central bank, the Global Bank of Issue, which should be responsible for global monetary policy. Monetary policy decisions would be made by a governing board in which the states are represented by their finance ministers (according to their economic weight in world production). The World Central Bank would produce its own money by buying (monetizing) debt securities of member states and/or by discounting, in the course of open market operations, acceptable debt securities offered to it on the initiative of commercial banks.

The single world currency issued by the World Central Bank could be created from any already established unbacked paper currency. Cooper sees the US dollar as the natural candidate. But the world currency could also be an artificial (synthetic) unit (such as the IMF’s special drawing right) to which the public would have to become accustomed (as it once became accustomed to a metric number system). What is decisive for Cooper is that the world currency would no longer be in the hands of the national governments, but in the hands of a supranational institution.

At the time his proposal was published, Cooper himself described his idea of world currency as “too radical” to be implemented in the near future. It would have been necessary to implement it over a period of twenty-five years (that would have been by 2010 at the latest) to prevent a relapse into a state of global trade and capital movement barriers. However, Cooper identifies two major problems in trying to create a single world currency. First, not all countries in the world would have been able to participate because of the existence of the Iron Curtain at the time. And second, (acceptance) problems could be expected in the developed economies if representatives of autocratic regimes were represented in the decision-making body of the World Central Bank.

In addition, Cooper sees the need to make the general population familiar with the plan to end national currency sovereignty and transfer it to a supranational authority. He sees an important step on the way to a single world currency in the formation of a (leading) group of countries—the US, Canada, Japan, and the European states—which are initially to begin to reduce the exchange rate fluctuations of their currencies.

If N countries in the group N-1 stabilize exchange rates, there is a remaining degree of freedom: a currency can then serve as an anchor that determines the money supply in the group as a whole. But which currency should be the anchor. If it is a fiat currency (such as the US dollar), the welfare of all other currencies depends on this anchor fiat currency. The United States, as the undisputed leading-currency country, did not adhere to the rules of the Bretton Woods system, and abused it for its own purposes in an inflationary manner, which led to the failure of this currency arrangement in the early 1970s.

With his proposal, Cooper did not really break new ground, and basically did not go beyond the legacy of the Bretton Woods system—although he also saw the option of creating the world currency as unbacked paper money as a possible solution. The other is a proposal for the creation of a single world currency by the Canadian economist Robert Mundell (b. 1932). Like Cooper, Mundell, who was awarded the Nobel Prize for Economics in 1999, takes into account the fact that fluctuating exchange rates disrupt the international division of labor. The constant ups and downs on the foreign exchange markets do not ensure that the exchange rates are always the right ones in real terms: a system of fluctuating exchange rates is not optimal; a system of fixed exchange rates, especially in the form of a single world currency, is preferable.

In order to achieve the global currency, Mundell proposes to first stabilize the exchange rates between the world’s major currencies—the US dollar, the euro, the Japanese yen, the British pound, and possibly also the Chinese renminbi. To this end, monetary policymakers in these currency areas should agree to keep inflation low. Then there were to be agreed bandwidths within which exchange rates could fluctuate. When exchange rates reached the upper or lower bounds, central banks would have to intervene in the foreign exchange markets to maintain exchange rates. This would reduce fluctuations in real exchange rates.

Of course, Mundell recognizes that such a system of fixed exchange rates is vulnerable because some participants have the incentive and the option of leaving. An example should illustrate this. Suppose the Fed and the ECB set a 1:1 exchange rate between the US dollar and the euro. Then the ECB begins to pursue an inflation policy. The euro becomes less attractive to investors. As a result, they increasingly offer euros on the foreign exchange market and demand US dollars. The US dollar begins to appreciate against the euro.

In order to keep the exchange rate at 1:1, the ECB must buy euros on the foreign exchange market and sell US dollars. This will reduce the euro money supply and domestic inflation. The Fed must buy euros against issuance of new US dollars, thereby increasing its domestic money supply and thus its domestic inflation. This in turn lowers the relative attractiveness of the US dollar, and the exchange rate moves back to the agreed ratio of 1:1. As a result, the fixed exchange rate is maintained, but only because the Fed is willing to participate in part in the ECB’s inflation policy.

Such a system of fixed exchange rates, participation in which is voluntary and which allows a participant to leave it again, cannot be sustained if the participants want to pursue different inflation policies or different monetary policy objectives concurrently. Mundell therefore considers it necessary to arrive at a global currency unit (initially not a single global currency) via an “intermediate step” which reduces exchange rate fluctuations. Specifically, Mundell’s proposal provides for three stages.

Stage 1: transition to a regime of stable exchange rates. It is characterized by intervention obligations on the part of the participating central banks to establish and defend the fixed exchange rates in the market. Stage 2: creation of a core group of countries (such as the United States, the eurozone countries, Japan, the United Kingdom, and possibly China) that fix exchange rates at certain parities and conduct a coordinated, common monetary policy in order to meet exchange rate targets. Stage 3: a global world currency is created. Mundell suggests the name INTOR: INT is the abbreviation for international and OR, the French word for gold. The currencies of the participating countries are pegged to the INTOR at a fixed (but possibly variable) exchange rate. The US dollar, euro, Japanese yen and Chinese renminbi remain the same in name and are freely convertible into the INTOR.

Subsequently, other countries have the option of tying their exchange rates to the INTOR as well. This too allows their exchange rates to be fixed against all other currencies. However, one important question remains: What kind of money should the INTOR be? Mundell assigns the IMF board the task of officially determining the currency basket for the INTOR—initially consisting of the US dollar, euro, and Japanese yen. The INTOR in this form would be a currency basket, an index very similar to the SDR issued by the IMF. Consequently, as with the SDR, the exchange value of the INTOR would be determined by the central banks of the participating currencies. As monetary history and economic theory show, this is not a recipe for good money.

In addition, INTOR exhibits a well-known problem: if there are mutual intervention obligations between the central banks to stabilize the exchange rate, the inflationary policy of one country can force all other countries into “a policy of inflation” or “inflationary policy.” According to Mundell, the IMF board of directors, which he recommends as a monetary policy body, would also be allowed to change the composition of the INTOR and the weights of the individual currencies in the it. The possibility of making such discretionary decisions arouses political desire and could sometimes significantly change the market or exchange value of the INTOR.

Mundell also hints at the possibility of backing the INTOR with gold. What do we make of that? If the INTOR is an expression of a certain quantity of fine gold, then a gold foreign exchange standard would again be created à la Bretton Woods. The system would be vulnerable to changes to the gold INTOR ratio. The latter would be left to the political arbitrariness of the IMF board of directors. In contrast to the Bretton Woods system, not a single country (the United States) would not decide on the gold INTOR exchange ratio, but the country representatives represented in the IMF body according to their economic strength. But would that really be an arrangement from which one can expect reliable money for the world? Hardly.

Mundell’s remarks ultimately show that an INTOR, alongside which the national currencies would continue to exist and circulate, can only be an intermediate step. For the maximum benefit which a monetary community with fixed exchange rates provides, and which above all the democratic socialists strive for, will only be achieved when, in the course of a currency reform, the national currencies are merged into the INTOR—just as the European currencies have been integrated in the euro. This illustrates the line of development intended for INTOR: an initial world currency that exists alongside national currencies should ultimately become a single world currency.

The concepts presented so far for the creation of a world currency originate from the idea that states should provide the money of the world. A private initiative comes from the American internet giant Facebook. On closer inspection, however, it is merely a matter of “saddling” a unit of account onto the existing fiat currencies. But one thing at a time. In June 2019, the company announced that it wanted to offer its customers a global high-tech currency and infrastructure in 2020. According to Facebook, many people around the world are to have easy and inexpensive access to the monetary and financial system. The new blockchain-based money is called “Libra.” The heart of the project is the Libra Association (LA). This nongovernmental association based in Geneva, Switzerland, was originally supported by founding members such as eBay, Facebook, Mastercard, PayPal, Spotify, Uber, Visa, and other renowned companies that were meant to be responsible for the operation and further development of Libra. Is Libra the way to a world currency?105

The Libra project does not aim to provide better-quality money to people around the world. The fact that the Libra accounts and payments are to be represented using a private (permissioned) blockchain does not change this. The Libra project of Facebook and friends is an entrepreneurial attempt to earn money in the global market for payment services (and later perhaps also in the market for loans)—and to get hold of as much data as possible. If the goal is to offer people in this world a better, form of money, the LA would have to do the obvious: offer a 100 percent gold-backed Libra. But who knows, maybe this will be the next step, initiated by Facebook, Amazon or any other company.

The Libra would to some extent be a digital coupon for national fiat currencies. Its design can therefore be compared with the IMF’s SDR. Like the SDR, the Libra represents a basket of national fiat currencies. While in the SDR it is the IMF that decides which national fiat currencies will be included in the SDR and what weight will be given to them, in the Libra it would be the LA that would be making all these decisions. If the Libra found great acceptance worldwide, the LA would grow into an extremely powerful position: it would become the depository for a huge amount of money or, if the LA invests the money in debt securities, a gigantic investor with dominant market influence.

Therefore, it is not surprising that the Facebook money concept has called the central banks into action. In view of overt resistance on the part of states, central banks, and state regulatory bodies, the LA reduced its ambition in April 2020. Most importantly, the association abandoned its original plan to create a global “stablecoin” directly tied to a fiat currency basket. It now plans to release several stablecoins—each of them will be backed by a fiat currency, such as the US dollar, the euro, and the British pound. There will also be a multi-fiat currency Libra “coin,” a composite of the single-currency stablecoins. The LA also abandoned its plan make the Libra blockchain a “permissionless blockchain” (so it actually seems to be difficult to call it a blockchain in the true sense of the word). What is more, the LA wishes its network to provide a clear path to seamlessly integrate central bank digital currencies (CBDCs) as they become available. Therefore, the Libra project—at least for now—succumbs to the states and their central banks’ claim a monopoly in money production.

In August 2019, the then governor of the Bank of England, Mark Carney, came forward with the idea that a “network of central banks” should launch a digital currency.106 His argument: the dollar is used to settle at least half of international trade transactions, a sum five times larger than US imports (through which foreigners can earn US dollars). In order to reduce the dependence of the world economy on the US dollar, he proposed a diversified multipolar financial system that provides a substitute reserve currency through new technologies. According to Carney, a private initiative à la the Libra project is not suitable for this. He posed the telling question of whether such a new synthetic hegemonic currency (SHC) might not be best provided by the public sector, perhaps through a network of central bank digital currencies (CBDCs). It could be built on the blueprint of the Libra project, but it would be entirely in the hands of the central banks.

The supporters of a state-controlled world currency are not only to be found in Western countries. In March 2009, the then governor of the People’s Bank of China, Zhou Xiaochuan, spoke out in favor of replacing the US dollar as the world’s reserve currency with a revaluation of the special drawing rights (SDRs) issued by the International Monetary Fund.107 Zhou’s call (on behalf of China’s Communist Party) for a reform of the global monetary system was aimed at reducing the world’s dependence on the US dollar and achieving a global currency that no longer depends on credit-based national currencies. Since then, no concrete proposals have been submitted to the public—however, the Chinese renminbi was included in the SDR basket in 2016.

At this point, the digital currencies that central banks could issue in the future deserve a brief mention.108 For example, the Swedish Riksbank is considering offering an “ekrona” which would compete with Swedish kronor in the form of cash and sight deposits at commercial banks. There are similar projects in China, Russia, and Venezuela. If digital central bank money is accepted, payment transactions will be transferred from the balance sheets of commercial banks to the balance sheet of the central bank. The central bank then obtains the perfect insight into who pays and receives what, when, where, and for what; it becomes the omniscient Big Brother.

There is a reason why most central banks are still reluctant to make digital central bank money available for all: it would constitute fierce competition for the deposit business of commercial banks. And the central banks need the commercial banks to expand the money supply through lending. Under prevailing conditions, money supply growth through lending requires equity capital, and in most currency areas this is still largely provided by private investors. Issuing digital central bank money to all would weaken commercial banks, and, politically, this is currently not desired in most Western countries. In China, on the other hand, things are different: Chinese banks are directly or indirectly in the hands of the state, and the obstacles to introducing digital central bank money for all are correspondingly low there.

But back to the core question: Can a fiat world currency (such as the SHC) be established voluntarily? The nations that have relatively better (i.e., less inflationary) fiat currencies have an incentive to exit if participation in the world currency leads to unacceptably high inflation in their home country; a voluntary cartel of central banks, which would be necessary to unify world monetary policy, would therefore be unstable. A fiat world currency could probably only be created if—as in the case of the euro—the nation-states or their voters were prepared to once and for all hand over self-determination over their money to a central body within the network of national central banks, i.e., a world central bank.

From a technical point of view, this is relatively easy to achieve, namely by merging the national fiat currencies into a single fiat currency. This step is likely to be opposed with considerable reservations on the part of the nation-states at present. However, the resistance is not guaranteed. For under democratic socialism, the states or the majority of voters will not be fundamentally averse to monetary centralization. One line of development could be that large countries first adopt a common currency and smaller countries follow the example with a time lag.

But is it realistic to expect that the United States, the European Union or the eurozone, Japan, the United Kingdom, China, and Russia will ultimately join forces and create a single fiat world currency? The likelihood that something like this will happen is probably greater than it may seem at first glance. For if democratic socialism continues to expand under the leadership of an oligarchized party democracy, the interests of the states will also converge ever closer together. The past decade has shown all too clearly how, for example, the interests of the Communist Party in Beijing and those of the democratic socialist governments, the “establishment,” “big business,” “Wall Street,” the “Davos elite” have already joined forces quite harmoniously.109

It is not only the Communist leadership in China that is striving to gain total control over its citizens and entrepreneurs.110 In the United States and Europe, for example, the overly powerful state—the “deep state”—is also on the advance, favored by the immense technical progress in the possibilities of control, the ever closer convergence of surveillance business and surveillance state, which is not sufficiently sanctioned by the electorate. Civil and entrepreneurial freedoms in the Western world are thus increasingly dwindling in favor of state influence and expansion of power.

In the Western world, political ideology has become increasingly unified in recent decades and has become more and more narrowed down to democratic socialism. It is essentially an ideology that is hostile to freedom, glorifies the state, and therefore does not differ categorically from an authoritarian regime such as the one in China. We should not be deceived: for the democratic socialists, the democratic element is merely a means to an end. With its help they want to gain dominion: socialism is the goal, and it is to be helped to victory by parliamentary means. Once it has been established, however, the socialists will of course no longer grant their opponents democratic freedoms. The Chinese coercive regime can certainly be understood as an expression of the endpoint toward which democratic socialism is working and which—as was shown in the preceding chapters—it can probably only achieve with a single world currency.

New financial and economic crises will strengthen the tendency of the political forces to create a fiat world currency. Just think of the social “hardships” that arise when the financial and economic system is severely shaken, when recession, loan defaults, bank failures, and social unrest spread in many countries. In times of such great distress, the willingness of people to accept unusual measures grows, of course, if these promise “rescue from hardship.” For the democratic socialists, such crises are “windows of opportunity” that can be used to initiate policies that would not be possible under normal circumstances; it was not for nothing that Karl Marx and Friedrich Engels saw “trade crises” as the prerequisite for the transition to communism.111 From this perspective, a major financial and economic crisis would be a circumstance in which to give the go-ahead for a single fiat world currency. However, the following chapter shows how problematic this is.

• 104In August 1971, the US government ended the gold redeemability of the US dollar. In March 1973,
  the G10 decided that the six members of the European Community should provide their currencies with fixed exchange rates and henceforth have a flexible exchange rate against the US dollar. In a way, this marked the real end of the Bretton Woods system.
• 105Meanwhile, Vodafone, Visa, eBay, and PayPal, among others, have withdrawn from the project.
• 106See Mark Carney, “The Growing Challenges for Monetary Policy in the Current International Monetary and Financial System” (speech given at Jackson Hole Symposium, Jackson Hole, WY, Aug. 23, 2019), p. 15: “As a consequence, it is an open question whether such a new Synthetic Hegemonic Currency (SHC) would be best provided by the public sector, perhaps through a network of central bank digital currencies.”
• 107See Xiaochuan Zhou, “Reform the International Monetary System,” BIS Review 41 (2009): esp. 2.
• 108Representatives of the Bank of England dealt with this issue at an early stage. See Ben Broadbent, “Central Banks and Digital Currencies” (speech given at the London School of Economics, London, Mar. 2, 2016), www.bis.org/review/r160303e.pdf.
• 109However, the collaboration was severely disrupted by the inauguration of US President Donald J. Trump in January 2017.
• 110It should be mentioned that the expectation that China would break away from the dictatorship of the Communist Party and turn to democracy has not yet been met. Rather the opposite seems to be the case: in March 2018, the National People’s Congress, the Chinese pseudo-parliament, secured a lifetime rule for President Xi Jinping. Deng Xiaoping had already separated party and government in 1982 and he had also introduced a regulation according to which there was to be a change of leadership every ten years. Xi Jinping’s empowerment must awaken memories of despotic rule.
• 111See Karl Marx and Friedrich Engels, Manifest der Kommunistischen Partei: Mit Vorreden von Karl Marx und Friedrich Engels (The Communist Manifesto) (Hamburg: Phönix Verlag, 1946).