Papering over a global crisis
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NEIL REYNOLDS
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April 1, 2009 at 6:00 AM EDT
“So much barbarism … remains in the transactions of the most civilized nations that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own.” – John Stuart Mill, 1848
In his assessment of national currencies, John Stuart Mill, the great English philosopher and political economist, made a good point, though it was quickly forgotten in subsequent years amid the rise of exalted nationalism – “the doctrine of State worship,” as Bertrand Russell described it, “which assigns to the State the same position that Catholicism gave to the Church, and even sometimes to God.” Now almost every country has its own “peculiar currency,” each bereft of intrinsic value, each kept functional by faith alone.
In a persuasive new book, Money, Markets and Sovereignt y (Yale University Press), economists Benn Steil, founding editor of the journal International Finance, and Manuel Hinds, twice minister of finance in El Salvador, say many “sovereign currencies” play no beneficial role in a globalized world. “National monies and global markets,” the authors say, “simply do not mix.”
Mr. Steil and Mr. Hinds argue that history's most liberal global trade regime now co-exists side by side with the most extreme economic nationalism the world has ever experienced. “If anything is likely to throw globalization in reverse, it is not trade itself,” they say. “It is the money that facilitates it.”
“Throughout virtually all of human history, up until 1971, money was either some form of durable commodity or a claim on such a commodity,” the authors say. “This use of a specific commodity to measure the value of things is built into many languages.” They cite the Latin word for copper – aes – as an example. From this word, the English language devised the verbs “to esteem” and “to estimate.” The use of copper in “esteeming” money dates to the 13th century BC.
Only in the 6th century BC – in the “age of tyrants” in Greece – did the state emerge as the monopoly supplier of money. These tyrants of yore were the first deliberately to debase currencies for their own advantage (producing coins that contained as little as 5 per cent of professed value, to as much as 95 per cent). To make compromised coins appear more legitimate, the tyrants imprinted them with religious symbols – “the less gold,” the authors say, “the more God.”
.........
“In the [gold standard] past, governments made some effort to make their money acceptable to foreigners, and capital flows were enormous even by contemporary standards,” the authors say. “Currency crises were brief and shallow – wholly unlike today. The money flowing around the world [in recent years] has been a claim on – well, on nothing at all. These monies are conjured by governments as pure manifestations of sovereignty. The vast majority of such monies are unwanted.”
The U.S. dollar, in its role as the world's currency, naturally attracts the most attention – and concern. “They get our oil,” Iranian President Mahmoud Ahmadinejad said at an OPEC summit in 2007, “and give us a worthless piece of paper.” He spoke when the greenback hit one of its periodic lows. It has since retraced much of its loss, which presumably means only that, for the moment, people want to hold the dollar only slightly more than they want to hold the British pound and the Japanese yen.
Mr. Steil and Mr. Hinds say time is running out for the U.S. dollar. Either the Fed produces a dollar that the rest of the world wants to hold or its ability to guide interest rates, control inflation and confine financial crises “will dissipate to the point where [U.S.] sovereignty is meaningless.”
Commentary: The danger signs are all around. In "Perspective", I highlighted the enormous change in the size and composition of leading world banks with Chinese banks moving to the forefront. In "A tear in the fabric of the economic universe" I pointed out that monetization leads to a debased currency. These authors are picking up on a theme that James Turk addressed in his 2005 book "The collapse of the dollar and how to profit from it".
The American currency is in far more difficulty than is generally acknowledged. With massive borrowing, the Americans may become indebted to the Chinese in a way that extends beyond the fiscal commitments.
Consider this old Hebrew proverb:
"The rich rule over the poor, and the borrower becomes the lenders slave." Prov. 22:7
There is a logical and inevitable conclusion to the post-modernist thought process. The "freethinkers" believe that there are no restraints to restrict their "freedom". However, they have made the error of not making a distinction between freedom and licence. The printing pressess running full tilt and the borrowing and spending mentality of some modern governments does not end happily.
Some one will have to pay.
And that someone is us.
Article
Comments
NEIL REYNOLDS
Globe and Mail Update
E-mail Neil Reynolds
Read Bio
Latest Columns
April 1, 2009 at 6:00 AM EDT
“So much barbarism … remains in the transactions of the most civilized nations that almost all independent countries choose to assert their nationality by having, to their own inconvenience and that of their neighbours, a peculiar currency of their own.” – John Stuart Mill, 1848
In his assessment of national currencies, John Stuart Mill, the great English philosopher and political economist, made a good point, though it was quickly forgotten in subsequent years amid the rise of exalted nationalism – “the doctrine of State worship,” as Bertrand Russell described it, “which assigns to the State the same position that Catholicism gave to the Church, and even sometimes to God.” Now almost every country has its own “peculiar currency,” each bereft of intrinsic value, each kept functional by faith alone.
In a persuasive new book, Money, Markets and Sovereignt y (Yale University Press), economists Benn Steil, founding editor of the journal International Finance, and Manuel Hinds, twice minister of finance in El Salvador, say many “sovereign currencies” play no beneficial role in a globalized world. “National monies and global markets,” the authors say, “simply do not mix.”
Mr. Steil and Mr. Hinds argue that history's most liberal global trade regime now co-exists side by side with the most extreme economic nationalism the world has ever experienced. “If anything is likely to throw globalization in reverse, it is not trade itself,” they say. “It is the money that facilitates it.”
“Throughout virtually all of human history, up until 1971, money was either some form of durable commodity or a claim on such a commodity,” the authors say. “This use of a specific commodity to measure the value of things is built into many languages.” They cite the Latin word for copper – aes – as an example. From this word, the English language devised the verbs “to esteem” and “to estimate.” The use of copper in “esteeming” money dates to the 13th century BC.
Only in the 6th century BC – in the “age of tyrants” in Greece – did the state emerge as the monopoly supplier of money. These tyrants of yore were the first deliberately to debase currencies for their own advantage (producing coins that contained as little as 5 per cent of professed value, to as much as 95 per cent). To make compromised coins appear more legitimate, the tyrants imprinted them with religious symbols – “the less gold,” the authors say, “the more God.”
.........
“In the [gold standard] past, governments made some effort to make their money acceptable to foreigners, and capital flows were enormous even by contemporary standards,” the authors say. “Currency crises were brief and shallow – wholly unlike today. The money flowing around the world [in recent years] has been a claim on – well, on nothing at all. These monies are conjured by governments as pure manifestations of sovereignty. The vast majority of such monies are unwanted.”
The U.S. dollar, in its role as the world's currency, naturally attracts the most attention – and concern. “They get our oil,” Iranian President Mahmoud Ahmadinejad said at an OPEC summit in 2007, “and give us a worthless piece of paper.” He spoke when the greenback hit one of its periodic lows. It has since retraced much of its loss, which presumably means only that, for the moment, people want to hold the dollar only slightly more than they want to hold the British pound and the Japanese yen.
Mr. Steil and Mr. Hinds say time is running out for the U.S. dollar. Either the Fed produces a dollar that the rest of the world wants to hold or its ability to guide interest rates, control inflation and confine financial crises “will dissipate to the point where [U.S.] sovereignty is meaningless.”
Commentary: The danger signs are all around. In "Perspective", I highlighted the enormous change in the size and composition of leading world banks with Chinese banks moving to the forefront. In "A tear in the fabric of the economic universe" I pointed out that monetization leads to a debased currency. These authors are picking up on a theme that James Turk addressed in his 2005 book "The collapse of the dollar and how to profit from it".
The American currency is in far more difficulty than is generally acknowledged. With massive borrowing, the Americans may become indebted to the Chinese in a way that extends beyond the fiscal commitments.
Consider this old Hebrew proverb:
"The rich rule over the poor, and the borrower becomes the lenders slave." Prov. 22:7
There is a logical and inevitable conclusion to the post-modernist thought process. The "freethinkers" believe that there are no restraints to restrict their "freedom". However, they have made the error of not making a distinction between freedom and licence. The printing pressess running full tilt and the borrowing and spending mentality of some modern governments does not end happily.
Some one will have to pay.
And that someone is us.
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