issue 257 - July 1994
JIM HOLMES / PANOS PICTURES
Speculators send currencies crashing; money moves like mercury all over the globe.
The genie is out of the bottle and even some bankers want it back in. Brahm Eiley reports.
It took just a couple of days. They were good days for currency speculator George Soros but bad days for the British pound. In 1992 Soros, whose multi-billion-dollar empire is based in the low-tax locale of the Netherlands Antilles, led a myriad of pension-fund managers and investment banks to bring down the pound, leaving it so enfeebled that it had to be removed from the European Exchange Rate Mechanism.
The speed with which this kind of big money can be made has large volumes of capital rushing around the globe. It has changed the world economy fundamentally. The last hopes for a stable international economic order lingering from those hot summer days in 1944 at Bretton Woods have now faded for good. The IMF and the World Bank were created to prevent the roller-coaster instabilities of the 1930s. Yet a new ‘global financial economy’ has emerged where super-profits can be made in a myriad of ways – ways which are at best irrelevant to, and at worst destructive of – stable jobs and communities.
Fernand Braudel, the French historian, argued in his classic The Wheels of Commerce that finance has been global since the fifteenth century. Maybe so. But it is hard to imagine the Medicis plugged into their computer terminals like some Renaissance George Soros deciding the fate of the ducat one day and the doubloon the next.
Today global financial flows dwarf world trade in traditional job-creating commerce and industry (like producing cars or soap) by about twenty to one. The amount of money that moves through computers and along elaborate undersea cable wire or is beamed off satellites on a single weekday is more than three times what Japan earns through trade in a whole year. Currency speculation sets off rapid changes of value in the foreign-exchange charts. One effect is to undermine even the modest attempts by economic planners or political reformers in the Third World. What were affordable machinery parts yesterday become out-of-reach luxuries today. Currency, bond and stock markets are complex and require an insider’s knowledge. Once inside, the financial investor can derive huge returns. But as in most games for each winner there have to be losers: these mighty markets destroy as much as they create. This is the heartless world of ruthless takeovers, currency manipulations and leveraged buy-outs made infamous in Oliver Stone’s movie Wall Street with its biting critique of the acquisitive spirit of the 1980s.
This casino economy is now in a position to dictate not only whose currency will be strongest and whose goods cheapest but perhaps most importantly to set ‘acceptable limits’ on the economic reforms and social changes so badly needed by the shantytown dwellers of Lima or the rural poor of northern Ghana.
What happened to François Mitterand and his French Socialist Party when they won election on a mildly socialist platform in the early 1980s has proved an object lesson to reformers worldwide. The Socialists stressed a modest increase in social programs and job creation as well as some nationalizations – mostly in the financial sector. This marked a radical departure from the Gaullist years. Within weeks the markets began to sell off the franc, pushing its value down and – voilà! – within the year, President Mitterand had reversed most of his economic policies. France’s socialist experiment quickly came to resemble a pale version of British Thatcherism. Not exactly what the party faithful had in mind when they passed those egalitarian policy resolutions at their convention.
In the South the ubiquitous structural-adjustment policies of the IMF and the World Bank are designed with this tale in mind. Back in the hothouse days of Jamaican politics in the early 1970s, Michael Manley rose to power and tried to institute nationalist policies. His popular program included plans for more housing and welfare spending. But this was not to be. The Jamaican dollar plummeted. Foreign companies packed their bags. And the international banks shut off the credit tap. By the late 1970s, the IMF was in a position to ‘reorient’ the Jamaican economy. Since that time Jamaica, even under Manley himself, has been less partial to policies which would upset Wall Street and the City of London. There are a host of Jamaican-type stories in the Third World.
The omnipotence that modern financial markets have achieved is rooted in the competing designs for the world economy put forward at the Bretton Woods conference 50 years ago. There the plan of John Maynard Keynes which would have put strict controls on and established global rules for the movement of capital, was rejected as against the interests of the US and its newly discovered economic dominance. If adopted the Keynes plan would have made the world of the 1990s a very different place. Instead the US delegation demanded and got a high degree of free capital mobility.
The US ended up with all the trumps: not only an effective veto on the policies and programs of the newly created IMF and World Bank but also the US dollar positioned as the only effective medium of international exchange. All other currencies were tied to the dollar through the gold standard, which fixed gold’s value in dollar terms. With these arrangements in place massive devaluations of other countries’ currencies became inevitable (25 devalued in 1949) and the world financial centre shifted from the the City of London to New York. Under the Marshall Plan the economies of post-war Europe were flooded both by US dollars and State Department political influence. The stability gained by having the US dollar as the world’s international currency, rather than adopting Keynes’ idea of controls on all capital movements, held only in so far as the dollar’s pre-eminent value was accepted by all concerned.
Although the US was seen as supreme during the 1950s and early 1960s, it was slowly undercutting itself and helping to create a world of money which existed in the air – separated from the production and sale of real goods and services. The whole world now relied on the US to provide currency and as the US pumped more and more dollars into the international economy the relationship between the dollar and the amount of gold it was worth began to slip.
The ‘dollar overhang’ – foreigners holding more dollars than the US had gold – rose during the 1960s as the US imported more from Europe thereby helping European economic recovery. US companies rapaciously bought up real estate, plants and commodities all over Western Europe with dollars worth far less than their official fixed-rate value. France’s President De Gaulle denounced this as an ‘exorbitant privilege!’
But most Americans hadn’t a clue why Western Europeans harboured such animosity. Something had to give. By 1967 the situation had reached breaking point and the US was forced to raise the price of gold. But things continued to deteriorate and in 1971 the government of Richard Nixon closed the gold window entirely – from now on you could no longer exchange a US dollar for a set amount of gold.
Thus the modern era of floating currencies was born. Now those with the market power to buy and sell large amounts of currency were well on their way to being able to dictate the value of the German mark or the Costa Rican colone.
Today the large pension funds and banks, but also clusters of small investors or even the central banks of smaller countries, can make millions in a day just by predicting if a currency is going to go up or down. Such profits are impossible in regular commerce. The main victims are global economic stability and the development policies of Third World governments, particularly those that prioritize the needs of the poor.
Over the past 20 years the problem has been further exacerbated as international and domestic financial markets have become inextricably linked. Third World debtors are vulnerable not only to currency manipulations but also to decisions about interest rates taken outside their control. When US interest rates soared to 20 per cent in 1980, developing countries such as Brazil and Mexico which had borrowed heavily from the US banks in the 1970s, had to pay off their loans at these high rates.
Today currency speculation and the power of financial markets and bond-rating services (which set a particular government’s credit-worthiness) to decide our global fate have become such threats that the world’s central bankers have at last decided to do something. Working through the Bank of International Settlements in Berne, Switzerland, they are trying to put the speculative genie back in the bottle by devising a set of co-ordinated national and international rules to control capital flows.
Without some such arrangements the democratic decisions taken by nation states to control their own economic life will become increasingly meaningless. The markets will take the place of the electorate. This would be a particularly perilous development for Third World societies which urgently need political and economic reforms to meet the basic needs of their populations. Yet big money is at stake and regulating the myriad international capital flows will be no small task - even if central bankers are sincere in their desire to rein in a system they have played a large role in creating. But until Bretton Woods’ commitment to the free movement of capital is rethought the big winnings at the global casino table are unlikely to trickle down to those who sweep the world’s floors.
Brahm Eiley is a Toronto-based journalist specializing in economics.