Challenges to the Global Monetary Structure
PART ONE
Edward J. Dodson
[1990]
Abstract
The last decade of the twentieth century and beyond promises to be
a period during which the private desires of individuals and groups
challenge the system of nation-states that has characterized our
socio-political arrangements since the late Renaissance period. The
era of empire-building, of centralizing bureaucracies and (more
recently) of ideologically-driven alliances faces -- if not
extinction -- certainly serious erosion. Our values as well as our
systems of production and finance have already become substantially
transnational and decentralized, so much so that efficiencies in the
sphere of production are more often hampered than assisted by the
inherently protectionist policies of the nation-state, acting under
its claims to sovereignty.
Despite serious animosities that clearly remain between groups
(both within and without individual societies), we are gradually
being forced to come to terms with an earth where geopolitical
isolation no longer exists as protection for status quo
arrangements. Narrow, domestic political and economic considerations
cannot dominate the relations between peoples in an interdependent
world. The global balance of power is, in fact, less attached to
direct coercive influence than ever before in the modern era.
Economic power, which in decades past depended to a large extent on
a military presence, is now far more the result of providing others
with high quality goods and services at affordable prices.
The ownership and control over natural resources, over improved
and as yet unimproved building sites, over production facilities and
communication systems, and over financial institutions is already
transnational. Self-interest, therefore, serves to mitigate the
conflict-based quest for hegemony historically pursued by leaders of
the nation-state. One cannot, however, ignore the continued
maldistributions of income and wealth ownership within societies,
and the statistical evidence suggests a widening of the gap in all
societies between the haves and the have nots.
In no arena of human endeavor is the process and experience of
transnationalism more important than within the global monetary
structure. What stands in the way of progress toward a system
operated according to just principles, however, is the issuance by
governments of legal tender in lieu of the circulation of sound
money. This last great vestige of state monopoly power is,
nevertheless, also being challenged by transnational organization.
This paper examines the historical development of this challenge and
speculates on how the displacement of state control over the global
medium of exchange will affect the nation-state and our more diverse
systems of socio-political arrangements.
Introduction
If history deals in any sense with absolute truth, the basis for
such knowledge is to be found in human behavior that is consistent
over time and across space. Armed with this type of understanding,
we come as close as possible to acquiring the basis for establishing
scientific principles where the study of human behavior is
concerned. Moreover, because the most consistent of our actions have
been those associated with our desire for survival, we can learn
much from an examination of these actions throughout our history.
We have for at least tens of thousands of years been engaged in
the production and exchange of wealth. (The term wealth is defined
for purposes of this examination as anything yielded from nature
(i.e., the earth) by human labor -- alone or assisted by physical
capital -- that is material and has potential or demonstrated value
in exchange.)
Yet, there has also been a darker side to our actions, revealed by
our use of coercion and exploitation of others in the pursuit of
wealth and power. As the earliest hunter-gatherer groups acquired an
understanding of weaponry and as the discovery of agriculture led to
fixed settlement, socio-political arrangements within groups evolved
to institutionalize a division of labor between the
warrior-protectors and the producers of food and other goods.
Eventually (and perhaps inevitably) this new division of labor was
replaced by a hierarchy of power with the warriors and spiritual
(i.e., knowledge-bearing) subgroups at the top and those actually
engaged in wealth production at the bottom. As time went on, a third
subgroup -- the exchangers -- emerged in many societies to challenge
and/or share power.
By the beginning of the nation-state era, the above-described
hierarchy had in many societies become extremely sophisticated and
deeply-entrenched. In his examination of group hierarchies,
sociologist Gerhard E. Lenski concluded:
If anything, inequalities in power and privilege seem
usually somewhat less pronounced in mature industrial societies than
in agrarian. In short, the appearance of mature industrial societies
marks the first significant reversal in the age-old evolutionary
trend toward ever increasing inequality.
Professor Lenski's conclusion draws attention to the problems
created by increasing complexity in the socio-political arrangements
of an industrializing society. Productivity gains from the use of
machinery and better organization generally yield certain absolute
improvements in the general level of well-being; however, this does
not necessarily equate to a lessening of inequality as measured by a
distribution of economic, social and political power.
Socio-political arrangements were sanctioned by tradition, by
formalization into systems of positive law and by coercive
imposition by means of physical domination. Running parallel to the
social and political hierarchy has been, of course, a hierarchy of
economic power. One means by which these two forms of power were
consolidated was control over access to nature; another was control
over the medium of exchange.
The scope of this paper neither permits nor demands an historical
overview of the use of various commodities and eventual adoption of
silver and gold as the preferred mediums of exchange and storehouses
of value. Rather, I offer evidence on behalf of the thesis that
those in power have consistently exploited the governed, including
(when possible) the citizens of other societies, by manipulation and
control of a monetary system created to advance centralized power
and to sanction what amounts to a pervasive pattern of theft of
wealth from producers.
The essential ingredient has been the power of the state and of
banks to self-create credit. The consequences of this assumed power
have been the confiscation of wealth from producers not only by
direct taxation, but also by the issuance of legal tender which
(unlike certificates of deposit for coinage or bullion) give to the
bearer no specific claim to wealth of a given quantity and quality.
Rather, legal tender acquires exchange value because of the coercive
imposition of the power of the state.
Monetary Hierarchy
As the consolidating European states fought for control over their
own continent and much of the rest of the earth's land mass and sea
lanes, the Dutch emerged in the early seventeenth century newly
independent from Spain and fast becoming overseers of a far-flung
commercial empire in their own right. At least part of their success
can be credited to the role they played in reforming what was at the
time the global monetary structure. The Scottish philosopher and
political economist, Adam Smith, wrote of the Dutch accomplishment:
Before 1609 the great quantity of clipt and worn foreign
coin, which the extensive trade of Amsterdam brought from all parts
of Europe, reduced the value of its currency about nine percent
below that of good money fresh from the mint. Such money no sooner
appeared than it was melted down or carried away, as it always is in
such circumstances. ...
In order to remedy these inconveniences, a bank was established in
1609 under the guarantee of the city. This bank received both
foreign coin, and the light and worn coin of the country at its real
intrinsic value in the good standard money of the country, deducting
only so much as was necessary for defraying the expence of coinage,
and the other necessary expence of management. For the value which
remained, after this small deduction was made, it gave a credit in
its books. This credit was called bank money, which, as it
represented money exactly according to the standard of the mint, was
always of the same real value, and intrinsically worth more than
current money.
This brief period during which the Bank of Amsterdam served as an
international bank of deposit was, I suggest, the high-water mark
for sound money in the modern era. Unfortunately, the bankers soon
discovered they needed only fractional reserves of bullion or
coinage to satisfy the demands by depositors. They then began
issuing additional bank notes as loans to business and government
borrowers. As this practice became common knowledge, both the
certificates of deposit and bank notes lost their full face value in
exchange and were traded at a discount.
Over time, the vicissitudes of empire-building, warfare and
commercial ventures generated increasing losses for the Bank of
Amsterdam, finally forcing its closing in 1819. More important than
its eventual demise, however, a narrow window of opportunity for a
sound and honest paper currency had long before already disappeared.
Bankers as a group made no attempt to return to a full reserve
system; fractional reserve banking gave birth to the so-called gold
standard, within which the primary skill of both banks and
governments was to promote an atmosphere of confidence so that
depositors would rather hold paper currency than bullion or coinage.
When confidence disappeared, the banks periodically closed their
doors at tremendous personal loss to depositors. Until very
recently, few governments provided any protection to depositors
against such losses.
The Dutch and English battled throughout the mid-seventeenth
century for commercial and financial hegemony at the core of an
industrializing Europe. In the end, a combination of superior naval
power, a more dynamic societal structure and more effective
isolation from continental intrigues lifted Britain to a position of
dominance within the European hierarchy of nation-states. Most other
European states relied heavily on loans from Europe's powerful
banking families, the fortunes of which fortunes rose and fell with
that of individual monarchs. Britain was unique in that a
considerable portion of the cost of empire-building was absorbed by
private companies and individuals. Debts by the British monarch were
often repaid with sizable grants of land in the Americas and
elsewhere, or by monopolistic trading privileges to joint-stock
companies. The bankers not only participated in these endeavors but
also served as repositories for government funds and as collectors
of tax revenue.
By such means, empire-building from the seventeenth century on
contributed to the growth of large personal fortunes while, on the
whole, impoverishing the overwhelming majority of other citizens. To
the extent that opportunities were made available to the producer
subgroup, migration to unsettled or conquered territories presented
the best opportunity to rise above one's status at birth -- even in
Britain. Those closest to the court or (in the case of Britain and a
few other states) the parliamentary houses enjoyed tremendous
privilege and often wholesale exemption from taxation in support of
the central government. Spanish socio-political arrangements
represented an extreme example of a society dominated by excessive
privilege. Even the vast riches extracted from the Americas were
insufficient to defray the cost of maintaining its empire.
Enclosures had turned a productive peasantry into landless serfs,
and Spain became dependent upon imports not merely for luxuries and
manufactures but also for foodstuffs. At the same time, neither the
Church nor the aristocracy contributed meaningfully to the costs of
empire.
Although the earliest European migrants to the Americas
experienced decades of severe hardship and deprivation, those who
survived and their offspring benefitted considerably by the access
gained to free or very cheap land; in return, they provided vast
quantities of foodstuffs and raw materials to European commercial
interests. For British subjects in North America, both commerce and
self-government prospered for nearly one hundred fifty years under
loosely-enforced mercantilist policies. This period of salutary
neglect operated to a lesser degree in the French, Dutch and even
Spanish colonies; however, the result in British North America was
eventual rebellion by a citizenry whose numbers had become large
enough to thwart further attempts to impose the rule of empire.
As even Britain was learning, the costs of government merely
expanded with the acquisition of new territories or the conquest of
other states. Nevertheless, the vested interests of those who
benefitted most were repeatedly advanced, regardless of the cost (to
others). Not that those in power were totally insensitive to the
potential for resistance. Some creativity was demanded to reduce the
frequency of such occasions. In a speech made before the House of
Lords, William Pitt (the Elder, Earl of Chatham) is quoted as
delivering the following statement:
There is a method by which you can tax the last rag from
the back, and the last bite from the mouth, without causing a murmur
against high taxes, and that is, to tax a great many articles of
daily use and necessity so indirectly that the people will pay them
and not know it. Their grumbling will then be of hard times, but
they will not know that the hard times are caused by taxation.
After breaking from the British empire and a short-lived
experience of government under articles of confederation, even the
new united states in North America were to suffer a tragic
retrenchment from its promise of a decentralized and weak national
government. Debts accumulated during the rebellion suggested to some
the need for rapprochement with the international bankers and
creditors. As a confederation of states, the reference to the "united
states" in plural seems appropriate. The assumption at this
early date was that the confederation was one based on voluntary
association. With the adoption of a federal constitution, this
confederation made a quantum leap toward the creation of one
nation-state and away from that of a voluntary association. Each
state had been issuing its own legal tender, forcing creditors to
accept these notes as payment for all debts; outside the individual
states, this legal tender was either deeply discounted or not
accepted at all. Clearly, successful imposition of a paper currency
issued without specific backing required the coercive power only a
strong, central government could provide. The influence of merchants
and other creditors of the government combined to ensure that the
new Federal government would at least assume responsibility for the
war debts of the states. The battle between the states, the Federal
government and private banks over the issuance of legal tender and
bank notes would go on throughout the nineteenth century.
Charles Beard and other historians have painted an interesting
picture of how principle was compromised by privilege and vested
interest -- couched in terms of necessity -- as the framers came
together to forge a new national government over what were still
very disunited states. To be sure, there were grave problems facing
the new nation, not the least of which was the war debt. Putting the
new government's financial affairs in order had to receive high
priority, and British prohibitions against the export of bullion or
the minting of coinage in North America left the confederation
without the basis for establishing a monetary system secured by gold
or silver. Historian John C. Miller went so far as to suggest the
experience of "[North] Americans under the Articles of
Confederation had demonstrated that no government could endure
without the ability to borrow.
Extraordinary circumstances do require extraordinary measures, and
all newly-emerging nations face both internal and external
challenges to their prospects for survival. Nevertheless, there has
been far too little debate among economists generally over the
systematic effort of those holding power to self-create credit
through manipulation of monetary systems. In the United States, this
meant violation of the Constitutional provisions under which the
Federal government was charged with protecting the citizenry from
issuance of unbacked paper currencies. Section 8 of Article I of the
Constitution of the United States provides, among other things, that
"The Congress shall have Power to ... pay the debts ... borrow
Money on the credit of the United States ... [and] coin Money ..."
David Ricardo, examining the historical evidence and commenting on
contemporary events in Britain, warned his fellow countrymen:
Experience shows that neither a state nor a bank ever has
had the unrestricted power of issuing paper money without abusing
that power; in all states, therefore, the issue of paper money ought
to be under some check and control; and none seems so proper for
that purpose as that of subjecting the issuers of paper money to the
obligation of paying their notes either in gold coin or bullion.
Although the debate over what constituted sound money would
continue within the halls of academia (and, at times, in the
chambers of government as well) throughout much of the nineteenth
century, the reality of empire-building within the confines of
protected privilege left few options open even to those who sought a
degree of responsibility where government spending was concerned.
The larger the empire, the greater the expenditures for a military
and administrative bureaucracy required to preserve (and expand) a
nation's holdings and influence. War, when it inevitably comes, very
quickly destroys not only human lives but also a large portion of a
society's storehouse of physical wealth.
Since the wealthy and powerful are generally unwilling, and the
masses unable, to provide government with the coinage or bullion
needed to procure the desired quantities of goods and services, the
path of least resistance is for governments to issue their own paper
currencies. By declaring such notes legal tender for all debts
public and private, governments effectively redistribute purchasing
power from private citizens to themselves.
Nineteenth century analysts, such as John Stuart Mill (1806-1873)
and Henry George (1839-1897) sailed the Ricardian flagship into the
twilight of political economy's reign as near-science. Mill thought
the substitution of paper currency for coinage and certificates of
deposit could be achieved without an inevitable discounting of the
paper currency, so long as increases in the quantity thereof were
stimulated by the production of real goods and services. The public
had to believe that paper currency could be fully converted upon
demand; therefore, the function of monetary policy was to maintain
confidence even under conditions of minimal actual reserves. This
view continues to be put forward by economists who advocate strict
monetary rules, such as Milton Friedman. George, for his part, felt
the coinage of money was a legitimate function of government but
that banking was rightly left to private interests. History, I
suggest, argues against such a direct role for any government, as
this paper will attempt to demonstrate. In the end, their warnings
and denouncements of government policies had little effect. The
global monetary system had already evolved into an extension of the
nation-state rather than as a system for facilitating exchange
between producers.
Viewed outside of the context of the wider socio-political
arrangements within which monetary policy functioned, the historian
has sometimes been led to rather ironic assertions. Carroll Quigley,
for example, saw the resort to fractional reserves as essential
during "the great Age of Expansion in the nineteenth century
..." One might ask, however, what the extent of expansion
(expansion, defined as the increase in the total stock of physical
wealth available for consumption, saving or combination to form new
capital) might have been had bank notes not lost their face value as
certificates of deposit -- and had the nation-state not co-opted the
creation of credit for its own vested interest. Instead the world
suffered under the weight of a monetary system by which the
industrialized states at the core effectively dominated those less
industrialized at the periphery. On this point, the German political
scientist Wilhelm Roepke observed in 1937:
The close of the 19th and the beginning of the 20th
centuries witnessed ... the successful creation of international
monetary homogeneity paralleling that existing on the national
level, thanks to the gold standard which united all countries within
the framework of one monetary system.
Certainly, this movement toward "one monetary system"
was not beneficial to the majority of people throughout the world.
Under conditions of open and competitive markets, however, the
consequences of monetary homogeneity might have been quite positive.
The actual result was characterized by an accelerating
maldistribution of wealth in Eurasia that sent tens of millions of
people on a mass migration to North America.
Most societies on the Eurasian continent remained dominated by
mercantilism and privileged subgroups. In the worst examples, the
majority of people lived under conditions of extreme poverty and
virtual serfdom (i.e., feudalism without the benefit of feudal
obligations to the producers by their overlords). In the monetary
arena, the widespread establishment of central banks and legal
tender opened the door for organized theft on a scale even the most
ardent reformers had failed to anticipate.
PART
2
