Provocative Demands: A small currency reform with big consequences
“Future workshop” on the financial system
By Bakara Merle
In a “future for all”, the role of finance will be much smaller than it is today. “Money makes the world go round” will be a thing of the past. Nonetheless, money serves important functions in any economy. Therefore, in our “future workshop”, we also discussed monetary, finance and currency systems. We conducted this workshop with pioneering thinkers from politics, sciences, NGOs and practitioners of alternative banking – as all of these can help to realise alternative concepts for a future society.
In 2048 we’ll see: The international standard currency “bancor”, an international clearing union, fixed but adjustable rates of exchange, penalty interest rates for aggressive trading strategies.
In 2048 we won’t see: Financial crises, disproportionate gaps between rich and poor countries, free exchange rates, speculation on fluctuating exchange rates.
About a hundred years ago, in the Bretton Woods negotiations of the mid-1940s, economist John M. Keynes proposed to introduce an international currency called bancor. Because of its far-reaching positive effects, this idea was repeatedly taken up. It was finally implemented in 2030. To see all that has improved since 2019, let’s take a look back at that year.
2019: The problems
The international economic system was characterised by strong inequality. Further, it was extremely susceptible to crises, which occurred every few years. The international financial crisis of 2007/08 was identified as the worst crisis since the Great Depression of the 1930s, and both crises had wealthy industrial nations at their epicentres. But South America, Asia and Africa, too, witnessed severe financial and debt crises, especially during the 1980s and 90s. These crises threw millions of people into poverty and considerably deflated chances for a just “development” [Footnote: Development is no longer understood as economic growth, but as a process aimed at the well-being of all people within planetary boundaries. This also means that countries or democratic confederations can decide independently on their own policies.].
The reasons for the financial and debt crises in countries that did not benefit from the capitalist system were manifold. In most cases, unjust global infrastructure for production, food, welfare and value creation were responsible. Three aspects were particularly relevant: 1) economically weak countries were dependent on foreign currencies; 2) their currencies were subject to substantial fluctuations on the exchange market; and 3) the unpredictable flux of international investments from external countries destabilized the economies of weaker countries.
The central problem: Exchange rate fluctuations
A currency, like money in general, is only worth as much as the trust put in it. This trust is based on the fact that a particular currency is accepted by market actors in purchase or debt contracts. Currencies of economically weak countries enjoyed a lower degree of trust, which is why these countries were dependent on foreign currencies such as the US dollar, euro, pound, and yen; not to forget colonial currencies such as the CFA franc, already unnecessary back then. Economically weak countries needed these foreign currencies to stabilise their exchange rates, for example, or to pay for imported goods and foreign debts.
There are three ways to obtain foreign currency: by exporting goods, by taking loans in these currencies or by attracting financial flows in the form of investments or “development cooperation” funds. In the old financial system, all three were difficult to achieve for countries in the Global South. Until 2030, economically weak countries relied on exporting mainly raw materials. On average their prices, compared to processed goods that had to be imported, fell in the long run and were highly volatile. While these countries repeatedly attempted to set up commodity cartels for goods such as copper or oil – OPEC is still known to many people, even in today’s post-fossil age – these projects, however, in the face of global economic power relations, failed in most cases.
Fiscal policy as an instrument of power for the Global North
Meeting the demand for foreign currencies through borrowing was accompanied by many risks for economically weak countries. They had to export enough goods to repay their loans in time. The interest to be paid on debts was astronomical, many times higher than what industrialized countries had to pay for their debts. If a country was unable to repay its debts, it had to fear two things. Either, it would not be able to borrow any further foreign currency – which few were ready to risk – or it would have to succumb to outside pressures to take up politics that would largely and negatively impact the well-being of its people and exacerbate its economic instability.
The same problems arose with financial inflows, whether in the form of foreign loans or development aid. Countries fell ill with the “Dutch disease”: if a lot of money suddenly flows into a country with flexible exchange rates, the currency appreciates, i.e. domestic prices rise in comparison to foreign prices. With this relative increase of prices, the domestic country becomes less competitive, which leads to lower exports. Lower exports in turn mean less foreign currency, so, consequently, the country has to take on more debt. A vicious circle.
Particularly dangerous were private foreign financial flows with short time horizons. These had been unleashed starting with the wave of deregulation in the 1980s and had always flowed to where the highest potential profits with the lowest possible risks were. Because poor countries had to pay higher interest rates on loans, they often found themselves to be the destination of short-term financial flows, causing their currency to appreciate. Since the appreciation of local currency was tantamount to a price increase for foreign buyers, the domestic (export) economy was, therefore, ruined. Debtor countries facing payment difficulties subsequently caused financial investors to withdraw their money again, resulting in the sudden devaluation of the domestic currency. This, in turn, means that countries found it harder to afford imports with their relatively increased foreign currency prices.
Exchange rate fluctuations are a risk for business and politics
Exchange rate fluctuations are bad for the economy and limit possible actions for governments. Due to the huge implied uncertainty of these fluctuations, companies and governments struggle to plan future strategies. Importing companies go bankrupt when an undervaluation of domestic currency makes imports more expensive. Exporting companies suffer when an overvaluation limits their competitiveness. Speculators used to take advantage of exchange rate fluctuations and, by the same token, magnified them: if the exchange rate was expected to rise, it was worth buying this currency, which made its price go up even more. In some cases, governments tried to counteract the ensuing appreciation. By raising interest rates, they sought to curb demand and to thereby lower the price level, causing the currency to depreciate. But the increased interest rates had two effects. First, by making it more expensive to take out loans the increased interest rates made domestic investment more difficult. Second, this again made the country more attractive for foreign financial flows.
…the situation is partially attenuated – while still being far from perfect. In 2030, the G195+ have decided to introduce the bancor and to establish an International Clearing Union. The G195+ was founded against the backdrop of the climate crisis, which, till 2030, was solely responsible for around half a million deaths per year. The G195+ is a diplomatic group that brings all nation states and grassroots confederations to the negotiating table. In this group, each diplomatic representation enjoys one vote. Thanks to an alliance formed by many countries and confederations of the Global South, it has been possible to push through not only compensation payments by those responsible for the climate disaster and on an absolute debt relief, but also a reform of the international financial system. This had far-reaching consequences. After decades of believing that individual policy failures were the sole cause of poverty in many countries, now the structural causes of poverty were finally addressed.
Global clearing currency bancor stabilises exchange rates
The aim of the reform was to ensure international balance and stability. The bancor has a fixed, albeit adjustable exchange rate with every other currency. It has been the currency used for all international treaties since 2030. If a country A exports to a country B, payment is processed via the International Clearing Union: Country B transfers the price of its exports in its currency to the Balancing Union. The latter converts the currency of country A into bancor and credits this amount to its bancor account. Country A can use this credit for future imports or lend it to another country at low interest rates. The International Clearing Union creates its own bancors as virtual money, the same way central banks have formerly done.
The reform has also taken into consideration the demands Keynes put forward in the older versions of his proposal. If a country pursues an aggressive export strategy (e.g. because it keeps wages in its country low) and therefore accumulates too large a surplus, this surplus may be subjected to a penalty interest rate. A country can circumvent the penalty by providing its surpluses as cheap loans to a deficit country. For this reason – and because economically weak countries no longer have to hoard foreign currencies to protect themselves against exchange rate fluctuations – former poor countries were conceded greater financial leeway. Ethiopia, for example, has taken advantage of this to become a leader in the development of hydrogen-oxygen fuel cells for decentralized power generation, with very low carbon emission rates thanks to solar energy. Since the time Ethiopia made this technology available to everyone free of cost, it has been used to generate electricity on a decentralized basis worldwide. In other countries, too, the additional resources released have been invested in socio-ecological transformations. Through these mechanisms, the gap between poor and rich countries has been closed considerably. This also benefited richer strata of societies, which no longer had to struggle with a bad conscience for living at the expense of others.
Further reforms: End of speculation and stabilisation of money supply
However, this alignment of living standards is only part of the reason why debt and financial crises have almost completely disappeared since 2030. Other factors include fixed exchange rates no longer allowing speculation on revaluations and devaluations, thereby removing the basis for destabilising speculation. Also, while in the past a restriction on the US dollar supply could threaten the solvency of other countries indebted in US dollars, money supply now is held stable, regardless of policies of the countries that used to provide internationally used currency. Moreover, the money supply in bancor can also be adapted to the needs of the G195+. For example, the Compensatory Union has created 4.4 billion additional bancor to provide humanitarian aid for victims of Cyclone Ingo, which devastated large parts of Central Europe in 2037 – an amount tantamount to 2018’s daily worldwide military expenditure.
Therefore, Keynes’ proposal has had the desired effect. An exception was made, however, in the final implementation of his idea. In 2030, the G195+ decided, contrary to Keynes original proposal, against a gold standard as the basis of their monetary system. This decision was made in light of the fact that gold holds very little practical value, apart from minor usages in electronic devices. After all, the value of gold is fictitious, and for centuries it has only been fuelled by the fascination with flashy jewellery – at high human and ecological costs. There was no need to link the currency to a material substance anyway, because, as said, a currency, like money in general, is worth only as much as the trust put in it. And enough confidence has been created indeed, by the common commitment that all states and democratic confederations gave to a system which helps reduce global inequality.