Review of a book by Jean-Claude Delaunay, Fondation Gabriel Peri, 2006

Le dollar, monnaie mondiale

by
William Krehm

Both the author of this extremely interesting analysis of Washington’s debt position and the reviewer owe a great deal to François Perroux, a masterful French economist, who today — as Delaunay notes — is wholly forgotten even in France. He is one of the "Great Forgotten Economists whom we sorely have need of as we hurtle to every greater, blinder catastrophes. One of his greatest contributions was his grasp of the power element — his "Dominant Revenue" — that he tracked down through the ages. As Delaunay so well shows, it can be immensely helpful in guiding us through the thickets of confusion of current economic theory.

To set the stage for his analysis, the author establishes the three basic functions of money, that will guide him in his analysis of the US debt position:

1. As a measure of the economic value of commodities not only in commercial circulation, but stock-piled, goods in the process of production, as well as financial assets. Money in this aspect is a unit of accountancy.

2. As the means of putting into circulation the economic essence of merchandise, both that being marketed to its ultimate consumers or still stocked. In this aspect money ensures the circulation of merchandise at whatever stage of its production and delivery.

3. A means of accumulating and handling the economic value of the goods without reference to conserving their specific usefulness over time. This aspect of money might be described as a reserve of value.

Distinguishing these three functions of money is essential to an understanding of any monetary operation, and the author applies it in his analysis of Washington’s hazards arising from its acceptance by the rest of the world as the main reserve currency, and its role as the purchaser of the last resort for the rest of the world.

Money as a Social Tool

One can improve this analysis by noting that those agents, private or governmental, who satisfy their monetary needs with American dollars while living outside the US occupy a special position. Marx wrote that money is a "social tool." This implies that money is the means whereby value that is produced in a decentralized way is put into a social context. Indeed, money is the form assumed by the economic unity of the world. However, in a jarring note, it is also the means of exercising economic power over other nations. We thus arrive at the basic analysis of the "dominant revenue" or the "dominant economy," of François Perroux.

Let us begin with the monetary figures related to the trade in merchandise. A study carried out by the European Community fifteen years ago, showed that in 1980 56% of the world exchange of goods was invoiced in US dollars, 48% in 1987. Another study covering the period of 1973 to 1990 provides a lower figure — 35%. The best known of the products denominated in dollars are oil, metals. More frequently, manufactured goods have their prices quoted in the currencies of the countries in which they are produced. But that is not always so. The products of the aeronautical industry are quoted in dollars, a detail that creates immense difficulties whenever the exchange rate of the dollar goes down. But more important has been the financial globalization that endowed the US dollar with a renewed importance as the preeminent currency of the world. In 2004, the US stock markets attained a total capitalization of $16,324 billion, while the stock exchanges of Europe and Japan respectively reached $9,300 and $5,850 billion.

The figure for long-term loans provides further insight into the dollar’s role as world reserve currency. In 1982 and 1992, the obligations in eurodollars (i.e., the dollars delivered outside the US by non-American banks or branches of American banks) amounted respectively to 56% and 41% of the total obligations undertaken in the world. One must conclude that on the world capital markets, borrowers have a vital "need" for dollars. But amongst these borrowers are the US state and the US economy. For the US currency is the first choice of borrowers, whether they happen to be developed or underdeveloped countries.

There is yet another "place," electronic and virtual, where the preeminent world-wide position of the dollar is evident. This allows investment or borrowing according to need; and there the standard currency is the American dollar. From the relevant data it is clear (1) that the dollar is the currency most bought and sold in significant places; (2) London is the most active market where every day the greatest amount of dollars are exchanged; (3) the Asiatic countries do the highest proportion of their trading in dollars; (4) ever since the 90s there is a tendency for an increase in the proportion of exchange transactions carried out in dollars, with the exception perhaps of Japan.

The Phenomenon of "Dollarization"

The term dollarization refers to the total or partial replacement of a local currency by the dollar. Take the example of Ecuador, a politically independent country in Latin America with a currency known as the sucre. In the year 2000 the government of that country, in agreement with the political authorities of the US, decided to replace the national currency with the dollar. Since then the dollar has replaced all the functions previously filled by the local currency with the exception of the coins. Ecuador has been "dollarized."

It is significant that since the decade of the 1990s, several countries of Latin America have either taken this step or announced their intention of doing so.

Dollarization may take an official form, as in the case of 14 territories or countries: Porto Rico (1899), Panama (1904), Salvador (2001). It is notable that the trend to official dollarization has slowed down as a result of the disaster experienced by the Argentine in 2001-2. Dollarization may also be semi-official, making it perfectly legal for the residents to keep dollar deposits in local banks in addition to deposits in the local currency. According to an estimate of the IMF in 1995, there were about fifty such semi-dollarized countries, of which 18 were "highly dollarized." Such countries were to be found in the Caribbean, the successor countries resulting from the dissolution of the Soviet Union, Vietnam.

After the definitive abandonment of the gold standard in 1971, the capital of the world entered a period of erratic monetary values, and floating exchange rates. Yet the globalization of capital continued on its upward course. Capitalists felt the need for more stable monetary instruments for their investments, On the other hand the heads of the underdeveloped countries, strangled by the extremely high interest rates, and driven to export to service and repay their debts, found it less and less possible to attract the capital needed for their development while undergoing unavoidable devaluations of their currencies. Dollarization was an extreme form of this trend.

American investments going to Europe have gone into finance and banking to a greater degree, while more of the movement in the opposite direction have gone into commerce and service industries.

However, assuming that a dollar crisis should actually ensue. Two distinct types of risk are conceivable:

1. An immediate drop in the exchange value of the dollar might ensue. This would have a probable partially corrective effect, since it would reduce the real value of the American debt held in Europe denominated as it is in dollars. An important result, however, would be the losses suffered by the capitalists holding the American debt. Their potential contributions to the prosperity of countries like China would accordingly shrink.

2. A strong increase in interest rates, to increase confidence in the dollar by attracting more investment into the US rather than from it.

Are Higher Prices Always a Disease?

The author proceeds to dismiss any serious "inflationary" effects from higher interest rates. "The condition of the dollar system is not, however, perceived currently critical for other reasons than those mentioned." In the OECD zone — the thirty-odd developed countries, the variation of prices — between March of 2005 and 2006, excepting higher energy costs, have moved up only 2.6%. That is generally explained by the effects of globalization and importations. But here the weakest aspect of the Delaunay book appears. "Inflation" cannot be considered a single disease of the economy — or even as necessarily a disease — because very different economic causes, some inevitable, others pathological, may share the same symptom of high price indexes.

That might be due not to an excess of Demand over available Supply, which to our mind is a proper description of "price" inflation. Another very different disorder giving rise to higher price indexes could be faulty government accountancy, that treats investments of government as a current expense, depreciating them entirely in the year when made, and then carrying the value of a building, a bridge or a highway at a token dollar. Since that would present the budget in unseemly deficit it would drive up the benchmark rate of the central bank.

In the early 1990s, the US government bailed out its banks after the BIS declaration the debt of developed countries "risk-free" and consequently requiring no down-payment for banks to acquire. This allowed the banks to load up with government debt with practically all the interest paid on such Fed-held government bonds going to the banks as "seigniorage," paying it to the private banks whose coffers were replenished in this and other ways.

Mr. Alexandre Lamfalussy, manager of BIS, proclaimed "zero inflation" the only acceptable goal. The plight of the deregulated banks had been so desperate from the massive loss of their capital in deregulated adventures, that M. Lamfalussy — and central banks around the world — overlooked the detail that when interest rates soared, the government debt hoards that had by now gone far to replace the banks’ lost capital would shed value. That brought down the Mexican peso by some 40%.

The entire world financial system tottered, but was saved only by a standby fund of some $51 billion US put together by the US. The IMF and Canada. More decisive for the longer run was the move by Clinton’s Secretary of the Treasury, Robert Rubin, in bringing in accrual accountancy (a.k.a. capital budgeting) and carrying back the revision of the government books to 1959. This retrieved some $1.3 trillion in government assets. This entered the Department of Commerce figures under the heading of "savings" — which it most definitely not since it was not cash or near-cash but long since invested in bricks, steel and concrete. However, a wink and a nudge to the bond-rating agencies produced the desired result: the ratings of government debt soared and interest rates dropped. That gave Clinton a second term, and the stock market the high-tech boom that soared until it bust in 2000.

The Need to Rediscover our Suppressed Great Economists

That is all a crucial part of the tale that Delaunay has missed, largely because he apparently abandoned much of what he should have learned from Perroux’s masterful destruction of the self-balancing market model. But then that is part of the immense tragedy of François Perroux — and of many other great economic thinkers — that at the very end of his life, finding himself increasingly expunged from the official world of economics, he made a feeble attempt at reconciling his great contribution in devastating the free, self-balancing mathematical model, in a half-hearted conciliatory review of some youngster’s efforts in the field.

And from there we get Delaunay’s discussion of "inflation" as though higher prices were one of the bed rock established certainties of economics rather than a grab-bag of very different causes, with the common symptom of rising prices. The ultimate tragedy of François Perroux caught up economists across the world in varied degrees. A key part of the COMER mission is to retrieve and put into circulation again some of the great creative work of leading economists that has simply been expunged, along with the very memory of their existence.

Fortunately, Delaunay is able not only to preserve Perroux’s theory of power — embodied in his "dominant revenue" that takes the flow and mass of the revenue of a given social class an index of the welfare of society as a whole. This he extends to embody the realities both of globalization and the current world preeminence of the United States.

"For François Perroux, power was the great forgotten factor. Let us keep in mind the ability of the dollar to drop in value without that reducing the world demand for that currency. This occurs for several reasons: (1) As the dollar forfeits some its value, the value of American investments outside the country rises; (2) the value of the foreign investments in the US declines; (3) A stimulus ensues for foreign capital to seek investments in dollar areas to profit by the cheapened dollar."

All this has another aspect than the purely political one. The unique position of the US dollar provides a powerful means of exploiting labour in the countries subjected to dollar supremacy — of appropriating a further part of the surplus value produced.

The "dollar system" is more than just the means of financing the American trade balance. "It is an immense gulf stream of capital heading to irrigate key financial and productive areas of the world economy. The ‘dollar economy’ adds up to a world-wide economic social machine lifting the US to the status of dominant economy. In this role it pursues two main goals: (1) Establishing a systemic control of ‘the enemies’ thus reinforcing the military and diplomatic controls of their economies; (2) Exploiting ‘the enemies’ to their very bones. More than just a political instrument it is a means of appropriating wealth."

Viewed by other cultures subjected to such currency domination, the prospects opened up are less than reassuring. Is it not time that we returned to Keynes’ abandoned effort at Bretton Woods to devise a monetary medium more conducive to a harmonious co-existence of different cultures?