The International Monetary Crunch: Crisis or Scandal?
JAN JOOST TEUNISSEN
"...The truth of his statement is brought home when we look at the way Western financial authorities are handling the so-called international debt crisis.' In their view, most of the blame for this crisis must be laid on the developing countries. They say that it all started with the oil 'shock' of 1973, when the Organization of Petroleum Exporting Countries (OPEC) abruptly quadrupled oil prices. Developing countries then had either to 'adjust' to the new situation, or borrow their way out. Most chose the second, easier, option. Easier because OPEC deposited its multi-billion dollar surplus with the private Western banks, and the banks were willing to lend them these dollars. This 'recycling' of OPEC dollars went smoothly until the end of the 1970s,. when another oil shock emerged: interest rates soared and prices of ravv materials nosedived. But developing countries still refused to adopt the necessary adjustment policies; a debt crisis was the inevitable result" Eventually, 'adjustment', i.e. harsh austerity measures prescribed by the International Monetary Fund, was the. only solution left..."
[Mrt: worth of dip deeper...]
Mr. W.Duisenberg (in eighties): 'The situation we are in now is completely absurd. A sound situation would be that the -rich countries lend or give money to the poor countries. There should be an export of capital in the form of loans and grants from the rich to the poor countries. But, surprisingly, the richest country in the world, the United States, actually imports capital from allover the world. In this sense the United States is being financed by the rest of the world, including the developing countries.'
"What the American government has done is implement a programme of tax reduction, which means less income for the government, while at the same time raising its expenditures, particularly in the military sector. Military expenditure increased in real terms by 7-8% a year. That's how the United States has acquired these tremendous budgetary deficits."
How is it that the United States has shifted its military expenditures to other countries? 'In short', Duisenberg replies, 'this amazing fact is the result of the privileged financial position the United States has in the world.'
So far Duisenberg has tried to avoid a moral judgement. But at the end of his story he says what he really thinks of the behaviour of the US government:
The United States has at once a very privileged and a very responsible position. A country which is conscious of that responsibility should not only look at the internal effects of its policy, but also look at the international repercussions. America produces tremendous shockwaves affecting the whole world-in both the industrialized and the developing countries-but continues to be strongly inwardlooking. That's why we, presidents of central banks all over the world have been shouting, 'America, get your own house in order!' The situation we now find ourselves in is going to be unbearable, both for the United States and for the World.
'Keeping the system going'... The financial system cannot stop lending, because then everybody goes bankrupt. ~Tavares
"Some years after World War II the United States indeed began to run a chronic deficit on its balance of payments, or, in other words, to run a foreign debt, thereby creating substantial dollar surpluses abroad. The question is, however, who was responsible? The position of American economists is that it was not the fault of the United States, but rather the fault of the foreign central banks. They say these banks were eager to accumulate dollars as international reserve; nobody forced them to take dollars. They could always bring them back to the United States and encash them in' gold, or they could always buy American goods. By not doing so, they imposed the need of running this deficit on the United States. However, this explanation shifts the responsibility too easily onto the foreign governments and their central banks. The argumen't that the foreign-notably European-central banks were so eager to accumulate dollars as reserves should, in fact, be taken with a grain of salt. By the middle to late fifties European central bankers had already started worrying that the United States' gold supply was insufficient to continue supporting the gold value of the dollar. But, as they had star~ed to hold dollars as reserves, they were caught in a dilemma: if they all tried to convert their dollars into gold, the value of their reserves would certainly have drastically fallen because the United States would then have been forced to change the dollar parity., So, they ,were stuck. They thought it was better to keep dollars as reserves than convert them into gold, which would have almost destroyed their value.
This meant the United States continued to run deficits and the central banks continued to accumulate dollars. Not wanting to buy more unwanted American goods, which was their other option, and eager to invest their locked up dollars, the solution they eventually hit upon was to lend them to private banks. But these banks themselves had to find outlets for them, so they looked for clients who needed long-term credits; and the underdeveloped countries seemed to be the best bet."
"It is said, for instance, that it was created by a Soviet controlled French bank, which, when the cold war intensified, did not want to hold its dollars in American banks. While there may be some truth in these stories, they are not the basic reason for the existence of the Eurodollar market. It was founded''Simply because there were large amounts of unproductive dollars held in European private banks and in the reserves of the central banks. The central banks themselves could only lend them with great difficulty, because central banks usually don't engage in these sorts of activities, and this is where the private banks came in. A large proportion of the Eurodollars came into the system through the Bank for International Settlements in Basel. This bank, a kind of a central bank of the central banks, placed dollar reserves in the commercial banking system. This is how the Eurodollar market started."
"Many countries did use external borrowing as a policy tool. That is, their central banks determined a certain rate of expansion of the internal money supply and a certain interest rate internally, and then encouraged domestic banks to borrow externally. Why? Because this allowed the central banks to keep the growth ofinternal credit strictly to the limits they had decided upon. Central banks like to set up quantitative credit restrictions which are intended to ensure that total credit does not grow, say, for the manufacturing sector, by more than a certain percentage. If the private banks go above this rate they are made to deposit a certain amount in reserves with the central bank. But, if the banks succeed in borrowing money externally, they can avoid these restrictions. That was the built-in incentive which drove the banks to the Eurodollar market. Moreover, they were attracted by the very low interest rates in the Eurodollar market."
"What is the fundamental cause of this Third World debt which has accumulated beyond any reasonable possibility of repayment? It is the fact that the dollar is still being used as the world currency. That is the basic flaw of the system, and as long as this flaw remains, we will continue to be plagued by major crises, be they dollar crises or international debt crises."
"Soon after publication of my book in 1960, the European Community asked the president of the German Bundesbank, Emminger, to form a committee to write a report on my plan. Emminger came to the conclusion that there was no reason to believe the dollar would be a problem in the foreseeable future. He wrote this in 1960, and in October 1960 we already .had our first dollar crisis. Even so, Emminger continued to believe in the dominating role of the dollar. Why? Let me tell you a story. I remember a meeting of the IMF in Washington, in 1963, where I explained my plan and where I urged in a' discussion with the Europeans for communal restraint in the purchasing of dollars. Afterwards Bob Roosa came to me and said, 'Robert, do you see what you are doing? You are undermining our position in relation to the Europeans. As long as we can approach them separately we have no problem, but if we have to confront them jointly we will be very much weakened.' Then Emminger added: 'Triffin, do you realize what you are saying? At the moment, when the United States asks us to take mo~e dollars, we can just say, "By all means, but it does not suit us right now, can't you address yourself to Italy or Belgium?" But if we have to confront the United States jointly we cannot say "no" without putting the Atlantic Alliance in danger.'"
"Ironically, the richest and the most capitalized country in the world is actually being financed by the poor countries through the creation of international monetary reserves. Economic logic as well as humane concerns should· lead the richer and more capitalized countries to help economic development in the poorer countries. This is piously stressed again and again in United Nations resolutions. But the United States is doing exactly the opposite; it is having itself financed by poorer countries, even the poorest countries. To te.ll the truth, the United States is the only debtor of international reserves. The creditors-or claimants-ofinternational reserves are: other industrialized countries for a small amount, OPEC countries for a larger amount, and the other developing countries for the largest amount."
Triffin's third argument for reform is that there is an enormous
overflow of capital to the United States from the rich countries.
Explaining the reasons for the overflows, Triffin says:
"It started when the Shah of Iran fell and embassies were being burned, and when there were fears of a third world war. Some people thought that West Germany and Switzerland were not as safe as the United. States, so they began to switch their capital from Europe to safer American havens. Then c:::).me the enormous rise in interest rates in the United States. And, more recently, the United States has introduced attractive terms for investment. But the fundamental cause is, of course, that the system has continued to be based on the dollar."
Why is Triffin so concerned about the rich countries investing their
money in America rather than Europe? 'Because', says Triffin, 'European
savings are not being used to finance European investment, economic
recovery or increasing employment; they are being used, instead, to
finance the US budget deficit. More than half the gigantic American
budget deficit is financed by this exported capital.'
"Some years ago, I was discussing with a central banker the proposal of
the European Commission to strengthen the position of the ECU .
(European Currency Unit). He said, 'Triffin, I am all in favour of
strengthening the European currency, but as a governor of the central
bank I must advise my government that this wo-qld be a loss of
sovereignty for our country.' And I said, 'Are you serious? Isn't it you
who told me only a few weeks ago that with the way interest rates were
rising you had become totally dependent on the United States and had no
real sovereignty left?'"
"In the end, I think you can blame them more than the United States. The dollar remained the world's key currency because the central banks ofVVest Germany and Japan continued to buy dollars. Thanks to its privileged position as world's banker, the United States could go on spending enormous amounts on the military. It perhaps sounds a little strange that I put the blame more on Western Europe and Japan than the United States. But imagine that I said to you, 'Go to the best restaurant you can find, invite your friends and tell the waiter to send the bill to me rather than to you.' It would qe very hard for you not to abuse that kind of privilege. I wish the United States had acted more responsibly; but the main fault lies with Western Europe and Japan. For, if you ,tell the United States, 'You can spend whatever you like; we will pay the bill' then this is no way to encourage reasonable policy by the United States. Those who accumulate dollars (Europe and Japan) have more power to curtail the use of the dollar than those who are offering them (the United States )."
"It is certainly impossible to introduce them as long as the United States does not support them. You can't have a world-wide monetary reform without the cooperation of the United States because it is, after all, the richest country with the biggest capital market in the world. This therefore means the Europeans must do all they can for reg~onal monetary cooperation. A stronger European monetary system and a stronger ECU would function as the carrot and the stick. It is a stick because the United States would no longer have the ability to use the dollar as they do now, in a nefarious way. And a carrot because it would help the United States improve i~s policies concerning lower interest rates and lower exchange rates for the dollar."
[Mrt: see FONDAD]