The spectres of Bretton Woods

Tuesday, 23 December 1997

Hugo Salinas Price

The fascinating articles which have appeared in the last few months in the financial newspapers, dealing with the crises in Southeast Asia, Korea and Japan, provoke a suspicion that the debacle we are witnessing is nothing less than a long-run consequence of the Bretton Woods agreements of 1944, which were drawn up, essentially, by two men: John Maynard Keynes and Harry Dexter White. Out of their two minds was hatched our present world, in which the U.S. Dollar is the primary reserve currency for all Central Banks.

Consider the following line of reasoning:

No currency in the world has intrinsic value; all currencies, including the U.S. Dollar, are based exclusively on confidence. Alan Greenspan admitted as much, in his address a few months ago in Louvain, Belgium. The precarious stability of all currencies outside the U.S. depends on the amount of U.S. Dollar reserves owned by the corresponding issuing Central Banks.

No Central Bank can accumulate a growing stock of U.S. Dollar reserves, if its country does not export more than it imports. What we have is, in effect, a neo-mercantilism based on conservation of U.S. Dollars. As soon as imports begin to catch up with exports, warning bells go off. What can be done? State-owned enterprises can be privatized, so that they can be sold off to foreigners. This brings in Dollars, but, of course, on a one-time basis. Another recourse is to relax laws restricting foreign ownership of enterprises, especially banks, so that foreigners can bring in fresh Dollars as they take over activities formerly in the hands of local people. Finally, incentives can be created to attract capital to invest in new productive entreprises and bring in much needed Dollars.

Nevertheless, without a surplus of exports over imports, all other measures are merely palliatives. Thus, the world over, national economies have been oriented to exports – always in exchange for Dollars – as the mainstay for the respective national currencies and banking systems.

As soon as exports of any one country seem to fade, the speculative sharks begin to circle. The currency is deemed "overvalued". A devaluation is at hand. The Central Bank can cast away all its accumulated Dollars in defense of its currency, but in vain. The speculators are stronger than any Central Bank. The currency must fall in value, and then will be weaker because the Central Bank has no reserves left.

The Central Bank will raise interest rates drastically, to stem the Dollar hemorrhage and retain or bring in Dollars. The devaluation will wreck savings, and the high interest rates will devastate the productive structure. The Central Bank will continue to invest its Dollar balances in U.S. Treasury Bills paying less than 6%. Thus even the most severely afflicted countries are financing the U.S. Government, at a cost to themselves.

All countries in the world are in competition for U.S. Dollars, which they must obtain at all costs, for failure to obtain Dollars means devaluation, ruination of savings and financial havoc. Further, devaluations are contagious, for devaluation in one country will likely mean devaluation by others, as each strives to hold on to its exports and indispensable Dollar inflows.

Everywhere, exporting has become the central economic activity. National economies are sacrificed for the benefit of exporters. Wage rates are depressed by devaluation, and savings are destroyed, so that exporters may export. Banking system are thrown into liquidation for the same reason. Those entrepreneurs who are fortunate enough to be exporters are happy, and they are all for globalism. They can amass Dollars, which they can sell for more of their national currencies, or keep offshore, as it pleases them.

The economic centre of gravity of all countries has been thrust outside their borders, placing them all in a condition of chronic instability. Since Dollars are the objective, the U.S. has to be the buyer, and the U.S. must run trade deficits to supply the world with export surpluses. How else are the Dollars to flow to the world´s Central Banks? Some analysts speculate that the U.S. trade deficit may reach $300 billion a year, and fear that whole areas of U.S. economic activity may be wiped out by the desperate export efforts of the rest of the world.

Such is the prevailing condition in the world´s economy. Clearly, it is unsound for the world to depend on exports to the U.S. for national stability. And it is profoundly unsound for the U.S., to place itself in the position of buyer of last resort to the world.

When economic collapse comes about, as in Malaysia, the globalists call for pulling down barriers to the flow of capital. However, their diagnosis of the problem lacks depth; the problem is not "free flow of capital"; it is not even, fundamentally, overexpansion of credit or other unsound banking practices, but rather, in the last analysis, the Bretton Woods system of Dollar reserves, that skews every economy in the world towards the objective of Dollars via exports, over everything else. The globalists´ insistence on lowering barriers to the entry of foreign capital is interpreted, correctly, as political intrusion, for power always follows money. Predictably, nationalism flares up. Korean rioters may not understand just what is going on, but their hatred of the IMF and foreign takeovers of their banks, is justified. And nationalism is alive and well in the U.S. itself, as will become very clear when the trade deficit approaches $300 billion a year.

Our very odd world monetary and financial system, built on the ruins of Bretton Woods, has produced an unstable world economy, and is headed for a serious conflict with nationalist sentiments the world over. Picture yourself playing "Monopoly" against a player that owns the "Bank"!

The Soviet Union fell apart because of the inherent weakness of its statist policies; the United States may find that its decline in the world mirrors the fall of the Soviet Union, because of the unsound basis of the monetary and financial system haunted by the ghosts of those two economists, long dead, John Maynard Keynes and Harry Dexter White.

If the world is out of joint because of the Dollar reserve system instituted by Bretton Woods, then clearly, what the world requires is a system where national currencies do not depend on Dollar reserves. And that can only mean one thing: gold reserves, and their corollary, currencies convertible into gold. Either that, or we shall be treated to the spectacle of a crumbling world economy, and virulent nationalistic reactions.