'We should also take heart from the fact that money,
after all, can be whatever people decree it to be'

Money is a public good. National governments print it and enforce its use by making the local currency ‘legal tender’ for discharging debts, for example. But it’s this public aspect of money that has always worried the wealthy. So long as money is controlled by the state, the rich worry that governments will overprint it, causing inflation and rendering accumulated wealth valueless.

That’s why the wealthy have always sought to remove the ability to print money from government. Money-printing can’t be privatized, but it can be quasi-privatized, relegated to semi-autonomous and undemocratic central banks. This removal of money from democratic control has been a major achievement of the rich.

In the global economy there is, however, no central bank to issue money. This lack of an international currency is a problem for corporations that operate in dozens of countries, each with its own currency. The same problem faces international investors – shares on the Argentinean stock exchange are purchased with pesos, but Americans or Japanese want their profits in pounds, dollars or yen.

Converting from one currency to another is costly and risky. Individual nations control the rules governing conversion – how much, at what exchange rate, even whether money can be converted at all. National governments have been known to devalue their currencies or prohibit conversion and trap foreign investors in the local currency. But as competition for foreign investment intensifies, global corporations are demanding and getting firm reassurances that their funds can be safely converted and repatriated.

Unfortunately, Third World governments are promising what they can’t deliver. Under pressure from global financial institutions, virtually every South American and Asian government has agreed to permit full and free convertibility of its currency into US dollars and other major currencies. (Malaysia and China are the only significant holdouts.) At the same time, they promise to stabilize their currencies against the dollar, so that global firms don’t suffer losses when they convert their profits. However, convertibility and stable exchange rates are incompatible. When a country allows investors to buy and sell its currency, repatriate earnings or play the local stock exchange, it quickly loses control over its own money. Speculators move in and set the exchange rate themselves.

Brazil is a case in point. In 1994, President Cardoso (then finance minister) introduced the real, a new currency whose value would be pegged to the dollar. The peg insured foreign investors against exchange-rate losses and protected the wealth of the Brazilian élite, who figure their worth in US dollars. The Government also declared an end to foreign-exchange controls: the new real would be freely convertible into international currencies.

The ‘Real Plan’ was supposed to set off an economic boom. Foreign investors would pour funds in and wealthy Brazilians, notorious for moving money overseas, would keep their money at home. For a time it worked. Floods of cash from abroad eased the heavy costs of servicing Brazil’s foreign debt. But the contradictions of the peg soon emerged. By 1998 financial players began to worry that the real was overvalued and that the Government couldn’t maintain the fixed exchange rate. They pulled their funds out and brought the real down with them, plunging the Brazilian economy into a crisis from which it has yet to emerge.

The contradictions of promising currencies that are both convertible and stable are well-understood by international financial institutions. Not one of the rich countries promises such a thing, nor do investors expect protection or compensation when the dollar or yen or euro drops 20 or 30 per cent. Those currencies are considered international, the forms in which the wealthy measure their power. Real, ringgit and baht are mere bits of paper and international investors will not hold them without assurances.

Such assurances don’t mean much to currency speculators. The gains from attacking exchange rates are irresistible and lead inevitably to the kind of crises that recently hit Thailand, Korea and Indonesia as well as Brazil. Yet the alternatives are worse. When countries abandon their currencies to market forces, speculators fear dollar losses and governments are forced to raise interest rates to placate them and stem capital flight.

While a few countries have successfully restricted money flows across their borders, more have given in entirely. Argentina placed its economy in the hands of a currency board – a quasi-public authority that issues pesos only when the country has enough dollars to back them up. Panama and Ecuador have abandoned their currencies entirely, conducting all transactions in US dollars, over which they have no control whatsoever. This ‘dollarization’ is driven by Latin America’s financial élite who are willing to sacrifice economic autonomy to protect the dollar value of their wealth.

JOHN MAIER / STILL PICTURES

It is difficult to resist such draconian responses when no alternative ways exist to pay for international trade. Countries need to buy things from the rest of the world and they need dollars or yen or euro to pay for them – yet these currencies are all tightly controlled by the world’s wealthy.

But change is brewing. Last October, World Bank Chief Economist Joseph Stiglitz spoke of the need for financial reform and declared that discussions should be widely representative and based on ‘broad consensus’.

We should also take heart from the fact that money, after all, can be whatever people decree it to be – as long as the institutions that define and issue it are responsive to popular control. The challenge is to fight for a financial architecture that serves the needs of the world’s people, not the other way round.

Ellen Frank teaches at Emmanuel College in Boston and is a contributing editor to Dollars and Sense.