The Brandt Equation, 21st Century Blueprint for the New Global Economy
The Brandt Proposals: A Report Card: MONEY and FINANCE
From the Brandt21 Forum, arising out of the Brandt Commission, headed by the late Willy Brandt.
The Brandt Reports noted that the global economy set off on a daredevil track when it adopted the flexible exchange rate system in 1971. Previously, nations could ensure stable rates because their currencies were convertible into gold at a fixed rate. The new system – or rather, non-system – has been a disaster.
Floating exchange rates have, for the most part, benefited developed countries, while creating waves of recession, currency instability, and financial risk for the rest of the world. Unregulated financial markets cause erratic fluctuations in exchange rates, as private capital travels with the speed of a keystroke from one country to another in search of safety and profit. This volatility was a primary concern of the Brandt Commission, because wild currency swings alternately cause speculative bubbles, then abrupt shocks, which hit developing economies especially hard….
A global economy also requires a global currency, primarily to avoid the contraction caused by declining liquidity and rising national deficits. For the world economy to grow, international cash flow must expand along with it. At present, developed nations maintain liquidity through access to private capital markets and by issuing new currency, but developing nations have little access to private capital and must borrow from the IMF to maintain adequate credit and cash flow….
There would be many advantages to a universal currency. The international money supply would be governed by global demand, rather than state decree. Holders of national currencies would enjoy greater convertibility and reduced risk, business would benefit from uniform price signals, nations would reduce the costs of maintaining separate reserve currencies, and the world would avoid the instability of the present system of competitive national currencies.
Moreover, the distribution of new international liquidity would be geared mostly toward developing nations, where the adjustment burden is the highest and the need for credit expansion the greatest. This would vastly enhance the overall adjustment process of the international monetary system.
“Perspective: One world, one currency” from the Bahai Community.
“Over the last few years, the monetary crises in Mexico, Brazil, Russia and Southeast Asia – to name but a few of the countries and regions whose economies have been especially hard hit – have demonstrated the fragility of the international financial system.
While some countries and regions have been relatively insulated so far from the very real economic hardship and dislocation caused by these crises, specialists in international finance have warned repeatedly of a possible domino effect, through which a deepening economic collapse in one region could spread elsewhere, if not worldwide.
Such warnings stem from the fact, now well established, that the world’s economy is today entirely integrated. While this integration offers a degree of redundancy and resiliency, it also calls for a much greater attention to the whole system – and mandates greater cooperation to ensure the economy’s proper functioning.
Government leaders, economists, business leaders and others have accordingly raised the call for some sort of reform of the global financial system. As policy makers consider the options, the long-neglected idea of establishing a world currency system deserves a thorough investigation.
In an age when international interdependence and integration are increasing on all fronts, a “uniform and universal system of currency” is one of a number of complementary measures that will help to “simplify and facilitate intercourse and understanding among the nations and races of mankind,” as Shoghi Effendi, who led the worldwide Bahá’í community from 1921 to 1957, wrote in 1936.
A single currency would in some respects be like a world language, improving communications around the globe. It would eliminate the present problems of speculation, instability and uncertainty and would provide a strong foundation for the growing world economy. It would reduce a significant cost and risk of doing business internationally.
A global currency would also be an important step in promoting economic justice in the world, removing the advantage of a few favored countries whose currency is seen as stronger or more secure and preventing the poor from being hurt by the impacts of currency fluctuations. In the long run, such a step would do much to counteract the local harm that is sometimes induced by economic globalization by putting everyone, everywhere, on a more “level” economic playing field.
The idea of a world currency is not new. Economist John Maynard Keynes proposed an “international currency union” in the 1940s. His idea was watered down at the Bretton Woods Conference by diplomats afraid of something quite so dramatic, and in its place emerged the International Monetary Fund and the World Bank. More recently The Economist, among the most orthodox of financial journals, called for a re-examination of the idea, suggesting in a 26 September 1998 article that “One world, one money” might be worth “a moment’s thought.” Certainly, a world currency would go far to solving the immediate problem of the regional currency crises.
Under the present system, over a trillion dollars changes hands each day as investors seek the best returns for the least risk. These currency movements are managed by professionals who must anticipate or protect themselves against adverse changes in exchange rates, which often leads to speculation for or against particular currencies. Governments also frequently intervene to protect their currency’s position or to seek trade advantages. The system is fundamentally unjust, inasmuch as countries whose money is held as a reserve currency receive undue economic benefits compared to less favored countries.
The instability in exchange rates between currencies creates difficulties for international trade and investment, for business planning, and for national economies, with impacts on prices and inflation. With any movement, there are not only winners and losers, but also general economic penalties. If a country opts for a fixed exchange rate, its monetary policy must defend that rate; if it chooses a managed float, it is open to speculative attacks. Central banks can intervene to defend their currency, but major currency crises today can quickly overwhelm national reserves and require emergency international assistance – assistance that in recent years has amounted to tens of billions of dollars.
The psychological dimension is important in currency crises, since much depends on the confidence investors have in a particular currency. Yet confidence is easily shaken and hard to restore. A world currency would not only eliminate the opportunity for speculation but also provide universal confidence.
In the past, various objections to a world currency have been raised, ranging from the rational to the emotional. A single currency would impose a common economic rigor on all countries and force them to face unpleasant realities. No longer could governments print money at will or ignore the fact that they cannot live forever beyond their means. Yet, in many important ways, these would obviously be positive developments.
Some argue that the best protection against international fluctuations is many more local currencies that people can manage for themselves, insulating their economies from the outside. Yet while this may apply in a world of fluctuating monies, a world currency would in fact eliminate a major source of outside impacts.
Another fear is that the abandonment of national currencies and foreign exchange markets would increase unemployment in some regions, both because some occupations would become redundant and because of the likelihood that a more open and level economic “playing field” would divert some jobs to other regions. But such transitions are occurring already – and without any underlying sense of justice that a world currency with its leveling power entails.
There are also those who fear such steps towards world unity as a further loss of control to powerful interests and distant bureaucracies. In the same vein, a national currency is a symbol of national sovereignty, and such symbols are rarely given up easily.
Yet, as shown by the launching in Europe of the Euro, a single currency for 11 countries that will by the year 2002 entirely replace the French franc, the German mark, the Italian lire and other long-established currencies, such symbols can be dispensed with when the promised benefits are strong.
A single currency must be accompanied by many other measures for integration and harmonization. It would require a strong and effective world monetary authority or central bank, working in the common interest and freed from political manipulation, to manage the world currency, regulate the money supply, and ensure adequate liquidity without inflation. The creation of such an institution would go hand in hand with the development of other mechanisms for global decision making aimed at building trust and consensus among the world’s governments.
The adoption of a world currency by itself will not solve all the world’s problems. It is one element needed to support a more just and effective world economic system, which in turn is but one facet of the world federal system necessary to accompany globalization and to achieve world unity and peace. Ultimately, technical solutions to economic problems will only work effectively if a new spirit permeates economic life and a new economic system is evolved based on the application of spiritual principles. Money itself needs to be put back in its place as a medium of exchange rather than the measure of economic performance or development. Economic values must be balanced by social and spiritual values.
A single world currency may seem like a distant goal, but the logic behind it as a solution to some of the critical problems threatening our present economic well being cannot be denied. Indeed, given the trends of global interdependence and integration, its desirability – and its ultimate inevitability – suggest that the idea should receive a thorough investigation by world leaders sooner rather than later. “
One Country, the Online Newsletter of the Bahai Community, Volume 10, Issue 4 / January-March 1999.
by Augusto Lopez-Claros
Baha’u’llah’s teachings are visionary in their anticipation of and call for a global economic and governmental system involving the free flow of goods and services and factors of production (e.g., labor and capital), a single global currency, a single system of weights and measures, a single code of international law, an universal auxiliary language and the emergence of institutions with jurisdiction over aspects of the global economy. This global system would develop within the framework of government based upon federal principles and supported by collective security agreements, ensuring the maintenance of peace.” (Bahai Development and Environment Summit, Sidcot, UK, 15-18 August 1999)
“When Money Usurps Economy, Something Is Seriously Wrong”
from the Institute for Local Self-Reliance
by David Morris, Vice-President for the Institute for Local Self-Reliance at Washington, D.C. and Minneapolis, Minnesota. October 21, 1997
“Some 10,000 years ago, the human species invented money as a medium-of-exchange. Barter had outlived its capacity to deal with increasing trade. Money lubricated commerce. And when commerce crossed borders, an exchange of currencies took place. Money was firmly tied to the real economy.
That pattern continued for several millenia. Indeed, as late as 1970, 95 percent of all foreign exchange transactions were linked to transactions that added real wealth to the planet’s economy–tourism, investment, trade.
In the early 1970s, the link between money and the creation of real wealth began to weaken. Governments allowed previously fixed exchange rates to float. Nations allowed domestic capital to roam at will. Computers allowed brokers to aggregate millions of individual accounts into a raging torrent of money that could profitably be “invested” in any one currency for just a few hours.
The result? The speculative economy now dwarfs the real economy. As much as 98 percent of all foreign exchange transactions involve currency speculation. Money, a device first invented to enable trade has now become by far the largest component of trade.
A few thousand financial brokers now punch a few computer keys and decide the fate of nations. Some see this as the ultimate invisible hand at work. Walter Wriston former CEO of Citibank for example, calls currency speculation “a kind of global plebiscite on the monetary and fiscal policies of governments.” Most observers, however, are concerned that this particular invisible hand maximizes its profit only by destabilizing economies. As Belgian economist and former currency speculator Bernard Litaer observes, “Volatility creates profitability. The worst thing that can happen to a currency speculator is when nothing happens.”
Former Federal Reserve Chair Paul Volcker agrees. His “biggest concern is the growing constituency for instability.” Billionaire currency speculator George Soros predicts catastrophe. “(I)nstability is cumulative, so that an eventual breakdown of freely floating exchanges is assured. It is only a question of when.”
Currency fluctuations now constitute the largest single risk of doing business in a foreign country. Businesses are responding by diverting a considerable amount of their time and resources to playing and monitoring foreign exchange markets.
Governments are increasingly powerless to prevent a run on their currencies. The IMF estimates that speculative funds can muster $800-900 billion to finance their currency positions. The combined efforts of governments rarely exceeds $50 billion.
In the last few months, currency speculation staggered the economies of Malaysia, Thailand, the Philippines and Indonesia. At the recent World Bank-IMF annual meetings in Hong Kong, the anguished and enraged Prime Minister of Malaysia Mahathir Mohamad declared, “I am saying that currency trading is unnecessary, unproductive and totally immoral. It should be stopped.”
His comments set off shock waves around the world. International bankers like Alan Greenspan chided Mohamad for trying to reverse the tide of history. But many experts, while concerned that Mohamad’s style was unduly abrasive, embraced his central message.
What can be done to safeguard our economies from the predations of rootless speculators?
- Slow down currency flows. Back in 1978, Nobel Prize winning economist James Tobin suggested that we impose a 0.5 percent tax on each transaction. The tax is trivial but given that speculators’ make only a fraction of a percent on each high volume transaction, it could significantly dampen speculation. And by Tobin’s estimate, such a tax could raise $1.75 trillion a year, enough to eliminate much of the world’s nutritional or health or environmental problems.
- Build up our defenses against currency speculators. That might mean resurrecting some of the old restrictions on investing abroad. I know this will raise the hackles of those who believe that the Bill of Rights protects their right to invest in Indonesian rupiahs or Thai bahts. So be it.
- Develop local currencies. In his new book Short Circuit, Irish economist Richard Douthwaite describes the remarkable new wave of city or regional currencies. More than a thousand such rooted currencies now exist around the world, evidence that people are searching for ways to delink their communities from the predations of the speculator economy.
- Resurrect John Maynard Keynes’ proposal, overruled by the United States 50 years ago, for a single global currency against which all others would be measured.
Global currency speculation is not an inevitable result of increased trade nor of technological advances. It is occurring because we changed the rules to allow it to occur. Now we need to develop new rules that will allow us to regain control of our national and local economies, and again make money the lubricant of the real economy.”