When Money Usurps Economy, Something Is Seriously Wrong

Date: 21 Oct 1997 | posted in: From the Desk of David Morris, The Public Good | 0 Facebooktwitterredditmail

When Money Usurps Economy, Something Is Seriously Wrong

by David Morris

October 21, 1997 – published in St. Paul Pioneer Press

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.

Morris is vice-president of the Institute for Local Self-Reliance

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David Morris

David Morris is co-founder of the Institute for Local Self-Reliance and currently ILSR's distinguished fellow. His five non-fiction books range from an analysis of Chilean development to the future of electric power to the transformation of cities and neighborhoods.  For 14 years he was a regular columnist for the Saint Paul Pioneer Press. His essays on public policy have appeared in the New York TimesWall Street Journal, Washington PostSalonAlternetCommon Dreams, and the Huffington Post.