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Stabilizing Exchange Rates
in a Floating Sea of Trade

Old debts can be wiped off the books, but the same debt syndrome
will strike again unless something is done to stabilize national
currencies. As long as currencies can be devalued by speculators,
Third World countries will be exporting goods for a fraction of their
value and over-paying for imports, keeping them impoverished. The
U.S. dollar itself could soon be at risk. If global bondholders start
dumping their bond holdings in large quantities, short sellers could
fan the flames, collapsing the value of the dollar just as speculators
collapsed the German mark in 1923.
To counteract commercial risks from sudden changes in the value
of foreign currencies, corporations today feel compelled to invest
heavily in derivatives, “hedging” their bets so they can win either way.
But derivatives themselves are quite risky and expensive, and they
can serve to compound the risk. Some other solution is needed that
can return predictability, certainty and fairness to international con-
tracts. The Bretton Woods gold standard worked to prevent devalua-
tions and huge trade deficits like the United States now has with China,
but gold ultimately failed as a currency peg. The U.S. government
(the global banker) had insufficient gold reserves for clearing interna-
tional trade balances, and it eventually ran out of gold. Gold alone
has also proved to be an unstable measure of value, since its own
value fluctuates widely. Some new system is needed that retains the
virtues of the gold standard while overcoming its limitations.

Web of Debt

From the Dollar Peg to “Full Dollarization”?

One solution that has been tried is for countries to stabilize their
currencies by pegging them directly to the U.S. dollar. The maneuver
has worked to prevent currency devaluations, but the countries have
lost the flexibility they needed to compete in international markets. In
Argentina between 1991 and 2001, a “currency board” maintained a
strict one-to-one peg between the Argentine peso and the U.S. dollar.
The money supply was fixed, limited and inflexible. The dire result
was national bankruptcy, in 1995 and again in 2001.4
In the extreme form of dollar pegging, called “full dollarization,”
the fully dollarized country simply abandons its local currency and
uses only U.S. dollars. Ecuador converted to full dollarization in 2000,
and El Salvador did it in 2002.5 Certain benefits were realized, in-
cluding reduced interest rates, reduced inflation, a stable currency,
and a measure of economic growth. But when neighboring countries
devalued their own currencies, the “dollarized” countries™ products
became more expensive and less competitive in global markets.
Dollarized countries also lost the ability to control their own money
supplies. When the El Salvador government incurred unexpected ex-
penses, it could not finance them either by issuing its own currency or
by issuing bonds that would be funded by its own banks, since neither
the government nor the bankers had the ability to create dollars. The
country™s money supply was fixed and limited, forcing the govern-
ment to cut budgeted programs to make up the difference; and that
seriously hurt the poor, since welfare programs got slashed first.

The Single Currency Solution

Another proposed solution to the floating currency conundrum is
for the world to convert en masse to a single currency. Proponents say
this would do on a global level what the standardized dollar bill did
on a national level for the United States, and what the Euro did on a
regional level for the European Union. But critics point out that the
world is not one nation or one region, and they question who would
be authorized to issue this single currency. If all governments could
issue it at will, the global money supply would be vulnerable to
irresponsible governments that issued too much. If, on the other hand,
the global currency could be issued only by a global central bank on
the model of the IMF, the result would be the equivalent of “full

Chapter 45- Government With Heart

dollarization” for the world. Countries would not be able to issue
their own currencies or draw on their own credit when they needed it
for internal purposes. As in El Salvador, whenever they had crises
that put unusual demands on the national budget, they would not
have the option of generating new money to meet those demands.
They would be forced to tighten their belts and pursue “austerity
measures” or to borrow from the world central bank, with all the
globalization hazards those compound-interest loans entail.
There is, however, a third possibility. Rather than having to
borrow the global fiat currency from a central bank at interest, nations
might be authorized to draw on this credit interest-free. In effect, they
would just be monetizing their own credit. We™ve seen that what has
driven the Third World into inescapable debt is the compound-interest
trap. Interest charges are estimated to compose about half the cost of
everything produced. If interest to financial middlemen were
eliminated, loans would merely be advances against future production,
which could be repaid from that production. Borrowing nations would
have to repay the money on a regular payment schedule, just as they
do now; and they could not borrow more after a certain ceiling had
been reached until old debts had been repaid. But without the burden
of compound interest, they should be able to repay their loans from
the goods and services produced -- rents from housing, fees charged
for publicly-developed energy and transportation, and so forth.5 If
they could not repay their loans, they could seek adjustments from
the World Parliament; but decisions concerning when and how much
to increase the national money supply with interest-free credit would
otherwise be their own. That sort of model has been proposed by an
organization called the World Constitution and Parliament
Association, which postulates an Earth Federation working for equal
prosperity and well-being for all Earth™s citizens. The global funding
body would be authorized not only to advance credit to nations but
to issue money directly, on the model of Lincoln™s Greenbacks and the
IMF™s SDRs. These funds would then be disbursed as needed for the
Common Wealth of Earth.6
Some such radical overhaul might be possible in the future; but in
the meantime, global trade is conducted in many competing currencies,
which are vulnerable to speculative attack by pirates prowling in a
sea of floating exchange rates. That risk needs to be eliminated. But

Web of Debt

Chapter 46

[S]uddenly they came to another gulf across the road. . . . [T]hey
sat down to consider what they should do, and after serious thought the
Scarecrow said, “Here is a great tree, standing close to the ditch. If the
Tin Woodman can chop it down, so that it will fall to the other side, we
can walk across it easily.”
“That is a first-rate idea,” said the Lion. “One would almost
suspect you had brains in your head, instead of straw.”
“ The Wonderful Wizard of Oz,
“The Journey to the Great Oz”

In his 1911 book The Purchasing Power of Money, Irving Fisher
wrote that for money to serve as a unit of account, a trusted medium
of exchange, and a reliable store of value, its purchasing power needs
to be stable. But substances existing by the bounty of nature, such as
gold or silver, cannot have that property because their values fluctuate
with changing supply and demand. To avoid the disastrous
devaluations caused by international currency speculation,
governments need a single stable peg against which they can value
their currencies, some independent measure in which merchants can
negotiate their contracts and be sure of getting what they bargained
for. Gold, the historical peg, was an imperfect solution, not only
because the value of gold fluctuated widely but because gold also
traded as a currency, and the “global banker” (the United States)
eventually ran out. Some unit of value is needed that can stand as a
lighthouse, resisting currency movements because it is independent
of them. But what? The relationship between feet and meters can be
fixed because the ground on which they are measured is solid, but
Chapter 46 - Building a Bridge

world trade ebbs and flows in a moving sea of currency values.
A solution devised in the experimental cauldron of eighteenth cen-
tury America was to measure the value of a paper currency against a
variety of goods. During the American Revolution, troops were often
paid with Continentals, which quickly depreciated as the economy
was flooded with them. Meanwhile, goods were becoming scarce,
causing prices to shoot up. By the time the Continental soldiers came
home from a long campaign, the money in which they had been paid
was nearly worthless. To ease the situation, the Massachusetts Bay
legislature authorized the state to trade the Continentals for treasury
certificates valued in terms of the sale price of staple commodities.
The certificates provided that soldiers were to be paid “in the then
current Money of the said State, in a greater or less Sum, according as
Five Bushels of CORN, Sixty-eight Pounds and four-sevenths Parts of
a Pound of BEEF, Ten Pounds of SHEEPS WOOL, and Sixteen Pounds
of SOLE LEATHER shall then cost, more or less than One Hundred
and Thirty Pounds current Money, at the then current Prices of said
Nearly two centuries later, John Maynard Keynes had a similar
idea. Instead of pegging currencies to the price of a single precious
metal (gold), they could be pegged to a “basket” of commodities: wheat,
oil, copper, and so forth. Keynes did not elaborate much on this solu-
tion, perhaps because the world economy was not then troubled by
wild currency devaluations, and because the daily statistical calcula-
tions would have been hard to make in the 1940s. But that would not
be a problem now. As Michael Rowbotham observes, “With today™s
sophisticated trading data, we could, literally, have a register of all
globally traded commodities used to determine currency values.”
Rowbotham calls Keynes™ proposal a profound and democratic idea
that is vital to any future sustainable and just world economy. He
Today, wheat grown in one country may, due to a devalued
currency, cost a fraction of wheat grown in another. This leads
to the country in which wheat is cheaper becoming a heavy
exporter “ regardless of need, or the capacity to produce better
quality wheat in other locations. In addition, currency values
can change dramatically and the situation can reverse. Critically,
such wheat “prices” bear no relation to genuine comparative
advantage of climate, soil type, geography and even less to
indigenous/local/regional needs. Neither does it have any

Web of Debt

stabilising element that would promote a long-term stability of
production with relation to need. . . . [B]y imputing value to a
nation™s produce, and allowing this to determine the value of a
nation™s currency, one is imputing value to its resources, its
labourers and acknowledging its own needs.2
An international trade unit could be established that consisted of
the value of a basket of commodities broad enough to be representative
of national products and prices and to withstand the manipulations
of speculators. This unit would include the price of gold and other
commodities, but it would not actually be gold or any other commodity,
and it would not be a currency. It would just be a yardstick for pegging
currencies and negotiating contracts. A global unit for pegging value
would allow currencies to be exchanged across national borders at
exact conversion rates, just as miles can be exactly converted into
kilometers, and watches can be precisely set when crossing
international date lines. Exchange rates would not be fixed forever,
but they would be fixed everywhere. Changes in exchange rates would
reflect the national market for real goods and services, not the
international market for currencies. Like in the Bretton Woods system
that pegged currencies to gold, there would be no room for speculation or
hedging. But the peg would be more stable than in the Bretton Woods
system; and because it would not trade as a currency itself, it would
not be in danger of becoming scarce.

Private Basket-of-Commodities Models

To implement such a standard globally would take another round
of Bretton Woods negotiations, which might not happen any time soon;
but private exchange systems have been devised on the same model,
which are instructive in the meantime for understanding how such a
system might work.
Community currency advocate Tom Greco has designed a “credit
clearing exchange” that expands on the LETS system. It involves an
exchange of credits tallied on a computer, without resorting to physi-
cal money at all. Values are computed using a market basket stan-
dard. The system is designed to provide merchants with a means of
negotiating contracts privately in international trade units, which are
measured against a basket of commodities rather than in particular
currencies. Greco writes:

Chapter 46 - Building a Bridge

The use of a market basket standard rather than a single
commodity standard has two major advantages. First, it
provides a more stable measure of value since fluctuation in the
market price of any single commodity is likely to be greater than
the fluctuation in the average price of a group of commodities.
The transitory effects of weather and other factors affecting
production and prices of individual commodities tend to average
out. Secondly, the use of many commodities makes it more
difficult for any trader or political entity to manipulate the value
standard for his or her own advantage.3
In determining what commodities should be included in the basket,
Greco suggests the following criteria. They should be (1) traded in
several relatively free markets, (2) traded in relatively high volume, (3)
important in satisfying basic human needs, (4) relatively stable in price
over time, and (5) uniform in quality or subject to quality standards.
Merchants using the credit clearing exchange could agree to accept
payment in a national currency, but the amount due would depend
on the currency™s value in relation to this commodity-based unit of
account. Once the unit had been established, the value of any currency
could be determined in relation to it, and exchange rates could be


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