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***
Background and Introduction
This
relatively lengthy introduction is deemed necessary to understand how
we got to where we are today; to grasp the long-term western (US) plan
to dominate the world economy with their currency, the US dollar, to
which some 23 years ago the US-dollar’s cousin, the Euro, was added,
with the same “zero-backing” base.
*
The
current western (US) made International Monetary System (IMS) has been
plagued by unfairness since the beginning, when it was created through
the so-called Federal Reserve Act (FRA), signed by US President Woodrow Wilson on December 23, 1913.
Image is from the public domain
The
FRA supposedly provided the US Government with the means to control
inflation, and most importantly, it brought about the
internationalization of the US-dollar as a global currency. Meaning, the
US dollar could be used internationally as a trading currency, which de facto,
made it into an international reserve currency. As such, it was
increasingly used by countries around the world as a major reserve
currency, allowing, or “necessitating” Washington to increase their
money supply.
In 1834, the United States fixed the price of gold at $20.67 per ounce,
where it remained until 1933. Other major countries joined the gold
standard in the 1870s. The period from 1880 to 1914 is known as the
classical gold standard. During that time, most countries adhered (to
varying degrees) to gold.
The
law required the Federal Reserve to hold gold equal to 40 percent of
the value of the currency it issued, i.e. the US dollar, and to convert
those dollars into gold at a fixed price of $20.67 per ounce of pure
gold.
The Federal Reserve Act of 1913 effectively created the Federal Reserve Bank called “The Fed”.
For purposes of (US) “financial stability” and adjustment to “varying international economic situations” the FRA also allowed The Fed to issue interest rates as guiding instruments for the US banking system, and de facto ever more for the international banking system, as The FED also internationalized the US dollar, especially for trade, so that gradually countries trading in US dollars were dollarized, to differing degrees. Trading in US dollars, no matter between what countries, became an unwritten rule.
This
meant on average and over time, more than 90% of international reserves
were held in gold and US dollars, thereby ever-more increasing their
economies’ dependence on the US – or the US currency.
This
also meant that the US could print dollars ever more indiscriminately –
without backing – as the world depended ever-more on the US dollar for
trade and national reserves.
When
in July 1944 the Bretton Woods (BW) Conference not only created the
International Monetary Fund (IMF) and the World Bank, but also a new
Gold Standard, the US, organizer and effective “owner” of the BW
Conference and its results, in a clever move, “convinced” the
participating delegates of 44 nations to accept that the new Gold
Standard – 1 troy ounce (about 31.1 grams) would be pegged to the US
dollar.
Instead
of fixing the value of gold according to the weighed average of the 5
or 6 key currencies emerging after WWII – applying the SDR principle –
the gold rate was fixed at US$ 35 / per troy ounce (t-oz); the gold value used for backing the currencies of the BW-participating nations was expressed in US dollars.
This meant that de facto gold was replaceable by the US dollar.
The
US also were and still are in full control of the IMF and the World
Bank with a veto power. The US being the largest shareholder with a
16.5% share, effectively giving it veto power, since major decisions
need 85% for approval.
This
total control over the IMF and the World Bank is also the reason why
China is vastly underrepresented in both the IMF and the World Bank.
China is the second largest economy in absolute GDP terms, and the
world’s largest economy in Purchasing Power Parity, or PPP-terms – see
below.
The
US administration needs congressional approval for any IMF quota
reform. It took the government years to get Congress to put its stamp on
the 2010 reform that increased China’s voting at the expense of
European countries, but NOT at the expense of the US.
Similarly,
only in October 2016, was the Chinese Yuan (RMB) accepted to join the
IMF’s basket of Special Drawing Rights (SDR). In May 2022 was the
currency weight in the SDR “adjusted” for the US-dollar to currently
43.38% from 41.73% and the yuan to 12.28% from 10.92%. The euro’s
weighting declined to 29.31% from 30.93%, the yen’s fell to 7.59% from
8.33% and the British pound fell to 7.44% from 8.09%.
There
is no doubt, comparing the Chinese economy with that of the US and
Europe, that the Yuan is way undervalued. A more just valuation /
weighing of the Yuan in the SDR currency basket (US$, Euro, Chinese
Yuan, UK pound, Japanese yen) – is of high priority.
U.S. Abandons the Gold Standard
When
in 1971 President Nixon abandoned the gold standard, via the US
controlled IMF, meaning that the US would no longer adhere to backing
her currency (US dollar) with gold, the price of gold skyrocketed and
the US dollar took de facto over the role of gold.
This
presented an unquestioned reason for the US to print indiscriminately
US dollars, as the world needed them for their international trade and
national reserve coffers.
The
second blow came when in 1974, after the artificially created oil
crisis of 1973-1974, the U.S. “negotiated” with Saudi Arabia, the head
of OPEC (Organization of Petroleum Exporting Countries) that
hydrocarbons, predominantly oil and gas, would only be traded in US
dollars, thus, prompting Petrodollars flooding the world.
In
exchange, the U.S. would provide Saudi Arabia with military protection
and assist with weapons deals and infrastructure investment.
As
of this day, oil continues to be the most valuable asset on the planet.
More than 85% of all energy used to fuel the world’s economy originates
from hydrocarbons.
The
OPEC-dollar transaction deal allowed the US again to print
indiscriminately more US dollars, as every country in the world needed
US dollars to buy its (hydrocarbon) energy, thereby strengthening the
US’s currency dominance over the world.
Today,
about 60% of the world’s most used currencies (formerly called
“convertible currencies”) are US dollars. While the world is flooded
with the totally non-backed US dollar, the Chinese Yuan, the currency of
the second largest or arguably the largest economy (in PPP-terms),
accounts only for about 5%.
This disequilibrium must be corrected.
Indications
for de-dollarization are increasing. In the early 1990s more than 90%
of all monetary reserves were held in US dollar-denominated securities.
Equally, about 90% of all international trade took place in US dollars.
Today these proportions have been reduced to about 50% and 65%,
respectively.
It
is worth mentioning that many of the OPEC countries have fully or
partially abandoned the unwritten rule of trading hydrocarbons in US
dollars, replacing the dollar by local currencies, or by Yuan.
But much more is needed.
Back to President Wilson, the signatory of the Federal Reserve Act.
Shortly
before his death in February 1924, President Wilson apparently came to
regret signing the bill (Federal Reserve Act), saying:
“I
am a most unhappy man. I have unwittingly ruined my country. A great
industrial nation is controlled by its system of credit. Our system of
credit is concentrated. The growth of the nation, therefore, and all our
activities are in the hands of a few men. We have come to be one of the
worst ruled, one of the most completely controlled and dominated
Governments in the civilized world no longer a Government by free
opinion, no longer a Government by conviction and the vote of the
majority, but a Government by the opinion and duress of a small group of
dominant men.”
If
indeed this is a true quote by President Woodrow Wilson, his foresight
had repercussion up to this date – the world is ruled by a small elite
and an unequal system, today still largely dominated by a single
currency, the US dollar, which is backed by nothing, not gold, not
commodities, not even by the United States’s own economy.
If
GDP and debt are any indication for the value of a currency, consider
this: Today’s US GDP in absolute terms is about US$ 27 trillion
(followed by China US$ equivalent of 19.4 trillion), compared to a
current US debt of 33.2 trillion – about 123% of GDP (China’s current
debt of US-dollar equivalent 12.6 trillion – about a 65% debt-GDP
ratio).
However,
the real US debt, also called “unfunded liabilities” is currently about
US$ 290 trillion (almost 11 times the current US GDP). Approximately
40% of unfunded liabilities consist of accrued interest on debt never
intended to be paid, and another 20% of unmet medical liabilities,
mostly related to war veterans’ injuries and psychic traumas; and about
12% relate to unfunded social security liabilities.
A
little used economic indicator is Purchasing Power Parity (PPP). It
equalizes the value of a basket of goods a currency can purchase, by
eliminating the differences in price levels between countries. The
GDP-PPP factor in the US is US$ 23.6 trillion, compared to China’s of
US$-equivalent 33.5 trillion (2023 est.).
Converted
into per capita, per year (pc/yr.) PPP: US = US$ 69,500; and China =
US$ equivalent 24,000. Meaning – in China you may purchase for US$
24,000 /pc/yr, what in the US would costs US$ 69,500 pc/yr.
In real economic terms GDP-PPP is more meaningful than the unadjusted GDP.
Towards a New International Monetary System
Any
monetary reform must be seen and carried out considering the current
international order – which is heavily marked by ever increasing
conflicts between West and East.
Western
powers are seeking to preserve their status, by rivaling the autonomous
and sovereign development of independent nations, or nations that
strive to become and stay independent from the western fangs.
To enhance their control over global events – and de facto,
attempting to establish a “Global One World Government” — western
powers have set up so-called “rules-based orders” attempting to erase
established international and national laws. As a result, the
International Court of Justice (ICJ) in the Hague has become inoperable,
defunct.
China’s
and Russia’s philosophy of life and cooperation with the world and
particularly within Asia is promoting a space for stability and joint
development.
The
year 2023 has shown that Greater Eurasia and Asia have so far been
resistant to the negative external influences that are having the most
dramatic consequences in Europe and the Middle East.
In
summary, Asia and Eurasia remain a space of cooperation, not
competition. The leading regional powers are able to reach terms that
are fair to their smaller partners.
The
new geographically widely dispersed BRICS-11 (5+6) add a new dimension
to international cooperation – and to a constructive detachment from the
western (US) sanctions regime and US dollar-dominated world-dictate.
*
A New or Revised International Monetary System: Might Consider.
General
- Assign a greater role of PPP – in economic valuation as well as in the weighted average of IMF’s SDRs;
- A massive reduction of US-dollars flooding the globe.
IMF / World Bank
- Chinese Yuan to be revalued in the SDR, according to China’s economic strength
- Chinese
contribution in both IMF and World Bank to be reassessed, according to
the weighted average of member-countries’ economies
- Veto-power
within these organizations to be reassessed; either abandoned
altogether, i.e. one participant – one vote, or assigned according to
newly assessed voting powers.
Asian Infrastructure and Investment Bank (AIIB)
- AIIB to
become an ever-stronger player in international economic development,
not as a competitor to the World Bank and IMF, but rather as a
cooperator and leader or co-leader in specific sectors, where AIIB might
have a comparative advantage.
- AIIB might
take a lead in multi-currency (economic development) investments,
promoting local currencies, under the premises that local currencies are
enhancing a nation’s sovereignty and economic strength.
Virtual / Trading Currencies
With
the objective of de-dollarization – i.e., brining an equilibrium of
currencies in world circulation – and effective banning / blocking of
(economic) sanctioning, which has proven detrimental to smaller and
weaker economies:
- Promote trading in local currencies – SWAP agreements
- Abandoning SWIFT transfer system – replacing it with not one, but different transfer systems, not linked to the US-dollar;
- Developing SDR-type (weighted average of specific economic indicators) virtual trading currency or currencies;
SDR-type – means an International Trading Currency (ITC) based on the principles applied to the IMF’s SDR; - AIIB could be at the forefront of developing an ITC
- BRICS-plus could be an initial trial for a common SDR-type ITC;
Digital Currencies – including Central Bank Digital Currencies (CBDC)
- To be used specifically for international trading;
- If used for day-to-day people’s and commercial transactions, digital
currencies, incl. CBDCs should not replace cash transactions, leaving
people free to choose between cash and digital currencies
Backing of Currencies
- A country’s
own economy should be determining a country’s monetary flow,
considering international reserves and internal economic growth- and
contraction fluctuations
- Instead of
gold or other precious metals, currencies might be backed by a package
or packages of, say 20 -25 internationally used commodities, of which
approx. a third could be country-specific.
Such commodity
packages might also include gold and other precious metals, but
foremost commonly used and essential food products and different types
of raw materials, including hydrocarbons (notably petrol and gas) – and
possibly other (maybe 10%-15%?), of less tangible social indicators;
like public health; level of education; peaceful international
cooperation; capacity of conflict resolution….
It
is understood that these indicators, the commodity packages, and
possibly social indicators, would have to be periodically reviewed and
reassessed by an international body, designated by the Community of
Nations.
The
Community of Nations is not necessarily represented by the United
Nations. The UN, as its stands and functions today, is no longer the UN
established in October 1945 in San Francisco, to replace the League of
Nations (set up after WWI), with the specific goal to help resolve
international conflicts and to foster peace and harmony among nations,
as today it is dominated by the US and a few US allies.
While a revision of the UN is necessary, it is beyond the task of designing a revised or new international monetary system.
Conclusion
The
process of introducing a new system of “currency backing” might take
time, and could start in Asia, under the lead of China and Russia,
extending to the ASEAN and BRICS countries, and eventually and hopefully
be adopted also in the west, meaning a successful revision and overhaul
of the IMF and World Bank.
The
AIIB and Shanghai Cooperation Organization (SCO), as well as China’s
International Monetary Institute (IMI), might take a leading role in
designing currency backing packages.
The
above are a few ideas for consideration and discussion possibly during
the seminar on a “New International Monetary System” on 23 January 2024
in Beijing.
*
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Peter Koenig is
a geopolitical analyst and a former Senior Economist at the World Bank
and the World Health Organization (WHO), where he worked for over 30
years around the world. He is the author of Implosion – An Economic Thriller about War, Environmental Destruction and Corporate Greed; and co-author of Cynthia McKinney’s book “When China Sneezes:Clarity Press – November 1, 2020).
Peter is
a non-resident Senior Fellow of the Chongyang Institute of Renmin
University, Beijing. He is also a Research Associate of the Centre for
Research on Globalization (CRG).
The original source of this article is Global Research
Posted with the permission of the author.
