Further Currency Developments…

Gold hit $1067.00 today, and the dollar has continued to weaken against other currencies, including the Yen and Euro.  In addition to the factors previously mentioned below, I just came across another article that adds a piece to the reserve currency puzzle.  According to an article from the Telegraph, last month the Chinese offered their first issuance of government debt that foreigners are allowed to acquire.

This is a rather important development, because any currency that aspires to fill the role of the World Reserve needs to be “backed” by internationally negotiable government debt.  If a country wants to sell its oil, right now (unless it is Iran, which is taking Euros) it accepts Dollars.  It then uses those Dollars to buy other goods and service that it requires on the world market.  However, what happens if that country has a trade surplus; that is, sells more goods than it buys?  It can put that surplus into commodities and private companies (as middle eastern “sovereign wealth funds” have done), but such strategies are risky and not very liquid should the country need a big wad of buying power in a pinch.  As they are backed by the power of the State to tax its citizens, Dollar denominated government bonds are the easiest place to park a surplus, and are as close to cash as a government can get in terms of liquidity.

Thus, this move by the Chinese government allows a country the option of selling its surplus for Yuan rather than Dollars, as it allows for a liquid, low risk place to park those Yuan.  This will begin to allow China to print more money than its own economy requires (just like the USA does now), meaning high value money enters the world economy in China and then loses value as it filters to the rest of the world.  American prosperity since the 1970s has been built on the rents collected from this system of inflation-exportation, and the Chinese are edging in on our hustle.  I wonder: at what point will the Federal Government be forced to openly acknowledge the economic warfare that they’re waging behind the backs of the American people?  An honest discussion of this inevitably leads to the problems inherent to a monopolized money supply*; this is why Dr. Paul’s Free Competition in Currency Act needs to be passed (but was assiduously ignored).

On the other hand, the Second Vermont Republic has just issued one ounce silver coins; I’m thinking a bit of silver might not be a bad call as a hedge given what the price of the yellow stuff is doing…

[UPDATE] – Looks like the American mainstream media (outside the financial press) is finally picking up on this story![/UPDATE]

* What follows is an excerpt from Kevin Carson’s “The Iron Fist Behind the Invisible Hand” discussing the money monopoly:

THE MONEY MONOPOLY. In every system of class exploitation, a ruling class controls access to the means of production in order to extract tribute from labor. Under capitalism, access to capital is restricted by the money monopoly, by which the state or banking system is given a monopoly on the medium of exchange, and alternative media of exchange are prohibited. The money monopoly also includes entry barriers against cooperative banks and prohibitions against private issuance of banknotes, by which access to finance capital is restricted and interest rates are kept artificially high.

Just in passing, we might mention the monumental hypocrisy of the regulation of credit unions in the United States, which require that their membership must share some common bond, like working for the same employer. Imagine the outrage if IGA and Safeway lobbied for a national law to prohibit grocery co-ops unless the members all worked for the same company! One of the most notable supporters of these laws is Phil Gramm, that renowned “free marketeer” and economics professor–and foremost among the banking industry’s whores in Congress.

Individualist and mutualist anarchists like William Greene [Mutual Banking], Benjamin Tucker [Instead of a Book], and J. B. Robertson [The Economics of Liberty] viewed the money monopoly as central to the capitalist system of privilege. In a genuinely free banking market, any group of individuals could form a mutual bank and issue monetized credit in the form of bank notes against any form of collateral they chose, with acceptance of these notes as tender being a condition of membership. Greene speculated that a mutual bank might choose to honor not only marketable property as collateral, but the “pledging … [of] future production.” [p. 73]. The result would be a reduction in interest rates, through competition, to the cost of administrative overhead–less than one percent.

Abundant cheap credit would drastically alter the balance of power between capital and labor, and returns on labor would replace returns on capital as the dominant form of economic activity. According to Robinson,

Upon the monopoly rate of interest for money that is… forced upon us by law, is based the whole system of interest upon capital, that permeates all modern business.

With free banking, interest upon bonds of all kinds and dividends upon stock would fall to the minimum bank interest charge. The so-called rent of houses… would fall to the cost of maintenance and replacement.

All that part of the product which is now taken by interest would belong to the producer. Capital, however… defined, would practically cease to exist as an income producing fund, for the simple reason that if money, wherewith to buy capital, could be obtained for one-half of one per cent, capital itself could command no higher price [pp. 80-81].

And the result would be a drastically improved bargaining position for tenants and workers against the owners of land and capital. According to Gary Elkin, Tucker’s free market anarchism carried certain inherent libertarian socialist implications:

It’s important to note that because of Tucker’s proposal to increase the bargaining power of workers through access to mutual credit, his so-called Individualist anarchism is not only compatible with workers’ control but would in fact promote it. For if access to mutual credit were to increase the bargaining power of workers to the extent that Tucker claimed it would, they would then be able to (1) demand and get workplace democracy, and (2) pool their credit buy and own companies collectively.

The banking monopoly was not only the “lynchpin of capitalism,” but also the seed from which the landlord’s monopoly grew. Without a money monopoly, the price of land would be much lower, and promote “the process of reducing rents toward zero.” [Gary Elkin, "Benjamin Tucker--Anarchist or Capitalist"].

Given the worker’s improved bargaining position, “capitalists’ ability to extract surplus value from the labor of employees would be eliminated or at least greatly reduced.” [Gary Elkin, Mutual Banking]. As compensation for labor approached value-added, returns on capital were driven down by market competition, and the value of corporate stock consequently plummeted, the worker would become a de facto co-owner of his workplace, even if the company remained nominally stockholder-owned.

Near-zero interest rates would increase the independence of labor in all sorts of interesting ways. For one thing, anyone with a twenty-year mortgage at 8% now could, in the absence of usury, pay it off in ten years. Most people in their 30s would have their houses paid off. Between this and the nonexistence of high-interest credit card debt, two of the greatest sources of anxiety to keep one’s job at any cost would disappear. In addition, many workers would have large savings (“go to hell money”). Significant numbers would retire in their forties or fifties, cut back to part-time, or start businesses; with jobs competing for workers, the effect on bargaining power would be revolutionary.

Our hypothetical world of free credit in many ways resembles the situation in colonial societies. E. G. Wakefield, in View of the Art of Colonization, wrote of the unacceptably weak position of the employing class when self-employment with one’s own property was readily available. In colonies, there was a tight labor market and poor labor discipline because of the abundance of cheap land. “Not only does the degree of exploitation of the wage-labourer remain indecently low. The wage-labourer loses into the bar- gain, along with the relation of dependence, also the sentiment of dependence on the abstemious capitalist.”

Where land is cheap and all men are free, where every one who so pleases can obtain a piece of land for himself, not only is labour very dear, as respects the labourers’ share of the product, but the difficulty is to obtain combined labour at any price.

This environment also prevented the concentration of wealth, as Wakefield commented: “Few, even of those whose lives are unusually long, can accumulate great masses of wealth.” As a result, colonial elites petitioned the mother country for imported labor and for restrictions on land for settlement. According to Wakefield’s disciple Herman Merivale, there was an “urgent desire for cheaper and more subservient labourers–for a class to whom the capitalist might dictate terms, instead of being dictated to by them.” [Maurice Dobb, Studies in the Development of Capitalism; Marx, Chapter 33: "The New Theory of Colonialism," in Capital Vol. 1].

In addition to all this, central banking systems perform additional service to the interests of capital. First of all, the chief requirement of finance capitalists is to avoid inflation, in order to allow predictable returns on investment. This is ostensibly the primary purpose of the Federal Reserve and other central banks. But at least as important is the role of the central banks in promoting what they consider a “natural” level of unemployment–until the 1990s around six per cent. The reason is that when unemployment goes much below this figure, labor becomes increasingly uppity and presses for better pay and working conditions and more autonomy. Workers are willing to take a lot less crap off the boss when they know they can find a job at least as good the next day. On the other hand, nothing is so effective in “getting your mind right” as the knowledge that people are lined up to take your job.

The Clinton “prosperity” is a seeming exception to this principle. As unemployment threatened to drop below the four per cent mark, some members of the Federal Reserve agitated to raise interest rates and take off the “inflationary” pressure by throwing a few million workers on the street. But as Greenspan [Testimony of Chairman Alan Greenspan] testified before the Senate Banking Committee, the situation was unique. Given the degree of job insecurity in the high-tech economy, there was “[a]typical restraint on compensation increases.” In 1996, even with a tight labor market, 46% of workers at large firms were fearful of layoffs–compared to only 25% in 1991, when unemployment was much higher.

The reluctance of workers to leave their jobs to seek other employment as the labor market tightened has provided further evidence of such concern, as has the tendency toward longer labor union contracts. For many decades, contracts rarely exceeded three years. Today, one can point to five- and six-year contracts–contracts that are commonly characterized by an emphasis on job security and that involve only modest wage increases. The low level of work stoppages of recent years also attests to concern about job security.

Thus the willingness of workers in recent years to trade off smaller increases in wages for greater job security seems to be reasonably well documented. For the bosses, the high-tech economy is the next best thing to high unemployment for keeping our minds right. “Fighting inflation” translates operationally to increasing job insecurity and making workers less likely to strike or to look for new jobs.