I want to discuss the rise of the dollar in the world economy, the general aspects of the oil industry and to identify the motives of the US at this time. To begin with, I thought I would mention the colonial days. This is the time when England used to have a few colonies over the pond and the British like to remind themselves of those days. The good old days of the British empire.
What was significant about those days was that the colonies had begun to issue their own paper currencies and as result they started to experience prosperity as they began to untangle themselves from the debt-based system of British bankers at the time.
Without going into too much detail I think it would be fairly safe to assume that one of the primary causes of the colonial war against Britain were the policies of George II and George III to actually insist upon loans to the colonies from British banks repaid with principal and interest. This led to a lot of anger in the colonies and revolution.
Since then in the 19th century we had the Lincoln assassination. Lincoln had gone to the international bankers during the civil seeking further monies to complete the war. He was turned down and decided to issue his own currency and many people believe that that was a key issue leading to his assassination.
But the aftermath of that period if we take the late 19th century there were very strong movements in the United States to restore the ideas of Lincoln, to restore the notion of interest free lending. It has been a waning movement ever since in the United States.
The reason I mention that is that because if we want to appreciate the role of the dollar in the world today we need to recognise the way in which it develops and the various power leads that were behind the rise of the power of the dollar in the world.
In the early 20th century we saw a lot of corporate monopolisations in the United States particularly with the Rockerfellers and J.P. Morgans. The rise of the joint stock firm in the late 19th century essentially increased the powers of investment bankers within the US financial system. In particular the way in which the financial markets were manipulated led to corporate monopolisation. There was a lot of short selling, leveraging large quantities of money with a small amount of collateral and then using that money to take positions on stock or currencies – in this case stock – leading to corporate monopolisations. We find Rockerfeller’s Standard Oil towards the end of the 19th century monopolised some 90% of all oil refining in the United States.
The influence of the debt-based system in combination with those power elites along with the oil industry we see the seeds of the twentieth century pattern of US hegemony and particularly the way in which they have approached the issue we want to consider today which is oil.
The Federal Reserve Act of 1913 was essentially the time when the Federal Reserve was becoming established. It was able to monetarise the debt of the Federal Government of the United States, by issuing currency for the United States government which then became part of the reserves system. This had a very key role in the dollar ever since. During the depression years we don’t need to really blame the fed entirely for depression years. There were all sorts of difficulties leading to the Wall Street Crash. For example debt reparations to Germany for WW1 and asset double inflation during the 1920s. The roaring 20s! The fed did play a key role in regulating the quantity of circulating currency, which shrunk by a third during this time.
So with the power elites in the fed reserve system, in league with the various industrialists that were involved in these corporate monopolisation we see they were essentially in the same group and they were descendants of characters that came after them. They essentially set the stage for the US role of the dollar in the 20th century.
During the depression years there was mass unemployment and then we had the re-militarization leading up to the Second World War and many people view the re-militarization as being the economic impetus for the recovery from depression years.
After the Second World War the United States was really established as a hegemon. They had the largest economy in the world, they provided part of the land lease system, substantial resources to the allied war effort, financial as well as hardware and so forth. There was also the Bretton Woods Conference at a hotel in New Hampshire where 24 countries met and negotiated with the United States and the United Kingdom the terms of the key currencies involved in policy making in terms of world affairs.
The Bretton Woods system essentially involved various arguments. Keynes for example had argued for the establishment of an international currency unit which he called the bank core. If the conference had accepted that proposal we would have seen a very different post-war world. Essentially the United States won the day and its chief negotiator managed to establish the US dollar as the chief reserve currency. It was exchangeable for gold at $35 per ounce and the central banks, not the individual consumers, had holdings of dollars, and the central banks of the world were entitled to exchange the dollars for gold.
By the time we get to the post-war period, the United States had amassed the vast majority of the world’ gold in Fort Knox. So we have a post-war world with the USA with the largest economy in the world and industrial output was running a surplus. They were, and still are, the second largest exporter of food. The industrial capacity of the United States exceeded its own needs so the United States had a vested interest in securing free trade and in the dollar being used in this particular system.
This led to a period of time known as the ‘golden age’. This golden age period lasted from the end of WW2 to the end of the 60s and the early 70s. It was marked by very favourable macro-economic conditions: full employment, low interest rates, low inflation. I am talking here primarily of the Western world. There was a phenomenal growth in global trade oil, of course, being a key issue in terms of financial volumes.
Just a quick word about the oil industry during this time. It wasn’t as expensive as it is today. Until the 1960’s there wasn’t a great quantity of cars on the roads. Obviously we had the mass produced multi Ford in the USA during the inter war years. But it isn’t until the 1960s that we see a great increase in passenger car sales and use in the West.
As far as the Gulf countries, or the oil producing nations were concerned, crude oil was cheap. In terms of the purchasing power of a barrel of oil the golden age for the West was not really a golden age for the oil producing nations and we had the purchasing power of a barrel of oil depreciating by 40 percent during this time. The real purchasing power.
Ironically since the early 70s till the present time we have actually got a parity between the real purchasing power of the dollar and actual oil prices. But in this golden age period this was not the case.
One key problem, and I want to give the American perspective during the period of the 50s and 60s, became known as the Triffin paradox after the economist Lord Triffin. Essentially he pointed out that if the world was going to use an international currency for its trading relationships so that third parties can use the currency to exchange goods and services, so that international payments can be made in the currency. It means you have to have a huge amount of that currency circulating around the global economy so that the French can use dollars to exchange with the Spanish and so forth.
The US dollar during the post-war period had this dual role of a)serving the US economy so that people could buy hamburgers and popcorn and so forth in the United States. It also had the role as the circulating currency in the world. This actually presented a huge dilemma for the United States because on the one hand they needed to maintain the high value of the dollar so that confidence in the US dollar as the reserve system would be maintained.
Yet paradoxically in order to have a currency and to provide for sufficient liquidity in the international system they may need to run persistent deficits. And persistent deficits led in the foreign exchange markets to depreciating currencies. So the dilemma the US faced during the 50s and 60s was maintaining the strength of the US dollar at the same time as making sure there is enough liquidity in the world to provide for the expansion of global trade and in particular in the 50s and 60s to purchase all of the US surplus.
However as we come through in this period there are signs of stress: Japan emerges as an economy, Western Europe starts to recover as a result of the Marshall Plan, the industrial work going on in Germany etc So we have the restoration of prosperity to Europe and Japan and they start to export again. This current account surplus of the United States becomes smaller and smaller and smaller and eventually goes into deficit in the 1960s leading to pressure on the dollar.
The demise of the golden age. So how did the Americans handle that particular situation in the early 70s. They sort of panicked and the key event at this time was Kissinger’s visit to Saudi Arabia. I will not go into the content of the negotiations – not that I am party to them. I can probably get hold of information about what was discussed.
Shortly after we had the OPEC oil price rise of 1973 where the spot price of a barrel of oil quadrupled over night. That has to be considered in the context of the depreciating purchasing power of a barrel of oil. For oil-producing nations it was a matter of catching up what they had lost. We should also consider the post war period of substantial economic growth and prosperity in the West when oil producing nations rightly wanted to get a more decent price for their oil.
At the same time there are all sorts of speculations about arrangements the United States made with Saudi Arabia regarding tacit support for the House of Saud. The Saudis continued to acquire payment for their oil in dollars.
The United States decided to work with friends which means according to the US criteria that they are not supporting terrorism and other criteria the US chooses to apply. It has been the US strategy in the post-war period to work with countries on a bilateral basis. I am thing primarily of Saudi Arabia and the Shah.
Perhaps of significance to us following the OPEC price rise of 1973 we have the breakdown of the Bretton Woods system in which the US had a pivotal role. But the other hard currencies essentially had a fixed rate against the US dollar. So as long as there weren’t too many problems with balance of payments disequilibria it would be quite possible for government policy to be tweaked in order to maintain currency currency with the US dollar. That was the political negotiated agreement at Bretton Woods but we get to the end of the 60s and 70s. The yen and deutsch mark were rising in value and these countries were not willing to readjust their economies and devalue putting further pressure on the dollar and the Bretton Woods system itself.
Also because there were a lot of surplus dollars floating around the global economy at the time as a result of the increasing US deficit it meant that major national banks around the world were buying gold. The French bought a whole load of it in the 1960s.
In 1971 President Nixon decided to close the gold window and prevented national banks for exchanging their dollars for gold. The significance of this particular event, and two years later in 1973 the fixed rate exchange system collapsed altogether we had changing exchange rates. This essentially means that perhaps for the first time the United States was able to operate like an empire because a real empire taxes the empire. It is a able to charge taxes outside of its own country.
Because the dollar was tied to gold they were not really able to do that. But as soon as the fixed exchange rate system broke down since then every time the dollar devalues it drives down their debt. So if there is a ten percent devaluation of the dollar their debt goes down by 10 percent. This means that they can essentially tax the rest of the world.
But the difficulty for all of us is that everyone is tied to the global economy in increasingly interdependent ways. We have the multinationals and free captial movements. We now have a much more integrated world so that one economic shock immediately translates into problems in another area. Since we are all tied into dollar use the depreciating dollar doesn’t just affect the USA – it affects everyone else as well.
The Iranian oil bourse has certainly been muted in discussions since 2004. It provides the opportunity or the desire to create an alternative trading platform for oil – essentially not one dominated by the United States and Britain. This makes a lot of sense as the two petroleum exchanges, London Petroleum Exchange and Nimax in the United States which are all owned by American interests anyway, through the actual control of contracts and the trade that take place – there has been a lot written about the level of manipulation that they have been able to exert on that market.
There is perhaps an increasing desire for an alternative platform to be created that eliminates this speculative, manipulative elements. There is euro use for payments. The Saudis request payment in euros for oil but the contracts are still dominated in dollars.
There are a lot of issues to do with the this subject. Economic stability. This is an idea that came out in the 1960s. There was the notion that perhaps hegemons are not such a bad idea. Tito in Yugoslavia and the communist regime. Since Tito went there have been all sorts of Balkan conflicts and sectarianism and so forth. The argument is that for economic stability sometimes it is good to have a dominant figure in a dominant entity within international relationships in order to prevent sectarianism and all sorts of conflicts emerging that that are likely to emerge as soon as the present-day hegemon is removed. Of course present-day Iraq serves as an example.
There are various military issues. You have all these troops on Iraq’s soil. They are clearly trying to maintain the sort of hegemonic role in the Middle East through Iraq. It is a matter of speculation whether of not this type of strategy has backfired for them and so forth.
A possible nuclear threat just needs to be added into the mix. The United States has done a lot of things people are not happy with. One of the issues to work bilaterally with other countries has actually created tensions that did not need have been there and perhaps if the United States had chosen a more multi-lateral, negotiation relationship strategy for oil and trade and general foreign policy we would have seen less problems than we have seen since the early 70s.
There is a role that the Christian Zionist movement has in the United States in lobbying and influencing US foreign policy. The reason I mention this is that it exacerbates the political situation. Much has been spoken about a lean towards Europe. Many nations are looking towards European regionalization in which many countries have a confederal political arrangement where perhaps the particular views on the Palestinian issue and Israel are seen to be more favourable to many countries in the region. So perhaps there is this lean towards Europe that we might like to consider.
There has been a depletion of oil. World demand still increases. There is speculation as to whether we have peaked or not. There is certainly a peak in terms of explorations. Whether or not we have peaked in terms of oil production is a matter of speculation. The United States has certainly peaked. It is the third largest producer in the world ironically, mainly from the Gulf of Mexico, California and Alaska. Yet if the United States was left to supply its own oil at the current rate of consumption it has about three years of oil supplies So that is another issue.
There is also the rise of the open media in the Gulf which is another aspect of Gulf politics. There seem to be more channels for communication which is leading to more informed people and more opinions. There is a positive and negative side to that. You get more solid studies, nicely referenced and supported by fact or perhaps slightly more speculative internet studies. This can only be a good thing in contributing towards change in the way in which oil is traded and the way in which the US conducts its policy.
Oil price rises of late have major redistributive effects. I read a figure somewhere. Something like two trillion dollars has been added to the oil producing nations current account surpluses as a result of the price rises alone. Incredible amounts of money have been made by these oil price rises. But of course it is redistributive. So countries like Russia have benefited and of course all oil importing nations have not.
A few points about the way in which the dollar is being managed now. It fluctuates according to supply and demand pressures in foreign exchange markets. However it is important to recognise that in today’s global economy it is not just hundreds of millions of individual people buying and selling currencies. There are some major players in the currency markets that are wielding huge volumes of money, a lot of it leveraged, in order to take positions on currencies and as an economist I find this frustrating. We find that in a lot of the world’s markets, and the currency market in particular, currency movements can change which bear no resemblance to the actual underlying economic fundamentals. I find this a very worrying trend and you see it in lots of other markets as well.
The United States has a depreciating dollar. I am sure you are aware of that. Funds protection.These feral funds available ostensibly to provide stability to market volatility but most cynics look at the provisions of these funds as something which the manipulators within the US government, or maybe corporate interest, can use to actually manipulate the market in their favour.
Another development that has been quite widely reported within the monetary reform movement has been that they have now started to stop producing statistics for M3 which is one of the measures of the money supply. It beggars belief really that the US government can unilaterally decide that they just don’t want to publish figures about their own monetary supply as if no one really needs to know. A lot of people want to know about how much money is being produced by the US monetary system. So shrouding their own money supply in secrecy is leading people to speculate all sorts of things as to why they have done that and what they are doing. Maybe it could be a panic measure. Federal reserve manipulation perhaps in currency markets, derivative markets and the mortgage backed securities that we have heard a lot about.
I read an article which said they have made a lot of money from oil in Kazakhstan recently as result of the oil price rises but the banks made a colossal loss because of their exposure to these mortgage backed securities. Who promoted these sub-prime mortgage securities all around the world so that so many banks around the world have got one? Who was it that told them that it was a safe bet?
* Rodney Shakespeare: Last Friday I had lunch with Dr Mohammed Yunis who is the founder of the Gremin bank and won the Nobel prize. But it was not the Nobel Prize for economics. He would never get that. The lunch was held in most unusual circumstances. It was a most unusual lunch. It was filmed with the warning that every single word we said could be recorded and at the same time the Gremin Bank upheld its own right to censor anything that was going to be broadcast. It was a fascinating situation.
Things were said and a lot of them are going to be censored from the film about that lunch. I am not going to tell you what any individual said. I am going to hold back some of the things that were said. They were highly private but highly relevant. I am going to tell you some of the things because they connect with some of the things we have been talking about today. There were congratulations on the basic model of Gremin which says that the fundamental object of economic activity is to develop and spread productive capacity. In the case of Gremin 96 percent of the loans – and this applies to Gremin and to all other equivalent operations in Bangladesh – is to women. There are social reasons for this. The men basically cannot be trusted.
Secondly repayment is 98 percent. It is a facet of the women, they way they are organised into groups and the way they support each other. Thirdly it is also true that in one sense interest is taken and in another it is not taken. When they women repay a loan they are paying for an administration cost and a training cost. Then they are paying something which goes into the resources of the bank and is lent to the next person. That is the source of the successful expansion of Gremin.
Peter Chalin and I and others were immediately in on this. We were questioning. We were saying okay, what a wonderful model – you are acting on the real world, you are doing splendid things but wouldn’t it be more splendid if you had a source of income coming from the Bangladeshi National Bank. The national bank is completely governed by conventional thinking. It has no concept at all of using its own money supply to lend to Gremin have it paid back and cancelled. No concept at all.
And incidentally it became clear that the Gremin mechanism of internal generation of funds is so powerful that they probably do not have a need for more funds from an external source. But we were pushing, along with some of the organisers of the Gremin movement in London, for the use of the national bank mechanism because it can help Gremin and extend it without any problem at all. There only problem would be to identify the women and the activities like the chicken coup or the fish pond or the telephone for market prices. There only problem would be to ascertain who to train and develop.
But we pointed out that this mechanism, of course, can be used right the way across the economy. And lets be fair, Dr Younis said that he has enough to get on with rather than extending his activities more widely.
But then during the course of things we were talking about this mechanism. Certain things were said and I am not saying who or why they were said. Here is one of them. Islamic banking as it has developed seems to have no concept, or very little concept, of spreading and developing the productive capacity in the economy.
There is a lot of talk about justice in business – these were other remarks which were being made very strongly round the table. There is rhetoric in Islam but there is in fact no will, no determination to in fact change things in a very fundamental way. The language in which that was said was much blunter then that which I have indicated now.
I want to point out now that, as Simon mentioned, there is shift taking place in the world. If you look at the nature of that shift you then have to say events are about to change and the question is whether Islam will be able to see the opportunity for Islam.
The first point is that you are getting the concentration of what are called ‘sovereign world funds’. They are indeed as Simon pointed concentrations due to oil prices. But they are also due to the industrial success, for example Singapore and Hong Kong are two industrial sovereign world funds as are China and India. They are successful model low labour economies and they are doing the industrial production which is no longer being done in the West.
The question then becomes what are those funds going to be used for? They should be used for internal development of capacity and consumption within their own economies. That is particularly true of China and India. It is quite clear that until we get justice in all countries of the world we will never be able to say you will stop doing that. When people are insecure and have nothing you have no right to tell them to stop doing things. This is sheer hypocrisy when you don’t do it yourself.
But the real issue is that power is shifting, I believe because the American economy is being hollowed out. There will be a huge decline at some stage in the dollar. I take the point which Simon made on monetary figures. They are totally out of control. There are speculations about the way in which money is being used in what is called the derivatives market and you will see on the internet figures which cannot even be understood. Four hundred and fifty trillion is now being talked of as the sum total of the derivatives market and you only need a tiny amount of that to collapse and there will be a tremendous effect on the credit markets. Everything will collapse. This is what happened in the 1930s.
So on the one hand you have huge forces of credit contraction if it all goes wrong. You have this conflict between inflation which may be of the Weimar extent as opposed to a genuine collapse of the economy and deflation. Nobody knows which way it is going to go but you are certainly going to see a decline in the power of the dollar, the rise in sovereign world funds, the rise of the euro and more powerful industrial economies developing like Indonesia.
But I say that neo-classical economics is going to be exposed as fraudulent because it is the theory of neo-classical endogenous money. The banking system can create money limitlessly. If it does this and adds interests (no distinction between administration costs and interest) it will always put this out for allocative purposes to the free market economy which will always be efficient and just.
That is what the theory says. But what is actually happening is that after the collapse of communism you have the rise of the free market which can do what it likes. This was connected with the rise of computerization when things are done off the books and nobody knows what’s going on. This then links up with the end of the legislation which restricted the activity of the banks. For example the cancellation of the Glass Steele acts in America. The whole thing now is a froth and a bubble and a skirmish which is not even known. That is the point. This is gambling. It only needs one person to collapse and the thing just rebounds all the way through. And that is the situation at the moment.
I am not saying that Islamic banking is part of an overall solution. It is a middle class thing and it appears to satisfy the Islamic desire to have no interest. It does nothing of the sort. It changes the contracts. I used to work for the Finance Houses Association, Lombard Central Forward Trust. The first thing they told me was that it doesn’t matter what the government or anybody else does. We can always change the contracts. There will always be interest used by the finance houses but we will call it rent. They have changed the contracts.
The real issue is that a situation is now arising in which there is a shift of economic power and the question is will Islam take advantage of that situation to develop something new in the world, in which Islam leads economically: it can lead materially, it can lead intellectually and it can lead morally if it sees and understands the opportunity.
It was said at that lunch that most people do not think Islam is capable of it. But I am a little different. I actually see facets which suggest that it is capable of developing something new. There is a desire for something new especially when we talk to young people. Second there is a religious objection to interest. It is possible to do things without interest particularly where the real economy is concerned. That is the third thing particularly understood in Islam by a surprising number of people. Fourthly if you look at Al Ghazali and some of the Islamic thinkers of the past they have a great understanding of things like the economy.
I think Islam is capable of developing a market economy which spreads and develops productive capacity which is not based upon interest and ensures that all money creation goes into the real economy. I do believe Islam is capable of that but it was not said at that lunch. There were remarkably informed people present but they said Islam is paralyzed. Islamic banking is just a version of what we have in the West. Islam will not go down in the way that America and the UK will go down because they haven’t got debt. Things are more controlled. So Islam will come out of this pretty well and the global economy isn’t going to bring down everybody in the same way. But the opportunity is there.
At the lunch there was good will towards Islam. All the Gremin people were totally skeptical of their own experience of Islam saying it was not utterly aimed at what they are trying to do, which is to bring dignity for the whole population in a world in which if you do not do that you will not solve your environmental problems.
I have spoken enough. Thank you to Simon for giving the history and then leading to a situation today that we are now seeing a shift away from the dollar. There will have to be a new Bretton Woods of some sort. There are those who say the system is going to be so bad it is going to bankrupted. But it is an opportunity for new thinking. And the question for me is can Islam put it together. Because if Islam doesn’t I don’t think anyone else is in a position to. They are just going to scrabble to try and survive.
