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Climate and Currency: Proposals for Global Monetary Reform - page 2
Essentially, SDRs are a version of the international currency, the bancor, (i.e., bank gold) proposed by John Maynard Keynes and the British delegation at the Bretton Woods Conference in 1944. Like SDRs, bancors were to be reserved for exchanges between central banks but, rather than their value being fixed in terms of a basket of other currencies, they were defined in terms of gold. The US also went to Bretton Woods with a plan for a world currency, the unitas, but as the Nobel-prizewinning economist Robert Mundell once put it "academic internationalist idealism fell prey to economic national self-interest" and both rival schemes were dropped vii. Instead, the US imposed a system under which the liquidity required for world trade was to be provided by gold and by dollars linked to gold at a fixed rate, $35 dollars an ounce. By so doing, America effectively made itself the world's bank
The link between the dollar and gold was, of course, broken unilaterally by the US in 1971 after it had spent more many dollars into circulation internationally to pay for the Vietnam war than it had gold in Fort Knox to back them. Fearing that the dollar's value had become unsustainable, holders led by the French under President de Gaulle rushed to convert them to gold before a devaluation happened. A run on the bank began and the manager, President Nixon responded by refusing the holders of the promissory notes he had issued what they were due. He defaulted by 'closing the gold window', thus ending any fixed relationship whatever between the dollar and gold. This destroyed the key feature of the Bretton Woods system which, in retrospect, seems to have served the world reasonably well. What emerged in its place was a totally-unthought-through arrangement which allowed the defaulter, the world's richest and most powerful country, to reap a massive benefit by creating the majority of the global money supply with no formal constraints at all. This has to be corrected.
2. The new world currency should be issued by being given into circulation rather than lent.
There are three ways in which the new currency could be put into circulation. It could be lent, spent, or given away. The disadvantages of lending the money into use are that:
i) The new money would only go to 'sound' borrowers. In other words, it would go to the financially strong.
ii) As the loans were repaid, the amount of money in circulation would shrink, reducing the size of the world economy unless new loans were taken out. But new loans would not be taken out unless the world economy was buoyant. As a result, issuing the new money this way would reinforce the present system's growth imperative, the prime cause of its unsustainability.
iii) The interest charged on the loans would reduce the amount of money in global circulation. If the world economy was not to contract, additional loans would have to be taken out. This would cause the ratio of debt to gross world product to increase, eventually to unsustainable levels, unless the world economy grew, in real terms, at the same percentage rate as the rate of interest charged. This would heighten the growth imperative.
The new currency could certainly be spent into use over the years at a rate which would not cause a global inflation by being used to pay for, say, greatly expanded activities by the United Nations and to relieve Highly Indebted Poor Countries of their debt. However, this approach would make it unlikely that the new currency would displace the present reserve currencies entirely. All it could hope for would be to capture the seignorage gains resulting from rising levels of world trade which would otherwise go to the reserve-currency-issuing countries. Very little of the new money would trickle down to the poor.
Feasta's strong preference is for a once-off currency give-away on a scale that would immediately make it the main world currency and allow the reserve currencies to be returned to their countries of origin to clear international debt and for the purchase of goods and services.
3. The distribution of the new currency should be on the basis of population rather than economic power.
SDRs were given into circulation but, as we noted, they were allocated on the basis of a country's IMF quota which is related to its importance in world trade. This was scarcely equitable as the strong got the lion's share of the new money. The Feasta proposal, for reasons which will become apparent in the next section, is that any new international currency issue should be distributed to countries on the basis of their populations on some agreed date.
4. The supply of the new currency should be limited in a way which ensures that the overall volume of world trade is compatible with the most crucial area of global sustainability.
To deliver the maximum level of human welfare, every economic system should try to work out which scarce resource places the tightest constraint on its development and expansion. It should then adjust its systems and technologies so that they work within the limits imposed by that constraint. In line with this, an international currency should be linked to the availability of the scarcest global resource so that, since people always try to minimise their use of money, they automatically minimise their use of that scarce resource.
What global resource do we most need to much use less of at present? Labour and capital can be immediately ruled out. There is unemployment in most countries and, in comparison with a century ago, the physical capital stock is huge and under-utilised. By contrast, the natural environment is grossly overused especially as a sink for human pollutants. For example, the Intergovernmental Panel on Climate Change (IPCC) believes that 60-80% cuts in emissions of one category of pollutants - greenhouse gases, which come largely from the burning of fossil fuels - are urgently needed to lessen the risk of humanity being exposed to the catastrophic consequences of a runaway global warming. Feasta believes that this is the most serious resource threat facing humankind at present, and that, consequently, the basis of the new world currency should be selected accordingly.
Contraction and Convergence (C&C), a plan for reducing greenhouse gas emissions developed by the Global Commons Institute in London, provides a way of linking a global currency with the limited capacity of the planet to absorb or break down greenhouse gas emissions. Under the C&C approach which has gained the support of a majority of the nations of the world, the international community agrees how much the level of the main greenhouse gas, carbon dioxide (CO2), in the atmosphere can be allowed to rise. There is considerable uncertainty over this. The EU considers a doubling from pre-industrial levels to around 550 parts per million (ppm) might be safe while Bert Bolin, the former chairman of the IPCC, has suggested that 450 ppm should be considered the absolute upper limit. Even the present level of roughly 360ppm may prove too high though, because of the time lag between a rise in concentration and the climate changes it brings about. Indeed, in view of the lag, it is worrying that so many harmful effects of warming such as melting icecaps, dryer summers, rougher seas and more frequent storms have already appeared.
Choosing a concentration target
Whatever CO2 concentration target is ultimately chosen automatically sets the annual rate at which the world must reduce its present emissions until they come into line with the Earth's capacity to absorb the gas. This is the contraction course implied in the Contraction and Convergence name.
Once the series of annual global emissions limits have been set, the right to burn whatever amount of fuel this represents in any year would be shared out among the nations of the world on the basis of their population in an agreed date, say, 1990. In the early stages of the contraction process, some nations would find themselves consuming less than their allocation, while others would be consuming more, so under-consumers would have the right to sell their surplus to more energy-intensive lands. This would generate a healthy income for some of the poorest countries in the world and give them every incentive to continue following a low-energy development path. Eventually, most countries would probably converge on similar levels of fossil energy use per head.
But what currency are the over-consuming nations going to use to buy extra CO2 emission permits? If those with reserve currencies are allowed to use them, they would effectively get the right to use a lot of their extra energy for free because, as we just discussed, much of the money they paid would be used for investing and trading around the world rather than purchasing goods from the countries which issued them. To avoid this, Feasta worked with GCI to devise a plan under which a new international organisation, the Issuing Authority, would assign Special Emission Rights (SERs, the right to emit a specified amount of greenhouse gases and hence to burn fossil fuel) to national governments every month according to their entitlement under the Contraction and Convergence formula.
Special Emissions Rights
SERs would essentially be ration coupons, to be handed over to fossil-fuel production companies in addition to cash by big users, such as electricity companies, and by fuel distributors such as oil and coal merchants. An international inspectorate would monitor fossil energy producers to ensure that their sales did not exceed the number of SERs they received. This would be surprisingly easy as nearly 80 per cent of the fossil carbon that ends up as manmade carbon dioxide in the earth's atmosphere comes from only 122 producers of carbon-based fuels viii. The used SER coupons would then be destroyed.
The prospect of this happening is not a fantasy. A considerable amount of work has already been done towards the development of an international trading system in carbon dioxide emission rights both at a theoretical level and in practice in the United States, where trading in permits entitling the bearer to emit sulphur dioxide into the atmosphere has led to a rapid reduction in discharges at the lowest possible cost.
Besides the SERs, the Issuing Authority would supply governments with the system's new money, energy-backed currency units (ebcus), on the same per capita basis, and hold itself ready to supply additional SERs to whoever presented it with a specific amount of ebcus. This would fix the value of the ebcu in relation to a certain amount of greenhouse emissions and through that to the use of fossil energy.
The issue of the ebcu money would be a once-off, to get the system started. If a buyer actually used ebcus to buy additional SERs from the Issuing Authority in order to be able to burn more fossil energy, the number of ebcus in circulation internationally would not be increased to make up for the loss - the ebcus paid over to the Issuing Authority would simply be cancelled and the world would have to manage with less of them in circulation. This would cut the amount of international trading it was possible to carry on and, as a result, world fossil energy consumption would fall. In other words, the level of international trading at any time would always be compatible with achieving the CO2 concentration target. If renewable energy output grew or the efficiency with which fossil energy was used was improved sufficiently rapidly, it would be possible for world trade to increase.
Governments could auction their Issuing Authority allocation of SERs at home to major energy users and distributors and then pass all or part of the national currency received to their citizens as a basic income. They could also sell SERs abroad for ebcus. The prices set by these two types of sale would establish the exchange rate of their national currency in terms of ebcus, and thus in terms of other national currencies.
Essentially, the system is a version of the Bretton Woods arrangement which President Nixon destroyed except that the right to burn fossil energy has replaced gold and ebcus play the role of the US dollar. Its introduction would meet fierce opposition from oil and gas exporting countries because, since many of their richer customers would have to buy SERs before they could purchase fuel, less money would be available to spend on the fuel itself. This would deny the fuel producers the huge profits they can expect to make when oil and gas become increasingly scarce in the near future. According to one of the world's leading petro-geologists, Dr. Colin Campbell, the world's oil output is expected to peak somewhere between 2005 and 2008, and the production of gas around 2020 ix. In the absence of some system of demand limitation such as SERs, the importing nations will have to offer higher and higher prices for - or go to war over- the rapidly declining amounts that the wells will be able to deliver.
On balance however, most other countries, even fossil-energy over-consumers like those in EU, would do well out of the new system for the very reason that the oil and gas producers would oppose it. Issuing a fixed amount of SERs would mean that overconsumers did not squander their money pushing up the price of fuel in a bidding war against each other. Instead, the ebcus they spent to buy extra SERs would go to the poorer nations selling them where they would create much better markets for their products.
5. Each country or monetary union should operate two currencies, one for normal commercial exchanges, the other for savings and capital transfers. Each of these currencies would have its own floating exchange rate with the new international currency, and hence a variable exchange rate with the other.
This proposal involves keeping flows of money from imports, exports, tourism and interest payments - current account flows - apart from flows of investors' capital. It does this by operating two foreign currency exchanges, with independent exchange rates, one for each type of flow, exactly as was done in the Sterling Area from the late 1940s until the late 1970s and more recently in South Africa between September 1985 and March 1995. The point of keeping the flows apart is that, at present, if there is an inflow of capital to a country - perhaps to buy a company there - the increased availability of foreign currency means that the strength of the national currency increases and that, as a result, the country's exporters get less national currency for the foreign currency they bring home. This naturally hurts them. It also hurts companies producing for the home market, because competing imports become cheaper.
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