The United States sells dollars for other people to use. Printed bits of paper or computer entries which don't cost anything to make. This is its biggest export. The process is admirably explained by Professor Thomas Barnett of the US Naval War College:
" We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia's amazing array of products and services. We are smart enough to know this is patently an unfair deal unless we offer something of great value along with those little pieces of paper. The product is a strong US Pacific fleet, which squares the transaction nicely. "
In other words, in exchange for vast quantities of goods and services, the poor get a US military presence. Bid deal!
People grow food and flowers, dig up minerals, refine them, design and make things, create art and music, run businesses, and do all those things that make a country tick. These are the things we want, the things that make for a good life. This is real wealth. We provide these things for ourselves in our own countries, and trade them with others. They are the things that flow into, and out of, every country. But the US does not export as many of these things as it imports. A third of its exports are simply -- dollars.
People want these dollars because they are, in effect, an international currency. A sheikh gets dollars for the oil he sells the US. He might buy a skyscraper in Sydney as an investment. The Australian, in turn, may buy goods from Japan. The Japanese may set up a factory in Britain or the US. So the dollars circulate. The more trade there is, the better for the US -- people will want more dollars. Countries, also, need a cushion. So there are dollars in central banks, in businesses and in private accounts all round the world.
The amount of these dollars, that have left the US in return for imported goods and services (the net foreign liability), is now huge, $2,500 billion. To put this in perspective, it would cost only $40 billion a year for 10 years, $400 billion in all, to ensure that everyone in the world had adequate diet, safe water, basic healthcare, adequate sanitation and natal attention.
The ability of the US to export an international currency in exchange for real wealth is one of the main reasons why most of the world is poor and the United States is rich. The poor subsidise the rich. Massively.
The US is on a treadmill. In order to support its standard of living it needs to keep exporting more and more dollars. Morgan Stanley, the investment bank, says that it will soon need to export $2 billion a day (the trade deficit). This is not sustainable and the value of the dollar will fall. Then people will no longer wish to invest in dollar assets. They will look for more stable currencies, and for gold and diamonds. The US foreign liability will then just be debt. The US will be the most heavily indebted country in the world. It would take two-and-a-half years for the US to pay off the debt if it imported absolutely nothing and continued to export at the present rate. The prospect is frightening.
So the US is desperate for trade throughout the world to increase. It is annoyed with Japan for failing to get its economy going. It is annoyed with Europe for not growing fast enough. It wants poor nations to cultivate cash-crops for export, rather than for local use. And it insists that heavily indebted poor countries will only have their debts `forgiven' if they open their markets to global free trade.
This perverse arrangement started at Bretton Woods in 1944 when the US was given the right to have its dollars considered the equivalent of gold in the reserves of central banks throughout the world. General de Gaulle of France called it "an exorbitant privilege" though the value of the privilege was limited while the dollar was linked to gold. But in 1971, President Nixon broke this link and the privilege is now unconstrained. Europe would like its own strong currency so that it can pick up the loot as the dollar drops (and, incidentally, become a terrorist target for the disaffected). It is difficult to understand how such an iniquitous arrangement has been allowed to run for half a century and is still in place (at the time of writing).
John Maynard Keynes said, at the Bretton Woods conference, that there should be a currency for trade between nations that is independent of any national currency. He was overruled. Fifty-eight years on, his suggestion should be re-visited. An independent international currency need not be dependent on the consent of the US. The process could start with a few countries agreeing to barter products with each other using their own invented currency to measure relative values. As dollar reserves are released the advantages would become obvious and others would join in.
Keynes would have regarded the necessity for aid, had it started in his lifetime, as a sign that the global financial architecture had failed. The introduction of an international currency would be the most effective first step towards reducing poverty in the world.
Excerpted from The Little Earth Book by James Bruges, published by Alastair Sawday. To order a copy or for further details visit www.littleearth.co.uk