Debt
Page 48
Free your mind of the idea of deserving, of the idea of earning, and you will begin to be able to think.
—Ursula K. Le Guin, The Dispossessed
ON AUGUST 15, 1971, United States President Richard Nixon announced that foreign-held U.S. dollars would no longer be convertible into gold—thus stripping away the last vestige of the international gold standard.1 This was the end of a policy that had been effective since 1931, and confirmed by the Bretton Woods accords at the end of World War II: that while United States citizens might no longer be allowed to cash in their dollars for gold, all U.S. currency held outside the country was to be redeemable at the rate of $35 an ounce. By doing so, Nixon initiated the regime of free-floating currencies that continues to this day.
The consensus among historians is that Nixon had little choice. His hand was forced by the rising costs of the Vietnam War—one that, like all capitalist wars, had been financed by deficit spending. The United States was in possession of a large proportion of the world’s gold reserves in its vaults in Fort Knox (though increasingly less in the late 1960s, as other governments, most famously Charles de Gaulle’s France, began demanding gold for their dollars); most poorer countries, in contrast, kept their reserves in dollars. The immediate effect of Nixon’s unpegging the dollar was to cause the price of gold to skyrocket; it hit a peak of $600 an ounce in 1980. This of course had the effect of causing U.S. gold reserves to increase dramatically in value. The value of the dollar, as denominated in gold, plummeted. The result was a massive net transfer of wealth from poor countries, which lacked gold reserves, to rich ones, like the United States and Great Britain, that maintained them. In the United States, it also set off persistent inflation.
Whatever Nixon’s reasons, though, once the global system of credit money was entirely unpegged from gold, the world entered a new phase of financial history—one that nobody completely understands. While I was growing up in New York, I would hear occasional rumors of secret gold vaults underneath the Twin Towers in Manhattan. Supposedly, these vaults contained not just the U.S. gold reserves, but those of all the major economic powers. The gold was said to be kept in the form of bars, piled up in separate vaults, one for each country, and every year, when the balance of accounts was calculated, workmen with dollies would adjust the stocks accordingly, carting, say, a few million in gold out of the vault marked “Brazil” and transfering them to the one marked “Germany,” and so on.
Apparently a lot of people had heard these stories. At least, right after the Towers were destroyed on September 11, 2001, one of the first questions many New Yorkers asked was: What happened to the money? Was it safe? Were the vaults destroyed? Presumably, the gold had melted. Was this the real aim of the attackers? Conspiracy theories abounded. Some spoke of legions of emergency workers secretly summoned to make their way through miles of overheated tunnels, desperately carting off tons of bullion even as rescue workers labored overhead. One particularly colorful conspiracy theory suggested that the entire attack was really staged by speculators who, like Nixon, expected to see the value of the dollar crash and that of gold to skyrocket—either because the reserves had been destroyed, or because they themselves had laid prior plans to steal them.2
The truly remarkable thing about this story is that, after having believed it for years, and then, in the wake of 9/11, having been convinced by some more knowing friends that it was all a great myth (“No,” one of them said resignedly, as if to a child, “the United States keeps its gold reserves in Fort Knox”), I did a little research and discovered that, no, actually, it’s true. The United States treasury’s gold reserves are indeed kept at Fort Knox, but the Federal Reserve’s gold reserves, and those of more than one hundred other central banks, governments, and organizations, are stored in vaults under the Federal Reserve building at 33 Liberty Street in Manhattan, two blocks away from the Towers. At roughly five thousand metric tons (266 million troy ounces), these combined reserves represent, according to the Fed’s own website, somewhere between one-fifth and one-quarter of all the gold that has ever been taken from the earth.
The gold stored at the Federal Reserve Bank of New York is secured in a most unusual vault. It rests on the bedrock of Manhattan Island—one of the few foundations considered adequate to support the weight of the vault, its door, and the gold inside—eighty feet below street level and fifty feet below sea level … To reach the vault, bullionladen pallets must be loaded into one of the Bank’s elevators and sent down five floors below street level to the vault floor … If everything is in order, the gold is either moved to one or more of the vault’s 122 compartments assigned to depositing countries and official international organizations or placed on shelves. “Gold stackers,” using hydraulic lifts, do indeed shift them back and forth between compartments to balance credits and debts, though the vaults have only numbers, so even the workers don’t know who is paying whom.3
There is no reason to believe, however, that these vaults were in any way affected by the events of September 11, 2001.
Reality, then, has become so odd that it’s hard to guess which elements of grand mythic fantasies are really fantasy, and which are true. The image of collapsed vaults, the melted bullion, of secret workers scurrying deep below Manhattan with underground forklifts evacuating the world economy—all this turns out not to be. But is it entirely surprising that people were willing to consider it?4
In America, the banking system since the days of Thomas Jefferson has shown a remarkable capacity to inspire paranoid fantasies: whether centering on Freemasons, or Elders of Zion, or the Secret Order of the Illuminati, or the Queen of England’s drug-money-laundering operations, or any of a thousand other secret conspiracies and cabals. It’s the main reason why it took so long for an American central bank to be established to begin with. In a way there’s nothing surprising here. The United States has always been dominated by a certain market populism, and the ability of banks to “create money out of nothing”—and even more, to prevent anyone else from doing so—has always been the bugaboo of market populists, since it directly contradicts the idea that markets are a simple expression of democratic equality. Still, since Nixon’s floating of the dollar, it has become evident that it’s only the wizard behind the screen who seems to be maintaining the viability of the whole arrangement. Under the free-market orthodoxy that followed, we have all being asked, effectively, to accept that “the market” is a self-regulating system, with the rising and falling of prices akin to a force of nature, and simultaneously to ignore the fact that, in the business pages, it is simply assumed that markets rise and fall mainly in anticipation of, or reaction to, decisions regarding interest rates by Alan Greenspan, or Ben Bernanke, or whoever is currently the chairman of the Federal Reserve.5
One element, however, tends to go flagrantly missing in even the most vivid conspiracy theories about the banking system, let alone in official accounts: that is, the role of war and military power. There’s a reason why the wizard has such a strange capacity to create money out of nothing. Behind him, there’s a man with a gun.
True, in one sense, he’s been there from the start. I have already pointed out that modern money is based on government debt, and that governments borrow money in order to finance wars. This is just as true today as it was in the age of King Phillip II. The creation of central banks represented a permanent institutionalization of that marriage between the interests of warriors and financiers that had already begun to emerge in Renaissance Italy, and that eventually became the foundation of financial capitalism.6
Nixon floated the dollar in order to pay for the cost of a war in which, during the period of 1970–1972 alone, he ordered more than four million tons of explosives and incendiaries dropped on cities and villages across Indochina—causing one senator to dub him “the greatest bomber of all time.”7 The debt crisis was a direct result of the need to pay for the bombs, or to be more precise, the vast military infrastructure required to deliver them. This was what was c
ausing such an enormous strain on the U.S. gold reserves. Many hold that by floating the dollar, Nixon converted the U.S. currency into pure “fiat money”—mere pieces of paper, intrinsically worthless, that were treated as money only because the United States government insisted that it should be. In that case, one could well argue that U.S. military power was now the only thing backing up the currency. In a certain sense this is true, but the notion of “fiat money” assumes that money really “was” gold in the first place. Really we are dealing with another variation of credit money.
Contrary to popular belief, the U.S. government can’t “just print money,” because American money is not issued by the government at all, but by private banks, under the aegis of the Federal Reserve System. The Federal Reserve—despite the name—is technically not part of the government at all, but a peculiar sort of public-private hybrid, a consortium of privately owned banks whose chairman is appointed by the United States president, with Congressional approval, but which otherwise operates without public oversight. All dollar bills in circulation in America are “Federal Reserve Notes”—the Fed issues them as promissory notes, and commissions the U.S. mint to do the actual printing, paying it four cents for each bill.8 The arrangement is just a variation of the scheme originally pioneered by the Bank of England, whereby the Fed “loans” money to the United States government by purchasing treasury bonds, and then monetizes the U.S. debt by lending the money thus owed by the government to other banks.9 The difference is that while the Bank of England originally loaned the king gold, the Fed simply whisks the money into existence by saying that it’s there. Thus, it’s the Fed that has the power to print money.10 The banks that receive loans from the Fed are no longer permitted to print money themselves, but they are allowed to create virtual money by making loans at a fractional reserve rate established by the Fed—though in the wake of the current credit crisis, at time of this writing, there has been a move to remove even these restrictions.
All this is a bit of a simplification: monetary policy is endlessly arcane, and it does sometimes seem, intentionally so. (Henry Ford once remarked that if ordinary Americans ever found out how the banking system really worked, there would be a revolution tomorrow.) What is remarkable for present purposes is not so much that American dollars are created by banks, but that one apparently paradoxical result of Nixon’s floating the currency was that these bank-created dollars themselves replaced gold as the world’s reserve currency: that is, as the ultimate store of value in the world, yielding the United States enormous economic advantages.
Meanwhile, the U.S. debt remains, as it has been since 1790, a war debt: the United States continues to spend more on its military than do all other nations on earth put together, and military expenditures are not only the basis of the government’s industrial policy; they also take up such a huge proportion of the budget that by many estimations, were it not for them, the United States would not run a deficit at all.
The U.S. military, unlike any other, maintains a doctrine of global power projection: that it should have the ability, through roughly 800 overseas military bases, to intervene with deadly force absolutely anywhere on the planet. In a way, though, land forces are secondary; at least since World War II, the key to U.S. military doctrine has always been a reliance on air power. The United States has fought no war in which it did not control the skies, and it has relied on aerial bombardment far more systematically than any other military—in its recent occupation of Iraq, for instance, even going so far as to bomb residential neighborhoods of cities ostensibly under its own control. The essence of U.S. military predominance in the world is, ultimately, the fact that it can, at will, drop bombs, with only a few hours’ notice, at absolutely any point on the surface of the planet.11 No other government has ever had anything remotely like this sort of capability. In fact, a case could well be made that it is this very power that holds the entire world monetary system, organized around the dollar, together.
Because of United States trade deficits, huge numbers of dollars circulate outside the country; and one effect of Nixon’s floating of the dollar was that foreign central banks have little they can do with these dollars except to use them to buy U.S. treasury bonds.12 This is what is meant by the dollar becoming the world’s “reserve currency.” These bonds are, like all bonds, supposed to be loans that will eventually mature and be repaid, but as economist Michael Hudson, who first began observing the phenomenon in the early ’70s, noted, they never really do:
To the extent that these Treasury IOUs are being built into the world’s monetary base they will not have to be repaid, but are to be rolled over indefinitely. This feature is the essence of America’s free financial ride, a tax imposed at the entire globe’s expense.13
What’s more, over time, the combined effect of low interest payments and the inflation is that these bonds actually depreciate in value—adding to the tax effect, or as I preferred to put it in the first chapter, “tribute.” Economists prefer to call it “seigniorage.” The effect, though, is that American imperial power is based on a debt that will never—can never—be repaid. Its national debt has become a promise, not just to its own people, but to the nations of the entire world, that everyone knows will not be kept.
At the same time, U.S. policy was to insist that those countries relying on U.S. treasury bonds as their reserve currency behaved in exactly the opposite way as they did: observing tight money policies and scrupulously repaying their debts.
As I’ve already observed, since Nixon’s time, the most significant overseas buyers of U.S. treasury bonds have tended to be banks in countries that were effectively under U.S. military occupation. In Europe, Nixon’s most enthusiastic ally in this respect was West Germany, which then hosted more than three hundred thousand U.S. troops. In more recent decades the focus has shifted to Asia, particularly the central banks of countries like Japan, Taiwan, and South Korea—again, all U.S. military protectorates. What’s more, the global status of the dollar is maintained in large part by the fact that it is, again since 1971, the only currency used to buy and sell petroleum, with any attempt by OPEC countries to begin trading in any currency stubbornly resisted by OPEC members Saudi Arabia and Kuwait—also U.S. military protectorates. When Saddam Hussein made the bold move of singlehandedly switching from the dollar to the euro in 2000, followed by Iran in 2001, this was quickly followed by American bombing and military occupation.14 How much Hussein’s decision to buck the dollar really weighed into the U.S. decision to depose him is impossible to know, but no country in a position to make a similar switch can ignore the possibility. The result, among policymakers particularly in the global South, is widespread terror.15
In all this, the advent of the free-floating dollar marks not a break with the alliance of warriors and financiers on which capitalism itself was originally founded, but its ultimate apotheosis. Neither has the return to virtual money led to a great return to relations of honor and trust: quite the contrary. By 1971, the change had only just begun. The American Express card, the first general-purpose credit card, had been invented a mere thirteen years before, and the modern national credit-card system had only really come into being with the advent of Visa and MasterCard in 1968. Debit cards were later, creatures of the 1970s, and the current, largely cashless economy only came into being in the 1990s. All of these new credit arrangements were mediated not by interpersonal relations of trust but by profit-seeking corporations, and one of the earliest and greatest political victories of the U.S. credit-card industry was the elimination of all legal restrictions on what they could charge as interest.
If history holds true, an age of virtual money should mean a movement away from war, empire-building, slavery, and debt peonage (waged or otherwise), and toward the creation of some sort of overarching institutions, global in scale, to protect debtors. What we have seen so far is the opposite. The new global currency is rooted in military power even more firmly than the old was. Debt peonage continues to be the m
ain principle of recruiting labor globally: either in the literal sense, in much of East Asia or Latin America, or in the subjective sense, whereby most of those working for wages or even salaries feel that they are doing so primarily to pay off interest-bearing loans. The new transportation and communications technologies have just made it easier, making it possible to charge domestics or factory workers thousands of dollars in transportation fees, and then have them work off the debt in distant countries where they lack legal protections.16 Insofar as overarching grand cosmic institutions have been created that might be considered in any way parallel to the divine kings of the ancient Middle East or the religious authorities of the Middle Ages, they have not been created to protect debtors, but to enforce the rights of creditors. The International Monetary Fund is only the most dramatic case in point here. It stands at the pinnacle of a great, emerging global bureaucracy—the first genuinely global administrative system in human history, enshrined not only in the United Nations, the World Bank, and the World Trade Organization, but also the endless host of economic unions and trade organizations and non-governmental organizations that work in tandem with them—created largely under U.S. patronage. All of them operate on the principle that (unless one is the United States Treasury), “one has to pay one’s debts”—since the specter of default by any country is assumed to imperil the entire world monetary system, threatening, in Addison’s colorful image, to turn all the world’s sacks of (virtual) gold into worthless sticks and paper.
All true. Still, we are speaking of a mere forty years here. But Nixon’s gambit, what Hudson calls “debt imperialism,” has already come under considerable strain. The first casualty was precisely the imperial bureaucracy dedicated to the protection of creditors (other than those that were owed money by the United States). IMF policies of insisting that debts be repaid almost exclusively from the pockets of the poor were met by an equally global movement of social rebellion (the so-called “anti-globalization movement”—though the name is profoundly deceptive), followed by outright fiscal rebellion in both East Asia and Latin America. By 2000, East Asian countries had begun a systematic boycott of the IMF. In 2002, Argentina committed the ultimate sin: they defaulted—and got away with it. Subsequent U.S. military adventures were clearly meant to terrify and overawe, but they do not appear to have been very successful: partly because, to finance them, the United States had to turn not just to its military clients, but increasingly, to China, its chief remaining military rival. After the near-total collapse of the U.S. financial industry, which despite having been very nearly granted rights to make up money at will, still managed to end up with trillions in liabilities it could not pay, bringing the world economy to a standstill, eliminating even the pretense that debt imperialism guaranteed stability.