The Value of Money


Paul Jay: On November 7, the president of the World Bank, Robert Zoellick, issued a statement calling for the reintroduction of some form of gold standard to establish the value of money.  Why now? . . .  Is Robert Zoellick’s proposal grasping at straws?

Jane D’Arista: Well, what you’re saying is quite right.  The gold standard or gold exchange standard under Bretton Woods was one in which the dollar was backed by gold and the US government offered to sell so many ounces of gold for so many dollars.  It got to the point where the amount of US dollars held outside the United States by other people — foreigners, if you will — was so much greater than the gold supply in the US that President Nixon closed the gold window and said: We can’t do it anymore — we don’t have enough gold. . . .

Paul Jay: Is the underlying problem here sort of more profound than what they’re talking about?  In other words, is the underlying problem that so much of capital is parasitical, so much of capital is actually not being invested in a productive process?  It’s being used either for speculation or as part of these derivative gambling schemes.  And you’ve described them as Ponzi schemes, that when you have so much of the global capital not involved in the productive process, you wind up creating bubbles that burst, and in the end, like we are now with American real estate — and other parts of the US economy, and not only the US economy — nobody knows what a house is worth.  In fact, nobody knows really what anything’s worth, ’cause if the truth of the bank ledgers was known, the whole system would –.

Jane D’Arista: Would collapse.  Yes, exactly. . . .

Paul Jay: Okay.  Just one more time, quickly explain what the Fed’s going to be doing here.

Jane D’Arista: The Fed is going to go and buy a great many assets, $600 billion worth of long-term assets, in the hopes of removing them from the system so that –.

Paul Jay: From the banking system.

Jane D’Arista: Not only from banks, but from any kind of financial institution — insurance companies, mutual funds, whatever.

Paul Jay: Anyone holding Treasury bonds.

Jane D’Arista: Right. . . .  And that’s going to put money in their hands to do something with.  Now, what we know is the banks are not doing anything productive with it. . . .  The Fed goes off and buys these government securities, takes them out of the market, and increases liquidity by that fashion.  I mean, if I’ve taken your security and I’ve given you money, you need to buy something else.  So the idea here is you’re going to buy something else that’s going to gin up the economy.  It’s a very nice idea, but it is not working in practice.

Paul Jay: ‘Cause a lot of banks and corporations are going to take the cash and just take it to Brazil and earn more of a spread on the interest.

Jane D’Arista: Precisely.  What they’re going to use it for is exactly as you say, for the carry trade.  In other words, they’re going to borrow short-term funds at a very low interest rate and invest in longer-term funds or higher-yielding (in terms of interest rate) assets in Brazil, Indonesia, etc.

Paul Jay: Which will cause an inflation in these other countries and supposedly make their goods more expensive, in theory.

Jane D’Arista: Right.  What it will cause in these other countries is a rise in the value of their currencies, because those dollars are sold to buy the currencies of the countries in which they’re going to invest.  That depresses the dollar. . . .  That raises the rupee or whatever the currency may be that they’re buying.  And in the process of raising the value of the currency of a given emerging-market economy, you make them uncompetitive — now their goods cost more.

Paul Jay: So, partly what Zoellick’s trying to deal with is the world saying: Well, if you, America, can snap your fingers and just create $600 billion of new liquidity, then what’s the dollar?  Then what is this whole currency system worth?  And then he says: Oh, okay, now we need to talk about gold.  So what’s wrong with that idea of going back to some kind of a gold standard?

Jane D’Arista: Well, it is not wrong that he’s raising the alarm.  Many people are.  But he’s not sophisticated enough in these areas to understand that gold will not work, that gold is produced primarily by two countries, Russia and South Africa.  There’s not going to be enough.  How are you going to evaluate who’s going to hold it?  There are so many questions.  You know, is it going to be held by the public sector?  Or is it going to be the private sector, in which case it’s back to speculation? . . .

Paul Jay: There’s tremendous speculation in gold now.

Jane D’Arista: Exactly.  So, if you want to do a commodity, I have colleagues who promote the ideas of Nicholas Kaldor, who was a British economist and who wrote very presciently in 1970 that, when we went to the fiat dollar standard, we would be taking a nation of entrepreneurs, i.e. the US, and making us a nation of rentiers –.

Paul Jay: Meaning?

Jane D’Arista: Meaning that we would be living off other people and that we would be an empire like the Roman Empire, featuring bread and circuses for our people.  Now, that appeared in the London Times in September of 1971.  It was amazing.  You could have written it every year since and it would have been true.

Paul Jay: Is there a model that anyone’s proposed that takes the valuation of currency out of the world of speculation, in other word, links the amount of money supply and the value of money to how much actually gets produced?

Jane D’Arista: Well, theoretically, yes.  At the international level you would have to take the private financial system out of the game.  That is exactly what Keynes proposed.

Paul Jay: I mean, is there any real solution short of that?

Jane D’Arista: No.

Paul Jay: So what would that look like?

Jane D’Arista: Well, the Keynes proposal, which many people still favor, is a central bank, if you will, at the international level, in which the deficit countries could borrow: everybody puts something in the pot, and deficit countries can borrow, and surplus countries put in their surplus; and everybody pays interest, whether you’re surplus or deficit.  The Keynes idea that was proposed would only work if there were capital controls — in other words, if you don’t have this free flow of capital.

Paul Jay: That’s really the key, is it not?

Jane D’Arista: That’s the key.

Paul Jay: I mean, essentially it all comes back to curbing the power of the finance sector and reducing the amount of capital involved in this parasitical part of the economy.

Jane D’Arista: Exactly.

Paul Jay: Which means an assertion of public interest through some kind of law, international and domestic.

Jane D’Arista: Yes.  With the mantra that came in in the Nixon administration and right on through the ’70s and ’80s of the free market, backed constantly with all that money that flowed into the Heritage Foundation and others, the main message there was let the market decide.

Paul Jay: And the market seems to be deciding to crash the market, which they know how to make money out of, too.

Jane D’Arista: Yes.

Jane D’Arista is a research associate with the Political Economy Research Institute where she also co-founded SAFER: A Committee of Economists and other Experts for Stable, Accountable, Fair and Efficient Financial Reform.  She is also a research associate at the Economic Policy Institute.  D’Arista served as a staff economist for the Banking and Commerce Committees of the US House of Representatives and as a principal analyst in the international division of the Congressional Budget Office.  Her publications include The Evolution of U.S. Finance, a two-volume history of US monetary policy and financial regulation.  This video was released by The Real News on 18 November 2010.  The text above is an edited partial transcript of the interview.  See, also, Jane D’Arista, “The Evolving International Monetary System,” Cambridge Journal of Economics 33 (2009).

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