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5 The US as leading
currency manipulator By Henry C
K Liu
made inoperative by
US-engineered financial globalization. For US
companies to compete and survive in global markets
and to attract global capital, jobs need to be
shifted to low-wage locations overseas to reduce
labor cost. Instead of foreign governments, such
as China's, being wrongly accused of manipulating
the exchange value of their currencies, US big
business should be recognized as the real culprit
that manipulates global labor markets to gain
unfair advantage over
labor, both foreign and
domestic.
This is a problem that a
labor-friendly US government can readily solve, by
passing labor regulations that reduce financial
incentives for companies to lay off workers and
outsource jobs to implement financial machination,
as has been done in Germany. Outside of slavery,
capital and labor have a symbiotic relationship
similar to a marriage. In California, a divorce is
settled with an equal split of property held in
the marriage plus lifetime alimony sufficient to
maintain the non-income-producing spouse in his or
her accustomed lifestyle until remarriage. What is
needed is a global level playing field between
capital and labor where the closing of plants to
reduce labor cost is subject to terms similar to
an equitable divorce settlement to provide the
unemployed worker a living income until
re-employed.
National security trumps
free trade Senator Dodd also raised
nationalistic concerns by pointing out that more
than a million US jobs outsourced have been in
critical defense-related industries, dislocating
the US manufacturing base and jeopardizing
capacity to produce items vitally needed for
national security. He gave the example of plants
producing special magnets used in smart bombs
relocating from Indiana to China, which could
expose the US military to interruption of
critically needed supply in the event of war.
The senator called for significant changes
in trade regulations "to adequately secure
America's future both economically and
militarily". This is of course a call for national
security trumping free trade. The military
requires not just exotic special magnets. It
requires also mundane "dual-use" items such as
uniforms and boots, which are mostly made in China
now.
Still, such conditions are the
results of US "free trade" policy, not created
unilaterally by China. Economic nationalism is
alive and well in the home of free trade in
sectors that are threatened by free trade.
Exchange rates not determined
by markets Reflecting popular misconception, the
Senate Banking Committee focused its hearing on
exchange-rate policy with a flawed assumption that
market-determined exchange rates would solve the
problem of US trade deficits. Yet market exchange
rates are determined by government interest-rate
policies. And the very concept of a government
exchange-rate policy is fundamentally opposed to
the concept of free markets.
For the
global marketplace to be truly free and fair, all
currencies must be equally subject to the
impartial discipline of market forces. Yet despite
neo-liberal rhetoric, no government today or even
in history, particularly the US government, leaves
the exchange rate of its currency to market
forces. In reality, market forces anticipate and
respond to government tax and trade policies as
well as central-bank deliberations on
interest-rate moves. The differences among the
exchange-rate policies of different governments
reflect the differences in each country's
economic, financial and monetary conditions as
well as political ideology, social structure and
societal values, but all governments manipulate
the currency market to sustain the exchange rates
of their currencies at levels best suited to their
separate national needs.
The United States
maintains an Exchange Stabilization Fund (ESF),
which is money available to the Treasury primarily
for participating in the foreign-exchange market
to maintain currency stability. It holds US
dollars, foreign currencies and IMF special
drawing rights to intervene in the
foreign-exchange market to influence exchange
rates, outside the domain of the central bank,
without affecting the domestic money supply.
History of exchange rates and currency
stabilization After World War II, as the
US emerged as the only country the industrial
sector of which had been left not only undamaged
but actually strengthened by war, the US dollar by
default became the uncontested world reserve
currency for international trade.
As early
as April 1942, the White Plan, named after Harry
Dexter White, US Treasury under secretary and a
student of free-trade advocate and Harvard
professor Frank W Taussig, proposed a United
Nations Stabilization Fund and a Bank for
Reconstruction and Development of the United and
Associated Nations. The advantages of stable
exchange rates that the automatic classical gold
standard had provided while it lasted from 1876 to
1914 had proved to be not so automatic after World
War I. The classical gold standard was causing
deflation around that world that translated into a
worldwide depression while mercantilism, the quest
by nations for gold through exporting, was causing
protectionist reaction in all countries.
The idea of the need for international
cooperation in trade and for a new "gold exchange
standard" that would make wider use of gold by
supplementing it with an anchor currency that
would be readily convertible into gold had been
developed at a 1920 international conference in
Genoa, Italy, but the participating governments
failed to reach agreement as not all were ready to
accept British sterling hegemony. This idea was
incorporated two and a half decades later into the
Bretton Woods regime, with a gold-backed US dollar
replacing the British pound. The challenge was to
devise an operative international finance
architecture out of fiat currencies anchored to a
gold-backed dollar to accommodate postwar
international trade.
One crucial
difference between the US plan by White and the
British plan by John Maynard Keynes was that the
Stabilization Fund (SF) proposed by the United
States was to be based on a mixed bag of national
currencies, while the Clearing Union (CU) proposed
by Britain was to operate with a new international
currency to be known as bancor. The CU also had
less strict rules than did the SF for its use by
countries with balance-of-payments deficits.
Unlike now, when the United States is the
world's largest debtor nation, the US at that
time, as the world's only creditor nation, was
concerned about its potential financial exposure
to bad credit worldwide and about preserving the
rights of creditor countries with
balance-of-payments surpluses. The US team voiced
serious reservations about the British/Keynes
plan, which had liberal liquidity provisions and
ready access to liquidity for countries with
temporary trade deficits that would encourage
moral hazard. Britain anticipated huge wartime
deficits as revenue from many parts of the British
Empire was suddenly interrupted.
The IMF,
dominated by US voting power, closely followed the
US/White plan for a contributory fund, although it
was slightly larger, at $8.8 billion ($77 billion
in 2004 dollars or $463 in relative share of gross
domestic product), of which the US put in $2.75
billion ($24 billion in 2004 dollars or $145 in
relative share of GDP), and the United Kingdom
contributed $1.3 billion. Exchange rates could
fluctuate 1% on either side of a par value with
the dollar.
The fund was designed to
provide members with a cushion of credit to give
them the confidence to abandon exchange and trade
controls while keeping their exchange rate stable
in relation to the dollar. It did not deal with
how the transition from war through reconstruction
to recovery was to be achieved cross-border
finance. The IMF was specifically not to lend for
relief or reconstruction arising from the war.
Article XIV allowed members to keep exchange
controls for three to five years, after which they
had to report annually on why controls still
remained. This left open the absolute deadline for
abandoning exchange controls or trade
restrictions, and in fact they were not abandoned
for current-account purposes until 1958. The UK
only abandoned its final controls on cross-border
capital flows in 1979.
In addition, the
US/White plan contemplated the forbiddance of
exchange-rate intervention, an important feature
for the United States, whereas the British/Keynes
plan did not put much emphasis on limits on
exchange-rate intervention and even
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