The Power of Money PDF
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THE POWER OF MONEY Also by Armand Van Dormael BRETTON WOODS: Birth of a Monetary System The Power of Money Armand Van Dormael © Armand Van Dormael 1997 Softcover reprint of the hardcover 1st edition 1997 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P9HE. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. First published 1997 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 6XS and London Companies and representatives throughout the world ISBN 978-1-349-14303-0 ISBN 978-1-349-14301-6 (eBook) DOI 10.1007/978-1-349-14301-6 A catalogue record for this book is available from the British Library. This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. 10 9 8 7 6 5 4 3 2 1 06 05 04 03 02 01 00 99 98 97 For Monique Pierre Jacques Contents 1 The Power of Money 10 2 The Morganization of America 10 3 Germany Will Pay 21 4 Morgan's Solution 32 5 TheCrash 38 6 The Wasted Years 49 7 Bretton Woods Revisited 60 8 The Americanization of Europe 71 9 The Eurodollar 90 10 Europe Unite 101 11 The EMU House of Cards 119 12 Banking in Wonderland 141 13 The Global Money Game 152 14 A Sisyphean Labyrinth 164 Notes 175 Index 182 Vll 1 The Power of Money The world is awash with money. Every working day of the year $1 trillion are exchanged between dealing rooms spread all over the planet and linked by globe-spanning circuitry of satellites and fibre-optic cable. Around the clock, electronic impulses project in a wink millions of coded financial data on Reuter screens manned by dealers buying and selling currencies, equities, futures, swaps, options, options on options and even swaptions, either as a financial service to customers or in pro prietary trading. All the participants - they call themselves 'players' - mostly large banks, claim their expertise is based on up-to-the-minute global information and their advice on facts, not guesswork. World population being 5.6 billion, the daily market turnover repre sents about $180 for every man, woman and child. International trade amounts to $4 trillion a year. No computer is needed to figure that only about 1 per cent of the foreign-exchange dealings is related to interna tional business transactions. The rest is pure trading, serving no other purpose than the management of investments or the assuagement of the gambling instinct. Both are often intertwined in unavowable promis cuity. Judging from the amount of liquid assets accumulated over the past 25 years, it is easier to get rich quick playing games with currencies than producing goods. From Singapore to Capetown, from London to Los Angeles, the international currency market keeps tens of thousands of foreign-exchange dealers riveted all day long to their screens and tele phones, in a hypermarket that knows no borders, only time zones. In this singular global exchange, currencies and equities have become the most widely traded commodities. Within less than three decades, a number of groundbreaking innovations in financial engineering have broken down national barriers, linked market to market through cross-border tax dodging money flows, matching capital and corporations, investors and borrowers around the world. Bank branches, like so many tax-free money shops, are ready to accommodate modest savers as well as insti tutional investors. According to the Bank for International Settlements, borrowing on foreign markets rose from $36.4 billion in 1974 to $1.8 tril lion in 1993. From the very beginning, governments have been among the most active borrowers. Learned textbooks have always defined money as a unit of account, a medium of exchange and a store of value, not as a commodity to be 1 2 The Power ofM oney traded like crude oil or soy beans. Recurrently, over the centuries, men have sought to master the secret of unlimited accretion of money. Gold, silver and copper had to be mined, refined and minted. The London goldsmiths of the seventeenth century were the first to discover with dis creet amazement that they could write receipts-accepted as money-far in excess of the gold and silverware they held in safekeeping. Some became rich very quickly. But the temptation to overextend oneself was too great, inevitably leading to rumours which led to 'runs' by anxious depositors, often winding up in bankruptcy. Only in the 1960s did London brokers 'invent' interbank lending, which finally allowed the international banking community to perform daily on a global scale the miracle oft he loaves and the fishes. This money was not intended for commerce and industry but for speculation. From then on monetary liquidity has exponentially outrun the availability of tradeable goods and services as well as trustworthy borrowers. In com merce and industry, before anything can be distributed it must first be produced. In finance-and this may come as a shock to the uninitiated and even to some initiated - money is created out of thin air. Money in itself is not capital; to become capital it must be put to productive use. Global foreign-exchange dealing is a recent phenomenon; throughout the ages the margin of profit on currency speculation was narrow and activities were confined to a few professionals. How did this new market develop and what do the liquid resources being shifted from one centre to another represent? This brings us to the fundamental question of the uses of money. 'Money', said Keynes, 'is only important for what it will procure.' Money, properly used, has contributed immensely to humanity's eco nomic development and material progress. Mismanagement and the abuse of money by those very people entrusted by society to be its guar dians, have constituted a major cause of mankind's most crushing trage dies. In monetary affairs, as in everything else, happy nations have no history. In our time certain dates and events stand out, where quarrels over money or frantic and irresponsible speculation played a major role. The Treaty of Versailles and the crash of 1929 were accidents of history setting off chain reactions culminating in World War II. Much of the human suffering they inflicted was the consequence of the inept or inexpert decisions by statesmen put at the helm oftheir governments by popular vote and the tumult of politics, but ungrounded in basic economics and unable to grasp the interrelated consequences of their policies. The Power ofM oney 3 Great leaders, political giants, blinded by hatred and primitive emo tions, devoid of elementary economic common sense, applied political judgment to financial problems. Throughout the ages money was the hidden mainspring of major turning points in history, often underrated in the chronicles. A banker such as Jakob Fugger has changed for ever the course of his tory in more ways than one. In 1519 he decided, after some hesitation, which of the two contenders would wear the crown of the Holy Roman Empire, Charles V, King of Spain or Fran~ois I, King of France. The choice was the appanage of seven Electors. Both monarchs knew that the Electors' votes would cost a great deal of money. Fran~ois I was the wealthiest. His bankers toured the Electors' residences with coffers full of gold ecus, which they distributed generously in exchange for the solemn pledge that the vote would go to the King of France. Fugger sent out his emissaries with letters of credit payable after Charles V's election. He obviously won. This banking transaction may be considered the first major victory in history of credit over cash. Reformation was largely born out of Luther's abhorrence of moneyed indulgences; he vituperated against the Fugger bank's practice of send ing out a cashier to accompany each monk and pick up the money col lected at the sermons. Fugger had indeed loaned a large sum to a young nobleman who wanted to buy three bishoprics; as a banker, he had the legitimate right to recuperate his funds. The pecuniary abuse of indulgences became the signal for the Protestant secession. It is doubtful whether any of the scores of men who fought and lost their lives on the battlefields, in defence of their faith, had any notion of their rulers' motives in the decision to side with the Catholics or the Protestants. The horrors of Nazism have obliterated from the collective memory and from world conscience the fact that Hitler owed his rise to power mainly to a twofold breakdown of the German money system; after the trauma of trillions of worthless paper marks came a depression leaving millions of unemployed without any cash to buy food. The devastating sufferings inflicted upon the German people by the 1923 hyperinflation followed by the sudden deflation of 1930 destroyed the wealth and the values of the most solid elements in society, leaving behind a moral and economic vacuum, breeding ground for the disasters which followed. Millions of destitute men and women put their hope in a leader who pro mised them dignity, work and bread. Hitler's Putsch took place 12 days before the stabilization of the German mark. In 1924 the National Socia list party won 32 seats in the Reichstag. In 1929, after a few years of
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