The Death of Money

by James Rickards

  These bloodbaths were followed by the wars of Louis XIV, waged continually from 1667 to 1714, in which the Sun King pursued an explicit policy of conquest aimed at reuniting France with territory once ruled by Charlemagne.

  The European major litany of carnage continued with the Seven Years’ War (1754–63), the Napoleonic Wars (1803–15), the Franco-Prussian War (1870–71), the First World War, the Second World War, and the Holocaust. By 1946, Europe was spiritually and materially exhausted and looked back with disgust and horror at the bitter fruits of nationalism, chauvinism, religious division, and anti-Semitism.

  France was involved in every one of these wars, and Franco-German conflict was at the heart of the three most recent, in 1870, 1914, and 1939, all occurring within a seventy-year span, a single lifetime. After the Second World War, while the U.K. wrestled with the demise of its own empire and a U.S.-Soviet condominium descended in the form of the Iron Curtain and the Cold War, Continental statesmen, economists, and intellectuals confronted the central question of how to avoid yet another war between France and Germany.

  ■ The New Europe

  A first step toward a unified, federal Europe took place in 1948 with the Hague Congress, which included public intellectuals, professionals, and politicians from both left and right in a broad-based discussion of the potential for political and economic union in Europe. Winston Churchill, Konrad Adenauer, and François Mitterrand, among many others, took part. This was followed in 1949 by the founding of the College of Europe, an elite postgraduate university dedicated to the promotion of solidarity among western European nations and the training of experts to implement that mission. Behind both the Hague Congress and the College of Europe were the statesmen Paul-Henri Spaak, Robert Schuman, Jean Monnet, and Alcide De Gasperi.

  The great insight of these leaders was that economic integration would lead to political integration, thereby making war obsolete, if not impossible.

  The first concrete step toward economic integration was the European Coal and Steel Community (ECSC), launched in 1952. Its six original members were France, West Germany, Italy, Belgium, Luxembourg, and the Netherlands. The ECSC was a common market for coal and steel, two of the largest industries in Europe at the time. In 1957 it was joined by the European Atomic Energy Community (Euratom), dedicated to developing the nuclear energy industry in Europe, and also by the European Economic Community (EEC), created by the Treaty of Rome and devoted to creating a common market in Europe for goods and services beyond coal and steel.

  In 1967 the Merger Treaty unified the ECSC, Euratom, and the EEC under the name of the European Communities (EC). The 1992 Maastricht Treaty recognized the European Communities as one of the “three pillars” of a new European Union (EU), along with Police and Judicial Cooperation, and a Common Foreign and Security Policy (CFSP), formed as the representative of the new EU to the rest of the world. Finally, in 2009, the Lisbon Treaty merged the three pillars into the sole legal entity of the European Union and named a European Council president to direct general objectives and policies.

  Alongside this economic and political integration was an equally ambitious effort at monetary integration. At the heart of monetary union is the European Central Bank (ECB), envisioned in the 1992 Maastricht Treaty and legally formed in 1998 pursuant to the Treaty of Amsterdam. The ECB issues the euro, which is a single currency for the eighteen nations that are Eurozone members. The ECB conducts monetary policy with a single mandate to maintain price stability in the Eurozone. It also trades in foreign exchange markets as needed to affect the euro’s value relative to other currencies. The ECB manages the foreign exchange reserves of the eighteen national central banks in the Eurozone and operates a payments platform among those banks called TARGET2.

  At present, Europe’s most tangible and visible symbol is the euro. It is literally held, exchanged, earned, or saved by hundreds of millions of Europeans daily, and it is the basis for trillions of euros in transactions conducted by many millions more around the world. In late 2014 the ECB will occupy its new headquarters building, almost six hundred feet high, located in a landscaped enclave in eastern Frankfurt. The building is a monument to the permanence and prominence of the ECB and the euro.

  Many market analysts, Americans in particular, approach Europe and the euro through the lens of efficient-markets theory and standard financial models—but with a grossly deficient sense of history. The structural problems in Europe are real enough, and analysts are right to point them out. Glib solutions from the likes of Nobelists Paul Krugman and Joseph Stiglitz—that nations like Spain and Greece should exit the Eurozone, revert to their former local currencies, and devalue to improve export competitiveness—ignore how these nations got to the euro in the first place. Italians and Greeks know all too well that the continual local currency devaluations they had suffered in the past were a form of state-sanctioned theft from savers and small businesses for the benefit of banks and informed elites. Theft by devaluation is the technocratic equivalent of theft by looting and war that Europeans set out to eradicate with the entire European project. Europeans see that there are far better options to achieve competitiveness than devaluation. The strength of this vision is confirmed by the fact that pro-euro forces have ultimately prevailed in every democratic election or referendum, and pro-euro opinion dominates poll and survey results.

  Charlemagne’s enlightened policies of uniformity, in combination with the continuity of local custom, exist today in the EU’s subsidiarity principle. The contemporary EU motto, “United in diversity,” could as well have been Charlemagne’s.

  ■ From Bretton Woods to Beijing

  The euro project is a part of the more broadly based international monetary system, which itself is subject to considerable stress and periodic reformation. Since the Second World War, the system has passed through distinct phases known as Bretton Woods, the Washington Consensus, and the Beijing Consensus. All three of these phrases are shorthand for shared norms of behavior in international finance, what are called the rules of the game.

  The Washington Consensus arose after the collapse of the Bretton Woods system in the late 1970s. The international monetary system was saved between 1980 and 1983 as Paul Volcker raised interest rates, and Ronald Reagan lowered taxes, and together they created the sound-dollar or King Dollar policy. The combination of higher interest rates, lower taxes, and less regulation made the United States a magnet for savings from around the world and thereby rescued the dollar. By 1985, the dollar was so strong that an international conference was held at the Plaza Hotel in New York in order to reduce its value. This was followed by another international monetary conference in 1987, at the Louvre in Paris, that informally stabilized exchange rates. The Plaza and Louvre Accords cemented the new dollar standard, but the international monetary system was still ad hoc and in search of a coherent set of principles.

  In 1989 the missing intellectual glue for the new dollar standard was provided by economist John Williamson. In his landmark paper, “What Washington Means by Policy Reform,” Williamson prescribed the “Washington Consensus” for good behavior by other countries, in the new world of the dollar standard. He made his meaning explicit in the opening paragraphs:

  No statement about how to deal with the debt crisis . . . would be complete without a call for the debtors to fulfill their part of the proposed bargain by “setting their houses in order,” “undertaking policy reforms,” or “submitting to strong conditionality.” The question posed in this paper is what such phrases mean, and especially what they are generally interpreted as meaning in Washington. . . .

  The Washington of this paper is both the political Washington of Congress and . . . the administration and the technocratic Washington of the international financial institutions, the economic agencies of the US government, the Federal Reserve Board, and the think tanks.

  It is hard to imagine a more blunt statement of glo
bal dollar hegemony emanating from Washington, D.C. The omission of any reference to nations other than the United States, or any institution other than those controlled by the United States, speaks to the state of international finance in 1989 and the years that followed.

  Williamson went on to describe what Washington meant by debtors “setting their houses in order.” He set forth ten policies that made up the Washington Consensus. These policies included commonsense initiatives such as fiscal discipline, elimination of wasteful subsidies, lower tax rates, positive real interest rates, openness to foreign investment, deregulation, and protection for property rights. The fact that these policies favored free-market capitalism and promoted the expansion of U.S. banks and corporations in global markets did not go unnoticed.

  By the early 2000s, the Washington Consensus was in tatters due to the rise of emerging market economies that viewed dollar hegemony as favoring the United States at their expense. This view was highlighted by the IMF response to the Asian financial crisis of 1997–98, in which IMF austerity plans resulted in riots and bloodshed in the cities of Jakarta and Seoul.

  Washington’s failure over time to adhere to its own fiscal prescriptions, combined with the acceleration of Asian economic growth after 1999, gave rise to the Beijing Consensus as a policy alternative to the Washington Consensus. The Beijing Consensus comes in conflicting versions and lacks the intellectual consistency that Williamson gave to the Washington Consensus. Author Joshua Cooper Ramo is credited with putting the phrase Beijing Consensus into wide use with his seminal 2004 article on the subject. Ramo’s analysis, while original and provocative, candidly admits that the definition of Beijing Consensus is amorphous: “the Beijing Consensus . . . is flexible enough that it is barely classifiable as a doctrine.”

  Despite the numerous economic elements thrown into the stew of the Beijing Consensus, Ramo’s most important analytic contribution was the recognition that the new economic paradigm was not solely about economics but rather was fundamentally geopolitical. The ubiquitous John Williamson expanded on Ramo in 2012 by defining the five pillars of the Beijing Consensus as incremental reform, innovation, export-led growth, state capitalism, and authoritarianism.

  As viewed from China, the Beijing Consensus is a curious blend of seventeenth-century Anglo-Dutch mercantilism and Alexander Hamilton’s eighteenth-century American School development policies. As interpreted by the Chinese Communist Party, it consists of protection for domestic industry, export-driven growth, and massive reserve accumulation.

  No sooner had policy intellectuals defined the Beijing Consensus than it began to break down due to internal contradictions and deviations from the original mercantilist model. China used protectionism to support infant industries as Hamilton recommended, but it failed to follow Hamilton’s support for domestic competition. Hamilton used protectionism to give new industries time to establish themselves, but he relied on competition to make them grow stronger so they could eventually hold their own in international trade. In contrast, Chinese elites coddled China’s “national champions” to the point that most are not globally competitive without state subsidies. By 2012, the deficiencies and limits of the Beijing Consensus were plain to see, although the policies were still widely practiced.

  ■ The Berlin Consensus

  By 2012, a new Berlin Consensus emerged from the ashes of the 2008 global financial crisis and the European sovereign debt crises of 2010–11. The Berlin Consensus has no pretensions to be a global one-size-fits-all economic growth model; rather it is highly specific to Europe and the evolving institutions of the EU and Eurozone. In particular, it represents the imposition of the successful German model on Europe’s periphery through the intermediation of Brussels and the ECB. German chancellor Angela Merkel has summarized her efforts under the motto of “More Europe,” but it would be more accurate to say that the project is about more Germany. The Berlin Consensus cannot be fully implemented without structural adjustments in order to make the periphery receptive and complementary to the German model.

  The Berlin Consensus, as conceived in Germany and applied to the Eurozone, consists of seven pillars:

  Promotion of exports through innovation and technology

  Low corporate tax rates

  Low inflation

  Investment in productive infrastructure

  Cooperative labor-management relations

  Globally competitive unit labor costs and labor mobility

  Positive business climate

  Each one of the seven pillars implies policies designed to promote specific goals and produce sustained growth. These policies, in turn, presuppose certain monetary arrangements. At the heart of the Berlin Consensus is a recognition that savings and trade, rather than borrowing and consumption, are the best path to growth.

  Taking the elements of the Berlin Consensus singly, one begins with the emphasis on innovation and technology as the key to a robust export sector. German companies such as SAP, Siemens, Volkswagen, Daimler, and many others exemplify this ethic. The World Intellectual Property Organization (WIPO) reports that six of the top ten applicants for international trademark protection in 2012 were EU members. Of 182,112 applications filed under the WIPO Patent Cooperation Treaty in 2011, 27.5 percent were filed by EU members, 26.8 percent by the United States, and 9.0 percent by China. The EU’s attainments in university education, basic research, and intellectual property are now on a par with those of the United States and well ahead of China’s.

  Intellectual property drives economic growth only to the extent that business can utilize it to create value-added products. A key factor in the ability of business to drive productivity through innovation is a low corporate tax rate. Statutory tax rates are an imperfect guide because they may be higher than the tax rate actually paid due to deductions, credits, and depreciation allowances; still, the statutory rate is a good starting place for analysis. Here Europe once again stands out favorably. The average European corporate tax rate is 20.67 percent, compared to 40 percent for the United States and 25 percent for China, once local income taxes are added to national taxes. Corporations in the EU are predominantly taxed on a national basis, meaning tax is paid to a host country only based on profits made in that country, which contrasts favorably with the U.S. system of global taxation, in which a U.S. corporation pays tax on foreign as well as domestic profits.

  Both the EU and the United States have managed to maintain low inflation in recent years, but Europe has done so with significantly less money printing and yield-curve manipulation, which means its potential for future inflation based on changes in the turnover or velocity of money is reduced. In contrast, China has had a persistent problem with inflation due to Chinese efforts to absorb Federal Reserve money printing to maintain a peg between the yuan and the dollar. Of the three largest economic zones, the EU has the best track record on inflation both in terms of recent experience and prospects going forward.

  The EU’s approach to infrastructure investment has resulted in higher quality and more productive investment than that of either the United States or China. Because large infrastructure projects in Europe typically involve cross-border collaboration, they tend to be more economically rational and less subject to political pressures. A prominent example is the Gotthard Base Tunnel, scheduled to open in 2017, which will run thirty-four miles end to end beneath the Swiss Alps, which tower ten thousand feet above it. The tunnel will be the longest in the world and has rightly been compared to the Panama Canal and the Suez Canal as a world-historic achievement in the advancement of transportation infrastructure for the benefit of trade and commerce. Although the Gotthard Base Tunnel lies entirely in Switzerland, it is a critical link in a Europe-wide high-speed rail transportation network.

  For passengers, the tunnel will cut an hour off the current three-hour-and-forty-minute travel time from Milan to Zurich. For rail freight traffic, th
e tunnel will increase annual capacity through the Gotthard Pass by 250 percent, from the current 20 million tons to a projected 50 million tons. The Gotthard Base Tunnel will be linked to scores of high-speed rail corridors coordinated by the EU’s Trans-European high-speed rail network, called TEN-R. These and many similar European infrastructure projects compare favorably in terms of long-term payoffs with Chinese ghost cities and the U.S. practice of wasted investments such as solar cell maker Solyndra and electric car maker Fisker, which both filed for bankruptcy.

  The German labor-management coordination model for large enterprises, called Mitbestimmung, or codetermination, has been in place since the end of the Second World War. It was expanded significantly in 1976 with the requirement that worker delegates hold board seats of any corporation with more than five hundred employees. Codetermination does not replace unions but complements them by allowing worker input in corporate decision making in a regular and continuous way, in addition to the sporadic and often disruptive processes of collective bargaining and occasional strikes. The model is unique to Germany and may not be copied specifically by other EU members. What is significant about codetermination for Europe is not the exact model but the example it sets with regard to improving productivity and competitiveness for business. The German model compares favorably with that of China, where workers have few rights, and the United States, where labor-management relations are adversarial rather than cooperative.

  Of the Berlin Consensus pillars, the one most difficult to engender in the EU as a whole, especially in the periphery, is the efficient labor pillar including lower unit labor costs. Here the policy is to force internal adjustment through lower nominal wages in euros, rather than external adjustment either by devaluing the euro or by abandoning it in favor of local currencies in countries such as Greece or Spain. Keynesians have argued that wages are “sticky” and do not respond to normal supply and demand forces. Paul Krugman puts the conventional Keynesian view as follows: