The following article is part II of longer text pertaining to
Hegemonic Currencies and Monetary Geopolitics, and “Honey Traps”: The
Strauss-Kahn Affair, A Stealthy Coup d’état at the IMF?
«Money brings honor, friends, conquests and realms» –John Milton
This study is incomprehensible unless one acknowledges that “the
management of money is always and everywhere political [and that…] even
in the esoteric realm of money, international relations still reflect,
to some extent, the interests of powerful states” (Kirshner, 2003).
Along these lines, since Classical Antiquity, there has always been a
strong connection between wealth and military power and therefore, in
the most simple and direct way, between economics and national security.
Not surprisingly, modern times are not so different. (Friedberg, 1991).
Therefore, the trends that rule the behavior of currencies are
strikingly similar to those that govern the conduct of national states.
They both seek dominance in highly hierarchical and dynamic systems
where competition, conflict and confrontation are commonplace. They both
gain and lose power and prestige at the expense of one another in
zero-sum games (Cohen, 2003). Therefore, “the realpolitik balancing
instinct would apply to currency politics as well as geopolitics”
(Drezner, 2010).
The evident overlapping parallel implies that, paraphrasing Robert
Mundell (1993), powerful States have powerful currencies. In fact,
history provides many examples that demonstrate that “currency can
enhance the power of the state that issues it” (Cohen, 2009). Thus, it
would be mistaken to disregard that “Money Rules – now more than ever –
but those rules serve political masters [so] students of money in
general and political scientists most particularly must return to that
basic starting point – money is politics”. (Kirshner, 2003).Indeed,
“World history demonstrates that there is a close relationship between
monetary systems and war and peace”(Lips, 2004).
Furthermore, since the dawn of human civilization, the issuance of
currency has invariably carried heavy political connotations related to
territorial considerations: “governments have been assumed to enjoy a
natural right of monopoly control over the issue and management of money
within their borders [and following a model akin to a]Westphalian model
of monetary geography […whereby] each state was expected to maintain
its own exclusive territorial currency” (Cohen, 2008).
Consequently, not unlike nations, currencies rise and fall too. “An
examination of the long history of reserve currencies shows the tendency
for one currency to dominate, with any change in status often
reflecting a shift or rebalancing of economic and political power” (Lee,
2010). Accordingly, “currency internationalization does indeed impact
directly on the power position of issuing states” (Cohen, 2009).
Hence, there seems to be a persistent symbiotic link between
geopolitics and finance that represents an element which is considered
by statesmen in order to properly assess national power. Indeed, it is
known that nowadays Central Bankers and political leaders actively
collect intelligence information on the behavior of currencies and
periodically test their relative strength, in order to “adjust their
strategies accordingly” (Stroupe, 2005).
However, hegemonies, both geopolitical and monetary, are not
perpetual: “historical experience demonstrates the speed and
pervasiveness of changes in national economic power; since hegemony is
transitory, so must be any international monetary system that takes
hegemony as its basis” (Eichengreen, 2003), which indicates that “the
international monetary system has always rested and depended upon
political foundations” (Kirshner, 2003).
The following graph, based on data from a study on the evolution of
monetary hegemony (Dwyer & Lothian, 2002), shows the historic
succession of dominant international currencies from the 5th century
B.C. onwards. Not surprisingly, as can be clearly seen, currencies
occupy a dominant position when the nation that mints them becomes a
great power.
However, “since states are no longer able to exercise supreme control
over the circulation and use of money within their own frontiers, they
must instead do what they can to preserve or promote market share. As a
result, the population of the monetary universe is becoming ever more
stratified, assuming the appearance of a vast Currency Pyramid — narrow
at the top, where the strongest monies dominate; and increasingly broad
below, reflecting varying degrees of competitive inferiority” (Cohen,
2003).
At this point, it is important to emphasize that ‘reserve currency’
status is the highest position a currency can attain because it is
“something which evolves over time through combination of international
economic and political power and convenience to the greatest number of
users rather than abruptly as the result of conscious decisions by a
single country”(Eslake, 2009). Moreover, there are other evident
advantages provided that “the issuers of currencies that are widely used
by others as reserve assets […] can finance deficits simply by printing
more of their own money” (Cohen, 2008). Therefore, there is a “link
between the distribution of economic power and the allocation of reserve
currencies” (Drezner, 2010). Hence, “the great bulk of reserves is held
in the form of highly liquid assets denominated in one of the small
handful of moneys at the peak of the Currency Pyramid” (Cohen, 2009).
A reserve currency is thus defined by three essential attributes:
a) It provides a store of value, i.e.
“confidence that the currency will retain its value, so making it a safe
place in which to invest official reserves or denominate contracts”
(Dobbs, 2009). Confidence is critical because “economies operate on
trust as a foundation” (Stroupe, 2006). Thus, “reserve assets serve as a
store of value that can be used directly for intervention purposes or
else can be more or less quickly converted into a usable intervention
medium” (Cohen, 2009).
b) It is employed as a “medium of
exchange that offers the ability to transact globally in the currency in
an easy and low-cost way” (Dobbs, 2009). As such, “a reserve currency
facilitates trade and finance by decreasing the number of bilateral
exchange markets that need to be created, thus reducing transaction
costs” (Carbaugh&Hendrik, 2009). Therefore, it provides a reference
to set the bilateral exchange rate quotations (Oxford Analytica, 2008).
c) As a unit of account, it is “a widely
held and recognized currency that can be used to denominate
international contracts […and] to invoice contracts” (Dobbs, 2009) and
it is the currency in which many commodities –including fossil fuels,
strategic raw materials, precious metals– and financial instruments
available in capital markets are priced and traded (Oxford Analytica,
2008).
The latter is particularly important because there is a strong link
between finance and hydrocarbons market, due to the fact that
“black gold has other pseudo-monetary characteristics as
an indispensable commodity that practically begs to be controlled. In an
increasingly industrialized world, this fungible primary energy source
is everywhere in demand [and, as result…] the spectrum of thought on
national security and foreign policy [is taken] into the realm of high
finance, capital flows and the trump asset of energy resources (Roby,
2010).
Hence, this research paper must be understood in the context of the
United States dollar’s decades-long role as the ‘first among equals’ in
the international monetary system. The following graph, based on data
from a paper written by a prominent scholar of International Political
Economy (Cohen, 2009) illustrates the current hierarchical pyramid of
currencies, classified as “top currency”, “patrician currencies” and
“elite currencies”.
In geopolitical terms, during the Cold War period, the Dollar
hegemony “held the American alliance system and the world economy
together… [because] America’s major allies and economic partners were
willing to hold dollars for political as well as for economic reasons”
(Engdahl, 2006). Therefore, the privileged position of the dollar has
been “a key contributor to US global hegemony” (Oxford Analytica, 2008)
for it provides advantages derived from the Federal Reserve’s absolute
monopoly of the printing of a currency needed by countless national
economies to survive (Engdahl, 2003).
Thus, thanks to of its wealth, “America has been able to irresistibly
influence all the other players on the geopolitical chessboard because
it has led the global economy, and historically it could therefore
greatly reward or severely punish in ways and to an extent no one else
could” (Stroupe, 2006), attaining both political and diplomatic power,
as well as formidable power projection capabilities.
For this reason, “America’s dominant position as the sole superpower
ultimately rests upon two pillars: its overwhelming military superiority
and its control of the global economic system by the unique role of the
dollar as the World Reserve Currency” (Clark, 2005). According to this
reasoning,
“it might be considered an elemental interest of the
United States to maintain the system which also includes intense
diplomatic and limited military operations in order to preserve its
abundant financing for as long as possible. After all, there seems to be
a strong interdependence among nations. The US is dependent on cheap
financing from abroad and is even willing to apply some military power
to protect these interests” (Schulz, 2009).
Moreover, it cannot be denied that “the dollar’s leading role in
foreign exchange transactions also is reinforced by this currency’s
widespread use in the invoicing of international trade” (Goldberg,
2011). That is especially true about oil markets, given that “since oil
trade was and still is noted, as well as traded in US Dollars, every
nation has to purchase huge amounts of this currency for its national
reserves in order to maintain its ability to purchase the required
energy” (Schulz, 2009). Consequently, monetary dependence of others on
the issuing country confers the latter significant geopolitical
power(Cohen, 2003).
The unavoidable reasoning that arises is that “a full challenge to
the domination of the US dollar as the world central-bank reserve
currency entails a de facto declaration of war [on American power]” and,
as a result, the United States is willing to fight wars to defend its
national currency (Engdahl, 2006) because “an end to the dollar’s
reserve currency status would impose material constraints on the United
States to finance its deficits, and lead to a major loss of prestige and
power projection capabilities” (Drezner, 2010). A possibility is that
“widespread oil pricing in alternative currencies or perhaps the
bartering of oil would then threaten U.S. hegemony by crimping the
relative global demand for dollars” (Roby, 2010).
Nevertheless, perpetual hierarchic supremacy of the dollar cannot be taken for granted:
“Sooner or later, confidence in the dollar is bound to be
undermined by America’s chronic payments deficits, which add
persistently to the country’s looming foreign debt […] The exorbitant
privilege obviously cannot endure forever; America’s spending cannot
indefinitely exceed its income. In the absence of significant policy
reforms to reverse the deficits, the world’s trust in the dollar is
bound […] to be eroded. Dollar accumulations will eventually dry up and
could even turn into massive sales” (Cohen, 2008).
The feasibility of said scenario has been enhanced by recent events.
Indeed, “the [2008 and 2009] financial crisis and its aftermath have
triggered uncertainty about the future of the dollar as the world’s
reserve currency” (Drezner, 2010) because it “revealed the inherent
weaknesses of the current international monetary system that contributed
to global financial instability and a weak global economy and [said
crisis has also] hampered the long-term prospects of both the US dollar
and the euro as reserve currencies. The crisis has compromised both
currencies as safe-haven stores of value” (Lee, 2010).
The following chart, based on official IMF data (International
Monetary Fund, 2013) reflects the composition of foreign exchange
reserves held on a global basis by early 2013. As can be seen, nowadays
the US dollar still occupies a predominant position which is unmatched
by other inhabitants of the world’s current monetary universe.
At first, “it appears that the current system of dollar dominance
will persist provided that geopolitical tensions do not become too
important for policymakers – or not important enough” (Drezner, 2010),
yet appearances can deceiving and potential challengers might become
increasingly assertive:
“several states around the world today are thought to
harbor ambitions to amplify their monetary power – including, most
prominently, the four BRIC countries (Brazil, Russia, India, and above
all China). One way to do this is to promote internationalization of
their currency” (Cohen, 2009) by “trying to establish their own
financial regimes as the international payment vehicle” (Schulz, 2009).
It is telling that, back in 2008, Vice Admiral J. Michael McConnell,
then Director of National Intelligence voiced before the United States
Congress Intelligence Committee his “concerns about the financial
capabilities of Russia, China, and OPEC countries and the potential use
of their market access to exert financial leverage to achieve political
ends” (McConnell, 2008). The senior American official’s threat
assessment is not mistaken: “influence might be increased directly
through the use of newly acquired reserve stockpiles to threaten
manipulation of the value or stability of a key currency such as the
dollar” (Cohen, 2008).
The Vice Admiral’s statement, which –needless to say– goes “beyond
the conventional world of spycraft” (Shelton, 2008), implies that the US
intelligence Nomenklatura has already acknowledged the threat posed by
the geopolitical manipulation of financial forces by foreign powers
hostile to American interests. It might be interpreted as the
confirmation that “the United States may be expected to resist any
compromise of the greenback’s historical dominance…” (Cohen, 2008).
Indeed, McConnell’s concern is not unsubstantiated at all, taking
into account that “[the] US increasingly came to rely on the governments
of countries that were neither democracies nor US allies for financing
[…and since such States] with large quantities of reserves have more
strategic freedom of action; they are less likely to be deterred from
taking geostrategic risks by the possibility that their actions could
precipitate a financial crisis (Setser, 2009).
Actually, the unleashing of financial warfare seeks the infliction of
economic damage as it “involves malicious acts in markets for stocks,
bonds, currencies, commodities and derivatives” (Rickards, 2012). The
same author points out that, unlike conventional warfare, it can be
waged stealthily enough so as to obscure the identities of the attackers
as well as their channels. Thus, it requires a remarkably high degree
of sophistication.
The aforementioned has engendered, paralleling Cold War terminology, a
system akin to a “balance of financial terror” (Summers, 2004) whereby
America’s overall stability could potentially be threatened due to the
fact that “America’s partners in NATO are no longer the dominant holders
of US dollars in reserve as they were during the cold war. The
connection between dollar holders and security partners has been severed
[and, as a result,] the dollar depends on the kindness of strangers”
(Drezner, 2010). At this point, it is vital to underscore that
“[regarding monetary concerns] politics will mater greatly [because]
States do not typically (accumulate claims on) countries that are, or
may be, their geopolitical competitors –if they can help it, that is, or
if there is any credible alternative” (Jaeger, 2010).
In the light of the above, based on data from the CIA World Factbook
(Central Intelligence Agency, 2012) and the World Gold Council (2011),
the following chart reveals the largest proprietors of financial assets,
including foreign currency reserves, gold and holdings of SDR. The list
includes industrial economies, emerging powers, world-class financial
centers and oil exporters. Not many of them are staunch US allies, some
might eventually reconsider their Foreign Policy vis-à-vis America and
only one of them, namely Germany, is a NATO member, for the time being.
It must be borne in mind that “for historical reasons gold is still
included in the reserve stockpiles of many countries, despite the fact
that it is no longer directly employable as a means of exchange. So too
are SDRs [and that both of them] must be exchanged for a more utilizable
instrument when the need for financing arises” (Cohen, 2009). Indeed,
given the fact that the aurous metal “has been used as money to a
greater or lesser extent for much of the history of civilization”
(Michaud, et al., 2006), it “fulfills the unique function of a global
store of value” (Faugère& Van Erlach, 2005). Incidentally, even
though the US is not among the top ten holders of financial assets, most
the US currency reserves are not denominated in dollars (!) but in
gold: Its 8,133.5 tons represent 76.6% of its national currency reserves
(World Gold Council, 2011).
Even though this paper does not focus on the yellow metal, its
significance in terms of monetary politics is deservedly acknowledged
because “from the beginning of recorded history some 6,000 years ago,
gold made a profound and lasting impression. Gold was, and still is, the
ultimate symbol of wealth, power, beauty and prestige. It has been
deeply rooted in the consciousness of man ever since” (Lips, 2001) and,
as a result, “gold is a political metal” (Lips, 2004). As such, it is
“highly susceptible to geopolitical factors [because…] during periods of
fiscal or monetary mismanagement, crises of various kinds or
fundamental changes in the dominant currency, gold may be a very useful
asset for hedging risk” (Michaud, et al., 2006).
In other respects, dollar hegemony went unchallenged during six
decades because no competitive rival emerged, yet “ample evidence exists
to suggest that the distribution of power in international monetary
affairs is changing” (Cohen, 2008). Especially, the rise of the People’s
Republic of China as an economic superpower has enhanced the
possibility that the ‘Middle Kingdom’ could become, in the long run, a
financial superpower (Makin, 2011). Naturally, “many PRC scholars and
policy makers […] aspire for a world economic and financial order less
dominated by the US and in which the PRC can play a more influential
role” (Lee, 2010).
Accordingly, by proposing alternatives to the US dollar as reserve
currency –like Special Drawing Rights–, “China desires to decrease the
financial and political power of the United States” (Carbaugh &
Hendrik, 2009) and, it has to be taken into account that “If any nation
is in a position to use its newly acquired influence in this manner, it
is China. At any time, Beijing could undermine America’s money by
dumping greenbacks on the world’s currency exchanges or even simply by
declining to add dollars to China’s reserves in the future” (Cohen,
2008).
Both options are not mutually exclusive and they can be advanced
simultaneously. Indeed, the People’s Bank of China could covertly and
progressively diversify its massive currency reserves by ceasing to buy
American dollars and, simultaneously, stockpiling growing reserves
denominated in other currencies and even in precious metals. This
deceptive strategy is meant to preserve wealth without precipitating a
sudden dollar collapse, along with some political consequences such move
would recklessly unleash. Therefore, it is not surprising that the
composition of its foreign currency reserves is one of the highest state
secrets of the People Republic of China (Stroupe, 2006).
Even if “China’s tactics suggest that it is not prepared to challenge
the dollar’s hegemonic status at any point in the near future”
(Drezner, 2010), it actually looks like, in the long term, Beijing is
interested in forging a new monetary system in which the US dollar is no
longer the only reserve currency available and overreliance on the
American currency is not a necessary evil anymore. Chinese statesmen can
accomplish such an ambitious objective through the application of two
strategies: a) contributing to the strengthening of Special Drawing
Rights (DSR)[1], in order to establish a multilateral reserve currency
under which financial power will be, more or less, evenly distributed
and b) unilaterally promoting the internationalization of the Renminbi
as a growingly solid currency (Chin & Wang, 2010).
Interestingly, the international monetary diversification away from
the dollar is enthusiastically welcomed by Russia (Drezner, 2010), an
utmost resourceful challenger of American geopolitical interests which,
as such, would be more than glad to witness the accelerated decline of
the US as the international’s system top power.
If the economic rise of China is uninterrupted during the next few
decades, there will be profound financial and, above all, geopolitical
consequences: “If the yuan emerges as a reserve currency potentially
rivaling the dollar, China will become more powerful and the US less
powerful in international and financial affairs… [In that sense,] the
emergence of the yuan as a major reserve currency will reflect the
underlying shift in economic and financial power, even if it does,
independently, provide tangible benefits to China [but] this is likely
to have ramifications for Washington’s political position in the world”
(Jaeger, 2010).
Reportedly, while discussing if accumulating mammoth currency
reserves denominated in American currency benefits China’s national
interests, Beijing’s ruling elite has questioned the long-term strength
of the US dollar a solid store of value and, in order to encourage the
introduction of a new international monetary system under a new global
reserve currency and, thus, senior Chinese government officials have
implemented. “measures to promote the internationalization of the
renminbi [also known as ‘people’s currency’ or yuan]” (Drezner, 2010).
Nowadays, it appears likely that
“the yuan is set to become a major reserve currency, but
it is not a foregone conclusion that it will emerge as the dominant
reserve currency 20, 30 or even 40 years from now. For, despite heated
theoretical debate, it is possible for two or even three major reserve
currencies to co-exist” (Jaeger, 2010).
Even if it is still unclear who will inherit the dollar’s position as
hegemonic currency due to a lack of credible alternative successors,
the assumption that an eventual monetary transition, far from being
unfeasible, is a real possibility, considering that “several currencies
can share reserve currency status, as they not infrequently have.
Changes in financial technologies and market structures […] make it even
more likely that this will be true in the future than the past”
(Eichengreen, 2005). Likewise, “a multi-currency reserve system provides
alternatives for countries to diversify their foreign exchange currency
holdings. If dollar liabilities increase and confidence declines, for
example, central banks can switch to the other reserve currencies” (Lee,
2010).
Accordingly, it is way too early to accurately forecast what the
international monetary system will look like during the next few
decades. It is also unknown if the much-anticipated shift will be
accomplished through peaceful or violent means. In the absence of
consolidated challengers, it appears likely that some sort of
‘multipolar balance of monetary power’ will emerge, i.e. “[a] fragmented
currency system, with no dominant leader… [akin to the] interregnum of
the period between the two World Wars, when Britain’s pound sterling was
in decline and the dollar on the rise, but neither was dominant”
(Cohen, 2008).
Whatever the ultimate result, it must always be kept in mind that a
power vacuum is not meant to last neither in geopolitics nor in finance.
Along these lines, some analysts foresee that “the dollar’s global
dominance is more likely to be lost incrementally to a number of other
currencies as those currencies continue to rise in international
importance, that is, as they come to be used more frequently in
international transactions” (Stroupe, 2006).
If the US dollar does lose its royal crown, it will not be
immediately grabbed by another national currency. There are alternative
possibilities that deserve special attention, such as Special Drawing
Rights (SDR), which were “created by the International Monetary Fund
(IMF) in 1969 to support the Bretton Woods system of fixed exchange
rates. The IMF’s objective was to introduce into the payments mechanism a
new type of international money, in addition to the dollar and gold,
that could be transferred among participating nations in settlement of
payments deficits Although the SDR was designed as a reserve currency,
it never took off. SDRs today add up to less than 1 percent of total
reserves. The SDR has only limited use as a reserve asset, and its main
purpose is to serve as the unit of account of the IMF and some other
international organizations. Rather than being an international
currency, the SDR is a potential claim on the freely usable currencies
of IMF members” (Carbaugh&Hendrik, 2009).
Nonetheless, it must be pointed out that “The SDR is not a hard
currency but rather a derivative as its value is determined based on the
value of other assets […] more importantly, the SDR is tied to all the
world’s economies unlike existing currencies which are components of
either a single country’s economy or a pool of countries like the euro”
(Rosensweig, 2009). In other words, SDR is regarded as the “Esperanto of
currency options” (Drezner, 2010).
The aforementioned plurality is due to the fact that “the value of
the SDR is defined as a basket of currencies which include the U.S.
dollar, Japanese yen, UK pound, and the euro. The SDR’s basket
composition is reviewed every five years to ensure that it reflects the
relative importance of currencies in the world’s trading and financial
systems. the economic welfare of the world would not depend on the
behavior of a single currency, namely the dollar. Currency risk would be
diversified through a basket reserve unit. It would take years to
develop SDR money markets that are liquid enough to serve as a reserve
asset. Although the IMF approved the first issuance of SDR-denominated
bonds on July 1, 2009, as it attempts to increase its resources, the
bonds can be purchased and sold only by central banks, not private
investors” (Carbaugh & Hendrik, 2009).
On the other hand, it is outstanding that, only until relatively
recent times, have military strategists acknowledged the full
destructive potential of financial warfare as a geopolitical weapon of
the highest caliber, yet if offers the advantage of avoiding much
bloodshed, unlike the use of conventional armament or Weapons of Mass
Destruction –WMD–. Indeed, according to Chinese military experts, wars
can be waged through the manipulation of financial instruments to
demolish countries’ national economies. In that sense, the consequences
of financial attacks are usually devastating because they precipitate “a
near collapse of the social and political order.
“The casualties resulting from the constant chaos are no
less than those resulting from a regional war, and the injury done to
the living social organism even exceeds the injury inflicted by a
regional war [and an additional advantage is that]… financial war […]
allows for concealed actions…” (Quiao & Wang, 1999).
In that sense, it has been argued that dollar hegemony was somehow
involved with the Anglo-American decision to invade Iraq back in 2003,
not long after the Middle Eastern country had switched to the euro in
its oil exports. Once Saddam Hussein’s regime was overthrown, the
occupation forces “quickly reconverted Iraq’s oil transaction currency
to the dollar” (Clark, 2005). That would explain the staunch
Franco-German reluctance to participate in and back Operation Iraqi
Freedom.
Libya offers another intriguing case worth looking into. Libyan
satrap Muammar Gaddafi was reportedly planning to sponsor the
introduction of a gold currency shared by African and Arab nations
(Scott, 2011). Revealingly, French President Sarkozy even declared that,
“Libya has begun to change their views towards financial security of
mankind” (Gold Investment, 2011). Furthermore, during an ensuing bloody
insurrection, Western-backed rebels fighting to unseat Gaddafi
established their own central bank even before the Libyan dictator was
finally deposed and a new government could be created, which illustrates
that “there were some pretty sophisticated influences [involved and
that it also shows] how extraordinarily powerful central bankers have
become in our era” (Brown, 2011).
Finally, “the absence of geopolitical tensions could boost the
chances of coordinated shift in currency reserves” (Drezner, 2010), but
it definitely cannot be discarded that “the outcome could be heightened
struggle for leadership over the longer term and a rising tension in
international currency affairs” (Chin & Wang, 2010). Indeed, it
seems that the first shots of this very unconventional war may have even
been fired already, indicating that, apparently, “a battle of
currencies [far from being peaceful] could get nasty” (Cohen, 2008).
Indeed, “there are many other historic examples of the US stepping in
to halt a movement away from the petrodollar system, often in covert
ways” (Katusha, 2012) and the case of Dominique Strauss-Kahn may offer
one of such examples. The author of this paper shares said perception
and believes that, as will be explained below, DSK apparently may have
been one of its (political)
casualties.
Intergovernmental Institutions as Battleground Arenas
«Money is a good soldier, sir…» –William Shakespeare
It is mistaken to disassociate international institutions from the
contextual balance of power that prevails at any given time. Far from
being autonomous players, they “are created by the more powerful states,
and [they] survive in their original form as long as they serve the
major interests of their creators, or are thought to do so [and]
institutions remain close to the underlying distribution of national
capabilities or [else] they court failure” (Waltz, 2000).
From the moment of their inception, intergovernmental institutions
are inescapably permeated by national interests due to the fact that
“States sometimes operate through institutions. The most powerful in the
system create and shape institutions so that they can maintain their
share of world power, or even increase it” (Mearsheimer, 1994). As a
result, institutions are not politically neutral. Instead, they “reflect
state calculations of self-interest based primarily on concerns about
relative power” (Mearsheimer, 1995). So, it is not surprising at all
that powerful States struggle to control, either directly or indirectly,
those same institutions.
For instance, the Organization of American States (OAS) is clearly
dominated by the USA as the Shanghai Cooperation Organization (SCO) is
undeniably dominated by both the People’s Republic of China and the
Russian Federation. Likewise, “since the founding of the Bretton Woods
institutions in 1945, the World Bank has been headed by an American
whereas the FMI has been under the helm of a (Western) European”
(Chossudovsky, 2011). Such control indicates that, when both
institutions were created, the US and Western Europe wanted to forge a
comprehensive transatlantic alliance which could encompass economic and
financial affairs. There was also, of course, a military counterpart:
The North Atlantic Treaty Organization (NATO).
The following lists, based on official data published by both the
International Monetary Fund (2012) and the World Bank (2012), illustrate
that the former has always been ran by a European whereas the latter
has invariably presided over by an American.
In that sense, international financial institutions –like the IMF–
are certainly no exception because “the most basic choices about money –
what money is used where, the behaviour of international financial
institutions, and efforts at cooperation – can only be understood as the
outcome of a political contest between states with motivations other
than the pursuit of global economic efficiency” (Kirshner, 2003).
History has shown that, from the very beginning, “the evolution of
the IMF has reflected the geopolitics of the international economy.
[Beyond the fact that its] headquarters […] have always been in
Washington D.C. […it] has undoubtedly played a role which has been
useful for the general national interest of the United States”
(Bordo& James, 2000).
In fact, it has been acknowledged that “one key channel of U.S.
global influence in the modern economic system has been its influence on
the institutions, such as the IMF and World Bank, that undergird the
current international economic and financial order” (Goldberg, 2011).
Moreover,“the United States also exercises a substantial amount of
informal power at the IMF” (Weiss, 2012).
It must not be forgotten that the
“the IMF is owned by the governments of its member
countries, represented through a Board of Governors. The Governor for
each member country is usually the Minister of Finance or sometimes the
Central Bank Governor. Voting is in accordance with the size of a
country’s share-holding in the Fund (or ‘quota’), and many important
decisions require special majorities (85% of the vote). Periodically,
quotas are recalculated to reflect changing economic size”. (Bordo
& James, 2000).
Consequently, it is deeply mistaken to assume that IMF activities
cannot be interpreted as foreign to power politics and “many analysts
contend that the IMF is a highly politicized institution, reflecting the
wide power differential between a few advanced economies and the
remaining membership” (Weiss, 2012). Moreover, “diverting the IMF, for
geopolitical purposes, from its principles to serve particular interest
is possible since decisions to lend are taken by the Executive Board
[…which] is responsible for conducting the day-to-day business of the
IMF. It is composed of 24 Directors, who are appointed or elected by
member countries or by groups of countries, and the Managing Director,
who serves as its Chairman” (Reynaud & Vauday, 2007).
Indeed, power is not evenly distributed among the IMF’s 188 member
States. That multilateral organization (International Monetary Fund,
2012) explains that “Each member country of the IMF is assigned a quota,
based broadly on its relative position in the world economy. A member
country’s quota determines its maximum financial commitment to the IMF,
its voting power, and has a bearing on its access to IMF financing”. The
logical result is that “members with very large voting weight can
possess a disproportionately greater voting power” (Leech, 2002). In a
nutshell, “the quota system is the basis of asymmetric power relations
among member states in the IMF” (Blomberg & Broz, 2006).
The following charts, based respectively on data from the IMF (2012)
and the CIA (2012) reflects a comparison between the most influential
IMF members, measured in terms of the share of their voting power, and
the largest economies, in terms of their 2011 Gross Domestic Product
(nominal). The correspondence is somewhat accurate but, in the IMF
system, the US, Japan, Germany, France, the UK and Canada and are
overrated, whereas China, India and Brazil are underrated. Please note
that, as of June 2012, the US represents 16.75 % of the vote and, as a
result, has the power to veto IMF decisions it does not accept or agree
with.
Conversely, it has to be taken into account that
“[even though] looking after national interests is the responsibility
of national governments… History gives us many examples of states
choosing policies supposedly in the national interest, but which in fact
were chosen to serve the interests of social, political or economic
elites… History has many examples of national policies serving special
interests” (Strange, 1998). Moreover, “finance is no longer dominated
[only] by a few national governments at the apex of the global order”
(Cohen, 2008).
By extension, the same applies to intergovernmental organizations, including the IMF.
Along these lines, the International Monetary Fund is hardly an
independent entity or indifferent to pervasive financial and banking
interests, for it “is run by its governors and executive directors, of
whom the overwhelmingly dominant authorities are the US treasury
department, which includes heavy representation from [investment bank]
GoldmanSachs, and, secondarily, the European powers” (Weisbrot, 2011).
Indeed,
“while the IMF is in theory an intergovernmental
organization, it has historically been controlled by Wall Street and the
US Treasury [… and its] role is to implement and enforce those economic
policies on behalf of dominant economic interests” (Chossudovsky,
2011).
It is not far-fetched to assert that “the IMF also responds to
pressure from private banks, as evidenced by the fact that IMF programs
include conditions that support their interests” (Dreher, et al., 2007).
In fact, even insiders admit this. For example, former Senior Vice
President of the World Bank Joseph Stiglitz (2002) points out that the
IMF is controlled by the wealthiest countries and also by their
financial interests, which provide the prism employed by the Fund’s
staff to observe events and developments. Stiglitz adds that, therefore,
it makes sense to presume that the IMF’s policies are designed taking
said interests into consideration.
The power of banking clans currently reaches considerable heights and
must not be dismissed outright only because they are non state actors.
According to an article published by the New Scientist magazine, a
compact group of corporations, “mainly banks, [exert] a disproportionate
power over the global economy” (Coghland & MacKenzie, 2011). The
study, produced by complex systems theorists at the Swiss Federal
Institute of Technology at Zurich, revealed that, through entangled
corporate ownership networks, financial juggernauts stand out among the
top “superconected companies”: Barclays pls, JP Morgan Chase & Co,
Deutsche Bank, Credit Suisse Group, Goldman Sachs Group Inc, Morgan
Stanley, Mitsubishi UFJ Financial Group Inc, Bank of America
Corporation, Lloyds TSB Group plc, ING Groep NV, among others.
A Geopolitical Interpretation of DSK’s Downfall as Managing Director of the IMF
«And I sincerely believe, with you, that banking establishments are more dangerous than standing armies…»–Thomas Jefferson
The International Monetary Fund (IMF) is not commonly thought of as a
likely candidate for regime change. Whenever one hears such term, one
thinks of strategically important States whose geopolitical patronage is
being fought over by great powers: Belarus, Cuba, Iran, Libya, Myanmar,
Syria, Ukraine, Venezuela and so on and so forth.
In fact, the IMF was established by the Western victors of World War
Two, who reached an unwritten agreement whereby the World Bank would be
run by an American whereas the IMF would be lead by a European, as
explained above. Therefore, according to conventional wisdom, it is
hardly conceivable that the most important intergovernmental financial
organism worldwide could even hypothetically become the target for a
regime change operation.
There might several member states interested in changing IMF policies
or maybe even its overall direction, but it has to be acknowledged that
only very few governments have the political willingness, the necessary
contacts, the inside influence, the global reach or the technical
capabilities to bring about such an outcome without serious consequences
or at least without being visibly detected.
In
that sense, back in 2007 even the Russian Federation failed to
substantially promote its handpicked nominee, then Governor of the of
the Czech National Bank Josef Tošovský. Instead, Dominique Gaston André
Strauss-Kahn (DSK), a French politician associated with the Socialist
Party, became Managing Director of the IMF as the candidate backed by
the European Union, replacing Spaniard Rodrigo Rato.
DSK was even supported by right-wing French President Nicolas
Sarkozy, who was allegedly trying to send away one the most prominent
heavyweights of the Socialist Party (Reuters, 2007) and, it must be
borne in mind, a potential challenger for Sarkozy’s UMP Party -Union
pour un MouvementPopulaire- in the coming French presidential election
that was to be held in 2012.
Moreover, what could possibly motivate a soft coup d’état against DSK?
There is an intriguing possibility. According to the UK-based
newspaper The Guardian, in February 2011, Strauss-Kahn proposed the
introduction of a new world currency that would challenge the supremacy
of the US dollar and help ensure a greater financial stability prevails.
The then managing director of the IMF specified that “using the Special
Drawing Rightsto price global trade and denominate financial assets
would provide a buffer from exchange rate volatility”, while “issuing
SDR-denominated bonds could create a potentially new class of reserve
assets“ (Stewart, 2011).
Said proposal, far from being far-fetched, is theoretically feasible
because “even though there is no currency currently poised to dethrone
the dollar, that does not mean that the euro, the yuan, or a basket of
currencies such as the SDR could not eventually join the dollar as a
reserve currency” (Carbaugh & Hendrik, 2009).
One must bear in mind that, during DSK’s tenure as Managing Director,
the IMF published a study which examined the implications of enhancing
the role of SRD in the context of the debate concerning international
monetary reform, especially as a unit of account “which could be used to
price internationally traded assets (e.g., sovereign bonds) and goods
(e.g., commodities), to peg currencies, and to report balance of
payments data” (International Monetary Fund, 2011).
Such solutions, according to the same IMF working paper, need to be
taken into consideration in order to correct problems like persistent
global imbalances, large and volatile capital flows, exchange rate
fluctuations disconnected from fundamentals and insufficient supply of
safe global assets, among others. Interestingly, the paper’s authors
warn that political hurdles and constraints would need to be overcome
(!).
It is important to consider that some specialists specify that an
attack on the dollar’s position as the world’s top reserve currency
amounts to an attack against the Achilles’ heel of American power. In
fact,
“The second pillar of American dominance in the world
[the first one being superior state-of-the-art military technology] is
the role played by the US dollar as the international World Reserve
Currency…Maintaining this is a strategic imperative if America seeks
global dominance. It should be noted that dollar hegemony is in many
respects more important than US military superiority. Indeed, removing
the dollar pillar will naturally result in the diminishment of the
military pillar” (Clark, 2005).
Hence, it is logical to believe that Washington is not willing to
lose, at least not without a fight, the considerable economic and
political advantages derived from the role of the US dollar as the only
truly global reserve currency, which is used as a medium of exchange,
unit of account and store of value all over the world, taking into
consideration that “[from the American viewpoint,] war and insidious
interventions of this sort may be costly, but the costs of not
protecting the petrodollar system would be far higher” (Katusha, 2012).
The consequences would include “the loss of the exorbitant privilege
of easy financing of large US deficits, both government and national.
The political influence that American policy makers have
internationally, including in international institutions, could also be
diminished. If the euro were to overtake the dollar in a few decades, it
would be a once-in-a-century event… [however, if] it happened to the
pound in the last century, so who is to say it could not happen to the
dollar in this?”(Frenkel& Chin, 2008).
Additionally, in a speech delivered by DSK back in late 2009, he
stressed that even though he acknowledged that the US dollar was
expected to remain the chief reserve currency for some (sic) time,
“there have already been a number of valuable proposals for how to
address concerns related to reserve currencies, including from prominent
figures here in China. Some call for the creation of a new world
reserve currency, possibly based on the Special Drawing Right (or
SDR)—the composite currency issued by the IMF. Another possibility is
for a multi-reserve currency system to emerge, with the euro, the yen,
and the renminbi perhaps serving as co-equal anchors. These are useful
ideas that will influence the future discussion of this issue”.
On that occasion, the then IMF Managing Director went ever farther
when he explored the potential implications of the “unprecedented shift
in relative wealth and economic power” –as the US intelligence community
terms it (National Intelligence Council, 2008)– away from the West to
the Eastern hemisphere. He explained that, given that the economic
balance of power is being reconfigured,
“for China and for Asia as a whole, a
growing voice on the international stage means tremendous opportunities
to contribute to the reshaping of the post-crisis global economy… China,
no doubt, will play a leadership role in making the changes needed to
embark on a new growth path that secures long-term economic success for
all nations… [adding that] China’s role in the international policy
debate has been rising in tandem with its growing economy. As a key
member of the G-20, China is helping to elaborate the global policy
priorities for the future, and devise solutions to global problems. And
at the IMF, China is supporting our efforts to adapt and serve the needs
of our member countries even more effectively”.(Strauss-Kahn, 2009).
Remarkably, in April 2011 –shortly before the abrupt end of DSK’s
tenure as its Managing Director–, the IMF forecasted that, by 2016,
China’s GDP, measured in terms of power purchasing parity, will have
overtaken the United States as the largest economy on Earth. It is not
news devoid of deeper ramifications because “It is the first time the
IMF has put a time frame on the communist country’s inevitable march,
and the forecast has profound implications for the balance of global
power […moreover, said prediction casted] a deepening cloud over the
future of the dollar as the world’s dominant currency as well as
Washington’s attempts to close the budget gap and rein in the nation’s
ballooning debt”. (Gardner, 2011).
IMF special studies and estimations go beyond the realm of
intellectual or academic interests alone because “the most useful
function that the IMF contributed to the debate about policy
coordination was through the provision of data and forecasts”
(Bordo& James, 2000). The importance of which is highlighted due to
the fact that “[said intergovernmental organization’s] board usually
meets several times a week and carries out its work largely on the basis
of papers prepared by IMF staff” (Reynaud &Vauday, 2007).
Incidentally, said forecasts “are not purely based on economic
considerations” (Dreher, et al., 2007).
The ultimate (geo)political significance of the aforementioned did
not go unnoticed by political analysts. The IMF’s projection was
certainly unwelcomed in Washington since “whether deserved or not, the
IMF has a lot of credibility. By placing China as the number one
economic power by the end of the next US presidential term, the IMF
thrust a dagger through the heart of American hegemony. Washington’s
power is based on America’s economic supremacy. The IMF report said that
this supremacy was at its end. This kind of announcement tells the
political world that, as the headline read, ‘the age of America is
over’” (Roberts, 2011). So, Strauss-Kahn possibly constituted a much
formidable and dangerous challenge due to his “perfect position to shape
policy and to persuade foreign heads of state that replacing the dollar
is in their best interests” (Whitney, 2011).
Even if DSK’s provocative statements were not monitored by the
mainstream media, they could not have gone unnoticed by neither the US
intelligence community nor by financial players interested in
maintaining the dollar hegemony. Needless to say, it is clear that said
reckless pronouncements were not received warmly.
Strauss-Kahn is (was?) a member of the Western elite as a
representative of Old Europe’s Franco-German establishment –in contrast
to the evident pro-Atlantist position held by President Sarkozy–.
Regardless, DSK was presumably framed by law enforcement authorities
closely linked to New York politician and Wall Street businessman
Michael Bloomberg (Chossudovsky, 2011). In the cases of both Eliot
Spitzer and Dominique Strauss-Kahn, some analysts suspect that “behind
the curtain might be found investment bankers and international
financiers” (Bucci, 2011).
Furthermore, it was reported that French politician Michelle Sabban
stated that she “[was] convinced it is an international conspiracy
[because] it’s the IMF they wanted to decapitate, not so much the
Socialist primary candidate […adding that] it’s not like him. Everyone
knows that his weakness is seduction, women. That’s how they got him”
(Allen, 2011).
In the light of the above, It must not be overlooked that Russian
President Vladimir Putin stated he disbelieved the official version of
the DSK sex scandal because the “real political underlying reasons…
[were] hard to evaluate” (Osborn, 2011). Taking into account his
professional background as a KGB spook, Mr. Putin is clearly not
unfamiliar with dirty tricks such as ‘honey traps’ and ‘character
assassination’ and, more importantly, his opinion openly endorses the
view that there were political factors involved (!).
There are other additional circumstances worth taken into
consideration. Then under the helm of DSK, “on November 11-12, 2010, IMF
member states agreed on a package of reforms, the core of which is a
doubling of overall IMF quota to about $755 billion. In addition, there
would be a significant shift of voting power to dynamic emerging market
economies. If the reforms are implemented, the ten largest members of
the IMF will consist of the United States, Japan, the four largest
European economies (France, Germany, Italy, and the United Kingdom) and
Brazil, China, India, and Russia” (Weiss, 2012).
Said proposed redistribution, needless to say, was not
enthusiastically received in some circles whereas because it favors
emerging powers. Meanwhile, “China is urging the IMF to […] accelerate
its own internal governance reforms [i.e.] changes in voting shares to
reflect changes in the international balance of economic power” (Chin
& Wang, 2010).
Conversely, some pundits speculated that “Strauss-Kahn could just as
easily been set up by rivals inside the IMF, as well as by rivals within
the French political establishment… [due to the fact that] Wall Street
and the US government also had strong reasons to eliminate him”
(Roberts, 2011). Other commentators wondered if DSK’s actions –specially
his promotion of SDR as alternative to the US Dollar– could have
unleashed the ire of “some very powerful and well-connected people”
(Whitney, 2011).
The apparent participation of operatives close to French President
Nicolas Sarkozy, a staunch supporter of US foreign policy, suggests
another factor worth scrutinizing beyond the undeclared goal of
triggering ‘regime change’ at the IMF, namely, the possibility that DSK
might have competed in the then incoming France’s presidential,
successfully challenging then incumbent President Sarkozy: To be
precise, “a Strauss-Kahn presidency and a ‘Socialist’ government would
have been a serious setback for Washington, contributing to a major
shift in Franco-American relations. It would have contributed to
weakening Washington’s role on the European political chessboard,
leading to a shift in the balance of power between America and ‘Old
Europe’ (namely the Franco-German alliance)” (Chossudovsky, 2011).
Both possibilities, it has to be borne in mind, are not mutually exclusive. Far from it: They reinforce one another.
Conclusions
«…and wine maketh merry, but money answereth all things» –Ecclesiastes 10:19
There is way too much at stake regarding the evolution of monetary
hegemony. As has been discussed throughout this paper, the indisputable
symbiosis of geopolitics and finance is a concern of the highest
political order for top decision makers and, as a result, there are
powerful States and groups involved. Moreover, the IMF is a most
critical multilateral organization whose proclivity is ultimately
decisive. Thus, resourceful players want to ensure that such
intergovernmental institution, far from being neutral, favors their
interests at the expense of potential challengers, real or imagined.
In practical terms, the aforementioned implies that, as the issuer of
the world’s top reserve currency, the US simply cannot afford to be a
passive observer while the IMF promotes an alternative, however
hypothetical, to the monetary system of dollar hegemony. The United
States is likely to perceive any such attempt as a ‘deviation’ that
needs to be corrected one way or another whereas financially capable
competitors politically willing to undermine the dollar’s supremacy
certainly consider the American currency’s reign as factor that somehow
will need to be deconstructed in order to irrevocably dismantle one of
the major elements of US power, contributing to catalyze its
geopolitical decadence.
Thus, the monetary system is doomed to become an increasingly
confrontational arena. At this point, the battle’s final results are, at
best, unclear and cannot be precisely foreseen with an ample degree of
accuracy. Yet only one thing is certain: Conflict is and will be
inevitable, both among great powers as well as among currencies.
Monetary war shall be waged through both conventional and unconventional
means. Consequently, intensifying attacks and backlashes are to be
expected either within the institutional framework of the IMF or, more
importantly, outside of it. In other words, the future of monetary
hegemony will not be defined peacefully and, of course, there will be
havoc, losses and casualties.
In the light of the above, although it cannot be authoritatively
confirmed that there was a clandestine conspiracy organized by a
powerful cabal of financial and political forces at the highest levels
to unseat Dominique Strauss-Kahn as the IMF Managing Director, the
circumstantial evidence analytically hereby scrutinized leads to the
reasonable conclusion that the ultimate goal of such plot involving the
judicialization of monetary geopolitics was to prevent the IMF from
becoming a solid platform for launching any initiative considered as a
credible alternative to the dollar hegemony, thus impeding any
meaningful reform of the international monetary system’s current
distribution of power any time soon. Geopolitically speaking, this
hypothetical interpretation does make sense.
On the other hand, the determination to eliminate a competitive
adversary who was acquiring enough political capital and momentum to
defy President Sarkozy’s bid for reelection in 2012 represented no more
than a secondary concern.
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Note
[1]SDRs are
supplementary foreign exchange reserve assets held by member countries
and maintained by the IMF and their value is based on four international
currencies: the US dollar, the euro, the yen and the pound and can be
exchanged for freely usable currencies. They represent a potential claim
on the freely usable currencies of IMF member states.
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