Table Of ContentTHE 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
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First published 1997 by
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Companies and representatives
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ISBN 978-1-349-14303-0 ISBN 978-1-349-14301-6 (eBook)
DOI 10.1007/978-1-349-14301-6
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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
