Privilege or Prejudice?

By James O. Goldsborough

Seigniorage is not a word that everyone carries on the tip of his tongue, but in the present economic situation it’s an important word to know. Long after banks are back on their feet, the regulatory system is functioning again and Congress has done something about bankers getting million dollar bonuses with taxpayers’ money, the effects of seigniorage will still be poisoning our economy.
It’s a benign-sounding word from old Anglo-French not used these days outside the economics profession. Originally, it referred to the right of the feudal lord, the “seignior,” to coin money for use in his realm. Central governments didn’t yet exist so each seignior had the right to coin money so commerce could rise above bartering.
Naturally, there was something in it for the seignior as well. Since it cost him less to make the money than the money was worth, he made a profit just through coining and printing. The more currency he made, the richer he became, and thus the seignior made money through inflation as others were losing it. When centralized governments took over from the feudal lords, they took full advantage of seigniorage, the right to acquire real resources through the coining or printing of money.
Internationally, the benefits of seigniorage have redounded to the United States since the Bretton Woods Agreement of 1944 made the dollar the de facto world currency by fixing its price in gold at $35 an ounce. Our country alone could print money and send it abroad in great quantities (Marshall Plan, Truman Plan, Korean War, Vietnam War, etc.) without risk of devaluation and inflation.
Because much of Europe and Asia were still prostrate, there was no rival economy or currency to threaten the dollar’s position. The dollar was the currency in which world trade was conducted and world foreign exchange reserves were held. Because foreign nations knew, in principle, that they could redeem dollars for gold, they felt no obligation to redeem them.
So they held on to them. The Eurodollar and Eurobond markets – which were comprised of all the dollars held in banks outside the United States and not redeemed – operated independently of the United States. Because European nations held so many dollars in their reserves (as China does today), they were careful not to sell them or seek to redeem them for gold for fear a dollar devaluation would diminish their own wealth.
For America it was fat city. We could print money at a speed that would have made the greediest seignior blush without fear that anyone would try to redeem dollars for gold. The unintended consequence of Bretton Woods was to give the United States economic hegemony over the world – and until the late 1950s the world didn’t care.
By the 1960s, there was grumbling. Speculators began demanding gold for their dollars, leading to the establishment of the secretive London Gold Pool, in which 250 metric tons of gold were pooled (much of it secret purchases from the Soviet Union), to stabilize the gold price. By the end of the decade, however, the costs of the Vietnam War and the export of dollars by U.S. industry taking advantage of undervalued European currencies (undervalued because of U.S. seigniorage), had weakened the gold pool.
What blew up the gold pool and the Bretton Woods system – but not the U.S. rights of seigniorage – was a French decision in 1967 to withdraw from the gold pool and remove its gold from New York and London to Paris. Under President Charles de Gaulle and his Finance minister Jacques Rueff, France had begun to protest the dollar’s privileged position. Rueff, whom I interviewed in 1969, outspokenly accused Washington of exporting its inflation around the world in the interview.
It was not hard to see that America was doing what every empire has done: use seigniorage to establish a dominant position in the world economy. After the Romans, the Spanish and British were successful at it for long periods. In each case, however, it led to over-extension and eventual decline.
Two years after my interview with Rueff, on the morning of Aug. 16, 1971, I received a call from the Elysee Palace, the French White House, in my office at the International Herald Tribune. I made the 15-minute walk down Faubourg St.-Honoré in ten minutes and was received by Michel Jobert, the chief of staff. The French – and all the other Europeans I would discover when I got back to my office – were livid. The night before, a Sunday night, President Nixon had announced the end of the gold-exchange standard. Dollars were no longer convertible into gold. Nixon imposed wage controls. Nobody knew how far the dollar would fall.
It fell all right. The last time I looked an ounce of gold was worth $950, about 30 times what it was worth in 1971.
The dollar’s position as the world’s main exchange and reserve currency means that its true value can never be determined. Had the dollar functioned like any other currency, our deficits could not have persisted for so long because the dollar’s value would have fallen, raising the price of imports and lowering the price of our exports, which would have been a boon to U.S. industry.
Had the dollar been like any other currency, we would not have been able to finance hegemonic wars as in Vietnam and Iraq. Financial and economic constraints caused the other postwar powers, Britain, France and the USSR, to withdraw from overseas commitments and adventures (France in Indo China, Britain in India and Palestine, France and Britain at the Suez Canal and the USSR in Afghanistan).
Beyond financing war, the worst unintended consequence of our seigniorage is that the persistent over-valuation of the dollar relative to U.S. deficits puts U.S. industry at a permanent disadvantage. It was heartening last week to see that General Electric is building new plants in New York and Kentucky in a new commitment to manufacturing. G.E. chief Jeffrey Immelt says that U.S. manufacturing should represent 20 percent of all employment, twice the current percentage.
He’s right, but we won’t get an export industry back for our manufacturers until there’s another reserve currency – like the euro – that lets the dollar find its true parity level. The benefits of our rights of seigniorage ran out in the 1960s, and U.S. industry is still paying the price. z

James Goldsborough is a distinguished foreign affairs writer, winner of the Edward R. Murrow award for foreign affairs reporting and a former columnist for The San Diego Union-Tribune.