The Vatican and Monetary Unions

Earlier this month, the Pontifical Council for Justice and Peace produced a note on the world economy. I read it in French, because an English translation did not exist, so I may have misunderstood some of it. The main conclusion of what to an 'English speaking economist' was an economics-thin document was that there should be a world economic or monetary authority--in essence, a world public authority--to manage the world economy.

The document, in so far as it was reviewed by an economist at all, seems to have been endorsed by Leonardo Beccetti, a left-wing (if not Marxist) professor from Rome Tor Vergata. A distinctive separate voice, which dwelt upon the largely Austrian but sometimes Soviet idea of business cycles is apparent in the first section of the note. Significantly, the head of the Vatican Bank, and a central banker from elsewhere, Gotti Tedeschi, did not endorse the document. Indeed, a few days later, he appeared in the Vatican newspaper, L'Osservatore Romano, to run it down. Tedeschi believes that the world's problems are in large part the consequence of collapsing birth rates in the developed world, and the 'grey bomb' effect of taxation and geriatric welfare on a shrinking tax base. His editorial of November 4 is worth quoting;
At this point, there are no longer many solutions.

To deflate the total debt – public, banking, business and family – and bring it back to pre-crisis levels, that is, to around 40% less, it is possible, though not advisable, to cancel a part of the debt with a type of “preventive agreement,” where creditors are paid at 60%.

It is possible, but it would be a hypothesis without a future, to invent some new bubble to compensate for debt with an increase in the value of real estate or goods.

It could be considered – but we hope it is only a temptation – to tax the wealth of families, sacrificing however, a necessary resource for development and at the same time creating an injustice.

One could also look for a way for rapid development, thanks to a growth in competition, which however in the global crisis is not easy to generate. There is no capital to invest, the banks are weak, the demographic problem penalizes demand and investments. In this context, besides, consumer debt is not even imaginable.

Western countries are expensive and to make them economical in a short period, one must intervene on the cost of labor. Protectionist interventions to sustain businesses that are not competitive however, would produce disadvantages for consumers and would reduce buying, already in decline

The single currency could be devalued, but this would lead to an increase in the price of imported goods.

Someone, to lower the debt, has also thought of inflation. But inflation does not happen if economic growth is at zero, salaries are at a standstill, the shadow of unemployment looms and even the price of raw goods is diminished.

One could say that the spiral of inflation will not occur as long as there is lack of faith in one’s currency. The problem is that today, one cannot have faith in any currency: all of them, including the euro and the dollar, are weak.

Inflation will not take off also because liquidity does not circulate, but mostly because that created by the central banks has substituted that produced by the banking system to sustain debt growth.

The first problem today, then, is not inflation but deflation. Markets, in fact, are privileging liquidity. This is because in a deflationary regime, the value of currency increases while during inflation, it decreases.

To advance the economy today without increasing public debt means correlating interest rates with the GDP. For public debt superior to 100% of GDP, it is evident that to obtain a growth of 1%, without increasing debt, means not having taxes superior to 1% and penalizing savings.

The solution is in the hands of governments and central banks who must come up with a coordinated strategic action of re-industrialization, strengthening of credit institutions and support for employment.

This will take time, a time of austerity in which the foundations of economic growth must be rebuilt.

Above all, governments must restore citizen and market trust through a governance that is adapted to the times and which, more than just being technically competent, is also a leadership model. A governance which aims for the common good.

In Vatican speak, then, Tedeschi accepted austerity and talked of problems in money as though monetarist theory, which holds that money is valuable in itself or should be, were the whole of the economic law. By contrast, the Pontifical Council note makes reference to Benedict XVI's encyclical caritas in Veritate, and implicitly to a line of papal thinking about a need for economic regulation for the common good which takes in Leo XIII's 1891 Rerum Novarum on capital and labor, Pius XI's 1931 Quadragesimo Anno, John XXIII's 1963 Pacem in Terris, Paul VI's 1967 Populorum Progressio, and John Paul II's Centesimus Annus. In this tradition, as for Erich Fromm and Karl Marx, capital is either dead or a convenient fictional cypher for time and value, whilst labour is alive and in need of real tendresse.

None of these encyclicals called for a global government. All would have or did call for global moderation and regulation, with polyarchic and multilateral structures suitable for the problems to which they were addressed.However, that is how the note is being interpreted. So I thought that I would put down, for my own diversion, what a global monetary union would have to mean.

In doing so, I'd advise readers to turn away from models like the west African CFA, or the Euro, or the Latin Monetary Union, and to look to the order which JM Keynes and most modern international structures, whether they know it or not, are directed at--the British Empire.

Keynes almost ran a ring around the Americans at Bretton Woods. He secured a pledge to a world free trade authority--always more of a British than an American idea--and to a world bank, which would swiftly come to be dominated by the ideas of British development economists like Sir Roy Harrod, and Sir Arthur Lewis. These institutions fitted alongside the largely British model of the United Nations Organisation, but critically, they were to be accompanied by a global currency which would help to regulate trade. This currency, Keynes proposed, would be known as a 'bancor'. The USA rejected this, but proposed the tie of gold to dollars as a world reserve anyway.

Doing so transferred the British way of power to the Americans, and whilst, ironically, the best demonstration of it was when the US used gold and dollars to stop the British themselves at Suez, the effect was double-edged. Britain had as a country generally maintained its empire between 1815 and 1914--the time when it was a great power--by small wars or financial diplomacy. Long wars were very difficult because the pound was tied to gold, and gold ran out. The Americans discovered this limitation in Vietnam, in 1967, when Westmoreland's surge--which conceivably could have won the war--was rejected because no more gold could be traded. It took America some time to use technology and the example of agricultural derivatives to invent a way out, in the form of the mortgage derivative that was first deployed by the federal mortgage associations, Fannie Mae and Freddie Mac in 1975. Until it died, Bretton Woods precluded long American wars from ending in victory; derivatives have allowed this at great cost.*

The Bancor would not have encouraged borrowing and deregulated near-paper currencies. Instead, an international clearing union would have established a currency on the basis of 30 leading commodities and currencies. All existing currencies would be linked to this bancor, and trade accounts of the balance of payments would be measured in it. Though states would have an overdraft, if they ran trade deficits, they would pay interest on their bancor accounts, promise to reduce the deficit, and devalue their currencies by buying bancors. When in surplus, they would reverse the process. This would avoid the sort of disastrous global imbalance found in the US-China relationship, and globally, and inside the euro.

Bretton Woods ground to a halt with Vietnam, and was finally killed off by Richard Nixon taking the dollar from gold, the oil price shocks, and the fiscal consequences of Lyndon Johnson's 'Great Society'. That cued the first serious postwar flirtation with globalised international currency, in the form of the Special Drawing Right at the IMF, which Jim Callaghan and Gerald Ford used to cluck over. An SDR is a fictional unit made up of the weights of investors (trading states) with the IMF. People have always looked to it as a possible Bancor, and in recent years the Chinese, Indian, and (unsurprisingly cynically) US governments have promoted it as a way of avoiding the euro supplanting Ole' Greenback. You'll see it on any insurance clause for luggage when you fly. There are big influences backing it.

The preponderance of economists and economic thinkers at the higher levels of the Catholic Church were always keen on Bretton Woods, and some seem to see them as eager to fix it's absence with a restoration. The Vatican, they say, thinks in centuries. If so, it doesn't seem to remember the demise of the Latin Monetary Union, which went under in large part because the papal states loaded the French Second Empire with silver which could not be redeemed at the agreed rate, leading to a massive outflow from France and arbitrage on the part of the banks in a vain attempt to resist default. It's an understudied episode, and one which the Church has always been keen to brush away since it speaks to one of the several modern periods when France and Rome ended up at each other's throats (Rome generally, but not always, won). The fiasco shows that supranational (or whatever the appropriate adjectival description is in Rome's case) interests almost never trump local ones, and that they can indeed generate a local interest in destroying the system.

Here's the problem; generally, world central banks in a fiat money system--whether the IMF for most of its career, the Bank of International Settlements at the Hague, the European Central Bank, or the Bank of England within the postwar empire--just don't work. When the BIS set reserve asset ratios for the banks in the 1990s, under the Basel agreements, it failed to preclude them from counting derivatives as assets. The Bank of England got the gold standard in 1931, the Sterling area in 1949, Bretton Woods in 1967, and the European Monetary System wrong. The ECB is currently burning down half of Europe.

In fact, the only supranational monetary authority that works is the CFA banking system in West Africa. It works there because the banks, in alliance with France and the resources of the EU, override anything approaching a sovereign government decision which breaches their spending rules.

The proper focus of the Pontifical Council's note should not have been the need for a world monetary authority, which would mark a new and useless slavery. It should have been the long tradition of distributism, labour rights, and institutional awareness of the need to trade ethically which the modern world is so much in need of.

I have a feeling that those things will be gained, if we can avoid war, by the re-localisation and regionalisation of trade in a peak oil, post-financial crisis world. I think that finance will prove almost impossible to regulate, and that therefore banks should be separated from speculation and either turned into credit unions or abolished in favour of electronic money post-office accounts in each country. That would leave joint stock companies with unlimited liability for their partners to do whatever they wish, and without the moral hazard of our tax monies having to keep them going. We might have less credit, but the same venture capital and insurance. We might have more equal resource use and wages. We might have to work harder for our bread, and to share more. We might have a better world.

The world doesn't need amoral fixes for yesterday's problems focussed on a vague bien commune--they won't work. Greed, selfishness and cocaine are better explanations of the financial crisis than any maths can produce, just as hubris, elite criminality, and arrogance explain the American and European economic debacles.

These things can only be regulated out by ethics, not system, reform, and the only system reforms that should be forced, rather than allowed to evolve, are those which allow for better ways to trammel or direct the worst of what people can be so that the best is available for all.

So--and it's the job of good Catholics to say this in the light of reason--the Pontifical Council's proposals are welcome, warm-hearted, misplaced and wrong where they are specific at all.

*As an aside, one should never forget that the American revolution began in earnest not with tea taxes, but with attempts to regulate inflationary scrip derived from currency and the expansion of business into Indian territory.


Edward Spalton said…

I will have to go over this again, as my eyes tend to glaze over with large amounts of monetary and economic information.

However I thought you would like this quotation from the encyclical Bonum Sane
of Benedict XV
"The coming of a world state is longed for by all the worst and most distorted elements. This state, based on the absolute equality of men and a community of possessions would banish all national loyalties. In it no acknowledgement would be made of the father over his children, or of God over human activity. If these ideals are put into practice there will inevitably follow a reign of unheard-of terror". (Hat tip to

Interesting how the effects of today's supra national corporatism and Marxism appear to coincide, isn't it? You would have thought Benedict XVI would have spotted it but, as Cardinal Ratzinger, he was up to his neck in Pan Europa with Otto von Habsburg.
Martin Meenagh said…
The more I think of it, the better it would have been if Bavaria had joined Austria and Burgundy had survived. Then the project of rationalising union with people who speak the same language wouldn't have got so much traction, but cooperation would.

Well, I say. I may well be wrong. I don't think that freedom in the Atlantic sense goes that well with cosmopolitanism, and as you know, I'm inclined to think that there is something to be said for moderate nationalism.

The release of the latest note was something of a debacle, as you know, and it's not clear that either the Holy Father or the Cardinal Secretaty of State saw the Pontifical Council's piece before it was released. I also think that the reporting was distorted--it was regulation, moderation, and limitation--governance not government--that they wanted to strengthen, as far as I could tell, but I think that they were diverted by the world currency system crowd.

Thank you for your comment, as usual.