Martin Henry, Contributor

The financial crisis in the United States is fundamentally about much more than bank credit and bad debts. It is, in fact, an international crisis, and it is fundamentally about money itself: the nature of money, the corruption of money, confidence in money, and the stability of monetary systems.

The 1944 Breton Woods agreement among the allied powers as World War II wound down, established the US dollar as the world's reserve currency, and so, the money for international transactions. Our own net international reserves, of which governments past and present like to boast, is held in US dollars. There are vastly more US dollars outside the United States in the vaults of the central banks of the world and circulating on the streets of these countries 'as good as gold', than there are inside their country of origin.

Gold standard

Gold used to be a tangible backing for paper money. Britain gave up the gold standard in 1931, although it still has printed on its currency notes that the Bank of England promises to pay the bearer of the note the face-value sum on the note. The United Sates abandoned the gold standard much later, in 1971, under President Nixon.

When the leaders of the Government of Jamaica give the assurance that the US financial crisis is not likely to have a major impact on Jamaica, what is meant is that we have no significant direct investments in that system to be lost, our J$ banking system after FINSAC appears sound, and if potential tourists do not lose their jobs, we can expect them to still visit Jamaica, and remittances will continue to flow. This is a remarkably narrow and optimistic view revealing a shallow grasp of the intricately interwoven structure of global financial systems centred on the American subsystem from Breton Woods.

After one of the longest periods of buoyancy and growth in the American economy, a bear market emerged in 2002 [Reader's Digest, September 2008]. The US dollar eventually lost 40 per cent of its value. In the tough period of the OPEC-led oil embargo, 1974-1979, the US dollar lost only 10 per cent of its value. The world's reserve currency, the post-WW II paper 'gold', hit an all-time low on April 22 this year when it traded at US$1.60 to one against its biggest rival, the nine-year-old euro.

Global crisis

Banks dread runs on their institutions and the Great Depression was exacerbated, if not created, by a run on American banks. Any run-out of holding the US dollar as 'good-as-gold' currency would precipitate a global crisis of unimaginable proportions. Dumping US dollars from bank vaults on to foreign-exchange markets would depreciate the currency and destroy wealth on a scale that would make the failure of Lehman Brothers look like a child's building-blocks house collapsing.

But the financial crisis in the US is strong temptation to do exactly that. The allegedly fool-fool president of the United States, George W. Bush, clearly understands this, as do his secretary of the treasury and the Federal Reserve chairman. The House of Representatives, on its first vote last Monday, pushed by constituents who do not want to bail out Wall Street, rejected the rescue package. And the Jamaican Government is crying peace and safety.

The rescue package is itself a sleight of hand, but a potentially useful one in a system used to such manoeuvres. When I asked an American economist attached to an Ivy League university, in a radio interview, where the US$700 billion bailout dollars would be coming from, he confidently advised that the Federal government had various resources from which to draw.

Celebrated [and despised] free-market economists, Milton and Rose Friedman, offer a simpler and more real-world explanation in Free to Choose: "Unless financed by increased taxation or by borrowing from the public, there is only one other way to finance increased government spending, a process facilitated by unbacked paper money. But in this case, it is a credit crunch that the government is seeking to provide a bailout for. So, there is no question of borrowing from the public through private commercial banks."

That third option is "by increasing the quantity of money". And "the US government can do that by having the US Treasury - one branch of the government - sell bonds to the Federal Reserve system - another branch of the government. The Federal Reserve pays for the bonds either with freshly printed Federal Reserve notes or by entering a deposit on its books to the credit of the US Treasury. The Treasury can then pay its bills with either the cash or a cheque drawn on its account at the Fed".

Now, "when the additional high-powered money is deposited in commercial banks [the aim of the rescue package] ... it serves as reserves for them and as the basis for a much larger addition to the money supply. Growth in money supply without increased production of goods and services leads to inflation, too much money chasing too few goods, a chronic problem in every modern economy where government can create fiat money."

But in this case, some inflation, in an inherently unstable system is infinitely preferable to the collapse of the system or even its serious debilitation. The real issue at stake is the same issue that adds value to worthless bits of paper, to electronic blips and to complex financial 'instruments': confidence. British prime minister, Benjamin Disraeli, once remarked that confidence in money is suspicion asleep.

Debauching the currency

John Maynard Keynes [quoted in the Friedmans' book], reacting to the inflation which set in after World War I, noted that "there is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one in a million is able to diagnose."

An inherently unstable system, by clever manipulation, has been managing to keep a couple of steps ahead of disaster and we all hope that it will continue to do. French king, Louis XV, famously remarked, Après moi, le deluge, 'after me, the flood' - which did come.

Martin Henry is a communications consultant. Feedback may be sent to medhen@gmail.com or columns@gleanerjm.com.