Cooking the Books 1 – Blowing up the global financial system
On 24 July US Treasury Secretary Scott Bessent announced that the US would be taking measures against any individual, bank or organisation that helped Iran engage in international trade but also secondary sanctions against any state that continued to trade with Iran. Asked why these measures weren’t going to be applied immediately, Bessent replied ‘Why would I want to blow up the global financial system?’. It was a good question, but an evasive answer even if it did at least show an understanding of what might happen if secondary sanctions were strictly enforced.
Capitalism depends on international trade, and international trade requires a generally accepted means of payment. Originally gold was this ‘universal equivalent’ that could be exchanged against any other product of labour of equivalent value. The pound sterling, the dollar and the currencies of the other major states trading and investing internationally were convertible on demand into a fixed amount of gold.
This Gold Standard was suspended in 1914 and never fully recovered, with Britain going off it in 1931 and the United States in 1933. It was revived after the Second World War in a modified form known as the Gold Exchange Standard where national currencies were tied to a fixed amount of a national currency that was convertible into gold at a fixed rate. That currency was the US dollar and was convertible at a rate of 1 ounce of gold = 35 dollars. It meant that a unit of a national currency could be expressed as a fixed amount of gold.
This system ended in 1971 when the United States stopped agreeing to buy gold at a fixed rate. However, the dollar remained the main means of international payment and the world’s main reserve currency, which central banks hold for international payments for trade and investment, and which they can use to buy their own currency to try to maintain its rate of exchange.
This puts the United States in a privileged position. Other states’ dollar reserves are held in the form of interest-bearing US Treasury Bills, which means that those states are in effect lending money to the US. In fact it is said that these loans not only cover the US’s trade deficit but also provide it with the money to sustain its military might.
It also puts the US in a position to use sanctions as a foreign policy tool, penalising or threatening to penalise individuals, businesses, and other states by excluding them from dollar transactions if they fail to comply. Trump evidently thinks that it is a good idea to use this power even though it undermines the dollar’s reliability. Whether he will use it to impose secondary sanctions against China for refusing to stop trading with Iran remains to be seen. Banning China from paying with dollars really would ‘blow up the global payments system’.
Other states are taking note of how, from their point of view, the US is abusing its position in the global payments system and have been taking precautions, such as by paying with other currencies and by holding more of their reserves as gold.
Goldman Sachs noted (28 August) that ‘central banks have been diversifying their holdings using gold; which is considered less likely to be frozen than reserves held in foreign currencies’.
Gold may no longer be the money-commodity but it is still a store of value because it’s a product of labour. No interest is paid on gold reserves and gold is not a stable store of value since its price fluctuates up and down as a result of capitalists speculating in it, but at least it is not an asset that another state can stop you using or use to exact compliance.