by Prabhat Patnaik, Peoples Democracy, 29 October 2017.  

FOR long one could divide the world’s currencies into three distinct
categories: (i) the leading currency, typically belonging to the leading
imperialist power,in the present case the United States, which was
considered “as good as gold” by the world’s wealth-holders; (ii) other
metropolitan currencies in terms of which the world’s wealth-holders
also held their wealth, but which, precisely by virtue of not being
considered “as good as gold”, had to maintain a certain stable value
vis-à-vis the leading currency through the pursuit of appropriate
macroeconomic policies, including contractionary policies, in their
respective countries; and (iii) third world currencies which,
irrespective of the macroeconomic policies being pursued, were generally
expected to depreciate over time in their relative value vis-à-vis the
above two sets of currencies, both in nominal and in real terms (i.e.
even when the differential rates of inflation between those countries
and the metropolitan economies were taken into account), and in terms of
which therefore wealth-holders would not like to hold their wealth; the
local wealth-holders in such countries no doubt did so, but this was
because of either inertia or coercion (i.e. the existence of exchange
controls which put restrictions on their shifting their wealth out of
these countries).

Such currencies therefore did actually tend to depreciate over time
vis-a-vis the leading currency, which in turn justified the expectation
that they would secularly depreciate, and therefore set up a tendency
towards a vicious downward spiral in their relative values. The world
capitalist economy thus operated in a manner where the tendency was for
wealth-holders, including third world wealth-holders, to shift their
wealth to metropolitan currencies and metropolitan locations if they
could, i.e. unless they were prevented from doing so (which is why
exchange controls were considered essential for third world economies).

To illustrate the point, the value of the rupee just before the 1966
devaluation in India was Rs 5 to a US dollar and with that particular
devaluation it became around 7.5. Because India pursued a fixed exchange
rate policy with only occasional devaluations, this value had reached
only around 13 on the eve of economic liberalisation when it was
devalued to 20, before being allowed to float; it is now around Rs 65 to
a dollar. No advanced country’s currency exchanges against the dollar
today at thirteen times what it did half a century ago, which
underscores the difference between the situations of third world and
first world currencies.

One implication of this tendency towards a secular depreciation of
third world currencies was that their labour was being continually
depreciated vis-à-vis the labour of first world economies. Hence
ironically the shifting of wealth by the third world rich from their own
countries to “safer” places in the metropolitan centres had the effect
of reducing the worth of their own countries’ labour vis-à-vis that of
the metropolis, which meant a secular worsening of the relative prices
of their products. This is one reason why even to this day several third
world governments, including in India, have at least some residual
restrictions on the shifting out of wealth by the local rich: the rupee
for instance is not a fully convertible currency even now.

This entire picture however is changing. One consequence of
the protracted world economic crisis has been that the interest rates in
the advanced capitalist countries have been pushed down to near-zero
levels in a bid to revive those economies; and this has meant a flow of
capital from those economies to certain third world economies, including
India, where interest rates are much higher. Such flow has taken the
form of both equities and loans. Some of this borrowing by such third
world countries is contracted in foreign exchange and some in local
currency. Likewise, some of it has come to governments, and some to
private and public sector corporations. What all this has meant however
is that metropolitan wealth-holders, unlike in the past, have now
started holding some of their wealth in the form of third world
currencies or currency-denominated assets.

This constitutes an important structural change within imperialism because it implies that metropolitan wealth-holders cannot now be indifferent to the depreciation of such third world currencies.
It is not just the local wealth-holders who lose out in terms of the
dollar value of their wealth when the local currency depreciates, but
also metropolitan wealth-holders. And since even when a currency, like
the rupee, is not fully convertible, metropolitan wealth-holders are
nonetheless allowed under the neo-liberal dispensation to take out their
funds when they wish, any depreciation of the local currency sets up an
avalanche of capital flight and also a spate of domestic insolvencies
(as several local firms have borrowed in foreign exchange to finance the
holding of local currency assets).

This basically implies that exchange rate depreciation is sought to
be prevented by the local governments. The currencies of these third
world countries, of whom India is a prominent example, like the
currencies of non-leading metropolitan economies such as the Eurozone
and Japan, have to be maintained at a stable relative value vis-à-vis
the US dollar. The fact that, for the last decade almost, the value of
the rupee has hardly depreciated vis-à-vis the US dollar, unlike in the
past, is indicative of this change in the scenario.

This change has two important implications, one obvious and one not
so obvious. The obvious implication is that since the usual instrument
which governments employ when the economy is faced with a balance of
payments problem, namely an exchange rate depreciation, is taken out of
their hands, they now have to rely much more on other instruments, such
as domestic demand compression and wage-deflation (i.e. a cut in money
wages) to achieve the same result. But, even though both exchange rate
depreciation and wage-deflation have the effect of squeezing the working
people, the former acts indirectly while the latter acts directly.

This implies several things (let me for simplicity here ignore any consideration of general demand compression through other means):
(i) a 10 per cent exchange rate depreciation does not necessarily mean a
10 per cent fall in real wages within any given time period, while a 10
per cent wage deflation does; (ii) for this very reason, a 10 per cent
exchange rate depreciation arouses less immediate resistance from the
workers compared to a 10 per cent wage-deflation; because of this the
imposition of a wage-deflation is invariably accompanied by an attack on
trade unions to break this resistance.

One can cite a famous historical illustration here. During the First
World War, Britain had gone off the Gold Standard, but returned to it in
1925 at pre-war parity, under pressure from the powerful
British financial interests which wanted such parity. But the type of
colonial prop that had been available to Britain in the pre-first world
war years was no longer available after the war (Japan for instance was
encroaching significantly on Britain’s Indian market), so that the pound
sterling was over-valued at the pre-war parity, and Britain started
facing balance of payments problems. As a result Britain tried to impose
a wage-deflation on its workers which would make its goods cheaper
abroad and also reduce domestic absorption, thereby improving its
balance of payments. This however gave rise to the famous General Strike
in Britain in 1926, within months of its return to the Gold Standard.
Thus, while both an exchange rate depreciation and a wage-deflation have
the effect of squeezing the working people, the latter is a direct
measure which has a directly political character.

The less obvious implication of the fact that metropolitan
wealth-holders now hold wealth in third world currencies, which rules
out exchange rate depreciations, is that wealth-holding decisions of
such wealth-holders now have a direct bearing upon third world trade
union rights and hence upon third world democracy. If metropolitan
wealth-holders start shifting their wealth out of a country, then the
country in question has to impose a wage-deflation by attacking trade
unions (apart from enticing metropolitan capital to stay on by offering
domestic assets for a “song”, which is a case of “denationalisation” of
national assets). What is more, if the US raises its interest rate, then
this too threatens to precipitate a wage-deflation in a country like
India to stem a capital flight, for which an attack on trade unions, on
the democratic rights of the workers, and on democratic structures
generally, becomes a necessary accompaniment (apart from
“denationalisation” as already mentioned).

This new situation differs from the earlier one in two important
ways: first, in the absence of any significant metropolitan wealth
holding in local currency assets, ie when only the third world
wealth-holders held their wealth in local currency assets, they were to
an extent subject to some degree of control by the third world State;
but the third world State within a neo-liberal regime has little
control, even in the absence of currency convertibility, upon
metropolitan wealth-holders. Second, exchange rate depreciation as an
instrument was usable earlier which obviated to a degree a direct attack
on workers and hence a direct assault on trade unions and workers’
political rights. This becomes impossible now.

In countries like India in short the changes occurring within the
structure of imperialism serve to strengthen the authoritarianism that
is already evident. The demand for the introduction of “labour market
flexibility”, a euphemism for an attack on trade unions, is sure to
gather momentum in the days to come, and the Hindutva government,
given its bloody-mindedness and its utter lack of comprehension of the
pitfalls of neo-liberalism, is sure to become a willing instrument for
fulfilling this demand.