Coda: Wars

DAVID A. ANDELMAN

t noon on August 10, 1978, I arrived at the frontier be- Atween Austria and Czecho- in my rickety old Opel sedan that was The New York Times bureau car. I’d driven up from Belgrade, where I was then based, covering an Eastern Europe thoroughly in the grip of communism. Now, when I arrived at the frontier, I steeled myself. I was about to pass through what Winston Churchill had 32 years earlier dubbed the Iron Curtain, separating East from West. These were difficult times. Communism and capitalism were very much at each others’ throats, and there was no more extreme a contrast than in some of these heavily-fortified bor- der points where the favored few could

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cross in both directions, provided they markets develop and are difficult—if not had all the right papers. Indeed, I had my impossible—to eradicate, especially in the American passport, my Czechoslovak visa, case of centrally planned economies where a fistful of dollars, my notebooks, and some the Soviets preferred to operate in their sat- background material, from which I had ellite protectorates. carefully expunged any Czech contacts and “In general, a black-market may be sliced off the letterhead of Radio Free Eu- expected to develop when restrictions are rope Research, the virulently anti-commu- imposed on commodity provision,” econo- nist, American-backed propaganda source, mists Alan E.H. Speight of the University that would likely have landed me in hot of Wales and David G. McMillan of St. An- water with the ever-vigilant border police. drews observed in the Journal of International I had also prudently resisted the mo- Money and Finance. “With a pegged official mentary temptation to buy a fistful of black exchange rate and controls on dealings in market Czechoslovak koruna in Vienna. foreign , an excess demand for I could have made a considerable amount foreign exchange and overvaluation of the of money. The official exchange rate at the exchange rate may be expected to arise, time was 35 koruna to the dollar. In Vienna, with the available supply of foreign cur- though, that number soared to at least 140 rency being rationed at the official price to the dollar—a four-fold profit. But as my when official reserves are unable to satisfy car inched toward the frontier I recognized the excess demand.” Or arriving visitors that I’d avoided what could have been a could simply bring in more supply that horrendously embarrassing, not to say out- black marketers would happily gobble up right dangerous, series of consequences. For at an elevated price. the border patrol was pulling out selected Then, as now, currencies are the heart cars, apparently at random, to search them. and soul of society and the governments And when I say search, I mean removing that rule them. Last year in these columns, the seats, unscrewing and dismantling all I sought to describe how various branches interior door panels, and putting the car up of government intersect with the lives of on a lift. They weren’t fooling around. In- people. But there is one outside factor that deed, they were looking every place I would I did not explore at the time—currencies. have secreted my black market koruna. And Nothing can undermine the viability of a that’s exactly what they were seeking. government more profoundly than a cur- rency whose value is plummeting. More- SETTING VALUES over, the efforts of a government to cope Across Eastern Europe at the time, govern- with such currency crises, whether of their ments were taking similar measures, largely own making or provoked by outside forces, in vain, to put a stake through the heart of can prove dramatically unsettling. Remov- black market currency trading that was ing from a government the ability to change making a mockery of what they sought to the course of its currency can change the portray as the communist economic mir- economic forces and drive deep wedges be- acle. Still, there are lots of reasons black tween various social and political elements,

David A. Andelman is editor of World Policy Journal.

116 WORLD POLICY JOURNAL Downloaded from wpj.sagepub.com at COLUMBIA UNIV on December 19, 2014 CURRENCY widening already profound gulfs between the country, quite openly and boldly out- rich and poor—the franchised and the dis- side. The black market rate of the koruna enfranchised. And, as much of Europe has was the one I could have obtained by sim- seen in recent years, as it has endeavored to ply walking into any major bank in Vi- stabilize the value of its pan-national cur- enna, on the “free” side of the Iron Curtain rency, economic imbalances can cause in- and changing the international currency of tense political turmoil. choice—the dollar—for all but worthless Seminal moments in modern political Czechoslovak paper. Of course, the only history had their roots in money and debt. way to use those koruna was to smuggle In Thailand, at the peak of the 1997 crisis them into the country—a process that was over the value of the , the govern- fraught with danger. Had I walked up to ment decided to allow the currency to float, the counter in the Intercontinental all but uncontrollably, when it simply did Hotel and sought to pay my bill with a not have enough hard cur- stack of koruna instead of a rency to defend the baht on dollar-denominated credit international markets. The russia, which ran card, I would instantly have Russian ruble crisis a year the economies called quite unwanted at- later was even more cata- tention to myself. Still, ko- strophic, particularly in its of its satellites runa, even then, were use- political fallout. President with an iron fist ful to many Czechs (at least Boris Yeltsin survived barely through the those not authorized to have months after the crisis be- direct contact with capital- gan to wane, paving the way east european ist interlopers like myself), for Vladimir Putin’s arrival common market for any variety of souvenirs, on the still fragile Russian restaurant meals, and other scene. These currency-based known as casual expenses. At four- crises still define interna- , had to-one, Prague would have tional responses to both na- little interest become one of the most af- tions and loom large in the fordable cities on the planet. political memory of their in freeing up Well, at least one of several people today. scarce hard as it happens. Forty years ago, when currency. For each of the East there were fundamentally European capitals had its two different global economic systems, own all but worthless currency—the Pol- the challenge was even greater. In Eastern ish zloty, the Hungarian forint, the Ro- Europe, Russia, and China—all centrally- manian leu, not to mention the Russian planned economies where rulers controlled ruble. Of all these currencies, though, the every aspect of production, output, pric- zloty was the most compelling domestic ing, and wages, the value of a currency was and international story. Poland, then and pegged to some artificial exchange rate now, was anxious to assume a leadership that clearly bore little relationship to the role on both sides of Europe. Dominant real value of any of these currencies. Not geographically, it was and is a nation rich surprisingly, a black market all but imme- in natural resources, the most populous diately sprang up—clandestinely within nation by far in Eastern Europe—twice

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the size of Romania and , a host of business rates of exchange rang- four times the size of Hungary—but it ing from five to 50 zlotys per dollar or the was still desperately short of the kinds of black market rate that was approaching equipment and machine tools that would 140 to the dollar. It was, after all, effec- allow its factories to compete in the West. tively a worthless currency everywhere And Russia, which ran the economies of but inside Poland, whose value was deter- its satellites with an iron fist through the mined not on any international exchange, East European common market known as but by fiat. Not surprisingly, the rate the COMECON, had little interest in free- government settled on was a price that, ing up scarce hard currency for any of its even after shipping costs to America, still satellites that might have allowed them vastly undercut the price any U.S. golf to modernize. So some, like cart maker could match. So Poland, effectively mort- the Polish variety sold like gaged their birthright, “the greeks hotcakes, up to the moment taking out loans with a simply wanted the American manufactur- host of western banks, col- ers got together and filed an lateralized with coal mines to continue to unfair trade complaint with and other natural resources. dance and sing the U.S. government. Then they tried to turn that in the sunshine,” The final resolution in- hard currency into products volved finding a comparable they could sell. groused capitalist economy with a Which is where I en- one greek currency freely convertible tered the picture in the late businesswoman. to dollars at daily market 1970s. One of the products rates that could then be that Poland discovered to used to “price” the value of be quite marketable was golf carts. Not Polish labor and raw materials. Poland that they had any vast experience with proposed Spain, Italy, or Finland. The such capitalist frivolities in their own American mediator, Deputy Assistant country. But they did know how to make Treasury Secretary Peter D. Ehrenhaft, them. It seems that making a golf cart chose Spain. And the golf carts wound up is not dissimilar to making a jet plane, being priced at $10 apiece more than the or at least the fuselage—the same metal- Poles had been charging, but below the bending and welding technology. Poland price of any American model. So the Poles had a factory that had been languishing wound up selling tens of thousands, their since the Russians took back the manu- stunningly clever marketers recognizing facturing of its own jet fighters to the that such technology would be invalu- motherland. So the Poles retooled a bit able far beyond golf courses—indeed as and began pumping out golf carts. The far afield as airports, amusement parks, question became how to price them. Since even the American presidential retreat the inputs—from steel to workers’ wag- at Camp David where a Polish cart was es—were all denominated in zlotys, they photographed as the setting for a semi- could be converted at just about any price nal conversation between Israeli President the government desired. There was the Menachem Begin and his Defense Minis- tourist rate of 31.5 to the dollar, any of ter Ezer Weizman.

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A POTPOURRI For if one member of the bloc At least 180 currencies are in use in the 193 were to pass through the looking glass to member countries of the United Nations. real or functional bankruptcy, that would Much of Europe, of course, has given up their effectively call into question the viability own currencies in favor of a common cur- of every other nation that priced its debt, rency—the Euro—and a gaggle of other na- not to mention the entire economy, in that tions had been knocking eagerly on the door common currency—the Euro. to join the Euro system. Then along came All this suggests one of the many prob- the economic crises in Greece, followed by lems of the concept of common currencies. Spain, Italy, Iceland, and several others wait- On the one hand, such a model can be quite ing in the wings as the world held its breath. positive. The European Commission lists Technically, these were not actually currency six such advantages for the Euro: crises, but rather sovereign debt crises. Still, • More choice and stable prices for as a member of the Euro bloc, the inability  consumers and citizens of Greece to finance its operations going for- • Greater security and more opportuni- ward, and fears that even more substantial ties for businesses and markets economies might do the same, sent shivers • Improved economic stability throughout Europe, across the Atlantic, and and growth

JERRY WONG JERRY as far as China and Japan. • More integrated financial markets

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• A stronger presence for the EU to some of the least profligate peoples of in the global economy Europe—particularly the Germans—that • A tangible sign of a European their industries and banking sector were identity being forced, at knifepoint, to subsidize the There are even more advantages that excesses of southern Europe. The price of transcend these immediate benefits, which failure would be an all but cataclysmic col- also remove the need to change money ev- lapse of one of the world’s most widely-used ery time you cross into another country. currencies—the Euro. The price of success A common currency in a common market was lower interest rates and a more potent as vast as Europe also removes the need single trading block for German consumers for most corporations to hedge their risks and businesses. All in all, a decent tradeoff, against fluctuations in multiple currencies the Germans finally decided. of nations where they do most of their busi- Nevertheless, the travails of southern ness. Of course, each of these countries must Europe do also suggest a host of reasons manage to keep its economy—especially its why a common currency can be question- labor market, inflation, economic growth, able when good times turn sour. First, and service and consumer sectors—healthy and foremost, a common currency suggests sev- growing. On the government level, as the eral critical prerequisites—a common labor EU points out, the most important advan- market with roughly equivalent levels of tage is that the Euro “allows every mem- employment (or unemployment), and by ber government to plan for the future.” extension, true portability of labor across Provided, of course, planning is wise and the entire with equivalent to the benefit not only of that individual rates of economic expansion (or contrac- government but Europe as a whole. Clearly, tion). If sudden pockets of deep depression some of the outlying governments were and high unemployment develop that can- not able to see beyond their own particular not be filled by importation of labor from needs. “The Greeks simply wanted to con- surplus areas, serious dislocations can re- tinue to dance and sing in the sunshine,” sult. Linguistic, social, and cultural barri- groused one Greek businesswoman, who ers exist in Europe that are all but insur- left the country decades before the arrival mountable compared with, for example, of the Euro. The result was the accumula- the United States, where a single currency tion of mountains of national debt, much and labor market is manageable across even of it denominated in , that its slim more time zones and theoretically as diverse industrial production and anemic exports cultural differences as in Europe, but where were ill equipped to service. Eventually, a common language and historical context that mountain had to collapse—putting in removes many of the barriers that exist in jeopardy not only Greece, but large swaths Europe’s common market. Even the remov- of Europe, whose member states were also al of national frontiers in Europe and the issuing Euro-denominated bonds that re- ability of any European to work in any Eu- quired a solid foundation. ropean nation has failed to lift many other At the same time, marginally more barriers that remain as insurmountable as manageable mountains of debt were being when there was a multiplicity of currencies. accumulated by even larger European econ- Not surprisingly, Britain—which chose omies, especially Italy and Spain. It seemed not to adopt the Euro, though it remains a

120 WORLD POLICY JOURNAL Downloaded from wpj.sagepub.com at COLUMBIA UNIV on December 19, 2014 CURRENCY member of the European Community—has Europe and the United States are not been rather quietly pleased by the discomfi- the only regions where there are real or ture of its fellows on the continent that did potential common currencies. So far, none choose a common, and increasingly fraught, seem to be working very much better. Af- currency. It has also managed to avoid many rica has contemplated eventually moving of the imbroglios that have pitted Germa- toward a pan-national currency regime. ny’s iron-willed Chancellor Angela Merkel And there is already a basis for this—the against France’s feckless president François CFA , used by 14 African nations and Hollande. And then there are the “fringe” guaranteed by the French treasury. Named countries, eight of whom—Lithuania, Ru- for the Communauté Financière Africaine mania, Bulgaria, Poland, , (African Financial Community), the com- Hungary, Sweden and Croa- munity includes 12 former tia—are waiting, several of French colonies in Africa, one them with some considerable by the time Portuguese (Guinea-Bissau), skepticism, to join. A few i arrived in and one Spanish (Equatorial are reluctant to adopt the fis- Guinea)—all now indepen- cal straight jacket that is re- bucharest, dent and most of marginal quired of new members; oth- kent king-size financial health. None of the ers are anxious about tying soft packs were major African powerhous- their fortunes to neighbors es—Nigeria, Kenya, South whose economic fortunes re- effectively the Africa—is a member or like- main somewhat problematic. only acceptable ly to join in the foreseeable future. The member states TRANSNATIONALITY currency. have a joint GDP of $166.6 All of these questions raise billion, or per capita annual deep concerns over just how transna- income of barely $1,129, compared with tional currencies could, or for that mat- $34,751 in the Euro zone. At the time the ter should, function. Certainly there are Euro zone was created, in 1998, European a few “reserve currencies” that are effec- leaders agreed that the CFA arrangement, tively trans-national currencies in their through the French treasury, could contin- own right due to the power and reach ue since it was unlikely to have any “mate- of the nations that back them. The dol- rial effect” on the Euro zone—first because lar is, of course, the premier such reserve of the scale, and second because there was currency. But during America’s fiscal no real or implied obligation of the new emergency, beginning in 2008, there was European to guarantee the considerable skepticism over how realis- CFA franc or the economies or obligations tic—indeed how toxic—it might be to of any of its member states. have the world’s finances based on a cur- So what’s the value? Membership in rency whose own foundations could be so the CFA does have the advantage of main- easily compromised. But then, of course, taining at least some tenuous ties to the the world’s central bankers, not to men- developed world through France and by ex- tion investors and others who trade every tension to the European Union. For compa- day in this very currency, began to reflect nies doing business in Africa, there are the what the alternative might be. prospects of a reasonably stable exchange

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rate across 14 markets—in short many of KENT KING-SIZE the same advantages as prevail in the Euro If there was any doubt that communism zone. But any effort to bring into such an was doomed, there was ample evidence in arrangement any economy far larger, more flawed currency systems like Romania’s all complex, and potentially more unstable but worthless leu. Black market money- could carry enormous risks that clearly the changers frequented the environs of the French treasury would, especially in these Intercontinental Bucharest, the only ho- fragile times for that nation’s own economy, tel where any foreigner with any means be ill prepared to bear. would ever consider spending time in the Which is not to say that 1970s, yet no self-respect- there are not other regions ing Romanian with western that might benefit from form- when contacts would ever consid- ing some common currency. conventional er taking leu in exchange for The Middle East’s Gulf re- goods or services. gion is one that has captured currency It was pretty much illegal attention at certain moments systems appear for any Romanian to possess in the past. The Gulf Coop- to break down, any hard currency. Indeed, eration Council (GCC) is a when the Romanian secret group of six countries border- unconventional police decided they wanted ing the Persian Gulf—Bah- systems quickly to entrap me in order to find rain, Kuwait, Omar, Qatar, an excuse to throw me out of Saudi Arabia, and the United emerge to fill the country, their first, pa- Arab Emirates. Founded in the gap. thetic efforts at compromis- 1981, at least in part as a po- ing me consisted of flinging litical and economic response to the Euro- “money changers” at me as I stepped out- pean Union and the growing power of Iran side the door of the hotel. And when I de- in the region, it took the countries 28 years murred, they began raising the temptation to launch a Monetary Council as a first step by offering as much as ten times the going toward a common currency. It’s moved little black market rate. Finally, exasperated by further. Not long after its formation, when this nonsense, I asked one hapless spook, I visited Saudi Arabia, several senior Saudi “Do you think I am an idiot? Go back and officials admitted to me that the real motiva- tell your colonel he needs to do way better tion behind a single currency would be to tie than that.” But what Romanians could and neighboring Gulf states even more closely to would take—no, actually insisted on tak- Saudi Arabia—effectively cementing Sunni ing—for services rendered (or even services hegemony along the Gulf. demanded) was cigarettes. But not just any Indeed, currency and politics are random smokes—Kents. And not just any closely tied. A weak currency means, for Kents, but Kent King-Size soft packs. By the most part, a weak economy—weak the time I arrived in Bucharest, they were purchasing power for consumers, inevi- effectively the only acceptable currency tably higher interest rates and, at least whatsoever. A pack would get you a ride in democracies, the defeat of the party in in a taxi. A couple of packs and your driver power that has led to these catastrophic, might even wait for you at your destination. real-world, pocketbook failures. Need a tune-up and oil change on your car?

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Probably a carton. A few days in the hospi- considering consisted of the , tal, a carton or two. I never spotted anyone Chinese yuan, Euro, gold, and a new, uni- actually breaking open a pack and smoking fied currency of the GCC nations. It was a single one of these precious commodities. said to be en route by 2019. While the It would be like someone lighting a cigar GCC couldn’t agree on how to implement with a hundred dollar bill. its part of the deal, the price of gold soared, Of course, in other countries, there peaked, and faded, while the Euro seemed were other brands. In Czechoslovakia, for at various times over the past year to be it- instance, it was Marlboros. The symbol of self poised on a high ledge. decadence, or at least of privilege and access, When conventional currency systems was to flaunt the act of smoking a Marlboro appear to break down, unconventional sys- in public. As it happens, I discovered that tems quickly emerge to fill the gap—hence I was being tailed, not very adeptly, by a the arrival of to replace the relative- young couple who had StB (state security) ly slow and easily hacked debit and credit written all over their trench coats. And it card systems. But what happens when these was always the same couple. I noticed that new crypto systems begin to fail? None is she smoked Marlboros, so on my next vis- backed by a central bank, nor by the full it, I brought along a carton. Sure enough, faith and credit of a government. there she was exiting her car with her fellow The problem is that devices such as officer. It was summer, so the window was Bitcoin are built on a series of computer rolled down. I led them down the sidewalk, algorithms and on a foundation of trust in then turned back toward their car and, as I the electronic systems that created them, passed her driver’s door, casually tossed the the good name of their creators, and even carton of Marlboros on her seat and kept on the extent of their acceptance in the real walking. A few paces later, I looked back. world of hard currencies. When one or They were in a heated discussion. Her com- another of them breaks down, so does the panion was red-faced and furious, and she value of the crypto-currency. This hap- was shaking her head vigorously, in great pened with Bitcoin in late January and fear for her immediate future. They’d both early February, when a succession of issues have a lot to explain. Incidentally, I never ranging from government probes into the saw either of them again. use of for illicit activities arose, to rejection by a host of central banks from CRYPTO-CURRENCIES & BEYOND Norway to China, to a series of computer Of course, through the years there have been glitches in the large Bitcoin exchange, Mt. a host of other crypto-currencies. Bitcoin Gox. The response was a devaluing of Bit- is especially fashionable today, as at vari- coin—slashing its value in half within a ous times were various currency baskets, week. If this ever occurred to any national like the one OPEC was considering some currency, it would represent a catastrophe five years ago to value oil. Always quoted approaching biblical proportions. in U.S. dollars, this came into question in Long before Bitcoin ever arrived, of the wake of some sharp fluctuations in the course, there was hawala. Though not a value of the currency issued by the single currency, per se, this institution served largest OPEC consumer, but certainly a as a response to an immediate need. Mil- non-member. The new basket OPEC was lions of people, many who had never seen

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each other, nor ever would, needed a viable law enforcement. Hawala and its clones and reliable system of exchange—of valu- drive officialdom crazy. Not surprisingly, ing their output, their work, their intel- Bitcoins and a host of IVTS are similarly ligence and creativity. Such a network is anathema. But each has come to life be- at once the single most critical lubricant cause of some failing—or some missed op- of an economic system and glue that holds portunity—in the conventional systems society together. And it is the single most of currencies and money. vital method of tying nations and people Rather than bay at the moon or send together across the globe. There is likely in law enforcement, why not simply try to no more immediate evidence of that than fix the system whose failings have given the hawala network. Meaning “transfer” in rise to these less than palatable alterna- Arabic, this system dates back to the early tives? If the issue is liquidity, make the Middle Ages, when there was no other system more liquid. If it’s transparency, means of transferring value along the vast improve the transparency. Frankly, cur- trade routes that began in Europe and rency transactions can never be too trans- stretched across the Middle East, follow- parent. The failures of the Euro, the vast ing the route of Marco Polo from Venice contortions to bring economies into closer to the court of Kublai Khan. Also known proximity in terms of growth, inflation, as Informal Value Transfer Systems (IVTS) employment, and a host of other metrics or Alternative Remittance Systems, they simply to make a unified currency palat- are used to transfer funds across borders able or workable, to perpetuate a system via multiple currencies—without a single that was artificially derived in the first piece of paper, species, or coin ever cross- place, may in the long run be unworkable ing a single frontier. The first step involves and unnecessary. Readers of this space have a person seeking to transfer funds walking perhaps come to appreciate my belief that into a hawaladar’s office, tent, or stall, in- artificially constructed nations combining forming the banker how much the custom- a host of elements with sharply differing er wants to transfer and where. The funds cultures, languages, histories, and sen- are handed over, and a code is provided. At sibilities will never work well for any of the other end, the recipient, armed with those involved. So Yugoslavia, Czechoslo- the code, receives the funds from the local vakia, the Soviet Union, perhaps even Iraq hawaladar. Not a single document has been eventually, have all broken apart or are in created in the entire process. There is no the process of doing so. Meaning, even- paper trail, no record of the transaction— tually it will be time to halt the creation just good faith inherent in the system. If of pan-national currencies across equally the transaction goes awry, the person at diverse economies and nations. fault could well pay with his life. In the end, currencies that respond di- It is also a perfect system of money rectly to the needs and will of their peo- laundering—indeed a system of currency ple will best serve those who spend them that runs parallel to the official system of every day. After all, how pleased are the wire transfers and bank drafts that are all Brits to have held onto their pound ster- too easily monitored by government and ling? l

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