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Policy, Monetary iess_Batch7N-Z 7/6/07 12:18 PM Page 245 Policy, Monetary changed the location of conflicts. Terrorism may be con- Engler, Robert. 1961. The Politics of Oil: A Study of Private sidered a form of guerrilla warfare, in contrast to a set- Power and Democratic Directions. New York: Macmillan. piece war. In response to this shift in theaters and tactics, Library of Congress Business References Service. 2005–2006. Western governments alleged that certain Arab Muslim History of the Oil and Gas Industry. Business and Economics states were “sponsors” of these acts of terror or gave safe Research Advisor (BERA) 5/6. http://www.loc.gov/rr/business/BERA/issue5/history.html. haven to terrorists. Western states directed military and economic sanctions against these states, which included Mir-Babayev, Mir Yusif. Azerbaijan’s Oil History: A Chronology Leading Up to the Soviet Era. 2002. Azerbaijan International Iran, Libya, Sudan, Somalia, Afghanistan, and Iraq. It is 10 (2). not without significance that all these states either have Razavi, Hossein, and Fereidun Fesharaki. 1991. Fundamentals of petroleum reserves or stand athwart transportation routes Petroleum Trading. New York: Praeger. to world petroleum markets. Somalia, for example, con- Sampson, Anthony. 1975. The Seven Sisters: The Great Oil trols the approach to the Red Sea and the Suez Canal. Companies and the World They Shaped. New York: Viking. Since 1980 five major wars have been fought in the Snow, Keith Harman. 2007. The New Old “Humanitarian” region: the Soviet-Afghanistan War (1979–1989), the Warfare in Africa, Part II. Somali Times, February 7. Iraq-Iran War (1980–1988), the Persian Gulf War U.S. Department of Commerce, Census Bureau. 1975. (1990–1991), the U.S.-Afghanistan War that began in Historical Statistics of the United States: Colonial Times to 2001, and the U.S.-Iraq War that began in 2003. In addi- 1970. Bicentennial ed., pt. 1. Washington, DC: U.S. tion since 1980 U.S. naval ships and aircraft have block- Government Printing Office. aded and threatened to attack Libya, accusing it of being Wirth, John D. 1985. Latin American Oil Companies and the a state sponsor of terrorism. Politics of Energy. Lincoln: University of Nebraska Press. In 1991 the former republics of the Soviet Union Wirth, John D., ed. 2001. The Oil Business in Latin America: became independent. Several of them gave concessions to The Early Years. Washington, DC: Beard. Western companies to explore for petroleum. With these discoveries, proposals were made for pipelines to carry the Julian Ellison petroleum to shipping points for export to world markets. Three feasible routes exist for exporting Caspian Sea petroleum to world markets: west through Azerbaijan, Armenia, and Georgia to the Black Sea; south through POLICY, MONETARY Iraq and Iran to the Persia Gulf; or southeast through Monetary policy is the management of money, credit, and Afghanistan and Pakistan to the Arabian Sea. Overland interest rates by a country’s central bank. Unfortunately, markets are north into Russia and east into China. this short definition is clearly inadequate. What is money? All wars have as an objective the conquest of territory What is credit? What is an interest rate? What is a central and its resources and assets, a major part since 1900 being bank and how does it control them? And, most impor- petroleum reserves. Thus all wars since 1900 may be con- tantly, why should anyone care? The purpose of this entry sidered, to some extent, wars to control oil. This objective is to answer these questions (for more detail, see the rele- has attained the highest priority since World War II, lead- vant chapters of Stephen G. Cecchetti [2006]). ing to increased military and diplomatic conflict. Petroleum wars may be expected to continue to arise until a different energy source is discovered and widely A FEW BASICS employed or until an effective international nonviolent Money is an asset that is generally accepted as payment for conflict resolution method is found and employed. goods and services or repayment of debt; money acts as a unit of account, and serves as a store of value. That is, peo- SEE ALSO Energy Industry; Industry; Iran-Iraq War; Iraq- ple use money to pay for things (it is a means of payment); U.S. War; Nationalization; Organization of Petroleum quote prices in dollars, euros, yen, or the units of our cur- Exporting Countries (OPEC); Resource Economics; rency (it is a unit of account); and use money to move State Enterprise purchasing power over time (it is a store of value). Credit is the borrowing and lending of resources. Some people BIBLIOGRAPHY have more resources than they currently need (they are Bilkadi, Zayn. 1994. Bulls from the Sea. Saudi Aramco World 45 savers) while others have profitable opportunities that (4): 20–31. they cannot fund (they are investors). Credit flows from Blair, John M. 1976. The Control of Oil. New York: Pantheon. the savers to the investors. And an interest rate is the cost Ellison, Julian. 1974. The Petroleum Industry in Africa and of borrowing and the reward for lending. Since lenders America. Occasional Paper no. 1974–1. New York: Black could have done something else with their resources, they Economic Research Center. require compensation—interest is rent paid by borrowers. INTERNATIONAL ENCYCLOPEDIA OF THE SOCIAL SCIENCES, 2ND EDITION 245 iess_Batch7N-Z 7/6/07 12:18 PM Page 246 Policy, Monetary THE CENTRAL BANK balance sheet, stripped of a number of incidental items The U.S. Federal Reserve System, the Bank of Japan, and (like buildings and gold). When looking at any balance the Bank of England are all central banks. Nearly every sheet, the most important thing to remember is that assets country in the world has a central bank. It is easiest to equal liabilities, so any change in one side must be understand a central bank by looking at what it does (for matched by a change in the other. When a central bank a history of money and central banks, see Glyn Davies purchases a government security, increasing its assets, this [2002]). A modern central bank both provides an array of is normally matched by an increase in commercial bank services to commercial banks (it is the bankers’ bank) and reserve liabilities. Banks hold these reserves both because manages the government’s finances (it is the government’s they are required by law and in order to make interbank bank). While not universally true, we will assume that payments. only banks and governments have accounts at central At its technical, day-to-day level, monetary policy is banks. As the bank for bankers, the central bank holds all about buying and selling securities to control the quan- deposits accounts and operates a system for interbank pay- tity of reserves in the commercial banking system. ments that enables commercial banks (the ones the public Modern central banks, like the Federal Reserve or the uses) to transfer balances in these accounts to one another. European Central Bank, use their monopoly over the sup- The central bank is also in a unique position to provide ply of commercial bank reserves to control an interest rate loans to commercial banks during times of crisis—more of their choosing. In some, like the Reserve Bank of on this shortly. Australia, it is the deposit rate the central bank pays com- Like any individual or business, the government mercial banks on the balances in their reserve account. In needs a bank to make and receive payments. So, the cen- the United States, it is the federal funds rate—the rate tral bank keeps an account for the government. When the banks charge each other for overnight loans of reserves. government wants to make or receive a payment, it needs The Federal Reserve decides on its target for the federal a bank just like the rest of us. The central bank does that funds, and then buys and sells securities to set the supply job. In addition, the government gives the central bank the right to print money—that is the paper currency that of reserves to hit this target. Twenty-first century mone- people use in everyday life. tary policy is not about controlling the quantity of money or its growth rate; it is about interest rates. (For a techni- At its most basic level, printing money is a very prof- cal discussion of the use and the abandonment of money itable business. A $100 bill costs only a few cents to print, as a target, see Laurence Meyer [2001a]. For a detailed dis- but it can be exchanged for $100 worth of goods and serv- ices. It is logical then that national governments create a cussion of the monetary policy of the European Central monopoly on printing money and use the revenue it gen- Bank, see Otmar Issing et al. [2001]). erates to benefit the general public. Also, government offi- It is important to note that some central banks decide cials know that losing control of the money printing to use their ability to control the size of their balance sheet presses means losing control of inflation. to target something other than interest rates. The natural alternative is the exchange value of their currency—that CONTROLLING MONEY, CREDIT, is, the value of the number of dollars it takes to purchase AND INTEREST RATES the currency issued by another central bank. But, by the beginning of the twenty-first century, this had become The fact that the central bank has the license to issue increasingly rare. A central bank cannot control the total money makes it unique. If individuals want to make a purchase, they need to have the resources to do it.
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