How does a strong dollar affect emerging economies?

By Pablo Druck

What is the effect of a stronger or weaker US dollar on emerging markets’ economic activity? Frenkel (1986) documents that US monetary easing – usually related to a more depreciated dollar – results in higher commodity prices, and vice versa. Dornbusch (1986), Borensztein and Reinhart (1994), and Akram (2009) show that nominal and real commodity prices depend negatively on the US real exchange rate. In parallel, Engel and Hamilton (1990) have long ago documented the long swings in dollar values. However, we are not aware of any systematic evidence of the link between the strength of the US dollar and economic activity in emerging markets over the dollar cycle – less so of any study documenting the transmission channel. In a recent paper (Druck et al., 2015) we try to bridge this gap.

Using data for 1970–2014, we document that:

• During periods of US dollar appreciation, real GDP growth in emerging markets slows despite the positive impulse of US growth, and vice versa.

The main transmission channel is through an income effect owing to the impact of the dollar on global commodity prices. As the dollar appreciates, dollar commodity prices tend to fall. In turn, weaker commodity prices depress domestic demand via lower real (dollar) income. Thus, real GDP in emerging markets decelerates. Moreover, we show that these effects hold despite any potential expenditure-switching effect resulting from the relative currency depreciation of emerging market economies when the dollar appreciates. We also show that despite controlling for the effects of the US real exchange rate appreciation and real GDP growth, an increase in the US interest rate further reduces growth in emerging markets. All these effects are stronger in countries with more rigid exchange rate regimes. Finally, although net commodity exporters are affected the most, countries that rely on importing capital or inputs for domestic production will also be affected. Therefore, at the time of writing, emerging markets’ growth is likely to remain subdued reflecting, in part, the expected persistence of the strong dollar and the anticipated increase in the US interest rates.

Why the US real effective exchange rate has such an impact? For developing countries, this is essentially an exogenous variable. Most international transactions are priced in US dollars, including commodity prices. And emerging markets (excluding perhaps China) cannot affect much the weights in the multilateral exchange rate of the US. Thus, developments in the US affect emerging markets – and not vice versa. Further, the independence of US macroeconomic policy with respect to less developed countries suggests that the US real exchange rate is likely to be more relevant and even more exogenous than the terms of trade.

Historical context: Some stylised facts

• Stronger US dollar, lower emerging markets’ growth.

Periods of US dollar appreciation coincide with softer real GDP growth rates throughout emerging market regions (Figure 1) – and vice versa. This stylised fact is especially strong for regions that are strong net commodity exporters.

Figure 1. US dollar strength and real GDP growth in emerging markets

Sources: IMF, World Economic Outlook; and IMF, International Financial Statistics; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase = depreciation.

• Stronger U.S. dollar, softer real domestic demand growth.

Figure 2 presents a similar picture as Figure 1, but using the growth rate of real domestic demand. It suggests that domestic demand is a strong driver of economic activity, beyond other factors that might influence domestic demand.

Figure 2. US dollar strength and real domestic demand growth in emerging markets

Sources: IMF, World Economic Outlook; and IMF, International Financial Statistics; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase = depreciation.

• Higher US interest rates, a stronger US dollar.

Higher interest rates in the US tend to occur alongside a stronger dollar, and vice versa (Figure 3). Higher interest rates in the US increase capital inflows to the US searching for higher yields, appreciating the currency. Often, higher interest rates are also associated with stronger growth, though not always.

Figure 3. US dollar strength, real GDP growth, and real interest rates

Sources: IMF, World Economic Outlook; and IMF, International Financial Statistics; and IMF staff calculations.
Note: REER = Real Effective Exchange Rate. Increase = depreciation.

• Though not systematically, higher US interest rates appear to be associated with stronger US growth; Interest rate-economic activity relationship: stronger growth eventually generates demand-induced inflationary pressures.

Lack of sufficient (or fast enough) supply response translates into higher prices. The latter triggers the Fed into tightening its monetary policy, increasing borrowing costs and thus mitigating inflationary pressures through slower economic activity growth.

Dollar appreciation/depreciation cycles

Estimating a simple Markov-switching model with appreciation/depreciation regimes for the period 1970–2014, we find that real depreciations have been, on average, stronger and lasted longer than real appreciations. The real annual average appreciation is 3.2% per year with an average duration of over 6 years; the real average annual depreciation is 3.8% with an average duration of close to 9 years.1 In addition, these regimes are very persistent. A period of real appreciation is 83% more likely to remain appreciating in the following period than to switch regimes. For real depreciation, the probability of continuation of the state of nature is about 88%.2 Thus, we identify the following cycles:

Table 1. Appreciation and depreciation cycles

Event analysis

Next, we add dynamics to the average depreciation and appreciation cycles, based on event analysis using the dollar cycles identified above.3 Figure 4 shows the indices for the average real GDP during appreciation and depreciation episodes; Figure 5 shows real domestic demand.

Figure 4. Real GDP during US dollar appreciation and depreciation cycles

Source: authors’ calculation.

Except for Central America and Mexico, every other emerging region shows that real GDP is lower during periods of US dollar appreciation. We observe that this pattern holds for Latin America as an aggregate, and especially for South America. The latter is a strong commodity exporter – unlike Central America and Mexico. It also holds for emerging countries in the Middle East and North Africa Region (MENA), as well as for emerging Europe. To a lesser extent, it also true for emerging Asia. On average, Latin America’s slower growth results in real GDP being about 25 percentage points lower toward the end of the cycle during appreciation cycles than during depreciation cycles. South America’s differences are of similar order of magnitude. They are even higher in MENA countries – about 50 percentage points, while lower in emerging Asia, though still sizeable (at about 20 percentage points). There is not such a marked difference in Central America and Mexico, however. Among the possible causes of the latter, are the strong links via trade, tourism, and remittances. The trade link operates through the external demand for goods. Tourism boosts external demand for services. And remittances transfer resources from the US to Mexico, Central America, and the Caribbean. All these factors help increase domestic demand and income in the emerging and developing countries. Thus, they could offset any negative income effect owing to the stronger dollar. Countries with hard pegs or outright dollarization tend to be further synchronised with the US’ business cycle.

Figure 5. Real domestic demand during US dollar appreciation and depreciation cycles

Source: authors’ calculation.

• Regarding domestic demand, except for Central America and Mexico, all other regions and sub-regions experience much stronger real domestic demand growth when the US dollar is more depreciated.

In fact, in many of the regions domestic demand actually decreases or remains flat during appreciation phases. We take this as a powerful indication of the negative impact of a stronger dollar on the purchasing power of domestic demand. In turn, this could suggest that it might be the case that the income effect actually dominates the (expenditure-switching) substitution effect in some cases.

Some simple econometrics

After sketching a simple model to rationalise our findings, we run two sets of simple regressions to test the above stylised facts. The left-hand side variable is either the growth rate of emerging markets’ real GDP or real domestic demand, respectively. Despite controlling for US and China’s real GDP growth rates (external demand), US real interest rates (financial channel), net capital inflows (availability of external financing), volatility (uncertainty), commodity terms of trade, and several other controls, there is a strong statistically significant effect of the US real effective exchange rate on emerging markets’ growth. This effect is negative, particularly so for domestic demand. It holds across different emerging regions, with varying degrees. It is especially strong for net commodity exporters. But it is also relevant for countries that rely on importing capital or inputs to produce. For economies with more exchange rate flexibility, the effect is weaker on output, but stronger on domestic demand, as expected. Thus, a stronger US dollar lowers real GDP and domestic demand growth.

Table 2. Real GDP growth rate and demand growth rate

Going forward

The US dollar is on an appreciating cycle since mid-2014. Based on our historical estimations, the probability of the dollar remaining appreciated in the short- and medium-term is high (above 80%), in line with appreciating cycles in the US dollar of about 6­8 years. In the circumstances, commodity prices would remain weak. Together, these effects point to slower domestic demand and real GDP growth in emerging markets than otherwise – across all regions.

Moreover, in the context of a lift-off in US interest rates as the Federal Reserve is expected to start unwinding the extraordinary expansionary monetary policy implemented in recent years, if anything, the US dollar is more likely to remain strong. Capital inflows to emerging markets are likely to moderate at best (even if no capital flow reversal takes place), on the back of weaker commodity prices. Unfortunately, thus, the external front for these economies is not promising.

Strong US growth is good for emerging markets, as external demand for the latter increases. Beyond that effect, however, a stronger US dollar mitigates the expansionary effect of faster growth in the US, via an income effect. The latter, in turn, is particularly strong for commodity exporters and countries with more rigid exchange rate regimes. To a lesser extent, countries that rely on importing capital and intermediate inputs in production could also experience this offsetting income effect via domestic demand. And higher US real interest rate further adds to the mitigation/amplification effect or the tighter/easier financial conditions that usually come along with a more appreciated dollar.

Disclaimer: The views expressed are those of the authors and do not necessarily represent the views of the IMF, its Executive Board of management.

References

Akram, Q F (2009), “Commodity Prices, Interest Rates, and the Dollar”, Energy Economics, Vol. 31, pp. 838–851.

Borensztein, E and C Reinhart (1994), “The Macroeconomic Determinants of Commodity Prices”, IMF Staff Papers, Vol. 41, No. 2 (June), pp. 236–261.

Dornbusch, R (1986), “Inflation, Exchange Rates and Stabilization,” Essays in International Finance, No. 165, (October), pp. 1-24. International Finance Section, Princeton, NJ: Princeton University Press.

Druck, P, N Magud, and R Mariscal-Paredes (2015), “Collateral Damage: Dollar Strength and Emerging Markets’ Growth”, International Monetary Fund Working Paper 15/179, July (Washington: International Monetary Fund).

Engel, C and J Hamilton (1990), “Long Swings in the Dollar: Are they in the Data and Do Markets Know it?”, The American Economic Review, September, pp. 689-713.

Frenkel, J (1986), “Expectations and Commodity Price Dynamics: the Overshooting Model”, Journal of Agricultural Economics, Vol. 68, No. 2 (May), pp. 344-348.

Footnotes

1 Excluding the current (ongoing) appreciation cycle we find that appreciation cycles are still shorter than depreciation cycles, but less so. The average length is about 8 years. The average annual appreciation rate is 3.4%, and the average annual depreciation rate is 3.7%.

2 The results from excluding the current appreciation cycle imply a slightly higher persistence of depreciation cycles (92%), and similar expected persistence for appreciation cycles (82%).

3 Given that each event is not necessarily of the same period length, we discretize the length of each event. To this end, let us call period t0 the first observation in any appreciation or depreciation cycle and (the real GDP) observation in the last year of the appreciation or depreciation cycle as t4. Let us standardise real GDP in period t-1 equal to 100. Given the data for real GDP growth rates for each (PPP-weighted) real GDP, we reconstruct the indexed real GDP for each region. We discretize the time-space to compute the real GDP index at the half-life of each event, as well as at quarter-life and three-quarter-life. Last, we compute basic statistics across each set of appreciation and depreciation episodes at t0, ¼, ½, and ¾ and t, respectively (which we label as t0, t1, t2, t3, and t4, respectively).

This article is published in collaboration with Vox EU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Pablo Druck is a Senior Economist, International Monetary Fund. Nicolas Magud is a Senior Economist at the International Monetary Fund. Rodrigo Mariscal is a Research analyst in the Western Hemisphere Department, IMF.

Image: A portrait of Benjamin Franklin on a U.S. One-hundred dollar bill is pictured at Interbank Inc. money exchange in Tokyo. REUTERS/Yuriko Nakao 

Source: https://agenda.weforum.org/2015/08/how-does-a-strong-dollar-affect-emerging-economies/

How Bush's grandfather helped Hitler's rise to power

Rumours of a link between the US first family and the Nazi war machine have circulated for decades. Now the Guardian can reveal how repercussions of events that culminated in action under the Trading with the Enemy Act are still being felt by today's president

George Bush's grandfather, the late US senator Prescott Bush, was a director and shareholder of companies that profited from their involvement with the financial backers of Nazi Germany.

The Guardian has obtained confirmation from newly discovered files in the US National Archives that a firm of which Prescott Bush was a director was involved with the financial architects of Nazism.

His business dealings, which continued until his company's assets were seized in 1942 under the Trading with the Enemy Act, has led more than 60 years later to a civil action for damages being brought in Germany against the Bush family by two former slave labourers at Auschwitz and to a hum of pre-election controversy.

The evidence has also prompted one former US Nazi war crimes prosecutor to argue that the late senator's action should have been grounds for prosecution for giving aid and comfort to the enemy.

The debate over Prescott Bush's behaviour has been bubbling under the surface for some time. There has been a steady internet chatter about the "Bush/Nazi" connection, much of it inaccurate and unfair. But the new documents, many of which were only declassified last year, show that even after America had entered the war and when there was already significant information about the Nazis' plans and policies, he worked for and profited from companies closely involved with the very German businesses that financed Hitler's rise to power. It has also been suggested that the money he made from these dealings helped to establish the Bush family fortune and set up its political dynasty.

Remarkably, little of Bush's dealings with Germany has received public scrutiny, partly because of the secret status of the documentation involving him. But now the multibillion dollar legal action for damages by two Holocaust survivors against the Bush family, and the imminent publication of three books on the subject are threatening to make Prescott Bush's business history an uncomfortable issue for his grandson, George W, as he seeks re-election.

While there is no suggestion that Prescott Bush was sympathetic to the Nazi cause, the documents reveal that the firm he worked for, Brown Brothers Harriman (BBH), acted as a US base for the German industrialist, Fritz Thyssen, who helped finance Hitler in the 1930s before falling out with him at the end of the decade. The Guardian has seen evidence that shows Bush was the director of the New York-based Union Banking Corporation (UBC) that represented Thyssen's US interests and he continued to work for the bank after America entered the war.

Tantalising

Bush was also on the board of at least one of the companies that formed part of a multinational network of front companies to allow Thyssen to move assets around the world.

Thyssen owned the largest steel and coal company in Germany and grew rich from Hitler's efforts to re-arm between the two world wars. One of the pillars in Thyssen's international corporate web, UBC, worked exclusively for, and was owned by, a Thyssen-controlled bank in the Netherlands. More tantalising are Bush's links to the Consolidated Silesian Steel Company (CSSC), based in mineral rich Silesia on the German-Polish border. During the war, the company made use of Nazi slave labour from the concentration camps, including Auschwitz. The ownership of CSSC changed hands several times in the 1930s, but documents from the US National Archive declassified last year link Bush to CSSC, although it is not clear if he and UBC were still involved in the company when Thyssen's American assets were seized in 1942.

Three sets of archives spell out Prescott Bush's involvement. All three are readily available, thanks to the efficient US archive system and a helpful and dedicated staff at both the Library of Congress in Washington and the National Archives at the University of Maryland.

The first set of files, the Harriman papers in the Library of Congress, show that Prescott Bush was a director and shareholder of a number of companies involved with Thyssen.

The second set of papers, which are in the National Archives, are contained in vesting order number 248 which records the seizure of the company assets. What these files show is that on October 20 1942 the alien property custodian seized the assets of the UBC, of which Prescott Bush was a director. Having gone through the books of the bank, further seizures were made against two affiliates, the Holland-American Trading Corporation and the Seamless Steel Equipment Corporation. By November, the Silesian-American Company, another of Prescott Bush's ventures, had also been seized.

The third set of documents, also at the National Archives, are contained in the files on IG Farben, who was prosecuted for war crimes.

A report issued by the Office of Alien Property Custodian in 1942 stated of the companies that "since 1939, these (steel and mining) properties have been in possession of and have been operated by the German government and have undoubtedly been of considerable assistance to that country's war effort".

Prescott Bush, a 6ft 4in charmer with a rich singing voice, was the founder of the Bush political dynasty and was once considered a potential presidential candidate himself. Like his son, George, and grandson, George W, he went to Yale where he was, again like his descendants, a member of the secretive and influential Skull and Bones student society. He was an artillery captain in the first world war and married Dorothy Walker, the daughter of George Herbert Walker, in 1921.

In 1924, his father-in-law, a well-known St Louis investment banker, helped set him up in business in New York with Averill Harriman, the wealthy son of railroad magnate E H Harriman in New York, who had gone into banking.

One of the first jobs Walker gave Bush was to manage UBC. Bush was a founding member of the bank and the incorporation documents, which list him as one of seven directors, show he owned one share in UBC worth $125.

The bank was set up by Harriman and Bush's father-in-law to provide a US bank for the Thyssens, Germany's most powerful industrial family.

August Thyssen, the founder of the dynasty had been a major contributor to Germany's first world war effort and in the 1920s, he and his sons Fritz and Heinrich established a network of overseas banks and companies so their assets and money could be whisked offshore if threatened again.

By the time Fritz Thyssen inherited the business empire in 1926, Germany's economic recovery was faltering. After hearing Adolf Hitler speak, Thyssen became mesmerised by the young firebrand. He joined the Nazi party in December 1931 and admits backing Hitler in his autobiography, I Paid Hitler, when the National Socialists were still a radical fringe party. He stepped in several times to bail out the struggling party: in 1928 Thyssen had bought the Barlow Palace on Briennerstrasse, in Munich, which Hitler converted into the Brown House, the headquarters of the Nazi party. The money came from another Thyssen overseas institution, the Bank voor Handel en Scheepvarrt in Rotterdam.

By the late 1930s, Brown Brothers Harriman, which claimed to be the world's largest private investment bank, and UBC had bought and shipped millions of dollars of gold, fuel, steel, coal and US treasury bonds to Germany, both feeding and financing Hitler's build-up to war.

Between 1931 and 1933 UBC bought more than $8m worth of gold, of which $3m was shipped abroad. According to documents seen by the Guardian, after UBC was set up it transferred $2m to BBH accounts and between 1924 and 1940 the assets of UBC hovered around $3m, dropping to $1m only on a few occasions.

In 1941, Thyssen fled Germany after falling out with Hitler but he was captured in France and detained for the remainder of the war.

There was nothing illegal in doing business with the Thyssens throughout the 1930s and many of America's best-known business names invested heavily in the German economic recovery. However, everything changed after Germany invaded Poland in 1939. Even then it could be argued that BBH was within its rights continuing business relations with the Thyssens until the end of 1941 as the US was still technically neutral until the attack on Pearl Harbor. The trouble started on July 30 1942 when the New York Herald-Tribune ran an article entitled "Hitler's Angel Has $3m in US Bank". UBC's huge gold purchases had raised suspicions that the bank was in fact a "secret nest egg" hidden in New York for Thyssen and other Nazi bigwigs. The Alien Property Commission (APC) launched an investigation.

There is no dispute over the fact that the US government seized a string of assets controlled by BBH - including UBC and SAC - in the autumn of 1942 under the Trading with the Enemy act. What is in dispute is if Harriman, Walker and Bush did more than own these companies on paper.

Erwin May, a treasury attache and officer for the department of investigation in the APC, was assigned to look into UBC's business. The first fact to emerge was that Roland Harriman, Prescott Bush and the other directors didn't actually own their shares in UBC but merely held them on behalf of Bank voor Handel. Strangely, no one seemed to know who owned the Rotterdam-based bank, including UBC's president.

May wrote in his report of August 16 1941: "Union Banking Corporation, incorporated August 4 1924, is wholly owned by the Bank voor Handel en Scheepvaart N.V of Rotterdam, the Netherlands. My investigation has produced no evidence as to the ownership of the Dutch bank. Mr Cornelis [sic] Lievense, president of UBC, claims no knowledge as to the ownership of the Bank voor Handel but believes it possible that Baron Heinrich Thyssen, brother of Fritz Thyssen, may own a substantial interest."

May cleared the bank of holding a golden nest egg for the Nazi leaders but went on to describe a network of companies spreading out from UBC across Europe, America and Canada, and how money from voor Handel travelled to these companies through UBC.

By September May had traced the origins of the non-American board members and found that Dutchman HJ Kouwenhoven - who met with Harriman in 1924 to set up UBC - had several other jobs: in addition to being the managing director of voor Handel he was also the director of the August Thyssen bank in Berlin and a director of Fritz Thyssen's Union Steel Works, the holding company that controlled Thyssen's steel and coal mine empire in Germany.

Within a few weeks, Homer Jones, the chief of the APC investigation and research division sent a memo to the executive committee of APC recommending the US government vest UBC and its assets. Jones named the directors of the bank in the memo, including Prescott Bush's name, and wrote: "Said stock is held by the above named individuals, however, solely as nominees for the Bank voor Handel, Rotterdam, Holland, which is owned by one or more of the Thyssen family, nationals of Germany and Hungary. The 4,000 shares hereinbefore set out are therefore beneficially owned and help for the interests of enemy nationals, and are vestible by the APC," according to the memo from the National Archives seen by the Guardian.

Red-handed

Jones recommended that the assets be liquidated for the benefit of the government, but instead UBC was maintained intact and eventually returned to the American shareholders after the war. Some claim that Bush sold his share in UBC after the war for $1.5m - a huge amount of money at the time - but there is no documentary evidence to support this claim. No further action was ever taken nor was the investigation continued, despite the fact UBC was caught red-handed operating a American shell company for the Thyssen family eight months after America had entered the war and that this was the bank that had partly financed Hitler's rise to power.

The most tantalising part of the story remains shrouded in mystery: the connection, if any, between Prescott Bush, Thyssen, Consolidated Silesian Steel Company (CSSC) and Auschwitz.

Thyssen's partner in United Steel Works, which had coal mines and steel plants across the region, was Friedrich Flick, another steel magnate who also owned part of IG Farben, the powerful German chemical company.

Flick's plants in Poland made heavy use of slave labour from the concentration camps in Poland. According to a New York Times article published in March 18 1934 Flick owned two-thirds of CSSC while "American interests" held the rest.

The US National Archive documents show that BBH's involvement with CSSC was more than simply holding the shares in the mid-1930s. Bush's friend and fellow "bonesman" Knight Woolley, another partner at BBH, wrote to Averill Harriman in January 1933 warning of problems with CSSC after the Poles started their drive to nationalise the plant. "The Consolidated Silesian Steel Company situation has become increasingly complicated, and I have accordingly brought in Sullivan and Cromwell, in order to be sure that our interests are protected," wrote Knight. "After studying the situation Foster Dulles is insisting that their man in Berlin get into the picture and obtain the information which the directors here should have. You will recall that Foster is a director and he is particularly anxious to be certain that there is no liability attaching to the American directors."

But the ownership of the CSSC between 1939 when the Germans invaded Poland and 1942 when the US government vested UBC and SAC is not clear.

"SAC held coal mines and definitely owned CSSC between 1934 and 1935, but when SAC was vested there was no trace of CSSC. All concrete evidence of its ownership disappears after 1935 and there are only a few traces in 1938 and 1939," says Eva Schweitzer, the journalist and author whose book, America and the Holocaust, is published next month.

Silesia was quickly made part of the German Reich after the invasion, but while Polish factories were seized by the Nazis, those belonging to the still neutral Americans (and some other nationals) were treated more carefully as Hitler was still hoping to persuade the US to at least sit out the war as a neutral country. Schweitzer says American interests were dealt with on a case-by-case basis. The Nazis bought some out, but not others.

The two Holocaust survivors suing the US government and the Bush family for a total of $40bn in compensation claim both materially benefited from Auschwitz slave labour during the second world war.

Kurt Julius Goldstein, 87, and Peter Gingold, 85, began a class action in America in 2001, but the case was thrown out by Judge Rosemary Collier on the grounds that the government cannot be held liable under the principle of "state sovereignty".

Jan Lissmann, one of the lawyers for the survivors, said: "President Bush withdrew President Bill Clinton's signature from the treaty [that founded the court] not only to protect Americans, but also to protect himself and his family."

Lissmann argues that genocide-related cases are covered by international law, which does hold governments accountable for their actions. He claims the ruling was invalid as no hearing took place.

In their claims, Mr Goldstein and Mr Gingold, honorary chairman of the League of Anti-fascists, suggest the Americans were aware of what was happening at Auschwitz and should have bombed the camp.

The lawyers also filed a motion in The Hague asking for an opinion on whether state sovereignty is a valid reason for refusing to hear their case. A ruling is expected within a month.

The petition to The Hague states: "From April 1944 on, the American Air Force could have destroyed the camp with air raids, as well as the railway bridges and railway lines from Hungary to Auschwitz. The murder of about 400,000 Hungarian Holocaust victims could have been prevented."

The case is built around a January 22 1944 executive order signed by President Franklin Roosevelt calling on the government to take all measures to rescue the European Jews. The lawyers claim the order was ignored because of pressure brought by a group of big American companies, including BBH, where Prescott Bush was a director.

Lissmann said: "If we have a positive ruling from the court it will cause [president] Bush huge problems and make him personally liable to pay compensation."

The US government and the Bush family deny all the claims against them.

In addition to Eva Schweitzer's book, two other books are about to be published that raise the subject of Prescott Bush's business history. The author of the second book, to be published next year, John Loftus, is a former US attorney who prosecuted Nazi war criminals in the 70s. Now living in St Petersburg, Florida and earning his living as a security commentator for Fox News and ABC radio, Loftus is working on a novel which uses some of the material he has uncovered on Bush. Loftus stressed that what Prescott Bush was involved in was just what many other American and British businessmen were doing at the time.

"You can't blame Bush for what his grandfather did any more than you can blame Jack Kennedy for what his father did - bought Nazi stocks - but what is important is the cover-up, how it could have gone on so successfully for half a century, and does that have implications for us today?" he said.

"This was the mechanism by which Hitler was funded to come to power, this was the mechanism by which the Third Reich's defence industry was re-armed, this was the mechanism by which Nazi profits were repatriated back to the American owners, this was the mechanism by which investigations into the financial laundering of the Third Reich were blunted," said Loftus, who is vice-chairman of the Holocaust Museum in St Petersburg.

"The Union Banking Corporation was a holding company for the Nazis, for Fritz Thyssen," said Loftus. "At various times, the Bush family has tried to spin it, saying they were owned by a Dutch bank and it wasn't until the Nazis took over Holland that they realised that now the Nazis controlled the apparent company and that is why the Bush supporters claim when the war was over they got their money back. Both the American treasury investigations and the intelligence investigations in Europe completely bely that, it's absolute horseshit. They always knew who the ultimate beneficiaries were."

"There is no one left alive who could be prosecuted but they did get away with it," said Loftus. "As a former federal prosecutor, I would make a case for Prescott Bush, his father-in-law (George Walker) and Averill Harriman [to be prosecuted] for giving aid and comfort to the enemy. They remained on the boards of these companies knowing that they were of financial benefit to the nation of Germany."

Loftus said Prescott Bush must have been aware of what was happening in Germany at the time. "My take on him was that he was a not terribly successful in-law who did what Herbert Walker told him to. Walker and Harriman were the two evil geniuses, they didn't care about the Nazis any more than they cared about their investments with the Bolsheviks."

What is also at issue is how much money Bush made from his involvement. His supporters suggest that he had one token share. Loftus disputes this, citing sources in "the banking and intelligence communities" and suggesting that the Bush family, through George Herbert Walker and Prescott, got $1.5m out of the involvement. There is, however, no paper trail to this sum.

The third person going into print on the subject is John Buchanan, 54, a Miami-based magazine journalist who started examining the files while working on a screenplay. Last year, Buchanan published his findings in the venerable but small-circulation New Hampshire Gazette under the headline "Documents in National Archives Prove George Bush's Grandfather Traded With the Nazis - Even After Pearl Harbor". He expands on this in his book to be published next month - Fixing America: Breaking the Stranglehold of Corporate Rule, Big Media and the Religious Right.

In the article, Buchanan, who has worked mainly in the trade and music press with a spell as a muckraking reporter in Miami, claimed that "the essential facts have appeared on the internet and in relatively obscure books but were dismissed by the media and Bush family as undocumented diatribes".

Buchanan suffers from hypermania, a form of manic depression, and when he found himself rebuffed in his initial efforts to interest the media, he responded with a series of threats against the journalists and media outlets that had spurned him. The threats, contained in e-mails, suggested that he would expose the journalists as "traitors to the truth".

Unsurprisingly, he soon had difficulty getting his calls returned. Most seriously, he faced aggravated stalking charges in Miami, in connection with a man with whom he had fallen out over the best way to publicise his findings. The charges were dropped last month.

Biography

Buchanan said he regretted his behaviour had damaged his credibility but his main aim was to secure publicity for the story. Both Loftus and Schweitzer say Buchanan has come up with previously undisclosed documentation.

The Bush family have largely responded with no comment to any reference to Prescott Bush. Brown Brothers Harriman also declined to comment.

The Bush family recently approved a flattering biography of Prescott Bush entitled Duty, Honour, Country by Mickey Herskowitz. The publishers, Rutledge Hill Press, promised the book would "deal honestly with Prescott Bush's alleged business relationships with Nazi industrialists and other accusations".

In fact, the allegations are dealt with in less than two pages. The book refers to the Herald-Tribune story by saying that "a person of less established ethics would have panicked ... Bush and his partners at Brown Brothers Harriman informed the government regulators that the account, opened in the late 1930s, was 'an unpaid courtesy for a client' ... Prescott Bush acted quickly and openly on behalf of the firm, served well by a reputation that had never been compromised. He made available all records and all documents. Viewed six decades later in the era of serial corporate scandals and shattered careers, he received what can be viewed as the ultimate clean bill."

The Prescott Bush story has been condemned by both conservatives and some liberals as having nothing to do with the current president. It has also been suggested that Prescott Bush had little to do with Averill Harriman and that the two men opposed each other politically.

However, documents from the Harriman papers include a flattering wartime profile of Harriman in the New York Journal American and next to it in the files is a letter to the financial editor of that paper from Prescott Bush congratulating the paper for running the profile. He added that Harriman's "performance and his whole attitude has been a source of inspiration and pride to his partners and his friends".

The Anti-Defamation League in the US is supportive of Prescott Bush and the Bush family. In a statement last year they said that "rumours about the alleged Nazi 'ties' of the late Prescott Bush ... have circulated widely through the internet in recent years. These charges are untenable and politically motivated ... Prescott Bush was neither a Nazi nor a Nazi sympathiser."

However, one of the country's oldest Jewish publications, the Jewish Advocate, has aired the controversy in detail.

More than 60 years after Prescott Bush came briefly under scrutiny at the time of a faraway war, his grandson is facing a different kind of scrutiny but one underpinned by the same perception that, for some people, war can be a profitable business.

Source: http://www.theguardian.com/world/2004/sep/25/usa.secondworldwar

KRUGMAN ON MONEY: SMALL STEPS TOWARDS AURITI

By Daniele Pace

Today I read an article, wrote in fact in 2012, when the Nobel laureate economist Paul Krugman, answering the question of “what is the money” placed by Noah Smith, assistant professor of finance at Stony Brook University, says that the money today is a social convention, coming in his thinking to Auriti.

As reported by The New York Times, the demand for Smith was "the claim that money is a bubble?", to which Paul Krugman responded clearly "No, it is a social convention".

Paul Krugman certainly does not come to the Auriti's definitions but his approach seems to be very positive because it focuses finally the core of the problem, which is the process of creating value, while not naming it and not achieving to grasp the most intimate aspects.

But we can say that Krugman has succeeded in a reflection that one would never expect from an economist, at the beginning of a process, which we hope would like to continue, and that inevitably leads, once finished, at the Popular Ownership of Money and its Induced Value.

Of course that it does not make Krugman either an Auritiano and an economist nor reliable to put as new idol of the people, but to have the comfort of some reflections by a Nobel Prize will certainly bring the debate for the many citizens who today seek to understand the monetary problem, to points of view not only exclusively economics that they can finally open a window on a superior approach; that juridical approach would bring the society over the economy as it is logical, being this a social phenomenon and therefore with no autonomous behaviour but to settle with conventional laws.

To place the society, with all of its doctrines at its natural place above the economy, it is the first step to take if you want to understand the problem.

Our time instead place the economy above the society, almost in divine position, thus distorting any attempt of evolution of the human race, no more Homo Sapiens but Homo Economicus.

This article of Krugman might be illuminating for those who have never read Auriti, while for the connoisseurs of professor of Teramo is certainly a small step towards the discovery of fields of judgement values by economists.

Krugman writes in fact that: "It’s true that green pieces of paper have no intrinsic value [...] so that my willingness to accept green paper from you is based only on my belief that I can in turn hand that green paper over to someone else. But there’s nothing to prevent that process of monetary circulation from going on forever."

Krugman is just confirming the induced value of Professor Auriti in which the value (purchasing power) comes from the acceptance because it involves the use (value) in exchange for goods.

Continuing Krugman says: "It’s a convention, which works as long as the future is like the past." bringing the monetary speech in a relationship of phases over time to assimilate the right to property as a convention: "Obviously, such conventions can break down — but then so can things like property rights", although this step Krugman is not expressed as clearly as in Auriti, where in fact in the currency, being the Convention and then the legal instrument because legislated, it reside the right of property for the citizens.

But continuing it understands his small insight: "In fact, you could argue that almost every asset in a modern economy owes its value to social convention; green pieces of paper could become worthless, but then so could any paper claim, which is, after all, worth something only because laws say it is", although the economic formation of Krugman in this passage clearly refers to the modern currency and economy leads to a reversal of the role of jurisprudence which should regulate the existing social behaviour and not determine them, especially as he himself defines money as a social convention.

This reversal in fact allowed the ruling elite to impose the private currency of banks instead to rule a social behaviour, the use of the monetary instrument, but also of barter in early trade, which had in the past given the neutrality of the medium of exchange as in the case of Roman bronze coin.

In particular, however, we must point out that Krugman has not caught in the step "green pieces of paper could become worthless", as the "loss of value" (worthless) of money is only in the symbol but not in the value of the monetary instrument. By the law a currency could certainly goes out of circulation and lose value as a symbol representative of a particular currency, as happened in the past for all coins; but the monetary value, as an instrument of social convention, it never loses the value but it changes only the representative symbol. The money not only never lose value, as saying that it would lose the same idea of social convention, but this nature (of social convention) makes it not privatized as is the case today with the modern currency.

Even on the role of taxes Krugman falls in an interpretation wrong. Recalling that he himself defines money as a social convention, we can recall as rightly stated by Davide Storelli in the 9th episode of his column "The value of money", ie that citizens do not accept money to pay taxes, but to exchange goods referred they need.

The taxes also were justified when the currency was in precious metal and rare to find in nature, to recast and redistribute, but not today with the Fiat currency / social convention, unlimited and at no cost.

In further comparison between money and any economic good that creates a bubble (comparison used to find an explanation between money and economic goods) Krugman makes a very important statement: “and once you realize that a social convention is not at all the same thing as a bubble, several related fallacies fall into place”.

That once you realize that the social convention of the currency is not a commodity, many of economic dogmas fall, but also moving the monetary studies from economics to social and legal doctrine.

Finally: “A final thought: the notion that there must be a “fundamental” source for money’s value, although it’s a right-wing trope, bears a strong family resemblance to the Marxist labour theory of value. In each case what people are missing is that value is an emergent property, not an essence: money, and actually everything, has a market value based on the role it plays in our economy — full stop.”

In this sentence we can trace another very important statement, namely that the money has no intrinsic value (essence), but an "emerging property" that comes from a social need for trade. An "emerging property" that is nothing more than the induced value and purchasing power of alternating phases of time, referred as money circulation by Auriti.

Although Krugman stops at this definition, with the separation of Auriti between symbol and value certainly that sentence is an important trace confirming the work of the Italian Professor in the process of value creation as spiritual mental activity.

In conclusion the article Krugman has certainly no innovative aspect than to see a Nobel Prize of orthodox economics to mention a different approach to the problem, the only one able to bring a permanent solution to the suffering of the people.

Switch from commodity money or currency-financial instrument to social convention it seems already a giant leap for orthodox economist and could point the way to many concerned citizens in understanding.

The Bretton Woods Agreement

By Giacinto Auriti

From the period immediately following the last World War, there has been a substantial change on traditional monetary systems, in such a way as to make them particularly relevant for the international jurisprudence, and such as to alter the political and economic balance of markets.

This new system has its origin in the Bretton Woods Agreement on 22^nd July 1944. The work of this conference were based on the two projects presented respectively by Harry White, delegate for the United States, and John Maynard Keynes, British delegate, simultaneously published on 6^th April 1943. Since around these two projects moved the conference and, as we shall see, the arguments and insights contained in them were widely enhancement in later developments of the international monetary system, make it here deserves a quick nod^[1].

The White project - which was based on the realization of the International Monetary Fund - provided a so-called international stabilization fund for an extend not less than $ 5 billion, made up by contributions in gold and currencies of the participating countries.

To this fund could draw the member countries to meet their liquidity monetary needs^[2]. It was provided for this purpose the creation of a monetary unit called Unitas, which would have had, just as reserves, these values.

White in fact considered the Unitas - with a gold content of 137 and 1/7 grains (equal to $ 10 of the time) – as international currency designed in the same way as a kind of representative credit of the values placed at his warranty. In this scheme the gold assumed a position of all relief and also in consideration of the fact that in that time the U.S. was the nation with the largest gold reserves.

According to the White plan, member states were obliged to yield to the Fund in exchange for their respective national currencies, all foreign currencies and gold, which they had come to have in excess compared with the quantity possessed at the time of their adherence to the Fund.

The White plan - which then was broadly welcomed in the creation of the International Monetary Fund - worked as a bank, in which each country appeared as "account holder" using traditional monetary foreign exchange (Gold and the respective currency). The project then was submitted to the limits of growth of the money supply that could not be proportionate to the need of money, ie the increase of economic development, but to the amount of the reserve.

The White project, which gave the appearance of a more reliable because it is based on a gold guarantee, in effect showed no serious expectation that there would be no arbitrary excesses in the issue of currency, as it had to demonstrate the subsequent development of monetary policy.

Also the Keynes project provided for the establishment of a new international monetary unit to be used as reserve: the Bancor, which, however, differed from the American, because did not precede the establishment of a fund of reserves as a condition of its issuance, as the Bancor was conceived purely as an international currency conventional, recognized as part of a currency union between states. For the Keynes plan, the Clearing Union would have to function as an instrument for transformation in Bancor of the equity assets of creditor countries.

In the Keynes plan, therefore, the Bancor came to constitute a new money to be issued - on the assumption of a positive balance - in favour of the country creditor.

The Bancor should have the quality of units of measure of value, but not that to be the object of the value. We know that this is a hypothesis impossible, as it is not conceivable that a unit of measurement without the characteristic corresponding to that of the object to be measured. It would be like designing a kilogram that it had not the quality of the weight or a meter without the quality of the length.

Mr. Palladino captures this aspect of the problem, who defines the amount of Bancor due to each country creditor, such as "theoretical limit of shares that would work as a simple obstacle to the nations debtor and as a basis for action to correct any imbalances and structural pathological"^[3].

Therefore, the Keynes project would not have materialized nothing but the restriction of the same monetary sovereignty of Member countries, namely in considering the Bancor as a parameter value which commensurates the monetary increases of every nation.

The White and Keynes projects, even though they had the apparent affinity, were then structured on two concepts and monetary philosophies completely antithetical.

Both plans contemplated, however, an international institution: respectively a "Fund" for White and a "Clearing International Unit" for Keynes, in order to achieve a common currency and the necessary discipline limitations on the monetary policies of member countries.

The inability to merge into a single project the two solutions, came from the fact that the fundamentals of the two plans moving on two antithetical conceptions of the monetary value: for White the currency had credit worthiness, ie title representative of the values of the reserve, for Keynes the currency had to be purely conventional, that is, free from any form of reserve, while constituting itself reserves for the various central banks.

Both projects realised then the partial purposes, while presenting defects of great importance for different aspects.

The work of the Bretton Woods Conference took place with the participation of 44 nations sent by the President of the United States Franklin Delano Roosevelt.

The presidency was assumed by the Secretary of the U.S. Treasury Morgenthau. The Congress came to the unanimous condemnation of the monetary regime before the last World War, highlighting the need for remove the restriction of the foreign exchange and foreign trade, encouraging international cooperation. In closing speech made by Lord Keynes, was emphasized that the conference had to be considered as the beginning a new experience unprecedented.

"We have accomplished here in Bretton Woods something more meaningful than what is stated in the Final". With these words of Keynes is closed after three weeks, namely 22 July 1944, the work of the Conference.

From: The International Regulation of Monetary System