"Caracas, July 21. Venezuelan President Hugo Chavez signed a partial reform to the Central Bank Law to authorize investing six billion USD of the hard currency reserve in social programs.

"The head of state told Venezuelan television that the reform to BCV approved last Tuesday by the National Assembly includes tight controls to prevent embezzlement, and the funds will only be used as USD or Euros for overseas purchases, to prevent inflation.

"Chavez mentioned acquiring medical technology for public hospitals within the Barrio Adentro III program, plus investments in railroads, telecommunications, energy, transportation and the subway systems of several states including the capital.

"Chavez said there is a proposal to create "a great bank in the south" where the countries of Latin America store their reserves, noting that if the creation of a Telesur, a Latin American TV station, caused Washington to threaten television and radial broadcasts against Venezuela, then "to remove the reserves from the banks in the north to bring them to the south" will attract even greater attacks.

"Venezuela approved an additional credit of more than 90 million USD to cancel 25 percent labor debt with university staff and another credit for 500 million USD for housing."

We take the occasion to repeat the proposal we made in our May/05 issue.

"The readers of Economic Reform will have noted the disastrous effects in Mexico, Ecuador and the Argentine, of having in one way or another adopted the US dollar either as their currency or required backing for it. Great effort was made by rightist think-tanks and individual economists, Canadian and those persistently visiting from the US to propose a united currency between the US and Canada. Fortunately up to now our government has had the good sense to resist such advice.

"When the central bank of any country adopts the currency of another as monetary base or backing for its monetary reserves, it is tantamount to a free loan of the amount of the foreign currency used for the purpose. About 60% of the world’s central bank reserves are in US dollars.

"A Latin American bank such as we propose would have its reserves made up almost entirely of currencies of the Latin American countries (say in the proportion of the Gross Domestic Products), with just marginal amounts of dollars, pounds, euros, yen and Yuan. With its reserves thus constituted, the LA Central Bank could concentrate on financing trade and investments amongst the LA countries. This would provide a tremendous help to them in casting off their inherited role as borrowers, with endless frustrations barring the way to financial independence. Since the Mexican financial crisis that began in 1994, that country’s huge foreign debt contracted on the advice of foreign banking consultants, resulted in 85% of the Mexican banking system ending up in foreign hands."

A further word. When a private bank makes loans it creates a multiple of the money base actually in its vaults. The excess is essentially float and fiction. What ultimately backs it all up in addition to the bank’s own capital and the deposits made by the public, is the creditworthiness of the government, through its central bank, as "lender of the last resort." What banks must keep their eye on is making sure that they always have the legal tender in their vaults or in deposit with their central bank to honour any cheque or draft drawn on them. If their reserves are in a foreign currency, the creditworthiness of their own government is hardly relevant. It is the motivation and creditworthiness of the government whose currency constitutes its reserves that is really decisive. For it is the reserve currency that is the modern equivalent of the old gold or silver standard. In recent years the statutory reserves required to back money that commercial banks create and were held by the central banks on an interest-free basis were done away with completely in countries like Canada and New Zealand and reduced to insignificance in the US and the UK. That has made it far more difficult for a borrowing nation to ever meet its own financing needs. Or to have an independent, sovereign say about how it conducts its affairs. For it should be remembered that the statutory reserves were base money that allowed banks at the end of WWII to lend out around 10 times the amount of legal tender they had in their vaults or in deposit with their central bank. With the end of statutory reserves, and the deregulation of the activities banks are allowed engage in, that multiple today approaches 400 to 1. That is why our proposal for a Latin American Central Bank is all the more timely.

Loans made to shareholding governments to finance essential public investments will – to the shareholders as a whole – approach a near-zero interest rate. For to the shareholders as a group the interest collected by the banks on such loans will return as dividends. Inevitably that will arouse the criticism that Latin American politics and finance has been too corrupt to indulge in such plans. Perhaps it was because He on High had foreknowledge that somebody was going to propose such a plan that the Attorney-General of New York State, Eliot Spitzer, was inspired to intensify his investigation of corruption on Wall St. No matter how great the corruption in some Latin American countries might have been, what Mr. Spitzer and the US Securities and Exchange Commission have turned up would be hard to match.

"And one of the purposes of both our proposals is to come to the help of Washington to step down with some grace from its dangerously tempting role as lone economic superpower that no longer is based on reality. Moreover, international interest rates are rising ominously once again as they are used as the one ‘blunt tool’ to fight rising oil prices." (For space consideration our quotation from the May issue of ER has been condensed and stylistically modified.)

-- from Economic Reform, August 2005