Demystifying the Exchange Rate

Exchange rate is actually not complicated. According to the original meaning of exchange rate, it means the conversion ratio among the currencies of various countries. As China is relatively late in adopting the principles of capital market economy, we are a step behind in implementing its theories and studies. The Americans thus took advantage of our lack of understanding of exchange rate principles and put pressure on us wantonly, saying things like “China is controlling the yuan’s exchange rate to gain trade advantages.” Such an inference corresponds to a fact, which is that there has been a huge trade deficit in China in the last few decades. This made it hard for us to put up any argument in our own defense, and put us in a very passive position.

Exchange rate is the conversion ratio of a currency, and it is not complicated at all. In the days of metal currencies, the only issues with exchange rates lied only in the gold and silver contents in the currencies, or the purity of bronze coins. When we entered the era when paper currencies replaced metal currencies, exchange rates were also not the main issue in economic development. Exchange rates becoming the main issue in world economic development can be traced to the 1960s. In general, only after the U.S. dollar had become the world’s main circulating currency had the exchange rate become a major issue. Therefore, to understand the exchange rate issue clearly, we have to understand the history of how the dollar became the international currency in circulation.

After World War II, as the U.S. itself was not affected by the war, the productivity of the industries that grew rapidly during the war was not able to adjust in time after the war. This means that the huge amount of products that came out of America had to find markets, and the recovery of Europe after the war needed American products and material resources urgently. The various nations in post-war Europe, however, were unable to pay because they had become very poor because of the war. The American government, therefore, introduced the Marshall Plan, which is somewhat similar to the present day export credit. Its purpose was to ensure production in the U.S. could carry on as normal. The Marshall Plan involved U.S. supplying loads in U.S. dollars to the European nations, and Europe could only buy American products with the money. It was only a credit plan, but it had unintentionally opened up a new world and helped the U.S. discover a gold mine for future development. The official Marshall Plan was for the U.S. dollar to become the international circulating currency after the war. The original international currency for the settlement of accounts gave way to the dollar. The U.S. dollar was able to replace the British pound for another reason, which was that the dollar was directly pegged to gold. At that time, $35 U.S. could be exchanged for an ounce of gold, but now, one ounce of gold requires more than $1300 U.S. Within a few short decades, the magnitude of the dollar’s depreciation was quite obvious.

The U.S. Federal Reserve and the U.S. Treasury discovered unwittingly that the American paper currency and bonds can be brought into Europe and exchanged for a large amount of material resources. As a result, the American paper currency circulated in exceedingly large amounts in Europe in order to soak up European material resources to help in America’s development. In this process, the French, who liked philosophy, were the first to discover that the Americans did not have pure intentions; the currencies were not executed in accordance with the economic principles and were not pegged to the gold reserves. In the 1960s, the French government took the lead to take the U.S. dollars that France took in and exchanged them for gold directly with the U.S. Federal Reserve. The Fed then introduced paper gold — which was the European U.S. dollar — upon seeing their gold reserves rapidly decreasing, and thus transferred the responsibility of the right of recourse for the U.S. dollars’ debt directly from the U.S. government to private corporations. The design of special drawing rights reduced the burdens of the Fed and the Treasury significantly. The issuance of the U.S. currency, however, was overly excessive, and was out of line with the original principle of currency issuance (that is, to issue the currency in proportion with gold reserves).

In 1971, various nations held $60 billion worth of currency, and there were only $10 billion worth of gold in the U.S. gold reserves. If anyone took the lead to withdraw U.S. dollars to exchange for gold, like Charles de Gaulle did in the 1960s, the U.S. would have gone bankrupt. At this time, the bold Richard Nixon thought of a way to force currencies like the franc, the mark, pound and the yen to appreciate. The U.S. was using its hegemonic status to force the little brothers (the underlings) to raise the exchange rates against the U.S. dollar. This can be said to be the beginning of the American government’s planned control of the exchange rates. Later, to circumvent the U.S.’s finances from the risk of bankruptcy, Nixon announced the unpegging of the U.S. dollar from gold, which means that the American government’s initial promise of changing the U.S. dollar directly for gold no longer stood as of 1971.

In 1971, in the thick of the Cold War, many Western nations needed the U.S. to protect their interests, and so they did not raise an issue with the unpegging of the U.S. dollar from gold. The unpegging, however, affected the U.S. dollar’s credit and purchasing power. Therefore, the U.S. government designed the oil crisis and stirred up the conflict between Israel and the Arab world, enticing the Arab world to establish Organization of Petroleum Exporting Countries (OPEC) to implement an embargo on oil, while the U.S. pretended that there was nothing they could do about it. In reality, the U.S. had been directing all of this, because Kuwait, Saudi Arabia, Iraq and Iran were vassals of the U.S. at that time. America’s act was for the purpose of finding a replacement for gold to back the dollar. As a result, OPEC announced that all oil transactions and settling on accounts had to be carried out in U.S. dollars. The dollar has thus found another solid material support base. In addition, in the oil embargo, the price of oil skyrocketed from a few U.S. dollars per barrel to tens of dollars per barrel. This had once again expanded the space for the depreciation and distribution of the dollar, because once the price of a raw material like oil inflated, the prices of plastic and other oil-based products would follow, and the fees for other transportation would go up as well. The inflation of the whole world was the depreciation of the world currency — the U.S. dollar.

Later on, in order to help America’s economy recover, the U.S. once again staged a currency war. The signing of the Plaza Accord was the relenting of the Western nations to let the U.S. dollar depreciate.

At the end of it all, the U.S. is the biggest currency exchange manipulator. Since the circulation of paper currencies, there had been many changes in the exchange rates of currencies of the various nations. This is because the amount of paper currency issued by these nations was variable, and the currency values were not stable, and floating exchange rates appeared as a result of this. The days of stable exchange rates in the metal currency era will never be seen again in the age of paper currency.

People’s knowledge about currency exchange is basically influenced by Western theories. Things like Purchasing Power Parity (which is the comparison of the currency standards and rates of various countries through the purchase levels of these countries of Rolex’s line of products. The result of this method, however, will see a very big disparity due to the differences in the production levels and professional distribution of the selected product in the different countries. It would be very unfair to use hamburgers to evaluate currencies.) Another is measuring currency ratios using import and export differentials. For example, the U.S. does not allow many products to be exported to China. The U.S. moved low-skilled industries and low-added value production to undeveloped countries because these countries upgraded their industrial capacities. Combined with great demand for these products in the U.S., it was unavoidable that a large trade deficit grew between China and the U.S. Some individuals measure exchange rates using the supply and demand prices in foreign exchange futures markets, and this will give rise to a great deviation. This is because the foreign exchange futures market is a market that can be manipulated, and it is an imperfect market. Great American banks like Goldman Sachs and Morgan Stanley were able to control the futures markets. Therefore, it is possible to see exchange rate deviations when foreign exchange trade markets are used to determine exchange rates.

How, then, is exchange rate measured? It is quite simple, actually. Currencies are actually proofs of circulating exchanges issued by governments of various nations. It is not a major issue when each government settles its accounts according to its trade demands. For example, if an American said that there was a problem with our exchange rate, we can say, “All right, we’ll do whatever you say.” One U.S. dollar will then be exchanged for 4.5 renminbi, and we will let the dollar depreciate against renminbi. But we have to be clear; China is only responsible for the trade figures that occur in its trade with the U.S., which means that China’s renminbi exchange rate is only shown in the settlement of accounts for the trade between China and the U.S. For the capital that the U.S. is circulating internationally, we do not acknowledge at all that renminbi can be exchanged at this rate. If the U.S. wants to pressure the renminbi exchange rate forcibly, such a measure can quickly put the American in his place!

If China gives differential treatment internationally on the dollar issue, the U.S. would be very upset, because if such a big country as China gives differential treatment to the U.S. dollar, it will cause the other nations to follow suit. In such a case, the U.S. plan to use the issuing rights of its currency to attain the material resources of other countries will come to naught.

For instance, the U.S. is using its currency issuing rights to let big American corporations make unrestrained investments in various big economies, which in reality is bringing a huge amount of U.S. dollars into those countries. As most of the economists in these countries subscribe to the American theory, thinking that their own currencies have depreciated against the dollar, in order to protect the exchange rates of their own currencies, their central banks have to buy up the excess U.S. dollars. In this way, the central banks of these countries have to issue their own currencies in order to buy up the excess U.S. dollars, and this leads to inflation in these countries. In actual fact, the U.S. is using its currency issuing rights to create worldwide inflation, while it stringently restricts the issuance of the U.S. dollar and the influx of the dollar from outside of the U.S. This leads to inflation in other countries and deflation in the U.S. It isn’t that the purchasing power of the dollar has increased, but that the U.S. has used the other nations’ lack of understanding of the currency theory to execute a financial plunder.

All the exchange rate issues and currency depreciation, right down to the root of inflation, has to do with the U.S. dollar. Therefore, we have to study and understand clearly about the dollar and the exchange rate currency theory, and not let others make use of our lack of understanding about financial issues to carry out exploitation and plundering.

In fact, the theory and principle are simple. Anyone who has studied Marxist theory of capitalism can understand such a principle. We must not follow behind the thoughts of others, or we will easily be deceived. Zhao Benshan’s ‘Mai Guai’* is one such example of misleading other people’s thoughts and mixing up the facts. I advise ‘experts’ with ill intents to stop deceiving out leaders!

*’Mai Guai’ is skit by Zhao Benshan, a well-known actor and director in China.