Publications / Essay

Energy, Petrocurrency, and the World Future

The oil producing countries of the world, particularly OPEC countries, may be in a unique position to help determine the solution to two of the most pressing issues facing the world today.

One concerns the source of the world’s future energy supply. After the world’s supply of oil has run out, will the primary dependence for energy be on nuclear power, particularly fission? Or will it be solar, wind, or other sources of renewable power that are ecologically safe and have decentralized access to supply? The second issue is whether or not, or how soon, the world will develop an alternative monetary system with which to replace the present patchwork system, and its worldwide inflation and increasing economic instability.

Situated as most of the oil producers are in the Middle East, with the constant threat of regional, if not global, war, they find themselves sitting on a tinderbox that could ignite the world, not least of all because of the very oil that makes them rich. Fifty percent or more of the world’s present supply of oil is under their control. Ninety percent of the world industry is dependent on oil, and thus they are in a position to set the course of history in a constructive direction.

It is now a commonplace speculation that the U.S. will go to war over any ultimate threat to the oil supply, even though at the time of the embargo, the U.S. was dependent on OPEC for less than 10 percent of its total oil requirements. (European nations and Japan are more heavily dependent on Middle East oil; it meets at least 50 percent of their needs.) Some people have gone so far as to predict that if OPEC were to demand payments in SDRs (Special Drawing Rights-the IMF’s “paper gold”), the U.S. might consider this “an act of strangulation” (see Terence McCarthy’s article in Ramparts, March 1975). It is now clear, however, that this fear is unfounded. OPEC’s announcement at the recent meeting in Gabon of its intention to price oil in SDRs did not raise even a mild protest from the U.S.

On the other hand, there have been a number of pronouncements indicating great concern about any new increases that might go over certain amounts (usually $2-$3 per barrel). Such increases would presumably represent a threat to the U.S. economy, which might be considered the “act of strangulation” to which Kissinger and Ford referred. A confusing element in the situation, however, is that it is also generally recognized that only if oil prices remain high will it be possible to economically tap the more costly sources such as offshore oil, which are supposed to make the U.S. less dependent on Middle East oil. Meanwhile, in spite of Project Independence (President Nixon’s much advertised effort to make the U.S. less dependent on oil), the degree of dependency on Middle East oil has increased, and is now 16-17 percent or more. How high prices can go, and whether or not a certain price would be “unacceptable” and call for military action, is a matter of debate. Less debatable perhaps, is the proposition of another oil embargo—especially if it were to last very long.

However, if Americans could take an objective view of the situation from the position of the OPEC countries, it would be obvious to them that the countries with oil under their feet consider it to be their major, if not only, resource. Most of them are greatly concerned that at the present rate of decline in oil supply, they will be reduced to less than half of their present value within five years. Even if these countries invest (or “recycle”) their funds in various parts of the industrialized world as they are now doing, at the present interest rates their returns will only represent about one-half of the inflationary loss being sustained. Equity investments offer little or no better hope than fixed interest rates, and in addition carry the danger of confiscation at any time by other national governments.

The alternative for OPEC countries is either to try and secure an equitable return in some form or to simply to turn off the supply of oil, which by staying in the ground, can only continue to appreciate in value. Either alternative, however, is likely to be considered am act of “strangulation,” which prompts the growing fear of many observers that say that such a move could lead to involvement of the major powers in a Middle East war-one that might be initiated by a preemptive Israeli attack on Syria, an act many consider likely.

While this threat is real and imminent, not only to the Middle East but to the entire world (with the possibility of nuclear war always present in such a confrontation), the situation, however, presents an opportunity to significantly redress the real source of conflict and to dramatize the desire of the OPEC countries to make constructive efforts toward world peace and economic stability.

Behind the fears of the industrialized nations about the economic effects of either another increase in the price of oil or the insistence on payments in SDRs (which in effect amounts to the same thing), there lies a deeper concern and a more widespread fear: the question of what will replace oil as a prime source of energy. Can adequate, safe alternatives be developed fast enough to replace the depleting supplies of oil? The powerful elites, both state and corporate, of the industrialized nations have clearly placed their hopes on the development of nuclear energy.

As it becomes clear to an increasing number of responsible scientists, economists, and commentators that nuclear energy is not only highly dangerous but also economically unfeasible as a source of net output, anxiety and fear about the future continue to grow. OPEC countries must share these same fears and concerns with the rest of the world.

OPEC countries are in a unique position, however, because they have not committed themselves to nuclear energy as the primary alternative to oil, even though U.S. nuclear salesmen, including former President Nixon, have been trying to sell them on the idea. Also, many of the OPEC countries have unique potential for capturing the sun’s energy in their vast desert landscapes. Energy from the sun could be utilized for developing a safe and efficient technology, for which a growing consensus of endorsements has begun to emerge. It is likely that hydrogen, stored as a gas or liquid, and produced from primary sources of “income” energies (solar, wind, tidal, etc.) is the most hopeful alternative to oil, not only because its production will not be dependent upon limited sources of supply, but because there are no adverse environmental effects in production, or by-products in combustion (see Energy, Earth, and Everyone, Straight Arrow Press, San Francisco).

Consider this, also. What if, as one Dr. Arthur Tamplin suggested at the Japan Congress Against A and H Bombs in August of 1974, OPEC countries were to announce their willingness to contribute some of their surplus funds into a new fund for the establishment of worldwide centers of research and development into ecologically safe and universally available energy sources. Such a policy would offer new security to the OPEC nations for energy self-efficiency and economic well-being in the face of dwindling oil reserves. Yet equally important, it would provide equity and needed leadership to all nations, particularly those of the industrialized world, in seeking new options for meeting future energy needs. In his Open Letter to the 29th Anniversary Conference Against A and H Bombs, Dr. Arthur Tamplin gave this endorsement for the plan:

Such action on the part of these nations would in my opinion, be a most significant step toward world peace. Moreover, it would allow them to exploit their most abundant resource-solar energy. For example, solar energy can be used to generate electricity-the electricity can be used to electrolize water-then using only a small fraction of the desert areas of the Middle East, more Btu’s could be shipped from this area in the form of hydrogen than is available in the oil reserves. Moreover, solar energy can be used to create fresh water. It can also be used to construct and operate an extensive agricultural system of greenhouses in which this fresh water can be recirculated. In addition, solar energy systems would be far more useful to the undeveloped nations than the expensive, sophisticated and dangerous nuclear reactors.

Other suggestions have been made in a similar vein. For example, to implement one of the recommendations from the Pugwash scientists, the oil exporting nations of the Middle East should add an excise tax to each barrel of oil. The tax could be as small as 5 to 10 cents per barrel. This tax money would then be used to support one or more solar energy institutes.

Closely related to the price of oil and the future supply of energy that will meet the world’s needs is the problem of building an alternative to the international monetary system. In the face of impending collapse beneath the combined weight of inflation on the one hand, and growing unemployment on the other, the issue of monetary stability presses with singular urgency. Both capitalist and socialist countries (with the possible exception of China) are suffering from the ravages of inflation, and appear equally unable to proffer effective remedies. Within the International Monetary Fund (IMF) itself, a continuing battle goes on between the countries demanding a “hard” or stable international currency, generally those countries with substantial gold reserves, and the developing countries who do not have gold or other “hard” reserves who are demanding a more “liberal” system.

The new SDRs, or “paper gold”, which the IMF began to issue in the early 1970s in its effort to increase world liquidity, have been a subject of controversy between developed and developing nations from their inception. These new credits (literally new money but without gold backing) have been apportioned, as is usual in banking practice, according to the deposits at the IMF. Quite naturally, the poorer countries that have smaller deposits get fewer credits. They have been contesting, sometimes bitterly, this apportionment, but so far little change has taken place.

Nevertheless, the SDRs represent a step forward in world monetary affairs. They are the first international or transnational currency to ever be issued, and because several relatively stable national currencies (German marks and Swiss francs, for instance) are included in the index, or “basket of currencies,” from which they are composed, they are a more stable monetary unit than some of the weaker currencies included, such as the English pound. Therefore, the move OPEC made in December to use SDRs in exchange for oil, which some feared would be the first step toward nuclear confrontation between the U.S. and Russia, was a move toward greater use in international exchange of the first world monetary unit. All those who consider themselves to be “one worlders,” or who assert the primacy of global interest over that of a single nation, should applaud this move on the part of OPEC, because it challenges the inviolability of the nation state as an economic entity.

Moreover, to the degree that the SDR is a relatively “hard” currency, it was indeed a move toward not only a world economy but a more stable system as well. It puts pressure on the governments of the world, including the U.S. that has been deliberately inflating its currency to pay for politically irresponsible actions, such as the war in Vietnam. Thus, those who demand stable money should approve the action of OPEC as a move that will help enforce fiscal responsibility. However, conservatives will justifiably insist that SDRs do not represent a genuine hard currency, which in their opinion generally must represent some kind of gold standard or gold reserve. It is true, of course, that SDRs are not based on gold but are merely an index of sixteen paper currencies, and ultimately do not have any redemption value, except in terms of other paper currency. Naturally, SDRs are vulnerable to inflation to the extent that nation states continue to inflate the constituent currencies.

In the end, the broader use of SDRs may prove disastrous to third world countries inasmuch as their currencies are generally devaluing at an even greater rate than the dollar or pound (that is, if OPEC countries, most of whom consider themselves to be third world countries, or at least tend to identify with these countries, should insist on payments for oil in SDRs from the third world). When and if SDRs begin to replace national currencies in world exchange on an increasing basis, the weaker currencies that comprise the index will thereby tend to devalue even more precipitously.1 The result will be increasing conflict between the “hard” currency nations and the “soft” currency nations within the IMF itself. SDRs will remain a currency for the industrialized world, not a currency for the third world.

No one can predict what the next step might be, but the course currently set clearly leads to international confrontation, or at least a mutually unacceptable impasse. However, a unique opportunity arises in this situation for OPEC to explore a positive alternative. It could act in one stroke to:

  1.  Protect its own interests in conserving the value of its money and resources;
  2.  Move in the direction of a genuine hard currency which would not only satisfy most conservatives but establish a genuine world currency for the first time in history;
  3.  Move toward economic stability and an end to money inflation on a world level;
  4.  Promote a new basis for monetary relationships that would offer long awaited equity to third-world countries.

The action to which I am referring would be following the suggestion of the Shah of Iran as the next step to call for oil payments in a currency denominated by an index of 20-30 commodities rather than SDR’s. However, rather than manufactured commodities, the commodities which would comprise this index would be the 20-30 most important basic commodities used and needed by the entire world. Each commodity would be weighed in the index according to its importance in world production. This would include all of the important agricultural commodities as well as energy and mineral resources, such an index, in fact, already exists, and is in process of being perfected. Present studies already clearly indicate that the index is itself a measure of world inflation. Basically, this means that owner-ship of the entire basket of commodities in the index would insure against loss from inflation. Any individual, group, corporation, nation, etc., holding title to the basket of these commodities would be protected against loss from money de-valuation, This is true simply because it is money which is being inflated and devalued, not the commodities themselves.

It may be true that in the past manufactured goods have tended to reflect relatively higher prices than the raw materials which go into them. But this has been largely due to the disparity in the labor cost which has gone into the manufacturing process, as against the labor and energy (mainly oil) cost for producing the raw materials in the third world whence most of them come. However, this disparity has already changed drastically, partly due to the higher cost of energy itself and partly to the increasing parity which agricultural products are commanding on the world market as an increasing world population demands more food from a stationary supply of land. And, in spite of the disparity which may have existed in the past, studies indicate that such a commodity index over a long period (30-40 years) has a remarkable parallel to national consumer price indices.2 Moreover, were such an index to be adopted for international exchange, this fact, in itself, would tend to decrease any existing disparity between “raw” and manufactured cost.

Were such an index of commodities to be adopted by OPEC (instead of the SDR index of currencies) as the monetary unit for pricing oil, a number of potential ramifications might derive from it.

It would, obviously, be a “hard” currency. While it might not satisfy all those who are insisting or demanding a return to gold as the unit for international exchange, it would in fact serve the purpose of an honest redemptive money system far better than gold— as a number of economists have been advocating for many years, from Stanley Jeavons in 1890 to Lord Kaldor in 1974 (in his speech to the IMF). Gold as a medium of exchange has a number of difficulties, prime among which are its limited supply and the fact that it is not distributed with any degree of equitability over the entire world, Raw commodities (of which gold is but one) are, however, available (particularly the agricultural commodities) over the entire world, There is hardly a country which does not have some commodity of importance in world trade which would be included in the index.

It is this latter point which makes such an act on the part of OPEC so important to third world countries. The result of such an action on 0PEC’s part would be to, in effect, monetize all the commodities in the index. The initial effect of monetization would probably be to raise the value of these raw commodities just as the value of gold in the world trade is increased because it has monetary value in addition to its industrial use value. This monetary value has been calculated to be at least 50% of the market value assigned to gold.

The second important effect it would have on the third world countries would be to provide them with a source of “foreign” exchange without the need to export special crops and commodities to the industrialized world at depressed prices.

Foreign exchange is, after all, exchange which has acceptance value in international trade. Generally speaking, this means “hard” currency (with gold as the most acceptable), dollars (particularly since the Bretton Woods Conference made dollars official international reserve currency), pounds, and the more stable currencies. Developing countries lack “foreign” exchange because their own currencies are “soft” and, therefore, not acceptable. However, since these commodities belonging to the third world would have been “monetized” in world monetary exchange, they would now represent an international reserve currency, or “foreign” exchange, which could be used to purchase whatever might be needed for further development. Third world countries could, in effect, create their own “foreign” exchange. This would also mean that they could concentrate on their own needs rather than become caught in a “one crop” economy primarily designed to export for foreign exchange— such as Brazil with coffee or Africa with cocoa. This does not mean they would necessarily cease to grow these crops, most of which they do not consume in their own country, but rather would be enabled to diversify their economy and concentrate on crops to feed their own people rather than for export. Further, they would have more resources within their own economies to encourage industry and otherwise stimulate development.

Monetization of domestically produced commodities could have the same or better results within any given country as the effort to nationalize at the state level might have— in that it would utilize resources more for internal use and benefit rather than for export. This could be of particular importance to small countries which, due to the lesser diversity of their available resources, do not benefit as much from nationalization as do large countries. For example, look to the difference between Cuba and China. Where the size of China provided great diversity of resources and made it possible to virtually eliminate the need for foreign exchange after the 1948 revolution, Cuba, by contrast, was forced to export sugar on the world market and continue its dependence on foreign exchange just as it had endured before the revolution— although perhaps not to as great an extent.

I do not mean to imply that all these benefits would come simply and easily by the mere act of OPEC requiring payments for oil in an index of commodities. In fact, it would require a great deal more. In order for such a commodity unit or international currency to become fully workable would require, at minimum, a redemption system. That is to say, unless payments were to be made in the actual commodities themselves (as in barter)— an obviously unworkable system— it would require the establishment of some kind of world bank prepared to issue the new currency, just as the IMF issues SDR’s today, and to redeem these notes in commodities on demand if necessary. Without such a redemption system there could be no credibility. Essentially it would require a Bank of Issue much like the IMF is today.3

There are several channels through which this might be accomplished;

  1.  OPEC establishing its own bank for this purpose;
  2.  The UN establishing such a bank;
  3.  The IMF and the World Bank converted to such a purpose;
  4.  Any combination of primarily third world countries which possess the basic raw materials which comprise the basket combining to initiate a bank;
  5.  A combination of private interests establishing a bank in one of the smaller countries (perhaps Luxembourg or the Bahamas) where international banking already is concentrated,

It is not the purpose of this article to discuss in any detail the possibilities and problems which each of the above options might entail, but only to emphasize the potential benefits to the world which a move by OPEC in this direction might mean. Already, we have seen discussion on the part of bauxite producing countries about the possibility of combining to establish a monetary unit based on bauxite which in their opinion would not devalue and would assure them of value received. Bauxite, however, could hardly become a world currency— although it might be as “good as gold” were it not for the mystique attached to gold. In my own view the UN might be the best organization to launch such a new world bank. Unlike the World Bank and IMF which are still dominated by the industrialized countries, the UN is largely controlled by third world countries and since it is they who would benefit primarily from such a bank, it would seem more logical to expect the UN to be a more receptive forum for its introduction. Moreover, it has facilities and resources with which it might launch such a large undertaking.4

Were such a commodity currency adopted, a number of other advantages could accrue to third world countries. For example, it is recognized that interest rates for present “soft” loans to the third world are not high enough to offset the inflationary loss, and it can be inferred that a form of subsidy is being given these countries. At the same time it is also true that these countries cannot afford the interest even at present rates, low as they may be (relative to inflation). Why is this so? I suggest it is true for several reasons. One of the reasons is, as already stated, that a primary inequity between the third world and the industrialized world is that the former countries cannot monetize their commodities under the present world monetary system. A second reason has to do with the approach to Investment which has been adopted by the World Bank during the first 20 years of its existence. This policy has been to invest in large scale infrastructure systems (roads, dams, harbors, etc.) and in industries which do not “pay off” in terms of increased production except over many years. These large scale projects require enormous amounts of capital but provide very little or no immediate return. On the other hand, if investments are made literally “from the ground up”, first in agriculture and second in industry, then more rapid progress is possible without inflation. To some degree, such a policy has been recognized by the World Bank in recent years. Even so, only a small part of its investment goes in this direction. Were a policy to place agriculture first adopted, it would also have tremendous implications for the World Food Crisis.5

In order to avoid the difficulties which have attended past World Bank policies of placing its major investments in capital intensive long-range infrastructure and, in any case, so as not to duplicate these investments, the UN sponsored bank might concentrate its efforts (allocate new credits) in the rural sector, emphasizing as its first priority the small farmers and small industries in the rural areas. To accomplish this most effectively it might utilize the voluntary or non-governmental agencies which work with the UN but are independent of national governments. Such agencies are already deeply involved in rural development and many of them have helped create cooperatives and credit unions among rural populations. These organizations would be the most effective place to start making rural loans. Some World Bank projects have already utilized this channel, but it remains underused and is the most hopeful starting point for rural revitalization— linked as it often is with access to international resources of knowledge and intermediate technology.

The mechanism for such loans would be a rediscount system— creation of new credits— directly to the credit unions, cooperatives, etc. In this way, new credits would be created for short-term productive loans rather than long-term loans for which SDR’s are now being created. What this means is that assuming a low default rate (and FAQ statistics indicate that such small agricultural loans on a world basis are better risks than industrial loans) literally unlimited amounts of new credit could be issued since the short-term productive nature of the loans would offset the otherwise inflationary nature of unlimited credit.

Moreover, since these loans would increase world commodity production and since investments in the bank would be redeemable in these commodities, interest rates on these investments could be kept very low— if not eliminated. Investors, or depositors, unlike their counterparts in the World Bank, could always redeem their investment in either commodities or national currencies but, in either case, would not be losing any of their capital due to inflation. Because their investment would be “inflation proof”, they would not need, or demand, a high interest rate, since interest rates on today’s market are generally high in order to offset inflationary loss. Quite obviously low interest or no interest rates would be of great assistance to the third world countries. In fact, some securities, or bonds, could be issued by the UN Bank which like US Government E Bonds, would not carry yearly interest rates but would be redeemable in 5-10 years for principal only. Such bonds (long term loans) would be important in providing the development time necessary for new technology transfers— particularly in the field of low impact energy technology (i.e., solar, wind, hydrogen).

But the ability to issue unlimited new credit for short-term productive purposes should be emphasized as the most important of all the advantages which such a new bank would have. Not only would it be possible to issue new credits for direct crop loans, but it could also issue credit for commodity storage purposes— one of the most critical issues for the developing world. Farmers, in particular, are throughout the world handicapped by the fact that at harvest time they must sell their crops at depressed prices which always climb rapidly after harvest. Cooperatives for storing grain and other crops could obtain newly created credit from the UN bank for this purpose and thereby improve the return to small farmers virtually without risk.

Beyond local storage systems, large international storage systems for holding “buffer” stocks (in order to prevent unfavorable short-term price fluctuations) of all the basic raw materials produced in third world countries could be developed without the need to raise all the initial funds from dollar savings, or other “hard” currency, of the participating nations. Such a project is now underway within the UN Conference on Trade and Development (UNCTAD) which is trying without too much success to raise several billion dollars among both developed and developing countries for initial investment in stocks. If such a bank as is being proposed here were in effect, then the commodities themselves could be contributed by the developing world and treated in the same way as currency deposits are treated at the IMF. That is, as the commodities are deposited, new credits (in commodity currency) would be issued to the depositing countries which could be used by them as “foreign” exchange – in the same way SDR’s are now issued and used.

There are difficulties, of course. The most serious technical difficulty which has been raised whenever such a proposal for “commodity money” has appeared, is that the commodities used for redemption, which are perishable, could not be stored economically and would be expensive to maintain. This objection was raised at the Bretton Woods Conference in 1944 when a commodity money system was proposed as the alternative to John Maynard Keynes’ proposals for what eventually became the IMF. As with gold, the proposal is generally considered “conservative” and is generally disliked by the majority of economists who are followers of Keynes and who advocate that “a little inflation is a good thing”. (Today’s Keynesians may not be quite so certain that this is true. At least it is not clear that “a little” inflation can be certain to remain “a little”.)

There are, however, several possible solutions to this technical problem. For one, it is not likely that the bank would have to keep a large amount of all such commodities in storage for redemption purposes. Most likely, if redemptions were demanded, they would be requested in the form of one of the commodities easiest to store – gold, for example. Most of the reserves, therefore, could be kept in precious metals for redemption purposes. Secondly, it probably is feasible to maintain storage of most perishable commodities (grains, etc.) in “ever normal” granaries from which old supplies would be continuously withdrawn and new supplies added. In fact, the international buffer stocks already discussed and which are now being developed by UNCTAD could become part, if not all, of the reserves required. Such storage systems might be located in strategic places around the world and would be used to stabilize prices of commodities as well. Stabilizing commodity prices would insure against depressed prices to third world countries, and would also stabilize the commodity index as a monetary unit.

In addition, there are at least two other possibilities for solving the “storage” problem which would not require storage at all and which would be very inexpensive to maintain. One possibility is to use the futures or forward markets by simply holding contracts in the commodities involved. The second possibility is the use of arbitrage markets whereby contracts for commodities in transit would be held by the bank without storage cost. Since these two possibilities offer the simplest and least expensive method for “storage” during the initial period of development, they are presently being investigated and tested by a private company to determine their feasibility.

The most serious problem, however, would not be technical at all, but would be the effect and reaction within the industrialized world. Although the transfer of the responsibility for initiating an honest, non-inflationary money system from the OPEC countries to the UN would make it difficult if not impossible for the US (or any other industrialized country, or countries) to go to war in a vain effort to protect its economy, it would not obviate the disciplining effect on the industrialized world which such an action would exact. Inevitably, as the new currency became the established standard of value— perhaps the most acceptable currency in international trade— all currencies would tend to be measured by this standard. Currencies such as the dollar and the pound would be devalued as no longer acceptable in international trade— unless they were able to maintain their internal value.

To accomplish this, politicians within the industrialized world would be forced to reduce or eliminate the waste spending which presently prevails— from the production of un-necessary military hardware to proliferating bureaucracies. This disciplining of politicians and the ending of a waste-oriented society might be painful to the over-indulged members of industrialized society. But it is a discipline which is inevitable in any case, because exponential growth of waste and pollution is impossible. Only ecological disaster lies down that road as any number of writers on the subject have been endlessly repeating (Limits to Growth, et al). Better then that the discipline be imposed by economic necessity rather than ecological catastrophe, which might be irreversible (such as continuously increasing radioactive waste from nuclear power plants, or climatic changes from urban and industrial pollution).

Moreover, new hope for human life and the human spirit lie in the direction of such discipline. We will all be better off when we are forced to recognize that the end of life is not consumption, but rather in being genuinely productive in human and creative ways. Third world countries will have provided a great service if they force the industrialized world to make such a change in its attitude and institutions before  ecological disaster brings the necessary changes.

Other difficulties maybe in getting OPEC countries and third world countries to see that their own future lies in joint action, as President Houari Boumediene of Algeria has been suggesting to his partners in OPEC. If OPEC remains isolated from other third world countries it will remain vulnerable to pressure and/or military action from the US and other industrialized countries. Third world countries, on the other hand, must realize they cannot win in the game of development as long as the international monetary System is stacked against them.6

Let us assume, then, that the OPEC countries as a whole, or any combination of them, are interested in making a contribution not only to their own welfare but to the welfare of the world as suggested by the foregoing discussion – what might be the appropriate move on their part?

  1.  They might announce to the world, as soon as possible, that they are pre-pared to invest and/or contribute funds from their surplus capital in a world development program to create adequate alternative energy sources. Such a proposal might be on condition that European and other countries join with them in a proportional investment, but not conditional on the US or USSR participation. All countries, however, would be invited to join and all contributors would have easy access to the results of development programs.
  2.  Simultaneously they might announce a willingness to invest in a new World Bank, perhaps sponsored by the UN, which would denominate its loans in terms of a group of commodities, or an index, including agricultural goods produced by the third world.
  3.  At the same time, in order to reduce world tension and the threat to the economies of the industrialized world which the price of oil represents, OPEC countries could also suggest that they were prepared to accept a negotiated agreement on the base price of oil within the con-text of a bilateral arrangement with the major industrialized countries (US, European Economic Community and Japan) provided that: payments for oil, once a base price had been agreed upon, would henceforth be denominated in SDR’s as a first step, but within an agreed-upon period be denominated in an index of commodities to be determined by a world bank established under UN auspices.

Such a step would appeal not only to the American people, but the people of the world as a fair and just step. Adoption, then, of the proposals suggested could have the following beneficial effects:

  • Reduce the possibility of war in the Mideast and the ultimate danger of nuclear confrontation for which the entire world would suffer unimaginable consequences.
  • Relieve the anxiety on the part of both oil producers and oil consumers regarding the end of oil supplies by the year 2,000.
  • Relieve the anxiety, rapidly growing in the US, about the dangers and shortcomings of nuclear power as (at present) the only alternative source of energy. (Further, it should be pointed out that neither third world nor most European countries has either the capital for purchasing nuclear power plants – even if they should want them – or the capability for developing adequate alternative sources of energy.)
  • Offer hope to third world countries caught in the trap of dependence upon outside sources of “foreign exchange” and also provide a new source of direct loans at very low (or no) interest.
  • By helping to initiate such a move towards stable money on a world level, OPEC countries would not only protect their own investments against inflationary loss but would become heroes to all those people in the world who recognize that runaway inflation is as much of a disaster as world wide depression— to both industrialized and non-industrialized countries.
  • Strengthen ties with European countries which are presently almost entirely dependent on Mideast oil supplies. Such European ties could help provide resistance to US and USSR military adventurism – as well as give pause to Israeli military assumptions of US support for its own military adventures.
  • Initiate a process of disciplining the industrialized countries, Short of ecological catastrophe, to reduce waste and pollution, and begin to live within their means.



  1. It should be noted that the New York Times of May 7, 1975 carried a front page article on the adoption by IATA—the international airlines system—of SDR’s for making payment on all international flights.
  2. The most recent studies (New York Times, May 25, 1975) by a UN team of economists, mostly from the third world, unanimously reported that in the last 25 years the prices of raw materials exported by poor countries have risen at about the same rate as manufactured goods— even though oil was excluded from their studies. However, they did report that “these terms of trade were subject to substantial short-term fluctuations”. It is these short-term fluctuations— due to seasonal harvests or market variations— which often cause the most havoc with poor countries and it is partly to avoid such variations that this proposal is aimed.
  3. It may be argued that there is no absolute guarantee against the possibility of inflation under such a commodity backed system, because the issuer could, in theory, over-issue the currency just as nation states do today. It is true there is no absolute guarantee. However, two factors would make it far less likely:
    1.  There would be no political motivation involved to make over-issue attractive— even SDR’s are unlikely to inflate from over-issue since no political faction would benefit from doing so;
    2.  Redemption; although it may be argued that redemption is not likely (who would want to redeem easily transferable currency for bulky commodities— even gold?) nevertheless, the possibility or “threat” of redemption remains valid just as the threat of redemption in gold forced President Nixon to close the “gold window” in 1971.
  4. Recent proposals within the UN to try and force the World Bank to be more representative of third world interests may succeed. If so, the World Bank may become a better possibility than it is now.
  5. See “World Lilliputs Hold Answer to Famine Threat” by Edgar Owens, an official in US Agency for International Development, Washington Post, October 13, 1974.
  6. See The Debt Trap (Penguin 1974) by Cheryl Payer. She demonstrates how all countries (including Yugoslavia) which have become linked to the IMF are entrapped in continuously mounting debt from which there is no exit.

Publication By

Robert Swann

Robert (Bob) Swann was the founder of the E. F. Schumacher Society, now the Schumacher Center for a New Economics. In 1974 E. F. Schumacher asked Robert Swann to start a sister organization to his own Intermediate Technology Development Group, but it was not until 1980, when prompted by Resurgence editor Satish Kumar, that Swann organized the E. F. … Continued

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