The recent fall in the value of the rupee not only revealed problems with the world financial system, but also showed the perils of making money into a commodity, which may be one of the signposts of the capitalist system.

One reason for the fall in the rupee being counter-intuitive is the fact that the USA is having money troubles of its own, and thus the rupee’s problems reflect a greater tie-in with the USA than is readily apparent. The Pakistani economy is not as deeply tied in with the American as their close political ties would lead one to expect, and the closeness has not led to the economic relationship developing to a great extent. As the larger economy, the USA should have invaded the Pakistani, but US firms have not come into Pakistan in a big way, even though outsourcing of both manufacturing and services to the Third World has apparently been something of a US specialty in recent times.

Though Pakistan has a great enough interest in the US economy to want to sign a Free Trade Agreement with it, and has long asked for access to American markets, especially for its textiles, its primary interest has been in its currency, through which it pays for its imports, and which it earns through its exports. Paying for imports has always been crucial, but now that so many exports depend on imported raw material (not to forget power produced by plants relying on imported fuel), even exports depend on imports.

The IMF has been blamed for the recent fall in the rupee, which would imply an evaluation that the rupee is over-valued. The fall also created something of a dilemma for those who had been paid dollars for what they had exported. Should they bring back those dollars and sell them to the State Bank (through their own banks)? Ultimately, they would need rupees, not just to pay their bills, such as salaries and for the utilities they had used, but also to consume their own profits. By holding on to these dollars, and selling them only when the rupee fell even further, they would get more rupees, even though the bills remained the same.

This would make exporters of fruit or textiles into financial decision-makers. Similarly, those with a future need to pay for exports would prefer to buy dollars now, and give up their rupees, than buy later. This would increase the demand for dollars at a time when exporters were holding them back from the market. This would lead to more rupees being offered for dollars, until the stage would be reached where speculators, intent only on making quick profits, without any need of dollars, future or present, would jump into the fray.

That the State Bank of Pakistan intervened, showed that the state still has the ability to do so, but it now also seems that a defence of the rupee is hopelessly old-fashioned. At the same time, the USA is facing a crisis of its own, with a shutdown of government caused by a refusal of US Congress to pass funding legislation for government activities coinciding with an approach of the limit on public debt, which must be raised to allow the US government to borrow to fund its activities.

It incidentally is not a very good advertisement for the USA’s public finance system. Pakistan may well be always perilously close to collapse, but it is never as close as the USA now is. Another implication is that American methods should not provide an example for public finance in Pakistan. That in turn implies that, behind the advice of the Washington Consensus institutions, like the IMF and World Bank, lies failure. For example, if indeed the tax net is broadened and power subsidies ended, there is no guarantee that things will improve. If this is such good advice, why has the USA not availed it? If it has, why is it facing the mess it does?

The crisis of the USA does not affect only the US government, or US citizens, but the whole world, because the US currency, the dollar, is a reserve currency, the one in which the trade of the world is conducted. Even when payment is made in some other currency, it is according to the currency’s exchange rate against the dollar. Any default will jeopardise the entire financial system, which is what Pakistan has been exploiting in its borrowing merely to stay current with its loan repayments. Any default by the USA will render all world trade dubious. Under those circumstances, it is the dollar which should be in free fall, not just the rupee.

However, the present run against the rupee was market-driven, and even a cursory study of markets shows that they are not very rational. Especially when there is clear movement of the price in one direction or the other, there is herd behavior, with the result that if the price goes up, there is a rush to sell, and if it goes down, there is a rush of buyers. When there is an increase in the price of a ‘real commodity’, the increase is measurable in terms of money. When money itself is the commodity, price is measured by some other currency.

The rupee is measured by the dollar, and the dollar by – what? At the heart of this crisis is the fact that the dollar is not backed by anything. In other words, it is just so much paper. Originally, the paper had been exchangeable for gold, but now it is exchangeable for nothing.

 Issuing currency is one of the basic functions of the state, and after Independence in 1947, one of the red-letter days was the foundation of the State Bank of Pakistan, for the Founding Fathers recognized that unless the new state controlled its currency, it would not control anything. What they probably did not realize that the new State Bank was on the same pattern as the Reserve Bank of India and the Bank of England, and the new state was entering the same international economic system as before, one in which the value of the newly born currency would be tied to first the pound sterling (as it was then), and now to the US dollar.

The transition to the dollar came because the pound was beset by too many crises to allow it be a reserve currency without the backing of gold. (Until the 20th century, all currencies represented gold, and exchange rates were fixed accordingly.) It seems that the rupee’s troubles are also faced by all other currencies. The dollar, while still mighty, is perhaps no longer able to bear the responsibility of being the reserve currency. It must give way to another. Maybe gold should make a comeback. Gold is also a commodity, and apart from currency, is also in demand for jewellery and for certain industrial uses. Going away from the gold standard had needed two world wars and the better part of the 20th century. Going back should be much easier.

The writer is a veteran journalist and founding member as well as executive editor of The Nation.