FOR long one could divide the world’s currencies into three distinct categories: (i) the leading currency, typically belonging to the leading imperialist power,in the present case the United States, which was considered “as good as gold” by the world’s wealth-holders; (ii) other metropolitan currencies in terms of which the world’s wealth-holders also held their wealth, but which, precisely by virtue of not being considered “as good as gold”, had to maintain a certain stable value vis-à-vis the leading currency through the pursuit of appropriate macroeconomic policies, including contractionary policies, in their respective countries; and (iii) third world currencies which, irrespective of the macroeconomic policies being pursued, were generally expected to depreciate over time in their relative value vis-à-vis the above two sets of currencies, both in nominal and in real terms (i.e. even when the differential rates of inflation between those countries and the metropolitan economies were taken into account), and in terms of which therefore wealth-holders would not like to hold their wealth; the local wealth-holders in such countries no doubt did so, but this was because of either inertia or coercion (i.e. the existence of exchange controls which put restrictions on their shifting their wealth out of these countries).

Such currencies therefore did actually tend to depreciate over time vis-a-vis the leading currency, which in turn justified the expectation that they would secularly depreciate, and therefore set up a tendency towards a vicious downward spiral in their relative values. The world capitalist economy thus operated in a manner where the tendency was for wealth-holders, including third world wealth-holders, to shift their wealth to metropolitan currencies and metropolitan locations if they could, i.e. unless they were prevented from doing so (which is why exchange controls were considered essential for third world economies).

To illustrate the point, the value of the rupee just before the 1966 devaluation in India was Rs 5 to a US dollar and with that particular devaluation it became around 7.5. Because India pursued a fixed exchange rate policy with only occasional devaluations, this value had reached only around 13 on the eve of economic liberalisation when it was devalued to 20, before being allowed to float; it is now around Rs 65 to a dollar. No advanced country’s currency exchanges against the dollar today at thirteen times what it did half a century ago, which underscores the difference between the situations of third world and first world currencies.

One implication of this tendency towards a secular depreciation of third world currencies was that their labour was being continually depreciated vis-à-vis the labour of first world economies. Hence ironically the shifting of wealth by the third world rich from their own countries to “safer” places in the metropolitan centres had the effect of reducing the worth of their own countries’ labour vis-à-vis that of the metropolis, which meant a secular worsening of the relative prices of their products. This is one reason why even to this day several third world governments, including in India, have at least some residual restrictions on the shifting out of wealth by the local rich: the rupee for instance is not a fully convertible currency even now.

This entire picture however is changing. One consequence of the protracted world economic crisis has been that the interest rates in the advanced capitalist countries have been pushed down to near-zero levels in a bid to revive those economies; and this has meant a flow of capital from those economies to certain third world economies, including India, where interest rates are much higher. Such flow has taken the form of both equities and loans. Some of this borrowing by such third world countries is contracted in foreign exchange and some in local currency. Likewise, some of it has come to governments, and some to private and public sector corporations. What all this has meant however is that metropolitan wealth-holders, unlike in the past, have now started holding some of their wealth in the form of third world currencies or currency-denominated assets.

This constitutes an important structural change within imperialism because it implies that metropolitan wealth-holders cannot now be indifferent to the depreciation of such third world currencies. It is not just the local wealth-holders who lose out in terms of the dollar value of their wealth when the local currency depreciates, but also metropolitan wealth-holders. And since even when a currency, like the rupee, is not fully convertible, metropolitan wealth-holders are nonetheless allowed under the neo-liberal dispensation to take out their funds when they wish, any depreciation of the local currency sets up an avalanche of capital flight and also a spate of domestic insolvencies (as several local firms have borrowed in foreign exchange to finance the holding of local currency assets).

This basically implies that exchange rate depreciation is sought to be prevented by the local governments. The currencies of these third world countries, of whom India is a prominent example, like the currencies of non-leading metropolitan economies such as the Eurozone and Japan, have to be maintained at a stable relative value vis-à-vis the US dollar. The fact that, for the last decade almost, the value of the rupee has hardly depreciated vis-à-vis the US dollar, unlike in the past, is indicative of this change in the scenario.

This change has two important implications, one obvious and one not so obvious. The obvious implication is that since the usual instrument which governments employ when the economy is faced with a balance of payments problem, namely an exchange rate depreciation, is taken out of their hands, they now have to rely much more on other instruments, such as domestic demand compression and wage-deflation (i.e. a cut in money wages) to achieve the same result. But, even though both exchange rate depreciation and wage-deflation have the effect of squeezing the working people, the former acts indirectly while the latter acts directly.

This implies several things (let me for simplicity here ignore any consideration of general demand compression through other means): (i) a 10 per cent exchange rate depreciation does not necessarily mean a 10 per cent fall in real wages within any given time period, while a 10 per cent wage deflation does; (ii) for this very reason, a 10 per cent exchange rate depreciation arouses less immediate resistance from the workers compared to a 10 per cent wage-deflation; because of this the imposition of a wage-deflation is invariably accompanied by an attack on trade unions to break this resistance.

One can cite a famous historical illustration here. During the First World War, Britain had gone off the Gold Standard, but returned to it in 1925 at pre-war parity, under pressure from the powerful British financial interests which wanted such parity. But the type of colonial prop that had been available to Britain in the pre-first world war years was no longer available after the war (Japan for instance was encroaching significantly on Britain’s Indian market), so that the pound sterling was over-valued at the pre-war parity, and Britain started facing balance of payments problems. As a result Britain tried to impose a wage-deflation on its workers which would make its goods cheaper abroad and also reduce domestic absorption, thereby improving its balance of payments. This however gave rise to the famous General Strike in Britain in 1926, within months of its return to the Gold Standard. Thus, while both an exchange rate depreciation and a wage-deflation have the effect of squeezing the working people, the latter is a direct measure which has a directly political character.

The less obvious implication of the fact that metropolitan wealth-holders now hold wealth in third world currencies, which rules out exchange rate depreciations, is that wealth-holding decisions of such wealth-holders now have a direct bearing upon third world trade union rights and hence upon third world democracy. If metropolitan wealth-holders start shifting their wealth out of a country, then the country in question has to impose a wage-deflation by attacking trade unions (apart from enticing metropolitan capital to stay on by offering domestic assets for a “song”, which is a case of “denationalisation” of national assets). What is more, if the US raises its interest rate, then this too threatens to precipitate a wage-deflation in a country like India to stem a capital flight, for which an attack on trade unions, on the democratic rights of the workers, and on democratic structures generally, becomes a necessary accompaniment (apart from “denationalisation” as already mentioned).

This new situation differs from the earlier one in two important ways: first, in the absence of any significant metropolitan wealth holding in local currency assets, ie when only the third world wealth-holders held their wealth in local currency assets, they were to an extent subject to some degree of control by the third world State; but the third world State within a neo-liberal regime has little control, even in the absence of currency convertibility, upon metropolitan wealth-holders. Second, exchange rate depreciation as an instrument was usable earlier which obviated to a degree a direct attack on workers and hence a direct assault on trade unions and workers’ political rights. This becomes impossible now.

In countries like India in short the changes occurring within the structure of imperialism serve to strengthen the authoritarianism that is already evident. The demand for the introduction of “labour market flexibility”, a euphemism for an attack on trade unions, is sure to gather momentum in the days to come, and the Hindutva government, given its bloody-mindedness and its utter lack of comprehension of the pitfalls of neo-liberalism, is sure to become a willing instrument for fulfilling this demand.