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Gnome$ for peace- How to Stop the Attack

by Richard Douthwaite Saturday, Mar. 15, 2003 at 8:59 PM

Boycott the dollars and bring peace to the world. The more people you can persuade to join you in becoming a Gnome for Peace, the better the chance there is of weakening the dollar and the American economy by enough to prevent or limit a war.

The article that follows was commissioned by Resurgence magazine but, in view of its urgency and potential importance, the editors have decided that its publication cannot wait until the next available issue appears. It has therefore been placed on the Resurgence website, and distributed on several Internet lists. It may be reproduced freely provided Resurgence is mentioned.

Editor's note: While the ideas presented here may be of interest to readers from all nations, we wish to point out that the specific actions recommended by the author apply only to individuals and institutions outside the US who have investments in the US.

So far, the main actions open to people keen to stop the United States and Britain invading Iraq have been limited to street protests, writing letters to editors, signing petitions on the Internet or voting on a BBC website. There's one other avenue to make one's views felt which, if enough people took it up, could be very effective indeed.

The precedent is certainly promising. In 1956, after bombing Egyptian airfields and destroying its airforce, British and French forces began landing at Port Said and Port Fuad on November 4th in an attempt to seize the Suez Canal which the Egyptian leader, Colonel Nasser, had nationalised earlier in the year. The troops were making good progress moving south down the waterway, occupying both banks, and were only two or three days from reaching their objective, Port Suez on the Red Sea, when, all of a sudden on November 6th, they were ordered to halt. Less than four weeks later they began to withdraw and by December 22nd, they were all gone.

So what happened? How was the invasion stopped so quickly? The answer is that the Americans pulled the monetary plug - a technique that can now be used on them.

Britain in 1956 was in a much healthier financial state than the US is today when you consider that its exports exceeded its imports whereas America's imports now exceed its exports by a massive 50%. Nevertheless, the Bank of England was having to fight off currency speculators - the famous Gnomes of Zurich - who were borrowing pounds and using them to buy dollars. Their aim was to run down the country's dollar reserves to such an extent that sterling would have to be devalued from its fixed rate of .80 to the pound.

Such a devaluation would have been highly profitable for the Gnomes because afterwards they could have used some of the dollars they had bought to purchase enough of the now-cheaper pounds to repay their loans and pocketed the difference. Even if the Bank of England was able to resist their attack, they would not lose much because, thanks to the fixed exchange rate, they could always buy sterling to repay their pound debts at the price they had received for those they had sold - apart, that is, from the currency dealers' commission. So the most they could lose was the commission plus the difference between the interest rates they had to pay on their sterling loans and the rate they had earned on their dollar deposits. They were taking an almost riskless bet.

The Bank of England reckoned it could fight off the Gnomes' speculative attacks if it had at least foreign exchange in its war chest. By September 1956, however, as a result of the speculation its dollar holdings were slipping uncomfortably close to the danger level. The speculators knew this, of course, which caused them to redouble their efforts. Accordingly, the British Chancellor of the Exchequer, Harold Macmillan, decided that the country had to borrow a sum so large that it was bound to cause the Gnomes to back off. He asked the IMF for a .3bn. loan.

US approval was needed, however, as it would be the biggest loan the IMF had ever made and far above Britain's automatic entitlement. But when the attack on Egypt brought matters to a head by increasing the speculative attack with the result that the reserves fell sharply, the US Treasury Secretary, George Humphrey, made it clear he would not give his approval unless Britain not only obeyed a UN resolution calling for a cease fire but pulled its troops out as well.

The British Cabinet regarded giving in to the speculators and devaluing the pound as a worse fate than losing the Suez Canal, so the Prime Minister, Sir Anthony Eden, felt he had no option but to order the invasion to stop. On December 3rd, the British told the Americans that all the troops would be withdrawn by December 22nd and the full .3bn loan was approved the same day. The crisis was over and the pound was saved.

So how can this technique be used to stop the Americans in their tracks? The first thing to recognise is that the reason the US, a country with 283 million people, is a superpower, able to spend more on arms than the next 20 biggest arms spenders put together (1) is because it has been getting a massive subsidy for many years from the rest of the world. The countries that it outspends have a total population of over 3 billion people and include Russia, China, India, Iran, Israel, Britain, France, and Germany.

The subsidy has come about because the rest of the world has allowed the US to import very much more than it has exported since 1982. In that period, countries receiving dollars for the goods and services they have supplied have only spent a proportion of them on imports from the US. Most of the remainder has been loaned back to America, typically by being used for the purchase of US Treasury bills or shares in companies quoted on the US stock exchange. ,500 bn, roughly half the rest of the world's total savings, have been invested and lent in this way.

Amazingly, this huge inflow of funds has cost America nothing - so far. True, interest has been paid on the loans and dividends on the shares but both payments have been in dollars that have simply been added to the outstanding debt. The US has not had to supply anything that cost it real resources to make for the use of this massive amount of capital. Moreover, the bigger its trade deficit has been, the more dollars foreigners have had to invest and the higher they have pushed Treasury Bond prices and the Dow Jones share price index, making investment in America seem very attractive. Even more foreigners have consequently been keen to get hold of dollars to put their savings there.

Last year, the US spent. 9bn., almost exactly the amount of its trade deficit the previous year, on its armed forces. In other words, all the resources required to run the US military machine can be considered to be coming from the rest of the world rather than America itself. Some commentators realise this. In a revealing article (2) published by the U.S. Naval Institute in January 2002, Professor Thomas Barnett of the US Naval War College, wrote: "We trade little pieces of paper (our currency, in the form of a trade deficit) for Asia's amazing array of products and services. We are smart enough to know this is a patently unfair deal unless we offer something of great value along with those little pieces of paper. That product is a strong US Pacific Fleet, which squares the transaction nicely."

At the moment, the US trade deficit is running at much higher levels and America is having to borrow around .25bn every single day. So the way to stop George Bush's war machine in its tracks is not only to refuse to lend it its daily bread but for everyone with savings invested in the US to take their money back. Very few of us have direct investments in America, of course, but anyone who does should sell them immediately and repatriate the proceeds. If they fail to do so they will be complicit in whatever happens.

People saving for their retirement through a life assurance company or some other financial institution will almost certainly have indirect investments in the US. The problem is to get them out. All they can do is to write to the company urging it to rapidly reduce the share that transatlantic investments make up in its portfolio because international outrage over Iraq is likely to cause a sharp fall in the value of those investments and of the dollar itself. The fact that they are personally against a war and don't want to be invested in it will cut little ice.

They could add, however, that several American commentators expect the value of the dollar to fall by at least 25% when the market makes its inevitable adjustment to correct the present trade gap. For example, as long ago as 1999, Catherine L. Mann, a professor at Vanderbilt University, investigated (3) current account corrections in industrialised countries in the previous two decades. She concluded that a current account deficit of over 4.2% of the Gross Domestic Product (GDP) was unsustainable and that a large and rapid fall in the value of the US currency was likely within two or three years.

"The US cannot live beyond its long-term means forever, nor will US assets always be so favored by global investors" she wrote in an article (4) 'Is the US Current Account Deficit Sustainable?' published by the IMF in March 2000. "When a change in investor sentiment comes, it could be dramatic. What would happen if the dollar depreciated by a significant amount, say 25 percent?"

Caroline Freund of the Federal Reserve researched (5) the same ground as Mann and also found that the US deficit was unsustainable except that she reckoned that the markets normally bring these corrections about when the deficit rises above 5% of GDP rather than 4.2%. It is now at the 5% level.

The timing might therefore be right to try to prevent the war by using a financial strategy almost exactly the same as that used by the Gnomes of Zurich half a century ago. Go to your bank and tell them that you want to sell ,000 (or ,000 or as much as you can afford) in three or six months' time and that you would like to fix the exchange rate now. The bank will quote you the rate at which it will purchase those dollars from you and give you a contract to that effect. This is a perfectly standard banking arrangement. Businesses expecting payments in foreign currency do it all the time. If your credit record is good, you won't have to pay anything at all.

Should the bank be unable to match your sale of dollars in three months' time with an order for dollars from somebody wanting to buy them then, it will borrow the dollars you intend to sell from a bank with which it has links in the US and sell them now. It will then lend out the proceeds of the sale until it has to pay them over to you in exchange for your dollars, which it will use to pay off its American loan. In other words, through the agency of your bank you will be doing exactly what the Gnomes did in 1956 - borrowing dollars in the US, selling them, and hoping to repay the loan at a profit if the dollar falls in value.

You get the dollars you need to hand over to the bank in three month's time by buying them from the bank at whatever rate is ruling on the day the contract falls due. If thousands upon thousands of ordinary people join you in protesting in this way, the value of the dollar will be forced down over the next few weeks as banks borrow dollars in the US and sell them on behalf of their customers. So, when the three months are up, the chances are that you will be able to buy the dollars you need for less than the price you agreed with the bank for selling them. In other words, if this form of direct action becomes wildly popular or the dollar falls for other reasons you should end up with a small profit. Of course, if the dollar stays where it is you will show a small loss and in the unlikely event that it rises, a rather bigger one. Your assessment of how much of a loss you can risk having to shoulder will obviously determine how many dollars you can sell.

In 1956, two big battalions stopped the British - the US government and professional speculators employed by the Swiss banks. This time, if the strategy I've outlined above is taken up, it will be more of a guerrilla action and the outcome will depend largely on the numbers of people who get involved. But we may just find that we have powerful allies fighting beside us. For example, in order to minimise their dependence on the dollar a group of Islamic countries led by Malaysia is introducing the Islamic gold dinar later this year for trading amongst themselves. Moreover, several OPEC countries are considering quoting the price of oil in euros rather than dollars. And as long ago as last August, the Financial Times reported that the Saudis had sold an estimated 0bn. of their US assets. The Kuwaitis have also withdrawn funds from America having decided that, despite the threat of a war next door spilling over the border, it is better to invest at home.

Within the past few months the dollar has already lost 26% of the maximum value it once held against the euro and a smaller amount against the pound. Our small gestures coupled with those of bigger players could continue this fall and, just as there was a virtuous circle on the way up, with the increasing US trade deficit providing foreign investors with extra funds to push the dollar and Wall Street higher and higher, there will be a similar effect on the way down. Falling stock markets and a depreciating dollar caused by some investors moving out will panic others into getting out too, thus accelerating both markets' decline.

Consequently. the more people you can persuade to join you in becoming a Gnome for Peace, the better the chance there is of weakening the dollar and the American economy by enough to prevent or limit a war. That's the real profit. Of course, if investor sentiment does really change - helped in part by your actions - virtue would not have to make do with merely being its own reward. Besides peace, it would bring something of a financial bonus too.

Richard Douthwaite, Cloona, Westport, Ireland .

Richard Douthwaite is an economist living in Ireland. He is the author of The Growth Illusion: How Economic Growth has Enriched the Few, Impoverished the Many and Endangered the Planet, The Ecology of Money, and Short Circuit: Strengthening Local Economies for Security in an Unstable World.


(1) See

(2) 'Asia: The Military-Market Link' The U.S. Naval Institute, January, 2002 pp. 53-56. See Downloaded March 2002.

(3) Is the US Trade Deficit Sustainable? Institute for International Economics, Washington DC, 1999.

(4) See Finance & Development, Vol. 37, No. 1, March 2000. Can be downloaded from

(5) 'Current Account Adjustment in Industrialized Countries, ' International Finance Discussion Paper No. 692, Board of Governors, Federal Reserve Board, Washington DC, December 2000. Available at

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