In
1944 at Bretton Woods, Treasury officials from Washington, London and
forty-two other capitals agreed to implement a monetary system based
on the US dollar, backed by a Gold-Exchange Standard and supervised
by the International Monetary Fund. During the war the United States
had granted credit for arms and food to its two fighting allies, the
UK and the USSR. After 1945 this credit was extended to the
vanquished enemies and to liberated Western Europe. The US was the
only belligerent nation that had not suffered any war damages at
home. It was producing half the world’s wealth and possessed most
of the existing bullion. All these reasons seemed to justify the
Bretton Woods decision. Keynes was a member of the British
delegation. He was a fervent adversary of the gold standard but his
caustic comments on buried bank-notes were ignored, $35 equalled a
troy ounce of 24 carat gold. That the dollar should be the standard
of world currency was more logical. As universal creditor the US had
the arguable right to control the value it received for credit it was
granting so generously. Except that monetary power is just like any
other power, a lot of it can do a lot of harm.
After
the high inflation of wartime, pegging the dollar to gold had a
stabilising effect on prices in the US and in occupied West Germany
and Japan. Elsewhere currencies were constantly being depreciated.
Then the war in Vietnam, social unrest and a growing trade deficit
brought the dollar down from its golden pedestal. Its
non-exchangeability was decided unilaterally by Nixon in 1971 and all
currencies were given over to market forces. This set off a period of
inflation even stronger than the one that had occurred in the 1940s.
However, dollars kept their pre-eminence as the currency of reference
for trans-national exchanges, notably on the crude oil market. Except
that America could print as many as it needed, whereas the rest of
the world had to trade for them. Nixon also initiated the practice of
balancing the trade deficit with the sale of Treasury bonds (1), a
foreign possession of Federal debt that makes debt reduction by
inflation so problematic to-day.
The
dollar was recognised as the standard for currencies because the US
was the world’s creditor. Now that it has become the world’s
debtor that reasoning no longer holds. In fact it is reversed and, as
the saying goes, whoever pays the piper usually calls the tune. And
yet the US still has by far the world’s largest economy and
military apparatus, with no other nation anywhere near to taking up
the relay. A decade ago the European Union professed such an ambition
when it inaugurated the euro. But the borrowing spree that followed
was such that the monetary union’s future has become troubled and
uncertain, and its currency is in no position to offer a global
standard. Some see the yuan as a possible contender, or a mix of
BRICS currencies, and who knows what might be in a quarter or half a
century from now. For the time being, however, there is no realistic
alternative to the dollar’s dominion.
The
dollar imposed its empire for the imperial purpose of drawing wealth
from the periphery to the centre. But empires always overstretch
themselves and, at some point, the cost is greater than the gain. To
be the intermediate measure of all exchanges the dollar multiplied
again and again, to such an extent that its numbers were increasingly
disconnected from the scale of its homeland economy. With the
introduction and rapid expansion of the derivatives market, dollar
multiplication went wild and opened the flood-gates of global credit.
Then, in 2008, began the sub-prime backlash. Lehman fell and the
others were bailed out. But the bailing out was and is being done
with Federal Reserve money, real cash, not the electronic mouse-click
stuff that comes and goes. The inconsequential mass of derivative
credit is being replaced by money that is accountable and can
actually buy things. The dollar’s virtual omnipresence is
materialising in large quantities that are being lent to the
Treasury. By the intermediary of banks, the Federal Reserve is
creating money to pay for government deficits. It is paying the banks
good money for equity that may turn out to be worthless, and the
banks are passing it on to the Treasury for bonds that may turn out
to be worth less. A lot of money is being spent on paper whose market
value is completely unbalanced by this massive demand.
Monetary
creation is sustaining government spending, which in turn is fuelling
demand with contracts, subsidies, salaries, welfare and tax-returns.
At the same time, corporate profits that result from this demand are
going on the stock and commodity markets. There is very little more
or new production capacity on the way and existing capacity is
contracting in many sectors. The Federal Reserve is making large
amounts of money whose only apparent effect is to bloat profits and
share prices. When the stock market slumps, this year, next year,
soon enough, the destruction of value will not destroy the money.
Stock market speculation is mostly driven by written on/written off
credit, only small investors use and lose the real money that pays
the bonuses. The surge of Federal cash being pumped into the market
bubble cannot disappear when the bubble bursts. It will still be
around at a much depreciated value.
The
dollar has built a global structure that has no substitute. The
foundation was cash but the rest was increasingly debt. And that
debt’s tipping point has probably been reached, with the weakest
elements falling off as a portent of things to come. The Federal
Reserve, along with other central banks, is trying to compensate
failing credit by creating money. But the devious way chosen to
circulate it has resulted in a stock market boom and large money
reserves held by corporations. Federal intervention has maintained
rates of profit. How long can it continue to do so, and what happens
if it stops? As profits (rent, interest and royalties) are the only
motive for production, if they drop below a certain level it stops.
As the need for intervention increases, government has to reduce some
spending to spend elsewhere. Contracts and subsidies get more,
whereas salaries, welfare and tax rebates get less. Consumer demand
is reduced, and arms, security, agro and energy receive the
difference. Treasury debt is keeping production out of the red. But
it has to favour some sectors of production and disadvantage the
rest, which brings to light the divisions of capital.
In
“Fascism and Big Business” (1939), the historian Daniel Guerin
describes the installation of totalitarian regimes in Italy and
Germany, from 1919 to 1938. In the early stages he notes the
distinction between different components of property, landowners and
big business (mining and metallurgy) on the one hand, and utilities,
services, developing industries such as chemistry, and small business
(confection and retail) on the other. The first group is for a
confrontation with labour. They hire armed thugs (sturmabteilung,
arditi) to attack public meetings, break-up strikes, ransack union
offices and murder labour leaders, and they fund Mussolini’s
Fascist Party in Italy and Hitler’s National-Socialist Party in
Germany. The second group favours class cooperation because the
labour it employs is familiar and is part of its customer base. A
section of capital is reactionary and the other is liberal, but both
obey the rule of profit. When profit gets scarce, they come into
conflict and vie for control of government and its resources. The two
parties joust for power. But the liberals cannot contest the rules of
profit and dare not arm labour, whereas the reactionaries have no
such qualms. They encourage demagogues and have recourse to organised
armed groups. And it is their parties that finally take over
government.
Guerin
studied a crucial period of 20th century history at the
time it was taking place. After the profitable expansion of WW1,
capitalism was in trouble and wanted to take back the concessions
made to labour during and just after the war. Profits had plunged and
only the state could bring them back. So labour was reduced to a form
of slavery by torture, murder, indoctrination and Thought Police. And
big business became totally dependent on government contracts and
subsidies. The total state was in place. The servant of capital had
become the master. The strutting, the screaming and the riding boots
of the 1930s have become caricatures of tyranny, but they were
hideously real at the time. And the circumstances that brought them
into being have a lot in common with unfolding events to-day. Profits
are dwindling and governments are bolstering them with wealth taken
from welfare and wages. Private security companies staffed by
ex-soldiers are numerous and active. Labour unions are harassed and
taken to court when they do not consent to the demands of capital.
Laws are passed that repress protest. The media brain-wash and
Thought Police keep watch on internet. On the other hand, the world
is a completely different place. Nations are tied together by
financial, commercial and cultural bonds, and one of them overshadows
the others. As for booted tyrants, even their more recent emulators
with sunglasses have been made redundant. With global capital, the
story line may be unchanged but the script will be completely
modified.
Empires
are sometimes perceived as stable structures, for example the so
called pax romana. Historically they expand and contract, with the
briefest of pauses between. Modern capitalism has expanded constantly
since its conception at the dawn of the Industrial Revolution. But,
having submitted the whole planet to its rule, it has nowhere left to
go (the moon, Mars?) and will necessarily contract. Whenever a
political empire contracts, another will expand to take its place,
but capitalism’s empire is only a concept, where everything is
bought and sold, where wealth can accumulate infinitely and where
workers possess little more than their labour power. Having conquered
the whole world, capitalism has left no space for an alternative.
Just as there is nothing to replace the dollar, there is no
substitute for capitalism. They cover the planet and can go no
farther. But the accumulation of capital is a Ponzi scheme that
collapses if it stops growing. And when governments start bailing out
the system, it is a sign of imminent disaster. Guerin notes that the
Italian and German governments paid their spending spree on
infrastructure and armaments with credit granted by banks, an
inflationary monetary creation. When this devalued their currency and
inflated their trade deficits, they decided to go after the nation’s
savings and obliged everyone to buy Treasury bonds. The Cypriot “hair
cut” looks like an up to date version, and could be a model for the
future.
By
the mid-1930s Italy and Germany had reconstructed the war economy
they had known twenty years earlier. They were isolated and heavily
armed, and they inevitably became aggressive. Mussolini sent troops
to ravage Ethiopia and Hitler marched his soldiers into Austria,
Czechoslovakia and then Poland, which set off the general massacre.
Both had units fighting for Franco in Spain. However, none of this is
relevant to-day. Arming for war has known no let-up in living memory,
isolation would be catastrophic for a developed economy and invading
armies have become commonplace. Capital needs strong government, to
keep labour in its place and transfer wealth by taxes and
inflationary paper. But war gives the executive exceptional powers,
and total war… Governments start giving orders to capital, and
threaten to nationalise it. In resolving the threat from labour,
capital created monsters of total bureaucracy. After a peak in the
1940s, government regulation was reduced in line with the declining
menace of war, with a trough in the 1990s. Capital had hardly brought
government back to heel that it had to call for help and protection.
Government is capital’s guard dog that sometimes bites the hand
that feeds it.
In
its struggle with government to regain the control of wealth,
capital’s main offensive was on taxes. One administration would
reduce them, and their successors would have to choose between
putting taxes up again and reduced spending, an impossible choice
that was resolved by borrowing. For a time all went well, largely due
to growth driven by digital technology. Then, as the novelty became
the mainstream and its induced growth petered out, debt became a fast
growing problem. For the time being governments are still at the
first stage of credit and monetary creation. This has its limits
because it devalues currency and inflates prices. The next step is to
play with the nation’s savings. But governments will have to muscle
up before they move against the middle class.
Capitalism
is in trouble. Its expansion has slowed down. The basic tenet of
“more to-morrow” that keeps the wheels of profit turning is
losing credibility. More than ever, capital needs government
collaboration to squeeze out the last drops of wealth held by the
nation. Will the people allow this? And, considering its likelihood,
what happens afterwards? Producing lots of weapons and invading
countries is already the norm, so that the past does not bring much
light. If there is no profit, the machine grinds to a halt. And
profit is the fruit of growth and expansion. But both are at a
standstill and all the piggy-banks are empty. And there is a pile of
debt that gets bigger by the second. Can the dollar collapse and
bring all other currencies down into the vortex? Or will it hold out,
as others fall off and drop into chaos, and be the last standing?
(Texans are talking of leaving the Federal Reserve and having their
own currency based on bullion, which does not bode well for the
second possibility). When currency is devalued the price of
necessities rises, but the price of most other things cannot because
there is no demand. There is a swing on the equity market from bonds
to shares. But, as many companies have doubtful futures, money also
goes to commodities, especially the most convenient of them, gold.
During
the previous period of high inflation, 1973 – 1982, the dollar lost
60% of its purchasing power. The beginning coincided with the
withdrawal from Vietnam and the OPEC oil embargo. It was a period of
sluggish growth and of historically low levels of Federal debt,
around 35% of GDP. It ended in a recession (‘82/’83) and was
followed by the Keynesian Reaganomics of tax cuts, budget deficits
and Treasury bond emissions. The most obvious correlation for the
period is between inflation and the price of oil. In 1973 oil prices
multiplied by three, then they fell back a bit but doubled in 1979,
and only returned to their pre-1973 levels in the mid-1980s. However,
if the price of oil caused inflation back then, why did the rising
price of oil a decade ago not have the same effect? And rising oil
prices could be the consequence of inflation instead of its cause.
Anyway, why were they connected then and not now? What seems more
likely is that the Treasury was rolling over fast growing amounts of
credit and inflating the money supply. It then changed tack and went
after the world’s savings, which did not modify the money supply.
The only trouble was that the rates of interest on ten, twenty and
thirty year bonds were much higher than on monthly notes. And the
increased interest meant even more borrowing.
Capital
is floundering again and clutching at straws. Central banks are
pumping money into the system, but not fast enough to compensate
failing credit. To-morrow’s money is exchanged for to-day’s
money, credit for cash, without a discount and in phenomenal
quantities. But future money should stay there. Bringing it forward
to the present disrupts the flow of time and upsets the delicate
balance of value. Over the last two decades capital has accumulated
at record rates, investing the unusual profits generated by
increasing productivity, and obliging the rest of society to make do
with credit. But credit is volatile and expands much faster than the
consumer demand it fuels. And being immaterial it can disappear as
easily as it appeared. Banks were encouraged to grant credit to
compensate the drain of money towards speculative and productive
investments. The amount of credit grew quickly, as it does in these
circumstances, and bankers no longer knew who they were granting it
to. They leveraged as much as they could (x30) and finally realised
they had gone too far, so contraction followed expansion. When credit
is not renewed money changes hands, but money was scarce and many
debtors had to default. These defaults quickly outweighed the measly
(1/30th) reserves the banks possessed to guarantee the
credit they had granted. Some went out of business and most others
were put on life-support by their central banks.
The
future looks grim and probably will be. Demagogues will promise easy
solutions where there are none. Capital will try to save itself by
fair means and foul, and it has shown in the past what it is capable
of. Labour’s only chance (humanity’s?) is union and association
with the middle class. An unrealistic hope, with 21st
century neo-tyranny already shaping up, and with working people as
divided and their liberal leaders as undecided as ever. Anyway, the
decision stage has probably passed and unfolding events will run
their course inexorably. It might be time, however, to imagine the
world that could be built after the big crunch. Something that is not
just more of the same. A world where humans are not the slaves of
power and wealth, a bit more Utopia and a lot less free for all after
profit. Meanwhile, it looks like a car crashing in slow motion. Will
it just be crumpled up, or will it burst into flames?
1.
By going off the gold standard at precise moment that it did, the
United States obliged the world’s central banks to finance the U.S.
balance-of-payments deficit by using their surplus dollars to buy
U.S. Treasury bonds, whose volume quickly exceeded America’s
ability or intention to pay. All the dollars that end up in European,
Asian, and Eastern central banks as result of American’s excessive
import-imbalance, have no place to go but the U.S. Treasury. Because
of the restrictions placed on the central banks_ there is no place
else for this money to go_these countries were forced to buy US
treasuries or else accept the worthlessness of the dollars received
through trade. (Standard Shaefer)
