Greenback supremacy 1944 – ? (Meanders on money)

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 20^th 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 (1/30^th) 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 21^st 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)

http://www.counterpunch.org/2003/04/21/an-interview-with-michael-hudson-author-of-super-imperialism/