The American Empire and the Evolution of the International Monetary System
As we have seen, the law of uneven development as it manifests itself under capitalism is rooted in the fundamental laws that rule capitalist production. (1)
The law of the uneven development of capitalism means that capitalist production in one country will develop with a vigor that far exceeds the development of other countries engaged in capitalist production. But in the next historical period, the country that was developing its capitalist production with exceptional force begins to decay while another country—or group of countries—develop their capitalist production with great vigor, which in turn will be doomed to decay in the following historical period.
At the very dawn of capitalist production, the Italian city state of Venice was the leading capitalist power. Then came the turn of the Netherlands, followed by Britain and now the United States. During the 20th century, the United States evolved into a world-spanning empire with military bases around the globe.
The American empire commands military power that dwarfs any potential competitor. As Mao-Zedong bluntly put it, (political) power grows out of the barrel of a gun. And indeed, America’s unchallenged military power—the gun—translates into unprecedented political power. (2) This is what we mean by the American empire, or “the Empire” for short. But “the gun” depends on the ability to produce “guns,” and the ability to produce guns reflects the development both relatively and absolutely of the productive forces.
The rise of the American world empire
After World War II, there was only one major attempt by other imperialist countries to defy the American empire. This occurred during the Suez crisis of 1956. In that year, the new nationalist government of Egyptian President Gamal Abdel Nasser had nationalized the British- and French-owned Suez Canal Company.
Britain, France and Israel then invaded Egypt without the permission of the United States. The U.S. ordered the British, French and Israelis to immediately withdraw from Egypt. To show its muscle, the U.S. threatened to withdraw support from the British pound unleashing a short-lived run against the pound and even made a few threatening military moves against British forces in the Mediterranean. Britain, France and Israel got the message and immediately withdrew from Egypt.
Britain and France, though nominal victors in World War II, found out the hard way that when it came to defying the power of the United States—in this case, for utterly reactionary reasons—they were no more able to act independently than the defeated axis powers—Germany, Japan and Italy—were. In the wake of Suez, Israel lost its ability to play the United States against Britain and France like it was still able to do to a certain extent during its “war of independence.” Instead, it found that all its major war “initiatives” were subject to veto by the United States.
A new wave of expansion of the military and political power of the Empire was initiated by the rise of Mikhail Gorbachev to power in the Soviet Union. The destruction that quickly followed of the Soviet Union and its Eastern European allies removed the one force that checked to a certain extent the unbridled military power of the United States. (3) NATO, the chief military arm of the American empire, was brought to the very borders of Russia proper.
American empire and domestic economic decay of the U.S. economy
When World War II came to an end in May-August 1945, the United States was at the peak of its relative industrial and financial power. According to Melvin P. Leffler, the United States had three-fourths of the world’s invested capital. In 1940, the U.S. had two-thirds of the world’s oil reserves, while the Middle East had only 5 percent. The better part of agricultural production was also located in the United States. According to Leffler, the U.S. GDP was five times that of the United Kingdom, the second most powerful imperialist country. The U.S. also had two-thirds of the world’s gold reserves, and that’s not counting the portion of European gold reserves that were kept in the United States for “safekeeping.” In 1945, U.S. domination was solidly rooted in the sphere of material production, military power and finance. (Melvin P. Leffler, “Cold War and Global Hegemony, 1945-1991”)
Bretton Woods establishes the world monetary system of the American empire
In 1944, with the defeat of Germany and Japan clearly in sight, an international conference of the victorious “allied” powers was held in Bretton Woods, New Hampshire. Given the emerging balance of military and thus political power, it was inevitable that the United States would dominate the post-World War II monetary system even more thoroughly than Great Britain had dominated the classical international gold standard in the decades preceding World War I.
Not surprisingly, the new international monetary system that emerged out of the Bretton Woods conference was essentially an international extension of Roosevelt’s Depression-era reforms of the U.S. domestic monetary system. Just like was the case under the classical gold standard, the U.S. dollar was defined in terms of a given weight of gold bullion, namely 1/35th of a fine troy ounce of gold. However, under the Bretton Woods System, unlike the case under the classical gold standard, the U.S. did not coin gold. (4)
Other currencies were defined in terms of their exchange rates with the U.S. dollar. These rates were fixed but were subject to renegotiation either down against the dollar—devaluation—or up against the dollar—revaluation. There was, however, no provision to change the quantity of gold bullion measured in terms of weight that was defined as a dollar.
The U.S. Treasury promised to redeem every $35 presented to it by either foreign governments or central banks in one troy ounce of fine gold bullion. For this system to work, the price of gold bullion on the London-based international gold market had to be kept near $35 an ounce. If it were allowed to rise significantly above $35 an ounce for a prolonged period of time, governments and central banks would have every incentive to exercise their rights to cash in their dollars for gold at the $35 an ounce rate and either sell it at the higher dollar price on the international gold market or simply hang on to the gold.
As we explained elsewhere, this new monetary system was in long-term contradiction with the growing consensus of economists and policymakers that the general price level must never again be allowed to fall. Before World War II, even mild recessions had been marked by falls in the cost of living. As a general rule, the more severe the recession the greater was the fall in prices. Economists and policymakers believed that if they could prevent prices from falling, they would avoid serious depressions in the future.
Avoiding deep depressions with their mass unemployment was viewed as especially important in light of the victory of the Soviet Union against capitalist Germany combined with the greatly strengthened position of the Communist Parties and the workers’ movement in general after the war.
However, unlike the classical international gold standard that had dominated the international monetary system between the late 19th century and the outbreak of World War I in August 1914, the new system had a built-in contradiction.
As prices rose, they would inevitably reach levels that not only reduced the purchasing power of gold but discouraged its further production. Or what comes to exactly the same thing, the market prices of commodities would once again rise above their labor values. This would lead to a new global gold shortage and eventually a “run” on the U.S. dollar. At that point, the policy makers would have to either abandon the policy of never allowing the general price level to fall or abandon the definition of a U.S. dollar as 1/35th of a troy ounce of fine gold.
However, unlike the situation after World War I, the post-World War II world was awash with gold. While the years before World I had been marked by rapid capitalist economic growth and rising commodity prices that had more and more discouraged gold production, the Depression had in contrast led to falling commodity prices and record levels of gold production. (See here and here for why this was so.)
In addition, the massive disruption of expanded capitalist reproduction that the Depression represented had caused huge amounts of money to fall out of circulation and accumulate in idle hoards stored in the U.S. banking system. The Second World War also suppressed expanded capitalist reproduction. Between 1929 and 1945, expanded capitalist reproduction had been greatly curtailed or suppressed altogether by first the Depression and then the War.
Therefore, relative to the ability to produce, as World War II ended, the world was awash in gold, or as the economists say, liquidity. With so much liquidity, there was a huge amount of potential purchasing power, which was to be progressively mobilized as normal expanded capitalist reproduction resumed after the war.
These conditions meant that a really serious crisis of overproduction would not occur for many years. Instead, the world market was about to enter into one of the “sudden expansions” that have marked the history of the capitalist mode of production since the 19th century. This was to have huge consequences for the development of the world political situation after World War II that caught many Marxists of the time off guard. (5)
The Bretton Woods System also established a series of U.S.-controlled international institutions to ensure continued U.S. financial domination as well as guard against a new major economic crisis. One of these institutions, which remains very powerful today, is the International Monetary Fund, or IMF. (6) The leading capitalist nations paid money into this fund, which was effectively controlled by the U.S. Treasury.
Suppose a country other than the U.S. faced a negative balance of trade and payments. Under the old international gold standard, a country would either have to raise interest rates to attract gold from abroad or face a contraction of banking reserves and credit domestically. If the latter happened, the result would be recession and possibly financial panic.
When a gold drain in one country led to a recession in that country, it would import less and export more as the domestic capitalists scrambled to replace lost sales at home with increased exports abroad. It would thus “export” its trade deficit, and its gold drain would also be exported to another country—or group of countries. In this way, a recession would begin in one country and then spread around the world.
Under the Bretton Woods System, a country facing a trade deficit and consequent drain of dollar or gold reserves could turn to the IMF for a short-term loan. Just like the ability of central banks to issue additional banknotes not backed by gold had generally prevented bank runs in the late 19th century and early 20th century—except for the United States, which didn’t have a central bank—it was hoped that the ability of a country to borrow dollars from the IMF would prevent runs against currencies.
The aim was that by preventing runs against currencies recession could either be avoided altogether, or if a recession did break out in a given country, it could be contained there before it engulfed the globe. If a country experienced a major drain of its reserves that a short-term loan from the IMF was not able to stop, it was allowed to devalue its currency against the dollar as an alternative to raising interest rates.
By devaluing its currency, the country would reduce the wages of its workers in terms of U.S. dollars. Since its capitalists would be paying its workers less for their labor power in U.S. dollars, the capitalists would gain an advantage on both the home market and world market, perhaps allowing them to correct a negative trade balance without a recession. Since as we have seen, the world market was experiencing a major period of expansion, which would have greatly limited recessions for several decades regardless of the international monetary system, it seemed that the new monetary system was successful in preventing deep global recessions. (7)
The one country that could not devalue its currency under the Bretton Woods System was the United States. If it faced a drain of its gold reserves, the United States, unlike other countries, had to raise interest rates. The U.S. could not devalue the dollar—raise the dollar price of gold—without pulling the rug from under the Bretton Woods System.
Many economists, especially but not limited to those of the now-dominant Keynesian school, saw this as a major flaw in the Bretton Woods System and hoped that at the next stage the dollar would be converted into a fully “managed currency” backed by the great wealth of capitalist society as a whole and not just gold. These economists imagined that in this way it would be possible to escape from the limitations of the capitalist system without abolishing capitalism.
Another important U.S.-controlled organization that was created at Bretton Woods was the General Agreement on Trade and Tariffs, or GATT, now called the World Trade Organization. As World War II approached its end, the U.S. played with the idea of using state power to destroy the industrial economies of Germany and Japan. But fear of the resistance of the working class of these countries to the deliberate destruction of their livelihoods by the occupying power as well as the possibility that the German—and Japanese—ruling classes might again support nationalist movements to resist the destruction of their productive capital caused the U.S. to quickly drop this idea.
Instead, the U.S. made a deal with the capitalists of its defeated axis rivals. It agreed to open its home market to German and Japanese capitalists—something it had stubbornly refused to do before World War II—in return for these countries accepting U.S. military occupations that have continued to the present day. In return for access to the U.S. home and other world markets, the defeated axis powers gave up of any attempt to compete with the United States either militarily or politically. In the military and political spheres, America would not share power with its defeated rival imperialists.
The pattern of capitalist economic growth after World War II
As we have seen, there were tremendous hoards of idle money in the U.S. banks after the war. Though the war had seen a great expansion of the debt of the U.S. federal government, most other domestic debts had been wiped out. First, the Depression had led to a debt deflation. Then, during the war economy that followed the Depression, there was little for consumers to buy. Since almost everybody was either serving in the military or had a job, consumers used the money they couldn’t spend on commodities to pay down their debts. For example, since no automobiles were produced during the war, nobody got into debt in order to purchase a new automobile.
However, the share of the world market that U.S. industry commanded—including its most important component, the U.S. home market—was now so large that the U.S. could no longer grow faster than the world market as a whole. Indeed, from then on the United States entered a phase where the growth of the domestic U.S. economy was doomed to be below the world average.
We have to remember, however, that corporate America now had the entire globe—minus the Soviet bloc before 1989 and China before 1978—to exploit. The (bourgeois) economists even have an adjective for economies that after a long period of growing faster than the global economy see their growth rate fall below the rate of growth of the world economy as a whole—”mature.”
After World War II, the transition of America to a slow growth—”mature”—economy was cushioned by the fact that the world market as a whole was going through a period of explosive growth. Even mediocre growth in the U.S. felt good compared to the Depression decade, which was still very much a living memory.
The flow of money and capital after the war
The Marshall Plan of loans and grants kick-started the recovery of Europe but ultimately was not decisive in itself. After World War I, American banks had lent huge sums of money to Europe that Europe proved unable to pay back. The main function of the Marshal Plan was to overcome the fear that this might happen again. The Marshall Plan played an important role here.
As the U.S. opened its domestic market to Germany and Japan, their economies entered into a phase where their rates of growth were far above the overall level of growth of the world capitalist economy. This period of exceptional economic growth of Germany and Japan went far beyond the initial postwar reconstruction boom. Unlike the now “mature” U.S. and British economies, the law of uneven development was now working in favor of the West European—minus Britain—countries and Japan.
The reconstruction boom proper followed by the phase of rapid economic growth obliged (West) European and Japanese corporations to place huge orders to U.S. corporations to supply the means of production they needed to take full advantage of the huge new markets—especially the American home market—that were finally opening to them. This helped keep the wheels of American industry turning in the early postwar years even as American industry was building up economic competitors that would later take many markets away from it. (8)
The movement of international loan capital after World War II
Just as industrial capital seeks the highest possible rate of profit—or super-profit, above and beyond the average rate of profit—loan capital seeks the highest possible rate of interest above and beyond the average rate of interest that prevails on the world market. While money capital was extremely abundant in America in the form of huge reserves of cash in its banks—backed up by the gold bars in Fort Knox plus the huge gold hoard stored in the vaults of the Federal Reserve Bank of New York—Europe and even more so Japan were immediately after the war lacking in money capital. The economists spoke of a “dollar shortage.”
The “dollar shortage” was reflected in higher rates of interest in Europe and Japan relative to those that prevailed in America. The result was that large amounts of loan capital flowed from America to Europe and Japan seeking higher interest rates. This flow of loan capital financed (Western) Europe and Japan’s post-World War II economic growth. This was somewhat like the situation that prevailed before World War I when British loan and stock capital financed the rapid growth that built up America’s huge industrial machine. American industry, largely financed by British money capital, then found itself excellently placed to take markets away from British industry leading to Britain’s industrial decline.
For historical reasons, as well as the aftermath of the Depression, fascist and military dictatorships and the war, the value of labor power was cheaper in Europe and considerably cheaper still in Japan than it was in the United States. The value of labor power was cheaper still in China, but the Chinese Revolution, combined with the extremely hostile reaction of U.S. imperialism to the revolution, prevented any investment of U.S. capital in that country between 1949 and 1978.
In addition, many consumer commodities were made in America. These included necessities consumed by both the capitalists and the workers and luxury commodities consumed by the capitalists alone. On top of this were the considerable quantities of agricultural commodities, plus raw and auxiliary materials, that were also produced in America. As a result America ran a considerable surplus in its balance of trade.
If this American trade surplus hadn’t been compensated for by a huge export of capital, Europe and Japan would have been quickly drained of what money they had and this would have led to the collapse of American exports. However, the higher rate of both profit and interest in Europe and Japan prevented this from happening.
In addition, the huge expenditures of the United States on the Korean War and later the Vietnam War, and the military forces that were maintained in Europe and Japan, supposedly to protect these countries from a Soviet attack but in reality to make sure these countries remained politically subordinated to the United States, helped pump even more money in the form of U.S. dollars into these countries.
The effect of military expenditure on economic growth
In addition to these purely economic forces, the relative—not yet absolute—decline of the United States economy after World War II was accelerated by the huge amount of military spending that the United States was obliged to carry out in order to maintain its worldwide empire.
Many progressives, under the influence of Keynes, believe that the high level of arms spending played a crucial role in not only preventing a new “Great Depression” but made possible the huge post-World War II capitalist economic expansion. However, as we have seen, economic conditions were radically different in the second postwar period than they were in the first. The economic conditions that led to the Depression were simply not present after World War II. If the high level of military spending did not stave off Depression, what was the effect of military spending?
Production versus reproduction
Assuming that there is a considerable amount of excess capacity and unemployment—and their usually is under capitalism—and that there is also a sufficient mass of idle loan capital—also generally present under capitalism—any sudden rise in government deficit spending will cause industrial production and employment to rise sharply. But while a sudden rise of government loan-financed military spending gives a powerful short-term stimulus to industrial production, it at the same time depresses capitalist expanded reproduction.
This is because factories that in the absence of military spending would produce additional means of production are shifted over to producing the means of destruction. But production and reproduction can diverge only temporarily. In the long run, they move together.
In a full-scale war economy, so many of the factories that normally produce the means of production are shifted over to means of destruction that more capital is consumed than is created. Expanded reproduction gives way to contracted reproduction. Since capitalism can only exist in the long run as a system of expanded reproduction, an all-out war economy can only be maintained for a relatively short time.
World War I lasted only slightly more than four years, while World War II, if we count the German invasion of Poland in September 1939 as the beginning of the war, lasted only six years. The relatively short duration of the two world wars of the 20th century stands in contrast to the greater length of some of the colonial wars fought by the United States after World War II—for example, the war in Vietnam and the ongoing war in Afghanistan, which has already lasted more than 10 years. These wars against oppressed countries do not oblige the United States to shift to a full-scale war economy with its contracted reproduction.
During a war economy, the industrial capitalists exchange real capital for fictitious capital in the form of government bonds, which generally will be repaid out of the proceeds of future expanded reproduction only in event of victory. If it appears that the period of war-induced contracted reproduction is stretching out with no end in sight, the capitalists rather than accumulating fictitious capital in the form of government bonds have the option of exchanging their governments bonds for gold, which unlike government bonds that are mere promises to pay in the event of victory, has a real value.
If the capitalists attempt on a large scale to convert their fictitious capital into gold—or currencies if there are any that are not depreciating—the war economy will collapse. This is what we saw during World War I in Russia starting in 1916 just before the Russian Revolution. This is why, contrary to the hopes of some Keynes-inspired progressives, the World War II war economy cannot be a model for long-term peacetime capitalist prosperity.
In addition to an all-out war economy, you can have a situation of a high level of military spending that is not so great as to transform expanded reproduction into contracted reproduction. Unlike an all-out war economy, such a situation can be maintained for a protracted period of time. However, a situation of chronic high-level military spending will still slow the rate of expanded reproduction, even if it doesn’t halt it altogether.
A country that engages in such high levels of military spending—as the United States is obliged to do in order to maintain its worldwide imperialist empire—will therefore, all other things remaining equal, lose ground to its competitors that engage in far lower levels of military spending.
The weight of military spending can fall either on wages or profits. If the capitalist class is successful in shifting the weight of militarism onto the backs of the workers by lowering after-tax wages—and it will make every attempt to do this—there will be no net increase in demand—leaving aside the temporary effects of deficit spending—since the demand generated by military spending will be offset by the reduced purchasing power of the workers.
If military expenditures come out of the profits—realized surplus value—of the capitalists, there will be less surplus value available to convert into new capital—either variable capital or constant capital. To the extent this happens, the process of capitalist expanded reproduction is weakened. High levels of military spending can explain long-term stagnation—sluggish capitalist expanded reproduction—but it cannot possibly explain the major capitalist expansion that followed World War II.
Objective need of world imperialism for a world dictator
As we have seen, the more the productive forces develop the greater is the development of the forces of destruction. At a certain stage, the destructive power of weaponry reaches a point where imperialism develops an objective need for a world policeman—or world dictator. Military—and thus political power—must be centralized in a single imperialist country under pain of warfare so destructive that it leads to the collapse of civilization and with it capitalism. In 1945, the United States as the country with the most powerful productive forces and thus the most powerful forces of destruction naturally assumed the role of world dictator.
The American imperialist dictatorship was not established through a peaceful agreement among the capitalists but took two of the bloodiest wars in history to establish. However, the high level of military spending relative to the other imperialist countries that the U.S. role of world dictator requires has inevitably helped weaken America’s own process of expanded capitalist reproduction relative to its economic competitors. This relative weakening of America’s internal capitalist reproduction in turn contributed to the gradual but relentless loss of the share of the world market that American-based industry commands.
Over time, the inevitable result was the decline and eventual disappearance of the surplus in America’s balance of trade.
The international monetary system in the period of the decline of American capitalism
As the old English economist James Steuart (1712-1790)—the last of the mercantilists (9), as Marx described him—explained, a system of issuing currency requires both flux and reflux. For example, when a bank of issue re-discounts commercial paper, we have a flux or expansion of the quantity of currency. When the commercial paper is paid off, we have a reflux of currency, or a decline in the quantity of currency. If there was only a flux but no reflux, the quantity of currency would expand without limit and its gold value and thus its purchasing power would rapidly collapse. Indeed, such a currency would soon cease to function as money—or more strictly would cease to represent real money in circulation.
Under the Bretton Woods System, as part the newly established U.S. world dictatorship, the U.S. dollar functioned as the world currency. On a global scale, the United States operated and still operates like a bank of issue. Indeed, the majority of U.S. dollar bills—Federal Reserve Notes—circulate outside of the United States. Under the Bretton Woods gold-dollar exchange standard, the flux was represented by loans by U.S. banks to capitalists and governments outside the United States; purchases by U.S. capitalists of foreign enterprises, individual stocks, bonds and real estate; and by U.S. military spending and wars.
The main reflux mechanism for the dollar was the U.S. trade surplus. As global capitalist expanded reproduction proceeds, the flux of currency has to exceed the reflux. How rapidly the quantity of dollars can grow without depreciation is determined in the long run by the the rate of growth of the quantity of gold bullion—money material—in the world. The rate of growth of the quantity of gold bullion is in turn governed by the level of gold mining and refining.
But in the wake of the 15-year-long interruption in capitalist expanded reproduction, caused by the Depression followed by World War II, a great amount of money had fallen out of circulation and was hoarded in American banks—except for the bank run years of 1931-33 when a lot of money was hoarded outside the banks. This meant that for a considerable period of time the quantity of dollars could actually grow faster than the rate of growth of gold bullion before the U.S. dollar began to depreciate ending the Bretton Woods gold-dollar exchange standard.
The crisis in the international monetary system of the late 1960s
As the U.S. trade surplus declined and finally disappeared at the end of the 1960s, the U.S. trade balance ceased to withdraw dollars on a net basis from global circulation. To make matters worse for capitalism, the rate of growth in the quantity of gold bullion began to decline by the mid 1960s due to the combined inflationary effects of the great economic boom of the 1960s, the Vietnam War on top of the earlier inflation that occurred during the World War II war economy, the Korean War, and the lesser economic boom of the 1950s.
From gold-dollar exchange standard to paper dollar standard
As the U.S. trade surplus ceased to function as a dollar reflux mechanism at the end of the 1960s, the quantity of U.S. dollars exploded relative to the slowing growth of the quantity of gold bullion. The inevitable result was the end of the Bretton Woods System and a massive devaluation of the dollar.
The dollar price of gold, which inversely measures the gold value of the dollar, rose sharply. The rate of exchange with the dollar of the the currencies of the imperialist countries that were taking markets from U.S. industry—especially the (West) German deutsche mark and the Japanese yen—declined as well, though not as much as the dollar depreciated against gold. Despite its massive devaluation during the 1970s, the dollar remained at the center of the now crisis-ridden international monetary system. This, however, was an unsustainable situation.
The final wave of dollar devaluation saw the dollar price of gold rise from around $300 in August 1979 to $875 the following January. If this had continued, the dollar would have not been able to function as the world currency. The key financial pillar of the U.S. global imperialist dictatorship would have been no more. To save the the U.S. imperialist dictatorship, the further devaluation of the U.S. dollar had to be halted.
The devaluation was halted by the violent rise in U.S. interest rates known as the “Volcker shock” after the then Federal Reserve chief Paul Volcker. The combined effects of the steepening fall in the dollar’s purchasing power combined with a sudden rise in the demand for dollar-denominated securities as capitalists moved to take advantage of these high interest rates created a sudden shortage of dollars and a resulting sharp fall of monetarily effective demand across the globe that accompanied the “Volcker shock” recession.
Suddenly, the world’s capitalists were eager to lend huge amounts of dollars back to the the U.S., first at extremely high interest rates but then at progressively lower rates of interest. The dollar reflux mechanism of the U.S. trade surplus was replaced by a borrowing reflux. In effect, the U.S. became a kind of global deposit bank. Under these conditions, not only didn’t the U.S. trade surplus reappear—which is what usually happens when a country experiences a monetary crisis like the U.S. did during the 1970s—but what had been only a slight trade deficit exploded.
Though after August 1971 the dollar has been in no way convertible into gold—except at variable rates on the open gold market (10)—the the Volcker shock halted further dollar devaluation. Indeed, if we look at a graph of the dollar price of gold between 1983 and 2000, we see that despite many fluctuations the overall trend is downward—or what comes to exactly the same thing, the slope of the gold value of the dollar is upward. To the extent that the value of the dollar rose against gold, the dollar was actually “better” than gold. In effect, in terms of real money—gold bullion—U.S. dollar bills were bearing a positive rate of interest. (11)
This new international monetary system—sometimes informally called Bretton Woods II—requires that the U.S. consumes far more commodities than it produces at home—the exact opposite of Bretton Woods I. Even under Bretton Woods I, the productive U.S. economy experienced a relative decline compared to the economies of other capitalist powers. But the U.S. industrial economy and with it the number of workers engaged in manufacturing was still growing in absolute terms across the industrial cycle.
But since 1979, which marks the beginning of the Volcker shock, the number of workers engaged in manufacturing within the U.S. has declined in absolute terms over the industrial cycle. That is, the loss in manufacturing jobs during recessions is greater than the gain in manufacturing jobs during booms. Indeed, after 1979 even during parts of the rising phase of the industrial cycle the number of manufacturing jobs in the U.S. has eroded. This was especially true of the final industrial cycle of the “Great Moderation”—that of 2000-2007.
While the rise in labor productivity means that the decline in the number of manufacturing workers does not imply a comparable decline in U.S. industrial production, the U.S. has indeed abandoned more and more branches of industrial production. The more U.S material production—and manufacturing is the heart of material production in a capitalist economy—declines relatively and in many areas absolutely—the greater the flux of dollars into the world economy is and the more the U.S. has to borrow dollars back to prevent the dollar from crashing.
In the years that immediately followed the Volcker shock, the U.S. was well positioned to engage in this borrowing spree, because it was still the world’s overall biggest net creditor. However, as a net borrower after the Volcker shock, the U.S. progressively ran down its net creditor balance. Sometime in the late 1980s, the balance shifted from creditor to debtor. It seemed that almost overnight, the U.S. had shifted from the world’s largest creditor to the world’s largest debtor.
The ability of the U.S. to borrow
The U.S. dollar continues to function as the world’s chief means of payment just like it did under the old Bretton Woods System. All the world’s primary commodities starting with oil are quoted in dollars. This obliges both large corporations engaged in world trade as well as banks, governments and their central banks to maintain large reserves of dollars. In practice, these reserves are kept not in dollar bills but in short-term U.S. Treasury notes that bear interest—though very little at present—and being highly liquid can be quickly sold for dollar cash.
Therefore, corporations that operate on an international scale as well as governments and central banks are forced by the logic of the dollar system to loan huge amounts of dollars back to United States providing the dollar system with its reflux mechanism. Since world commodity prices are denominated in U.S. dollars, so are world debts. Unlike other countries, the U.S. can pay off its debts in the currency it issues itself.
This does not mean that U.S. has the power to buy as much as it wants in return for currency it can simply print. If the U.S. trade deficit causes the quantity of dollars worldwide to grow at a rate that exceeds the rate of growth of the global quantity of gold bullion, the dollar will sooner or later depreciate against gold, unleashing inflation. If this were to go beyond a certain point, primary commodities would no longer be quoted in dollars. This would mean that world debts would cease to be defined in terms of dollars as well.
At this point, large corporations, banks, governments and central banks would no longer have any incentive to hold dollar reserves—lend back dollars to the United States. The collapse of the ability of the U.S. to borrow would mean an end to the U.S. trade deficit accompanied by a sharp decline of U.S. living standards that we can be sure would be born by the 99 percent—especially the lower half of the 99 percent—and not the 1 percent.
Just like the Bretton Woods System worked well at first before entering into a mortal crisis in the late 1960s, Bretton Woods II also worked from the end of the Volcker shock in 1982 through the year 2000. After that, the dollar standard has entered a crisis that with some fluctuations has grown progressively worse.
Why did the dollar standard work at all?
First, there were cyclical factors at work. The huge devaluation of the U.S. dollar during the 1970s meant that the price of commodities in terms of gold actually fell sharply. This resulted in a considerable rise in the rate of profit both relatively and absolutely in the gold mining and refining industries. Indeed, gold mining was one of the few profitable industries during the 1970s if profits are calculated in terms of gold.
In addition, despite the great growth of the quantity of paper dollars in circulation on the world market, the ratio of the amount of gold that depreciating dollars represented to the actual amount of gold bullion in existence actually fell. Remember, as the dollar price of gold rises, each individual dollar represents less gold in circulation. As each individual dollar represents less gold, assuming no change in either the quantity of gold bullion (12) or the quantity of circulating dollars, more actual gold backs the gold value of each dollar.
Between the beginning of the Bretton Woods System in 1944-45 to its collapse in 1968-71 (13), the amount of gold represented by the dollars in circulation grew faster the quantity of actual gold bullion backing these dollars. The international monetary system, therefore, grew progressively less liquid. During the 1970s, the opposite happened. The amount of gold that each dollar represented in circulation fell faster than the growth in the total quantity of bullion. This combined with first the halt in the decline in global gold production after the 1974-75 recession and then the new rise in gold production after the 1979-82 recession restored the liquidity of the international monetary system. (14)
In addition to these purely cyclical factors, there were some special forces at work between 1983 and 2000 that served to prop up the dollar system. First, the U.S. put pressure on the central banks of other countries to both sell off some of their gold reserves and not purchase any newly produced gold. For example, between 1999 and 2002, the Bank of England sold off 60 percent of its gold reserves, putting downward pressure on the dollar price of gold.
The U.S. also had the IMF periodically sell off modest amounts of gold on the international market to put further downward pressure on the dollar price of gold.
Another important factor that put downward pressure on the dollar price of gold was the return of capitalist rule in what had been the Soviet Union between 1985 and 1991. The movement to restore capitalist rule in the Soviet Union was largely based on a growing thirst—especially on the part of the more privileged layers of Soviet society—for high-quality luxury consumer goods produced by global capitalist industry that were not being produced by Soviet industry.
Soviet industry was of necessity geared to the needs of socialist construction and the needs of the Soviet workers for consumer necessities—not luxuries—as well as meeting the need to defend the Soviet Union against the threat represented by an imperialism that was now unified by the American empire. As soon as they came to power, Russia’s new capitalist leaders quickly sold off Soviet gold reserves in exchange for dollars to import huge amounts of consumer luxury commodities.
However, the amount of gold that can be sold by central banks, the IMF and former Soviet Union was and is limited by the finite quantity of gold, especially when compared to the huge amounts of commodities that global capitalist industry is capable of producing.
Then, starting in 2001, the growing depletion of the world’s gold mines—especially the gold mines in South Africa—combined with the negative effects of the rise in the prices of commodities in terms of gold that had occurred during the 1980s and 1900s led to a new decline in gold production that continued at least until 2008. The combination of slumping world gold production and soaring U.S. trade deficits that pumped ever greater quantities of dollars into the world economy led to a renewed depreciation of the dollar, throwing the dollar system into crisis after only 18 years of relative stability.
Fearing a far more more dangerous version of the 1979-80 run on the dollar, the U.S. Federal Reserve began to slow the rate of growth of the quantity of dollars it creates. Instead, the Greenspan and then Bernanke Fed relied on financial de-regulation and “financial engineering.” Financial engineering is the art of inflating credit on the basis of a relatively tiny amount of hard cash. Such a process inevitably leads, sooner or later, to a crash.
As we know, the crash arrived in full force with the collapse of the Lehman Brothers investment bank in September 2008. However, this panic by creating a huge increase in demand for dollars as a means of payment did stave off a run on the dollar that could have led to a collapse of the dollar system, and in effect the financial collapse of the American empire. The events of 2008 show that the dollar system, while crisis-ridden, is still far from dead.
What next for the international monetary system?
The deep recession did not eliminate but considerably reduced the U.S. trade deficit. If a sharp enough rise in world gold production occurs over the next few years, the U.S. trade deficit might be able to resume its growth. If, on the other hand, gold production fails to increase significantly or even declines, it will mean that the ability of the U.S. to increase its trade deficit has probably reached its limit.
Within the U.S., the crisis—but not yet the death—of the dollar system has meant among other things that U.S. homes are no longer functioning as ATMs (15) as they were previously. As a result, U.S. politics has already been considerably transformed as shown by the explosion of the Occupy movement. If the crisis of the dollar system unleashed the Occupy movement, imagine what the effect of the actual end of dollar system would be!
We can be sure that the U.S. government—Democrats and Republicans alike—will do all in its power to maintain the dollar system. How long it can be successful at this remains to be seen.
The current phase of the crisis in the dollar system
Since the “Great Recession” officially bottomed out in July 2009, whenever hopes have risen that the economic recovery from the “Great Recession” is finally gaining traction, the extraordinary demand for dollars as a means of payment and hoarding begins to drop off. Or as the financial press puts it, investors’ appetite for risk increases.
The result is a renewed depreciation of the dollar against other currencies and gold. The dollar price of gold, which measures the depreciation of the U.S. dollar, has exceeded $1,900 per ounce several times recently before falling back. The rising dollar price of gold then causes the dollar price of oil to rise as well.
However, whenever economic statistics indicate a stall in the global economy, or the news from Europe becomes alarming, raising the specter of renewed global recession, the dollar recovers and the dollar price of gold as well as the dollar price of oil and food drops off. Or to use the language in the financial press, “investors’ appetite for risk” decreases. In recent weeks, the financial markets have been fluctuating between mini-panics and mini-dollar runs. You can hardly manage the international monetary system on this basis for very long.
One thing that in theory could give the dollar system a certain respite would be a major new upswing in global gold production. If this occurs, however, it will only deepen the forces that led to the current international monetary crisis in the first place. In the most “favorable” case, the dollar strengthens and the U.S. trade deficit starts to grow once again without a further depreciation of the U.S. dollar. U.S. home prices turn up and home equity loans make a comeback. But this would mean a further decay in America’s productive capacity. The day of reckoning would be postponed but only at the cost of an even worse crisis down the road.
Another possibility is that in a last-ditch attempt to salvage the dollar standard the U.S. government and Federal Reserve System “bite the bullet” and abandon their policy of never allowing the general price level defined in dollars to fall—also called “inflation targeting.” At the price of perhaps a 1930s-scale or worse Depression (16), the U.S. trade balance swings back into surplus. Instead of a glut of depreciating dollars, there would be an acute shortage of greenbacks, and deflationary Depression conditions would spread throughout the world.
The question would then be that given its vastly relative and—in many branches of industry absolute—reduced ability to produce commodities, would U.S. exports be sufficient to support a new Bretton Woods-type international monetary system as the world emerges from the Depression?
Perhaps the most rational solution to the current crisis of the international monetary system would be to follow China’s proposal and create a kind of international monetary authority that would be a jointly administered world monetary system. For example, instead of quoting oil and other primary commodities in U.S. dollars, they could be quoted in a market basket of currencies such as the International Monetary Fund’s SDRs (Special Drawing Rights).
Presumably, this would mean that global debts would be increasingly denominated in SDRs rather than dollars. The U.S. would then lose the ability to pay off its debts in its own currency. Not surprisingly, China’s proposal has earned a thumbs down from Washington.
If it were actually implemented, China’s proposal would end the U.S. dictatorship in the currency sphere and imply an end to the U.S. world dictatorship in other spheres as well. Instead of a single world dictator, we would have a more democratic “collective leadership” that would issue the global currency.
The problem with this is that the very nature of capitalism implies that in the absence of a world dictator, an unbridled struggle for economic, military and political position among all the countries engaged in capitalist production would inevitably develop. This is the “system”—if we can call it that—that prevailed between August 1914 and August 1945 and led to the emergence of the U.S. world imperialist dictatorship in the first place.
Gold dinar system
Another variant, proposed by among others Libya’s late Colonial Muammar Qaddafi (17), would be a “gold dinar” system. Instead of using another national currency as the standard of price and denominator of world debts, a certain weight of gold could be defined as a “gold dinar” and primary commodities would be quoted in gold dinars. This implies that world debts would be denominated in gold dinars as well. Governments, central banks and corporations engaged in world trade would maintain reserves in either gold itself, or in currencies that are convertible into gold and are expected to remain so without devaluation.
There would be no necessity to actually mint dinar coins and still less to issue dinar banknotes. Debts would be paid in various national currencies, and the amount of dollars, euros, yen, pounds, yuan, or other currency necessary to discharge a given debt would be defined by the exchange rate of that national currency with the gold dinar, or what comes to the same thing the price of gold in terms of the given currency. Like the SDR system, the gold dinar system, which would essentially be a revival of the international gold standard, would mean the end of the U.S. world dictatorship with all it implies.
But even the classic international gold standard was largely managed by Britain and its Bank of England. Who exactly would manage the new international gold standard?
Another possibility is that some other national currency will replace the dollar as the world currency. Essentially, another country would replace the U.S. as world imperialist dictator. But what country and currency will play this role? In recent years, there was some discussion that the euro might play this role. Considering the present state of European finances, it seems much more likely that the euro will disappear altogether than that the euro will succeed the dollar as the global currency. Considering their “mature” economies, it hard to see how even a imperialist United States of Europe would have enough export power to impose an international “euro system.”
Despite the speculator growth of Japanese capitalism after World War II, it seems that the yen is no more likely to replace the dollar than the euro is.
A yuan system?
How about the Chinese yuan? China has the largest population in the world and in many ways has become the new “workshop of the world.” By some measures—although this is hotly disputed—Chinese manufacturing output now exceeds that of the United States. (18) However, despite the spectacular growth of industrial capitalism in China as a result of Deng Xiaoping’s economic reforms starting in 1978, the Chinese capitalists still have quite a ways to go before they reach the stage of an imperialist power in its own right.
First, even if China’s manufacturing output now exceeds that of the United States absolutely, the per capita output of Chinese manufacturing still lags far behind the United States due to China’s vastly larger population. After all, if manufacturing capacity were fairly distributed across the globe, China and India would have the highest manufacturing output.
In addition, despite its rapid growth, the productivity of labor in China is still far less than that of the United States. And the still extremely low wages of factory workers in China compared to the prevailing levels of the United States will make it difficult for China to close the productivity gap on a capitalist basis.
China is forced to sell many of the commodities that companies located there produce under the trademarks of American corporations. For example, iPods, iPads and iPhones are produced by the Foxconn corporation—run by a Taiwanese Chinese billionaire whose huge factory complex is located in mainland China. However, Foxconn is obliged to yield large amounts of the surplus value produced by its hundreds of thousands of super-exploited Chinese workers to the billionaire shareholders and business executives of the Apple corporation located in the U.S. These include the heirs of the late Steve Jobs. The relationship of Apple to Foxconn illustrates how China, despite its spectacular progress, still remains an oppressed nation and not an oppressor imperialist nation.
We should also remember that imperialism is characterized not by the dominance of industrial capital but of finance capital. Chinese banks have a long way to go before they catch up with those of the United States. On the road to creating a true Chinese imperialism, the Chinese capitalist class has to overcome both the resistance of the workers at home and the resistance of both imperialist—and non-imperialist—countries abroad.
Despite loose talk of Chinese “imperialism” in certain circles, China has no troops outside its borders with the exception of troops serving in UN “peace missions,” which serve under the command of the Empire. In addition, the Chinese province of Taiwan, located just off the mainland, remains under the military and thus the political control of the United States.
Finally, Hong Kong, which was stolen from China by Britain as a result of the notorious “Opium Wars” of the 19th century, is still not fully integrated into the People’s Republic of China.
True, China is now the U.S.’s largest creditor. But the debt owned by China is largely in the form of U.S. Treasury securities that form the backing of China’s currency. We don’t see Chinese finance capital buying up the banks and large corporations that dominate the U.S. and world economies. Actually, China’s large holding of U.S. Treasury securities is in many ways a weakness, since China’s political position would be far stronger if its currency were backed up by a large gold reserve rather than U.S. Treasury notes.
China’s dependence on U.S. securities to back its currency makes it dependent on the U.S. dollar system in the sense that a collapse of the dollar system would also throw China into crisis.
An awful lot will have to happen before a Chinese world empire and a world yuan international monetary system could replace the dollar system. It is hard to see how this could happen peacefully when the replacement of Britain by the United States took two world wars.
Dollar system self-liquidating
It seems inevitable that the dollar system will die sooner or later. In a sense, the dollar system is self-liquidating. The longer it lasts the more the U.S. domestic economy decays and with it the power of the U.S. to maintain the dictatorship of the dollar over the international monetary system. Yet all the alternatives to the dollar system seem to point towards a return to the worldwide financial, military and political anarchy that existed between 1914 and 1945, but with the difference that today’s means of destruction can easily destroy civilization altogether.
But there is another possibility. That is, the American world empire and its dollar dictatorship can be replaced by the international rule of the workers and their allies. This may seem like a wildly improbable solution after decades of reaction and “the death of communism” proclaimed by the capitalists and their hired pens ever since Gorbachev. That is, until we consider the alternatives. Then it appears as the only alternative to a new series of wars among capitalist countries that will end sooner or later in a a third world war that would be the grave of civilization.
1 Here I interested in examining the law of uneven development only as it manifests itself under capitalist production. For example, under capitalism the means of production have the ability to grow faster than the market for the products they are capable of producing. This plays an important role in uneven economic development as it evolves under the capitalist system. However, the ability of the means of production to grow faster than the market for them is true only for capitalist production. It does not apply to any other mode of production.
2 A recent example was the unfortunately successful campaign of the United States to replace the government of Libya with one that was more acceptable to the Empire. Working through NATO, the United States and its British and French imperialist satellites were able to use their vast naval and air power to destroy in a highly computerized war Libya’s armed forces while suffering virtually no casualties.
But there are now two other even more recent examples, this time in Europe itself. We have just seen the replacement of the governments of Greece and Italy with “technocratic”—meaning banker-controlled—governments at the command of U.S. finance capital. If massive resistance to the these brazenly undemocratic governments were to develop in either Greece and Italy, the NATO-commanded armed forces of these countries would attempt to put it down. If the members of these armed forces were to refuse to obey the orders of the banker-controlled American empire, NATO invasions of Greece, Italy or both are by no means beyond the realm of possibility.
4 The minting of gold coins was halted as soon as Roosevelt assumed office in 1933. The U.S. mint resumed the minting gold coins under Ronald Reagan in the 1980s. The U.S. mint will now coin gold bullion that is produced within the U.S. and presented to it for coining. Though these modern U.S. gold coins are officially legal tender and official U.S. currency, they are not designed to circulate, since their face value is well below the market dollar price of gold bullion. For example, the one-ounce gold coin has a dollar value of $50, but the market price of gold bullion has been recently fluctuating at a price in excess of $1,700.
5 Marxists were generally divided into two camps about the economic prospects for the postwar world. Paul Sweezy, under the influence of Keynes, believed that capitalist governments now had the power to prevent depressions by increasing demand to whatever extent necessary through increased government spending. Sweezy hoped that the government spending would take the form of public housing projects and public works that he hoped would lead over time to a gradual and peaceful democratic transition to socialism.
Sweezy was therefore not surprised by the postwar boom, but he was appalled that the high level of government spending that he believed was necessary to prevent a return to the Depression took the form of Cold War militarism, including major “hot wars” in Korea and Vietnam.
In contrast, the Marxists associated with the Trotskyist movement reasoned that since World War II was even more destructive then World War I and had led to even bigger government debts, an even bigger Depression would follow—if not immediately after the war, at the very latest at the end of the first postwar business cycle.
When this did not happen, these Marxists more or less adopted Sweezy’s Keynesian-influenced view that the high levels of government spending on arms were the cause of the unexpected-to-them postwar capitalist expansion.
The Communist Parties were more or less divided between these two views. The left wings of the CPs generally believed that capitalism would soon experience a new “Great Depression” that they hoped would lead to successful socialist revolutions throughout the world, while the right-wing Communists put their hopes in a new popular front that would stave off Depression through government-spending programs on public works that would benefit both the working and middle classes.
6 Today, the IMF is widely hated for forcing oppressed countries to adopt “structural adjustment programs” that impoverish the workers and peasants and generally ruin their economies. Ironically, however, the chief architect of the International Monetary Fund as well as the World Bank was the left-wing New Dealer Harry Dexter White. In 1948, White was charged with passing information to the Soviet Union and hounded to death. There is some indication that the charge had a degree of truth, which would suggest that White had been sympathetic to the Soviet Union and socialism. How could such a progressive man have designed the hated International Monetary Fund?
Actually, the illusion that banking institutions such as the IMF will lead to a peaceful transition to socialism has deep roots in socialist thought going back to the French utopian socialist Henri de Saint-Simon (1760-1825).
The banking system becomes more centralized and powerful as capitalism develops. The banks create a mechanism of universal bookkeeping that, once freed of its capitalist shell, will provide the means for the planned regulation of production by the associated producers. The unprecedented centralization of bank capital that has occurred as a result of the crisis of 2007-09 is a powerful indication that the forces of production have so outgrown the capitalist relations of production that the transition to socialist production cannot be postponed for much longer.
The illusion that men from Saint-Simon to Harry Dexter White have held is that the banking system will lead to a transition to socialism through a peaceful evolution without the transfer of political power from the 1 percent capitalist class to the 99 percent majority led by the working class. In reality, the experience of the 20th century, as well as Marxist theory, has demonstrated that a workers’ revolution is necessary to break through the capitalist shell if the socialist possibilities represented by the modern banking system is to be realized in practice.
However, as long as the banks and bank-like institutions such as the IMF remain under the control of the capitalist class, they will remain tools of capitalist exploitation, not liberation.
7 Since the demise of the Bretton Woods System, many well-meaning but economically naive progressives—much like Harry Dexter White—have dreamed about a “new Bretton Woods” that would reform the international monetary system in a way that would enable the capitalist system to work for the benefit of the 99 percent and not just the 1 percent.
8 Because the nations engaged in capitalist production have the power to increase their production faster than the market can grow, it is inevitable that the rapid advance of some nations will of necessity be accompanied by the decay of others.
9 In his day, Steuart represented mercantilist reaction against the rising economic liberalism represented by Adam Smith and later David Ricardo and other liberal economists. But Steuart’s contributions illustrate that when it comes to the study of monetary phenomena the mercantilists were generally superior to their economic liberal successors who subscribed to the false quantity theory of money.
11 This is actually undesirable from the viewpoint of capitalist expanded reproduction, because to the extent that currency notes bear interest the capitalists are encouraged to hoard currency rather than to engage in M—C..P..C’—M’ (expanded capitalist reproduction).
However, after the great devaluation of the U.S. dollar that occurred between 1968-71 and 1980, the capitalists were reluctant to accept dollars unless they were reassured that though the dollar was no longer convertible into gold at a fixed rate the dollar despite periodic dips would in the long run no longer lose value against gold and would likely gradually gain gold value.
The great advantage of a gold standard for the capitalist system over the current system is that the currency does not bear interest—gain gold value—but also does not depreciate or lose gold value, encouraging the capitalist to spend rather than hoard money in either the form of currency or gold.
12 To illustrate this, suppose there was one ounce of gold bullion and $100 in circulation, each dollar representing one ounce of gold. Each dollar is backed by only 1/100 of an ounce of gold. This would represent a very illiquid monetary system. But suppose the dollar price of gold rises from $1 to $100 per ounce everything else remaining unchanged. Each dollar now represents only 1/100 of an ounce of gold instead of one ounce. But now each dollar enjoys a 100 percent gold backing rather than a 1 percent backing like before.
13 The formal end of the Bretton Woods System is usually given as 1973 when the last agreement on a fixed schedule of exchange rates quickly broke down. But in reality, the system began to die after the collapse of the gold pool in 1968 and was effectively dead from August 1971 when the U.S. defaulted on its promise to redeem U.S. dollars presented by a central bank or government for gold at a rate of $35 for one ounce of gold.
14 In reality, the quantity of gold bullion is always growing because of ongoing gold mining and refining, though the rate of growth both absolutely and relatively to commodities fluctuates as prices in terms of gold first rise above their values and then fall below them.
15 In the years leading up to the crisis in 2007, U.S. homeowners were taking out so-called “home equity loans” and using these loans to purchase consumer commodities increasingly produced outside of the United States. The idea was that as the price of the homes—actually the price of the land under them—kept rising, they would be able to take out even more home equity loans, much as stock buyers can purchase more stocks “on margin” as stock prices rise in a “bull market.”
It was said that American consumers were using their homes as “ATMs.” This came to a screeching halt when home prices started to fall in 2006-07.
16 Remember, when I use the word “Depression” with a capital “D” I am referring not to the normal depression that occurs to one degree or another in every industrial cycle but an economic and political disaster on a scale equal to or greater than that which occurred in the 1930s and led to World War II.
17 There has been speculation that Qaddafi’s “gold dinar” proposal—more precisely his proposal that gold rather than the U.S. dollar be used in trade among African nations—played a role in the decision of the United States to use U.S. air and sea power to overthrow his government, leading to his murder at the hands of the U.S.-backed racist rebels. Many other factors were involved in the U.S. decision to overthrow Qaddafi including the U.S. reaction to the revolutions in Egypt and Tunisia. The U.S. had long wanted to get rid of him.
The fact remains that the United States reacts to any proposal that gold serve once again as the standard of price and denominator of debt rather than the U.S. dollar about the same way that a vampire reacts to a cross.
18 Comparing the relative quantity of manufacturing output of different countries runs into the problem that different countries manufacture commodities with different use values and qualities. However, the dramatic rise of Chinese manufacturing compared to that the United States is undeniable.