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82Четвертый международный политэкономический конгресс
R. Desai
THE PAST AND FUTURE OF THE INTERNATIONAL MONETARY SYSTEM
Despite signs over the decades that the world role of the dollar has been problematic, and much recent commentary pointing to signs that de-dollarization is happening, questioning of the role of the dollar in the international monetary system has been remarkably untheoretical and unhistorical fashion. Since no heap of facts, no matter how large, can amount to an argument, this is a serious intellectual liability. Moreover, the world has been paying, at least the 1980s, a heavy price for this lack of understanding. The purpose of this paper is to clear up this misunderstanding by pointing to the largely ignored intimate and necessary relationship between financialization - of the Western economies and the pressures they generate for the rest of the world to follow suit, exposing them to dangerous financial and currency volatility - and the dollar-centred international monetary system. This relationship can only be understood by putting the dollar’s world role in the longer historical perspective of the modern international monetary system, going back to the role of the pound sterling under to so-called international gold standard.
Keywords: international monetary system, US dollar, gold standard, geopolitical economy, multipolar world.
УДК 330.352
When the neoliberal project was pioneered in the Anglo-American ‘Lockean’ heartland (van der Pijl 2006) of world capitalism as the 1970s turned into the 1980s, its proclaimed purpose was to revive capitalism, specifically Western capitalism. It had been ailing over the previous decade with the onset of the ‘Long Downturn’ (Brenner 1998). Almost four decades on, it should be clear to all but the most ideological neoliberals and the most inobservant that things have not gone according to plan.
Neoliberalism failed to rejuvenate Western capitalism (notwithstanding mainstream opinion shared by some Marxists, such as Dumenil and Levy 2004, who insist against all evidence that it did). Instead, it has financialized capitalism and, inevitably, enervated it. As financial activities increased as a proportion of economic activities at the expense of productive activities and constrained them further, Western capitalism became reliant on asset bubbles to stimulate growth. Such growth could only be anaemic. With the increased consumption of a narrow elite facilitated by the ‘wealth effects’ of asset bubbles being the only demand stimulus and austerity the name of the game in government policy, investment slumped. Such anaemic growth, incapable of producing broad based prosperity, is all Western capitalism is now capable of, as its ‘left’ and ‘right’ wing commentators have admitted (Krugman 2103, Summers 2013).
1 Radhika Desai, Professor in the Department of Political Studies and Director of the Geopolitical Economy Research Group at the University of Manitoba, President of the Society for Socialist Studies.
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If the benefits of this financialized capitalism were meagre, the costs were great. They included higher unemployment, restricted wage growth and historically unprecedented levels of inequality. In addition, there were periodic financial crises. Initially scattered throughout the world, these crises reached an early peak in the 1997 East Asian Financial Crisis. Thereafter, they increasingly homed in on Western capitalism’s homelands, with the 2000 dot-com bust and then the ‘mother of all financial crises’ (so far), the 2008 financial crisis. The epicentre of both was the US, and more generally capitalism’s Anglo-American heartland, although, thanks to monetary integration-related liberalization of the Eurozone’s financial sector, it too became heavily invested in the US housing and credit bubbles, even more so than its US counterpart (Nesvetailova and Palan 2008). Inevitably then, the 2008 crisis laid the basis of the 2010 Eurozone crisis.
This costly financialized pattern of accumulation inevitably had political and geopolitical consequences. Domestically, the mire of low employment, declining real working class incomes and rising inequality, combined with the dissipation of the left, which was also a feature of the long neoliberal decades, Western countries have experienced a rise of dangerously authoritarian right wing politics. Internationally, slow Western growth (the chief nonWestern centre of capital accumulation, Japan, having entered ‘secular stagnation’ long before) combined with faster growth elsewhere. To be sure, the rest of the world had been neoliberalism’s victim with so much of the Third World subjected to outright economic retardation in the 1980s and 1990s. Financialization also afflicted the rest of the world, as manifested in the series of financial crises suffered by so many non-Western countries in the 1990s or the more recent currency crises. However, enough countries largely escaped neoliberalism (like China), or adapted it (like India) or rejected it after an initial debilitating subjection to it (like Russia and many Latin American countries) to post far more robust growth rates in the neoliberal decades. This enabled them to begin gaining on the West in terms of their economic weight in the world economy, if not in per capita income terms (O’Neill 2001 brought this matter to the world’s attention). This ‘rise of the rest’ has begun moving the world economy’s centre of gravity away from the West for the first time in modern history, or, to put the same thing another way, for the first time since the origins of capitalism (Desai 2013b). This is also recognised under the label of ‘multipolarity’ (though, as discussed below, the world was already multipolar by the late nineteenth century; it has only become more so since).
This development has inevitably led to discussions about the possibility of the end of Western and, more specifically, US dominance in the world economy and, given that this dominance works so centrally through it, of the dollar-dominated international monetary system. However, there have been rather curious discussions. On the one hand, the largely US centred scholarship on the dollar system continues to insist that it remains robust. On the other hand, those who do not agree and point to contrary facts and trends do so in a remarkably untheoretical and unhistorical fashion. Since no heap of facts, no matter how large, can amount to an argument, this is a serious intellectual liability, and it permits the US orthodoxy to reign. This would not matter if most of the world was not paying and had not been paying since at least the 1980s a heavy price for this lack of understanding.
The purpose of this paper is to clear up this misunderstanding by pointing to the largely ignored intimate and necessary relationship between financialization - of the Western economies and the pressures they generate for the rest of the world to follow suit, exposing them to dangerous financial and currency volatility - and the dollar-centred international monetary system.
The corpus of writing on the dollar-based international monetary system and finan-cialization is extensive. The former dates back to the early 1970s and Nixon’s closing of the
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gold window. This was when ‘hegemony stability theories’ emerged to normalise the resulting situation, proclaiming that the dollar could, should and would remain the world’s currency (Kindleberger 1973 is generally regarded as the origin, though Kindleberger was forming his ideas about it for more than a decade before that, as Desai 2013 points out in her overview of hegemony stability theories). These theories have shaped the dominant understanding of the dollar’s world role. It simply assumes that the world’s money is, and has always been, the currency of the dominant economy, conferring on it an ‘exorbitant privilege’, as Valery Gis-card d’Estaing called it. What passes for debate is focussed on minute details: the larger theme about the reality, desirability and endurance of the dollar as the world’s currency is never subject to question. Indeed, such literature has honed the fine art of taking everything and its contrary as evidentiary grist for its mill. Consider the most obvious example: the strength of the dollar is taken for evidence that the dollar system is robust (‘ See how strong the dollar is!’) and the dollar’s weakness also attests to the same (‘See, despite the dollar’s weakness, the dollar-system is robust’).
The contemporary financialization of Western economies began with neoliberalism, though the literature on it began to burgeon only in the new century (with works such as Epstein 2005 and Krippner 2005) and exploded with the 2008 financial crisis, which was seen as a culmination of financialization. Nevertheless, it is important to note that an awareness of the antithesis between an excess of necessarily speculative financial activity and production has long been a staple of political economy since the nineteenth century (including Marx: see the excellent discussion in Hudson 2010); important works began to appear much earlier than the 2000s (Hutton 1995 and Dore 2000); and Alain Lipietz drew attention to it already in the 1980s (Lipietz 1985), as the problem of financialization reasserted itself with the onset of neoliberalism, after the post-war decades of ‘financial repression’ through capital controls. The broad thrust of the literature on financialization has been critical, with an emphasis on the adverse consequences of financialization, including episodic but extremely destructive and dangerous financial crises, increases in inequality, poverty and insecurity, and decrease in demand and employment. While the causes of financialization are debated - is it the cause or the consequence of the aforementioned problems? - its link with the international monetary system is rarely, if ever, discussed. I address it in this paper.
Rethinking Relations between States in a Capitalist World
This requires a brieftheoretical prelude into what I have called ‘geopolitical economy’ so that we may deal with the considerable theoretical confusion that plagues our understanding of what is generally known as international or global political economy. This field of study is dominated by US and Western scholars and social science (as opposed to historical, see Desai 2016) approaches. It is consequently designed to direct attention away from any ideas that may put US and US dollar dominance in question. In recent years, I have proposed an alternative approach in Geopolitical Economy: After Globalization, US Hegemony, and Empire (Desai 2013a, to be translated into Russian by S.Y Witte Institute for New Industrial Development. For a short introduction to geopolitical economy, see Desai 2015a and, in Russian, Desai 2015b), which can help us comprehend, theoretically and historically, the actually questionable basis of both and enable us to understand the emergence of multipolarity today in a longer historical perspective. This approach allows us to understand the current conjuncture of US and Western decline, growing multipolarity and new international monetary and financial realities and prospects centred on China. It is an approach that is rooted in classical political economy which culminated in the work of K. Marx and F. Engels. This is in contrast to whereas the field alternatively called international political economy (IPE) or global polit-
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ical economy (GPE), which is rooted in neoclassical economics, the approach which displaced classical political economy because it had become politically inconvenient. Geopolitical economy also draws from those researchers who were critical of neoclassical economics, such as John Maynard Keynes, Karl Polanyi and more recent developmental state theorists, such as Alice Amsden, Robert Wade, Ilene Grabel and Ha-Joon Chang. Geopolitical economy also takes issue with the dominant interpretation of Marxism in what is called ‘Marxist economics’. Marx was no ‘economist’, but rather, by resolving the antinomies of classical political economy, represented its culmination. Neoclassical economics emerged to contest the legacy of classical political economy and Marxism, which raised too many questions about capitalism to serve as its legitimation. For more than a century now, Marxist economists have sought to fit Marxism into the antithetical theoretical and methodological framework of neoclassical economics. Inevitably, this has led them to question the very basics of Marx’s analysis of capitalism and its contradictions (discussed in Desai 2010, Desai 2016 and Desai 2017a2). Geopolitical economy returns to Marx’s own analysis and makes the contradictions of capitalism central for its understanding. It also recovers another critical legacy of Marx, i.e. his understanding of nations as historical agents, which are as important as classes. Moreover, as the quote in Figure 1 drawn from his remarks on the US mercantilist theorist Henry Carey in the closing page of the Grundrisse indicates, Marx understood relations and struggles between nations in a capitalist world as being driven centrally by capitalism’s contradictions, just as the relations and struggles between classes were.
According to geopolitical economy, numerous inter- and intra-class contradictions and crisis tendencies of capitalism create imperatives for capitalist states. They are set out in Figure 2 (drawn from Desai 2016a3). To explain it briefly, capitalism’s contradictions emerge
... with Carey the harmony of the bourgeois relations of production ends with the most complete disharmony of these relations on the grandest terrain where they appear, the world market, and in their grandest development, as the relations of producing
nations...What Carey has not grasped is
that these world-market disharmonies are merely the ultimate adequate expressions of the disharmonies which have become fixed as abstract relations within the economic categories or which have a local existence on the smallest scale.
Marx, Grundisse
Figure 1
2 Available in Russian. Десаи, Р. К 150-летию «Капитала»: историзм в «капитале» и «капитал» в истории // Вопросы политической экономии. 2018. N° 2. Р.112-115; Десаи, Р. Ценность истории и история стоимости // Вопросы политической экономии. 2018. № 4. Р. 104—125.
3 Available in Russian. Десаи, Р. Ценность истории и история стоимости // Вопросы политической экономии. 2018. № 4. Р. 104-125.
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Crises of Capitalism: By Source and Form
ТШ? 8.1 Crises by source and form
Source Fonti Production foliation Money Fnun MEtkal Geopolitical
Tnirc-dj» Tendency of ihenicof profit to fiD (TRPF) Deproponfcm Defbiion Qcctil crunch/ specuhlivc hubbift Fiscal OBii Uneven ч capitalist combined dcwbpmcfit
кпсг-еЫ Prdtil Kjuc:;e Oifleiprotbciii)n/ undpamuiuplHn InJlitton МогЦфСпи LegilimLon crisis Uneven vs J4jpill.it or socialist combined cbclLipmcni
Source: Desai 2016.
Figure 2
from a variety of sources or areas necessary to any capitalism: production, realization, money, finance, politics and geopolitics. And they can take one of two forms. Firstly, they can be what one might call horizontal contradictions, emerging from the relations between capitals, i.e. emerging from their competition. Secondly, they can be vertical contradictions, emerging from the relations between capital and the classes and nations capital exploits. So, in the realm of production, for example, the famous Tendency of the Rate of Profit to Fall is the horizontal contradiction emerging from competition between capitals. It lowers the profit rate unless counteracted by other factors. The vertical contradiction in production is the profit squeeze in which, when organised workers are able to make demands for higher wages successfully, profits are squeezed if not compensated by other factors, such as rising productivity or prices. The table in Fig. 2 maps the principal inter- and intra-class contradictions that emerge in capitalism’s main spheres. Of course, in addition to the contradictions that emerge from the contradictory dynamics of capital accumulation, capitalism also suffers from political and geopolitical problems, such as difficulties in legitimising a fundamentally unequal and unstable society and wars.
All these contradictions must be managed, and no agency is more important in doing so than the state. That is why the foundational tenet of geopolitical economy is the materiality of nations: contrary to most economistic accounts, which, as we have seen, unfortunately include many Marxist ones, the state is not an incidental actor in capitalism, but is systemical-ly necessary throughout its life. Of course, there is no guarantee that states will be successful in their actions.
Much has been written, both social scientific and historical, on states’ domestic actions in managing accumulation, its contradictions and the class struggles resulting from it. However, since the classical theories of imperialism of Hilferding, Luxemburg, Bukharin and Lenin and the not dissimilar work of John A. Hobson, which Lenin praised, there have been few attempts to understand the international relations of a capitalist world in relation to any sufficiently critical and credible analysis of capitalism. Though there has been much activity in what some call ‘Marxist international relations’, this endeavour has been plagued with
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many problems, including the tendency to accept neoclassical economics or ‘Marxist economics’ and the corresponding tendency to separate ‘the economic’ from ‘the political’. (Discussed in Desai 2010a, 2013a, Rioux 2015, Rolf 2015 and van der Pijl 2015).
To the understanding of class struggle and the roles of states in managing it domestically, geopolitical economy adds the understanding, long suppressed in Marxist scholarship, of nations and their historical agency as developed in classical political economy, Marx, later Marxists and their theories of imperialism and critics of neoclassical economics. Geopolitical economy argues that the state’s essential role in managing capitalism’s contradictions with both domestic and international actions underlines the ‘materiality of nations’. To recover this understanding of both class and nations as historical agents, geopolitical economy particularly returns to the classical Marxist theories of imperialism, which were also the first theories of capitalist international relations, and the associated idea of uneven and combined development.
The result is an understanding of relations between states in a capitalist world driven by the contradictions of its capitalisms. Capitalist states compete with one another to externalise the consequences of the contradictions and crises and inflict them on colonies and weaker states. To develop the language of uneven and combined development, dominant states seek to maintain unevenness and complementarity between their more productive and subordinate nations’ less productive structures. Some countries are, however, able and willing to resist such subjection, imminent or actual, through state-directed development or combined development aimed at establishing similarity of productive structures. This dialectic of capitalist international relations between dominant and contender nations has been solely responsible for spreading productive capacity around the world. By doing so, it had already made the world multipolar with the 1870s industrialization of the first challengers to UK original industrial and imperial supremacy: Germany, the US and Japan. Since then multipolarity has advanced further, including through the industrialization of the USSR, to the contemporary rise of China, the resurgence of Russia and the emergence of other economies today.
The Geopolitical Economy of the International Monetary System
Thus geopolitical economy restores the element of contestation in our understanding of the capitalist world order. It now becomes possible to see that such contestation destabilises all international imperial domination. Historically, it has made it difficult for the pound sterling to serve as the world’s money and impossible for the dollar to do so. The reasons, in both cases, are the same: currencies are necessarily national and nation-states are necessarily not world states. National currencies could not stably serve as world currencies as soon as contender contestation challenged the necessary, but also necessarily brief dominance of the first industrialiser.
The stability and neutrality of the gold-sterling standard is a myth. In reality, as Mar-celle De Cecco (1984) argued long ago, to understand it we need not David Ricardo with his Panglossian view of the mutual benefits of free trade, but Friedrich List with his frank appreciation of the reality of international dominance and contestation. The gold sterling standard rested not on an alleged solidity of gold, but on authoritarian and imperial foundations. Authoritarian politics domestically permitted Britain and other member countries to impose the costs of adjustment on working classes. Internationally, the British Empire provided the surpluses through which Britain supplied the world with liquidity by exporting capital.
It is widely appreciated that these capital exports relied on ‘the colonies’. While the classical theorists of imperialism were right to note this, they were more concerned with the effects of imperialism on Europe itself, chiefly how competition for colonies would, and did,
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lead to war. So they did not make the historically fateful distinction between the white-settler colonies, such as the (former colony) the United States, Canada and Australia, and the nonsettler colonies, such as India, the Caribbean or Africa. Just how fateful this distinction was becomes clear when we note that capital was available for export thanks to surpluses drawn from the non-settler colonies directly and indirectly. Directly, the surpluses came from taxation. Indirectly, they came from the trade surpluses the non-settler colonies ran with the rest of the world by exporting chiefly low-priced primary products. The hard currency proceeds of these trade surpluses were appropriated by Britain, and they more than compensated for her trade deficits. Britain may have been the first industrialiser and once the ‘workshop of the world’, but by the late nineteenth century, the heyday of the so-called gold standard, it was facing competition from contender industrialisers like the US, Germany and Japan, which pursued state-led, protectionist, combined development.
By contrast, Britain, despite the industrial decline it now began to experience in the face of this competition, preferred to adhere to freer trade policies rather than prioritise addressing her industrial decline through a state-directed revival of her industry. Doing otherwise would have compromised the interests of the aristocratic landed and financial class that continued to rule her, notwithstanding being home to the Industrial Revolution (this point has been the subject of much discussion, originating on the left but then also accepted in mainstream scholarship. See Anderson 1987, Ingham 1984). What is important for our purposes, however, is that this approach permitted Britain to export capital rather than invest it at home and export it to the white-settler colonies, including the United States, all of which began or accelerated their industrialization in the late nineteenth century (detailed figures available in Feis 1964). Figure 3 displays the flows from the non-settler colonies, via the United Kingdom, to the settler colonies.
These facts, essential to understanding the past and future of the international monetary system, are rarely noted, largely so that the essential contribution of the colonies to the
Surpluses from non-Settler Colonies Capital Exports to Settler Colonies
Figure 3
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industrialization of the capitalist core and the harm colonialism did to the colonies are safely obscured or even actively denied when intellectuals from colonies, such as India, draw attention to them. As Utsa Patnaik, who has done sterling work in uncovering this matter (see, inter alia, Patnaik 2006 and 2017) points out
The literature on economic imperialism .... reveals little awareness of even the fact of the existence of transfers, let alone the sheer scale of the transfers involved, or the specific real and financial mechanisms through which these transfers were effected. In India, the largest colony of the first world capitalist leader, Britain, a rich discussion dealing with transfers, termed the ‘drain of wealth’, has been taking place from the time that the phenomenon was pointed out over a century ago by Dadabhai Naoroji and R.C. Dutt. The literature on industrial transition in the core countries in the eighteenth-nineteenth centuries ignores almost completely this existing discussion on the drain of wealth, or transfers from the colonies. The mainstream interpretation posits a purely internal dynamic for the rise of capitalist industrialization, and some authors argue that the colonies were a burden on the metropolis which would have been better off if they had been ‘given away’. (Patnaik 2017, 277)
The studied silence on this matter has been so effectively maintained that no one in the vast body of Keynes scholarship, while praising the perspicuity of John Maynard Keynes’s first book Indian Currency and Finance (1913), asked how a work on Indian monetary affairs could become a primer on the operation of the gold standard. It could only do so because colonies in general and India, the Jewel in the British Crown, in particular, were central to its operation. The centrality was such that the so-called gold standard should have been, more accurately, named the colonial standard, so little did gold have to do with it and so much the colonies, as the quote in Figure 4 (Desai 2018a) makes clear.
Even with the advantages the British Empire afforded, Britain’s position in the international monetary system was not unassailable. The critical thing to understand here was that
‘John Maynard Pangloss: Indian Currency and Finance in Imperial Context’
Not only was Moggridge right that Keynes’s ‘writings on India reflected wnat mightbe called the India Office view of the world’ (Moggridge 1992, p. 203), the India Office in these years was a central part of wnat would later be called the ‘City-Bank-Treasury’ nexus (Ingham 1984). For, given India’s centrality'to the operation of the gold standard, the India Office was its engine room, where the fuel of the home charges turned its big wheels of credit and Key nes was the protege of its key engineers like Lionel Abrahams. In 1CF, he merely put down their understanding of how they' worked the gold standard, managed money and economised on gold, and made minor suggestions on how it might be improved to better serve the same purposes. While there was intellectual merit in his lucid and informative synthesis, that is all it was.
Figure 4
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the so-called gold standard system was not a uniform one, but consisted of very different countries with very different aims and roles. Britain was, of course, its centre, with the Bank of England playing, as Keynes memorably described it, the role of the conductor of an international orchestra. But its members were far more wilful and the overall sound considerably more cacophonous than Keynes’ glib analogy suggests.
Contrary to the idea of the gold standard as a sort of automatic, neutral international measure of competitiveness, none of the countries that joined the gold standard, leaving the silver standard that had prevailed until then, had «... the slightest intention of linking their countries to an international monetary system which would then automatically produce a kind of international economic meritocracy, based on differences in prices and interest rates among the various nations. ... The various governments adopted such economic policies as they deemed would best serve the interest of the ruling classes». (De Cecco, 1984, 60-61)
While gold appreciated, some countries, such as the oligarchical primary commodity exporters, Austria-Hungary and Russia, remained with depreciating silver (ibid., pp. 51-2). Moreover, the countries which adopted the gold standard did so for varied reasons: to escape the depreciation of silver or to obtain credit. Moreover, the system could be and was challenged. Countries like Germany joined the gold standard not to subordinate themselves to sterling, but to challenge it with a gold-backed mark. As a contender industrialiser, Germany wanted to gain international acceptability for its own currency as part of a drive to expand market share (ibid., ch. 3).
The result was international monetary instability. After all, ‘a stable gold exchange standard could exist only so long as the political sovereignty of the centre countries vis-a vis the periphery remained unchallenged’ (ibid., p. 57). So, ‘the system was stable while it remained a Sterling Standard, and ... it began to oscillate more and more dangerously, till its final collapse in July 1914, as Britain declined and other large industrial countries rose to greater prominence, and adopted the Gold Standard [i.e. sought to become key currency countries] as a form of monetary nationalism, in order to deprive Britain of her last power, that of control over international financial flows’ (ibid., pp. vii-viii).
This international challenge was joined by a domestic one. As we have seen, a gold standard could only work as long as the working classes remained unorganised and unable to resist the discipline of adjustment, usually the lowering prices and wages, whenever there was a trade deficit. Eichengreen’s (1992) account is celebrated for pointing to the role of organised labour in undermining the gold standard. However, he appears to believe it began in the interwar years when, in fact, even Britain’s legendary commitment to the gold standard was weakening well before 1914, inducing it to avoid its ‘discipline’ and ‘adjustment’ ‘rather than continuing to accept the sacrifice of domestic unemployment’ (Block 1977, p. 14; Lindert 1969, pp. 74-5) in the face of an increasingly organised working class.
For both these reasons, international and domestic, Britain’s commitment to the goldsterling standard was wavering well before the First World War and not, contra Eichengreen, only after it.
John Maynard Keynes may have had a Panglossian attitude to the gold standard in 1913, admiring it unreservedly in Indian Currency and Finance and delighting in proposing little tweaks that would make it function better. After all, at the time Britain was still the directing centre of the international monetary system. However, this would change, drastically and rapidly. The Thirty Years’ Crisis (1914-1945) during which Britain suffered the steepest decline of any nation, going from the premier imperial power to a weak national economy imminently to lose its colonies, also led Keynes on a long intellectual journey whose leitmotif
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was his thinking on international monetary matters. It grew ever more critical of the goldsterling system in tandem with Britain’s decline and his growing awareness that the US coveted the international monetary role Britain had once played, centrally involved as he was with questions of British economic policy. By the 1940s as head of the British delegation to Bretton Woods, he was proposing such a radical overhaul of the international monetary system that it would be, in nearly every substantive aspect, the opposite of the gold sterling system (argued in Desai 2015 and further elaborated in Desai 2018).
Keynes’ proposals recognised that in the absence of a world state, world money was impossible. He was also acutely aware that as the US dollar became more important, Britain faced subordination of its monetary policy to a foreign power. This was the opposite of what Britain needed, not least because, given the parlous state of its industry, Britain needed state-directed productive investment if it was to maintain its living standards and export and earn enough foreign exchange to fund its historically large import needs. The reason why these proposals found wide support was that in speaking for a country that was being inexorably transformed from a powerful imperial to a weak national economy, Keynes’s proposals would be closer to what most countries in the world needed (as argued in Desai 2009).
Rather than being run by the most powerful country, the system Keynes originally proposed at Bretton Woods would be a truly multilateral system dominated by no country or national currency. In the proposed system, national currencies would not be pegged to gold, but to a multilaterally created currency, which Keynes named ‘bancor’. It would be used only for settling imbalances between central banks, and its value would be governed not by the price of gold, representing the financial interests of a narrow wealthy elite, but by a basket of primary commodities systemically important in world trade. That would represent a wider popular interest in productive expansion and monetary stability. This peg to primary commodities rested on Keynes’s recognition that it was specifically their rising prices (along with those of labour) that typically triggered inflation and decline in the value of money, an insight developed recently by Prabhat and Utsa Patnaik in their brilliant work A Theory of Imperialism (Patnaik and Patnaik 2016). Nor would the peg be perpetual: it could be changed if circumstances required it.
Keynes’s proposals also recognised the necessity of subordinating the financial system to production and proposed capital controls, confining the options of financial capital to its respective national economy. They would permit more effective national regulation of financial sectors, gearing them to financing productive, long-term investment rather than unproductive, even counter-productive, short-term speculation, and the management of national economies for full employment without having to worry about the exchange rate implications.
Finally, recognising the harm stronger countries could wreak on weaker ones, chiefly through the mechanism of adjustment to current account deficits, Keynes proposed that the International Clearing Union (ICU), the institution that would govern bancor, would discourage persistent imbalances, surpluses as well as deficits, on both trade and capital flows. He also proposed creditor and surplus country co-adjustment for trade and financial imbalances, making it as incumbent on the trade surplus country to accept more imports as it did on trade deficit countries to export more (and consume less) and it recognised the co-responsibility of creditors as well as debtors for any credit/debt relationship. This set of features promised to convert the normally deflationary process of adjustment into an expansionary one. It would also prevent the accumulation of strength at some poles and the compounding of disadvantage at others. It made the economic strength and development of weaker countries a responsibility of the system in general and the stronger countries in particular.
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The Dollar Non-System: The World-Wide Cost of Vanity
At the end of the Second World War, the folly of national currencies serving as the world’s money was clear. The authoritarian and imperial world that had underpinned the sterling system was no longer. The domestic power of working people in countries around the world had grown too large to permit the burden of adjustment to be inflicted on them, and the forces of national liberation were too strong to permit the extraction of surpluses that had furnished liquidity hitherto. So, how did the dollar, which was after all just another national currency, become the world’s money? Was it sustainable? The short answers are that it was imposed by force and was not sustainable.
As is inevitable when powerful interests are involved, much confusion surrounds the international monetary system, a confusion compounded by dominant scholarly currents, which, as we have noted, have worked at once to mystify and normalise the dollar system, all the more energetically after 1971 when it became even more volatile, opaque and questionable.
Keynes’ proposals were defeated by Bretton Woods not by Harry Dexter White’s, as is often supposed in hegemony stability theories. White’s proposals were a mere variation on Keynes’ (Skidelsky 2002). Despite both seeking an international monetary system that would be more equitable and reflect interests wider than those of the US, US policy-makers insisted on making the dollar the world’s money (Block 1977 is also useful here) in a vain effort to emulate the gold-sterling standard (Desai 2009 and 2013). Indeed, US policy and political elites had been seeking to emulate British dominance and become ‘the managing segment of the world economy’ (Parrini 1969) ever since they realised it was waning in the early years of the twentieth century. They realised, of course, that it would have to be a sort of ‘dominance lite’. After all, in an age when other major capitalist countries had already staked their claim to much of the world territory available for colonization and when nationalism was also on the rise, the US could hardly hope to amass an empire remotely comparable to the UK’s.
Even such ‘dominance lite’ was, however, now impossible. Firstly, as we have seen, it was impossible even for the largest empire in the world. Britain’s gold-sterling standard was never stable or neutral. Secondly, it was powered by the fuel of colonial surpluses, and the US had none. It could only supply the world with liquidity by running deficits, and this method was subject to the famous Triffin Dilemma (Triffin 1961): the larger the deficits, the more downward pressure they put on the dollar, straining its peg to gold. While the troubles this created manifested themselves in the form of outflows of gold until 1971 when the dollar was tied to gold, the problem did not go away thereafter. It only manifested itself in downward pressure on the dollar.
This is why, though it looks as though the dollar has remained the world’s currency since the end of the Second World War, and despite the closing of the gold window, in reality, the dollar has never worked as a stable world currency and since 1971 has been subjecting the world to unnecessary financialization and financial instability.
During the 1950s, the US export surpluses created a shortage of world liquidity which the relatively puny and largely self-serving Marshall Plan (Kolko and Kolko 1972, 429-35) could not remedy. By the 1960s, when the European economies had recovered, with US current account deficits already widened by the Vietnam War, as soon as European currencies became convertible, the dollar shortage turned into a dollar glut overnight. Gold flowed out, and the 1960s witnessed one stratagem after another to keep the dollar’s gold backing - the gold pool, the end to domestic gold convertibility, persuading Europeans not to demand gold, etc. Once they were exhausted, there was no alternative to closing the gold window. The rationale for closing it was reinforced by the US’s own declining competitiveness.
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The dominant narrative of what happened thereafter, essentially the one created by the hegemony stability theories that now appeared (on the timing of these theories, see Desai 2013, Chapter 5), looks with a certain grudging admiration at the US’s nerve in closing the gold window. Many had feared that it would lead to an end of the dollar’s world role. No such end came, and, according to the dominant interpretation, the dollar not only survived but even thrives, while relieving the US of the burden of backing it with gold. Some even speak of a ‘Bretton Woods II’. Most hegemony stability theories, such as Charles Kindleberger’s, confine themselves to insisting, as they had done since the late 1960s (Despres, Kindleberger and Salant, 1969), that the acceptability of the dollar was not affected by US deficits because the US was not an ‘ordinary country’. Instead, it was the world’s banker, essentially empowered to create its money. According to such views, private investors understood this and were confident of the dollar; only central bankers were the thorn in the dollar’s side. Of course, this was little better than a narrative fig-leaf, what Michael Hudson called a ‘ Say’s Law for international finance’ (Hudson 1972, 325; for further discussion, see Desai 2013, 113-119). After all, the US’s excessive outstanding dollars were no investment, and no world central bank authorised or regulated it.
Moreover, no amount of intellectual heft could affect the reality that the US was a single nation state whose economy was suffering from serious competitiveness problems. The downward pressure on the dollar that the Triffin Dilemma would lead us to expect never went away. Immediately upon the closing of the gold window, the Federal Reserve had to organise market intervention to prop up its value when the private sector failed to express its confidence adequately. Since 1971, the broad trend in the dollar’s value has been downward. And it would have gone downward faster were it not for financialization. However, though the decades since then have witnessed varieties of hegemony stability theories naturalising the dollar’s world role ruling the scholarly roost, doubts about it have never been far from the surface and have been regularly expressed with every crisis that its necessary accompaniment, financialization, has caused.
Financialization and the Dollar Non-System
If the dollar has managed to sustain a major role in the world’s monetary affairs since 1971, it has been because of an enormous expansion of financial activities (The narrative in this section relies on Desai 2013a, 239-41). It has created an artificial demand for dollars, one that has little to do with the demands of production and trade and is even constricting them, which counteracts the downward pressure on the US dollar predicted by the Triffin Dilemma. This financialization emerged in the 1970s with the oil price rises. They increased demand for dollars directly since oil remained denominated in dollars. Moreover, the US also ensured the failure of European and Japanese proposals for recycling OPEC oil surpluses so that these surpluses were deposited in Western, chiefly Anglo-American banks in dollars, swelling the small and nascent Eurodollar market with petrodollars. These had to be lent out and, given that the Western world had already entered the Long Downturn and therefore presented few investment opportunities, they flowed to the Third World in a lending spree that laid the foundations of the Third World debt crisis in the 1980s. That crisis erupted when, despite this prop, the dollar once again began to sink and Paul Volcker exercised the nuclear option of permitting interest rates to rise to whatever level was necessary to stop dollar devaluation, even at the cost of a severe recession.
The so-called Volcker Shock led to that massive and, given the realities of the US economy and its competitiveness problems, dangerous overvaluation of the US dollar that
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required the Plaza Accord to bring it down, but not before causing the first of the modern bubbles in the US stock market, which burst in 1987. The 1980s were turbulent. The dollar swung wildly. The US’s twin deficits ballooned as Reagan cut taxes and increased (chiefly defence) expenditures. The Japanese invested their export surpluses to finance them. The Third World debt crisis raged, siphoning money from the Third World and pouring it into Western and Anglo-American financial markets enabling them to get up to even more mischief. The US’s own savings and loans crisis aided concentration in the US financial sector by wiping out scores of small and local financial institutions that had hitherto invested productively, but were now trapped between strict regulation and the inflation of the 1970s. And major US financial institutions exposed to the Third World debt crisis, such as Continental Illinois, nearly collapsed before being bailed out by the US government (incidentally giving rise to the concept of ‘too big to fail’, as Ugarteche explains in his forthcoming publication). Amid all this, financialization continued, but with one critical difference: direct lending was replaced, sector-wide, with securitised lending.
The securitization of lending was fashioned by the US financial sector itself and it would be one of the three pillars of US-centred financialization. The other two would be provided by Alan Greenspan, who replaced Paul Volcker as Chairman of the Federal Reserve a few weeks before the bursting of the stock market bubble in 1987 and retired in 2006, when trouble first began to appear in the US housing and credit markets. Volcker had proved too old-fashioned for a financial sector already straining against the Depression-era regulations that still girded it. Greenspan would initiate the process of deregulation that culminated in the 1999 repeal of the Glass-Steagall Act. This deregulation was the second pillar. Thirdly, within weeks of taking office, Greenspan built the final pillar of modern-day financialization, the ‘Greenspan put’, i.e. the promise to inject necessary liquidity into financial markets at every crisis to ensure that its commanding heights would always be bailed out even as the savings of retail investors and working people invested in pension and mutual funds were wiped out. Securitised lending, deregulation and the Federal Reserve’s guarantee (or ‘put’) to financial markets would undergird the series of financialization that would now undergird the US-dollar system and prop up the dollar (Fleckenstein 2008 offers an entertaining, but also alarming account), counteracting the Triffin Dilemma.
The dollar, which had slumped with the recession of the early 1990s, rose under Clinton as the Federal Reserve kept interest rates high and the government followed a strong dollar policy and led a campaign urging chiefly East Asian ‘Big Emerging Markets to lift capital controls. While the argument was couched in terms of how this would bring the benefits of long term productive investment which their developing economies so badly needed, lifting capital controls could and did only permit funds from these countries to enter the US dollar centred financial system and enabled US and other western financial institutions to seek profits through short term investments in their financial and asset markets. Such capital movements led to the East Asian Financial crisis (two of the best accounts are Bagchi 1998 and Wade and Veneroso 1998, while Rohatyn 1994 presciently predicted it), and, thereafter, as dollars returned home, they inflated the stock market and ‘dot-com’ bubbles that burst in 2000.
They, as is well-known, were replaced by the housing and credit bubbles that burst in 2008. Figure 5 plots the rise and decline of cross-border capital flows, one indicator of the extent of financialization. There are a number of things to note here. The first is the sheer scale of the rise of the flows. They reached an initial peak in the late 1990s marking the East Asian Crisis and a second peak close to 2000 marking the dot-com and stock market bubbles that
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Экономическое возрождение России. 2019. № 3(61)
Rise and Decline of Cross Border Capital Flows
Mc-Kinsey Global Institute, 'A Decade Atarthe Global Financial Crisis: Wbat lias fatid hasn't) Changed'. EneflugNcilt,
^dii^dmbiii1 -T.m К
Exhibit E1
Global cross-border capital flows have declined 65 percent since the 2007 peak
Global cross-border capital flows'
$ trillion
Q ___I__I__I__I__I__I__I__I__I__I__I__I__I__I__I__I__I__I_I__I__I__I__I__I__I__I
1990 95 97 2000 03 07 10 14 2016E
% of _____________ 1990-2000 _________________._______________ 2000-10 __________________ 2010-16E
global GDP 5.3 11.5 7.1
1 Gross capital inflows, including foreign direct investment (FDI). debt securities, equity, and lending and other nvestment
SOURCE: International Monetary Fund (IMF) Balance of Payments: McKmsey Global Institute analysis
1 World Trade Organization, Report on G20 trade measures, June 21,2016. г The analysis in this report is based on many sources of data, tut several primary ones stand out: gross cross-border capital inflows and outflows and net capital flows from national balance of payments: the stock of foreign investment assets and liabilities of countries, also from rational balance of payments; and the stock of tanks’ foregn claims from Ihe Bank for International Settlements ©IS). Balance of payments data ccme from the International Monetary Fund (IMF). For more detail on data -definitions and soirees, see Box 1 n Chapter 1.
Figure 5
burst that year. The second thing to note is the order of magnitude that separates these earlier peaks from the greatest one of them all, the credit and housing bubble that burst in 2008.
Three major developments made it so large. The first was the repeal of the Glass Steagall Act in 1999. The second was the low interest rate policy that the Federal Reserve followed from the bursting of the stock market and dot-com bubbles in 2000 to the middle of the 2000s, when downward pressure on the dollar became too acute to continue. The resulting rises in interest rates eventually led to the bursting of the housing and credit bubbles, both of which relied on low interest rates. The third was the launching of the Euro and the deregulation of the Eurozone’s financial sector that went with it. It resulted in Eurozone financial institutions becoming heavily invested in what proved to be the ‘toxic securities’ generated by the housing and credit bubbles (Brenner 2009 is among the best brief accounts of the housing and credit bubbles, and Nesvetailova and Palan 2008 document the Eurozone’s implication in them, which is otherwise rarely commented on).
The dominant understanding of the 2008 crash, propagated as much by the none-too-clever US president at the time as by the erudite Governor of the Federal Reserve and accepted by most observers, focused the role of the allegedly too-great ‘Asian’ savings in providing
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Четвертый международный политэкономический конгресс
European Investment in US Toxic Securities’
Souive: Bono, Claudio and Pit! Disyatat. son. "Global Imablanoes and the Financial Crisis: Link or no link?" Bank for IrfemuftMul SeltleHieuts Working Paper No. 346- Мяу.
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Gro-bs Capital flows' as a percentage of Woitrl GDP
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Figure 6
the excess of liquidity that inflated the twin bubbles. However, Claudio Borio and Piti Disyat-at pointed to the fallacy of such arguments. They focused only on net flows whose magnitude was too small to carry the weight of this ‘Asian Savings Glut’ explanation (see also Chan-drashekhar and Ghosh 2005). The real story lay in the gross capital flows. When these were examined, it was clear that Asia, including China, had only a bit part in the larger drama whose principal dramatis personae were investors and financial institutions in other advanced economies, chiefly Europe. This also became clear from the analysis of the pattern of suffering: while it was concentrated in the US, the UK and the Eurozone, the rest of the world, though it suffered from a sharp but also short trade shock, emerged relatively unscathed. That is why the crash of2008 is better termed a North Atlantic Financial Crisis rather than a Global Financial Crisis.
A second important matter is that, while the earlier smaller peaks did coincide with a rising dollar, despite its vastly greater size, the increase in cross-border flows in the 2000s did not prevent steady and steep fall in the value of the dollar, no matter how much US policymakers and the Greenspan and Bernanke Feds talked up the US economy and its financial sector. That means that, without this enormous increase in financial activity, the dollar would have fallen even more steeply.
Conclusion: 2008 and the Future of the US Dollar Non-System
The third important matter is that, after crashing in 2008, though international capital flows recovered, their levels remain considerably short of the 2007 peak, by some 65% in 2016. This and accompanying developments point to an acceleration in the world’s shift away from the dollar. A number of points may be noted.
In themselves, lower levels of international capital flows mean that the rest of the world is pouring less money into the US dollar-dominated financial system, and this limits the
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Экономическое возрождение России. 2019. № 3(61)
extent of dollar-denominated financializations on which the dollar’s international role and its value has depended. Financial resources necessary to feed the financializations necessary to prop up the dollar’s value are coming, and must now come, from US sources. The Federal Reserve, with its return to lax monetary posture (low interest rates and Quantitative Easing until October 2014 which has inflated its balance sheet to historically unprecedented levels), is certainly the major source. Though justified in terms of levels of inflation and employment, the real function of Federal Reserve monetary policy has been to provide US financial institutions with the liquidity necessary to continue the speculative activities that have been the chief source of their income as well as the chief prop of the US dollar. However, with the substantial withdrawal of European financial institutions from this game, it is one that is being played chiefly by US financial institutions and the inevitable bust, when it comes, will affect them chiefly.
Secondly, the Federal Reserve is caught on the horns of another dilemma: on the one hand, injections of liquidity into the system are necessary to keep dollar-denominated financializations going, while on the other, lax monetary policy is putting direct downward pressure on the US dollar. This is best witnessed in the effects of US monetary policy on the currencies of certain countries that insist on keeping their capital accounts open. In these countries, such as Russia or Turkey, when US monetary policy is lax, dollar-denominated funds flow in, inflating the rouble or the lira. At the slightest hint of tightening at the Federal Reserve, however, it flows out, leading to a crash in their values. These countries keep their capital accounts open in the interests of their wealthier classes, permitting them to take their money out of the country and to participate in the entirely unproductive and speculative activities of the US dollar denominated financial system. Open capital accounts certainly do nothing for the health of the national economy or its productive growth. Open capital accounts also require, as a measure of prudence, the accumulation of reserves, usually in US dollars, which can be used in the event of unexpected, severe and unjustified downward pressure on their currencies. These reserves represent funds that could be productively invested, but are kept in forced idleness (Rodrik 2006). Those who benefit from these arrangements are the US financial sector, the US ultra-rich who own it and the super-rich of these otherwise ill-served countries.
Thirdly, just as the entirely speculative and financialised nature of the US-dollar centred financial system is becoming ever clearer, the US policy-makers have begun weaponising it. The increasing use of financial sanctions effectively and illegally blockade countries as diverse as Venezuela, Iran and Russia from using the US dollar-denominated payments system or accessing finance through it. The US also sequesters the assets of these countries and their nationals and causes them to lose credit and standing in the international financial and trading system. Such US actions has made the search for alternative payments and financial mechanisms more urgent.
Contrary to the many who believe that the US dollar can only be replaced by another currency, our argument has stressed that this role was difficult even for sterling, with the surpluses of the British empire flowing through it, to play. And it was impossible for the dollar. It could only give rise to a non-system. It can only be replaced either by multilateral arrangements of the sort Keynes proposed 75 years ago or, given that the sort of wide agreement it would require is unlikely to be forthcoming if only because the US elite and policymakers, with the most to lose, will certainly be the major nay-sayers, through a more dispersed set of bi-, mini- and plurilateral agreements between two or more countries. It is important to recall that it was not the US’s enemies but its closest allies, the countries of the
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European Union, which began the move away from the dollar nearly 5 decades ago. They began the process of European Monetary Integration soon after the closing of the gold window in 1971 and today’s Eurozone is, for all its current troubles which point to critical design faults, the first, largest and most enduring of attempts to opt out of the dollar system.
The key thing is that such a scenario has been emerging for some time and today, it appears, is increasingly centred around China, particularly its Asian Infrastructure Investment Bank and its Belt and Road Initiative. This alternative could not be more different from the US-centred one. Figure 7 itemises their key differences.
On the one hand, the US dollar-centred system, reliant as it is on financialization, is focused on short term, speculative and volatile investments which have been responsible for countless financial bubbles and crises. They also require dangerous capital account liberalization and inefficient reserve accumulation. Finally, the US dollar-centred system is even at the root of wars waged to prevent countries from exiting it, as, most famously, in the cases of Iraq or Libya. By contrast, the emerging monetary and financial system centred on China provides long-term, stable and what is increasingly called ‘patient’ capital for productive investment. It permits capital account management and control which lead to financial stability and an efficient allocation of capital for production and employment growth. Rather than wars, it promotes international cooperation.
It should now be clear how, in the geopolitical economy of advancing multipolarity, itself the result of uneven and combined development which has served to beat back the imperial power of the first industrialisers and spread productive power ever more widely, even the sterling-centred ‘gold’, or rather colonial, standard was fraught with instability, both domestic and international. It should also be clear why the dollar could only preside over a non-system. It never worked even when the dollar was pegged to gold and, in order to keep it going after the closing of the gold window in 1971, repeated dollar-denominated financializa-tions have been necessary. It is no wonder that the five decades since have been regularly punctuated with destructive financial crises. Initially inflicted on the rest of the world, beginning with the many Third World countries in the 1980s, these crises have slowly been inching towards the homeland of the dollar-system, the Anglo-American financial system. It has already taken many hits and the most recent one in 2008 already led to a massive decline in
International Financial Systems: Old vs New
us
• Short term capital
• Speculative investment
• Financial crises
• Volatile capital
• Capital account liberalization
• Inefficient Reserve accumulation
• Wars
China
• Long term capital
• Productive investment
• Financial stability
• Stable capital
• Capital account management
• Efficient allocation of capital
• Cooperation
Figure 7
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international financial flows, reducing the capacity of the system to draw in funds from outside. The next crisis, inevitable as the previous ones were and imminent, according to many, will only further accelerate the process by making the costs of participating in the dollar system all the more clear.
What will emerge in its place is not another national currency to serve as the world’s money, but a more complex set of arrangements: the more they resemble Keynes’s original Bretton Woods proposals, the better off the majority of the people in the world will be.
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