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• THE END OF SUPER IMPERIALISM

eBitcoinics   11 Nov, 2021   Bitcoin magazine   Views: 368

In 1972, one year after President Richard Nixon defaulted on the dollar and formally took the United States off of the gold standard for good, the financial historian and analyst Michael Hudson published “Super Imperialism,” a radical critique of the dollar-dominated world economy.

The book is overlooked by today’s economic mainstream but puts forward a variety of provocative arguments that place it outside of the orthodoxy. However, for those seeking to understand how the dollar won the money wars of the past century, the book makes for essential reading.

Hudson’s thesis comes from the left-leaning perspective — the title inspired by the German Marxist phrase “überimperialismus” — and yet thinkers of all political stripes, from progressives to libertarians, should find value in its approach and lessons.

In “Super Imperialism,” Hudson — who has updated the book twice over the past 50 years, with a third edition published just last month — traces the evolution of the world financial system, where U.S. debt displaced gold as the ultimate world reserve currency and premium collateral for financial markets.

How did the world shift from using asset money in the form of gold to balance international payments to using debt money in the form of American treasuries?

How did, as Hudson puts it, “America’s ideal of implementing laissez-faire economic institutions, political democracy, and a dismantling of formal empires and colonial systems” turn into a system where the U.S. forced other nations to pay for its wars, defaulted on its debt, and exploited developing economies?

For those seeking to answer the question of how the dollar became so dominant — even as it was intentionally devalued over and over again in the decades after World War I — then “Super Imperialism” has a fascinating, and at times, deeply troubling answer.

Drawing on extensive historical source material, Hudson argues that the change from the gold standard to what he calls the “Treasury Bill Standard” happened over several decades, straddling the post-World War I era up through the 1970s.

In short, the U.S. was able to convince other nations to save in dollars instead of in gold by guaranteeing that the dollars could be redeemed for gold. But eventually, U.S. officials rug-pulled the world, refusing to redeem billions of dollars that had been spent into the hands of foreign governments under the promise that they were as good as gold through fixed rate redemption.

This deceit allowed the U.S. government to finance an ever-expanding military-industrial complex and inefficient welfare state without having to make the traditional trade offs a country or empire would make if its deficit grew too large. Instead, since U.S. policymakers figured out a way to bake American debt into the global monetary base, it never had to pay off its debt. Counterintuitively, Hudson says, America turned its Cold War debtor status into an “unprecedented element of strength rather than weakness.”

As a result, the U.S. has been able to, in Hudson’s words, pursue domestic expansion and foreign diplomacy with no balance of payment concerns: “Imposing austerity on debtor countries, America as the world’s largest debtor economy acts uniquely without financial constraint.”

A key narrative in Hudson’s 380-page book is the story of how the U.S. government systematically demonetized gold out of the international economic system. Curiously, he does not mention Executive Order 6102 — passed by President Roosevelt in 1933 to seize gold from the hands of the American public — but weaves a compelling narrative of how the U.S. government pulled the world away from the gold standard, culminating in the Nixon Shock of 1971.

In Hudson’s view, leaving the gold standard was all about America’s desire to finance war abroad, particularly in Southeast Asia. He says the Vietnam War was “single-handedly” responsible for pushing the U.S. balance-of-payments negative and drastically drawing down America’s once staggering gold reserves.

Ultimately, Hudson’s thesis argues that unlike classic European imperialism — driven by private sector profit motives — American super imperialism was driven by nation-state power motives. It was not steered by Wall Street, but by Washington. Bretton Woods institutions like the World Bank and International Monetary Fund (IMF) did not primarily help the developing world, but rather harnessed its minerals and raw goods for America and forced its leaders to buy U.S. agricultural exports, preventing them from developing economic independence.

There are, of course, several criticisms of Hudson’s narrative. It can be argued that dollar hegemony helped defeat the Soviet Union, pressuring its economy and paving the way for a more free world; usher in the age of technology, science, and information; push growth globally with surplus dollars; and isolate rogue regimes. Perhaps most compellingly, history seems to suggest the world “wanted” dollar hegemony, if one considers the rise of the eurodollar system, where even America’s enemies tried to accumulate dollars outside of the control of the Federal Reserve.

Hudson was not without contemporary critics, either. A 1972 review in The Journal Of Economic History argued that “it would require an exceptionally naive understanding of politics to accept the underlying assertion that the United States government has been clever, efficient, totally unscrupulous, and consistently successful in exploiting developed and developing nations.”

The reader can be the judge of that. But even with these criticisms in mind, Hudson’s work is important to consider. The undeniable bottom line is that by shifting the world economy from relying on gold to relying on American debt, the U.S. government implemented a system where it could spend in a way no other country could, in a way where it never had to pay back its promises, and where other countries financed its warfare and welfare state.

“Never before,” Hudson writes, “has a bankrupt nation dared insist that its bankruptcy become the foundation of world economic policy.”

In 1972, the physicist and futurist Herman Kahn said that Hudson’s work revealed how “the United States has run rings around Britain and every other empire-building nation in history. We’ve pulled off the greatest rip-off ever achieved.”

Governments always dreamed of transforming their debt into the most valuable asset on earth. This essay explains how the U.S. succeeded in turning this dream into a reality, what the implications for the wider world were, how this era might be coming to a close, and why a Bitcoin standard might be next.

THE RISE AND FALL OF AMERICA AS A CREDITOR NATION

European powers, tempted by the ability to print paper money to finance war operations, broke off the gold standard entirely during World War I. The metal’s restraint would have resulted in a much shorter conflict and the warring factions decided instead to prolong the violence by debasing their currencies.

Between 1914 and 1918, German authorities suspended the convertibility of marks to gold and increased the money supply from 17.2 billion marks to 66.3 billion marks, while their British rivals increased their money supply from 1.1 billion pounds to 2.4 billion pounds. They expanded the German monetary base by six-fold and the British monetary base by nearly four-fold.

While European powers went deeper and deeper into debt, America enriched itself by selling arms and other goods to the allies, all while avoiding conflict in its homeland. As Europe tore itself to shreds, American farms and industrial operations ran full steam. The world at large began to buy more from the U.S. than it sold back, creating a large American current account surplus.

Post-war, U.S. officials broke with historical precedent and insisted that their European allies repay their war debts. Traditionally, this kind of support was considered a cost of war. At the same time, U.S. officials put up tariff barriers that prevented the allies from earning dollars through more exports to America.

Hudson argues that the U.S. essentially starved Germany through protectionist policy as it was also unable to export goods to the U.S. market to pay back its loans. Britain and France had to use whatever German reparations they did receive to pay back America.

The Federal Reserve, Hudson says, held down interest rates so as not to draw investment away from Britain, hoping in this way the English could pay back their war debt. But these low rates in turn helped spark a stock market bubble, discouraging capital outflows to Europe. Hudson argues this dynamic, especially after the Great Crash, created a global economic breakdown that helped trigger nationalism, isolationism, autarky, and depression, paving the way for World War II.

Hudson summarizes America’s post-World War I global legacy as follows: the devastation of Germany, the collapse of the British Empire, and a stockpiling of gold. At home, President Roosevelt ended domestic convertibility of dollars for gold, made holding gold a felony, and devalued the dollar by 40%. At the same time, the U.S. received most of Europe’s “refugee gold” during the 1930s as the threat of renewed war with Germany led to capital flight from wealthy Europeans. Washington was accumulating gold in its own coffers, just as it was stripping the precious metal from the public.

As World War II neared, Germany halted reparations payments, drying up the allied cash flow. Britain was unable to pay its debts, something it wouldn’t be able to fully do for another 80 years. Capital flight to the “safe” U.S. accelerated, combining with Roosevelt’s tariffs and export-boosting dollar devaluation to further enlarge America’s balance-of-payments position and gold stock. America became the world’s largest creditor nation.

This advantage grew even more dramatic when the allies spent the rest of their gold to fight the Nazis. By the end of the 1940s, the U.S. held more than 70% of non-Soviet-central-bank-held gold, around 700 million ounces.

In 1922, European powers had gathered in Genoa to discuss the reconstruction of Central and Eastern Europe. One of the outcomes was an agreement to partially go back to the gold standard through a “gold exchange” system where central banks would hold currencies which could be exchanged for gold, instead of the metal itself, which was to be increasingly centralized in financial hubs like New York and London.

In the later stages of World War II in 1944, the U.S. advanced this concept even further at the Bretton Woods conference in New Hampshire. There, a proposal put forth by British delegate John Maynard Keynes to use an internationally-managed currency called the “bancor” was rejected. Instead, American diplomats — holding leverage over their British counterparts as a result of their gold advantage and the bailouts they had extended through Lend-Lease Act policies — created a new global trade system underpinned by dollars, which were promised to be backed by gold at the rate of $35 per ounce. The World Bank, International Monetary Fund, and General Agreement on Tariffs and Trade were created as U.S.-dominated institutions which would enforce the worldwide dollar system.

Moving forward, U.S. foreign economic policy was very different from what it was after World War I, when Congress gave priority to domestic programs and America adopted a protectionist stance. U.S. policymakers theorized that America would need to remain a “major exporter to maintain full employment during the transition back to peacetime life” after World War II.

“Foreign markets,” Hudson writes, “would have to replace the War Department as a source of demand for the products of American industry and agriculture.”

This realization led the U.S. to determine it could not impose war debt on its allies like it did after World War I. A Cold War perspective began to take over: if the U.S. invested abroad, it could build up the allies and defeat the Soviets. The Treasury and the World Bank lent funds to Europe as part of the Marshall Plan so that it could rebuild and buy American goods.

Hudson distinguishes the new U.S. imperial system from the old European imperial systems. He quotes Treasury Secretary Morgenthau, who said Bretton Woods institutions “tried to get away from the concept of control of international finance by private financiers who were not accountable to the people,” pulling power away from Wall Street to Washington. In dramatic contrast to “classic” imperialism, which was driven by corporate interests and straightforward military action, in the new “super imperialism” the U.S. government would “exploit the world via the international monetary system itself.” Hence why Hudson’s original title for his book was “Monetary Imperialism.”

The other defining feature of super imperialism versus classic imperialism was that the former is based on a debtor position, while the latter was based on a creditor position. The American approach was to force foreign central banks to finance U.S. growth, whereas the British or French approach was to extract raw materials from colonies, sell them back finished goods, and exploit low wage or even slave labor.

Classic imperialists, if they ran into enough debt, would have to impose domestic austerity or sell off their assets. Military adventurism had restraints. But Hudson argues that with super imperialism, America figured out not just how to avoid these limits but how to derive positive benefits from a massive balance-of-payments deficit. It forced foreign central banks to absorb the cost of U.S. military spending and domestic social programs which defended Americans and boosted their standards of living.

Hudson points to the Korean War as the major event that shifted America’s considerable post-World War II balance-of-payments surplus into a deficit. He writes that the fight on the Korean peninsula was “financed essentially by the Federal Reserve’s monetizing the federal deficit, an effort that transferred the war’s cost onto some future generation, or more accurately from future taxpayers to future bondholders.”

THE FAILURE OF BRETTON WOODS

In the classic gold standard system of international trade, Hudson describes how things worked:

“If trade and payments among countries were fairly evenly balanced, no gold actually changed hands: the currency claims going in one direction offset those going in the opposite direction. But when trade and payments were not exactly in balance, countries that bought or paid more than they sold or received found themselves with a balance-of-payments deficit, while nations that sold more than they bought enjoyed a surplus which they settled in gold... If a country lost gold its monetary base would be contracted, interest rates would rise, and foreign short-term funds would be attracted to balance international trade movements. If gold outflows persisted, the higher interest rates would deter new domestic investment and incomes would fall, thereby reducing the demand for imports until balance was restored in the country’s international payments.”

Gold helped nations account with each other in a neutral and straightforward way. However, just as European powers discarded the restraining element of gold during World War I, Hudson says America did not like the restraint of gold either, and instead “worked to ‘demonetize’ the metal, driving it out of the world financial system — a geopolitical version of Gresham’s Law,” where bad money drives out the good. By pushing a transformation of a world where the premium reserve was gold to a world where the premium reserve was American debt, the U.S. hacked the system to drive out the good money.

By 1957, U.S. gold reserves still outnumbered dollar reserves of foreign central banks three to one. But in 1958, the system saw its first cracks, as the Fed had to sell off more than $2 billion of gold to keep the Bretton Woods system afloat. The ability of the U.S. to hold the dollar at $35 per ounce of gold was being called into question. In one of his last acts in office, President Eisenhower banned Americans from owning gold anywhere in the world. But following the presidential victory of John F. Kennedy — who was predicted to pursue inflationist monetary policies — gold surged anyway, breaking $40 per ounce. It was not easy to demonetize gold in a world of increasing paper currency.

American and European powers tried to band-aid the system by creating the London Gold Pool. Formed in 1961, the pool’s mission was to fix the gold price. Whenever market demand pushed up the price, central banks coordinated to sell part of their reserves. The pool came under relentless pressure in the 1960s, both from the dollar depreciating against the rising currencies of Japan and Europe and from the enormous expenditures of Great Society programs and the U.S. war in Vietnam.

Some economists saw the failure of the Bretton Woods system as inevitable. Robert Triffin predicted that the dollar could not act as the international reserve currency with a current account surplus. In what is known as the “Triffin dilemma,” he theorized that countries worldwide would have a growing need for that “key currency,” and liabilities would necessarily expand beyond what the key country could hold in reserves, creating a larger and larger debt position. Eventually the debt position would grow so large so as to cause the currency to collapse, destroying the system.

By 1964, this dynamic began to visibly kick in, as American foreign debt finally exceeded the Treasury’s gold stock. Hudson says that American overseas military spending was “the entire balance-of-payments deficit as the private sector and non-military government transactions remained in balance.”

The London Gold Pool was held in place (buoyed by gold sales from the Soviet Union and South Africa) until 1968, when the arrangement collapsed and a new two-tiered system with a “government” price and a “market” price emerged.

That same year, President Lyndon B. Johnson shocked the American public when he announced he would not run for another term, possibly in part because of the stress of the unraveling monetary system. Richard Nixon won the presidency in 1968, and his administration did its part to convince other nations to stop converting dollars to gold.

By the end of that year, the U.S. had drawn down its gold from 700 million to 300 million ounces. A few months later, Congress removed the 25% gold backing requirement for federal reserve notes, cutting one more link between the U.S. money supply and gold. Fifty economists had signed a letter warning against such an action, saying it would “open the way to a practically unlimited expansion of Federal Reserve notes… and a decline and even collapse in the value of our currency.”

In 1969, with the end of Bretton Woods palpably close, the IMF introduced Special Drawing Rights (SDRs) or “paper gold.” These currency units were supposed to be equal to gold, but not redeemable for the metal. The move was celebrated in newspapers worldwide as creating a new currency that would “fill monetary needs but exist only on books.” In Hudson’s view, the IMF violated its founding charter by bailing out the U.S. with billions of SDRs.

He says the SDR strategy was “akin to a tax levied upon payments surplus nations by the United States… it represented a transfer of goods and resources from civilian and government sectors of payments-surplus nations to payments deficit countries, a transfer for which no tangible quid pro quo was to be received by the nations who had refrained from embarking on the extravagance of war.”

By 1971, short-term dollar liabilities to foreigners exceeded $50 billion, but gold holdings dipped below $10 billion. Mirroring the World War I behavior of Germany and Britain, the U.S. inflated its money supply to 18-times its gold reserves while it waged the Vietnam War.

THE DEATH OF THE GOLD STANDARD AND THE RISE OF THE

 TREASURY BILL STANDARD

As it became clear that the U.S. government could not possibly redeem extant dollars for gold, foreign countries found themselves in a trap. They could not sell off their U.S. treasuries or refuse to accept dollars, as this would collapse the dollar’s value in currency markets, advantaging U.S. exports and harming their own industries. This is the key mechanism that made the Treasury bill system work.

As foreign central banks received dollars from their exporters and commercial banks, Hudson says they had “little choice but to lend these dollars to the U.S. government.” They also gave seigniorage privilege to the U.S. as foreign nations “earned” a negative interest rate on American paper promises most years between the end of World War II and the fall of the Berlin Wall, in effect paying Washington to hold their money on a real basis.

“Instead of U.S. citizens and companies being taxed or U.S. capital markets being obliged to finance the rising federal deficit,” Hudson writes, “foreign economies were obliged to buy the new Treasury bonds… America’s Cold War spending thus became a tax on foreigners. It was their central banks who financed the costs of the war in Southeast Asia.”

American officials, annoyed that the allies never paid them back for World War I, could now get their pound of flesh in another way.

French diplomat Jacques Rueff gave his take on the mechanism behind the Treasury bill standard in his book, “The Monetary Sin Of The West”:

“Having learned the secret of having a ‘deficit without tears,’ it was only human for the US to use that knowledge, thereby putting its balance of payments in a permanent state of deficit. Inflation would develop in the surplus countries as they increased their own currencies on the basis of the increased dollar reserves held by their central banks. The convertibility of the reserve currency, the dollar, would eventually be abolished owing to the gradual but unlimited accumulation of sight loans redeemable in US gold.”

The French government was vividly aware of this, and persistently redeemed its dollars for gold during the Vietnam era, even sending a warship to Manhattan in August 1971 to collect what they were owed. A few days later, on August 15, 1971, President Nixon went on national television and formally announced the end of the dollar’s international convertibility to gold. The U.S. had defaulted on its debt, leaving tens of billions of dollars abroad, all of a sudden unbacked. By extension, every currency that was backed by dollars became pure fiat. Rueff was right, and the French were left with paper instead of precious metal.

Nixon could have simply raised the price of gold, instead of defaulting entirely, but governments do not like admitting to their citizenry that they have been debasing the public’s money. It was much easier for his administration to break a promise to people thousands of miles away.

As Hudson writes, “more than $50 billion of short-term liabilities to foreigners owed by the U.S. on public and private account could not be used as claims on America’s gold stock.” They could, of course, “be used to buy U.S. exports, to pay obligations to U.S. public and private creditors, or to invest in government corporate securities.”

These liabilities were no longer liabilities of the U.S. Treasury. American debt had been baked into the global monetary base.

“IOUs,” Hudson says, became “IOU-nothings.” The final piece of the strategy was to “roll the debt over” on an ongoing basis, ideally with interest rates below the rate of monetary inflation.

Americans could now obtain foreign goods, services, companies, and other assets in exchange for mere pieces of paper: “It became possible for a single nation to export its inflation by settling its payment deficit with paper instead of gold… a rising world price level thus became in effect a derivative function of U.S. monetary policy,” Hudson writes.

If you owe $5,000 to the bank, it’s your problem. If you owe $5 million, it’s theirs. President Nixon’s Treasury Secretary John Connolly riffed on that old adage, quipping at the time: “The dollar may be our currency, but now it’s your problem.”

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