Dollar, Doldrums and Floating

Effects of the 4th European War (World War-2)

1939-45: Europe and Russia burned again, consuming some 50 million, mostly White, men to the 4th European War. The US, fighting a distant war, remained safe and secure from the ravages of that war. Clearly, the days of unchallenged European Imperialism were over.

The net effect of fierce rivalry between Fascism and Communism was the involvement and consolidation of Constitutional Democracy of the US.

The US economy emerged as the strongest, the most productive and the most dynamic in the world. Not because Europe, Japan and the Soviet Union and were all in ruins, and the rest of the world was barren from a century of imperialism, but because the US model was operatively superior: 1) constitutionalism and willing to follow the Rule of Law, 2) high socio-economic mobility (from incoming world wealth, creative entrepreneurship and innovation) and relatively equality of income, 3) heavy public investment (in infrastructure projects like transportation, education and research and public health).

The birth of Dollar Hegemony

1944: With the victory in sight, more than 700 delegates from 44 Allied Nations met. Led by the US, the Bretton Woods conference created the International Monetary Fund (IMF) and the World Bank (WB) which were given the roles of police and ambulance respectively.

IMF would oversee bankrupt poor nations to prevent credit abuse, while the WB would keep systemic poverty from turning into political instability. For the next 30 years, this system forced the member nations to deny their citizens the right to buy and own gold, and ban the import and export of gold ( gold control policy).

The European Recovery Program (the Marshall Plan)

1947: Europe, devastated by the war and facing the harshest winters on record, had nothing to sell nor had currency with which to buy food and fuel. The postwar socialist governments were unwilling to adopt the draconian proposals for recovery while the US was keen to prevent the pre-war socialist European society from embracing communism through elections. Post-EW4, the US manufactured more than half of world’s goods, and controlled it too.

The European Recovery Program (the Marshall Plan) offered the Europeans and Soviet Union a relief up to $20 billion (10% of US’s GDP) but only if they drew up a plan to act as a single cooperative economic unit. The money came out of US sovereign credit – the US government guaranteed the US investors in Europe to exchange their profits (denominated in weak European currencies) back into dollars at guaranteed fixed rates, backed by gold at $35/ounce.

Thus the new international trade was to be denominated in dollars, fully backed by gold in US banks, only if the Europeans were to take such an offer. And, they did.

Soviet Resistance to the Marshall Plan

1947: An Hungarian expatriate in Russia, Evgenii Varga, proposed the notion of the ‘Third World’. The First World was occupied by the two superpowers (US and Soviet Union); the Second World by the major powers that were allies of either the two superpowers (Europeans). Instead of the US, the Soviets will concentrate to the Third World – the colonised countries of Asia, Africa and Central/South America. Why?

1947: Soviet Union denounced the US ‘humanitarian gesture’ as a trick to spread their Capitalist Ideology, and refused to participate. Communist Information Bureau (ComInform) was founded to counter the Marshall Aid and to coordinate actions between the communist parties across the world, including the Third World. In response, the US avowed to resist, by force, the establishment of communist governments worldwide. The Cold War began. Israeli invasion and Kashmir problem has roots in this Cold War.

1948: Moscow tried to counter the creation of the Organization for European Economic Cooperation (OEEC), to be funded by the Marshall Plan, by proposing the establishment of a ‘committee for the development of economic relations between European states’, under the auspices of the United Nations’s ‘Economic Commission for Europe’. The OEEC later became today’s Organization of Economic Cooperation and Development (OECD).

1947: Soviet Union reduced the amount of paper money in circulation. The Old roubles were revalued at one tenth of their face value.

1949: The USSR inaugurated the Council for Mutual Economic Assistance (ComEcon) hoping to pull US allies, particularly Italy and France, by the lure of Soviet supply of raw materials. With the ‘loss’ of India to the socialist democrats and China to the communists, Europe was firmly divided between the capitalist West and the communist East. The Cold War continued.

1961: Rouble was formally equal to 0.987 gram of gold, but the exchange for gold was not available to the Soviet public, as per US-lead Bretton Woods 1944 agreement.

Dollar Doldrums

1946-71: Though the trading countries settled their international payments balances in US dollars, pegged to gold at $35/ounce, persistent US balance-of-payments deficits steadily reduced US gold reserves.

By 1960, many were buying gold at an artificially low price of $35, set in 1944, and sold it in the black market for easy profit. France was the first to see through the deceit: the US was printing more dollars than its gold holding could support, and was dumping the dollars in world markets in the name of Marshall Plan.

In Hong Kong, a British territory since 1841, trading firms bought gold legally on the London gold market at a pegged price of $35/ounce. They then passed it along to Macau gold syndicates. Britain was a signatory but Portugal, and its colony Macau, was not. The gold was then smuggled back to Hong Kong, where it was sold at above-peg prices for use in financial transactions around the world that did not follow the Bretton Woods regulations (‘Pink Nations‘).

The Failed ‘London Gold Pool’

1961: US, Britain, France, Germany and other capitalist nations pooled their gold resources (London Gold Pool) to prevent the commercial price for gold from exceeding the Bretton Woods mandated rate of US 35/ounce.

Again, France saw through the sham and pulled out, and began to send the dollars (earned from its exports) to the US and demanded gold rather than US Treasury debt papers in return. Under the terms of the 1944 Bretton Woods Agreement, France was legally entitled to do just that.

1971: France redeemed its dollar holdings in gold; Bank of France eventually increased its gold holding to 92% of its reserves. Even Britain, converted its $3 billion into gold. US gold reserves had dropped from 20,000 tons to 8,500 tons (32,150 troy ounces = 1 metric ton).

Floating the Currencies

1971: To fight domestic inflation, the German central bank suspended the fixed exchange rate of its Mark and allowed it to rise against the dollar. Netherlands did the same.

As the dollars returned in massive numbers back to the US banks, the US announced that it would no longer redeem its dollars for gold. The dollars, that US’s satellite countries held in their treasuries, could now be redeemed only by trading with the US.

US was still the origin of most of the manufactured goods in the world; it still controlled the large depots of world oil; it still had the largest military in the world. For the Western Europe, which manufactured and controlled the rest of the world trade, the choice was clear: accept the dollar hegemony and US promises of fair play, or succumb to the Soviet dictatorial power which they perceived was hell-bent to distribute the hard-earned European money to the inferior races of the world.

Western Europe submitted their financial sovereignty to the US, fearing the communist menace from the East.

Financial Colonisation of Soviet Union

The Soviet Union continued to engage the capitalist markets, denominated in dollars, not understanding the fact that the US could print its dollar at will, while the Soviets and the rest of the world (including China and India) will have to earn their money through trade. As the Soviet economy fell into the trap of needing dollars to achieve their planning goals, it was a matter of time for the socialist system to collapse. It did in 1989.

With the victory of dollar over communism, celebrations and party time began in the US. It’s allies in Europe thought they too were invited. Or, so they thought!