Beginning in the 1980s the United States transitioned from its position as predominant national economy and workshop of the post-war world to a global economy, dependent on the world for the consumer goods demanded by its populace as tantamount to their “freedom” and for financing of it quadruple deficits, while remaining in the global driver seat due its currency being world money. There are no business-as-usual policy ways out of this morass.
In the aftermath of World War II (WWII) the United States (US) salvaged the international capitalist order by rebuilding it around three poles of prosperity. Erstwhile belligerents Germany and Japan were reconstructed through US beneficence as showcase economies for their regions while the US shaped development in the Americas. Yet, by the 1970s, as Germany and Japan surpassed US industrial prowess, their own multinational corporations (MNCs) now prowling world markets, the US economy became a victim of the very success of the international system it helped create.¹
The first casualty was the international monetary system “contracted” among major economies at Bretton Woods. Two key features of this system had potential conflict of interest written all over them. First, the possibility of maintaining exchange rate stability hinged on the exchange rate of all currencies in the post WWII international system being fixed in terms of the US dollar. The dollar exchange rate was then fixed in terms of gold. Only if dollars were accumulated in excess by this or that country would gold ever be brought into the equation and dollars be redeemed for it. Second, the currency of every country, including the US, was issued as “fiat money”. Fiat money, quite simply, is money issued as legal tender by the state or “created” through credit issuance by commercial banks, based not on anything of real value such as gold. Rather it is based on “high powered” money or government debt IOUs held by the central bank. Only on the basis of fiat money could major economies maintain welfare states and regimes of macroeconomic policymaking.
Much to its chagrin, as US competitiveness waned, international demands increased to exchange accumulating dollar surpluses for gold. In 1971, the US responded by closing the gold window to unilaterally exit Bretton Woods. But US difficulties did not end there. US waning global competitiveness had domestic origins in declining MNC profits and slowed investment that its casting of blame upon allies disguised. Responding to these travails, the US turned to the fiat money pump. This spurred domestic inflation as it weakened the dollar. According to accepted economic norms, declining international competitiveness is reflected in currency devaluation. In the post WWII order, the International Monetary Fund (IMF) was tasked with smoothing balance of payments deficits of the sort that the US economy began to experience from the early 1970s for the first time since 1891! Yet the US was not just another economy here. With the dollar as world money, combating its domestic recession while simultaneously expanding military adventurism abroad exported US inflation across the globe.²
About the Author
- A. Saad-Filho, “Monetary Policy in the Neo-liberal Transition: A Political Economy Critique of Keynesianism, Monetarism and Inflation Targeting” in R. Albritton, B. Jessop and R. Westra (eds.) Political Economy and Global Capitalism: The 21st Century, Present and Future (London: Anthem, 2007) p 93.
- E. Altvater and K. Hubner, “The End of the U.S. American Empire?” in W. Vath (ed.) Political Regulation in the Great Crisis (Berlin: Sigma, 1989)
- G. Dumenil and D. Levy, Capital Resurgent: The Roots of the Neoliberal Revolution (Cambridge, Mass: Harvard University Press, 2004) p. 69.
- Altvater and Hubner, “The End of the U.S. American Empire?”
- Richard Westra, The Evil Axis of Finance: The US-Japan-China Stranglehold on the Global Future (Atlanta: Clarity, 2012).
- M. Hart-Landsberg, Capitalist Globalization: Consequences, Resistance, and Alternatives (New York: Monthly Review Press, 2013) pp. 31-9.
- W. Milberg and D. Winkler, Outsourcing Economics: Global Value Chains in Capitalist Development (Cambridge: Cambridge University Press, 2013).
- Westra, The Evil Axis of Finance, p. 166.