Monetary Hegemony - American Monetary Hegemony

American Monetary Hegemony

The end of World War II witnessed the recentralization of monetary power in the hands of a United States that had become willing to carry the burden of postwar reconstruction. The United States had emerged from World War II with the ideals of economic interdependence, accountability, and altruism, expressed in the vision of universal multilateralism (above all, multilateralism simply meant nondiscrimination via the elimination or reduction of barriers and obstacles to trade, but more importantly was the maintenance of barriers “that were difficult to apply in a nondiscriminatory manner” (Ruggie, 1982, p. 213)). In essence, the term multilateralism differs today, compared to what it meant after World War II. US interests in a multilateral, liberal world economy would not only be grounded entirely in idealistic internationalism. There was the cold, calculating necessity of generating a US export surplus. This would obviate government spending, stimulate the domestic economy, substitute for domestic investment, and avert reorganization for certain industries in the economy that were overbuilt during the war effort. For these reasons the “idea of an export surplus took on a special importance” (Block, 1977, p.35) for the US. The production of an export surplus was therefore intimately connected with establishing a world economy that was free of imperial systems, as well as bilateral payments and trading systems. The US would therefore aim to open its predecessor’s empire to American trade and to garner British compliance to create its postwar monetary system through financial leverage, namely the Anglo-American Financial Agreement of 1945.

This new vision of universal multilateralism was, however, forestalled by the new economic realities of a war-torn Europe, symbolized by Britain’s financial inability to maintain sterling convertibility. Combined with this new economic reality, was the political-military threat of the Soviet Union. On December 29, 1945, only two days before the expiration of Bretton Woods, Soviet Foreign Minister Vyacheslave Molotov notified George Kennan, “that for the amount the U.S.S.R. would not subscribe to the articles” (James et al., 1994, p. 617). Two months later, in February 1946, Kennan sent his famous telegram to Washington, which inquired into why the Soviet Union had not ratified the Bretton Woods Agreement. The telegram would later be regarded as the beginning of US Cold War policy (James et al., 1994).

The US thus altered its vision from universal multilateralism to regional multilateralism, which it would promote in Europe through the Marshall Plan, the European Recovery Program (ERP), and the European Payments Union (EPU). With the dissolution of the EPU came the prospect of a real multilateral world as the Bretton Woods monetary system came into effect in 1958. The same year marked the beginning of a permanent US balance of payments deficits.

Throughout the 1960s, the Bretton Woods system had permitted the US to finance approximately 70 percent of its cumulative balance of payments deficits via dual processes of gold demonetization and liability financing. The liability financing enabled the US to undertake heavy overseas military expenditures and “foreign commitments, and to retain substantial flexibility in domestic economic policy” (Gowa, 1983, p. 63).

In 1970, the US was at the center of international instability that was a consequence of its rapid monetary growth (James, 1996). The US, however, had learned the fate of its predecessor’s key currency (e.g. Sterling). Britain’s experience as monetary hegemon demonstrated to the US the problems faced by a reserve currency when foreign monetary authorities, individuals, and investors chose to convert their reserves. In terms of monetary power defined by reserves, the US share of reserves had fallen from 50 percent in 1950 to 11 percent in August 1971 (Odell, 1982, p. 218). Although, the US had become considerably weak in defending convertibility, its rule-making power was second to none. Rather than being constrained by the system it created, the US moved to the conclusion that it “was better to attack the system than to work within it” (James, 1996, p. 203). This decision was based on the recognition of the inseparability between foreign policy and monetary policy. The termination of the Bretton Woods system signified the subordination of monetary policy to foreign policy. The closing of the gold window was a fix that was assigned to “free…foreign policy from constraints imposed by weaknesses in the financial system” (Gowa, 1983,p. 69).

In other words, monetary policy conformed to the needs of foreign policy; this conformation is denoted by the gradual demonetization of gold throughout the 1960s beginning with the London Gold Pool of 1961 and culminating in the suspension of convertibility in 1971. It was to be a direct attack by the US upon the very system it espoused for the purpose of inverting the classical rules of international finance: debt had become a means of monetary power, rather than credit.

US Monetary Hegemony persists as does the Bretton Woods System, as Dooley, Folkerts-Landau, Garber (2003) contend in their work An Essay on The Revised Bretton Woods System. The rules of the Bretton Woods system have stayed the same but the players have changed. The Post Bretton Woods system or Bretton Woods II has given rise to a new periphery for which the development strategy is export-led growth supported by undervalued exchange rates,capital controls and official capital outflows in the form of accumulation of reserve asset claims on the center country (e.g. US). In other words, Asia has replaced Europe vis-a-vis in financing US balance of payments deficits.