Bretton Woods, the Gold Standard, and the Rise of the Debt Standard

To begin, I should address the significance of terms such as “Kapital,” “Schuld,” “Incentives of Supply and Demand,” and other associated terms. These terms are used specifically in my critiques of Liberal Capitalist economics and finance to document the distinct form and methodology employed under Liberal Capitalism. The goal of this is to present the reader with an introduction into how this author was able to present the Socialistic alternatives to those terms.

The term “Kapital” here refers to any Currency generated by the “Financial Regime” of a Liberal Capitalist nation-state. Financial Regimes refer to Central Banks, Parliamentarian Legislatures, Financial Ministries, and Financial Markets associated with the powers necessary for overseeing the creation, allocation, circulation, production and consumption of Kapital. It is from those positions of power that four conventional forms of Kapital are introduced into the Liberal Capitalist economy: Bimetallism, Schuld, LCFIs, and Cryptocurrencies.    

  • “Bimetallism” refers to the Gold and Silver Standards that had dominated much of international finance in the Western world prior to the end of the Bretton Woods System. This form of Kapital relies on the Value of a Currency being pegged to the Price of Gold or Silver. The Silver Standard ended in the 1873 financial crisis that brought about the original “Great Depression” of 1873-1896, replaced by the Gold Standard throughout most of the 20th century. The Gold Standard that met its demise in the two World Wars was defined by the British Pound Sterling as the World Reserve Currency, the predominant Currency during the period. It was later superseded by a post-1945 variant which is the subject of this Post;
  • “Schuld” is a German word that has two meanings, both of which are employed to describe the deeper meanings behind the contemporary usage of Fiat Currencies. It can mean “Guilt” in a moral sense and it can also mean “Debt” in the financial sense as well. Whenever a Currency is not backed by anything, it is a Fiat Currency pegged to the Schuld Standard. This form of Kapital has been the most commonly-used variant since the end of Bretton Woods, as evidenced by the spiraling amounts of Schuld accumulated by nation-states for decades. Its composition is a dialectical combination of lending Credits and borrowing Debits;   
  • LCFIs (Liberal Capitalist Financial Instruments) refer to the means of financial production commonly found at Financial Markets under Liberal Capitalist Financial Regimes. With the exception of “Forex” (Foreign Exchange), LCFIs emerged in the centuries since the Enlightenment of the 17th and 18th centuries, as Liberal Capitalism gradually created its planetary hegemony throughout the 19th and 20th centuries. These include Securities such as “Stocks” and “Bonds,” “Derivatives,” “Options,” and “Futures,” as well as “Mortgages,” “Insurance,” and “Commodities”;
  • Lastly, “Cryptocurrencies” represent the latest form of Kapital, its conception a byproduct of advancements in the commercial application of computer technologies after Bretton Woods. The historical documentation on Cryptocurrencies were conceptualized between the 1980s and 1990s before finally becoming realized by the advent of the Bitcoin in the late 2000s. Since the Bitcoin’s introduction, an entire industry devoted to this form of Kapital has grown up throughout the 2010s and has proven to be unstable due to the lack of anything backing its Value except for a “Blockchain” that acts as a digital ledger for a limited number in circulation at any given time.     

All four types of Kapital prevail in the post-1945 world thanks to the financial hegemony of the US Dollar as the World Reserve Currency. The origins can be traced back to the final years of the Second World War. The terms of the post-1945 monetary order was arranged in the favor of the US at the Bretton Woods Conference in 1944. The Allied Powers convened in response to the proliferation of protectionism, currency devaluations, and trading blocs of the interwar period between the two World Wars. They sought to ensure that the conditions which created those policies would be deterred post-1945. Among the terms agreed upon by the Allied Powers were the creation of the “International Monetary Fund” (IMF) and the International Bank for Reconstruction and Development (IBRD), the lending arm of the World Bank. What enabled the rise of US Dollar hegemony was the Bretton Woods System that defined the international finance during the early half of the Cold War.

The Bretton Woods System that emerged in the wake of the conference was a reformed version of the Gold Standard. It dictated that the Value of the US Dollar was pegged to the price of Gold at $35 USD per Ounce. All foreign currencies had to be exchanged to US Dollars before being converted into Gold at the listed price. Any nation-state that wished to acquire Gold under the Bretton Woods System, had to also maintain US Dollars in order to facilitate the conversions. This in turn solidified the financial hegemony of the US Dollar as the World Reserve Currency.

Throughout the early Cold War years, the Bretton Woods System was able to operate uninterrupted. American industrial capabilities were unaffected by World War II and the US controlled the majority of the world’s Gold during this time. It also helped that much of Europe and Asia was in ruins and undergoing reconstruction efforts because of the conflict. Furthering US interests in the creation of its own power bloc in Western Europe was the Marshall Plan, which financed much of the post-1945 reconstruction. Similar financial endeavors were also being pursued by the US in Asia, even though they had been conducted outside the purview of the Marshall Plan. The OECD (Organisation for Economic Co-operation and Development) is the result of American economic aid to the Western Bloc countries shortly after 1945.

It was precisely within the conditions of the early Cold War that the US Dollar stood unchallenged by any other Currency on the Eurasian landmass. The Soviet Union rejected the terms of the Bretton Woods System due to its being intended to further a Liberal Capitalist ideological agenda by the Americans. In response to the Marshall Plan, the Soviets sent economic aid to the countries that later became the Eastern Bloc countries through the CMEA (Council for Mutual Economic Assistance). CMEA consolidated Soviet economic interests within the Eastern Bloc countries by providing them an ideological alternative to the terms of the Bretton Woods System and the Marshall Plan in particular. Its significance to the Blog will be further elaborated on in a future Post on the CMEA and its affiliated “Hard Currency Shops” and failed attempts to create a Currency Union.

Furthermore, the reformed Gold Standard employed by the Bretton Woods System did far more than just cement the hegemony of the US Dollar in the post-1945 world. It especially ensured the economic and political hegemony of the “Liberal International Economic Order” (LIEO), the formal technical name to denote the Liberal Capitalist nation-states of the Western Bloc. The LIEO, unlike the Eastern Bloc, survived the Cold War along with the US. The same cannot be said for the Bretton Woods System, however.

Under conventional Liberal Capitalist economics, the Bretton Woods System relied on the Incentives of Supply and Demand to maintain its Gold Standard. The “Incentives” here are the US Dollars and Gold and the “Supply and Demand” are the quantitative amounts of both.  

The Value of the US Dollar as a form of Kapital is dependent on the “Supply of US Dollars” and the “Demand for Gold.” Too many US Dollars in circulation depreciate its Value relative to the agreed upon Price of Gold. The result is Currency Depreciation due to an increase in Inflation Rates, which in turn causes the Value of a Currency to fall. Unlike Socialist Currencies, Liberal Capitalist Currencies can employ a combination of Currency Depreciation and Free Trade Agreements (FTAs) to their advantage through cheaper exports and expensive imports.

Conversely, the Price of Gold is in turn dependent on the “Supply of Gold” and the “Demand for US Dollars.” Too little Gold in reserve appreciates its Price relative to the Value of the US Dollar. The result is Currency Appreciation due to an increase in Deflation Rates, which in turn causes the Value of the Currency to rise. Liberal Capitalist Currencies will encounter the inverse: expensive exports and cheaper imports.  

Together with the energy crises of the 1970s, entire economies around the world experienced the negative effects of “Stagflation.” The decline of both the Soviet Union and the Eastern Bloc during this particular period was a byproduct of it insofar as they lacked a reliable alternative to Kapital. Thus, Kapital was able to proliferate in the Eastern Bloc through the same institution originally intended to deter its influence: the CMEA.

What led to the demise of the Bretton Woods System was a combination of both factors: a high amount of US Dollars in circulation and a low amount of Gold in reserve. It was from those considerations that the IMF introduced the “XDR” (Special Drawing Rights) as a stopgap measure in order to protect the Bretton Woods System. The XDR failed, which led to the unpegging of the US Dollar from the Gold Standard in 1971 and the end of the Bretton Woods System by 1973. This in turn contributed to the worldwide proliferation of Fiat Currencies pegged to Schuld Standard. The US Dollar was able to maintain its status as the World Reserve Currency not from the “Petrodollar” per se, but the Schuld backing the Value of the US Dollar.



Categories: Compendium, Economic History

Tags: ,

1 reply

Trackbacks

  1. Compendium: Kapital – The Fourth Estate

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: