Michael Hudson and Radhika Desai on Dollar Imperialism

Yves here. I have to confess to this claim at the top of the interview that is is about de-dollarization, when it is devoted almost entirely to telling the story of the how the dollar achieved its current status, describes the advantages to the US of the current system, yet can depict concerted movement away from the dollar as only aspirational.

We have pointed out that it took two World Wars and the Great Depression to dethrone pound sterling, and that was when England had never been the dominant economic power (France, for instance, has been bigger). Even with the understandable resentment of America’s abuse of its privileged position, as the quip has it, “The dollar is still the cleanest shirt in the dirty laundry.” In an interview yesterday, Kremlin spokesman Dmitry Peskov conceded “We will not stand a chance to succeed” if Russia were to try to dethrone the dollar now.

It is true that a long-standing move away from the dollar has been underway as the US standing in the world economy shrinks. The dollar represented 70% of central bank foreign exchange reserves in 2000. It’s now down to 60% as of the end of second quarter 2022. But the US percentage of world GDP has fallen even more over this time frame, from 30% of world GDP to 24%.

Even as countries are trying to move to more bilateral trade and skip the dollar for trade transactions, many trade partners have currencies that are too weak, volatile, or illiquid in large transactions to be suitable to retain as foreign exchange reserves. For instance, the countries of Southeast Asia take each other’s currencies, but their central banks square up in dollars every few months.

The US is admittedly capable of shooting itself in its economic foot, say via attempting a rapid military buildup with our “good only for looting” defense industry, which would put the US on an even faster decline path than it is now. (Doomsters can also worry about the Yellowstone caldera). But absent a rapid fall in our economic standing, there is not an obvious way to displace the dollar.

The renminbi is not a good candidate for a host of reasons: China uses capital controls and is unwilling to run sustained trade deficits to get currency in circulation abroad. The US capital markets are still comparatively well regulated and the US courts are seen as pretty even-handed in dealing with monied interests.

As the bro-affecting Jacob Dreizin put it:

A bunch of commenters have written…..

…..at various times…..

…..that “if China, Russia, India, Brazil, etc. start trading in their own currencies“…..

…..then the dollar comes down.


It doesn’t matter so much…..

…..what you accept for your oil, coal…..

…..nuclear fuel, arms, whatever.

Yes, it’s great to avoid key economic sectors being impacted…..

…..by U.S. or other sanctions.

But, structurally, it hardly impacts anything.

What matters is…..

In which currency do central and private banks, maintain their RESERVES?

For Russia to stash away a lot of yuan…..

…..(MUCH more than it holds now)…..

…..China would have to issue a TON of debt…..

…..because, at present…..

…..there isn’t enough “quality” (central state-issued), yuan-denominated debt…..

…..to be had, in the entire world.

(Yes, if you read Bloomberg etc., you’ll hear about China’s horrible debt growth. It’s almost all regional, crap debt.)

Well, the Chinese central state can only issue such debt…..

…..if it will deficit-spend the proceeds.

But, guess what…..

China’s central state, barely runs a budget deficit.

(It’s gotten bigger in the last two years, but it’s still just a laughable fraction of what the U.S. runs.)

What this means…..

There is only a NOMINAL volume of Chinese state debt, available.

And even less, available OUTSIDE of China.

If China DID run a large budget deficit…..

…..(I can’t imagine it needs to, or what it would spend on, so this is just hypothetical)….

…..that would be HUGELY inflationary…..

……as all that extra money spent inside China…..

…..would stay almost exclusively INSIDE the country…..

…..rather than “leaking out” all over the world, as does the dollar.

(Because unlike the USA, China is a massive net exporter, not a massive net importer, and also doesn’t host tens of millions of immigrants/migrants who send money “home.”)

And what THAT would do…..

…..is raise demand for U.S. Treasury bonds by Chinese financial institutions…..

…..and dollar account demand on the part of rich Chinese and their brats…..

…..(looking to park something out of the country)…..

….and, what would that do?


So China is not a candidate until it radically changes its economic policies by becoming much more internal-consumption driven as opposed to export/investment driven.

How about a joint new currency?

If you read the section on the bancor below, you’ll see that a multi-polar system requires the participants to surrender national sovereignity. Admittedly they arguably have already with the dollar system but participants understand how it works and have become accustomed to its costs.

A selling point of a multi-polar order is more national sovereignity, but any new system requires the surrender of authority to new currency minders. And the bigger countries will have more say. But even so, would China cede authority and control to a multi-lateral authority where it did not have a majority vote or veto rights? Somehow I doubt it.

Please don’t let this long introduction deter you from reading the important and detailed history of how the dollar system developed.

Originally published at Geopolitical Economy News Hour

RADHIKA DESAI: Hello everyone. Welcome to the fourth Geopolitical Economy Hour, our fortnightly show on the political and geopolitical economy of our times. I’m Radhika Desai.

MICHAEL HUDSON: And I’m Michael Hudson.

RADHIKA DESAI: Today we are continuing our discussion of de-dollarization. As many of you know we have structured our discussion around some ten questions, and last time we dealt with the first five.

What is money? What is the relation between money and debt? Is money a commodity? What is the theory of how the dollar serves as  world money?

And then because this theory so much relies on the sterling system we discussed the sterling system. What is it? What was this real basis not gold but actually empire etcetera.

And then we decided that in this show we will discuss the next five questions which are, how did the sterling system end? What really happened between the world wars? something on which Michael has written an enormous amount and he knows a great deal.

Then we will discuss the dollar system between 1945 and 1971 which is the year when the dollar’s gold link was broken. How did the dollar system actually function during this time? Because we are always told that this was the time when everything was hunky-dory and the dollar system was fine until 1971; but the reality is quite different.

And then we are told that after the dollar’s gold link was broken, that this was not somehow some kind of a great disaster. On the contrary, the United States kind of pulled a fast one on the rest of the world and managed to get the dollar to function as the world’s money without the burden of linking it to gold. Is that really the case? What really went on?

And then we finally come to the crisis of today. What are the main dimensions? What are the forms that de-dollarization takes?

I should say Michael and I were discussing exactly how far we are going to get to this, since we have an hour, and we have a lot to discuss. It’s possible that we go through all of this, but it’s quite possible that we will get to question three or question four and then have to leave the rest for the next show.

Having said that, let me dive straight into the question of how the sterling system ended.

As we discussed last time, the sterling system was naturalized and portrayed as if it could have lasted forever. Basically making the world believe that it is perfectly natural and okay for the currency of one country to serve as the world’s money.

And of course its functioning was attributed to gold. And we saw last time that this was not so. And it’s important to clarify this, because people still hanker after a gold standard, and in reality you have to understand that while gold was the benchmark of the value of sterling, it was not what make the system tick.

What made the system tick were the surpluses as I showed in the map that I showed last time. Essentially the fact that Britain had a large empire meant that surpluses, as you see in the map, flowed from Britain’s non-settler colonies — principally British India but also some other countries — as you see in the blue arrows, all this flowed towards Britain.

These flows were based on Britain essentially charging these colonies for the privilege of being ruled by Britain, [and] Britain appropriating the gold and foreign exchange value of the huge export services that these colonies ran through the rest of the world and so on.

So these surpluses were centered in Britain and then they were recycled into the famous capital exports which essentially financed the industrialization of Europe at this time, of North America, of southern Africa, and also of course the Antipodes Australia and New Zealand.

So essentially this is where the distinction between the settler and non-settler colonies becomes very important.

We also pointed out that, even though Britain sat on top of the largest empire the world has ever known, the fact of the matter was that this was also a period during which other countries were emerging to challenge Britain’s power.

Germany linked its currency to gold, not in order to subordinate itself to some sort of gold standard, but rather to make its own currency attractive to the rest of the world, in order that it may increase the market for German goods and increase, generally speaking, Germany’s power over large parts of the world.

The United States also waited until 1913 but finally got around to creating the Federal Reserve system, and this was another way of essentially asserting its own priorities and so on.

So in this context as Marcello De Cecco, whose famous book Money and Empire is really worth the read, pointed out it’s very important for us not to take what he called a Ricardian interpretation of the sterling system, but to take a Listian one.

He’s referring, of course, to David Ricardo (1772 – 1823) the famous 19th century political economist who was a great partisan of free trade and the idea that the world economy was simply a homogeneous whole united by markets and so on.

And De Cecco is  referring to Friedrich List (1789 – 1846) who, on the contrary — and Michael and I would agree much more with List — portray the world order as a world order composed of national economies.

And these national economies were often in competition, struggle, and conflict with one another. And in this context the industrialization of other major powers to challenge Britain’s industrial dominance was bound to destabilize the sterling system and indeed did.

And of course it also relied on the fact that Britain’s industrial classes and industrial capitalist classes would accept a regime that was actually quite harmful to that interest. And there was quite a lot of disturbance on that front as well, where they were basically questioning the priorities of the city of London and the workings of the gold sterling system.

And finally it rested on working class acquiescence: the idea that Britain could periodically inflict upon its own economy severe recessions in order to maintain the value of sterling and severe recessions meant, of course, heavy unemployment and working class people were getting more and more organized and opposing [the policies].

So for all of these reasons, the sterling system was actually weakening in the period [up to 1914 and the] outbreak of the First World War.

One should add here that, while this really got going only after the First World War, there was also the beginning of nationalist restiveness in the colonies which would also threaten to take away the basis of the sterling system.

So all of this was happening and after the First World War of course the British Empire was drastically weakened and a stable return to the gold standard on the part of sterling was simply not possible.

So, this is the story of how the sterling system ended, and after the sterling system ended, and during and after the First World War there were a number of really important shenanigans on the part of the United States in particular vis-a-vis Britain that Michael will now talk about, because really our second question is exactly what happened between the world wars. And Michael, also please feel free to add anything else about the end of the sterling system that you would like to.

MICHAEL HUDSON: Well most of our discussion from here on end is going to be about intergovernmental finance and what WWI did was for the first time it changed the whole rules of how allies and other countries settled all of the balances and the mutual aid that had built up during the war.

After earlier wars, like the Napoleonic Wars, it was normal for allies to say, “Well okay we’ll forgive the debts, we’re all fighting the same fight, we’ll start again.”

Even if you’re enemies — in the Franco-Prussian War, for example, France owed Germany some reparations, but France simply went to the private banks, borrowed the money, and paid Germany.

So, the whole connections between the world monetary systems were basically private sector finance.

All this changed when the United States said, “Well during the war of course we’re not going to charge you for the tanks and all the aid we gave you during the war, but we didn’t enter the war when you British did and French did, so you’re still going to have to pay us all the debts that you ran out when we were a neutral country, before we entered the war.” These debts were enormous, and the Allies didn’t know what to do. They didn’t want to be impolite to the United States so they said, “All right, we’re going to make Germany, the loser, pay reparations. That will enable us to pay you the inter-ally debts.”

So the Allies, with American agreement, said Germany has to pay the money that we’ve charged them for the debts that they didn’t expect to have to pay after WWI.

Well the result was very rapidly a crisis.

Germany was stripped of its steel making regions, it was stripped of its assets, it was left almost unable to pay, but burdened with enormous reparations that it couldn’t possibly pay, and the result was a collapse.

Germany tried to pay by simply throwing marks — its currency, the German mark — onto the foreign exchange market, and the foreign exchange rate would plunge.

When a foreign exchange rate goes down — just as a what happened in the Third World and after World War II — the price of imports goes up. If the price of everything Germany needed — oil, steel, machinery was all denominated in dollars — the price of imports went up, and as a result the German Reichsbank had to create more money to finance the transactions of people and businesses at the higher prices.

Now, this is the exact opposite of what you’re told by today’s monetary theorists.

Today’s monetary theorists say, “Well governments run a deficit, and that puts money into the economy, and that causes a trade deficit, and that leads to foreign borrowing.”

Just the reverse. Germany only created money at home because its international currency was falling. So, immediately, [and] for the balance of the 1920s — after 1921 there was a huge debate over: should Germany have to pay reparations, and should the Allies have to pay international debts.

Now this argument is very important because the arguments put forth in the 1920s were the identical arguments that the IMF would put forth after WWII. And the 1920s bankruptcy of Europe was a dress rehearsal for how the IMF has bankrupted Third World countries and the Global South countries.

There were two sides to the argument, as I’ve discussed in my book Trade, Development, and Foreign Debt, [in which] I go over these arguments.

On the one hand you had the people who not only hate Germany but, even more than they hated Germany, they hated labor. Bertil Ohlin in the United States, and Jacques Rueff in France, said that any country could pay any amount of foreign debt simply by taxing the country domestically and lowering the price of labor —  lowering the wages. You could squeeze enough out if you just squeeze labor enough, and that would somehow create — whatever you took away from the domestic economy in marks could be paid right over to the Allies.

Well, Keynes and, in the American economy, Harold Moulton said, “This is nonsense. Solving the budgetary problem — raising a budget surplus — does not help the transfer problem. Germany was able to tax its labor and its industry in mark, but how did it pay in dollars? It can’t tax them in dollars because Germany used the the mark system. The question is, how on earth can Germany translate this economic surplus, that it squeezes out of labor and industry, to pay foreign countries?”

Well, that’s exactly the same problem that occurred in Argentina and in other countries after WWII.

Keynes pointed out, saying, “Well the country is going to have to export, but that means that the only way Germany can pay is by having other countries buy its exports. But as soon as the German mark begin to go down, as it tried to pay its foreign debt — and foreign debt is the main factor that pushed down the third world exchange rates in the 1960s, 70s, and 80s — is this happened, America immediately raised its tariffs and it passed a law in 1921 against countries selling and depreciated currencies.

So the United States said, “Well Germany has to pay the Allies [so the Allies can] pay us, but we’re not going to buy German exports to provide the dollars. We’re not going to give the rest of the world dollars at all. It will have to pay us in dollars without any way of earning them.”

Well obviously this wouldn’t work. The question is: What did happen?

In practice, the United States said, “Well, we’ll settle it the old-fashioned way, by having the private sector balance matters by having the Federal Reserve lower interest rates” in the 1920s —just like today’s quantitative easing — and the lower interest rates would make it profitable for American investors to buy the bonds of German municipalities, and to buy up Germany companies.

So the American investors would buy German municipal bonds and lend to German companies — or buy German companies — Germany would take these dollars and pay the Allies, the Allies would pay the United States, and there would be a circular flow, and everything would balance.

Meanwhile, England still had problems paying the United States, and the Bank of England came to the United States and said, “You’ve got to keep your interest rates really low so that people will lend to England too, because we need to get money so we won’t be strapped.”

So the United States — the Federal Reserve — flooded the economy with money. A lot of this money was used for the stock market boom. And the stock market boom finally collapsed in 1929 because it was all funded on credit.

People were using this credit to buy stocks on margin. And just as in subsequent financial bubbles, they are created by borrowing money to buy stocks on margin, and they are all basically debt-financed bubbles, and that’s what happened.

Finally there was a collapse in 1929. Countries moved into depression, 1929, 1930. Finally in 1931 the governments got together and declared a moratorium on foreign debt, on inter-Ally debt, on German reparations. They declared a moratorium.

The United States [said], “Well, we won’t ask for money now, but we may ask for European money later. If Europe ever gets prosperous, we’re going to ask for the money, and we’re still going to make it pay. But for the time being, we understand, we forced you into depression.”

Roosevelt came to office and he immediately devalued the dollar and blocked gold sales and said, “Well, we’re not going to be tied by gold anymore. We’re going to basically nationalize the gold stock.”

Keynes wrote, in England, “Roosevelt is magnificently right. Of course you don’t want gold to limit what any country does.”

So America and the rest of the world go free. They still didn’t recover from the depression until WWII. And WWII, of course, changed matters. And I think Radhika has a few things to say about that.

RADHIKA DESAI: Yeah, thanks Michael, that’s really excellent. As you were speaking, I remembered a few things that I felt I should really add to what you were saying.

So first of all, I just wanted to say that, in your Super Imperialism, you make a really important point that is worth quoting, so that’s what I’m going to do.

What Michael was discussing, about the US’s refusal to essentially agree that the aid that it had given to the Allies during the First World War should just be treated as a grant and the US should not demand repayments.

The way in which this set off the financial merry-go-round of the British demanding reparations from Germany, and then the whole US supplying — so essentially what it did is that Germany had to pay reparations to Britain, Britain and France had to pay debt repayments to the United States.

And the United States, having made it next to impossible for Germany to earn much through exports, then essentially forced the private sector to lend to German municipalities.  So there was this financial merry-go-round which eventually collapsed, as Michael says, with the 1929 crash.

But in the beginning of this, Michael says in Super Imperialism, that it would be false to say that the United States provoked WWII.

It is true, however, that no act, by whatever nation, contributed more to the genesis of WWII than the intolerable and insupportable burden which the United States deliberately imposed on its allies of WWI, and, through them, on Germany.

So I think this is a really valuable important point and it also will connect up with the other points we will be making about how essentially the United States has, over the last century and a half, or certainly over the last century, mastered the technique of profiting from wars that it often — that it can instigate or otherwise encourage, thousands of miles away. And I think this has been very important.

And also, Michael, you said that the United States was keeping rates low in order to essentially force the private sector to finance — to essentially lend money to Germany. But it was also the case that the US at this time, although it really wanted to make the dollar the world’s money because sterling was no longer capable of doing so, it found that it could not do so quite so easily.

And for a time it was countenancing some sort of “dollar-sterling condominium” so to speak, a joint dollar-sterling system. And in the interest of pursuing this, the US was also keeping interest rates low during the early and mid 1920s in order to essentially encourage Britain to go back onto gold after the interval after the First World War.

And finally a really important point which is very critically important, partly because there are so many people that think that somehow a gold standard would solve everything. It’s important to remember that a gold standard has typically been quite deflationary, because essentially, as we said early on, capitalism and money have a strange sort of relationship, because capital can only be accumulated in money.

Therefore, capitalists want money to retain its value. SO what capitalists need from money in order to retain its value is to restrict its supply, because that is the only way capitalist states know how to make money retain its value.

But at the same time, in order for money to facilitate the expansion of capitalism, in order to facilitate ever-wider accumulation, you need money to be in good supply, so a deflationary monetary order is a bad thing.

So capitalists essentially want to have their cake and eat it too, and they can’t have both at the same time, so they are always in this problem.

Gold has typically been deflationary because it is an artificial way of restricting the supply of money in order that money will retain its value, because it does not have any rational way of deciding on investment priorities and so on, so it can only do it in this fashion.

Now, yes, I do have some other things to say, which are relevant to this second question, which is, what happened in the interwar period.

The final thing, in addition to what Michael is saying — the final thing that happened is Keynes’s Bretton Woods proposal. That is to say, Keynes, in order to —

In the interwar period, there was a great depression, international trade and payment systems had collapsed, there was a lot of uncertainty, currencies were very volatile against one another. And this was not making recovery any easier.

So there was a big conference, as it became clear that the Allies were going to win the war, especially after 1943 and Stalingrad, it became clear that the war would be won by the Allies, it was only a matter of time.

So then, post-war planning, planning for the post-war period began in earnest. A large part of this planning took place at the New Hampshire resort called Bretton Woods. And out of that have come the post-Second World War systems of international economic governance, which include the United Nations, it includes the WOrld Bank, the International Monetary Fund.

And, given that the effort to try to create an International Trade Organization failed, they had to accept a stopgap arrangement that was the General Agreements on Tariffs and Trade which after 1995 became the World Trade Organization.

So, in order to understand — it is very important from our point of view to understand the proposals Keynes made at Bretton Woods

So you see here in this diagram, basically Keynes arrived at Bretton Woods as the head of the British delegation. Britain had between the two wars experienced what can only be described as the steepest decline in the power and status that a country has ever known.

Because in 1914, Britain sat on top of the biggest empire the world had ever known, and the biggest creditor to the world. And in the course of the next thirty-odd years, Britain declined from these positions. Its industry was increasingly uncompetitive, its financial hold on the world and monetary hold on the world had declined. Its colonies were getting restive and decolonization was impending.


So Keynes arrived at Bretton Woods with a set of proposals that would make it possible for a much weakened country, like Britain, to still try and pursue policies that were beneficial to British people and the British economy.


He was very aware, and he knew, by the way, better than practically anyone how the gold-sterling system worked, because his first book Indian Currency and Finance had been about nothing but that.

So he knew that the time in which those arrangements could have worked was past, and new arrangements were needed. He was very aware, also, that not only was Britain no longer the head honcho in the world system, but that there was now a greater dispersion of productive power and financial power around the world.

So he came to Bretton Woods with an original set of proposals, and I underline “original” because over the course of much negotiation they tended to be whittled down, and many people think that the post-war system that we got in the end was a result of Keynes’s proposals, but in fact it was the result of Keynes’s eventual defeat.

But the reason it’s very important to understand what he proposed is that it gives us the framework of thinking which allows us to see what’s wrong with the post-war system.

So basically he proposed that there should be a multilaterally-created, new currency. He said, for want of a better name, I’m going to call it “bancor” — and that’s what you see at the bottom of the screen there with the green little dot.

And the value of bancor, Keynes said, would rely on that of thirty commodities — thirty of the most heavily traded primary commodities.

Remember last time we discussed that primary commodities are critically important because primary commodities go into the production of everything else. So whether it is oil, or iron ore, or copper, or what have you, wheat, et cetera, these primary commodities go into the production of everything else. Every economy needs these and therefore the prices of these are critically important for any economy.

So [bancor] would be based not on gold — gold was one of the thirty commodities — but on these thirty primary commodities.

Bancor would be issued by an organization which received the ??? called the International Clearing Union (ICU). And bancor would not be used as domestic currency. You and I wouldn’t use it to buy a restaurant meal or a bar of chocolate. Only central banks could use it in order to settle imbalances.

So say between two countries, if one country exported $50 worth of goods to another country, and that country exported $70 worth of goods to the first country, then the imbalance is not $50 + $70 ($130), the imbalance is only $20 ($70 – $50).

Those were the imbalances that bancor would be used to settle.

And the other important thing about bancor is that countries could buy bancor, but they could not sell bancor. So they would need to buy bancor in order to settle their imbalances, but once having done so they could not sell it, so that meant that — the idea was that countries were to be discouraged from accumulating too much bancor, and the way they could use it to buy other things, and settle their accounts with their each other, their imbalances with each other, but they could not use it to, say, make an investment in a foreign country or what have you. So they could buy bancor but they could not sell bancor [back to the ICU].

All of this — there were a couple of other things that are important about this.

Number one, this system would only function in a system of capital controls.

The idea was that you cannot manage your economy, for example, for full employment, for high levels of activity, unless you were able to control the inflow and outflow of funds.

And this is very important, because, you know, in more recent times, particularly after the 1980s and 1990s when so many countries lifted capital controls, we have been asked to become used to the idea that not having capital controls, having free capital flows, is totally natural and desirable. But this is actually not the case.

We are told that, for example, there is a so-called “holy trinity.” That is, you can have a stable currency, an independent monetary policy, and free capital flows.

[But really], you can’t have all three things at the same time. You have to choose one of them.

Most people say you have to, essentially, choose either one or the other, but keep free capital flows open.

In reality, that is the thing that can most easily go, because all countries need a stable currency and an independent foreign policy. So it’s very important to know that capital controls are very critically important.

And also, countries lift capital controls — not because it’s beneficial for you or me and ordinary people. They lift capital controls so that rich people can easily take money into and out of economies. And it is entirely so that they can take their money wherever they want; they can escape taxes; they can look for more lucrative opportunities. But it does not help us.

And the final element that Keynes proposed in his Bretton Woods system, was creditor adjustment.

That is to say, that if you have a trade imbalance they would not persist. That is different from the system we have today when some countries have persistent trade surpluses and other countries have persistent trade deficits and similarly also some countries are persistently exporting capital, other countries are persistently importing capital, leading to the accumulation of large imbalances.

All these sorts of balances would be settled, moreover,  not just by imposing adjustment on the weaker part, on the trade deficit countries and the capital deficit countries — or, that is to say, to make them tighten their belts and to make themexport more and so on. It would also be imposed on the stronger part, by making countries export less and import more in the case of trade imbalances.

Creditor adjustment was also critically important. That is to say, if you are exporting too much, of either goods or capital, you will have to reduce your export surplus, either by importing more, or exporting less, take your choice.

This was regarded by Keynes as important, and he actually made it a part of the structure of the system by essentially pointing out that, since you could not sell bancor, and you can only accumulate bancor, what was the point of accumulating something that you could only use to settle imbalances?

So that was the main thing.

And secondly, you could not accumulate bancor beyond a certain point. If you did, then it would essentially be hived off to finance development in various parts of the world that needed it.

So this was the structure of the system that Keynes brought to Bretton Woods. And it was nixed, essentially, by the United States, who would not accept that any other such multilateral currency could be the world’s money because it wanted the dollar to be the world’s money.

I’ve spoken a lot, so I should give Michael a chance to come in and add anything he wants on this matter.

MICHAEL HUDSON: Well, what I want to add is the reason that Keynes made these proposals. What was he trying to avoid?

Well, he was trying to avoid the fact that England was broke. In order to understand it, you have to understand how America’s strategy, throughout WWII, was to look at England as its main potential post-war rival.

In 1942, when the Allies won their first major victory, at El Alamein, Churchill gave his famous speech, saying, “This is not the beginning of the end, but the end of the beginning.” [“Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” – ed.]

Just what is that “beginning”? The beginning was really shaped in Lend-Lease. When America joined the war, it had a discussion, “How are we going to supply the Allies with armaments? We can’t have inter-ally debts like there were before. We are going to have to negotiate some means of payment. England can’t pay money right now, but what it canpay is, giving up its empire. It can end the Sterling Area. It can agree to become a satellite of the United States and essentially force itself into a depression and bankruptcy after WWII as the price of our giving it support.”

Well that basically was Lend-Lease.

Radhika reminded me yesterday that the wikipedia [page] on Lend-Lease says, “The aid was given for free on the basis that such help was essential for the defense of the United States.”

If you look at my Super Imperialism, it has a whole chapter on Lend-Lease, describing the negotiations that occurred, back and forth. What the United States Congress insisted was the price of Lend-Lease.

There were a number of prices.

The first was that — when there was going to be peace, England would give up its system of Imperial Preference. That is what Radhika was discussing before, as how did England create an empire of dependent colonies.

Imperial Preference meant that England would give trade favoritism — tariff favoritism — to its colonies, to members of its empires.

This was very important, because during WWII, India, Egypt, Argentina, and other raw materials suppliers, built up enormous savings in income that they got. They sold their grain, mining materials, all sorts of things, to the Allies. And the Allies paid them, and they built up enormous international balances.

British colonies had ten billion dollars of balances they’d saved during the war. Not only was there Imperial Preference, but these balances were blocked. England’s colonies said, “You can use these Sterling Area balances to pay other Sterling Area countries, namely, us, in England.”

The whole idea was that, England’s hope was that, after WWII, all these balances that its colonies had built up would be spent on [England’s] exports, and that would enable [England] to have full employment instead of the mass unemployment that led to a general strike.

So the United States basically — this was the beginning of America’s “rules-based order.” The rules-based order means — it’s a double standard. “We have one set of rules [for us], one set for others.”

England had to agree to abolish the Imperial Preference system and let the countries spend their ten billion dollars anywhere — meaning, on the United States as well

But the United States did not promise to lower its tariffs and enable these countries to earn money from the United States. Only England was supposed to do this.

You’ll remember what Henry Kissinger said: “It’s dangerous to be an enemy of the United States, but it’s fatal to be an ally.”

England was an ally and it suffered a fatality.

So you could say that Lend-Lease was America’s victory over the Allies even while WWII was going on. Principally against England, because England was viewed almost with as much worry as America was worried about socialism.

Just as the socialist economies had their capital controls and their price subsidy, so England seemed to America to be a planned economy to the extent that it wanted its own economy to grow — its own labor force to be employed, instead of the American labor force.

So Britain had to agree to a “free market” that ended Imperial Preference. It also had to agree not to devalue sterling to make its exports more important. England — when Lend-Lease gave way to — soon as the war ended, within a week, it happened very quickly, because of the atom bomb on Japan — England had hoped that the war would last a year longer so that it would have a chance to settle things more in its favor.

But all of a sudden it was broke, it needed money, and America said of course, “Now that there’s not a war anymore, we don’t have to give you any support, but we will give you a loan, but you have to agree not to devalue sterling until 1949. You have to hold sterling at such a high price that nobody can afford to buy your exports.”

And [the US] said, “There’s one great advantage that we know Mr. Churchill will love. Without exports, you’ll have mass unemployment. Without mass unemployment, you’ll have low wage rates. You will win the war against labor, and we’ll win the war against you.”

That was basically the deal that was made, and basically it was foreign policy agencies.

The United States — if you look at the debates during Lend-Lease and the British loan, Congress said, “Well, you know, they say that they need money. But if they really need money they have plenty of assets. Let them sell Shell Oil to the United States. Let Mr. and Mrs. Astor put their wealth up on the block. They have plenty of things they can give us.”

In other words, they treated Britain as a dress rehearsal for how the International Monetary Fund (IMF) was going to treat Third World countries after the 1950s.

You have to pay a foreign creditor, sell off all of your assets, sell off your public domain, your mining rights, your public infrastructure.

That basically is what the United States insisted that Britain do. And by [Britain] agreeing to all of this economic surrender, the United States went to the rest of Europe and said, “Well we’ve got Britain to agree with this. This is a fait accompli. Either you join us, or you don’t. Either you’re with us, or without.”

You didn’t need George W. Bush to say that. That was the policy that America went to Europe with. England has always, ever since, acted as America’s proxy; as America’s battering ram. It will sell out, and then give a model for America to impose on other countries.

So essentially the IMF, when it was being structured, was to enforce this system.

Well what Keynes said — the reason that he put forth this idea of the bancor, that Radhika described, is he described, “Creditor countries have moral obligation that we want to make into a legal obligation, to enable the debtors to pay them. You can’t say you’re a creditor making a loan if you prevent the countries from paying the loan.”

Keynes said that the key element in his proposal for the International Monetary Fund was the “scarce currency” clause. That countries would borrow this special IMF currency, the bancor — they would accumulate it.

But if a country would run a sustained surplus for more than seven years — and we know what country he meant, the United States — then the surplus would be wiped out, because it was so large that it would be unpayable.

This logic is exactly the logic that Keynes applied in the reparations debate in the 1920s, when he said, “Look what happened. When reparations couldn’t be paid, finally the world saw reality and they canceled the reparation debts‚ the inter-ally debts. My system with the bancor is designed to write that into law.”

“That if a country” like the United States — [Keynes] didn’t [actually] mention any country — “is a chronic surplus country, and other countries will be chronic debtors, at a certain point this imbalance will be wiped out. That’s the way that we’re going to create market balance. We will create a marketplace that has the rules to prevent the market from transferring all the wealth of the world into the creditor countries and bankrupting debtor countries and forcing depression on them.”

Well the United States said, “That’s what we want! We want the IMF to enforce depression on the rest of the world, because then we can ask Argentina and Chile and Latin America and Asia to do just what England did. You owe us the money — sell off your public infrastructure. Sell off your oil rights. Sell off your mineral rights.”

And essentially if you look at the debate over Keynes’s proposals and what British politicians in the House of Lords wrote, you see this all spelled out.

The House of Lords warned that this would happen. The advocates, fighting against workers, the main anti-worker party, was of course the Labour Party. And the Labour Party said, “We’ve got to agree with the Americans. Even though it will be mass unemployment, well, they’re Americans.”

The Conservatives fought against bankrupting labor. The Labour Party, even before Tony Blair, advocated fighting against Keynes’s proposals and wanted abject surrender to the United States.

And basically, that’s what happened.

The task of the IMF turned out to be a replay of Lend-Lease agreements, and the British loan of 1945— it’s to lend to the Third World export countries. Its prime directive was to promote dependence there.

But I’ll get to the 1950s after Radhika makes the transition from what Keyenes did to what happened after WWII.

RADHIKA DESAI: Thanks Michael. Again, really very interesting, and it just makes me think of several things that I thought I should really mention here.

Not only is the wikipedia entry wrong, that somehow this Lend-Lease was essentially free aid. As you point out, the big price that had to be paid was essentially the surrender of national sovereignty. Essentially agreeing to do what the United States wanted you to do on important policy issues.

But there’s also something further.

Actually, countries like the UK were very aware of what the US was doing, and that the end game that the US was looking for was essentially to be a creditor which could then dictate, if not repayment, then essentially dictate policies.

And in order to avoid being in that situation, for a large part of the Lend-Lease, Britain essentially tried to sell assets as much as possible, whatever it could, in order to pay for it anyway. So actually it was both monetarily paid for, in the bulk of the instances, and it was also paid for in terms of surrendering policy.

And very critical policy. I mean, if you could buy policies like these, they are cheap, actually.

And secondly, this discussion is very important from the point of view of today, because as some of you may know, the idea of Lend-Lease has been dusted off and put into practice once again, vis-a-vis Ukraine. And we’ll probably be discussing this in a later show, because we intend to do one on the political economy and the geopolitical economy of the Ukraine war.

But it’s important to say that, again, most people think that the aid that’s being given to Ukraine, and the Lend-Lease, and so on, is free. It isn’t. The United States is running a tab. At the end of this war, whenever that may be, Ukraine, or whatever entity is the successor to Ukraine, because it will be as likely as not a much diminished entity, will be saddled with a big bill.

And if it can’t pay, all the better, because the United States will be able to dictate policy. So one way or the other, the people — not only are they destroying Ukraine right now, but they are going to be squeezing it further.

I should also add one other thing.

The United States, because it essentially demanded that the UK not devalue for a period of time — until 1949, et cetera — also ended up — it did that, and it also ended up enlisting the colonies of Britain in its own favor.

Because essentially the colonies did not want to purchase things with overvalued sterling, and they said, “Why can’t we use our sterling balances, because they are our sterling balances?”

Remember this is also the time when these colonies are becoming one by one independent, and they said, “Why can’t we use this to buy American goods?” Because of course at that time, with much of the productive capacity of the world destroyed around the world, the United States was the only major economy left standing, and the only major economy capable of exporting the things that the colonies might want.

And then, finally, Michael has pointed out this whole point about austerity, this whole point about how essentially exclusively debtor adjustment — which is the opposite of what Keynes wanted.

Keynes wanted creditor adjustment — to have exclusively debtor adjustment means you are making the weaker party even further weaker by making them tighten their belt by making them consume less by imposing recessions on them, et cetera.

And from this point of view, again, remember, this is not the only way to pay off your debt. There are actually two very different ways of paying off debt. And I think it’s important to remember them as we try to assess these arrangements.

One is, yes, you restrict your consumption — you say, okay, if I owe you x amount of dollars, I’m going to restrict my consumption, I’m going to not eat, I’m going to not heat my house, and I’m going to repay the debt.

Some people can do so with minor difficulties, for others it will be too great a difficulty, and for societies creating generalized misery by paying debts these ways and also inflicting misery on those least able to bear it, like working people, the poor, et cetera.

But there is another way of paying debt, which is to increase your capacity to pay. So you invest in that society and its productive capacity. Or, if you are talking about an individual, you say, “Okay, I want to take on further debt for now, I’m going to train myself as this or that, increase my capacity to earn, and then I will pay off the debt.”

This is a very different way and Keynes wanted to institute this way of repaying debt, in his ideas about an International Clearing Union and the dollar and so on. So that it does not inflict such misery.

But the United States wanted the opposite.

And so now, let us come slowly to the third question, about the dollar system between 1945 and 1971, which is when the dollar’s gold link was broken. How exactly did it work?

So essentially, before we get there, it’s important to remember a couple of things. One of them, as I discussed in my Geopolitical Economy, the United States could see that the sterling system was weakening already in the early part of the twentieth century.

And, throughout the period that we have just been talking about — the two world wars, the Great Depression, et cetera — the United States basically calculated its policy actions in a way as to try to realize the possibility that the dollar would replace sterling as the world’s money.

Essentially the United States saw itself as the country that would replace the United Kingdom.

Of course the US knew that it was never going to be able to acquire an empire the size that Britain had, but it would essentially try to say, “Forget about that, but we will try to make the dollar the world’s currency.”

The problem with this was of course that the sterling system relied on empire. If you [didn’t] have an empire, you were going to have a pretty tough time. You were going to have to engage in some pretty shady shenanigans in order to make the dollar the world’s money.

But this desire on the part of the US has been there all along. The United States has always been an expansionary society. And if you read critical historians and writers on the US like Charles and Mary Beard or, more recently, William Appleman Williams or Andrew Bacevich, and so on.

All of these people emphasized that the United States was always expansionary. It justified that by saying that, “We are always producing more than we can consume, and we are creating more capital than we can employ. We need the whole world to be open to us.”

So ideas of Manifest Destiny, the Frontier Thesis, the Monroe Doctrine — all of these ideas justified US expansionism. And as I said, by the early twentieth century the US had actually made this general expansionism of its history very focused on making the dollar the world’s money.

And one more preliminary point, before we look at how the dollar system operated.

Michael discussed monetary imperialism, and that is really quite important. Because when you look at ideas — last time we mentioned hegemony stability theory — hegemony stability theory is not really a theory, it’s really an [ideological] discourse justifying the dollar’s world role. And so it tends to not be particularly consistent.

So sometimes you see that hegemony is — they talk about hegemony as though it were productive superiority. The most competitive country is the leading country of the world.

And other times they talk about the country whose currency the world accepts.

But these are two quite different things. And it’s interesting from one point of view, because we have already seen that running the sterling system actually affected the British productive economy adversely.

Because it required a financial system that was the opposite of what an expanding, productive economy requires. It was the absolute opposite of that.

Therefore it is not surprising that Britain’s monetary imperialism — that is to say, the gold-sterling system — coincided with the period when Britain was losing manufacturing superiority rather rapidly to other countries.

As we’ll discuss — probably in the last show, when we discuss the last two questions — we will show that the United States’s attempt to emulate this, it’s the second phase of it which became reliant very much on certain types of financialization — that also has coincided with the rapid decline of US competitiveness.

That is to say, all the people who are talking up the dollar and saying the dollar is naturally the world’s money, are not just hiding from people the cost the rest of the world pays, they are also hiding from you that American workers — US workers, even US small business people — are paying for this crazy system.

Already this monetary imperialism was a sign of expanding multipolarity, because it showed that Britain no longer had productive dominance. it would exercise monetary dominance to some extent thanks to its empire. But this was also limited by time.

Now, essentially, like I said before, the United States left the world with no choice but to accept the dollar as the world’s currency by simply nixing all alternative plans. Simply saying that the world could not come  to any multilateral agreement, it was not going to cooperate.

So we are told, however, by [advocates of] hegemony stability theory, that the dollar system functioned perfectly fine up until 1971 and then there was some little (unintelligible) difficulty and the dollar’s gold link had to be broken.

And in any case it was a masterstroke. But nevertheless, all the people who talk about US hegemony tend to think that the post-Second World War period up to 1971 was a period of dollar hegemony and American or US hegemony.

But if we actually look at the reality of the period from 1945 to 1971, we see the opposite. What we see is an extremely tumultuous couple of decades and a half.

So essentially the story can be compressed into the following.

First of all, without an empire, the dollar could not export capital to the rest of the world. It did a little bit after the Marshall Plan, but the Marshall Plan itself is totally hyped up. It was not really necessary for European recovery which was largely done under its own steam.

And what’s more, the Marshall Plan credit that was given to Europe also came with multiple strings attached, including strings that made this aid not particularly helpful to Europe.

But nevertheless the US could not export much capital.

So essentially what the US started doing was eventually — when this period of export of capital was over — essentially it started supplying the world with liquidity by running deficits.

So this is the opposite — Britain was the creditor nation of the world when it ran this gold-sterling system, and it could do that thanks to her empire. Without an empire, the US could only run the dollar system by running deficits, by becoming increasingly indebted to the world.

In the 1940s, actually, we had a special period in which the United States — thanks to the devastation of the rest of the world’s economy, and the great boost that the war gave to the US economy — was running huge export surpluses.

And because when you are running an export surplus the world has to pay you dollars, rather than you making dollars available to the rest of the world. There was a general condition of dollar shortage.

The Marshall Plan was not really able to alleviate this dollar shortage. And of course as a consequence, European economies, rather than opening themselves up to free trade, naturally chose to protect themselves as much as possible, because they had to manage the relations between their economies and the rest of the world carefully in order to conserve scarce foreign exchange.

So this was the situation. The dollar system was there, there was no alternative, but it wasn’t working particularly well either. And certainly not contributing to the world’s recovery.

In fact, the only proposal of Keynes that actually survived the US’s nixing of Keynes’s proposal was capital controls. The US had to accept that, unless European countries practiced capital controls — that is, managed the inflow and outflow of money from their economies and into their economies — there would be such a lot of economic devastation, and this could only increase the attractiveness of communism in western Europe.

And this was to be avoided at all costs, so the United States accepted capital controls.

Capital controls was what made it possible for all these European economies to organize their recoveries with a lot of state involvement, a lot of state ownership, et cetera. But they allowed them to organize this.

So, they did manage to do it, and by 1958 they were sufficiently recovered to be able to finally make the currencies convertible. And of course with convertible currencies of these countries, they could also use each other’s currency in their trade.

And almost overnight what had been a dollar shortage turned into a dollar glut. Nobody wanted dollars, since their were European currencies of far stronger economies that were becoming convertible.

Remember, the bulk of the growth of the post-Second World War period took place in the recovering economies.

So essentially there was a dollar glut. And also around this time, you also began to see the first post-war declines in US exports. Eventually these declines in exports would become trade deficits, but we can discuss that another time.

And also around this time, the famous Belgian economist Robert Triffin proposed there was something inherently wrong about supplying the world with liquidity via deficits.

At that time, remember, these deficits were not due to trade deficits but because of the US’s military spending abroad in the Korean War and later the Vietnam War.

So [Triffin] said that these sorts of deficits — basically he proposed that there was a dilemma here. Because the more liquidity you supply via the deficits, the greater the deficits. That may mean greater liquidity, but the size of the deficit made the dollar less attractive.

And the Triffin dilemma essentially operated throughout this period. Essentially, the major trading partners of the United States, rather than accepting dollars, said, “No, the dollar is convertible into gold, so we want gold instead.”

So within a very very short period, between 1958 and 1961, the European (unintelligible)  had drained so much gold out of the United States that the United States could no longer back the dollar with gold on its own.

So a gold pool had to be created, pooling the gold of all the countries involved, in order to back the dollar. And the countries involved only did so because they thought this would give them a place at the table when eventually this crazy system came to an end and they could negotiate a better system.

And even while the United States kept trying to talk as though there was no problem, saying, “We have lots of assets abroad, there’s nothing to worry about, we are not living beyond our means.” Nevertheless they may be talking in this way, but they were walking in a very different way.

Because they were taking a number of measures trying to reduce the payment deficits by removing tax incentives for outgoing FDI (??), trying to keep money within the United States by imposing a tax on interest earned elsewhere. Increasing domestic military procurement, et cetera.. There is a whole long list, I won’t go into that. But a number of efforts were made in order to curb US deficits.

Things did not improve, and by 1967 they were so bad that the domestic convertibility of the dollar into gold had to be ended. The same year the French withdrew from the gold pool, saying, “This simply is not making sense.”

The United States kept the game going by basically requiring the rest of the world to not demand gold but eventually by 1971 (the slide should say 1971)  there was a run on the dollar and the Nixon administration had to end convertibility.

So if you look at this series of events, you would not believe that the dollar was the world’s money in any kind of stable fashion. So that is the story.

Michael, perhaps you want to add something.

MICHAEL HUDSON: I want to add a quantitative backing of all of this.

In 1945, the United States had its gold reserves — its gold reserves had all been flowing to the United States in the 1930s, and during the war. It was “flight capital”. People were afraid to hold their gold in Europe because they thought Germany was going to attack.

So most of the gold was in the United States in 1945. If America had really wanted to create a system of balance, it would have done what you described, it would have helped other countries actually invest to develop.

What you describe as the “nightmare” for the United States, that other countries would invest to develop, and wouldn’t need to be dependent on the United States.

Between 1945 and 1950, the United States raised its gold holdings from 20 billion to almost 25 billion. 75% of the world’s monetary gold stock was held in the United States. And that was what you called the “dollar shortage.”

Other countries, without having enough dollars, they were forced to do what England called Stop-Go.

Whenever England would begin to recover — its business would expand, workers would be employed — they’d have to import their grain, they’d have to import their food, they’d have to import other things. Pound sterling would go into deficit. England would have to raise its interest rates in order to borrow the money to finance the deficit — to keep the exchange rate of sterling stable. And this rising interest rate would cause it to fall back into depression.

That was Stop-Go. Which mainly meant, stop stop stop whenever you begin to become solvent.

Everybody was complaining by 1950. The United States solved the problem in a way that nobody had expected. The Korean War — from the time America entered the Korean War in 1950/51, every single year its balance of payments moved into chronic deficit that got deeper and deeper until 1971 when it was forced off gold.

The entire balance of payments deficit was equal to, year after year, to America’s military spending abroad.

WHen I left Chase Manhattan Bank, I was employed by Arthur Anderson to do an analysis of the US balance of payments. I produced the charts and the statistics — they are repeated in Super Imperialism — to show the entire deficit was indeed U.S. foreign military spending.

At that time, Mr. John McNamara, the Secretary of Defense, telephoned Arthur Anderson and said, if they supply [Michael’s] report, [Arthur Anderson] would never get another contract with the US government.

So my boss Mr. Barsanti came in and apologized to me and said that they couldn’t publish it.

Their art department had made very nice charts and he gave them to me. And I went to New York University’s business school and I published it,  all these statistics, and a monograph summarized in Super Imperialism.

The Federal Reserve, then, thought, “How are we going to cope with this?”

They didn’t want to attack me obviously, so they attacked all the publications of NYU’s business school. They said that the fact that I found the Vietnam War responsible for the deficit and military spending doesn’t give confidence in NYU’s editorial decision.

But then one of my students, at The New School where I was teaching international finance and trade, worked for the Federal Reserve and showed me their internal memos saying, “Yes this is true, we can’t let it get out.”

All of this discussion about international balance and fairness, as if all the balance of payments deficits were international trade, ignored two things.

They ignored, number one, military spending that was the key to the deficit, and that actually has been since the thirteenth century. War forces countries into deficit. War forces countries to borrow. That was why the Catholic Church, the papacy in the thirteenth century, legitimized interest-bearing debt to finance the wars — the crusades and the wars it was fighting.

So this is a constant throughout history. It doesn’t appear in any of the “free trade” economic models. It’s as if governments don’t exist.

And the other thing that doesn’t exist in this, saying that balance of payments equilibrium is all trade — they then say that all trade is a result of labor asking for [higher] wages. And the way to run a deficit is to institute a class war against labor. You want to fight the labor unions, you want to lower wage levels to enable countries to have achieved balance.

Well what they mean by “balance” is obviously to finance this US-centered, military order, because the dollars that countries who are accumulating — when they weren’t asking for gold — were loans to the US Treasury by buying Treasury Bills that financed not only the domestic budget deficit — that was largely military — but also the balance of payments deficit.

So the entire stability between 1951 and 1971, for 20 years, was provided by military spending as the United States put military bases all over the rest of the world.

So what achieved balance was military — the military deficit. Not trade adjustment. Not investment adjustment. All of this is left out.

Trade theory does not have room for the gunboats. And if you look at the balance of payments for the last 800 years, it’s all about the gunboats. That’s the amazing thing.

And what we’re focusing on is the politics. International exchange rates and relations are not a function of “free market” arrangements. They are a function of intergovernmental debt — not so much private [debt] — and military spending. And governments paying their foreign currency by selling off their infrastructure.

I want to make one final comment. When Radhika says that “stability is achieved by investing,” I said that was the US nightmare.

That nightmare was imposed — the iron hand was the World Bank. There is a reason it’s usually led by defense department and military heads. The prime directive of the World Bank is, “No country should compete with major products that the United States exports — above all, grain.

The one thing that the World Bank has opposed is other countries growing their own food grain.

From the very beginning, it’s fought against land reform, against land redistribution. It’s said, “We will make loans for export facilities, for roads and ports. You can export plantation crops from huge latifundia. You must not grow your own grain. You must depend on the United States. That’s the free market. You must not have government investment.”

The World Bank publishes country missions for every member country. Every single mission report has recommended that the first thing they need is domestic currency for agricultural extension – for marketing, seed development, rural education.  In other words, for all these things that the United States has done under its Agricultural Adjustment Act (1933) that Roosevelt sponsored. That helped American agricultural productivity in the 1930s and 1940s grow faster than any industry in world history had grown.

Farm productivity. That’s exactly what America looked at as its nightmare if Argentina — if Latin America and Africa would grow their own grain

The idea of dollar dependency was based on the United States using the market to prevent other countries from investing to become independent of reliance on the dollar and on products that are exported by the United States, primarily oil and grain.


RADHIKA DESAI: This is fascinating, Michael. And I should say, we are probably over an hour, so we should stop this for today and we will take up the last two questions, that is to say, Was there really a Bretoon WOods II — that is to say, things just simply carry on as normal after 1971. And, this will become a prelude to understanding the contradictions of the system after 1971 will help us to understand the current possibility of the demise of the dollar as the world’s money.

But before closing let me just say that, as part of this story, Michael’s absolutely right.The United States is really afraid of the rest of the world developing, growing, et cetera.

But the fact is, it has not been able to prevent it, which is one of the fundamental reasons for the current crisis.

So the United States — what it wants to have, and what it can have, the difference between the two has grown wider and wider. And this is partly why we see increasingly desperate military actions of the United States.

So in the story we have to tell, first the Europeans essentially check out of the dollar system by creating European monetary integration. And later on, other countries — today, even the oil-importing countries, the OPEC countries, which for a while were persuaded to hold vast quantities of US currency, they are also checking out.


The Chinese, Russians, Japanese — everybody is increasingly wary of holding dollars. So this is the story we will tell.


And even the IMF and the World Bank. They have been loyal servants of the United States in imposing austerity on the rest of the world, as much as possible. But by the early twenty-first century, you also see that the rest of the world, having been bitten several times, were now quite shy of the IMF.


And the IMF and the World Bank loan portfolios actually shrank, and remained so until after the 2008 financial crisis.


What the US wants, and what it can have — the distance between these two things, as I say, we will show how this expanded in our next program, which will definitely be the last one we will do on de-dollarization. And then we will move on to other topics.

Michael and I were thinking we would do one on the political and geopolitical economy of the Ukraine, the conflict over Ukraine.

So thanks very much. Thanks to Paul Graham, who is behind the scenes, recording all this and being our wonderful videographer. And thanks again to Ben again for hosting our show. See you in a couple of weeks.

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  1. PlutoniumKun

    I think the still elevated role of sterling in world markets shows just how important momentum and historic practice is in markets. Business operations are usually a matter of habit (which is why big bureaucratic organisations can usually withstand ‘disrupters’ for longer than seems logical) and major business cities thrive decades or centuries after they lost their original reason for prospering. It would take a lot to persuade the biggest players to switch away from the dollar, even if there were compelling alternatives. But the incredible arrogance and short sightedness of Washington seems designed to test this to the limit.

  2. Candide

    Thanks, Yves, for this rounding out of the value of the duet between Desai and Hudson. My wife and I listened to this insightful history as we painted (on) the house. By the time we get to the far corner I can apply for the diploma I’d gotten within one or two courses of completing ;- )

  3. Jan Krikke

    No mention of the impact of CBDCs… When money moves in real-time, we may not need a reserve currency. We may only need creditworthiness.

    1. Yves Smith Post author

      This is nonsense. Money does move in real time. Banks run enormous intra-day balances with each other. The reason they can is they are backstopped by central banks.

      Central banks operationally do not have the capacity to go retail or commercial banking, which involves many services bundled with payment services. Commercial banks are constantly making judgements about the credit-worthiness of their customers. Central banks can’t step into that role. Among other reasons, it would be too political.

      1. deplorado

        Thank you for this important clarification, Yves. It makes perfect sense, but then why are central banks so doggedly talking about doing CBDCs — it is very obvious that they would be going into a politically fraught area and yet they seem to be relentlessly pushing for it… makes one want to put on the tinfoil hat. China is doing it too and is probably way ahead of the others. Why exactly?

  4. ChrisFromGA

    Economics is not my strong suit, but I am not sure why national central banks couldn’t hold digital currencies instead of dollars. Bitcoin is way too unstable, but something else could do the trick, digital quatloos, for example.

    1. Yves Smith Post author

      Please tell me how a digital currency solves any problem. It doesn’t, except for eliminating cash to improve tax collection and surveillance of the informal economy. It really bothers me how many have fallen for techno-cons.

  5. LY

    There’s also the dollar dominance in the popular usage. About half of US physical paper currency is circulating overseas. So what replaces US dollars in the suitcases used by international crime lords in movies, whether made by Hollywood, Bollywood, Hengdian, etc.?

  6. Michael Hudson

    I think we’re talking at cross purposes, with two different meanings of “dedollarization.”
    I have no disagreement with you. By “dedollarization” I mean what China and Russia have meant by the word so far:
    (1) diversifying away from the dollar in their currency reserves. At this time that means into gold and mutual currency swaps, and most of all
    (2) a decoupling from U.S. trade and investment by avoiding reliance on U.S. exports of key products whose sanctioning could disrupt their economies. I suspect that
    (3) there will be some bancor-like policy of artificial IOUs USED ONLY FOR INTER-GOVERNMENTAL DEBTS.
    I never suggested a new currency for use domestically to buy goods and services. Of course that’s impossible, because it requires political unity – one political system, tax system, et all. Of course countries will continue to use their own currency.

    1. deplorado

      This was a very important clarification, thank you, Professor Hudson.

      And best wishes for your continued health, and for success in institutionalizing your knowledge and type of analysis!

    2. Dida

      Michael, this is a crucial distinction. If I understand you correctly, most commentators refer to de-dollarization as dollar replacement, while for the moment China-Russia are attempting dollar containment, a defensive strategy which attempts to limit the share of the dollar through a set of hybrid policies, in order to contain the destruction that the dollar system has wrought on their economies and the rest of the world.

      This is a crucial point, not only because replacing the dollar with another national currency is not currently possible for a myriad reasons, as Yves emphasized earlier in an excellent article, but I would think that it is not even desirable for a state. Although everybody seems to assume that China would naturally aspire to provide the next world money, as Rhadika explained, without empire, China would face the same conundrum. It would have to sustain an international currency through deficits, and we have seen where this leads. It is very unclear why China would want to repeat the American experience, and hollow its own economy within the next 50 years.

      I am hoping that you will address this issue of defensive de-dollarization, what it is, what it is not, what effects it would have on the current system, and what policies and institutions of international governance China and Russia are proposing. I was also wondering if the partial turn to gold money can avoid permanent deflation and austerity, which are known to have been endemic in the gold sterling era.

    3. Yves Smith Post author

      I disagree with your bancor prediction. It requires capital controls, fixed exchange rates, and most important, ceding national sovereignity to a central monetary authority.

      The reason the US was able to get its way at Bretton Woods was that every other major capitalist economy was crippled and no one was in a position to object. China is unlikely to accept a central authority having influence on its monetary regime unless it has control of the central authority, and it is not conceivable that Russia, India, Saudi Arabia, nd other major non-US players will go along with China dominance in that system.

      1. deplorado

        So if not some sort of “bancor,” then the future diversification out of the dollar would amount to a myriad of bilateral agreements – like a “full mesh” of bilaterals all avoiding the dollar… seems too much work to me. Then back to square one…. and hence the rumors of dollar’s demise are exaggerated for all of the foreseeable future?

        I feel like cracking this crystal ball will hold the key to seeing the future.

  7. Cesar

    Thanks for providing this for us, Yves. As I’m sure a few people will notice, I’m new here (have been checking from time to time but it’s the first time I comment) and although my understanding of things has gotten particularly better since I started reading what is posted in NC, I’m still pretty ignorant to a lot of it. Due to that, I gotta ask you Yves, and anyone else interested in presenting their opinion, how do you think the next, let’s say, 5 to 10 years will play out regarding geopolitics, wars and conflicts, economy and climate change? If anyone has any books, articles or other good sites in order for me to better learn this things, It’ll be much appreciated.

  8. fresno dan

    And [the US] said, “There’s one great advantage that we know Mr. Churchill will love. Without exports, you’ll have mass unemployment. Without mass unemployment, you’ll have low wage rates. You will win the war against labor, and we’ll win the war against you.”

    I think the sentence was meant to read: And [the US] said, “There’s one great advantage that we know Mr. Churchill will love. Without exports, you’ll have mass unemployment. With mass unemployment, you’ll have low wage rates. You will win the war against labor, and we’ll win the war against you.”

  9. QuantumSoma

    I think you’re missing the point of the bancor (or it’s contemporary variations): it isn’t supposed to be a general purpose currency, it’s purpose is to facilitate intergovernmental and inter-central bank transfers, backed by a basket of participating countries currencies (and possibly certain commodities). In other words, it’s supposed to solve the currency and sovereignty problems posed by a globalized market through essentially a negotiated algorithm as a governing structure.

    It would be a political creation, one that needn’t necessarily have buy in from the market. Likewise, whether it is ever actually comes into being is almost totally a question of political will, not general market buy in.

    None of this is to say that a system like this would ultimately succeed in it’s own goals, or even that what those goals are could actually be clearly drawn out of the political mechanizations that create it. The same, however, could be said of the current system, as well as all past systems. My only point is that you seem to misrepresent the hypothetical bancor as basically a globalized euro, when it is intended to be anything but.

    1. digi_owl

      Frankly this is what the Euro should have been.

      Each member nation retaining their own internal currencies, but using the Euro as the cross border exchange currency. This replacing the d-mark peg that preceded it.

    2. Yves Smith Post author

      You apparently didn’t read my introduction with care or Hudson’s description of bancor. It requires ceding sovereign power to a central authority. Who controls that? What are the rules? And in particular, who is going to trust China? China will want disproportionate say given its economic heft. I doubt anyone will go along with that.

      All sorts of things were possible at the end of WWII because the devastation had wiped a lot of slates clean. That is not the situation now.

      We already have a version of that system, the SDR. Tell me how well that has done in real world applications.

    3. deplorado

      This reminds me of the Soviet times COMECON and the convertible ruble it used. I think the convertible ruble was backed by gold and possible by other commodity assets and was used exactly for intergovernmental settlement.

      Would love for someone to provide some details on how it worked and how successful it was. My impression at the time was that it worked fine, as long as the USSR was willing to produce cheap commodities to go around.

      1. Wukchumni

        The convertible Ruble* was only used within the bloc party and like all Communist currency (with the exception of Hungary late in the game) not worth hardly anything in the west.

        The USSR’s commodity traders in Switzerland had to be ultra sharp as everybody knew they were net sellers, how else was the Soviet Union going to get hard currency otherwise?

        * My favorite ‘convertible’ Ruble story was in the 1980’s, commemorative Rubles worked just fine for Swiss 5 Franc coins in vending machines in Switzerland for defrauding purposes.

        One time I was there and the vending machines all took 5 Franc coins and then the next trip 6 months later, none of them did.

        1. deplorado

          >> not worth hardly anything in the west.

          That was because currency trade was restricted, and overall trade of goods/services was restricted or broadly undeveloped. And it was backed by gold, so if you could present a claim at the Soviet central bank in Moscow, you at least theoretically (maybe not as an individual, but as a business or a state) would get your currency’s worth in gold.

          But what’s interesting is, within COMECON, I think the settlement mechanism was commodity based. How those commodities were valued may be similar to what the new dedollarized mechanism may be and Im sure there is interesting, though obscure, literature on it.

  10. Susan the other

    The American Century, the last century, was the most wasteful and destructive of all. It is so ironic that capital destroys itself as a currency. That is, the more successful it is at expanding good old productivity the less it is worth in relative terms. If we do come to our senses with a sort-of Bancorp/IOU system, in order to make that idea balance out it will need to be balanced against the big creditor – the planet. The health and sustainability of the planet. Talk about the need for deficit spending! But in this case we will have lots of jobs for a very long time.

  11. Pookah Harvey

    Sergey Glazyev is a former economic adviser to the Kremlin from 2012 to 2019, and for the past three years he has been Minister in Charge of Integration and Macroeconomics of the Eurasia Economic Union (EAEU). Here is his reasoning on why the Global South would move to a new Bancor type international trade currency:

    Transition to the new world economic order will likely be accompanied by systematic refusal to honor obligations in dollars, euro, pound, and yen. In this respect, it will be no different from the example set by the countries issuing these currencies who thought it appropriate to steal foreign exchange reserves of Iraq, Iran, Venezuela, Afghanistan, and Russia to the tune of trillions of dollars. Since the U.S., Britain, EU, and Japan refused to honor their obligations and confiscated the wealth of other nations which was held in their currencies, why should other countries be obliged to pay them back and to service their loans?

    In any case, participation in the new economic system will not be constrained by the obligations in the old one. Countries of the Global South can be full participants of the new system regardless of their accumulated debts in dollars, euro, pound, and yen. Even if they were to default on their obligations in those currencies, this would have no bearing on their credit rating in the new financial system. Nationalization of extraction industry, likewise, would not cause a disruption. Further, should these countries reserve a portion of their natural resources for the backing of the new economic system, their respective weight in the currency basket of the new monetary unit would increase accordingly, providing that nation with larger currency reserves and credit capacity. In addition, bilateral swap lines with trading partner countries would provide them with adequate financing for co-investments and trade financing.

    A recent article in Bloomberg suggested that the FED could raise interest rates to 6%. The Global South is already complaining about the US exporting its inflation to save itself. The question becomes getting an IMF loan and another imposed austerity regime or joining the new system and following Glazyev’s suggestion of defaulting on Dollar denominated debt and nationalizing natural resources.
    Which is more appealing?

    1. Yves Smith Post author

      Russia will never refuse to honor obligations. They make a point of respecting contracts unless they have a legal basis not to. That is probably the reason Glazyev is reputed to have little influence. As John Helmer noted:

      Putin listens to his economic advisers on the “right” — Kudrin is the obvious one. He listens to those on the “left”, like Glazyev, but he never decides in their favour.

      On top of that, a move like the one he recommends would create a depression that would engulf China, which exports to advanced economies. Yanis Varoufakis was unwilling to have Greece leave the euro, not for the reasons we documented (the operational impossibility; it takes the cooperation of many parties outside Greece, and a tremendous amount of IT work, which experts estimated would take a bare minimum of three years and more likely >5). Varoufakis said that leaving the eurozone would damage the EU economy, which was critical to Greece and so Greece would poison the water it was swimming in. Same issue here.

      1. Pookah Harvey

        Putin seems to be at least thinking about it. Tass reported that at the 2022 BRICS Business Forum in the welcome address Putin stated; “The matter of creating the international reserve currency based on the basket of currencies of our countries is under review,”

        1. Yves Smith Post author

          Please do not straw man me. Nowhere have I ever said Russia and China are not interested in a new currency system. What I am questioning is their ability to effect much change any time soon

          And Russia appears to be reaching that conclusion. I provided at the top of the post the link to Putin’s spokesman, Dmirty Peskov, saying yesterday that isn’t on right now. Please pay attention.

          And you are missing the point. You can want another system. Making it happen is another thing. As I said, and it frustrates me to have to keep repeating myself, any system not based on a single currency is going to require a loss of sovereignity. The participants will have to submit to the oversight and control of a joint body. That includes with respect to banking standards and monetary policy.

          1. podcastkid

            I will come across as the most dense here, but did you mean not based on a single currency or based on a single currency?
            There are so many reasons here it can’t be created soon I don’t grok, but I hope to plow ahead with my groking. I have no earthly idea if a “bancor-like policy of artificial IOUs used only for inter-governmental debts” might even be a first step…why it could be, or why it couldn’t be. You’ve stated the reasons, and in time I may be able to interpolate. But the state of healthcare ticks me off. It makes me dare to hope for things that are probably, as you say, impossible near term. Maybe the big manufacturers (and what’s left of the importers too) will let a new system happen when exporting their stuff becomes a big problem anyway…due to environment (just prior to 2050 as Alfred McCoy has conjectured).

            And so I dream. If you can get social security in Russia at age 61…well then, maybe we should take a look at their healthcare system too? Four hundred thousand healthcare job slots in the US not filled! As the latter defines the lowest of low points in modern [U.S.] history (considering what omicron could morph into somewhere at any moment), perhaps the new system should take off with a notion of how the worst feature should be revised.

            With a Bancor currency, you could put one bancor at a value, say, equal to 3 min of nursing labor, but…relative to the past…getting paid more. To buy a house and put one offspring through college a nurse these days at the very least would have to make $60 an hour [I know that’s low, but for theory purposes I’m keeping the number even]. So, whereas under our system an LPN gets, say, 58 cents a minute…relative to our current system under a Bancor paradigm, where s/he got the equivalent of $60/hr, one bancor could be pegged as equal to roughly 5X the old earnings for 3 min
            [1 bancor would = 3 min of nursing in such an era].

  12. fresno dan

    So sometimes you see that hegemony is — they talk about hegemony as though it were productive superiority. The most competitive country is the leading country of the world.
    And other times they talk about the country whose currency the world accepts.
    But these are two quite different things. And it’s interesting from one point of view, because we have already seen that running the sterling system actually affected the British productive economy adversely.
    Because it required a financial system that was the opposite of what an expanding, productive economy requires. It was the absolute opposite of that.
    Therefore it is not surprising that Britain’s monetary imperialism — that is to say, the gold-sterling system — coincided with the period when Britain was losing manufacturing superiority rather rapidly to other countries.
    As we’ll discuss — probably in the last show, when we discuss the last two questions — we will show that the United States’s attempt to emulate this, it’s the second phase of it which became reliant very much on certain types of financialization — that also has coincided with the rapid decline of US competitiveness.
    That is to say, all the people who are talking up the dollar and saying the dollar is naturally the world’s money, are not just hiding from people the cost the rest of the world pays, they are also hiding from you that American workers — US workers, even US small business people — are paying for this crazy system.
    To me, this is the crux of the problem. The people who want US empire are unconcerned with who they have to flatten to get it.

    1. Yves Smith Post author

      I don’t see anyone saying hegemony = productive. That’s a straw man, Hegemony implies abuse of power. There are other expressions that try to depict US dominance as benign but not that one.

      1. Dida

        The Hegemonic Stability Theory, which is closely associated with Charles P. Kindleberger, is taught as part of the core coursework of international relations degrees. It describes the hegemonic power as a provider of public goods, such as global stability, security, cooperation, and dispute resolution.

        ‘The key mechanisms in hegemonic stability theory revolve around public goods provision: to resolve collective action problems regarding public goods, a powerful actor who is willing and able to shoulder a disproportionate share of public goods provision is needed.’


        1. Dida

          I forgot to mention that these scholars recount the ascent of the ‘benevolent’ hegemon in similarly hagiographical terms, as a triumph of the most productive economy. Not a whisper is heard of the use of violence to impose colonialism on the highly productive economies of the Asia Pacific, which were wantonly ruined. Nary a whisper of the 45 trillion dollars extracted from colonial India, which the British Empire invested preferentially in the Dominions.

          Of course, the theory of the productive and helpful hegemon is an ideological product designed to legitimize American supremacy, as Radhika explained briefly in a previous podcast.

        2. Yves Smith Post author

          I hate to tell you but that almost proves the point. Kindleberger like other institutionalists is very much out of fashion. His thesis does not influence current usage. The references in Wikipedia are virtually all <20 years old.

          More generally, the word hegemon is theoretically merely descriptive, of a person or state with influence or authority over others. However, with the shift in values, particularly in the US, against the much weaker "privilege," domination now has negative connotations that it didn't (or didn't so much) in the past.

          Usage is not static over time. If you used the expression "elites" before 2008 or so, you would have been seen as an Alex Jones-following crank. The current usage of hegemon is mainly by critics and is disapproving.

  13. Eudora Welty

    Thank you for this. I always look forward to Mr. Hudson. In this regard, on the topic of the decline of Sterling: it struck me as weird to be learning in high school how England won WWII with the US, etc, and yet I watched Monty Python’s Flying Circus on TV and the living standards were so drab compared to the US. It was one of those things you didn’t question, you just gave the correct answer in history class for the grade and because that’s what history said. But, really, how did England win the war and then end up with drab cheese shops and uniformly unattractive people? The fact that England won and also simultaneously lost, that now makes more sense, and really – to me – shows that the US once again was a lousy ally.

  14. Anon

    a multi-polar system requires the participants to surrender national sovereignity. Admittedly they arguably have already with the dollar system but participants understand how it works and have become accustomed to its costs.

    This last bit made me shudder. All expenses considered.

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