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Y_ 3 years ago.
Thanks to Tyler Durden of ZeroHedge for his excellent article: Thanks also to Noam Chomsky, The Hon. Ron Paul and Jim Rickards for the material.
<post-note. I have noticed the charts are not coming out. I will add a link above the charts so you can manually click to open the chart in another window>
Part I – Perspectives
Between 1939 and 1945, the US State Department and the Council on Foreign Relations developed a post-WWII economic plan – dominating a vast swath of the globe that came to be known as the “Grand Area” – comprising the Western Hemisphere, including the former British Empire, and much of the commercial and industrial centre of Europe as possible. Within this region, the United States was to hold unquestioned power with military and economic supremacy, while ensuring the limitation of any exercise of sovereignty by states that might interfere with these global designs. Far from a Pentagon pipedream, the “Grand Area” became and still is, concrete U.S. foreign policy, and its effects form the basis of modern-day Europe, although the capacity to implement these policies has been significantly diminished.
As Professor Noam Chomsky and other historians have observed, Washington’s plans to dominate the “Grand Area” led directly to a multitude of wars, proxy wars and later to the start of a Middle-East crises (which are for another post). Crucial was the development of an International Monetary Fund, which was intended for and continues to disrupt global economies for the benefit of the US dollar, the US based multinational corporations and the US military-industrial complex. There needed to be a balance of both military and economic structures within the Grand Design –one without the other would not exist for long. (By the way, it is not by chance that the EU is run by Germany and the IMF by France; this divide is implicit in promises made to both Germany and France post-war).
World War II was very beneficial for the U.S. economy. Industrial production virtually quadrupled, wartime spending ended the 1930’s Depression, which had not been ended before — and an enormous stimulus to the economy by the issue of fiat currency. As industrial expansion and population growth exceeded inflation the depreciation of the currency through printing was not readily felt. The technologies that were developed laid the bases for post-war economic growth. To enable confidence in the US dollar and enable international trade using a single currency – a partial gold standard was agreed at the Bretton Woods Conference, New Hampshire in July 1944.
The International Monetary Fund (IMF), the International Bank for Reconstruction and Development (IBRD), which today are part of the World Bank Group were (not coincidentally) born at the same time. (The IMF prints Special Drawings Rights or SDR’s termed by Rickards as ‘World Money’ – which can be created as needed to insure stable growth of international reserves. If SDR’s replace the US dollar as Reserve assets in world central banks, the U.S. dollar will lose Reserve status. SDR makes the IMF an International Central Bank.)
The United States, which controlled two thirds of the world’s gold, insisted that the Bretton Woods system rest on both gold and the US dollar. This meant that other countries would peg their currencies to the U.S. dollar, and—once convertibility was restored—would buy and sell U.S. dollars to keep market exchange rates within plus or minus 1% of parity. Thus, the U.S. dollar took over the role that gold had played under the gold standard in the international financial system. Although gold was still the basis for the system actual transactions would be conducted in U.S. dollars. The U.S. blueprint for international access to liquidity was to be policed by the new IMF.
The U.S. dollar now provided economic backing as the de-facto world reserve currency for trade settlements sanctioned under the new IMF regulations. (A little known fact is that the United States is the only country with veto power in the IMF with 15% of voting rights. This veto power will be given to the BRICS nations in 2017). It was then easier for Western Europe and Japan to facilitate trade with a monetary unit that was backed by gold, in-use globally and guaranteed by one of the two greatest military powers at the time. At the same time these countries were ‘protected’ as long as they paid the necessary political and economic tribute to Washington, never mind the partial sovereignty that was the necessary by-product of such a deal.
Once freedom of economic choice was quashed – willing or not – there was no practical escape from the enforced hegemony without running foul of the IMF. This meant that a steady supply of US dollars needed to be bought from the US Treasury by countries to effect trade and enabled the United States to sell its debt via dollars through the exchange mechanism while keeping the gold safe – or so it seemed at the time. In times of growth, the United States would use these countries to absorb inflation and conversely during periods of decline as a cushion against deflation. A conditional that did not sit well with participants traded with but were forced to accept the terms as part of post-war assistance.
On the 21st September 1949 The People’s Republic of China came into being. China was considered an asset that was ‘lost’ to the Western power structure of the day. This seemingly unrelated action halfway across the world will have major implications later, on the balance of global economic power.
The design of the Bretton Woods System was that nations could only enforce gold convertibility on the anchor currency—the United States’ dollar. Gold convertibility enforcement was not required, but instead, allowed. Nations could forgo converting dollars to gold, and instead hold dollars. Rather than full convertibility, it provided a fixed price for sales between central banks. However, there was still an open gold market. For the Bretton Woods system to remain workable, it would either have to alter the peg of the dollar to gold, or it would have to maintain the free market price for gold near the $35 per ounce value.
The greater the gap between free market gold prices and central bank gold prices, the greater the temptation to deal with internal economic issues by buying gold at the Bretton Woods price and selling it on the open market. This control was effected on the open market by the London Gold Pool on behalf of the U.S. Treasury.
Under the “London Gold Pool” arrangement, member banks provided a quota of gold into a central pool, with the Federal Reserve matching the combined contributions on a one to one basis. During a time of rising prices, the Bank of England, the agent, could draw on the gold from the pool and sell into the market to cap or lower prices. This was basically an illegal price suppression scheme of gold on the free market.
The United States set up the European Recovery Program (Marshall Plan) to provide large-scale financial and economic aid for rebuilding Europe largely through grants rather than loans. This included countries belonging to the Soviet bloc, e.g., Poland. Multinationals and global aid which originated from the US burgeoned.
From 1947 until 1958, the U.S. deliberately encouraged an outflow of dollars, and, from 1950 on, the United States ran a balance of payments deficit with the intent of providing liquidity for the international economy. Holding dollars became more valuable than gold because constant U.S. balance of payments deficits helped to keep the system liquid and fuel economic growth. From 1948 to 1954 the United States provided 16 Western European countries with USD $17 billion in grants. However it is to be understood that this system was in the U.S.’s interest in keeping economic competition under currency controls. It did not work as expected. Incurring such payment deficits also meant that, over time, the deficits would erode confidence in the dollar as the reserve currency created instability.
During the next thirty years, most Western European countries took full advantage of the redemption of US dollars for gold at the US Treasury.
Just like any other empire, the US dollar was an easy way for vassal states to replenish gold supplies. Gold was pegged at USD $36 an ounce – which was mildly inflationary at the time. It was also illegal for US citizens to own gold – which enabled the US Treasury a full monopoly of the metal domestically. As countries could possibly revert to trade via gold or handle balance of payments through gold, there was a rush for everyone to get their hot little hands on as much US gold as possible while the going was good.
Between 1944 and 1971 the United States’ gold reserves dwindled from 20,200 tonnes to 8133 tonnes as a result of gold repatriation and the price fix at the London Gold Pool and there a real danger of losing all Treasury gold within the next decade. In the first six months of 1971, gold assets of $22 billion fled the U.S. It can be seen that most of this gold above 8000 tonnes was accumulated during US interdiction in the European Theater of WWII.
http://www.24hgold.com/24hpmdata/articles/img/20130219ELS100.jpg
Gold’s price spiked in response to events such as the Cuban Missile Crisis, and other smaller events, to as high as $40/ounce. The Kennedy administration drafted a radical change of the tax system to spur more production capacity and thus encourage exports. This culminated with the 1963 tax cut program, designed to maintain the $35 peg with more gold infusion. The London Gold Pool was unsustainable as it was required to cap gold prices that would otherwise rise in the free market. Over 3,000 tons were lost by the US in the price suppression scheme..
This was unacceptable to the Federal Reserve – which actually owned the 8000 plus tonnes left with the US Treasury – not to say anything about how the economy would fare. (This gold is – by the way – the reason why the Federal Reserve, despite massive currency printing – is still solvent. Gold is still the real ‘shadow’ monetary base of the United States).
It was now apparent that the experiment to control world monetary policy through a pseudo-gold standard through Bretton-Woods had failed. It was not possible to artificially depress the gold price while gold was acting as an independent store of value set by world markets.
On 15 August 1971, Nixon issued Executive Order 11615 pursuant to the Economic Stabilization Act of 1970. He unilaterally did what a few good men knew to be a harbinger of death for the US dollar. Nixon declared the United States of America a non-participant of the Bretton Woods agreement of 1944. The US was off the gold standard – and so was every other country that was tied to the US dollar through Breton Woods, trade and investments. Just like that – a world fiat reserve currency and trade system were born. Almost immediately gold began its climb to a true market value of USD $850 from $41 within 7 years.
Bretton Woods had all of the world currencies pegged to the dollar and the dollar then pegged directly to gold. If the U.S. was running massive trade deficits, they could – in theory – just adjust the value of the currencies with respect to the dollar, and those deficits would disappear.
However, because of pegging to the dollar, this just would not work. To adjust the relative value of the dollar, you’d have to convince every other country in the world to adjust their currency at the same time to retain parity between all member nations, and this would not happen as it would de-stabilise international trade and possibly wipe out financial assets of other countries. (Something the EU and ECB would realise 40 years on).
Adjusting the value of the dollar with respect to gold would also not work since every other currency was pegged to the dollar and not to the value of gold.
Bretton Woods could have been salvaged if all currencies individually floated to gold traded freely in the marketplace, with the US Treasury very rich indeed at this point – and there would have been no need for repatriation. In hindsight we may wonder how this alternative escaped mention or implementation.
In fact – it had been proposed and rejected, for two reasons. Firstly, this would be then the end of US economic hegemony. Secondly, the economists at that time running Washington and Europe were from the Keynesian School of Economics – they had as much use for gold as MGTOW for females. This was a perfect opportunity to convert the unbelievers.
However in 1971 most countries could find an alternative rather than financing US debt through the buying of worthless fiat currency paper bills. It was also not clear if a revision to the Bretton Woods would be ratified. As monetary value is a confidence game – there needed to be an imperative for countries to continue use of the dollar. By the mid-1960s, the E.E.C. and Japan had become international economic powers. With total reserves exceeding those of the U.S., higher levels of growth and trade, and per capita income approaching that of the U.S., Europe and Japan were narrowing the gap between themselves and the United States and did not need the dollar.
The following is a comparison of the Dow to Gold. This is value of the Dow Jones Industrial Index (based on the currency in use) divided by the Gold Price. Note the stock market crashes, especially after Bretton Woods between 1973 – 1975 CE. Compare how the price of stocks revert close to the market gold price during crises periods. No matter the shorter term gains through other means – the intrinsic value of any market in the longer term is pegged naturally to the gold available to underwrite that market.
As the only real money – gold acts as the final arbiter of the stock market. The real value of any country’s wealth is in the amount of physical gold it holds in reserve.
http://goldsilverworlds.com/wp-content/uploads/2012/07/dow_gold_ratio_long_term_chart_1900-20121.png
There was an ongoing Cold War in Europe, The Vietnam War had just ended and South East Asia was starting to rebuild. China was also industrialising its economy at an incredible rate.. Plain common sense dictated the US needed Europe and Japan more than the other way around as a cushion against trade wars and actual military confrontation. If Europe decided to decouple from the US dollar there was nothing – short of a trade war with allies that could stop it. This would give the advantage in the regional conflict to the USSR and China – who were preaching the glories of communism to all and sundry and needed converts.
The consequences for the US economy had already started at the close of the 1960’s. The 1973–1974 bear market lasted between January 1973 and December 1974. Affecting all the major stock markets in the world, particularly the United Kingdom, it was one of the worst stock market downturns in modern history. The crash came after the collapse of the Bretton Woods system over the previous two years, with the associated ‘Nixon Shock’ and United States dollar devaluation (under the Smithsonian Agreement) to help curb the U.S. trade deficit. There were calls to reinstate the gold standard under President Reagan – which was rejected. The Keynesians had won again.
Republican Congressman the Hon. Ron Paul – in the brilliantly argued Minority Report of the U.S. Gold Commission in 1982 for the Reagan Administration (titled and published as ‘The Case for Gold’ in 1983) – said “… all the effort and planning imaginable cannot make paper money work. There is no way paper can be ‘improved’ as money. Whenever governments are granted power to purchase their own debt, they never fail to do so, eventually destroying the value of the currency. Political money always fails because free people eventually reject it. For short periods individual countries can tell their citizens to use paper, but only at the sacrifice of personal and economic liberty”.
The following is a comparison of USD to Gold in terms of purchasing power. Look what happens after 1971.
The possibility of an economy in recession – again – was something the US Government and their true masters– Wall Street and the Federal Reserve – could not afford – at any cost.
The United States used all its economic and military power to take possession of the world gold standard – and failed.
Something had to be done to ensure the U.S fiat-dollar stayed as the World Reserve Currency.
End of Part 1
Citiations
http://www.actvism.org/en/politics/chomsky-new-world-order-grand-area/
http://www.zerohedge.com/print/583177
http://content.time.com/time/business/article/0,8599,1852254,00.html
https://www.thebalance.com/gold-price-history-3305646
http://goldsilverworlds.com/gold-to-silver-price-ratio-dow-jones-to-gold-price-gold-vs-us-dollar-rate/
https://www.quandl.com/collections/markets/gold
http://www.gold-eagle.com/article/lessons-london-gold-pool
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