American market populism dominates

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from Ken Zimmerman (originally a comment)

Nixon initiated the regime of free-floating currencies that continues to this day by ending US commitment to the international gold standard. The immediate effect of Nixon’s unlinking the dollar was to cause the price of gold to skyrocket; it hit a peak of $600 an ounce in 1980. This of course had the effect of causing U.S. gold reserves to increase dramatically in value. The value of the dollar, as denominated in gold, plummeted. The result was a massive net transfer of wealth from poor countries, which lacked gold reserves, to rich ones, like the US and Great Britain, that maintained them. In the US, it also set off persistent inflation.

Nixon’s action began the return to the historical relationship of financiers (banks, etc.; the ‘money people’) and military/police as the basis of capitalism. And ended a period of wage and benefits increases for workers, expansion of the American middle-class, and greater voter access and participation. Since Nixon’s floating of the dollar, many of us have come to recognize that it’s only the wizard behind the screen who maintains at least a sense that this arrangement is viable. Under the free-market orthodoxy that followed, we have all been asked, effectively, to accept that “the market” is a self-regulating system, with the rising and falling of prices akin to a forces of nature, and simultaneously to ignore the fact that, in the business news, it is simply assumed that markets rise and fall mainly in anticipation of, or reaction to, decisions by whoever is currently the chair of the Federal Reserve. Of course enforced by someone with a gun standing behind the chairperson.

Nixon’s decision also lead the world to a new phase of financial history—one that nobody completely understands, even today. But one that assured the US as the preeminent world power. Still Americans have been paranoid of banks since before the nation even existed. No big surprise here. Since an American form of market populism dominates in many aspects of life in the US, the ability of banks to “create money out of nothing”—and even more, to prevent others from doing so—has always been the bane of market populists, since it directly contradicts the idea that markets are a simple expression of democratic equality.

All dollar bills in circulation in America are “Federal Reserve Notes”—the Fed issues them as promissory notes and commissions the US mint to do the actual printing. This arrangement is simply a variation of the scheme originally pioneered by the Bank of England, whereby the Fed ‘loans’ money to the US government by purchasing treasury bonds, and then monetizes the US debt by lending the money thus owed by the government to other banks. But unlike the Bank of England which loaned the king gold, the Fed simply ‘wishes’ the money into existence by saying that it’s there. Thus, it’s the Fed that has the power to print money. The banks that receive loans from the Fed are no longer permitted to print money themselves, but they are allowed to create virtual money by making loans ostensibly, at a fractional reserve rate established by the Fed—though in practice, even these restrictions have become largely theoretic.

As part of these change US government issued bonds, circulating as money have now themselves come to replace gold as the world’s reserve currency: that is, as the ultimate store of value in the world, yielding the US enormous economic advantages. Nixon’s floating of the dollar left foreign central banks with but one choice for their US dollars except to use them to buy US treasury bonds. This is what is meant by the dollar becoming the world’s “reserve currency.” These bonds are, like all bonds, supposed to be loans that will eventually mature and be repaid, but as economist Michael Hudson, who first began observing the phenomenon in the early ’70s, noted, they never really do.
To the extent that these Treasury IOUs are being built into the world’s monetary base they will not have to be repaid, but are to be rolled over indefinitely. This feature is the essence of America’s free financial ride, a tax imposed at the entire globe’s expense. (Super Imperialism: The Origins and Fundamentals of U.S World Dominance, xv)

Hudson also notes, over time, the combined effect of low interest payments and inflation is that these bonds actually depreciate in value, adding to tribute afforded the US. What economists call “seigniorage.” The effect is that American imperial power is based on a debt that will never—can never—be repaid. Its national debt has become a promise, not just to its own people, but to the nations of the entire world, that everyone knows will not be kept. (Super Imperialism: The Origins and Fundamentals of U.S World Dominance, xxv) Backed up of course by US military power, capable of striking any target in the world in a few hours.

At the same time, US policy has been to insist that those countries relying on US treasury bonds as their reserve currency behaved in exactly the opposite way. Observing tight money policies and repaying their debts precisely and promptly. It was only a matter of time before American capitalists rejected any concern for America and applied this same requirement to American as well as to foreign debtors. That time is now here.

So why does the US have inflation? First, the US debt remains, as it has been since 1790, largely a war debt. The US continues to spend more on its military than do all other nations on earth put together. Military expenditures are not only the basis of the government’s industrial policy; they also take up such a huge proportion of the budget that by many estimations, were it not for them, the US would not run a deficit at all. Just think, without this budgetary burden, the US could have no poverty, no homeless, and an infrastructure second to none. Second, with the financiers and their armed protectors now in charge once again, the last 45 years have seen the US monopolized by oligarchs, either individual persons or corporate conglomerates. These use their control and great wealth to change laws and the economy. Inflation is one consequence. I can’t see MMT has a part in any of this.