Floris D’Aalst has taken on an ambitious task as he attempts to explain the political/economic situation in which we, in the United States, find ourselves. Among the many topics he attempts to link together are:
- an explanation of the deindustrialization of the 1980s and ’90s in the United States;
- the basis of what he calls “neo right and neo fascist oppositional culture”;
- the potential role of millennials in the emerging class struggles;
- the evolving role of “race” in American society,
- a critique of “revolutionary communists” that includes their failure to take seriously the various conspiracy theories involving a “deep state” in the United States as well as their failure to see the relationship between capitalism and climate change;
- a discussion of how Trump-initiated trade wars may well lead to hot war.
My critique here will focus on his argument about the causes and consequences of industrial (manufacturing) decline, especially what he terms “us dollar suzerainty” and “global de-dollarization.”
The author argues that it is the decline in us “dollar suzerainty” or what he calls a “de-dollarization” in world trade that has brought on trade wars that are likely to end up with hot shooting wars.
D’Aalst correctly emphasizes the importance of the dollar’s status as a “global reserve currency” in his discussion. But his explanation of the extent to which this status has been declining, why it’s declining and why it’s important needs further discussion.
If a nation or an individual wants to buy stuff, say a car, from another nation, they have to pay for the car in that nation’s currency or use a currency that can easily be converted to that nation’s currency.
For that reason, nations try to hold foreign exchange reserves in currencies that can be used in trade, or to make investments in other nations. Central banks of large economies hold a reserve of different currencies that have “global reserve status” (meaning that they can be easily converted to a number of other currencies). However, they select one currency, based on their assessment of the size and stability of the economy it represents and hold most of their “foreign exchange reserves” in that currency. In the case of the us dollar, foreign holdings are not just in dollar bills but in dollar denominated assets like government short-term notes or longer-term government bonds. The U.S sells its debt in the form of bonds and notes in global markets where governments and private investors purchase them, essentially lending the us money.
Worldwide the us dollar dominates the foreign exchange reserves. As of November 2018, 64 percent of such reserves were in dollars. The Euro was second at 20 percent. Further, about 65 percent of all cash dollars ($580 billion) circulate outside of the us, mostly in the nations of the former Soviet Union.
So the us dollar, both in the form of dollar denominated assets and cash, continues to be dominant in the world. And that economic power enables the people and businesses in the us and the us government to spend more than we take in and trade freely with other nations. But the dominance of the dollar has slipped since it achieved global reserve currency status in 1944. Why it has slipped is important to D’Aalst’s argument.
At the end of World War II, the us was the only industrial nation left in tact. Bombing and fighting had devastated Europe, and the us used its advantage to dictate the terms of global commerce. The Bretton Woods Agreement of 1944 created three institutions that governed global finance and trade. They were the World Bank, the International Monetary Fund (imf) and the General Agreement on Tariffs and Trade (gatt). The us had a voting majority in the boards of all three of these institutions. In addition, Bretton Woods made the dollar the one and only global reserve currency. Its value relative to all other currencies was fixed and backed by gold that the us Federal Reserve Bank kept in its vaults. Other nations could use their currency locally and its value was backed by us dollars. Each dollar, in turn, was backed by us gold reserves. This powerful status of the dollar was initially opposed by some other nations as the Bretton Woods Agreement was being negotiated because it gave us capital total hegemony in the global economy.
As Europe recovered from the war and began rebuilding, us capital’s power began to be challenged both by industrial workers in the us and other national blocs of capital. Global capital accumulation was generated at the time by a system of large-scale mass production known as “Fordism.” And us hegemony was grounded in its domestic industrial might. The use of the dollar for trade along with the productivity and purchasing power of us workers made the us a vital trading partner of the nations of the world. The challenge came initially from industrial workers who demanded a greater share of us capital’s fortunes. It also came from the us civil rights movements that demanded among other things equality in wages, benefits and job opportunities. In addition, other industrial nations began to diversify their foreign exchange reserves. And some nations began to cash in some of their dollars for gold.
In 1971, President Nixon announced that he was removing the gold standard. The us would no longer allow the sale of gold for dollars. Even in the aftermath of this unilateral action, the dollar remained dominant at 85 percent of global reserves. Then in 1973 Nixon announced that the exchange rates between the dollar and other currencies would no longer be fixed, creating a global market for currencies. And then, as D’Aalst points out, in 1974 there was the petro dollar deal with Saudi Arabia to trade oil in dollars. The us effort to protect the global status of the dollar by cancelling the Bretton Woods Agreement and insuring that oil would be traded in dollars was initially unsuccessful. By 1995 the percentage of total foreign reserves held in us dollars fell to 58 percent. But then it began to rise again and reached 71 percent by 2000. Another decline followed, but presently it seems to be stable at 60–65 percent.
So what was behind this movement? I don’t agree with D’Aalst’s emphasis on single events like the “petro dollar deal” or technological advances like the rise of automation. They were factors, but the decline in the dollar’s dominance in global trade is more systemic than he presents. Historically there have been times when the global capital system is unable to reproduce itself and the people who live within its strictures. More demands are placed on the value produced by working people than the system is able to generate. And the crisis is inherent in capitalism itself. A new crisis appeared in the 1960s. The mode of accumulation that had been institutionalized by the Bretton Woods Agreement was no longer viable which generated further challenges from workers generally but also took the form of civil rights movements, war and a vibrant anti war movement. This is the broader context of Nixon’s monetary initiatives that unilaterally cancelled the Bretton Woods system.
There were many more developments from a variety of sectors of the ruling class over the next 25 years that caused a decline in the dominance of us Capital. These included technologies that enabled manufacturing to get out of the bind of “Fordist” mass production, allowing cost effective production of a single product by manufacturing parts all over the world. A completely revamped logistics industry gradually came into being. It included new networks of automated ports, massive warehousing, product containers, trucking, rail, air and ship innovations to facilitate the movement of goods and services around the world. The Bretton Woods institutions were repurposed to enable capital and goods to flow around the world as needed and to undermine workers’ rights, environmental standards, health and safety rules that had been gained through struggles of the Fordist/Bretton Woods era. Ultimately Fordist mass production and the Bretton Woods system were replaced with a new mode of accumulation that many call “neo liberalism.”
Most importantly, money in the broadest sense of the word, took on a new role in this system. The world shortage of value was offset by globally traded debt. Debt was created and then traded like any other commodity all over the world. And nations could now hold debt as part of foreign exchange reserves. Dollar denominated debt like us Government bonds is “as good as gold.” So dollar reserves today take on a different meaning than they did in the Bretton Woods period.
The us and its corporations were major players in the creation of neo liberalism but on more of an even footing than was the case in 1944. And the us government and us corporations no longer have global hegemony. Even the national identity of global corporations is murky.
Today, classic capitalist crisis where claims on total value are greater than the system is capable of producing is reappearing. Debt, which is essentially a promise to produce value in the future, is phantom capital. It cannot indefinitely enable the global capitalist system to reproduce itself and the people who live within it. Trade wars and hot wars are part of the chaos and the “churning and flailing,” that historically comes with classic capitalist crisis. Once again efforts are under way by the capitalist class to save the system. But this time us capital is not the dominant player as it was in 1944 or even in the1960s.
Trade wars, hot wars, massive human dislocation, a growing population of people who are not needed by the system, increasing environmental degradation, revolutionary challenge from both right and left are all in play. A period like today’s churning and flailing is both a time of great peril and a time of great opportunity. D’Aalst has laid out a number of the perils ahead. And he singles out a possible role for millenials in shaping what comes next. The opportunity now as it has been in past crisis periods is to rid ourselves of capitalism. This could make global de-dollarization irrelevant if a new system includes abolishing wage labor and money itself as we create a totally new society in which the full and free development of everyone is the point of society.