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 i