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Journey to Jekyll Island Part II

The years shortly before and after 1900 proved to be the beginnings of the drive toward the establishment of a Federal Reserve System and economic & political imperialism. It was also the origin of the gold-exchange standard, the fateful system imposed upon the world by the British in the 1920s and by the United States after World War II at Bretton Woods.

Even more than the case of a gold standard with a central bank, the gold-exchange standard establishes a system, in the name of gold, which in reality manages to install coordinated international inflationary paper money. The idea was to replace a genuine gold standard, in which each country (or, domestically, each bank) maintains its reserves in gold, by a pseudo-gold standard in which the central bank of the client country maintains its reserves in some key or base currency, say pounds or dollars. Thus, during the 1920s, most countries maintained their reserves in pounds, and only Britain purported to redeem pounds in gold. This meant that these other countries were really on a pound rather than a gold standard, although they were able, at least temporarily, to acquire the prestige of gold. It also meant that when Britain inflated pounds, there was no danger of losing gold to these other countries, who, quite the contrary, happily inflated their own currencies on top of their expanding balances in pounds sterling. Thus, this generated an unstable, inflationary system—all in the name of gold— in which client states pyramided their own inflation on top of Great Britain’s. The system was eventually bound to collapse, as did the gold-exchange standard in the Great Depression and Bretton Woods by the late 1960s. In addition, the close ties based on pounds and then dollars meant that the key or base country was able to exert a form of economic imperialism, joined by its common paper and pseudo-gold inflation, upon the client states using the key money.

As early as the 1890s, groups of theoreticians in the United States were working the theory of capitalist imperialism. The idea was that capitalism in the developed countries was “overproducing,” not simply in the sense that more purchasing power was needed in recessions, but more deeply in that the rate of profit was therefore inevitably falling.( The inflation was creating too much cheap capital, thereby reducing barriers to entry by marginal player, cost of capital. These marginal player may never become dominate in their particular market, but combined they exerted great downward pressure on prices in the market therefore reducing profits for all. If capital cannot return an economic profit, capital will flow from one particular market to another for a superior return. This is the concept of malinvestment due to inflation and the opportunity cost of capital.) This ever lower rate of profit from the “surplus capital” was in danger of crippling capitalism, except that salvation loomed in the form of foreign markets and especially foreign investments. New and expanded foreign markets would increase profits, at least temporarily, while investments in undeveloped countries would be bound to bring a high rate of profit. Hence, to save advanced capitalism, it was necessary for Western governments to engage in outright imperialist or neo-imperialist ventures, which would force other countries to open their markets for American products and would force open investment opportunities abroad. The theory was originated, by advocates of imperialism, centering on such Morgan men like Charles Conant.

Charles Conant set forth that the existence of excess capital and modern technology, Conant claimed, invalidated Say’s Law and the concept of equilibrium, and led to chronic “oversavings,” which he defined as savings in excess of profitable investment outlets, in the developed Western capitalist world. Business cycles, opined Conant, were inherent in the unregulated activity of modern industrial capitalism. Hence the importance of government encouraged monopolies and cartels to stabilize markets and the business cycle, and in particular the necessity of economic imperialism force open profitable outlets abroad for American and other Western surplus capital.

The United States’ bold venture into an imperialist war against Spain in 1898 galvanized the energies of Conant and other theoreticians of imperialism. Conant responded with his call for imperialism in “The Economic Basis of Imperialism” in the September 1898 North American Review, and in other essays collected in The United States in the Orient: The Nature of the Economic Problem and published in 1900. S.J. Chapman, a distinguished British economist, accurately summarized Conant’s argument as follows: (1) “In all advanced countries there has been such excessive saving that no profitable investment for capital remains,” (2) since all countries do not practice a policy of commercial freedom, “America must be prepared to use force if necessary” to open up profitable investment outlets abroad, and (3) the United States possesses an advantage in the coming struggle, since the organization of many of its industries “in the form of trusts will assist it greatly in the fight for commercial supremacy.”

The war successfully won, Conant was particularly enthusiastic about the United States keeping the Philippines, the gateway to the great potential Asian market. The United States, he opined, should not be held back by “an abstract theory” to adopt “extreme conclusions” on applying the doctrines of the Founding Fathers on the importance of the consent of the governed. The Founding Fathers, he declared, surely meant that self-government could only apply to those competent to exercise it, a requirement that clearly did not apply to the backward people of the Philippines. After all, Conant wrote, “Only by the firm hand of the responsible governing races . . . can the assurance of uninterrupted progress be conveyed to the tropical and undeveloped countries.

Conant also was bold enough to derive important domestic conclusions from his enthusiasm for imperialism. Domestic society, he claimed, would have to be transformed to make the nation as “efficient” as possible. Efficiency, in particular, meant centralized concentration of power. “Concentration of power, in order to permit prompt and efficient action, will be an almost essential factor in the struggle for world empire.” In particular, it was important for the United States to learn from the magnificent centralization of power and purpose in Czarist Russia.The government of the United States would require “a degree of harmony and symmetry which will permit the direction of the whole power of the state toward definite and intelligent policies.” The U.S. Constitution would have to be amended to permit a form of czarist absolutism, or at the very least an enormously expanded executive power in foreign affairs.

Throughout the land by the turn of the twentieth century, a legion of economists and other social scientists had arisen, many of them trained in graduate schools in Germany to learn of the virtues of the inductive method, the German Historical School,and a collectivist, organicist state.

Previously, executives were hampered in seeking such expert counsel by the importance of political parties,their ideological commitments, and their mass base in the voting population. But now, fortunately, the growing municipal reform (soon to be called the Progressive) movement was taking power away from political parties and putting it into the hands of administrators and experts.

The “increased centralization of administrative power [was giving] . . . the expert a fair chance.” And now, on the national scene, the new American leap into imperialism in the Spanish-American War was providing an opportunity for increased centralization, executive power, and therefore for administrative and expert planning. Eager for positions and power commensurate with their graduate training, these new social scientists, in the name of professionalism and technical expertise, prepared to abandon the old
laissez-faire creed and take their places as apologists and planners in a new, centrally planned state. The possession of economic knowledge would grant economists the power “to control . . . and mold” the material forces of progress. As the economist proved able to forecast more accurately, he would be installed as “the real philosopher of social life,” and the public would pay “deference to his views.” The leap into political imperialism by the United States in the late 1890s was accompanied by economic imperialism, and one key to economic imperialism was monetary imperialism. In brief, the developed Western countries by this time were on the gold standard, while most of the Third World nations were on the silver standard. For the past several decades, the value of silver in relation to gold had been steadily falling, due to (1) an increasing world supply of silver relative to gold, and (2) the subsequent shift of many Western nations from silver or bimetallism to gold, thereby lowering the world’s demand for silver as a monetary metal. Nicaragua, Panama, Cuba, Puerto Rico from Spain in 1898 to the Philippines, the other Spanish colony grabbed by the United States, and yes even attempted on Mexico & China were in the sight of the United States Government Empire. The fall of silver value meant monetary depreciation and inflation in the Third World, and it would have been a reasonable policy to shift from a silver-coin to a gold-coin standard.

But the new imperialists among U.S. bankers, economists, and politicians were far less interested in the welfare of Third World countries than in foisting a monetary imperialism upon them. For not only would the economies of the imperial center and the client states then be tied together, but they would be tied in such a way that these economies could pyramid their own monetary and bank credit inflation on top of inflation in the United States.

Hence, what the new imperialists set out to do was to pressure or coerce Third World countries to adopt, not a genuine gold coin standard, but a newly conceived “gold-exchange” or dollar
standard. It is no accident that the United States’ major financial and imperial rival, Great Britain, which was pioneering in imposing gold-exchange standards in its own colonial area at this time, built upon this experience to impose a gold-exchange standard, marked by all European currencies pyramiding on top of British inflation, during the 1920s. That disastrous inflationary experiment led straight to the worldwide banking crash and the general shift to fiat paper moneys in the early 1930s. After World War II, the United States took up the torch of a world gold exchange standard at Bretton Woods, with the dollar replacing the pound sterling in a worldwide inflationary system that lasted approximately 25 years.

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