Submitted by Noa Rodman on February 26, 2017


In examining the world monetary system in its historical aspect, mention must be made of the decisions made at the financial and economic conference held in Bretton Woods (USA) in June 1944. The decisions of this conference, convened on the initiative of the United States and held under its aegis a year prior to the end of the war, were an international action which consolidated the emergent dominating position of American finance capital in international monetary circulation and financial and credit relations. By that time the United States had succeeded in accumulating the main part of the world's gold stock ($23,400 million at the end of 1943), and the further development of financial and economic relations in the capitalist world depended on how the USA intended to use them. But even before the conference, during the preliminary work of financial experts it had become clear that the United States wanted to utilise the existing situation for consolidating the hegemony of American capital.

At the conference the United States very definitely sought to weaken the former tendencies to consolidate economic blocs and currency areas, putting up against them its monetary policy designed to secure the hegemony of the dollar. Moreover, as a result of the Second World War and the defeat of fascist Germany and Japan, the blocs in Southeastern Europe and in Asia headed by these countries collapsed. A number of the countries belonging to these blocs fell away from the capitalist system embarking on the socialist road. This naturally led to the mutual drawing together of these countries and their economic co-operation on a mutually beneficial basis.

The US ruling circles which called the tune during^ the conclusion of the Bretton Woods Agreements did not expect that the defeat of fascist Germany and Japan would lead to the breaking away of a number of European and Asian countries from capitalism. They confidently projected the shaping of the postwar capitalist system on the establishment of American hegemony in capitalist financial and economic relations after the war. Thus, the Bretton Woods conference decided to set up two international financial organisations with special functions: the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF).

The aims and tasks of the IBRD were to a certain extent revealed in its name. But some provisions of its charter show in what ways it was contemplated to achieve them. Thus, according to Article 2 of the charter, the bank was designed to promote private foreign investments by guaranteeing and participating in loans and other private investments. From this it followed that the IBRD had to not only discharge the functions of a bank for the long-term financing of its member states from its paid-in capital and mobilised resources, but also to act as mediator and guarantor between private capital of creditor countries and the respective loanreceiving countries or countries in which private capital would be invested. It is easy to understand that such capital could only be private capital from countries which had not been weakened by the war, above all the United States. For the convenience of the borrowers bank loans were to be given in the currencies of different countries as needed by the borrowers. But all these details could not alter the cardinal function of the Bank–to serve as guarantor and mediator in investments of private capital. The share of different countries in the Bank's capital was determined by the financial potential of the countries themselves. In keeping with this principle, the United States assumed a dominant position in the leading bodies of the IBRD, which began to function in 1946.

When the Bretton Woods Agreements were concluded, it seemed to many that it was the IBRD which was destined to play the most important part in the restoration and development of the postwar economy. But this was far from being the case. The postwar situation demanded of US finance capital the wider use of other ways and means of struggle for world supremacy. In this context greater attention is merited by the other international organisation set up under the Bretton Woods Agreements–the International Monetary Fund.

From the formal viewpoint, the International Monetary Fund can also be regarded as an organisation of the banking type. At the same time it is a specific organisation. It is radically different from former monetary organisations. Even such a body as the Latin Monetary Union which existed in the 19th century only remotely resembles the IMF. The main purposes of the IMF are to promote international monetary co-operation and extend international trade.

The International Monetary Fund was designed to facilitate stability of circulation and understanding between members of the organisation, and to prevent competitive depressions in monetary circulation (i.e. currency dumping, etc.). Lastly, this organisation had to help build up a system of reciprocal payments on current accounts between IMF members and the limitation of any restrictions in foreign circulation which could hamper world trade. The enumerated propositions, as it were, admitted the fallacious nature of all preceding practices in inter-capitalist financial and commercial relations, including economic blocs, preferences, currency, customs and other restrictions. New ideals of organised capitalism were put to the fore which, as always, were destined to remain mere paper declarations.

The interstate nature of this organisation was recorded in the statutes of the IMF. In contrast to the IBRD, the tasks of the IMF did not include business relations with private capital. The IMF, the way it was conceived, may at first glance be compared with some kind of an interstate mutual aid organisation, the purpose of which is to help regulate the balances of payments of the Fund's member countries, and maintain the exchange rates of national currencies in international markets. This greatly appealed to financially weak countries.

According to the statutes, the International Monetary Fund was regarded as legally formalised on December 27 1945, when, in accordance with the decisions of the Bretton Woods Agreements, 80 per cent of its capital was paid in. It was made up of subscriptions by the countries which had decided to set up the organisation.

IMF membership was not limited to the founding countries. Accession to the organisation was envisaged, with a subscription commensurate with the financial potential of a country.

At present 126 countries are members of the IMF, while in 1956 there were only 60. The capital of the Fund has also risen substantially through both subscriptions of new members and an increase in the subscriptions of old members, primarily the financially leading capitalist countries.

At present the capital of the fund in currencies of different countries amounts to about $ 21,000 million as against $ 9,200 million at^the end of 1958. Part of the capital is in gold. In January* 1969 it amounted to $ 2,288 million.

To give some idea of the IMF and its functions, it should be emphasised that the influence individual countries enjoy in it depends on the size of their subscriptions. From this standpoint too the United Stales (whose subscription exceeds $4,100 million), Britain ($1,950 million), and France and the Federal Republic of Germany ($ 785,5 million each) are prominent. The subscriptions of other countries are much smaller. They are paid in national currencies and partly in gold.

Votes in the policy-making bodies of the IMF are distributed depending on the size of the subscriptions, i.e., as in corporations, depending on the number of shares (each $ 100,000 of the subscription gives a country one vote plus 250 votes irrespective of the size of the subscription). Under this system, the United States had 26.6 per cent of the vote, Britain 12.7 per cent, and the other countries, correspondingly, a much smaller number.

The executive body of the IMF is the Board of Governors, consisting of the most authoritative financial representalives of member countries, who meet at annual sessions. More than 29 such sessions have been held so far.

The Executive Board of Directors, in which the main place is held by US representatives, is the standing agency of the IMF which actually determines the current activity of the organisation. Its headquarters are in Washington, D.C.

What is the meaning and purpose of such an intricate organisational set up? It represents an attempt to introduce elements of organisation into the capitalist monetary system. American financiers and political leaders missed no chance to prove the objective necessity for precisely such an organisation of the monetary system which is supposedly beneficial to all countries.

The question of returning to the gold standard was not raised, but even so it was clear that in a situation in which more than half of the world gold stock was concentrated in one country, the United States, it was not so easy to return to the gold standard of the former type with the free exchange of bank notes for gold. In this case it seemed natural that the country possessing the biggest reserves of gold and which had become the creditor of many other countries should furnish its currency as an international medium of circulation. The question arose, how could this currency preserve its stability if it were not based on the gold standard with a free exchange of bank aotes for gold? This was the question that was decided in Bretton Woods. It was found necessary to preserve unchanged the so-called dollar price of gold, the exact relation of the American dollar to gold: 35 dollars equalled one troy ounce of pure gold (a troy ounce is equal to 31.10348 grams, and from this it followed that one dollar was equal to 0.888671 g).

The United States confirmed its obligation to sell gold to other countries for dollars at this price with an addition of 0.25 per cent for covering commercial expenses. It agreed to buy gold from other countries on the same terms.

After the war it was a matter chiefly of buying gold in the United States (the gold stock in other countries was insignificant). Therefore, the question arose, would other countries not resort to the massive buying of American gold in an indirect way? Such a possibility was not ruled out. By buying dollars with their currency and presenting them to the US Treasury in exchange for American gold, the capitalist countries could very swiftly exhaust the American gold reserve. To prevent this, Article 4 of the IMF agreement stipulated the obligation of IMF member countries to maintain the price of gold at the indicated level and to prevent its upward and downward fluctuations by more than 1 per cent. The countries which assumed this commitment under Article 4 of the IMF agreement also recognised that their currency was convertible into gold. And this implied their obligation to exchange their currency for gold on the same terms as the United States. From this it followed that all currencies of IMF member countries had to have a fixed gold parity.

Since the relation between gold and the dollar had already been given a constant value, in practical terms the gold parity of other currencies began to be expressed as their relation to the dollar. Thus the West German mark had a 4 : 1 ratio to the American dollar. In other words, the gold content of 4 marks corresponded to the gold content of one dollar.

In practice, however, it rarely happens that the current market rate of a currency fully coincides with its parity. The rate usually deviates from the parity under the influence of supply and demand. If a country's balance of payments is favourable and it has to receive the difference from abroad in gold or hard currency, the rate of its currency rises. If, conversely, a country's balance of payments is unfavourable and it has to make payments abroad, the rate declines.

It is expected that to pay for a deficit in the balance, a country will have to buy either gold or the liquid liabilities of other countries, e.g., bills or foreign exchange, at times paying even considerably more than the parity rate.

These fluctuations of the exchange rates could also harbour a threat to the gold base of the dollar. For example, a country could deliberately buy dollars during a period when there was a high exchange rate for its currency and then exchange them for American gold. To preclude such a possibility, it was laid down in the IMF agreement that just as all Fund member countries had to maintain the fixed price of gold within the bounds of a fluctuation of not more than 1 per cent, the rates of the currencies of these countries must not deviate from parity or in relation to the dollar by more than 1 per cent. How can this be achieved by the IMF countries? For this purpose, depending on the circumstances, one of two things can be done: either a country has to buy part of its currency for gold or foreign convertible currency and then the demand for it will have a raising effect on the exchange rate or, on the contrary, to increase the influx of its own currency in the money market by exchanging it for other currencies, buying securities in stock exchanges, and so on, and then the bigger supply of the given currency will lower its rate.

All these examples show that the entire system for regulating currency rates was compelling central banks as the financial agencies of IMF countries to constantly intervene in money markets, orienting themselves on the dollar. Formally these countries exerted efforts and quite often spent gold or foreign convertible currency in order to maintain the exchange rate of their currencies but at the same time each of them individually, and all of them together, maintained the exchange rate of the dollar, the "key currency''.

Indeed, if, in order to raise the rate of its currency to the fixed parity with the dollar, the government of some country spent gold for its purchase, it thereby maintained the dollar as the monetary standard. But this standard, according to the IMF rules and the commitments of the US Government, must itself have a stable relation to gold.

Thus, gold was ultimately the foundation of the postwar monetary system but the latter relied on gold through the American dollar. The excessive issues of dollars as a national US currency, causing inflation within the country, could drag onto this path other countries, whose currencies are linked to the dollar through the general system of regulating exchange rates.

The Bretton Woods Agreements also gave rise to one more circumstance which made the national currencies of many countries dependent on the US dollar. Whenever regulation methods nevertheless failed to maintain the rate of a currency within the bounds of the permitted fluctuations from parity or the relation to the dollar, the IMF rules demand an official change in the parity of the given currency.

Depending on the circumstances, such a change of parity may either be its decrease, devaluation, or increase, revaluation. This still more increased the dependence of national currencies of other capitalist countries on the American dollar.

But during the Second World War and the postwar derangement of international markets capitalist countries had to reconcile themselves to this dependence.

What was the meaning and purpose of this monetary system for the United States? Thanks to it the national American currency simultaneously became a world currency which replaced gold. This offered American finance capital great advantages in the struggle against rivals and turned the dollar into a weapon for gaining domination in international monetary and financial relations.

'The most important thing was that the issue of American bank notes in dollars, which became a legal international medium of exchange, remained uncontrolled in the hands of the American ruling circles. This enabled them to utilise the issue of bank notes and other liquid assets for the expansion of credit, just as in internal circulation. In fact, American dollars became world credit money, the issue and circulation of which were subordinated to the laws we examined earlier. Washington, however, embarked on the path of their unlimited issue.

Taking this path the US financial agencies were pursuing a seemingly noble aim–to supply the postwar capitalist world with reliable liquid assets instead of the gold concentrated mostly in the United States. They were doing it with real American sweep, rightly considering that, in view of the acute shortage of gold and other reliable international liquid assets in other countries, the dollars issued in circulation in postwar conditions could not be presented to be exchanged for American gold. Even if this should happen as an exception, it would not greatly influence the money market. It was also held that, with the favourable trade balance of the United States, there`would'be'an increased demand for American dollars abroad to cover the trade deficit of other countries. Dollars or US Federal Reserve notes, as it was assumed, would be required merely as a means of international circulation–a substitute for gold. Moreover, it was expected that reliable bank notes or credit money, backed by short-term bills and other securities, within definite bounds would also function independently of a link with gold. After the war American banks had in their safes sufficient foreign liabilities to serve as security for the Federal Reserve notes. The calculations of the US ruling circles when this monetary system was created were based on the sum total of these factors. True enough, the demand for dollars abroad enabled the United States for a long time to play the role of a bank in relation to other countries of the capitalist world. The United States was compared with a bank by US financiers, e.g., William Martin, Chairman of the Federal Reserve Board, at a conference on financial questions held in New York in the summer of 1968. He even regarded it as a service provided by the United States that it, like a bank, through the Marshall Plan and in other ways, supplied the capitalist world with liquid assets.

Indeed, the United States furnished credits to other countries in different forms, and in this way American capital penetrated their economies. The methods and forms of this penetration were diverse: direct investments in foreign industry, the purchase of shares in foreign companies, participation in mixed enterprises, deposits in foreign banks, loans issued for definite purposes and marketable bonds.

Lastly–and this was particularly important to the US Government–the status of the dollar as an international monetary unit enabled the US Treasury to utilise American currency for covering the military expenditure abroad, instead of gold. It became possible, through the wide issue of liquid liabilities, bank notes and so on, or, as it is customary to say, of dollars, to render ``aid'' and credits for arming other states, disregarding the unfavourable balance of payments of the USA. Since this ``aid'' was supplemented by credits at high interest rates and involving economic and political concessions, in the long run American finance capital could not complain that its role as banker to the capitalist world was not advantageous to the United States. It was just as advantageous as that of the banker, of whom Karl Marx wrote: "Those of his notes... cost him nothing, save the cost of the paper and the printing. They are circulating certificates of indebtedness (bills of exchange) made out in his own name, but they bring him money and thus serve as a means of expanding his capital.''1

An easy way of making money with the help of financial machinations has always tempted not only private capitalists and capitalist corporations but also the governments of capitalist states. It is therefore natural that not only individual capitalists and big financial corporations but also- central state banks, treasuries and other government agencies take part in large-scale speculation on the stock exchanges.

Government financial agencies engage in currency intervention, different combinations with state securities, and so on. Hence it is not surprising that, relying on the special position of the dollar, the United States quite frequently allowed itself to expand foreign credits too lavishly, disregarding its balance-of-payments deficit. There was fundam3ntally nothing new in all this.

It was thus effecting its financial and economic expansion in other countries.

It goes without saying that we are not inclined to regard the financial invasion of American capital in other countries as mere speculation. But much of what has been done in postwar years in this sphere is not as idealistically motivated as the apologists of US finance capital claim. The capitalist economy is indebted for its postwar recovery and development not to American credits but to the exploitation of the working class, especially through the extensive use of inflation.

The US ruling circles, of course, not out of ethical but purely practical considerations sought to remove the inflalional derangement of national currencies because this prevented the full operation of the world monetary system based on the Bretton Woods Agreements and hindered the expansion of American capital in the form of credit and various investments. Moreover, the dumping of commodities in the world market as a result of inflation impeded American exports and threatened the US home market, although it was protected by high customs barriers.

A great deal has been, and is being, written about inflation in the world press. Some economists, paying tribute to Keyriesianism, praise it as the only way to ensure full employment and as a stimulant of exports. Others condemn it because, by artificially stepping up exports, it leads to keener competition and disorganises world trade. The Bretton Woods Agreements, had they been strictly applied, would have been incompatible with inflation (this by no means proves the merits of the system as such).

Let us examine the meaning of inflation. It offers advantages to export goods because it cuts the labour costs. It reduces the real wages of the total working class and this is a gain for the total class of capitalists in a given country. In other words, since nominal wages remain unchanged, during inflation workers producing one and the same quantity of commodities are themselves able to buy much less because inflation reduces the purchasing power of money. What the workers are unable to buy in the home market, can be exported by the capitalists abroad. But the stimulating action of inflation on exports is not limited to this point.

It spurs on exports by diverting commodities from the home to the foreign market through the reduced currency rate. Let us assume that for a certain period an industry sells its output in the home and foreign markets in equal parts and obtains in the home market 1,000 national money units and in the foreign market X foreign money units which, according to the fixed rate, are equivalent to the selfsame 1,000 national units. In such a case it makes absolutely no difference to the given industry where it sells its output–in the home or foreign market (though preference will be given to the home market because it is closer and better known).

Now, let us assume that inflation cuts the exchange rate of the given national money unit by 25 per cent. Then for the goods sold in the home market the receipts will be the same–1,000 money units; for the goods sold in the foreign market the same X. But in exchanging the foreign currency for the national currency the exporter will receive an additional 25 per cent or the difference in the exchange rate 1,000x25/100=250. It is this difference that will stimulate the exports of the given commodities. Moreover, exports to foreign markets will be expanded by reducing their sale in the home market. This mechanism of stimulating exports with the help of a lowered exchange rate is known as monetary dumping.

After all that has been said about the role of inflation as a factor in stimulating exports, it becomes clear why the US ruling circles acted to curb it in capitalist countries. Under the Bretton'Woods-Agreements the US currency had to remain stable, while other capitalist countries after the war resorted to stimulating their exports through monetary dumping. This was the main'reason why in the initial postwar years the United States took measures to restrict inflation in the capitalist world. West Germany, Italy, Japan, and other countries began to stabilise their currencies under the direct pressure and with the ``aid'' of Washington. Thus, on April 25, 1949, by way of implementing the so-called Dodge line, the Japanese yen was stabilised at the level of 360 yen to the dollar. This ratio remained unchanged until December 19, 1971, when the yen was revalued.

Relying on the Bretton Woods Agreements and the International Monetary Fund, the US ruling element in one way or another extricated the economy of capitalism from the wartime stagnation. But it also drew it into the channel of American monetary and financial policy, which suited the interests of US monopoly capital.

Big changes in the currency circulation of the capitalist countries began four years after the end of the war. They were linked with the monetary and financial policy of the USA, particularly the Marshall Plan and the formation of the Organisation for European Economic Co-operation (OEEC). This plan pursued the same ends as the entire monetary system.

The Marshall Plan was a specific programme of ``aid'' to, and pressure on, the European countries designed to consolidate US monetary and financial hegemony in Europe. As the first prerequisite it was necessary to stabilise the currencies of West European countries and to link them to the American dollar in accordance with the Bretton Woods Agreements. It was this purpose that was to be promoted by American loans and ``aid'' under the Marshall Plan.

Outlining the basic principles of this plan in a speech delivered on July 5, 1947, in Harvard University, US State Secretary Marshall expounded the idea of the need for the economic unification of the capitalist countries of Western Europe so as to guarantee the efficient use of the financial resources of the United States for the accelerated shifting of the economy of the former belligerent countries on to peaceful lines.

The West European countries could not but heed this demand of the US ruling circles and as a result of the convention signed in Paris on April 16, 1948, by 17 West European countries, including Britain, France, West Germany and Italy, the OEEC was set up. Through this organisation about $ 30,000 million dollars came to Western Europe under the Marshall Plan and other programmes in the form of ``grants'' and loans in order "to help put the economies of Europe back on their feet again", as claimed by Henry H. Fowler, former US Secretary of the Treasury.2

But this official statement was made many years after the end of the Marshall Plan. Actually, through the OEEC the US ruling circles succeeded in stabilising the West Europ >an currencies, considerably liberalising the foreign trade of Western Europe, eliminating various quotas and tariff barriers which hindered the successful spread of American goods in the West European market. The OEEG facilitated the introduction of a system of multilateral payments, reorganised in September 1950 into the European Payments Union (EPU). This facilitated the introduction of the US dollar as a substitute for gold in the currency circulation of the Old World.

The monetary and financial policy of the United States was one of the causes for the wave of devaluations which swept the capitalist countries in 1949. This wave was set rolling by the devaluation of the pound as a result of Britain's foreign trade difficulties arising from the weakening of the sterling area and the system of trade preferences.

The difficulties of British exports worsened the country's trade and payments balances, which led to an outflow of the gold reserves. That is why even after the formation of the OEEC the ruling circles of Britain sought to expand exports with the help of the methods of inflation described earlier.

In the summer of 1949 the rate of the British pound dropped very sharply, and the Government was unable to control the rate even at the lower level. The Labour Government pressed the United States to carry out measures which could eliminate Britain's dollar deficit, specifically to admit more British goods into the United States, to furnish dollar loans on easy terms, and so on. But the attempts to normalise the country's finances were unsuccessful. At the IMF session, held in Washington in September 1949, the US Government, on the strength of the IMF rule about coordinating the rates of exchange in relation to the dollar, raised the question of devaluing the pound sterling. The Labour Government, seeing no possibility of waiting for a more favourable economic situation, resorted to a substantial devaluation of the pound on September 18, 1949. Instead of the rate of $ 4.03 per pound which existed hitherto, a rate of $2.80 per pound was introduced. Thus, the new parity of sterling to the dollar decreased by 30.5 per cent. The price of gold in British currency rose from 248 shillings per ounce, instead of 172 shillings 3 pence prior to devaluation.

The devaluation of the pound triggered off a chain reaction in the countries of the sterling area–from Australia and New Zealand to Norway and Sweden.

What is important for us is not a description of the process of currency devaluation by countries as such but the impact that the massive devaluation of national currencies had on the capitalist economy.

From the economic viewpoint, what happened, as it were, was the simultaneous reduction to a common denominator of the devalued currencies and the establishment of a strict correlation of parities to the dollar in accordance with the IMF rules. The role of the American dollar was enhanced under the aegis of the IMF. A new stage in the monetary and financial policy of the United States was opened in September 1949. It was marked by the further purposeful introduction of the dollar into world currency circulation. Moreover, the accumulation of foreign exchange reserves in dollars was intensified in countries which were unable to increase their gold stock.

This process of raising the role of the dollar in world circulation led to a change in the quantitative indices characterising the position of the United States itself from the viewpoint of international liquid assets. It is not by chance that in 1949 the gold reserves of the United States reached their maximum, $ 24,600 million, or almost 70 per cent of the world stock of monetary gold.

The dollar, it seemed, solidly rested on a huge gold basis. But quantitative changes occurred in the world monetary reserves after 1949. The sum of dollars in circulation increased relatively swiftly and the US gold reserves began to decline, although slowly. The USA turned into a supplier of liquidity for the world monetary system. This exerted a corresponding influence on its own monetary position.

The monetary assets of the United States in the form of reserves of gold and foreign exchange either remained unchanged or were slowly shrinking, while their ``liabilities'' abroad, especially notes of the Federal Reserve System and Treasury bills were increasing. The gap between the available assets and foreign liabilities was widening. Thus, the introduction of American dollars into world circulation and the exchange reserves of other countries led to a decline in the gold backing of the dollar. The discrepancy between the gold stock in the USA and the liquid liabilities to other countries (bills of exchange, Federal Reserve notes and so on) was increasing. In 1938 the liquid liabilities of the USA to other countries amounted to $ 2,200 million and the country had a gold stock of $ 14,600 million; in 1949, with a gold stock of $ 24,600 million, the liquid liabilities rose to $ 8,200 million3 . In other words, in 1938 the liquid liabilities were only about 15 per cent of the gold stock, while in 1949 they amounted to 33 per cent. Thus, the absolute and relative growth of liquid liabilities, chiefly American short-term bills and bank notes abroad, was much in evidence.

This process of the introduction of American liquid liabilities into international circulation was further .accelerated when US imperialism launched its military venture in Korea in the summer of 1950. The temptation to cover the military expenditure abroad by dollars and other liquid liabilities instead of gold was so great that already in 1952, with the US gold reserves cut to $ 23,300 million, the liquid liabilities had increased to $ 11,700 million.4

The war in Korea marked a turning point in the extensive use of the postwar monetary and fmancial system of capitalism in the interests of US finance capital. The dollar became an instrument for the wide investment of US capital in other countries, a means of financing the Pentagon's military ventures.

  • 1Karl Marx, Capital, Vol. Ill, pp. 444-45.
  • 2The Department of State Bulletin, August 2, 1965, p. 210.
  • 3Robert Triffin, "International Monetary Position of the United States", The Dollar in Crisis, New York, 1961, p. 228.
  • 4Ibid., p. 229.