The US emerged unscathed from World War II as the most advanced capitalist country, with the largest domestic market, the smallest agricultural population (as a percentage of employment), and the most advanced industrial technologies. By some estimates it was responsible for more than half of the world’s output.36 It also emerged from the war as the global creditor par excellence, owning two thirds of global gold reserves and with most allied powers owing it tremendous sums of money. Under these conditions, the US was able to reconstruct the international monetary order, in a shambles since the Great Depression, on its own terms. At Bretton Woods, the dollar was established as the international reserve currency, the only one to be directly backed by gold, and all other currencies were pegged to the dollar (creating a fixed exchange rate system, which nevertheless allowed for periodic adjustments). On the one hand, by fixing their own currencies to the dollar, European powers were given temporary relief from balancing their budgets during reconstruction. On the other hand, the US, by facilitating reconstruction, was assured of markets for its capital exports, which in turn facilitated the European purchase of American goods. In this way European budget deficits were funded by US capital exports, and a persistent trans-Atlantic trade imbalance was effectively written into the Bretton Woods agreements. Endnotes, Misery and Debt, On the Logic and History of Surplus Population and Surplus Capital, Endnotes #2 (2010), https://endnotes.org.uk/articles/misery-and-debt

While during the post-war boom the export of dollars via foreign direct investment had enabled rapid growth in deficit countries, this phase change meant that US capital exports became increasingly inflationary. [37] The spiralling US budget deficits of the Vietnam war only intensified this problem of inflation, as the seemingly inevitable devaluation of the dollar threatened to undermine the reserves, and hence the balance of payments, of all nations, straining the fixed exchange rate system to its limits. The result was that on the one hand many central banks began to cash in their dollars for gold (forcing the US to effectively end convertibility in 1968), while on the other hand surplus dollars accumulated in Eurodollar markets began to put speculative pressure on the currencies of export-based economies who were most at risk from the effects of dollar devaluation. These included both those developing countries which had pegged their currencies to the dollar, and thus risked seeing their primary commodity exports fall in value relative to the manufactured imports on which their development depended, as well as developed nations whose export markets risked being undermined by the revaluation of their currencies relative to the dollar. In its subsequent abandonment of Bretton Woods and its policy of “benign neglect” of the deficit, the US used this threat of dollar devaluation to impose a new flexible dollar reserve currency standard on the rest of the world, effectively delegating the job of stabilizing the dollar to foreign central banks who would be compelled to spend their surplus dollars on US securities in order to maintain the dollar value of their own currencies. This to all intents and purposes removed budgetary constraints from the US, allowing it to run up deficits and issue dollars at will, knowing that foreign nations would have no choice but to recycle them back to US financial markets, particularly into US government debt which quickly replaced gold as the global reserve currency. [37]: Most Marxists attribute inflation in this period either to the exploding US budget deficit (due in large part to the Vietnam war) or to the rising strength of labour. Yet Anwar Shaikh convincingly argues that the restricted supply in relation to which inflation is the index of excess demand is not full employment or labour recalcitrance, but rather the maximum level of accumulation, or the maximum capacity profit rate – whose decline during this period is the leading factor behind stagflation. Anwar Shaikh, ‘Explaining Inflation and Unemployment’ in Andriana Vachlou, ed., Contemporary Economic Theory (Macmillan 1999). Endnotes, Misery and Debt, On the Logic and History of Surplus Population and Surplus Capital, Endnotes #2 (2010), https://endnotes.org.uk/articles/misery-and-debt