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In a global system of fixed exchange rates, shock absorbers take the form of strong regional currencies, issued by potent central banks, to act as secondary pillars in support of the system's main currency. There was need for at least one such currency in Europe and another in Asia. Of course strong regional currencies cannot be created; heavy industry powerhouses must underpin them. But here is the tricky part: industrial powerhouses produce more manufacturing goods than their domestic economies can absorb--think China today. To keep going, powerhouse economies need markets--surrounding states in permanent deficit with them so that they can remain in surplus.
So the first question was: which would the powerhouse economies in Europe and Asia be? In Europe the United Kingdom was an early candidate. Only, like most early front-runners, Britain went by the wayside. Its elites were determined to retain their grip on an empire that, in Washington's eyes, was both repugnant and unsustainable. Its returning soldiers, having shed their blood for king and country, were determined not to return to their prewar pitiful wages and abject living conditions. This was why Winston Churchill, the nation's wartime tower of strength, was swept away in a 1945 electoral landslide that ushered in a radical-sounding (especially to American ears) Labour government. A year later a fiscal crisis ended sterling's convertibility and further tarnished Britain's candidacy as the European pillar of America's global plan. [...]
[...]
Why not France? For three excellent reasons. First, Germany industry was far more advanced than France's. In 1945, despite the hammering it had received from the Allies in the final stages of the war, German factories produced more than twice as much as France's. Secondly, the defeated Germans, fearing a pastoral future, would breathe a sigh of relief if the United States were to patronize their economy, invest in it and generally take it under their wing. In contrast, General de Gaulle and the vast majority of the French would be incensed by any hint of similar intervention, let alone a takeover. Thirdly, just as in the case of Japan America had written the constitution of the Federal Republic of Germany and even created the Bundesbank from scratch. The fact that American forces controlled West Germany's land, sea and airspace did not harm the notion either.
The second question now remained: who would provide the deficit hinterland for Germany's and Japan's powerhouse economies?
to prevent recessions from spreading too much. Japan was obviously the Asian winner
[...] Germany's export-led economy could never afford its own genuinely free-floating currency. The reason is simple: if the Deutsche Mark's international value were to be determined freely by the money markets, Germany's surpluses would create demand for its money, which would push up its value until German goods became so expensive abroad that German surpluses would disappear. The ambition to remain a surplus nation could not be served by a free-floating Deutsche Mark.
While the mark was embedded in America's global plan, its value fixed within the Bretton Woods international monetary system, German leaders and officials could behave like the managers of Europe's gleaming factory. They could concentrate solely on making sturdy cars and impressive gadgets, letting America mind global capitalism--exactly as the United States had planned things in the late 1940s. Alas, once the United States jettisoned Bretton Woods, and Europe along with it, German leaders could no longer treat the global environment as they treated the weather--as a natural system impervious to their actions and beliefs. They had to concede that the international economic environment was no longer divinely ordered and independent of what they decided. They had, in other words, to do something to shape that international environment in ways consistent with Germany's continued economic success.
Hence the Euro
So, when in 1971 Europe was jettisoned from the dollar zone, and exchange rates between its currencies started bobbing up and down, some of them falling as violently as others were rising, the European Union had real trouble managing the heavy industry cartel and the common agricultural policy that were its core. Without stable steel, coal and agricultural prices across France, Germany, Belgium, the Netherlands and Italy, cartel-like price fixing was impossible. [...]
and of course that was the main purpose of the EU (well, its precursor) at the time
[...] nations in deficit could not sustain fixed exchange rates with the rest, especially in times of crisis. To remain within Europe's monetary snake, a country with a trade deficit, France for example, urgently needed to attract foreign money to finance its net imports. Foreign money is attracted by high interest rates and deterred by any prospect that the state will not be able to pay its bills or repay its creditors. In other words, to stay in the snake Paris had to make borrowing dearer and simultaneously reduce public spending. But dearer money would reduce investment by French business, which would in turn depress employment and private incomes. [...]
"snake in a tunnel" being the metaphor used for the allowed exchange rate fluctuation bands
this is a great illustration of the problems with austerity
(the other problem with the "snake", apparently, was the lack of bueaucratic sinecures for French graduates)
The only way the Franc's Deutsche Mark value could be kept constant was, indeed, for the Bundesbank to keep doing the one thing it detested: incessantly buy francs using freshly printed Deutsche Marks. Were these marks to remain stashed in the vaults of the French central bank--or anywhere else for that matter--the Bundesbank would not have minded much. Only these banknotes did not stay under lock and key, but were steadily repatriated back to Germany, as the French used them to buy more Volkswagens and speculators converted their francs into marks convinced that at some point the Bundesbank would let the franc slide, netting them a substantial windfall. And why would the Bundesbank let the franc slide? Because the repatriated Deutsche Marks were increasing the quantity of money circulating in Germany, pushing prices up and causing inflation in a nation that despised rising prices with all its heart, nation that trusted the Bundesbank to prevent this from happening.
[...] combining high returns to financial capital (requiring high interest rates) with high profit rates for American businesses (requiring low interest rates) was never going to be easy, and Volcker knew this. It was a combination that could only come about if another way of providing that profit could be found. And one way to do that would be to reduce wages. [...]
[...] if 'the weak suffer what they must', their very capacity, let alone willingness, to reproduce the power of the strong declines precipitiously.
on why Volcker would have opted to fix Bretton Woods (if he had the choice)
put another way, by Marquis de Condorcet later on the page, "real power lies not with the oppressors but with the oppressed" (though it's a bit misleading)
[...] unlike in the late 1960s, German inflation was less of at threat with Volcker on the loose. The American vacuum cleaner, powered by Volcker's high interest rates, could now be counted upon to suck the fresh Deutsche Marks in, preventing them from making their way immediately from France back into Germany. [...]
think more about why
[...] The more US deficits grew, the greater the global Minotaur's appetite for Europe and Asia's capital. Its truly global significance was due to its role in recycling national circuits (profits, savings, surplus money) through the international circuits that Wall Street had established. It kept the gleaming German factories busy. It gobbled up everything produced in Japan and later in China. And, to complete the circle, the foreign (or American) owners of these distant factories sent their profits, their cash, to Wall Street--a modern tribute to the global Minotaur.
[...] The gold standard was underpinned by the idea of depoliticizing money by linking its quantity to the amount of gold--a metal that politicians could not conjure up from thin air since it was provided exogenously by nature. Today the same fantasy of apolitical money can be foudn not just in the construction of a European central bank that is answerable to no parliament [...] but also in newfound digital currencies like Bitcoin, whose selling point is the absence of political authority over them. Margaret Thatcher's precious point was that controlling interest rates and the supply of money is a quintessentially political activity which, if removed from the purview of a democratically elected parliament, would occasion a steady descent into authoritarianism.