Despite the two world wars of the last century, the economic and political balance of the world at the time did not change rapidly. The 20th century was a time of tremendous suffering for humanity as the consequences of the two major wars gave way to, in the first half of the 20th century, what is now known as the current political and economic balances.
The developed countries of that time knew what to do for the sake of market and political sovereignty, even if doing so would eventually lead to a world war. Germany, having lacked colonies and experienced tremendous difficulties in reaching the markets and raw materials unlike other colonial powers, had no choice but to attack in order to gain a share of Britain's old, imperial domination.
On the other hand, increasingly acknowledging the fact that it could no longer dominate the "old territories" on its own, Britain consented to an obligatory alliance with the rapidly rising U.S.
Britain discreetly gave up even the Gold Standard, also known as the monetary system of the "old" colonialism, introducing the fiduciary monetary system during the period between the two world wars, ultimately leading to the U.S.'s monetary hegemony.
Gold convertibility, the most important indicator of the mercantilist rule of Britain, became a thing of the past and the central banks focused on ensuring economic stability with monetary accounting games based on political sovereignty.
With the Bretton-Woods system created under the U.S.'s leadership immediately after World War II, this system was reinforced despite John Maynard Keynes' well-established objections. At that time, Britain quickly backpedaled on all of its historical "imperial" reflexes, abandoning the centuries-long, basic colonialist institutions as a commonwealth (the long-time unity of wealth and domination), the Gold Standard in particular, in what was a wise and strategic decision for both itself and the capitalist system of the world.
Otherwise, even the U.K., let alone its empire on which the sun never set, would fall to pieces and turn into small satellite states of the U.S. or continental Europe. This strategic mind of Britain and its historical retreat in case of need still exists today. For instance, Brexit is a decision of this mind.
Although the U.S. must retreat today as Britain did a century ago, it cannot do this in a state of great bewilderment, and injudiciously insists on the old system. Let alone the puzzlement of the U.S. that is destroying all of its alliances in the Pacific and the Middle East, even its debates about the Federal Reserve (Fed) alone reveal its stalemate.
Just look at the debate about the next Fed chairman. They are trying to make John Taylor, whose arguments were completely denied even in the U.S. by the 2008 crisis, the next Fed chair. The basic mechanism of the Bretton-Woods system regulates a country's balances of payments on the basis of the dollar. In other words, the countries that run dollar surpluses, transfer dollars to the countries that run dollar deficits through the price mechanism, the rule of equalizing domestic prices and external prices. The rules for this transfer and debt system are set by the International Monetary Fund (IMF), a Bretton-Woods institution. The U.S. is a country with deficits, but it is exempt from IMF rules since it exports dollars. After World War II, all monetary policies were built on it, starting with the Phillips hypothesis in the 1960s. In fact, the theses of Taylor, whose name is being mentioned for the position of the Fed chairman, rely on this.
The Phillips curve, which was introduced in the 1960s, asserts that inflation and unemployment rates in an economy move in opposite directions.
Some central banks that considered this relation as a basis began following inflationary policies in order to increase employment as a political choice. However, the 1973 crisis rejected this thesis with an impasse in which unemployment and inflation were together.
In this case, the prevailing monetary policy preferred financial profitability and inflation prevention to employment and growth and, as such, set interest rates as the only control variable.
The Taylor rule argues that central banks need to monitor growth rates in order to see the link between real inflation and expected (target) inflation, which is ensured with interest rates. In short, Taylor suggests that central banks can reach the expected inflation with interest rates, taking into account the difference between growth potential and actual growth. The inevitable outcome of this thesis is to raise financial "stability" (profitability) by keeping interest rates constantly higher than the anticipated inflation rate.
Charles Evans, the president of the Federal Reserve Bank of Chicago, said a while ago that this rule would no longer apply and what matters now is unemployment rather than inflation, arguing that the Fed would not be able to raise interest rates for a long time. In fact, the basis of former Fed Chair Ben Bernanke and current Fed Chair Janet Yellen is hidden in Evans' remarks.
Well, is it just a coincidence that pro-interest Taylor is being mentioned for Fed chairmanship at a time when Donald Trump makes statements that may lead to a war with Iran? I do not think so. A similar scenario came up in 1995 when former Fed Chair Alan Greenspan, under the Bill Clinton administration, hiked interest rates, paving the way for the George W. Bush administration.
But unlike before, the U.S.'s insistence on returning to the old days will hit itself first, not the countries on target. If the U.S. does not know to retreat by building alliances, as Britain once did, it will only hasten the rapid rise of Asia.
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