Keynes’ Begging Trip to America

October 25th, 2008 4 comments link to (permalink) posted by david

After WWII, which Britain had fought with American weapons while being supplied with American food, the UK was heavily in debt and on the brink of bankruptcy while the US economy was booming. The US demanded repayment for the wartime loans and so John Maynard Keynes went to Washington to ask for an $8billion bailout. He was refused, but given a loan of half the amount on condition that made the US dollar the new reserve currency. This loan was only paid off in 2006.

What does this have to teach us about today? In the details, not very much, but in the big picture view, it says a lot about how we might expect creditors such as China and Japan to behave towards the US, now that dollar priced hegemony may be ending. The current strength of the dollar is a panic move and prefaces an increasingly likely collapse, during which the US will be at the mercy of Asia.

If you want to get really spooked consider this:

“Victor Shih, a specialist in Chinese central banking at Northwestern University, said that when he visited the People’s Bank of China for a series of meetings this summer, he was surprised by how many officials resented the institution’s losses [on dollar assets].

He said the officials blamed the United States and believed the controversial assertions set forth in the book “Currency War,” a Chinese best seller published a year ago. The book suggests that the United States deliberately lured China into buying its securities knowing that they would later plunge in value.”

In other words the fate of the US economy may be in the hands of people who believe in conspiracy theorists. See the full piece here on Yves Smith’s great finance blog.

(despite the jingoistic commentary next to this video clip, on YouTube, its a serious piece by a well respected British historian)

tags: business history