The American Empire, as seen by a Major General of the PLA

Summary: This series of posts provides excerpts from a recent speech by Qiao Liang, a Major General in the People’s Liberation Army. These give a glimpse into the thinking of China’s elites, unlike the US-centric perspective provided by our news media. Like any good speech, it grows more interesting as it unfolds. In part one the general describes the foundation of America’s Empire. A brief analysis follows the text.

Globe and China Flag

Speech by Qiao Liang (乔良): part one
Major General in the People’s Liberation Army

Given at a study forum of the Chinese Communist Party, April 2015
Reported and translated by Chinascope
Reposted with their generous permission.

A. The First Financial Empire in History

… On August 15, 1971, when the U.S. dollar stopped being pegged to gold, the dollar ship threw away its anchor, which was gold.

Let’s take a step back. In July 1944, to help the U.S. to take over the currency hegemony from the British Empire, President Roosevelt pushed for three world systems: the political system – the United Nations; the trade system – the General Agreement on Tariffs and Trade (GATT), which later became the World Trade Organization (WTO); and the currency financial system – the Bretton Woods system.

The Americans’ desire was to establish the U.S. dollar’s hegemony over the world via the Bretton Woods system. However, from 1944 to 1971, the dollar didn’t gain that power. What blocked the dollar? It was gold.

When the Bretton Woods system was set up, the U.S. promised the world that the U.S. dollar would be pegged to gold while every other country’s currency could peg to the dollar. One ounce of gold was fixed at US$35. With this promise, the U.S. couldn’t do anything according to its own will. In other words, the Americans couldn’t print an unlimited number of dollars. Whenever it printed a dollar bill, it had to add one additional ounce of gold into its treasury as a reserve.

The U.S. made that promise to the world because it held 80% of the world’s gold reserve at that time. The Americans thought that, with that much gold in hand, it was enough to support the U.S. dollar’s credibility.

Qiao Liang

However, it was not that simple. The U.S. stupidly got involved in the Korean War and the Vietnam War, which cost it dearly. The Vietnam War especially cost US$800 billion. The cost became so much that the U.S. couldn’t bear it. Based on the U.S.’s promise, every time it spent US$35, it meant a loss of one ounce of gold.

By August 1971, the Americans had about 8,800 tons of gold left. They knew they were in trouble. Other people continued creating new trouble for them. For example, French President De Gaulle didn’t trust the U.S. dollar. He asked the French Finance Minister and Central Bank President and was told that France had about US$2.3 billion dollars in reserve. He told them to sell all of that for gold. Some other countries followed suit.

Thus, on August 15, 1971, then U.S. President Nixon announced that the U.S. stopped pegging the dollar to gold. It was the beginning of the collapse of the Bretton Woods system, and also a way in which the Americans cheated the world. However, the world didn’t realize it.

People trusted the U.S. dollar because it was supported by gold. The U.S. dollar had been the international currency, the settlement currency, and the reserve currency for over 20 years. People were used to the dollar. When the U.S. dollar suddenly lost its tie to gold, it then, in theory, became a pure piece of green paper. Why did people still use it?

In theory people could stop using it. But in practice what would people use for international settlement? Currency is a measure of value. If people stopped using the U.S. dollar, was there any other currency they trusted?

… Not many people had a clear understanding of this at the time. People, including economists and financial experts, didn’t realize that the most important thing in the 20th century was not World War I, World War II, or the disintegration of the USSR, but rather the August 15, 1971, disconnection between the U.S. dollar and gold.

Since that day, a true financial empire has emerged, the U.S. dollar’s hegemony has been established, and we have entered a true paper currency era. There is no precious metal behind the U.S. dollar. The government’s credit is the sole support for the U.S. dollar. The U.S. makes a profit from the whole world. This means that the Americans can obtain material wealth from the world by printing a piece of green paper.

This has never happened in the world before. Throughout mankind’s history there have been many ways for people to obtain wealth: an exchange with currency, gold, or silver, or using war to grab things (however, war is very costly). When the U.S. dollar became just a piece of green paper, the cost for the U.S. to make money became extremely low.

Without the restriction of gold, the U.S. can print dollars at will. If they keep a large amount of dollars inside the U.S., it will certainly create inflation. If they export dollars to the world, the whole world is helping the U.S. to deal with its inflation. That’s why inflation is not that high in the U.S.

———————– End Excerpt  ———————– 

Analysis

The general appears envious of the US dollar’s role as a reserve currency. His analysis is largely correct, but overlooks so many key aspects of the world economic system that the result is fallacious. I hope the civilians running China’s economy are better informed.

On the other hand, I doubt the average US major general is better informed about economics; they probably share many of his misconceptions. One of the odder aspects of this speech is the similarity of views about economics between a Chinese general and American conservatives.

  • All major nations have fiat currencies.
  • The US dollar has a dominant role in the global economic system, but other currencies also play a large role. Approximately 64% of all foreign reserves are in US dollar-denominated securities (mostly Treasury security), roughly 3x its share of world GDP (see this graph for the big picture over time).
  • Modern tech makes denominating trade in dollars nothing more than a convenience with minimal economic significance. The hysteria about the “petrodollar” (denominating and trading oil in dollars) is nonsense.
  • Other nations hold US treasury securities — not dollar bills. We pay them interest at market rates on these loans, just like everybody else. Our high credit rating results from America’s extraordinary political stability during the past 232 years.
  • The total amount of US dollars in circulation (physical and electronic) is $4 trillion, mostly held in the US. The benefit of our “exorbitant privilege” — we pay no interest on dollars held by foreigners — is insignificant to the US.
  • The US dollar’s role results from independent decisions of the world’s nations. It has benefits AND costs. Chief among the costs is a persistent overvaluation. Most nations prefer a weak currency that boosts exports. For details see The falling US dollar – bane or boon?
  • Most importantly, he misunderstands the foundation of the American Empire. It lies in our political stability, our economic growth, our network of allies, and our military power. The role of the US dollar is a result of these things, not a cause.

Other Posts in this series

  1. China introduces us to the future of warfare (asymmetric).
  2. Speech: The First Financial Empire in History.
  3. A Chinese general judges America’s leadership of the world economy.
  4. A Chinese general sees a ruthless America striving to contain his nation’s growth.
Unrestricted Warfare
Available at Amazon.

Unrestricted Warfare: the way of 21stC conflict

One of the key texts describing 4th generation warfare is Unrestricted Warfare, published in 1999 by Qiao Liang (乔良) and Wang Xiangsui (王湘穗), both Colonels in the air force of the People’s Liberation Army. They describe the 1997 attack by western hedge funds on the currencies of Southeast Asia as an example of this new generation of warfare.

For more about this see China introduces us to the future of warfare (asymmetric).

Chinascope

About Chinascope

Chinascope gathers, translates, and analyzes Chinese-language media reporting and documents that are generally inaccessible to the West. … Chinascope’s candid and objective presentation allows readers to feel the pulse of PRC opinion makers. Its contents provide a unique window into Chinese policy making, official attitudes, social developments, changing perceptions of the West, and much more. Based in the Washington it is owned by Global Communications Association, Inc., an independent, nonpartisan, 501 (c)3 nonprofit organization.  {From their About Page.}

For More Information

See this note by Qiao Liang published in Xinhua describing how the U.S. is “Containing China by Agents“. Also important is his 2010 speech about China’s geopolitical strategy: “Regional Power with Global Influence“. For more about economics seen from China’s perspective: A new world comes, probably one with no place for our “lords of finance”.

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