Even Communist countries began to aim at running trade deficits in order to increase imports. Today, Europe and East Asia struggle to dispose of their surplus dollars with as little loss as possible as they recycle the U.S. balance-of-payments deficit into world capital markets, through which these dollars end up back in the United States. The result has been a global financial bubble.
America’s shift from a creditor to a debtor strategy of world economic domination in the 1960s and 1970s reversed the kind of global relationships that had characterized the 1920s. At that time it was the U.S. balance-of-payments surplus on government account that untracked the world economy. Since the 1960s it has been the U.S. payments deficit that has done so, initially stemming from the government’s overseas military spending. During the 1950s, 1960s and 1970s this military spending was responsible for the entire U.S. payments deficit.
Most economic models neglect the degree to which such spending and its consequent balance-of-payments deficits have played in the transformation of twentieth-century international finance. The world dollar surplus of initially was catalyzed by U.S. overseas military spending in Asia, starting with the Korean War in 1950–51. It was this spending that inverted America’s balance-of-payments position from surplus to deficit, forced it off gold in 1971, and induced a debtor-oriented international financial policy vis-à-vis the rest of the world – the policy from which foreign economies have not been able to extricate themselves even today.
The new deficit strategy was accompanied by rising commercial protectionism and investment regulation – just the opposite of the philosophy that characterized early postwar U.S. policies, and continues in a vestigial manner to color much of today’s anachronistic economic rhetoric. The shape of economic development in one economy after another has become a function of intergovernmental negotiation and diplomacy in ways not anticipated a half-century ago. Even Russia’s privatizations were a product of U.S. diplomatic pressure, not a natural evolutionary development.
Rather than U.S. overseas military spending being designed simply to protect and extend private sector exports and investments, just the opposite set of priorities emerged in the 1960s and 1970s. U.S. foreign trade and investment were regulated increasingly to finance America’s world military and diplomatic system. To finance the Cold War in Southeast Asia, U.S. banks and corporations were regulated in their foreign lending and investment activities, the IMF was all but broken up, GATT was gutted, and the system of free trade for which the United States ostensibly fought in World War II (and in its subsequent Cold War confrontation with Russia and China) was pushed aside.
The U.S. deficit is still disrupting the world, but its character has shifted from a military focus to one of insisting that foreign economies supply the consumer goods and investment goods that the domestic U.S. economy no longer is supplying as it postindustrializes and becomes a bubble economy, while buying American farm surpluses and other surplus output. In the financial sphere, the role of foreign economies is to sustain America’s stock market and real estate bubble, producing capital gains and asset-price inflation even as the U.S. industrial economy is being hollowed out.
The United States’ attempt to limit its payments surpluses in the 1920s by holding down its interest rates vis-à-vis those of Britain worked to inflate the stock market bubble that broke in 1929. Today, America’s trade deficit is pumping dollars into the central banks of East Asia and Europe, to be recycled into the U.S. capital markets, creating a new form of financial bubble. The Plaza Accords of 1985, and the Louvre Accords the following year, obliged Japan’s central bank to lower interest rates and inflate a bubble economy that burst in five years, leaving Japan a financial wreck, unable to challenge America as had been feared by U.S. strategists in the 1980s.
Both in the 1920s and today the U.S. payments imbalance grew so large as to split the world economy asunder, culminating in a statist reaction in one region after another. But today’s government policies abroad ultimately are controlled by U.S. Government planners and the Washington Consensus they impose via the international organizations they dominate. The demand for free trade and dollarization of foreign debts is essentially a demand by the U.S. Government that other governments remain passive rather than adopting U.S.-style market regulation.
What is ironic is how short a period it took – just 25 years, from 1945 to 1970 – for the United States to invert its professed wartime idealism and build a double standard into the world “marketplace.” By the 1970s the United States was insisting that West Germany revalue the Deutschmark and relend its dollar reserves to the U.S. Treasury as the price for keeping U.S. troops on German soil. Similar economic coercion occurred vis-à-vis Saudi Arabia, Kuwait and Iran to buy U.S. arms with the dollar proceeds of their oil exports, and between America and Japan. Even vis-à-vis the Soviet Union the U.S. Government set out to negotiate bilateral agreements for the Soviet Union to spend the $10 billion anticipated proceeds from its natural gas exports to the United States exclusively on U.S. products. Such agreements recall the blocked-currency agreements developed by Hjalmar Schacht for Nazi Germany in the 1930s.
The drive to privatize public enterprises, ostensibly a move to get governments out of economic affairs, is a product of U.S. Government pressure (often wielded via the IMF and now increasingly by the World Bank) on debtor countries. The destruction of public sector initiative in countries selling off their public utilities and the rest of their public domain has not been matched by domestic U.S. policies, but is rather their mirror image. It is the kind of policy against which the U.S. Government itself protested in 1972–73 when Europe, OPEC and other creditors sought to use their creditor position to buy control of major American companies and key resources, and to dictate government policy at least to the extent of restraining international profligacy.
The public domains of debtor countries are passing into the hands of global finance capital, including that of Europe and Asia, plugged into an international system controlled and shaped by the Washington Consensus. American pension funds, mutual funds, vulture funds, hedge funds and other institutional investors and speculators have come to dominate Europe’s stock markets and, since the 1997 Asian crash, have been appropriating those of the Far East. Stock markets in the former Communist economies and Third World are now dominated by the shares of the hitherto public domain that has been sold to institutional financial investors in the United States and other leading payments-surplus economies. The proceeds from these sales have been spent to pay interest accruals on debts taken on from consortia organized by the IMF and World Bank for projects that turn out not to be as self-amortizing as they were promised to be.
So we are brought back to the question of how conscious this system was. When did it became a deliberate policy rather than merely an ad hoc official opportunism in the game of international diplomacy?
To begin with, the United States paved the way by demanding that it be given veto power in any multilateral institution it might join. This power enabled it to block other countries from taking any collective measures to assert their interests as these might be distinct from U.S. economic drives and objectives.
I believe that at first the use of the U.S. payments deficit to get a free ride was a case of making a virtue out of necessity. But since 1972 it has been wielded as an increasingly conscious and deliberately exploitative financial lever.
What is novel about the new state capitalist form of imperialism is that it is the state itself that is siphoning off economic surpluses. Central banks are the vehicle for balance-of-payments exploitation via today’s dollar standard, not private firms. What turns this financial key-currency imperialism into a veritable super imperialism is that the privilege of running free deficits belongs to one nation alone, not to every state. Only the credit-creating center’s central bank (and the international monetary institutions its diplomats control) is able to create its own credit to buy up the assets and exports of foreign financial satellites.
On the other hand, there is nothing unique to capitalism about this mode of imperialism. Soviet Russia exerted control over the rule-making bodies of trade, investment and finance to exploit its fellow COMECON countries. Controlling the pricing and payments system of trade under conditions of rouble inconvertibility, Russia obtained the economic surpluses