obliged to invest in U.S. Treasury securities, financing simultaneously the balance-of-payments deficit and the domestic federal budget deficit.
The stock and bond markets boomed as American banks and other investors moved out of government bonds into higher-yielding corporate bonds and mortgage loans, leaving the lower-yielding Treasury bonds for foreign governments to buy. U.S. companies also began to buy up lucrative foreign businesses. The dollars they spent were turned over to foreign governments, which had little option but to reinvest them in U.S. Treasury obligations at abnormally low interest rates. Foreign demand for these Treasury securities drove up their price, reducing their yields accordingly. This held down U.S. interest rates, spurring yet further capital outflows to Europe.
The U.S. Government had little motivation to stop this dollar-debt spiral. It recognized that foreign central banks hardly could refuse to accept further dollars, lest the world monetary system break down. Not even Germany or the Allies had thought of making this threat in the 1920s or after World War II, and they were not prepared to do it in the 1960s and 1970s. It was generally felt that such a breakdown would hurt foreign countries more than the United States, thanks to the larger role played by foreign trade in their own economic life. U.S. strategists recognized this, and insisted that the U.S. payments deficit was a foreign problem, not one for American citizens to worry about.
In the absence of the payments deficit, Americans themselves would have had to finance the growth in their federal debt. This would have had a deflationary effect, which in turn would have obliged the economy to live within its means. But under circumstances where growth in the national debt was financed by foreign central banks, a balance-of-payments deficit was in the U.S. national interest, for it became a means for the economy to tap the resources of other countries.
All the government had to do was to spend the money to push its domestic budget into deficit. This spending flowed abroad, both directly as military spending and indirectly via the overheated domestic economy’s demand for foreign products, as well as for foreign assets. The excess dollars were recycled to their point of origin, the United States, spurring a worldwide inflation along the way. A large number of Americans felt they were getting rich from this inflation as incomes and property values rose.
Figure 1 shows that foreign governments financed the entire increase in publicly held U.S. federal debt between the end of World War II and March 1973, and were still doing this throughout the 1990s. (How the system ended up after that time is outlined in my sequel to this book, Global Fracture.) The process reached its first crisis during 1968–72, peaking in the inflationary blowout that culminated in the quadrupling of grain and oil prices in 1972–73. Of the $47 billion increase in net public debt the publicly held federal debt during this five-year period – the gross public debt, less that which the government owes to its own Social Security and other trust funds and the Federal Reserve System – foreign governments financed $42 billion.
This unique ability of the U.S. Government to borrow from foreign central banks rather than from its own citizens is one of the economic miracles of modern times. Without it the war-induced American prosperity of the 1960s and early 1970s would have ended quickly, as was threatened in 1973 when foreign central banks decided to cut their currencies loose from the dollar, letting them float upward rather than accepting a further flood of U.S. Treasury IOUs.
How America’s payments deficit became a source of strength, not weakness
This Treasury bill standard was not at first a deliberate policy. Government officials tried to direct the private sector to run a balance-of-payments surplus capable of offsetting the deficit on overseas military spending. This was the stated objective of President Johnson’s “voluntary” controls announced in February 1965. Banks and direct investors were limited as to how much they could lend or spend abroad. U.S. firms were obliged to finance their takeovers and other overseas investments by issuing foreign bonds so as to absorb foreign-held dollars and thereby keep them out of the hands of French, German and other central banks.
Figure 1 Ownership of U.S. Public Debt, 1945–76
Source: Hudson, Global Fracture New York: Harper & Row 1977
But it soon became apparent that the new situation possessed some unanticipated virtues. As long as the United States did not have to pay in gold to finance its payments deficits after 1971 (in practice, after 1968), foreign governments could use their dollars only to help the Nixon Administration roll over the mounting federal debt year after year.
This inspired a reckless attitude toward the balance of payments that U.S. officials smilingly called one of benign neglect. The economy enjoyed a free ride as the payments deficit obliged foreign governments to finance the domestic federal debt. When foreign governments finally stopped supporting the dollar in 1971, its exchange rate fell by 10 per cent. This reduced the foreign exchange value of foreign-held dollar debt accordingly, above and beyond the degree to which inflation was eroded its value. But American companies that had invested abroad saw the dollar value of their holdings rise by the degree to which the dollar depreciated.
What was so remarkable about dollar devaluation – that is, an upward revaluation of foreign currencies – is that far from signaling the end of American domination of its allies, it became the deliberate object of U.S. financial strategy, a means to enmesh foreign central banks further in the dollar-debt standard. What newspaper reports called a crisis actually was the successful culmination of U.S. monetary strategy. It might be a crisis of Europe’s political and economic independence from the United States, but it was not perceived to be a crisis of domestic U.S. economic policy.
A financial crisis usually involves a shortage of funds resulting in a break in the chain of payments somewhere along the line. But what occurred in February and March 1973 was just the reverse, a plethora of dollars that inflated rather than deflated the world monetary system. In this respect that year’s runs on the dollar were like the competitive devaluations of the 1930s, fed by U.S. official pronouncements of further devaluation to come. The Federal Reserve System expanded the money supply at a rapid pace and held down interest rates.
From the 1920s through the 1940s the United States had demanded concessions from foreign governments by virtue of its creditor position. It would not provide them with foreign aid and military support unless they opened their markets to American exports and investment capital. U.S. officials made similar demands in the 1960s and 1970s, but this time by virtue of their nation’s payments-deficit status! They refused to stabilize the dollar in world markets or control U.S. deficit-spending policies unless foreign countries gave special treatment to favor American exports and investments. Europe was told to bend its agricultural policy to guarantee U.S. farmers a fixed share of Common Market food consumption, to relax its special trade ties with Africa, and to proffer special aid to Latin America with the intention that the latter region would pass on the money to U.S. creditors and exporters.
The United States thus achieved what no earlier imperial system had put in place: a flexible form of global exploitation that controlled debtor countries by imposing the Washington Consensus via the IMF and World Bank, while the Treasury bill standard obliged the payments-surplus nations of Europe and East Asia to extend forced loans to the U.S. Government. Against dollar-deficit regions the United States continued to apply the classical economic leverage that Europe and Japan were not able to use against it. Debtor economies were forced to impose economic austerity to block their own industrialization and agricultural modernization. Their designated role was to export raw materials and provide low-priced labor whose wages were denominated in depreciating currencies.
Against dollar-surplus nations the United States was learning to apply a new, unprecedented form of coercion. It dared the rest of the world to call its bluff and plunge the international economy into monetary crisis. That is what would have happened if creditor nations had not channeled their surplus savings to the United States by buying its Government securities.
Implications for the theory of imperialism
The