global investors move out of the sinking dollar, central banks hardly would want to buy American stocks in any event. Norway suffered such severe losses from recycling its North Sea oil earnings into the U.S. market that by October 2001 the government felt obliged to inform local municipalities that they would have to contribute extra sums to their pension funds. To make up for the U.S. market plunge, public support for Norwegian museums, orchestras and other cultural organizations was cut back.
Unfortunately for the world’s central banks, buying U.S. Treasury IOUs also is a losing proposition. The falling dollar erodes their international value, causing Europe and Asia to lose over 10 per cent of the value of their U.S. dollar reserves in 2002. Japan and China each have lost over $35 billion on their dollar holdings. These losses are the equivalent of a negative interest rate.
The greatest loss, however, comes from the sterilized dollar balances themselves. What can central banks do with their dollar inflows except lend them back to the U.S. Treasury to help fund America’s own domestic budget deficit? In fact, the larger the U.S. balance of payments grows, the more dollars mount up in the hands of foreign to be recycled to finance the U.S. budget deficit. These dollar holdings – in the form of Treasury bonds – have become a seignorage tax levied by America on the world’s central banks.
The world has come to operate on a double standard as the U.S. payments deficit provides a free lunch in the form of compulsory foreign loans to finance U.S. Government policy. To make matters worse, the U.S. budget deficit is soaring as the Bush Administration slashes taxes on the wealthy and their inheritance legacies while increasing military spending.
Foreigners have no say over these policies. Americans fought a revolution over the principle of “no taxation without representation” two centuries ago, but Europe, Asia and Third World countries seem politically far from taking a similar step today. Their dollar claims do not give them the voting rights in U.S. policy formation, yet U.S. Government, IMF and World Bank officials use their dollar claims on debtor economies in Latin America, Africa and Asia to force them to follow the Washington Consensus.
Gold was the monetary medium that checked America’s ability to run balance-of-payments deficits without limit. As the dollar ceased being “as good as gold” leading up to 1971, the U.S. Treasury put pressure on central banks to demonetize the metal and finally drove it out of the world monetary system – a geopolitical version of Gresham’s Law that bad money drives out good. Removing gold convertibility of the dollar – or for that matter its convertibility into the purchase of U.S. companies or other hard assets – enabled the United States to pursue protectionist trade policies unilaterally. U.S. agricultural subsidies are now helping to drive foreign food production out of world markets, while illegal steel tariffs threaten to drive European and Asian steel out of U.S. and foreign markets alike.
It is significant that the most recent dollar decline started in late spring 2002, soon after President Bush announced steel tariffs that are illegal under international law while Alan Greenspan at the Federal Reserve Board lowered interest rates in an attempt to slow the U.S. stock market plunge. These acts recall the 1971–72 “Chicken War” between America and Europe, and the grain embargo that quadrupled wheat prices outside of the United States. It was this embargo that inspired OPEC to enact matching increases in oil prices to maintain terms-of-trade parity between oil and foodstuffs. The “oil shock” was simply a reverberation of the U.S. grain shock.
There always are two sides to every issue, of course. But as every lawyer and judge knows, rhetorical flourish and a massive ideological bombing in the press often sways public opinion. U.S. officials claim that their surplus dollars act as a “growth locomotive” for other countries by inflating their credit-creating powers, as if they needed dollars to do this. Another supposed silver lining to the dollar glut is that falling import prices for dollar-denominated commodities helps deter inflationary pressures in the industrialized European and Asian economies. The flip side of this coin, of course, is that the falling dollar once again is squeezing raw materials exporters who price their minerals, fuels and other commodities in dollars, throwing them into yet deeper financial dependency on the United States.
Credit creation for all countries is an inherently domestic affair. As long as national central banks rely on the dollar, their monetary backing must take the form of financing the U.S. budget deficit and balance-of-payments deficit simultaneously. This linkage promises to make the balance of payments as political an issue today as it was a generation ago in the days of General de Gaulle. But at least he was able to cash in France’s surplus dollars for U.S. gold on a monthly basis. Today it would be necessary for Europe and Asia to design an artificial, politically created alternative to the dollar as an international store of value. This promises to become the crux of international political tensions for the next generation.
This book aims at providing the background for U.S.–European and U.S.–Asian financial relations by explaining how the U.S. Treasury bill standard came to provide America with a free lunch since gold was demonetized in 1971, and why the IMF and World Bank cannot be expected to help. Published thirty years ago, it was the first to criticize the World Bank and IMF for imposing destructive policies on the world’s debtor economies, and to trace these policies to U.S. diplomatic pressure. It shows how Anglo-American maneuvering during the closing phases of World War II led the IMF to promote capital flight from debtor countries under the slogan of financial deregulation. Also documented is how the World Bank has aimed since the 1950s at promoting foreign trade dependency on U.S. farm exports, and accordingly has opposed land reform and agricultural self-sufficiency abroad. The seeds of the policies that created the disasters of Russian reform under the U.S.-sponsored kleptocrats after 1991 and the Asian-Russian crisis of 1997–98 may be traced back to the malstructuring of the World Bank and IMF at the insistence of U.S. economic diplomats at the inception of these two Bretton Woods institutions.
The new edition is an expanded version, as the dollar crisis was just breaking at the time I handed in the manuscript for this book to Holt, Rinehart and Winston early in 1972. By the time it was published in September, under the title Super Imperialism: The Economic Strategy of American Empire, the international financial system was being radically transformed by the currency upheavals that followed the closing of the London gold window in August 1971 and devaluation of the dollar by 10 per cent. America’s balance-of-payments deficit continued to widen, but foreign central banks no longer were able to hold America to account by cashing in their surplus dollars for gold.
At the Smithsonian Conference in 1971 the world’s major powers argued mightily over the U.S. demand that parity values should be changed in coordinated fashion with a view to permitting the U.S. to improve its external current account position by an annual amount of some $15–20 billion. Today that amount seems so small as to be merely marginal. A comparison of the 1971 dollar crisis with the situation that is now accepted as the norm shows the degree to which foreign nations have simply capitulated to the dollar’s free lunch at their own expense.
The fact that running a balance-of-payments deficit forced foreign central banks to use their dollars to buy U.S. bonds to finance America’s own domestic budget deficit came as somewhat of a surprise even to Washington officials. Politicians are notorious for lacking an economic perspective, preferring to confront worldly constraints with authoritarian commands. They simply overlooked the balance-of-payments constraint on U.S. overseas military spending.
In 1971 the Institute for Policy Studies obtained the Pentagon Papers, and invited me down to Washington for a series of meetings to review them. What struck me was that the absence of any discussion of the balance-of-payments costs of the war in Southeast Asia. Yet the war was single-handedly responsible for pushing the balance of payments into deficit, inspiring headlines each month when General de Gaulle cashed in his surplus dollars for gold. Rather than subordinate U.S. diplomacy to balance-of-payments constraints, the Pentagon mobilized a full-time desk to counter with the warnings about the war’s balance-of-payments costs voiced by the “Columbia Group,” composed of my mentor Terence McCarthy and Seymour Melman at Columbia University’s School of Industrial Engineering, and myself.
No one anticipated that America’s federal budget deficit during the 1990s would be financed by China, Japan and other East Asian countries rather than by American taxpayers and domestic investors.