the postwar period was attended by representatives of the Allied countries, including John Maynard Keynes of Great Britain and Harry D. White of the United States. The conference would not only establish a monetary system, it would also determine whether the pound or the dollar would have primacy in the postwar world. By this time the Allied countries could read the signs of German and Japanese defeat and had begun to take steps accordingly.
Keynes’s concept was that the IMF should act as a clearinghouse, coordinating and maintaining a balance so that no particular country would become too weak or too strong. This, of course, was a desperate attempt to preserve British authority and save the pound. White’s plan was to place America at the center and subordinate all the other countries around it like satellites. It tied the dollar to the gold standard and created a fixed exchange rate for all other currencies. Despite Keynes’s strong opposition to White’s plan, there was no contest between the ascending dollar and the setting sun of the British pound. Keynes’s arguments fell on deaf ears. The key currency shifted from the pound to the dollar, and world leadership shifted from Great Britain to the United States.
The present IMF system thus came about in part through American steamrolling, and America is unlikely to give up control of the IMF unless it is forced to do so. The IMF was created at a time when America accounted for 52 percent of the world’s Gross National Product (GNP) and two-thirds of the world’s gold supply. That America with a mere 3 percent of the world’s population had so much wealth is amazing. That period was indeed an unprecedented golden age for the United States, which was able to do whatever it pleased.
Despite Keynes’s desperate efforts at Bretton Woods, the outcome was inevitable. Britain no longer had the political, economic, or military clout to prevent the dollar from replacing the pound as the key currency. Though it has declined since those heady days, the United States remains a great power. Replacing America today with second-place Japan or Germany would leave much to be desired. But even if these countries were absolute equals with the United States, the transfer of leadership as the result of discussion is inconceivable. History teaches that there has to be some dramatic upheaval for world leadership to shift.
We therefore cannot expect any change in the IMF system until America becomes much weaker and the number-two powers much stronger—and much stronger not only in terms of their economic capabilities. In order to attain superpower status a country also needs physical, that is, military, strength. Economic power is too fragile to respond in emergency situations. In the 1980s Japan went on a shopping spree, buying up America and investing elsewhere overseas. If the laws changed or a war broke out in any of those foreign countries, however, Japan’s foreign investments would be frozen or confiscated and that would be the end of that.
At present Japan does not even have the power to protect Japanese corporations that have set up businesses overseas. Take the case of the Iran Japan Petrochemical Company, a joint venture between Iran and members of the Mitsui group. Its plans to build a petrochemical company in southern Iran were interrupted first by the Khomeini revolution and then by the Iran-Iraq war, resulting in the loss of millions of dollars. If Japan had had military capabilities, the results might have been different. Japanese oil tankers sailing into the Persian Gulf would not have had to seek American protection during the Iran-Iraq war. At the very least, there would have been no outcry in the United States about Japan’s getting a free ride militarily. More recently during the Gulf War, I repeatedly heard Americans ask why the lives of American young people should be sacrificed to give Japan access to the oil it needs so that it can go on making money. Despite having contributed $13 billion to the war effort, Japan had little say, diplomatically speaking, in the postwar settlement. Most Japanese sense that Japanese diplomacy carries little weight. Does any country look to the prime minister of Japan for leadership? Though it may pride itself on being an economic superpower, Japan is still frustrated by its relative powerlessness on the world scene.
To turn the argument around, it could be said that Japan, which has so little political or military strength, has come to have too much economic power. Having written this, I should hasten to say that I am not a Japanese nationalist or a hawk who wants to see Japan rearm. As a realist I am merely pointing out the obvious. Shintaro Ishihara’s statement that Japan might call on Russia to defend it if America tried to contain Japan is nonsense. In such an event, Russian demands are unlikely to stop at microchips. To put it bluntly, as far as most Japanese are concerned, Russia is not the country that they are most likely to trust. The realistic view is that it would be far better for Japan to listen to America’s complaints than to join hands with the country that stole Japan’s Northern Territories at the end of World War II.
Excessive Exports versus Excessive Imports. In order for the dollar to function as the key currency, America must reconsider its special right to cheap imports and exercise restraint. If it is going to be the world’s leader, it must act like a leader and show more self-control. This means becoming more internationally competitive and achieving a trade balance through an export effort or through a further devaluation of the dollar. Competitiveness can be achieved by letting the dollar fall even further, but there is an inherent contradiction in a constantly declining dollar. A key currency that falls unchecked makes no sense as a key currency. Thus, as long as the dollar is the key currency, it must not be allowed to fall indefinitely.
After the Plaza Accord, the dollar plummeted and by 1988 it had reached an exchange rate of 120 yen. At the time some predicted that the dollar might drop even further to the 100-yen or 80-yen level. (At the time this book went to press, the exchange rate was fluctuating between 125 and 104 yen to the dollar.) Although logically speaking it is not strange for the value of the dollar to go down, as a key currency it should not do so. It cannot depreciate so much that it loses its meaning as the key currency. So, in fact, America had no alternative but to become more competitive and increase exports. Since it is impossible to regain over night something that has been lost over a period of years, the real agenda behind the SII trade talks was to get Japan to import more American goods and to get the United States to import less from Japan.
This put Japan in a peculiar position. Because exports had exceeded imports for some time, Japan had excess reserves that enabled it to import whatever it wanted. It was no longer necessary, as it once had been, to export in order to import. Thus, just as America continues to import even though it can no longer afford to do so, Japan continued to export even though it no longer needed to do so.* This exporting for the sake of exporting is illogical, economically speaking. The more Japan exports, the stronger the yen grows and the more unprofitable exporting becomes. It would make far better sense to spend the money at home. But no effort whatsoever was made to apply the brakes to Japan’s export drive. The more Japan exported, the more money came in so that it became even harder to say “stop.” What corporation would be willing to cut back exports and reduce tangible profits for the intangible good of the state? The worst aspect of all this is that Japanese society looks up to businessmen as its heroes, and everyone—both inside and outside government—listens to their views. The Recruit scandal and, more recently, the revelation of payments made to leading Diet members by Sagawa Kyubin, a parcel-delivery company, have given a glimpse of how pervasive the practice of influence buying is in Japan, and how deeply politicians are in the pay of business.
* Japan’s economic growth has reduced the already low level of Japanese imports still further. As imports decline and exports increase (or even remain the same), the trade surplus continues to grow.
America faces a similar dilemma. The fact that the dollar, as the key currency, cannot fall below a certain point, makes it even more difficult to say “stop importing.” Paradoxically, what has happened in both Japan and the United States as far as business is concerned is entirely rational economic behavior, and we can only assume that the present situation will continue as long as the IMF system remains unchanged.
Made in Japan—Breaking Down the Exchange Myth. As I mentioned earlier, when the value of the dollar declined by half and the yen doubled, Japanese corporations ended up making exactly the same profits as before. That was odd enough, but the 1985 currency realignment caused another strange phenomenon to occur.