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Preface to the Second Edition

As of summer 2002 the U.S. Treasury is pursuing the same strategy of “benign neglect” for its balance-of-payments deficit that it did thirty years ago. The deficit that caused a global crisis in 1971 when its $10 billion rate led to a 10 per cent dollar devaluation has now risen to hundreds of billions of dollars annually, and is still rising. Treasury Secretary O’Neill says he is not worried and that the situation does not call for any action, at least not on the part of the United States.

This confronts Europe and Asia with a dilemma. If they let the U.S. payments deficit drag the dollar down, this will give U.S. exporters a price advantage. To protect their own producers, central banks must support the dollar’s exchange rate by recycling their surplus dollars back to the United States. This option obliges them to buy U.S. Government securities, as U.S. diplomats have made it clear that to buy control of U.S. companies or even to return to gold would be viewed as an unfriendly act.

As 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. Yet this international exploitation was implicit in the U.S. Treasury bill standard. Since 1971 it has freed the U.S. economy from having to do what American diplomats insist that other debtor countries do when they run payments deficits: impose austerity to restore balance in its international payments. The United States alone has been free to pursue domestic expansion and foreign diplomacy with hardly a worry about the balance-of-payments consequences. Imposing austerity on debtor countries, America as the world’s largest debtor economy acts uniquely without financial constraint. For that reason I originally wanted to entitle my book Monetary Imperialism so as to emphasize this new financial character of America’s way of exploiting the world via the international monetary system itself.

I had published my analysis of the U.S. balance of payments (updated here in Chapter 8) in New York University’s Institute of Finance Bulletin in March 1970. One of my students gave me an internal New York Federal Reserve review of my analysis that found it correct even while their economists publicly denounced my findings that the war alone was responsible for the crisis, not foreign aid or private investment. The balance of payments was becoming a highly political topic.

A few years ago I sought to update my breakdown of the balance of payments to update the impact of U.S. military spending and foreign aid. But the Commerce Department’s Table 5 from its balance of payments data had been changed in such a way it no longer reveals the extent to which foreign aid generates a transfer of dollars from foreign countries to the United States, as it did in the 1960s and 1970s. I telephoned the statistical division responsible for collecting these statistics and in due course reached the technician responsible for the numbers. “We used to publish that data,” he explained, “but some joker published a report showing that the United States actually made money off the countries we were aiding. It caused such a stir that we changed the accounting format so that nobody can embarrass us like that again.” I realized that I was the joker who had been responsible for the present-day statistical concealment, and that it would take a Congressional request to get the Commerce and State Departments to replicate the analysis that still was being made public in the years in which I wrote Super Imperialism.

The book sold especially well in Washington. I was told that U.S. agencies were the main customers, using it in effect as a training manual on how to turn the payments deficit into an economically aggressive lever to exploit other countries via their central banks. It was translated into Spanish, Russian and Japanese almost immediately, but I was informed that U.S. diplomatic pressure on Japan led the publisher to withdraw the book (after having already paid for the translation rights) so as not to offend American sensibilities.

The book received a wider review in the business press than in academic journals. A few weeks after the U.S. publication I was invited to address the annual meeting of Drexel-Burnham to outline how the new Treasury bill standard of world finance had replaced the gold exchange standard. Herman Kahn was the meeting’s other invited speaker. When I had finished, he got up and said, “You’ve shown how the United States has run rings around Britain and every other empire-building nation in history. We’ve pulled off the greatest rip-off ever achieved.” He hired me on the spot to join him as the Hudson Institute’s economist.

I was happy enough to leave my professorship in international economics at the New School for Social Research. My professional background had been on Wall Street as balance-of-payments economist for the Chase Manhattan Bank and Arthur Andersen. My research along these lines was too political to fit comfortably into the academic economics curriculum, but at the Hudson Institute I set to work tracing how America was turning its payments deficit into an unprecedented element of strength rather than weakness.

At the American Political Science Association’s annual meeting in New Orleans in September 1972, the month the book was published, I gave a speech on “Intergovernmental Imperialism vs. Private-Sector Imperialism” outlining how the Treasury bill standard had turned the traditional rules of international finance on their head. This paper forms the new introduction to this book.

I also have expanded the first chapter into what now are three chapters in order put today’s economic behavior in perspective to see the degree to which World War I was the watershed signaling the ascendancy of inter-governmental capital, that is, foreign official debt. This debt has a dynamic that overrides the usual political ideologies. Intergovernmental debts first were catalyzed in the 1920s by the breakdown of world payments and trade in the wake of Inter-Ally war debts and German reparations, a breakdown that resulted mainly from the absence of a responsible government policy on the part of the United States.

Had the U.S. Government been interested in dominating the world economy and its diplomacy at that time, as it sought to do after World War II, it could have done so while maintaining the semblance of business as usual. Instead, it pursued an essentially isolationist policy, looking within rather than involving itself directly in foreign affairs. America’s major foreign policy was crudely to demand payment of its World War I arms loans to its allies, while erecting tariff barriers that prevented these debts from being paid in the form of higher exports to the United States. The parallel with today’s Third World debts in the face of rising non-tariff barriers against Third World exports is clear enough.

U.S. private investment seemed prepared to pick up the slack, but could not bridge the payments gap imposed by the enormous weight of official debt service demanded by American nationalists. The U.S. Government refused to take the mantel of world financial leadership from Britain, and the result was a world economic breakdown whose fate was sealed in 1933 at the London Economic Conference. Modest attempts at internationalism gave way to renewed nationalist pressures which culminated in World War II.

In the years following the war the U.S. Government took a much more active role in directing the world economy. Espousing laissez-faire rhetoric, it moved deftly to shape the environment in which world market forces operated so as to promote international dependency on the United States.

I looked forward to adding these additional chapters to the paperback edition, but Holt Rinehart was not doing well enough to reprint much of anything as its owner, CBS, drastically cut its staff in an attempt to sell the company along with other CBS holdings. So I was given a reversion of the book’s rights. In mid-1973 the Beacon Press in Boston offered to bring out a paperback version, but told me that their publication of The Pentagon Papers had brought down the wrathful power of government harassment, consuming their resources in heavy legal costs. They had no money to add any material to the book, as the additions that I had made to nearly every chapter would have entailed resetting the type. I chose to hold out until another offer was made that would include the expansions I had written.

In the meantime Harper & Row proposed that I write a sequel, Global Fracture: The Economic Strategy of American Empire (1977). That book’s second chapter summarized the characteristics of the Treasury bill standard as an exploitative financial device enabling the United States to run cost-free payments deficits ad infinitum.

The rewritten manuscript of Super Imperialism’s second edition lay on my shelf for nearly thirty years. Periodically I discussed reprinting it, but the issue did not become pressing until 1999. Protest finally was arising against the failure of the World Bank and IMF, or more accurately – and what amounted to the same thing – their success at promoting an exploitative U.S.-centered diplomacy. It had begun to be acknowledged that the international financial system had been shunted onto a destructive path causing chronic balance-of-payments crises throughout the world. I found it appropriate to publish this revised edition of my book so as to relate present-day critiques to the fatal errors that were built into the World Bank and IMF at their inception. The new edition therefore is an augmented study of U.S. financial diplomacy, originally published when the character of America’s response to its changing place in the world was just becoming apparent.

A number of trends that were merely implicit in 1972 have since become explicit. First has been the U.S. Treasury’s ability to run up an international debt of over $600 billion, using the balance-of-payments deficit to finance not only its widening trade deficit but its federal budget deficit as well. To the extent that these Treasury IOUs are being built into the world’s monetary base they will not have to be repaid, but are to be rolled over indefinitely. This feature is the essence of America’s free financial ride, a tax imposed at the entire globe’s expense.

U.S. economic interest lies supporting a world monetary order that permits it to run even more deeply into debt without foreign constraint. European and Asian attempts to create alternative regional currency clearing blocs accordingly are opposed. Foreign countries are to dollarize their economies, Argentina-style.

A second flowering of seeds planted in the early 1970s has been the use of the International Monetary Fund and World Bank to use Third World, Russian and East Asian debt as a lever to force debtor economies to pursue lines promoted by the Washington Consensus. To promote this objective U.S. diplomats oppose reform of these institutions and their replacement by new global institutions with an economic philosophy that would promote domestic or regional self-sufficiency rather than continued agricultural, financial and technological as well as political and military dependence on the United States.

A third dynamic has been an increasing domination of economic life by government, despite the recent wave of privatizations throughout the world. In fact, these privatizations reflect foreign government obedience to the Washington Consensus. The rhetoric is free enterprise, but the market is to be shaped and defined by bilateral diplomacy with U.S. planners. America would like to mobilize multilateral foreign aid through the IMF and World Bank to continue subsidizing client oligarchies and political parties whose policies serve U.S. interests rather than those of their own nationals. Landmarks in U.S. influence obliging foreign governments to warp their economies to serve U.S. designs include the Plaza Accord with Japan and Europe in 1985 and the ensuing Louvre Accord. These agreements triggered Japan’s Bubble Economy and broke the “Japanese challenge.” The most recent disaster has been the Russian reforms imposed by the U.S. client Yeltsin–Chubais families. They are the antithesis of weak government, acting as they do on behalf of the Washington Consensus. The government in question is simply that of the United States.

A fourth characteristic of U.S. diplomatic strong-arming has been the shift of world trade toward bilateral “orderly market-sharing agreements” in which foreign economies guarantee a fixed or rising market share to U.S. suppliers, regardless of growth in their own domestic production capacity. Dependency policies are to be pursued, not self-sufficiency in food, technology or other vital sectors.

Other tendencies that seemed likely to gain momentum in 1972 have passed their crest and are now being superseded. The New International Economic Order aimed at resisting U.S. initiatives in the 1970s, but was successfully countered by American diplomats in the 1980s. Declining terms of trade for raw materials exporters were reversed temporarily following the 1973 Oil War, and negotiations to stabilize commodity prices favorable to Third World exporters began, but quickly collapsed. The fact that most commodities are now priced in dollars that are depreciating in value aggravates the terms of trade for Third World countries.

No serious alternative is now being proposed to the American-centered financial system and the debt deflation its monetarist policies are imposing on debtor economies outside of the United States. The euro has not been put forth as a political alternative to the dollar, nor has a Yen Area materialized in Asia.

Europe’s tendency to buckle at each new U.S. diplomatic initiative was potentially stemmed by formation of the European Council and coordinated European Community foreign policy preparing for unification in the 1990s. But despite the euro’s introduction there still is much opposition to a full-fledged United States of Europe. Britain is leading the opposition as usual, acting as America’s Trojan horse as it did during and after World War II in reaching agreements with the U.S. Treasury that were adverse to its own interests. Lacking a common power to tax and create credit, the euro is no more on a par with the dollar than is the yen. The European Commission seems to be functioning virtually as an arm of U.S. diplomacy in curtailing the power of governments to take an independent monetary stance from the United States.

The upshot is that although the world seems to be consolidating into five major regions, each with its own north–south tensions, each region is heavily U.S.-centered: 1) a Western Hemisphere Dollar Bloc dominated by the United States, including Canada via NAFTA and Latin America; 2) a Japanese-dominated Yen Area, whose surplus are turned over to the U.S. as reserves kept in Treasury bills, while savings have been turned over to U.S. brokerage firms and money managers following Japan’s Big Bang of 1998; 3) an emerging Mediterranean triangle including the European Community, the Near East and North Africa; 4) the former Soviet Union and associated COMECON economies, which have all but adopted the U.S. dollar as their currency as a result of adopting crippling U.S. economic recommendations; and 5) China, whose application to join the World Trade Organization does not yet indicate just what position it may end up taking.

I have analyzed the system that might have emerged out of these tendencies in Global Fracture (1977). The present book describes how the proposed New International Economic Order originated as a response to America’s aggressive world economic diplomacy, and how U.S. strategy has provided other nations with a learning curve that they may follow in pressing their own national and regional interests.

Michael Hudson

2002