Chalmers Johnson - Blowback, Second Edition - The Costs and Consequences of American Empire

This was actually a brilliant system. Oxfam, the British development and relief agency, maintains that the Cold War East Asian economies achieved “the fastest reduction in poverty for the greatest number of people in history.” 4But the stability of any East Asian economy depended on its keeping its financial system closed—that is, under national control and supervision. Once opened up to the rest of the world, the financial structures of the East Asian developmental states were extremely vulnerable to attack by foreign capital and international financial speculators. The industrial policy system produced corporations in which the burden of debt was five times greater than the value of the shareholders’ investments, whereas these so-called debt-to-equity ratios for U.S. firms are less than one to one. East Asian corporations operating with such large burdens of debt were normally indifferent to the price of their equity shares. Instead, they serviced these debts at their banks with income from foreign sales. When they were unable to repay their loans, the banks themselves very quickly veered toward bankruptcy. The whole system depended on continuous growth of revenue from export sales.

East Asian bankers are no stupider or more corrupt than those elsewhere. It is just that the industrial policies of the systems within which they operate put the profitability of a loan very near the bottom of the criteria they use for making an investment decision. Instead, these bankers focus on enlarging productive capacity, achieving larger market shares, accumulating assets, and having large balance sheets. It is true that from a purely Western perspective, they should not have offered many of the loans they made. To us it seems insane to ignore commercial criteria such as profitability. But for a Korean banker, it was more important to support an affiliated company that was building cars for the U.S. market than to question whether the company was making prudent investment decisions. That was part of the logic of being a banker in a satellite country within America’s hegemonic order in East Asia.

Then, without warning, that order changed. Perhaps the first important blow to the East Asian model of capitalism came in 1971, when President Nixon abolished the Bretton Woods system of fixed exchange rates, created by the United Nations Monetary and Financial Conference in the summer of 1944 at Bretton Woods, New Hampshire. The treaties that resulted from Bretton Woods were the most important efforts of the victorious Allies of World War II to create a better global financial system than the one that existed in the 1930s. The Allies intended to prevent a recurrence of the protectionism and competitive devaluations of national currencies that had deepened the Great Depression and fueled the rise of Nazism. To do these things, the Bretton Woods conference established a system of fixed exchange rates among the world’s currencies. It also created the International Monetary Fund, to help countries whose economic conditions forced them to alter the value of their currencies, and the World Bank, to help finance postwar rebuilding. The value of every currency was tied to the value of the U.S. dollar, which was in turn backed by the U.S. government’s guarantee that it would convert dollars into gold on demand.

Nixon decided to end the Bretton Woods system because the Vietnam War had imposed such excessive expenditures on the United States that it was hemorrhaging money. He concluded that the government could no longer afford to exchange its currency for a fixed value of gold. A more effective answer would have been to end the Vietnam War and balance the federal budget. Instead, what actually occurred was that the dollar and other currencies were allowed to “float”—that is, to be converted into other currencies at whatever rate the market determined.

The historian, business executive, and novelist John Ralston Saul described Nixon’s action as “perhaps the single most destructive act of the postwar world. The West was returned to the monetary barbarism and instability of the 19th century.” 5Floating exchange rates introduced a major element of instability into the international trading system. They stimulated the growth of so-called finance capitalism—which refers to making money from trading stocks, bonds, currencies, and other forms of securities as well as lending money to companies, governments, and consumers rather than manufacturing products and selling them at prices determined by unfettered markets. Finance capitalism, as its name implies, means making money by manipulating money, not trying to achieve a balance between the producers and consumers of goods. On the contrary, finance capitalism aggravates the problems of equilibrium within and among capitalist economies in order to profit from the discrepancies. During the nineteenth century the appearance, and then dominance, of finance capitalism was widely recognized as a defect of improperly regulated capitalist systems. Theorists from Adam Smith to John Hobson observed that capitalists do not really like being capitalists. They would much rather be monopolists, rentiers, inside traders, or usurers or in some other way achieve an unfair advantage that might allow them to profit more easily from the mental and physical work of others. Smith and Hobson both believed that finance capitalism produced the pathologies of the global economy they called mercantilism and imperialism: that is, true economic exploitation of others rather than mutually beneficial exchanges among economic actors.

Opponents of capitalism, such as Marxists, viewed such problems as inescapable and the ultimate reason capitalist systems must sooner or later implode. Supporters of capitalism, such as Smith and Hobson, thought that its problems could be solved by imposing social controls on the monetary system, as did the Bretton Woods agreement. As they saw it, lack of such controls led to the maldistribution of purchasing power. Too few rich people and too many poor people resulted in an insufficient demand for goods and services. The “excess capital” thus generated had to find some place to go. In the maturing capitalist countries of the nineteenth century, financiers pressured their governments to create colonies in which they could invest and obtain profits of a sort no longer available to them at home. The nineteenth-century theorists believed this was the root cause of imperialism and that its specific antidote was the use of state power to raise the ability of the domestic public to consume. After the United States ended the Bretton Woods system, these kinds of problems once again returned to haunt the world.

In the 1980s, when Japanese trade with the United States began seriously to damage the American economy, the leaders of both countries chose to deal with the problem by manipulating exchange rates. This could be done by having the central banks of each country work in concert buying and selling dollars and yen. In a meeting of finance ministers at the Plaza Hotel in New York City in 1985, the United States and Japan agreed in the Plaza Accord to force down the value of the dollar and force up the value of the yen, thereby making American products cheaper on international markets and Japanese goods more expensive. The low (that is, inexpensive) dollar lasted for a decade.

The Plaza Accord was intended to ameliorate the United States’ huge trade deficits with Japan, but altering exchange rates affects only prices, and price competitiveness and price advantages were not the cause of the deficits. The accord was based on good classroom economic theory, but it ignored the realities of how the Japanese economy was actually organized and its dependence on sales to the American market. The accord was, as a result, the root cause of the major catastrophes that befell East Asia’s economies over the succeeding fifteen years.