Welcome to the first event of the Oxford Economics Society for this academic year. I’m Oscar, the Co-President of our society, and I’m glad to welcome you back for another term of exciting discussions. Although we were hoping last term to be back in-person by January, due to the worsening Covid-19 situation in the UK our events this term are going to remain online, so that everyone at home can still participate.
A new year calls for new resolutions, and our society’s resolution for 2021 is to increase the diversity of economic topics discussed. To give you an idea, we’ll be hosting a presentation on Decolonising Economics and its role in Emerging Markets by Dr. Ingrid Kvangraven, the executive board member of Diversifying and Decolonising Economics. We’ll be hosting Prof. Randall Wray, a strong proponent of the much-discussed modern monetary theory, who was also as I just discovered, professor at the University of Missouri-Kansas City, like our guest today. We’ll also be hosting a presentation on the Young Scholars Initiative run by the Institute of New Economic Thinking at Oxford, a community some of you will definitely be interested in joining that brings together more than 15,000 young economists from around the world. Finally, we’ll be organizing a moderated discussion with the FT’s Chief Economics commentator Martin Wolf, and many other events of course.
To start us off, we are proud to host Michael Hudson, Distinguished Research Professor of Economics at the University of Missouri, Kansas City, former balance-of-payments economist at Chase Manhattan, and an economic advisor to governments worldwide, including Iceland, Latvia and China, on finance and tax law. Now, nearly 50 years after the original publication of “Super Imperialism”, Professor Hudson will be discussing “Changes in Super Imperialism: The position of the USA & China in our Global Economic System”. How has the rise of China and the Covid-19 pandemic affected the USA’s capacity to control financial flows? How will the USA modify its behaviour as a result?
The talk will last 45 minutes, with 15 minutes of questions at the end. Make sure to send in your questions throughout the talk through our Pigeonhole page. The link should be in the description of this event. If you would like to re-watch our events, they’ll be posted to our YouTube channel afterwards.
Thank you for joining us, Professor Hudson…
It’s good to be here. Thank you for inviting me, especially since you mentioned people that I’ve known for a long time. Randall Wray, both of us are now at the Levy Institute and working in other places, and Martin Wolf I’ve been friends with.
The reason that I’m writing a new version of Super Imperialism is that I was asked to by China, and I thought, “As long as they want to bring out a new translation and basically an update of the book, I might as well do it in English too.” I bought the rights back from Pluto and in about two or three months I will be reissuing the English language edition. The context for de-dollarization today by China, Russia and other countries is basically “How do you make an alternative to an international financial order that really was designed from the beginning to benefit the United States in its own self-interest?”
This issue was discussed after WWI when the intergovernmental debt system broke down into Allied debts and German reparations. It was discussed again at the 1930s when the United States sort of scuttled the London Economic Conference of 1933, and it was especially discussed in 1945 in December, in parliament. In the House of Commons, the British parliamentarians were discussing, “Do we want to accept the terms of the British loan?” which ended up being 3.75 billion USD, written down from what Keynes had wanted, or “Do we want to go it alone?”
It was the Conservative pro-empire Members of Parliament that wanted to reject the loan. Churchill wanted at least to abstain, but there was no alternative. In 1945 and again in 1971 when America moved off gold, in every case the alternative seemed to be anarchy. The U.S. strategy was to say, either you accept U.S. rules that favored the United States – in the beginning creditor rules, but debtor rules after 1971, and essentially gave it control of the world economy – or you go it alone and risk anarchy.
Britain was not able to go it alone in 1945. I did not include the parliamentary discussion in the first version of Super Imperialism, but I’ve included that discussion in the new version, because Britain said very clearly: “The United States basically wants to absorb the British Empire and the Sterling area into the Dollar area on its own terms and leave us almost broke. What can we do about it?” Both parties said: “We see that the United States is treating us, its ally in WWII, as a defeated party.” They came right out and said that. “But we don’t have an alternative because we can’t go alone. We have to rely on the United States.”
Let me review what the U.S. strategy is, and what’s led to major changes over time. Dollar supremacy was established after World War I by America’s creditor position. Something very novel happened after. In every previous war, for instance the Napoleonic wars and the earlier wars England had been involved with, the allies had forgiven all of their mutual debts at the end of the war. There was something that the British called “shared sacrifice”, and the idea was “We’re going to have a clean slate after the war.”
This idea goes all the way back to Babylonia in the second millennium BC. Throughout history there was a debt cancellation. There was no carryover of war debts after victory was achieved, because the idea was that if you leave war debts in place, that’s going to bankrupt the allies that you had during the war. It’s also going to bankrupt the defeated countries, and leave them no choice except to fight back.
The laws of Hammurabi showed this. His whole dynasty showed this. My book on Forgive Them Their Debts is a whole history of debt cancellations. But the United States broke this practice after WWI and said: “The debts have to be paid.” The amazing thing is that Europe went along with it. It had a pro-creditor ideology. It believed in the sanctity of debt, and was not going to question that because there was a guiding assumption – which is erroneous – that all debts somehow can be paid if only countries will either devalue or transform their economy, or impose austerity.
Keynes had a long debate with the anti-German Jacques Rueff of France and the American-Swede Bertil Ohlin. Keynes explained that there was no way that debtor countries like the allies or Germany could pay their debts to the creditor unless the creditor is willing to buy their exports, to provide them with the foreign exchange to pay. That debate obviously he won in reality, but that assumption was rejected by the United States, and continues to be rejected by the International Monetary Fund today. The junk economics that was brought in after World War One to consolidate the American position was: “Of course you can pay: simply destroy your economy and let us take you over, and sell out all of your industry and raw materials out to us, and that will enable you to pay.” That’s what the Americans demanded. It’s what the creditor demand has always been. Essentially you have to be willing to destroy your economy in order to pay your debts.
Keynes said this was crazy and he was right, but Europe went along with it and said, “Yes, we are willing to destroy our economies; we are willing to create the resentment for World War II rather than question the assumption that all the debts have to be paid.”
What Keynes pointed out was that there was a distinction between the budget problem – in other words, taxing the economy to raise a domestic fiscal surplus in German Marks or British Sterling – and the transfer problem of paying foreign currency. What happened was that the Allies said, “If America is going to insist that we pay, we’re not going to wreck our economies. We’re going to make Germany pay reparations.”
As you all know, the result was to bankrupt Germany, causing a hyperinflation there that was only solved by Germany essentially borrowing the money from the United States. German municipalities would borrow the money in dollars for local spending, use the dollars to turn over to the Reichsbank to pay the Bank of England and the Bank of France, in turn to pay their dollar debts to the United States. That was a circular flow.
It could only be kept going by the Federal Reserve making interest rates very low here in the United States to promote an outflow of foreign investment to Germany. But those low interest rates also created a stock market boom that crashed in 1939. In the end, the Inter-Ally debts had to be canceled. There had to be a moratorium [on those debts], along with German reparations, as the system broke down in 1931. There was an attempt to reconstruct the economy at the London Economic Conference of 1933 but Roosevelt scuttled that and said, “We’re going to go it alone.”
The basic principle of American foreign policy is that no other country can tell us what to do. We can tell other countries what to do, but they cannot tell us what to do. So we will not join any agreement in which we don’t have a veto power that gives us control of the World Bank and the International Monetary Fund, or the veto power in the United Nations and any international organization that the United States will join. So the question is: how could this supremacy be established all over again as World War II came to a close?
In 1944 and 1945, America made plans for the postwar economy. Its guiding logic was that: “In order to have full employment in the United States we have to have an export-based industry. Now that we’ve destroyed Germany and Japan our major enemy is the United Kingdom.” It became very clear that America’s enemy immediately on the ending of World War II was not Russia or the Soviet Union, but England. It developed a strategy that was designed to essentially bankrupt England with the 1946 British Loan, to force England to accept to end Imperial Preference, to break up its empire, to make it free the about 10 billion pounds Sterling, to be used for spending not in England as blocked currency as the British Board of Trade expected, but in the United States. So England was stripped of all of the blocked currency, stripped of the currency area, stripped of its exclusive Sterling Area, and thereby the empire that became absorbed into the Dollar Area.
The parliamentarians and members of the House of Lords said, “We know that we’re bankrupting Britain, but the alternative is to go it alone, and we can’t really make an alternative.” Keynes said, “Of course you could create your own currency and trading area with India, Canada and other countries, but that would involve a great shrinking.”
At the time they believed still that there had to be some means of settling international payments on creditor terms with gold. The United States had most of the gold in 1945. The British understood very clearly that what seemed to be the gold exchange standard – for countries that settled their balance of payments deficits in gold – was really the Dollar standard, because the dollar was defined in terms of gold. What seemed to be a gold standard was actually the Dollar standard, and in fact the arrangements that America created in 1945 were so one-sided that by 1950 it had drawn another five billion dollars’ worth of monetary gold into the United States out of Europe. There was a refugee flight of gold in the 1930s that was followed by a post-war flight out of Europe. British banks and the wealthiest classes began to move their money to the United States.
By the time of the Korean War in 1950 and 1951, America’s balance-of-payments deficit changed abruptly. From 1951 through the 1960s and 1970s, the entire U.S. balance of payments deficit was military. At first this deficit was welcomed by Europe and by other countries because finally the United States was providing the rest of the world with dollars that it needed to grow. The dollar outflows became the basis of Europe’s central bank reserves along with gold. Some of the dollars were cashed into gold especially by France, and by Germany even more.
The U.S. balance-of-payments deficit was entirely due to America’s military spending. The U.S. private sector was exactly in balance. All of the deficits were on government account, and were entirely military. American foreign aid actually made money in balance-of-payments terms. In the 1960s when I was working at the Chase Manhattan Bank, every Friday the Federal Reserve would publish statistics on the gold cover. All of the paper currency in the United States had to be backed 25 percent by gold. Every Friday we would look at what is the gold cover – how much over the 25 percent does America have in free gold to sell, to settle the military deficit from spending in Southeast Asia, in the Vietnam War and other military operations throughout the world.
It was obvious already in the mid-60s that the United States at some point would run out of gold if it continued its military spending. That led Chase Manhattan’s Chairman of the Board George Champion to oppose the Vietnam War, saying it was fiscally irresponsible. It was the business community and the right-wing in the United States that opposed America’s foreign war, not the labor movement. The labor movement was for the war because it was causing an inflation and helping wages rise. The golden age of American labor was the 1960s and 1970s, resulting from the balance of payments deficit. It was the business community that opposed the war – but not David Rockefeller when he took over from George Champion. Rockefeller wanted to “do the right thing.” He sort of followed what the Treasury asked Chase to do and the other Wall Street leaders followed suit.
Already in the mid-60s the United States faced the problem of how to avoid its balance-of-payments deficit. The solution was to make America the haven for criminal capital in the world. Somebody from the State Department joined Chase Manhattan, and asked Chase to set up enclave affiliates in the Caribbean to essentially attract the criminal capital of the world. As they explained it to me: “We want to be the new Switzerland.” They said the most liquid people in the world are the criminal class, the drug dealers. “We want the drug dealer money; we want the criminal money because it’s liquid. They have nowhere to go. Let’s make America safe for the flight capitalists, for the kleptocrats, for the crooked heads of states of the world for putting their money. Don’t have them put them in Switzerland to push up the Swiss currency. Have them put it in the branches of Wall Street banks that then would take this money in the Caribbean tax evasion and offshore banking center enclaves and then send the money to the head offices.”
The Federal Reserve every three months would publish statistics on head office bank liabilities to their branches in the Caribbean and Panama and Liberia and other countries that were used as tax avoidance centers. We were following that quite closely. Despite trying such stratagems, the United States went off gold in August 1971. At the time it worried about what on earth was going to happen. “Are we going to lose the creditor position that has enabled us to dictate the trade rules and the financial rules and political diplomacy of the world when they went off gold?”
In 1972, a year after the United States went off gold, my Super Imperialism was published. Its theme was that American diplomacy was in an even stronger position now that its deficit was not having to be paid with gold. What were other countries to do? How were foreign central banks going to hold their international reserves? There was only one currency that they could hold, and that was the U.S. dollar. So the fear by Wall Street and the U.S. Government that the dollar would be devalued as a result of its military spending didn’t materialize, because foreign central banks were in a quandary: If they did not recycle the dollars that they received from the America’s balance of payments deficit, their currencies would rise and that would hurt their export interests.
From the American point of view, central banks recycled dollars into Treasury bond holdings, because foreign central banks at that time could only invest in official government securities; they were not creating sovereign wealth funds. America’s balance-of-payments deficits thus financed its domestic budget deficits.
The response to my book on Super Imperialism was not primarily from the Left but from the U.S. Government, especially the Defense Department. I went to work for the Hudson Institute with Herman Kahn, and immediately we got a contract from the Defense Department to explain to them how Super Imperialism was working. I didn’t want to call the book Super Imperialism. I wanted to call it Monetary Imperialism, but the publisher thought differently. Most of the copies were sold in Washington to the Defense Department, the State Department and the CIA, and Herman Khan brought me numerous times down to the White House to discuss this. The Americans made it very clear that – for instance when OPEC quadrupled its oil prices in 1973 and 1974, after America quadrupled its grain prices – Kissinger and the State Department and Treasury told them that they could charge whatever they wanted for the oil, but whatever they charged they had to recycle into U.S. financial markets, mainly into government bonds. They also could buy U.S. stocks and U.S. corporate bonds, but couldn’t buy majority ownership of any big American industry. American had to be in control of its industry. The Arab countries were told “you can buy all the stocks you want through the stock market”. I think one of the Saudi Arabian kings bought a million shares of every company on the Dow Jones Industrial Average.
So you had a recycling. The more dollars Americans spent abroad on its military deficit, the more money flowed into the bond market to finance America’s budget deficit. What the American government had achieved by its creditor status before 1971, it achieved by its debtor status after 1971. Once again, it told the rest of the world: “What’s the alternative? The alternative is anarchy.” Essentially it used that threat. President Johnson insisted that Europe give America special trade favoritism, special advantages, and the rest of the world felt that it had to go along to survive.
At the time there was a discussion concerning the advantages of gold. Herman Khan was a monetary right-winger, and believed that gold should be reintroduced into the international monetary system. He and I went down and gave a presentation to the U.S. Treasury, saying, “Gold is a peaceful metal because it’s a constraint on the balance of payments. If countries had to pay their balance-of-payments deficit in gold, they would not be able to afford the balance-of-payments costs of going to war.” That was pretty much accepted and that was why the United States basically responded, “That’s why we’re not going back to gold. We want to be able to go to war and we want the only alternative to hold central bank reserve to be the United States Dollar.”
The United States also arranged the World Bank and the International Monetary Fund to favor the U.S. economy. In the World Bank it would only make foreign currency loans to other countries. It sent out missions to foreign countries to say “What does the country need?” and almost every mission said “What Latin America, Africa and the Near East need is not foreign currency. They need domestic currency for agricultural development.” You had a latifundia problem in Latin America. The United Nations came out with two wonderful reports on the need for land reform throughout the Third World in order to grow domestic food. But the World Bank was set against other countries becoming food independent. The most important heads of the World Bank were former Secretaries of Defense like McNamara and John McCloy. You can look through who the heads were. The Americans said that any foreign country wanting to grow its own food instead of depending on U.S. grain exports was counted as an Act of War and would be overthrown. That was the explicit reason why the United States established military dictatorships and client oligarchies in Latin America.
The World Bank did promote plantation agriculture but the plantation agriculture was for tropical export crops to compete with other exporting countries, to lower the price of export crops, of tropical crops that could not be grown in the United States. These countries were not supposed to grow their own food supply.
The World Bank became a huge market for American firms to build dams etc. I was told that the World Bank person in charge of designing dams had been a chronic bed-wetter as a child, sort of acting it all out. It also got countries into debt, and once countries were in debt they were forced into the International Monetary Fund, which said basically” “In order to pay your debts, you have to engage in a vicious class war against labor”. You have to lower wages because it’s the only variable in world trade. There’s a common world trade [price] in raw materials: All countries pay the same price for copper, machinery, and other materials. There’s a common world price for oil; there’s a common world price for capital goods. The one variable in foreign trade is the price of labor. So the IMF said, “You’ve got to prevent unionization, you’ve got to prevent any kind of pro-labor reform. Your only way of paying debts is to polarize your economy and impoverish your labor force.”
That is exactly what the opponents of Keynes had urged in the 1920s, and you saw the result in Germany. The same thing was imposed on the Third World countries. That is why, until a few years ago, all the countries of the world tried to get free of the IMF’s “conditionalities,” the terms on which the IMF would lend money. You should essentially think of the IMF as a small office in the basement of the Pentagon, deciding what countries to support, and what countries are following policies that the United States does not want and therefore wants to wreck. That explains why the IMF will give loans to completely non-creditworthy countries such as Argentina under the dictators, or the Ukraine with no visible means of paying off the debt.
The loans to Ukraine, the loans to Greece recently that ended up bankrupting it, the loans yet again to Argentina have demoralized the IMF staff. They complained that every forecast they make shows that the debts can’t be paid, but the IMF continues to make them anyway. The IMF has become a pariah among competent financial analysts throughout the world. The United States is still trying to force countries into the IMF as a means of controlling them, saying “Either you engage in a pro-American war against labor and [engage in] neoliberalism, or the alternative is wreckage.”
Ironically what’s changing all this is the United States’ cold war against Russia and China. The United States has begun to impose sanctions on the Russian and other post-Soviet economies, and on China. This is driving them into a position where their only defense is to do what Britain could not do in 1945: to create an alternative economic order with its own rules. So for the last five years or so China, Russia and other countries are discussing how to de-dollarize their economy.
What do they want to do? They say: “The first thing we have to do is we don’t want to hold our international reserves in loans to the U.S. Government, because that finances the United States military deficit, building its 800 military bases all around us, to try to threaten us militarily. If we withdraw from this international financial system based on the U.S. dollar free-lunch, then dollars can’t be spent ad infinitum without any constraint on military policies that we don’t agree with – right-wing and anti-labor policies that we don’t agree with. So we’re going to take the lead in creating a new grouping – China, Russia, Iran, the Shanghai Cooperation Organization members basically – to do this.”
They’re trying to do what the world began to talk about doing in 1933 at the London Economic Conference: “How do we make a fair system?” When Keynes outlined his plans for Bretton Woods in 1944, his alternative was the Bancor. He said there should be a central bank that can make loans, creating fiat money to enable deficit countries to pay. So that if they ran a balance-of-payments deficit, they wouldn’t have to impose austerity. Austerity and anti-labor policies never enable a country to pay debts. It makes them less able to pay, and even more dependent on creditor countries. So the Chinese and Russians are discussing today “How do we create a currency, a central bank that will help us actually develop? We’ll use international reserves to promote the industrialization and the upgrading of labor and public infrastructure investment, instead of the U.S. demand to privatize infrastructure development and sell it off to foreign rent-seekers.”
What China and Russia found out very quickly is what initially seemed to be an economic rivalry between America and China and other countries was not really an anti-China rivalry as such. It’s a conflict of economic systems. The conflict is between neoliberalism – a financialized world order that wants to privatize all infrastructure and create monopoly rents for transportation, education, healthcare, like what occurs in the United States – and having these basic investments in the public domain, to be subsidized and their services provided at minimum cost. The question at issue is what kind of economy the world is going to have. Will it be a neoliberal economy, a privatized economy – Reaganized, Thatcherized and financialized, organized by central planning in Wall Street – or is the government going to plan?
China and Russia do not want a centrally planned economy anywhere near as centralized as the United States is promoting with Wall Street. In the United States the center of economic planning has been shifted from Washington to Wall Street financial institutions. Banks create credit not to create new means of production, not to build new factories and plant and equipment, but essentially to extend credit against assets already in place. Eighty percent of bank loans in the United States and in England are mortgage loans for real estate, against real estate that’s already in place. I think three percent of mortgage loans are for new construction as long as these loans are already collateralized with promises to buy apartments etc.
So the question is what kind of financial system are you going to have to back up a central banking system and credit creation? Is credit going to be a public infrastructure enterprise as it is in China, where the banks of China are able to decide who is going to get the loans. A public bank is not going to make corporate takeover loans or loans to corporate raiders. It’s going to make loans to actually increase the tangible economy, not to take it over and turn public infrastructure – the education system, healthcare, transportation and communications – into rent extraction.
We’re having today finally a revival of the kind of debate that classical economics was all about in the 19th century – Adam Smith, John Stuart Mill, down through Marx and Alfred Marshall. At issue was how to minimize unearned income as economic rent. At that time, the main form of economic rent they were trying to minimize was land rent. The idea was to get rid of the hereditary landlord class, which was treated as a form of overhead. In today’s economy the main rentiers are financial. There’s not a landlord class anymore, because two-thirds of Americans own their own home (on credit, to be sure). Home ownership rates are higher in continental Europe and England. You don’t have a hereditary landlord class living off land rent. What you do have is a financial class that’s emerged after World War I in a way that they have become the new central planners. It’s a new concentration of wealth, engaging in a new kind of economic war, not only against labor but against government as well, to appropriate the public domain by financializing it. This is done by getting governments into debt and having them sell off the public infrastructure. That’s happening in America at the state and local level, for indebted cities and states like New York.
How do China and Russia avoid their economies becoming financialized? How do they avoid a financialized economy from becoming a high-cost economy and losing their international trade advantage? What’s at stake in de-dollarization is how to create an alternative to a financialized, dollarized economy, one that is going to try to minimize the cost of living and minimize the cost of doing business, instead of a high-cost economy as is occurring in the United States.
The answer they have is that to some extent there’s going to be gold as a means of settlement. But most of all China, Russia, Iran, and other countries are going to mutually hold each other’s trading currencies. They’re replacing dollars with gold and with each other’s currencies. That essentially is the response that the world could have taken after World War One and didn’t, and could have taken after World War II if it had followed Keynes’s policies. Finally, with the help of Donald Trump isolating China and Russia, U.S. diplomacy is creating an independent bloc and helping them do what was unthinkable in the past.
Great, thank you very much. We’ve got some questions coming in.
To start off, yesterday Joe Biden was inaugurated, making him the 46th President of the United States. What are your expectations regarding his stance on China? We’ve heard him talk a lot about democracy as a guiding foreign-policy principle to distinguish between what is good and what is bad for the U.S. Which measures are likely to be used to advance the USA’s interests: will it be tariffs, sanctions or could we even see a military buildup and embargoes?
The question is, what are the U.S. interests? Again and again in the 1920s, the 1930s and today, the U.S. Government interests were the opposite of U.S. industrial interests, opposite of U.S. economic interests. Just because the Biden administration has an emotional hatred of Russia does not mean that it’s in the U.S. interest. The Biden administration said, “On second thought we’re not going to join the Iran agreements because we’re going to talk to Israel first,” and Blinken, his neocon Secretary of State, said that we won’t do anything without Israel’s approval regarding Iran. Biden also said that the United States will not do anything about solving the world problem of global warming that the oil industry doesn’t like, because basically what’s called the “interest of the United States” is that of his political campaign contributors. So almost his first act was to approve more oil drilling. Here we have the Supreme Court’s Citizens United ruling that lets campaign contributors dominate U.S. policy, not the voters. The American voters were not given a choice in this election. Biden did not do well in the early primaries and Kamala Harris got only one percent of the primary vote.
Polls show that what American voters want is basically a Bernie Sanders type policy. They want what you have in Europe. They want public healthcare, universal healthcare. They don’t want to have to pay 18 percent of America’s GDP for medical insurance and medical expenses, because there’s no way that American industry can compete in markets and American labor be employed in export industries, having health care monopolies protected by successive administrations.
The American public didn’t want the Obama administration to evict 10 million American families, and it looks like the Biden administration is going to outdo Obama. Biden basically says, “We’re going to evict another 10 million American families. What Obama did I can do more.” Many families have not been able to pay the rent or even pay the mortgage if they’ve been unemployed or if their income is reduced because of the Coronavirus. There’s going to be a huge wave of evictions in the United States that will be even larger than the Obama evictions.
The Obama evictions were targeted mainly against Black and Hispanics, who were the victims of the junk mortgage loans. Biden has made a point of appointing many Black women and men to administer positions as a cover story for the fact that his policies are going to be just as viciously anti-Black and anti-minority and anti-Hispanic as the Obama administration’s were. They found that as long as you can have identity politics front and center you can do whatever you want economically to crush the people that you pretend to be representing in identity politics.
Nobody can see really any way in which the American economy can recover. The stock market can recover because the Federal Reserve credit and quantitative easing has been going into supporting stocks and bonds, including junk bonds. Sheila Bair wrote a Wall Street Journal editorial on that. But the underlying economy is shrinking rapidly while the stock market’s going up. That’s what the American economists call a K-shaped recovery – up for the One Percent, down for the 99 Percent.
I’m going to ask one more question on the China topic and then talk a bit more about historical things you mentioned. China has been building up a network of support and trade deals to drive its expansion. You mentioned some of the policies. It’s also been growing its presence in the U.N. system and even putting together alternative international organizations like the Asian Infrastructure Investment Bank. Is there a line that the U.S. would not tolerate China crossing, after which the U.S. would start devoting much larger resources and spending to contain China, or is the U.S. already at full power?
The United States is muscle-bound. Despite its huge military budget it can’t field an army. It has a foreign legion. ISIS, for instance, is part of its foreign legion. The European NATO is part of its foreign legion. But there’s no way American can ever have a land war again, so you can never invade and conquer a country with a military army. All America has is the Atom bomb, and that’s muscle bound. It cannot go to wage any kind of war except atomic war. There’s nothing in between.
I think Russia and China know that, and Russia at least has taken steps to protect itself and said, “If the United States wants atomic war, we’ll be wiped out but it’ll be wiped out too, and Europe will be wiped out.” I think probably the first exchange would be to wipe out England and Europe, to say “We don’t want to go to war with you and really blow up the world, America. Let’s just show you what we can do. Let’s blow up England and Europe so at least you won’t have your colonies there.” If America persisted, it would be the end of the world. Will America really do that? There was worry that Donald Trump would do that so he could go down in history as the man who destroyed civilization, but I don’t think other people are going to do that.
Moving now into some of the historical things you mentioned, for example in the 19th century the most powerful European empire was the British Empire. I am trying to see if there’s a parallel between the UK and the American. Did the UK establish such currency dominance similar to the one the U.S. has today? Did it use similar methods to the U.S. to establish its dominance, for example creating international organizations in which it had an institutional advantage, or for example through the control of key energy deposits?
England thought that it was establishing currency dominance with the Sterling area. In other words it would spend money abroad and other countries would save their money in Sterling. All during the 1930s the surpluses earned by India and by other members of the Sterling area were basically kept in London, paid to England. But then England ran a deficit with the United States so ultimately the benefit of England’s Sterling area, the financial benefit, was all spent to the United States already in the 1930s. You can look up the balance of payments articles on that.
In 1945, as I mentioned, England thought, “We have 10 billion Pounds of all the savings of Argentina and India, countries that have been providing the raw materials for the World War that we fought, World War II. Now there is going to be a demand for English exports and we can recover by employing our labor to make exports.” But the terms of America’s British Loan said: “No, you have to open up the Sterling area and let these countries cancel their contracts with England.” England had long four-year and five-year capital purchase contracts from India, Argentina. “They can cancel them all and buy from the United States”. England went along with that. So the attempt to create a currency area was smashed by the United States.
Ever since the 19th century America looked at England as the great rival, not the Soviet Union. The Cold War in the 19th century was against England. The fight for protectionism in the United States went so far as to create state colleges and universities that would teach an alternative to Anglo-centered free-trade economics and Anglophile moral philosophy. There was a feeling in the late 19th century of America creating a new civilization and it would not be the religious-based, unscientific civilization of Europe. It would be a new secular civilization. That feeling of a new civilization in America is what led Americans to think, “We will never let other countries tell us what to do because they’re part of the decadent old world and we’re the new world. We’re going to make our own rules.”
You also discussed Bretton Woods. Would it be beneficial to recreate, very hypothetically, a system similar to the Bretton Woods one today? I think a key question that underlies that is, “Does the country that runs such a system reap a benefit from running it or are they just constrained?” Will there be an interest for China to set up such a system?
They realize that they cannot set up any system in which the United States is a member because the United States will insist on veto power. If it has veto power, then they can’t do the kind of economic system that I described. Bretton Woods was designed one-sidedly to give all the benefit to the United States, and to make other countries dependent on the U.S. economy, on U.S. exports – largely of agriculture, but also industry – and also on the U.S. dollar. Obviously, that’s not going to be done. The agreement that is being developed on an ad hoc spontaneous basis between China, Russia and neighboring countries is their own system of international payments that will be based on mutual benefit, of holding of each other’s currencies, of preventing any payment surplus country – and it could be China – any payment surplus country ending up with so much credit in a creditor position vis-a-vis debtors. The new system will not impoverish the debtors.
The IMF system was designed to impoverish debtors. The purpose of the IMF was to make other countries so poor and dependent on the United States so they could never be militarily independent. In the discussion of the British loan for instance, in the 1930s the discussion in the London Economic Conference was, “Yes, we’re bankrupting Europe, but if we give Europe enough money to avoid austerity, they’re just going to spend the money on the military.” That was said by the Americans in the State Department and the White House again and again, especially by Raymond Moley who was basically in charge of President Roosevelt’s foreign policy towards Europe.
The question is: how do you create an international financial system designed to promote prosperity, not austerity? The Bretton Woods perspective is for austerity for everybody except the United States, which will have a free ride forever. The question that I’m involved with in the work I’m doing in China and with other countries is how to create a system based on prosperity instead of austerity, with mutual support between creditors and debtors, without the kind of financial antagonism that has been built into the international financial system ever since World War I. Financial reform involves tax reform as well: how do we end up taxing economic rent instead of letting the rentiers take over society. That is what classical economics is all about: how do we revive it?
Final question: these austerity and anti-labor policies which the IMF imposes on countries of the global South seem to be well known practices from before the IMF was created, from what you’ve discussed. Did the IMF invent anything new? In addition, in the 19th century, was predatory lending something common, or was direct invasion always the go-to method for subjugating a territory?
The 19th century was really the golden age of industrial capitalism. Countries wanted to invest to make a profit. They didn’t want to invest in dismantling an existing industry, because there wasn’t much industry to dismantle. They wanted to make profit by creating industry. There was a lot of investment in infrastructure, and it almost always lost money. For instance, there was recently a criticism of China saying, “Doesn’t China know that the Panama Canal went bankrupt again and again, and that all the investments in canals and the railroads all went broke again and again?” Of course China knows that. The idea is that you make investment not to make a profit on basic large infrastructure. The 19th century was basically inter-state lending, inter-governmental lending, public sector lending. That’s where the money was made. The late 20th century was one of financialization, dismantling the industry that was already in place, not lending to create industry to make a profit. It’s asset-stripping, not profit-seeking
Thank you very much for joining us today. Our next event will be on February 4th and we look forward to seeing you all then. Thank you very much Prof. Hudson.
Photo by Ugur Akdemir on Unsplash