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CHAPTER 1
Pax Americana
The postwar economic order is fragmenting because it was designed to solve the problems of 1945 in a backward-looking not a forward-looking manner, and because it aimed to curtail European nationalism but not that of the United States. In 1945 the immediate political issue was how to supersede the diplomacy of nationalism that had led to world breakdown and war. The pressing economic issue was how to avoid postwar recession by supporting international purchasing power. These objectives inspired the most idealistic sentiments among their proponents. However, their proposed solutions were preoccupied with the trauma of the Great Depression and its associated tariff and currency wars, and with specifically U.S. economic objectives. By looking backward, by concentrating overwhelmingly on the problems of the industrial nations and those of the U.S. economy in particular, the postwar move toward a cosmopolitan world economy under American aegis lay the ground for new and unanticipated problems.
The devastation wrought by World War II transformed political philosophy just as it altered economic circumstances. Avoidance of war, and of statism generally, became a higher political principle than the nationalism which had formed the basis of world relations for over four centuries. Only twelve years had elapsed since breakdown of the 1933 London Economic Conference led to internecine tariff and currency wars. With these spectres in mind European countries virtually abandoned the traditional adversary system of world diplomacy based on negotiations among men representing their own nations' self-interests. Alliances historically had been formed and broken, compromises made and national wealth promoted or lost through a combination of negotiated tradeoffs, direct coercion or threat thereof. All this was now changed, heralding an era unique in international relations.
At the outset, the world's diplomats were determined that the economic problems and upheavals that followed the First World War would not recur. Defeated nations would not have to pay reparations which could bankrupt them and leave them vulnerable to renewed nationalist, socialist or communist movements. The European Allies would not have to repay armaments debts out of depleted international reserves and an almost non-existent net export income. The world could start afresh, at least from the economic vantage point.
Europe for its part felt a revulsion against the nationalism that had culminated in depression and war. Its means of production had to be rebuilt or redirected to peacetime applications, while its financial resources had been drained. The continent no longer could afford the enormous military and bureaucratic overhead imposed by its colonial systems. Even if it desired the trappings of imperialism (as did France for awhile in Southeast Asia and Algeria), it could hardly pay for them. England found itself nearly bankrupted by the costs of occupying its zone of defeated Germany, and could not reassert imperial authority without cutting itself off from American aid. In fact, it was heavily in debt to its own colonies for its wartime purchases of raw materials and military support, so that growth in its exports would be earmarked largely to repay these debts. Furthermore, production of commodities for export would divert resources from the task of reconstruction. These factors muted Europe's desire to enter into export competition with America.
Most important of all, Europe's leaders believed that U.S. financial leadership and resources were preconditions for postwar economic stability, hence for political and military stability. They chose not to start a new rivalry for export markets, not to engage in competitive currency devaluations, tariff protection or export subsidies, nor to move toward either full-scale socialist planning or economic integration with one another. Instead of pressing their own national interests they merged themselves into a U.S.-oriented world order.
Meanwhile, the first concern of U.S. officials was to secure full employment and production at home. America's productive capacity in both agriculture and industry exceeded domestic needs. Now that the war demand was over and the economy was returning to civilian production, demand for its economic surplus would have to be met through exports. The National Planning Association estimated that the United States would have to export about $10 billion annually in order to ensure full employment. Its most obvious markets were the devastated countries that needed these products.
Cordell Hull and other U.S. officials feared that European nations might seek to regain their former international positions by entering into a new export competition, beginning with their own colonies and spreading out to absorb the markets and raw-materials supplies of other powers. National rivalries, with their alignment of competing satellite systems, would prevent economic recovery (especially in the United States) and thereby threaten peaceful world relations. In particular the Sterling Area and the Franc Zone threatened the concept of a unified trade and investment area based on the dollar and on preeminent U.S. export capacity. America's postwar planners therefore pressed for a regime of free trade and an open door to international investment. The world was to become integrated along lines highly favorable for the United States.
Both Europe and America looked forward to a cosmopolitan One Worldism that seemed to dovetail neatly into U.S. economic objectives while providing substantial inducements to Europe in the form of foreign aid, U.S. military support, and a reciprocal demand for exports. However, the textbook principles underlying the postwar economic order rested on the simplistic hope that the economic and political self-interests of nations might easily complement each other without much sacrifice of any single nation's economic potential or established interests. Prosperity for all would be promoted through a harmonious specialization of world labor and production, with the gains shared equitably among nations.
The specific terms on which this was to occur were highly self-serving to America. Foreign countries would purchase enough surplus American output to guarantee full employment for the United States, and they would pay for these U.S. exports in two ways: by supplying raw materials and labor-intensive products desired by Americans, and by selling their resources to U.S. investors. America's own idea of One Worldism thus merged easily with its own national self-interest.
European governments meanwhile shifted their attention away from imperial rivalry toward rebuilding their domestic economies. The world moved to dissolve the principles of nationalism itself, along with protectionism, socialism, imperialism and any other form of statism that might interfere with an open international economy.
The major threat to free trade and a universal open door policy seemed to emanate from the communist countries, which might manipulate foreign trade in such a way as to interfere with the West's allocation of resources along market-oriented lines. U.S. officials argued that laissez faire economies would be at a disadvantage in dealing with state-planned economies, inasmuch as foreign trade and investment patterns would be established by pricing and trade decisions made in the managed economies. Furthermore, if the Soviet Union and its satellites were to be permitted such practices, should not England and France be entitled to follow suit? Economic planning seemed to connote the paraphernalia of nationalism, and must therefore be stymied at the outset. The solution to this problem was to isolate the communist countries and cut them off from commerce with the West. The Free World must remain integrated in order to prevent commerce from evolving on the basis of restrictive intra-bloc markets that might once again lead the world into economic fragmentation. A cosmopolitan world economy would set the stage for prosperous and peaceful world relations. (The only threat of war seemed to lie with the Soviet Bloc, and this could be minimized by the U.S. nuclear deterrent, complemented by the set of interlocking regional alliances established under U.S. leadership — NATO, CENTO and SEATO.)
America's diplomats therefore presented both the Soviet Union and its other allies with a choice: either to join the United States in a dollar-oriented trade and investment area while being helped by U.S. aid during their transition to this new epoch, or to maintain their statist policies and colonial systems on a go-it-alone basis. The Soviet Union chose the latter course while the Europeans, led by England, readily accepted America's economic, financial and military umbrella. The world thus split into two great blocs, one led by the United States, the other by Soviet Russia.
Within the Western bloc, England was quickly stripped of its world position and empire. The pound sterling was maintained at so high a parity that British industry could hardly compete with American exporters in world markets. England entered the postwar world in debt to its colonies and to the United States (thanks to the British Loan of 1945–46). Like other countries it was obliged to settle its balance-of-payments deficits in gold or in U.S. dollars freely convertible into gold. England, France and other European countries watched their modest international reserves drain to the United States.
In order to finance European and other foreign purchases from America, that is, to ensure adequate financial resources to sustain U.S. exports ("world trade") under moderately laissez faire policies and currency convertibility, the U.S. Government had taken the lead (in 1944, at Bretton Woods, New Hampshire) in establishing the International Monetary Fund (IMF) and the World Bank (formally called the International Bank for Reconstruction and Development). Loans were provided by the U.S. Government and U.S. credit markets via the World Bank to European governments, which used them mainly to pay for goods supplied by American exporters. The source of the original loan funds provided by the IMF and the World Bank came from foreign currency and gold subscriptions by the participating nations. America's subscription amounted to almost $3 billion and entitled it to nearly 30 per cent of the voting power. The member nations agreed that an 80 per cent majority vote would be required for most rulings, thus conceding unique veto power to the United States. This enabled U.S. officials to dictate terms and refuse loans to governments that pursued policies opposed by the United States.
In this way a moderately open world economy was maintained. In fact, during 1944–46 an internationalist spirit merged naturally with laissez faire principles that hitherto had been considered idealistic rather than pragmatic. In place of the system of nation-states, with its colonial rivalries that had existed since the beginning of the modern industrial era, the victors of war acquiesced to an ally and voluntarily dismantled their empires, opening vast new areas to U.S. trade and investment. The Western Alliance was consolidated voluntarily into the postwar dollar-gold area. Europe gave up its empires but was at peace with itself. This was a major accomplishment. Whatever today's juncture in world affairs will bring, the epoch of European nationalism has passed from the world stage forever.
Europe was fully aware that it was ceding to America the option of determining its own currency values and tariffs. The United States was the only nation with sufficient foreign exchange to finance a program of overseas investment, long-term export financing, and foreign aid. Still, in Europe's exhausted state the concepts of internationalism and "free" market competition held tremendous appeal, particularly during the era of Marshall Plan aid. It was left to American diplomats to shape this war-weary world and, for all their internationalist rhetoric and ideals, one can hardly be surprised that they expressed their national interest by appropriating the markets and resources of Europe's dependencies and ensuring that the postwar international organizations were subject to U.S. veto power and diplomatic constraints. Inevitably, the particular form of internationalism emerging from World War II was dominated by U.S. economic strength (surplus productive capacity, especially in agriculture), backed by U.S. ownership of 59 per cent of the world's monetary gold (composed largely of Europe's refugee gold that had been transferred to the United States in the 1930s), and ultimately cemented by U.S. military force and police operations.
Even so, the resulting system seemed to connote stability, not one-sidedness. In the realm of world finance, for instance, currencies were assigned fixed values and gold once again became the standard of foreign exchange, with a defined value of 35 U.S. dollars per ounce. This return to fixed currencies freely convertible into gold prevented foreign countries from pursuing competitive devaluations or beggar-my-neighbor policies. But it also curtailed foreign ability to pursue expansionary economic policies. Relatively early in their business cycles foreign countries began to lose their rather modest holdings of gold as increasing domestic purchasing power reflected itself in a rising net demand for imports.
In the realm of world trade, the General Agreement on Tariffs and Trade (GATT) called for equal tariff treatment of all trading parties. Tariffs no longer could be unilaterally imposed, and more than two decades of international tariff concessions were negotiated. Other trade barriers, such as quotas and assigned values for imports, were disallowed. Even in those special cases where general trade restrictions were permitted for domestic or balance-of-payments purposes, discrimination among supplier countries was forbidden. The IMF, World Bank and GATT became interlocked into a single postwar system governing world trade, aid and investment. Withdrawal from any of these institutions would de facto involve withdrawal from the others as well. Nations that failed to participate could find their access to Western markets, foreign aid and investment resources blocked.
Nonetheless, the United States did not join GATT as a full member. U.S. representatives could negotiate trade agreements, but Congress could repudiate them and often did. After all, congressmen were elected to serve the interests of their particular districts, and protection of domestic industry and agriculture took precedence over more generalized foreign trade benefits. Other member nations accepted this double standard and agreed to adhere to rules and restrictions that did not constrain Americans. This became the original flaw that moved the world further and further away from the images conjured up by the egalitarian, laissez faire rhetoric that characterized early postwar diplomacy.
Pax Americana had been achieved. Europe set about rebuilding its domestic economies according to the Keynesian doctrine of supporting domestic employment and incomes (hence demand) by pursuing expansionist social-economic policies and growth in consumption standards. This was precisely what John Hobson had urged a half-century earlier as an alternative to economic imperialism, with its primary focus on foreign markets rather than on domestic demand. Europe abandoned its imperial ambitions, virtually ceding its empires to the United States as spheres of influence and as wards.
U.S. domination of the world's foreign-aid programs, and its position as the world's major source of capital equipment, foodstuffs and arms, led to even greater U.S. affluence. By 1949 the nation had acquired 72 per cent of the world's gold. Embarrassed by its riches, and aware that accumulating gold in only one country would destroy its function as the world's monetary standard, the United States made substantial outright grants to foreign governments via the United Nations Relief and Rehabilitation Administration (UNRRA) and through Marshall Plan aid. In 1950 it achieved its $10 billion annual export target. The United States stood at the pinnacle of its power and appeared invincible in the military, political and economic spheres.
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Excerpted from "Global Fracture"
by .
Copyright © 2005 Michael Hudson.
Excerpted by permission of Pluto Press.
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