The Economic Strategy of American Empire (3rd edition)
“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.” — Herman Kahn (1972)
Preface to the Third Edition (2021)
This edition of Super Imperialism is the finalized version of the analysis that I first published in the wake of President Nixon severing the dollar’s link to gold in August 1971. Closing the gold window had been imminent since the London Gold Pool was disbanded in 1968 in response to the U.S. overseas military spending that had pushed the balance of payments into steadily deepening deficit since the Korean War (1950–51).
I handed in the manuscript to Holt, Rinehart and Winston early in 1972. By the time it was published in September, the international financial system had been radically transformed by the currency upheavals that followed the ending of the conversion of dollars into gold in August 1971, devaluation of the dollar by 10 percent, and America’s imposition of import quotas and tariff surcharges at home while demanding that European and Asian countries open their own markets to U.S. farm exports, permit continued U.S. financial takeover of their industry, and above all not force cutbacks in U.S. Cold War spending.
Earlier in 1971 the Institute for Policy Studies in Washington had obtained a copy of the Pentagon Papers, and invited me down for a series of meetings to review them. What struck me was the absence of any discussion of the balance-of-payments costs of the war in Southeast Asia. I had published statistics that showed military spending to be single-handedly responsible for pushing the balance of payments into deficit. Headlines each month focused on General de Gaulle cashing in his surplus dollars for gold. Germany was doing the same thing, although less vocally.
The Pentagon had mobilized a full-time desk to counter the warnings about the war’s balance-of-payments costs voiced by the “Columbia Group,” composed of Terence McCarthy (my mentor) and Seymour Melman at Columbia University’s School of Industrial Engineering, and me.
I had worked for Arthur Andersen in 1968–69 to create an accounting format to separate the balance of payments on government operations from private-sector trade and investment. The statistics showed that the entire U.S. payments deficit occurred on the government’s account — specifically the military sector, not foreign aid. U.S. private-sector trade and investment had remained in balance from the 1950s through the 1960s.[1]
I was told that Robert McNamara himself had pressured Arthur Andersen not to publish my report, so the firm had no prospects for developing my accounting format. I took my analysis to NYU’s Institute of Finance, which quickly published it, illustrated with the chartwork that Arthur Andersen had prepared and kindly given me.
In due course the New York Federal Reserve published a review of the Institute of Finance’s various monographs, singling out my report to comment that it was unbelievable that war spending alone was responsible for the U.S. balance-of-payments deficit. But one of my New School graduate students who worked for the bank gave me an internal review of my analysis that found it correct, despite the Fed’s public denials.
Politicians in charge of national statistics encourage popular misunderstanding, but my statistical analysis tells a different story from what is widely believed. A few years ago I sought to update my calculations on the impact of U.S. military spending and foreign aid on the balance of payments. But the Commerce Department had changed Table 5 of its balance-of-payments report, dealing with foreign aid and other government programs, in a way that no longer reveals the extent to which foreign aid programs generate a transfer of dollars from foreign countries to the United States. I phoned 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 was responsible for the present-day statistical concealment. But in the years in which I wrote Super Imperialism, Congress was glad to defend its foreign aid program precisely because its tied exports and credit did not cause an actual payments outflow, but helped U.S. exporters, bankers and bondholders.
Part of the problem is that the balance of payments is not taught in the academic curriculum. Theories of international trade and payments describe supposedly automatic equilibrium processes promoting world convergence and economic equality. Left out of account is the political diplomacy that counteracts this happy picture. As Yogi Berra supposedly said: “In theory, theory and practice are the same. In practice, they’re different.”
Histories of international trade theory exclude the 18th-century mercantilists who openly explained that the aim was to draw all the world’s gold, skilled labor and capital into their nation — Britain, France or Austria. That aim characterizes U.S. economic diplomacy in today’s world. Yet no economist or world diplomat in the 1940s or 1950s anticipated that America’s federal budget deficit since the 1970s would be financed by China and Japan, Europe and Third World countries instead of by American taxpayers and bondholders. Balance-of-payments deficits were supposed to be financed by governments running a budget surplus to impose austerity, not serving to finance government budget deficits.
Since 1971 the U.S. Treasury-bill standard has freed the U.S. economy from having to do what other debtor countries must do when they run payments deficits: raise their interest rates and impose austerity to restore balance in their international payments. The United States alone has been free to pursue domestic expansion and foreign diplomacy without having to worry about the balance-of-payments consequences.
As Treasury Secretary John Connally said in September 1971, a month after the U.S. went off gold, its payments deficit was the world’s problem. To America it was a means of funding its Cold War spending with other nation’s credit, drawn on without constraint. While not hesitating to impose austerity on Third World and other debtor countries, America itself is the world’s largest debtor economy and its officials demand the right to act uniquely without financial constraint.
To emphasize how America’s novel financial way of exploiting the world is achieved via the international monetary system, I originally wanted to entitle my book Monetary Imperialism. That focus is reflected in the title of the 2018 German translation published by Klett-Cotta: Finanzimperium. My basic theme is that foreign central banks no longer are able to hold America to account by cashing in their surplus dollars for gold or for appropriation of U.S. assets. As America’s balance-of-payments deficit widens, foreign central banks simply add the surplus dollars to their reserves, mainly in the form of U.S. Treasury IOUs. Other countries’ monetary assets are thus America’s monetary debt. This foreign official saving finances the U.S. domestic budget deficit in the process of funding the U.S. international deficit.
In diametric contrast to the dollar shortage that underlay the post-World War II economic order, the post-1971 world has suffered a chronic dollar glut for half a century now. Foreign countries have felt unable to resist this inflow without risking a world economic breakdown. So they have accepted more and more dollars, making them yet more hesitant to reject the Dollar Standard’s free lunch. As a result, America’s military and related Cold War balance-of-payments deficit has become the foundation for world central bank reserves and hence of today’s world monetary system.
Instead of undercutting American economic power, the U.S. deficit has siphoned off other countries’ surpluses, exploiting them financially — as a debtor, not as a creditor as in times past. This unique American strategy is still not broadly understood, mainly because it seems so at odds with most peoples’ ideas of what is fair and equitable. And of course, it is not in American interests for it to be widely understood.
Complaints about how unfair the international financial system was becoming did indeed break out into the open at the Smithsonian Conference in 1971. The world’s major powers protested against U.S. demands that they manage their exchange rates, tariffs and trade quotas specifically to enable the United States to improve its balance of payments by $15 to $20 billion annually, at the expense of their own producers and domestic policy aims. Today that amount seems modest, but it was unprecedented at the time. Foreign central bankers tried in vain to impose constraints on U.S. military spending and foreign investment. But they made no attempt to act together, and U.S. demands for international financial arrangement have now come to be accepted as the norm.
Although ending the era in which the United States dominated financial diplomacy by its creditor position and gold stock, the Treasury-bill standard gave Washington a new international power. This was largely unanticipated, however. A fear of the unknown developed over what the aftermath of America’s rejection of gold would bring. Ironically, publication of rny book helped U.S. officials understand how to perfect their post-gold strategy.
A few weeks after its publication I was invited to address the annual meeting of Drexel-Burnham to outline how the new Treasury-bill standard of world finance enthroned U.S. debt as the main international monetary asset. 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 told me that the book had sold very well in Washington and hired me on the spot to join him as the Hudson Institute’s economist.
It turned out that U.S. foreign policy agencies were the main customers, using it as a training manual, and the Defense Department almost immediately gave the Institute an $85,000 contract for me to explain just how the Treasury-bill standard was putting creditor nations on the hook for financing the U.S. economy and its overseas military presence. I was driven to the FBI office in Ossining, New York, to apply for a Top Secret security clearance, and soon went to Washington for briefings with generals and diplomats.
Having tried for a decade to avoid losing the gold that had served as the backing for world power since the 1920s, America’s early post-1971 policy was simply to demand that other countries subsidize its balance of payments by giving special favoritism to U.S. trade and foreign investment. There was little thought that the U.S. economy could turn the deficit into a source of affluence, by creating a new kind of circular flow, from U.S. military spending abroad to foreign central banks back to the U.S. Treasury.
My post-1972 analysis of monetary imperialism
Super Imperialism was translated into Spanish (by Dopesa in 1973), Russian and Japanese almost immediately. But I was informed that U.S. diplomatic pressure on Japan led the publisher to withdraw the book in 1975 (after having already paid for the translation rights) so as not to offend American government sensibilities. (It finally was officially published in 2002 by Tokuma Shoten.) The book has sold most widely in China, in its 2008 translation by the Government Publication and Translation House.
Super Imperialism received a wider U.S. review in the business press than in academic journals, and in any case I had found that my historical approach to teaching international economic theory was too political to fit comfortably into the academic economics curriculum. However, at the American Political Science Association’s annual meeting in New Orleans in September 1972, the month the book was published, I presented a paper on “Inter-governmental Imperialism vs. Private-Sector Imperialism” outlining how the Treasury-bill standard had turned the traditional rules of international finance on their head. That paper forms the basis for the new introduction to this book.
I spent 1973 expanding the original first chapter into what now are four chapters in order to better explain the ascendancy of U.S. inter-governmental capital. The United States demanded payment of its World War I arms loans to its allies, but erected tariff barriers that prevented them from earning the dollars to pay these debts in the form of higher exports to the United States. Mainstream liberal histories of this period describe the United States as “rejecting world leadership,” by which is meant helping to restore business as usual. The reality is that U.S. diplomacy did indeed assert world leadership, but not in a multipolar way. A prime objective in putting U.S. interest first and foremost was to destroy any possible rivalry from Britain. This was achieved by turning Britain into an indebted satellite during World War II, from Lend-Lease in 1942–43 to the postwar British Loan of 1946.
I looked forward to adding these additional chapters to the paperback edition, but Holt Rinehart’s owner, CBS, was not doing well and 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 would have entailed resetting the type. I decided to hold out until I could publish the expansions I had written.
The rewritten manuscript of Super Imperialism lay on my shelf for almost thirty years. Periodically I discussed reprinting it with my additions, and the issue became pressing by 1999, when global protests were occurring against the U.S.-centered diplomacy enforced by World Bank and IMF policies imposing foreign dependency and austerity throughout the world. In 2002, as the aggressive character of America’s drive to control the world economy along self-serving lines was becoming especially blatant, Pluto Press published a revised and augmented edition of the book. That edition unfortunately was riddled with typographical errors and misspellings. I sent a long list of corrections, but nothing was fixed, so I bought back the rights in 2019 and prepared for the book to be reset, taking the opportunity to edit the manuscript for greater clarity.
In 1977, Harper & Row asked me to write a sequel bringing the narrative up to date to reflect the diplomatic confrontations of the early 1970s: Global Fracture: The New International Economic Order. It describes how the United States drove foreign countries to protect themselves from American diplomatic aggression by creating their own regional blocs. That trend is still underway today.
Indeed, since the 1970s a number of trends have become even more pronounced. First and foremost is the U.S. Treasury’s ability to run up trillions of dollars of Treasury IOUs that are now built into the world’s monetary base. This U.S. inter-governmental debt presumably is to be rolled over indefinitely without being converted into gold or being used to take over ownership of U.S. foreign or domestic assets, as American diplomats demanded of Britain in the 1930s and 1940s. This international free ride has seen the United States run more deeply into debt without foreign constraint, a debt not to be repaid, just as governments rarely retire paper currency from circulation. Foreign-held U.S. Treasury securities in the world’s central-bank reserves are a tax imposed on foreign dollar holders without giving them any voice or representation on the U.S. foreign policies being financed.
As long as central banks rely on the dollar for their international reserves, the effect is to finance the U.S. balance-of-payments deficit and, incidentally, the domestic U.S. budget deficit. That makes the balance of payments as central a diplomatic and political issue today as it was in the mid-1960s, when General de Gaulle cashed in France’s surplus dollars for U.S. gold on a monthly basis. De-dollarization promises to remain the crux of world political tensions for the next generation.
A second trend of U.S. diplomacy has been to use the International Monetary Fund and World Bank to subsidize client kleptocracies such as Ukraine (and Russia under Yeltsin), and to promote dependency on the United States by opposing foreign moves toward self-sufficiency in food, technology and, above all, finance. Argentina’s adoption of borrowed U.S. dollars to serve as its own domestic currency provides an object lesson in why no country should denominate its money or public debt in a foreign currency.
To escape from an intrusive world financial order based on the current US. free lunch, China, Russia and other countries are moving to create alternative regional currency blocs so as to de-dollarize their trade and payments. America’s response has been to impose punitive sanctions to deter such moves. This has brought about precisely what its diplomats most feared. For instance, threats to starve Russians by blocking food exports to them, and to cut them off from the SWIFT bank-clearing system, have obliged them to become self-suflicient in these areas. Avoidance of reliance on imports frolil the United States and its allies is now an irreversible trend.
The Washington Consensus has called for a neoliberal wave of privatizations throughout the world since the 1980s, often financed by foreign debt, especially via U.S. and allied bank credit. This is the opposite policy from how the United States subsidized its industry in the nineteenth century by keeping basic infrastructure in the public domain. That also is how China managed its post-1980 industrial drive. The aim should be to avoid monopoly rent, and that is best done by making banking and credit creation into public utilities, along with other essential services.
For countries adhering to the Washington Consensus, the financial sector’s overhead, and its sponsorship of monopoly rent extraction by privatization and Public-Private Partnerships, has raised the cost of living and doing business. Financialized “wealth creation” has been couraged by using bank credit to bid up asset prices for housing, stocks and bonds, rather than to increase “real” wealth creation by expanding the means of production. Interest, rent and insurance charges have been added to the cost of labor and also corporate business, becoming major factors pricing U.S. labor and industry out of world markets while leaving debt deflation in their wake.
The result of the post-1980 U.S. economic decline and the post-1991 dissolution of the USSR is that instead of a conflict between Soviet Communism and American capitalism, today’s primary conflict is between industrial capitalism in a mixed economy and finance capitalism based on monopoly rents. Economic planning in the West has shifted to the financial centers (Wall Street, the City of London, the Paris Bourse and Frankfurt). Victory in the conflict over just what kind of capitalism countries will have will be achieved by economies that best free themselves from the financialized rentier overhead that has undercut and de-industrialized the U.S. economy. Economic growth and international solvency require a political rollback of oligarchies to democracies in a mixed economy (an aim that today’s neoliberal vocabulary rhetorically accuses of leading to socialism or Marxism).
A full-fledged United States of Europe is still far from being created. The euro is not an alternative to the dollar, because the ability to create money in the Eurozone by running government budget deficits is quite limited. That prevents the euro from gaining the critical mass to be more than a satellite currency to the dollar, while leaving Greece, Italy, Spain and Portugal suffering monetary austerity and fiscal insolvency. The European Central Bank and European Commission have created credit to support financial markets, but not to provide affluence for the “real” economy of production and consumption.
To be sure, Europe’s diplomacy may be changing as a result of the United States no longer being agreement-capable when it comes to international rules and treaties. U.S. policy rejects free trade and free markets when counter to its interests, and intervenes to seek to control the world’s economy by organizing and imposing international sanctions. The most notorious recent examples are those designed to prevent Russia’s Nord Stream 2 pipeline from supplying Germany and the rest of Europe with gas in competition with U.S. liquified natural gas, and President Trump’s U.S. 25 percent steel tariff and 10 percent aluminum tariff. The effect seems to be driving Germany and other European countries out of the U.S. orbit.[2]
In recent years I have developed a logic for monetary and economic reform in articles for the Russian Academy of Sciences and the Chinese Academy of Social Sciences (CASS), as well as a series of articles, lectures and speeches published by the Global University for Sustainability based in Hong Kong.[3] That is the international audience that I had expected to be the keenest readers of Super Imperialism when I published it in 1972, not as a how-to-do-it instruction book for imperialism but as a handbook for de-dollarization and an outline of U.S. tactics that need to be countered. It therefore is appropriate that the present edition has been typeset in Hong Kong, China.
[1] “A Financial Payments Flow Analysis of U.S. International Transactions: 1960–1968,” New York University, Graduate School of Business Administration, The Bulletin, Nos. 61–63 (March 1970). Also in 1969 I began to publish critiques of the World Bank, U.S. foreign aid and the International Monetary Fund: The Myth Of Aid (with Dennis Goulet, Maryknoll, NY: 1971) and “Epitaph for Bretton woods” Journal of International Affairs 23 (Winter 1969), as well as articles in Ramparts and Commonweal. These articles form the basis of what are now Chapters 8 through 11 of this book, being Part II — The Institutions of American Empire.
[2] See for instance, “It’s not about Trump: Berlin says relations with US are so bad even Democrats back in White House cannot fix them,” Defend Democracy, June 29, 2020, quoting Germany’s Foreign Minister Heiko Maas telling the German news agency dpa: “Anyone, who believes that the Transatlantic partnership will once again be what it once was with a Democratic president, underestimates the structural changes.” Relations between thetwo allies now seem irreconcilable, even without President Donald Trump at the helm.
[3] “How Neoliberal Tax and Financial Policy Impoverishes Russia — Needlessly,” Mir Peremen (The World of Transformations), 2012(3), pp. 49–64 (in Russian); “The Transition from Industrial Capitalism to a Financialized Bubble Economy,” World Review of Political Economy 1 (№1, Spring 2010); and “‘Creating Wealth’ through Debt: The West’s Finance-Capitalist Road,” World Review of Political Economy 10 (№2, Summer 2019), as well as Finance as Warfare (World Economics Association: 2015) and Canada in the New Monetary Order (Toronto: 1978).
