From: gerald_a_levy (email@example.com)
Date: Fri Apr 04 2003 - 08:29:23 EST
The following is a longer, more detailed, and better developed presentation of Joseph Halevi's perspective on this subject than the short article on "Oil and Imperialism" that was reported on in  (see http://www.users.bigpond.com/pbtoms/Halevi.htm ). He presented this paper recently in Bergamo and Riccardo B. heard the talk and recommended it highly. This is the first time that this paper has been published on the Internet. In solidarity, Jerry =========================================== US Imperialism, Oil, and Finance Joseph Halevi Political Economy, University of Sydney UFR Sciences é conomiques, Université Pierre Mendès France, Grenoble Introduction Economic theories of imperialism were developed when, (a) large corporations began to dominate production and markets thereby bringing to an end the vision according to which economies expand endogenously by means of competitive accumulation in the Smithian and early Marxian sense, (b) when the issue of surplus production and capital, connected to the phenomenon described in (a), began to seriously occupy the minds and action of policy makers and related institutional bodies. In this respect the United States occupies a special place as it was a trail blazer in imperialism and its manifestation as a quest for markets and capital outlets. By the end of the 19th century Britain was already on her way to become a rentier oriented economy and her main concern was, by using the crucial role of Indian net exports to the world in order to effect a transfer back to the British metropolis, how to manage international capital flows in order to sustain a deepening balance of payments deficit. In the same period however the United States’ concern centred on how to guarantee an appropriate level of international effective demand to its output. The latter was deemed to be chronically in surplus relatively to the domestic size of demand. No one better that the State Department expressed the above preoccupation in a memorandum dated 1898, the year of the American-Spanish war which was to bring Washington into Asia through the occupation of the Philippines. It seems to be conceded that every year we shall be confronted with an increasing surplus of manufactured goods for sale in foreign markets if American operatives and artisans are to be kept employed the year around. The enlargement of foreign consumption of the products of our mills and workshops has, therefore, become a serious problem of statesmanship as well as of commerce (quoted from Zinn, 1998, p.5). In Europe the conceptualisation of the political economy of imperialism is ascribed to Hobson, Hilferding, Luxemburg, but in the United States the process started earlier and involved, in a fashion sympathetic to imperialist expansion especially towards Asia, economists of an institutionalist orientation. Charles Conant for instance theorised both the system of administered prices in industry and the open door policy towards China in alternative to the strategy pursued by the Continental powers and by Britain involving the carving out of special areas of control within that country (Sklar, 1988). Investment he argued can be expanded only by securing a firm price basis as opposed to the price cutting wars which characterised the period leading to the formation of trusts and cartels. To a very large extent Conant’s approach is more advanced than that of Hilferding. For Conant the internationalisation process is not the autonomous by product of private decisions. Instead it must go through State relations otherwise the appropriate mechanisms required to enable international investment would not be set in place. In practice, and with both eyes on China, he advocated direct intervention to bring about the modernisation of non-capitalist areas in order to usher in an expansion of investment and exports from the industrial centres. Such an intervention should be agreed upon by all the industrial countries who should also cooperate to allocate to themselves shares of world development in proportion to their own productive capacity. Needless to say that the largest share would have had to accrue to the United States. Those ideas were part and parcel of the mind-set of the political and economic establishment in the USA caught between the intense expansion of the nation’s productive capacity since the end of the Civil War and the persistence of excess capacity expressed in the long depression of the 1890s. China became the concrete target and terrain of the above economic, political and institutional views thereby starting, slowly but surely, the trajectory leading to the clash with Japan (La Feber, 1997). The United States did in fact reach the status of a superimperialist power but in 1945 and in such a way as to systematically undo its coordinating role for the world capitalist system. More than a century after the American-Spanish war - which saw the emergence of the USA as a world imperialist country motivated to create market outlets for its surplus capacity - the United States’ predicament is closer to that of Britain one hundred years ago. It is governed by the necessity to sustain its growing balance of payments deficit lest the country be plunged into a debt deflation crisis. Yet the world cannot be to the USA what India was to Britain. India produced primary commodities exported them and was kept in a state of underdevelopment. Britain used the Home Charges (taxes paid by India to London), protectionism against Indian exports to the UK and the free access to the Indian market by British industries, and, last but not least, the control over the London discount rate, to siphon off the Indian external surplus. By definition the rest of the world has no external surplus to be siphoned off to the US unless it has net exports to the Moon or some other planet. The only way in which the USA can avoid deflating to adjust the external balance is by compelling the rest of the world to keep financing that very deficit. Thus the instruments used to guarantee the international financial position of the USA are primarily political and military. It will be pointed out that oil and the military industrial complex are essential ingredients of that ‘policy mix’. Moreover it will be argued that while past US military Keynesianism led to a rising tide for all the advanced capitalist boats, enabling also, through the expenditure of the Vietnam war, the launching of new ones such as South Korea and Taiwan, to day Washington is pursuing a policy of global deflation. The American deficit does create effective demand for the other countries’ production, but in order to make those countries willing to refinance the deficit indefinitely, i.e. independently from whether the bond and stock markets are good or bad, the rest of the world has to be desperate to export thereby accepting any flow of dollars. This can happen only in a context of widespread deflation, unemployment, and crisis. For the US corporations and financial institutions to be in a buyer’ s market the world must be in a chronic state of recession and stagnation. At the same time the structural long term transformation of the US national economy into a globally importing economy has gutted the American industrial sectors. Million of people in the US are in an almost free fall, producing a general weakening of wages, constantly competing against fellow workers from Mexico to Malaysia and, in the computer industry, even India (Galbraith, 1998). Since in the end domestic profits depend upon domestic investment, stagnant incomes bring about stagnant domestic investment and profits for the civilian economy. This bleak prospect can be circumvented if companies can further relocate and subcontract taking advantage of the endemic poverty of still more million of people around the world. Hence the higher rate of exploitation translates itself into profits for the corporations and in affordable prices for the bulk of the now poorer American population. It follows that international deflation as a condition for the refinancing of the US deficit, and the destructuring of the US domestic economy are part and parcel of the same process. Oil, raw materials and military Keynesianism This sector was the best placed to enhance the corporate expansion of US corporate interests in the world. In America the use of oil was more widespread than elsewhere given the British and German reliance on domestic coal. Furthermore Rockefeller’s strategies generated, already by the end of the 19th century, a significant oligopolistic consolidation among the oil companies (Wheewlright, 1991). Immediately after WW1 the US ambassador to London, an oil man, demanded and obtained that Britain allow in the Middle East a space for the interests of American oil companies. Unlike to day, the United States did not need to import oil being in fact by far the largest world exporter. In 1928 American, British and French companies signed an agreement about sharing any new oil development in the area. In 1947 when massive reserves were discovered in Saudi Arabia, American companies successfully evicted the British ones by obtaining the Saudi concession and denounced as collusive the 1928 agreement (Shalom,1990). The crux of the matter was lucidly expressed by the then Secretary of the Navy James Forrestal to the Secretary of State Byrnes, "I don't care which American company or companies develop the Arabian reserves, but I think most emphatically that it should be American” (Quoted from Shalom, 1990). Few years later in 1953, after a CIA led coup ousted Prime Minister Mossadegh of Iran who nationalised the Anglo-Iranian Petroleum Company, US companies acquired 40% of Iran’s concessions which prior to the nationalisation where wholly British. These developments compel us to pause a moment in order to evaluate them in the context of global, not just oil based, American policies. Forrestal and Byrnes were, with George Kennan, the architects of post war US globalism. They are the ones who, after the collapse of the pound sterling in 1947 and the humiliating flight of Britain to non convertibility, decided to forcefully shift the US strategy away from Britain as a junior partner focusing it, instead, on Germany in Europe and on Japan in Asia. Quite early in the piece they envisaged a German rearmament as well as the restoration to power of the Japanese monopolistic Zaibatsus (Schaller, 1985). Their strategy was aimed at creating two regional growth poles both tied to the United States. Such a policy was also based on the dismantling of the British position internationally and its replacement by the United States. London’s balance of payments crisis of 1947 was itself created by Washington ’s refusal to extend further credit to Britain in order to meet the payments due on the debt accumulated during the wartime lend and lease programme. >From 1947 to 1955 Washington steadily evicted Britain form its areas of economic and political influence: from the crucial oil fields in the Middle East to the coup de grace of Japan’s asymmetrical admission to GATT which caused the disintegration of the British system of the formerly imperial preferences. This line of conduct reflected US conception about globalism as both an end and as a means. The reconstruction of world – Japan and a European continent tied to Germany – fell exclusively upon the United States as a provider of credit, direct investment (in Europe not in Japan), capital goods, food, and as a guarantor of the supply of raw materials, oil above all. This outlook unified the interest of finance with those of multinational companies in the energy sector and tied them both to the rising military-industrial complex. As long as the United States ran a net export balance, domestic producers went happily along with those policies although some branches such as textiles and apparel grumbled especially in relation to Japan. Raw materials played and important part in this strategy (Rotter, 1987). Indeed, the raw material question paved the road to war in Asia and to intervention in the Middle East (Lebanon 1958). The third world was supposed to remain in a situation of neocolonial dependency, so clearly described by Prebish and Singer of ECLA, by providing cheap raw materials to the centres. Production costs had to be kept really low in order to allow corporations to charge a good profit margin on them. Think for example of the tight oligopolistic structure of the seven Sisters in the 1950s. Hence, as elucidated by Gabriel Kolko, the USA ended up clashing with third world developmentalist movements, from Iran to Indonesia, to Vietnam, to the Belgian Congo. They also clashed with those organisations, such as Italy’s state owned ENI whose CEO, Enrico Mattei, died in a mysterious accident while battling the Seven Sisters, of the Western countries which attempted to establish a direct link with the producing countries. The above paragraph contains the central features of what Joan Robinson aptly called military Keynesianism. Its demise has been widely analysed in the literature. It is important to stress however that in order to be effective military Keynesianism requires both global rearmament and intense large scale warfare and even that does not always suffice. The Korean war launched Japan and helped Germany which was also benefiting from the prolongation of the Marshall Plan into the US funded NATO Plan. Yet the Korean war sustained an American boom only up to 1953. From that year to 1962 the US economy went through three recessions with unemployment rising in each. During the 1960s the US had three large public expenditure programmes two of which were military. The ICBM programme, the Vietnam war and Johnson’s Great Society. In other words the first two were monopoly capital programmes and from their bosom emerged what is now known as the Aeronautic-Computer-Electronics complex (ACE) largely divorced from the rest of the economy (Markusen and Yudken, 1992; Melman, 1997). At this juncture two points must be remembered for a proper historical understanding of the predicament of the US economy. By the 1980s the military industrial complex mutated into ACE becoming very specific with products and technologies which cannot connect to the rest of the economy. In that sense the ACE sectors can prosper, as they are always bailed out of crises and given government contracts, credits and exports subsidies, but the general technological and productive strength of economy declines. ACE cuts across corporations. An auto multinational may have a division in ACE and yet may decide to relocate, say to Mexico, factories operating for the civilian economy. The research by Seymour Melman, Ann Markusen and Joel Yudken, tallies at the sectoral level with James Galbraith findings on the workforce. The latter is best paid and protected in the equivalent of the ACE sectors, while its free fall status increases as we move closer to sectors producing capital and consumption goods and retail services for the civilian economy. The implication of the autonomy of the ACE sectors for the well being of the American working population is far reaching. It means that investment in ACE may be significant in providing direct employment in good jobs but not so much in generating an overall expansion of demand and investment. In other words, in to day’s ACE the impact of military Keynesianism would no longer be as strong as in the past for a given dollar spent. The second point to bear in mind relates to the hollowing out of US industry through the actions of the multinationals. The issue was already raised by Baran and Sweezy in their celebrated Monopoly Capital book, when military Keynesianism was in full swing. The question of the balance of payments position of the United States must be put in this context. There are four major legacies from the period of military Keynesianism. The first is that it is not socially practicable over an extended period. Despite full employment and wages rising above productivity growth the American society was torn apart with white kids, expecting a high income after schooling, refusing to die or be maimed in the jungle while black boys resented being the ones who had to be the killers and the eventual casualties without being allowed the mirage of a rising income. Thus the societies that benefited from American international military spending were Europe and, especially, Japan. The Forrestal-Kennan-Byrnes strategy did come about but in a very different form from that envisaged by its architects. The growth of other capitalist centres far from being in harmony with the position of the United States was, in the light of the American quagmire in the third world, which was globally generating the quantitative conditions for that very growth, giving rise to a renewed intercapitalist rivalry which at that time manifested itself in a lack of confidence in the dollar imputed to the US balance of payments deficit. From 1971 till the Volcker-Reagan policies US authorities tackled the problems emerging from the end of military Keynesianism in contradictory terms. In order to maintain their international military position and their support to client states, particularly Israel, Iran, Turkey, Pakistan, Indonesia and South Korea, entailing persistent monetary outflows as well asymmetric imports concessions, they moved towards the deregulation of capital movements so as to cover for the growing current account deficit. Under the pressure of domestic producers who perceived a threat from Japanese exports, initially in textiles and steel but later in the 1970s in autos and other big ticket items, they pushed for a devaluation of the dollar. During the tenure of Presidents Ford and Carter the target was also to regain net exports. This objective stemmed from the fact that the specific form of globalisation followed by American corporations, through peripheral subcontracting and relocation, was still its early stages. Thus the American economy still appeared to be a structurally coherent national system in terms of its intersectoral linkages. Finally they also aimed at reinstating unilaterally the international role of the dollar using in particular the fact - and this is the second legacy – that the dollar became the undisputed currency in the financial flows stemming from the raw materials sector thereby contributing to the hegemonic globalisation of US financial corporations. Such a scenario could arise only thanks to US multinational control of most of the capitalist world oil, a situation connected with the support to client states. To the macroeconomist these objectives may have appeared as conflicting with each other emanating just from the political interests of the authorities in charge. Yet they coherently expressed the contradictions, in the Marxian sense, inherent in the international stance of US monopolistic capitalism. Henry Kissinger constitutes the most cynical synthesis of that stance. With the United States bogged down by a losing war in Vietnam, the US State Department moved, during 1969-70, towards a solution of the Middle East conflict consistent with UN Resolution 242 requiring Israel to withdraw from all the areas occupied in the June 1967 war, including the illegally annexed Eastern part of Jerusalem (Shlaim, 2000). The policy was gradually obtaining also the consensus of the USSR for whom the Middle East conflict was becoming a serious problem in the context of the worsening relations with China. In his capacity as the chief presidential security adviser, Kissinger scuttled the State Department’s orientations emphasising the building up of strategic links with Israel and further increasing the American involvement in the Middle East to the great pleasure and relief of the oil companies. When Nixon appointed him Secretary of State that became Washington’s official policy. Hence the road to the October 1973 war had been paved with reinforced concrete. It must be stressed that Kissinger’s policy was not a random shift caused by the Vietnam crisis. Instead it was the response to both the Vietnam crisis and the economic-financial crisis. Out of Kissinger’s policy came the October war and the oil embargo leading to what economists inappropriately call the oil shock. The United States, through Kissinger, was quick to seize upon the embargo to push for a sharp increase in oil prices, well beyond anything demanded by OPEC, believing that the impact would be felt more sorely by the real sectors of Europe and Japan while, at the same time counting on the shift in international balances towards the petrodollars to strengthen the global position of the US financial system. Here lie the seeds of the debt crisis in the third world and in the consequent emergence of the interventionist powers by the IMF as a world debt collector. The third permanent legacy of the era of military Keynesianism consists in the accelerated divorce of US multinational corporations from their domestic productive basis. The transformation would manifests itself at a high speed and relentlessly from the 1980s onward in the wake of the stagflation of the 1970s and the anti-inflationary policies initiated in 1980 by Volcker, but the prerequisites were laid down during the 1950s and 1960s. In those decades US multinationals invested abroad by taking advantage of the growth rates in the foreign countries, excluding Japan. In Europe they also became structurally and technologically independent from the home country. Yet they serviced mostly the foreign markets and followed the export patterns of the foreign countries to third parties. Very little was exported back to the United States. In the mid 1960s 82% of total sales of foreign affiliates of US multinationals was in the respective host countries, 13% was exported to third countries and 4% to the USA (Magdoff, 1978, p.134). By 1995 the share reimported into the United States had risen to 10%. The most significant stride to export back to the USA occurred in Latin America where from 1.5% of the affiliates’ sales, the share exported back to the USA reached 18%. Only in Europe the affiliates did not expand their exports to the USA (Zupnick, 1999, p. 120). Thus the behaviour of US multinationals has been that of gutting themselves out of their own American basis in order to benefit both from lower costs and from the size of the US market. The fourth legacy, already clear in the 1970s but becoming ever more pronounced with the invention of what Markusen and Yudken called post modern war strategies and technologies, is the parallel separation of the military-industrial complex, turned ACE, from the civilian economy. Thus the most important power groups in the USA, the military ACE, the multinationals and the resource and energy companies have greatly weakened their links with the domestic economy but they want US institutions, political, military and monetary, to guarantee their interests world wide. Structural right turn: a globally dislocated economy By the end of the 1970s it was becoming apparent that stagnation and inflationary tendencies were not abating. Petrodollar expansion helped the flow position of US financial institutions yet inflation undermined their asset’s values. More ominously as long as post war institutions and social contract remained in place, albeit in the mild form of the US system, even a 6% unemployment rate was not enough to discipline wages and benefits. Carter ’s policy of devaluing the US dollar, coupled with low growth, did produce a reduction in the external deficit but mostly in relation to services not to merchandise where the gap actually grew. Thus, the strength of the US system internationally appeared to rest on finance, which was however undermined by inflation, and related services, on the profitability of US corporate investment abroad which did well also during the stagnant 1970s, and, finally, on the Federal Military Sales Program whose deliveries kept rising until the collapse of the Shah in Iran (they recovered sharply in the 1980s). Yet these strong points, in particular the connection – in which oil interests play the major role – between armaments and the US position in the third world did create its own problems as typified by the fall of the Shah in Iran so that “even as military assistance and arms sales rocketed upward in the 1970s, many American business figures pressed for an enhanced American capacity for direct intervention abroad” (Ferguson and Rogers, 1986, p.97). The antinflationary monetary policies of the Volcker-Reagan period are to be seen not in relation to their macroeconomic principles to be countered by this or that alternative (Post-Keynesian?) theory, but as a set of class decisions aimed at decimating the material – and therefore political – basis of social compromise. Joan Robinson coined the term military Keynesianism in a disparaging way. “Keynesian” effects were obtained not as a result of deliberate and thought out policies relatively to maintaining full employment and all the rest. They rather stemmed from the requirements of the Forrestal-Kennan-Byrnes globalism leading onto the Vietnam path. There was no “Keynesian” plan in relation to Japan, the “Keynesian” effect came from the Special Procurement Policies set up during the Korean war, and so on. They were simply rationalised by “Keynesian” academics after the fact. Similarly, the roots of the Volckers – Reagan actions are to be understood in the coagulation of class and corporate interests deliberately oriented to attacking the domestic basis of production, and with it the people’s standard of living. The not disguised beneficiaries were and still are three main groups of businesses formed by oil companies, other multinationals, finance, and the ACE group. The rest will have to adjust. If it pays to companies and large retailers to subcontract and import garments from Costarica or Indonesia at the expense of domestic employment, so be it. The textile workers in free fall can become janitors in office building suffering pay cuts and the loss of benefits. Exactly as the domestic civilian economy has to adjust, the world also has to adjust to American deficits. What is important is that the three groups do not suffer. In relation to the third world the adjustment is not difficult to obtain. It comes naturally through the debt crises that devastate those countries, periodically pushing them back into hyperdeflation. The tighter the country is linked to the USA and its institutions such as the IMF, the stronger are the hyperdeflationary crises. Workers in Mexico will have no chance to earn competitive salaries vis à vis their American colleagues not as a result of differential productivity rates and of different levels of development. These are physiological gaps. The crucial gaps are the pathological ones. Mexico has been industrialising for at least 40 years. It has a modern productive capacity greater than that of a medium size EU country. Yet the earnings gap with the USA has actually widened not because the earnings of American workers have improved but because the Mexicans fared much, much worse. The reason for that does not lie in production. In fact Mexican production has expanded more than in the United States with the country becoming an export base for the multinationals operating towards the North American market. The systemic plunge into deflation is caused by debt which resolves itself into a balance of payments crisis due the impossibility of servicing it. This happens also when the current account on merchandise trade is booming (Halevi, 2002). Given that these kind of economies are quasi dollarised, the adjustment happens naturally through a domestic social catastrophe. At each crisis the leverage over these countries’ resources by the US government, businesses and financial institutions expands enormously. The plan Free Trade for the Americas is nothing but a strategy in which the whole Latin American continent (450 million people) will have to adjust in the afore mentioned manner creating a permanent and deepening anti-wage and anti-inflationary framework within the United States. Thus the booming Mexican exports to North America can be seen as an ideal deflationary demand creation. The demand for Mexican products rises, partly at the expense of American made products, thereby reducing the value of the American workers. In turn the debt dependency of Mexico generates the catastrophic adjustment which now devalues Mexican workers even more. The cycle starts all over again with a new batch of American workers being readied for devaluation. This adjustment can successfully work, until people say enough is enough, thanks to debt dependency and the ensuing lack of credibility in the local currency and financial system. In relation to the developed economies and to China the story is different but the necessity to make those countries adjust is no less compelling. In fact Japan, and Taiwan province of China hold a great deal of US debt and, with China, they run the largest current account surpluses with the US. Thus their behaviour is crucial in relation to the refinancing of the American deficit and in keeping the American financial system afloat. China is at the moment interested in exporting and in accumulating reserves since her policy is a huge NEP import-substitution-by-means- of-exports strategy. For the United States China is, like Mexico, a source of low cost imports to the delight of retail chains, intermediaries and, in principle, of multinational companies. I said in principle because China does not and will not liberalise the capital account. Even for multinationals is not easy to export their profits back to the Western world or to Japan. This shows that China is not Mexico, and it will not partake for ever in the deflationary demand creation process. They will not adjust the way debt dependent countries have to. For them the present stage is part of a process aimed at becoming a strong country industrially and militarily. The more they will accumulate American debt, the more they will condition and exercise pressure on American policies on all fronts, on the oil and energy fronts in particular. Very slowly yet unflinchingly they are moving toward that direction. United States’ officials know that also. Just after September 11 Colin Powell was asked about the US-China relations. His answer must be remembered by heart: they are far too complex to be described in one way or the other, he said. The China issue is one of the reasons, perhaps politically the main one, why Washington absolutely must tie up the rest of Latin America in the Free Trade for the Americas pact. From the point of view of American dislocated capitalism the sooner they reach a formal decision the better. The protocols of the Free Trade for the Americas will be tailored made to the exigencies of US multinationals where the balancing act will mostly be in relation to mediating the differences among US companies. The protocols will reflect US priorities in virtually every sector and in matters of investment, legally binding the other Latin countries to them. This will form a coherent political-legislative bloc within the WTO conditioning also China’s policies. Yet oil and energy are the essential immediate instrument to meet China’s growth strategy In 1998 John Maresca, Vice President of the oil company UNOCAL, gave a fundamental testimony at a Congressional hearing on Afghanistan (Maresca, 1998). In his presentation, the whole rationale given for getting into Afghanistan and take over Central Asia’s resources had to do with Chinese development which has to be both abetted and controlled. The best way to do it is to monopolise the supply of energy and to acquire the resources around China. Notice that if China’s energy requirements are successfully wrapped up by American companies, the country’s and with it the world’s dollar dependency will rise quite a part from any worsening of the US balance of payments deficit. As to Japan their willingness to refinance the deficit lies purely and simply in the stagnation of the economy. This makes Japan even more export dependent upon the United Sates. The greater compliance of Japan is obtained however by preventing it from developing its own international financial policy and establishing new international bodies in managing financial volatility. When Tokyo meekly suggested such a move during the Asian crisis of 1997-98, which was well received in Asia, the US Treasury and the IMF attacked it vehemently while the State and Defense department whipped up again the Taiwan issue against China sending navy ships in the area. Also the recent security treaty signed with Japan and the strategy of making the latter into an advanced frontier of the renewed drive for a star war like missile shield (aimed at China), is part of the financial locking in of both China and Japan. In all these cases as in Afghanistan and the Middle East we have the same sectors joining forces together: energy multinationals, financial companies, the ACE industries. All of them happily free from domestic economy and not even terribly interested in it. Conclusions The above are the real economic policies of the United States to which everything else has been subordinated. The possibility of carrying them out depends on the control of oil. Such a control compels countries to hold large dollar reserves for transaction, precautionary and speculative reasons. To the extent to which their own currencies are non oil currencies the holding of large dollar reserves will be considered necessary for defence against speculation. Theoretically there are some alternatives to the dollar-oil based system but they are only hypothetical. If an Asian monetary fund is set up it will comprise the countries with the largest dollar surpluses. It will not have to depend on US official injections unlike what happened to the European Payments Union during the post war reconstruction. But Washington will not allow, even to the point of starting a war, an alternative financial centre made of China and Japan. Also Europe does not have many possibilities to become an alternative currency system. On the surface the EURO appears to be an alternative currency given the size of European demand nominally only slightly smaller than that of the US. Yet in relation to 30 years ago the strategic dollar dependency of Europe has increased not declined. Europe is in stagnation since 1982 and needs to export, it has not dislocated itself the way the USA has done nor do they have such a chasm in the connection between sectors and the domestic economies. More importantly, from the mid 1970s onward the EEC was quietly diversifying its energy supplies away from dollar based oil to energy projects and delivery contracts with the USSR denominated in European currencies. This is why in the 1970s the talk about finding an alternative to the dollar, which led to France’s proposal to set up a group of five countries (G5, later G7), was aired in an open manner. It is the USSR that helped expand energy dollarisation in Eastern Europe by asking, under Gorbachev, that the CMEA countries move to settle oil imports from the Soviet Union in dollars. With the end of the USSR the energy products of the former republics have been dollarised and the US government and military are present from Georgia to Central Asia along with their multinationals. .So far the only country that has asked to be paid in Euros is Iraq. After the coming war the American companies who, like in Iran in 1953, will end up controlling most of Iraq’s oil will sell it for dollars. Furthermore the role of the rest of the world, of Europe, China, and Japan, in sustaining the American financial system is not confined to the external deficit. By continuously validating US IOUs, the rest of the world must protect the American financial system against the eventuality of a domestic debt deflation brought about by the rising levels of household and corporate net debt. This sort of compliance can be obtained only by forcing the issues. 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