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The Financial Tsunami: The Financial Foundations of the American Century

by : InternationalNews
Tuesday January 29, 2008 - 06:04

Global Research
January 16, 2008

F. William Engdahl

The ongoing and deepening global financial crisis, nominally triggered in July 2007 by an event involving a small German bank holding securitized assets backed by USA sub-prime real estate mortgages, can best be understood as an essential part of an historical process dating back to the end of the Second World War—the rise and decline of the American Century.

The American Century, proudly proclaimed by Time-Life founder and establishment insider, Henry Luce in a famous 1941 Life magazine editorial, was built on the preeminent role of New York banks and Wall Street investment banks which had by then clearly replaced the City of London as the center of gravity of global finance. Luce’s American Century was to be built in a far more calculated manner than the British Empire it replaced.1

A then top-secret Council on Foreign Relations postwar planning group, The War & Peace Studies Group, led by Johns Hopkins President and geo-political geographer, Isaiah Bowman, laid out a series of studies designed to lay the foundations of their postwar world, already beginning 1939, well before German tanks had rolled into Poland. The American Empire was to be an empire indeed. But it would not make the fatal mistake of the British or other European empires before, namely to be an empire of open colonial conquest with costly troops in permanent military occupation.

Instead, the American Century would be packaged and sold to the world, above all the emerging countries of Africa, Latin America and Asia, as the guardian of liberty, democracy. It would clothe itself as the foremost advocate of end to colonial rule, a stance which uniquely benefited the only major power without large colonies—namely, the United States.

The new American Century world was to be led by the champion of free trade everywhere, which also uniquely benefited the strongest economy in the early postwar years, the United States. It was a brilliant, if fatally flawed concept. As State Department planning head, George F. Kennan wrote in a confidential internal memo in 1948, “We have about 50% of the world’s wealth but only 6.3% of its population…Our real task in the coming period is to devise a pattern of relationships which will permit us to maintain this position of disparity without positive detriment to our national security.” 2

The core of the War & Peace Studies, which were designed for and implemented by the US State Department after 1944, was to be the creation of a United Nations organization to replace the British-dominated League of Nations. A central part of that new UN organization, which would serve as the preserver of the US-friendly postwar status quo, was creation of what were originally referred to as the Bretton Woods institutions—the International Monetary Fund and the International Bank for Reconstruction and Development or World Bank.3 The GATT multinational trade agreements were later added.

The US negotiators in Bretton Woods New Hampshire, led by US Treasury deputy Secretary Harry Dexter White, imposed a design on the IMF and World Bank which insured the two would remain essentially instruments of an “informal” US empire, an empire, initially based on credit, and later, after about 1973, on debt.

New York and the New York Federal Reserve Bank were the heart of the new empire in 1945. The United States held the overwhelming majority of world central bank monetary gold reserves. The postwar Bretton Woods Gold Exchange Standard uniquely benefited the role of the US dollar, then and even now world reserve currency.

All IMF member country currencies were to be fixed in value to the US dollar. In turn, the US dollar, but only the US dollar was fixed to a preset weight of gold at $35 per ounce of gold. At this fixed rate, foreign governments and central banks could exchange dollars for gold.

Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to the dollar. It was ingenious and uniquely favorable to the emerging financial power of New York, whose bankers actively shaped the final agreements.

In those days, in stark contrast to the present, the dollar was “as good as gold." The US currency was effectively the world currency, the standard to which every other currency was pegged. As the world’s key currency, most international transactions were denominated in dollars.

Maintaining the role of the US dollar as world reserve currency has been the foremost pillar of the American Century since 1945, related to but more strategic even than US military superiority. How that dollar primacy has been maintained to now encompassed the history of countless postwar wars, financial warfare, debt crises, and threats of nuclear war to the present.

Important to place the emergence of the asset securitization revolution in global finance which is now impacting the world financial system in wave after wave of new shocks and dislocations, and to appreciate Alan Greenspan’s substantial contribution to preserving the dominance of the dollar as world reserve well beyond the point the US economy ceased being the world’s most productive industrial manufacturer, a brief review of the distinct phases in postwar dollar hegemony is useful.

The Golden Years of America’s Century

The first phase, which we might call the postwar “golden years,” saw the US emerge from the ashes of World War II as the unchallenged global economic Colossus. The US was the dominant world power; no one even came close. Over half of all international money transactions were financed in terms of dollar. The US produced more than half the world output. The US also owned about two thirds of the official gold reserves in the world in 1940.

When various European countries had reserve surpluses, they converted the surpluses into dollar reserves rather than gold because they could earn interest on dollar assets such as US Treasury bonds and dollars could always be converted into gold at $35 per ounce whenever it became necessary. The US dollar was at the center of this system.

American industry, led by General Motors, Ford and Chrysler Motors, the Big Three, were the world class leaders—no one was even close back then. US Steel (before it became USX), machine tool manufacture, aluminum, aircraft and related industries all set the benchmark for global excellence well into the 1950’s.

Above all, the American oil giants—Mobil, Standard Oil of New Jersey, Texaco, Gulf Oil—those key companies dominated the unique energy source which was to become essential to unprecedented postwar growth rates in Europe, Japan and the rest of the postwar world—petroleum.4

In this early postwar period demand for dollars in the world to finance reconstruction was so great that the primary economic problem faced in the 1950’s in Europe, Japan, South Korea and elsewhere was dollar shortages to finance imports of needed US capital equipment, its oil, its consumer products.

The US monetary gold stocks reached a record $24.6 billion in 1949, a huge sum that was comparable today to $211 billion, as gold from abroad poured into the US to pay the deficits in trade run up by foreign nations. New York, backed by gold reserves, was the unchallenged world banker.

This process began to deteriorate after a steep postwar recession in 1957-58. That recession should have been the alarm bell to US economic policy planners and industry that the unique period of profiting from the relative economic dislocation of a war-torn world was at its outer limits. Beginning 1957 the US economy was in need of a substantial regeneration, were it to remain globally competitive. That was not to happen.

By the time of the November 1967 British Sterling crisis, where the British Government was forced to violate IMF rules and devalue Sterling by 14% to maintain their economy amid severe recession, the focus turned on the fact that President Lyndon Johnson’s Great Society and disastrous Vietnam War costs were causing the US government to run record budget deficits. The dollar was vulnerable to a run on US gold for the first time since the 1930’s.

To hide the extent of those deficits, the Johnson Administration introduced creative accounting. For the first time the Budget director added the funds paid by working Americans into the Federal Social Security Trust Fund, a surplus that was to have been set aside to pay future retirement and related benefits for most Americans, to the Consolidated General Budget—a start to budget fakery which by the early years of the next century were to become huge.

Johnson also began manipulation of key government economic statistics used to compute everything from unemployment to inflation to GDP. The statistical manipulations, for reasons of obvious if fateful political opportunism, were endorsed silently by every succeeding Administration, the most egregious of them being the present Bush-Cheney Administration. 5

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