4 June 2013 — New Left Project
On the opening page of their superb work on the political economy of the American Empire, Leo Panitch and Sam Gindin outline the fundamental premise of their study: that the American state has played ‘an exceptional role in the creation of a fully global capitalism and in coordinating its management, as well as restructuring other states’.
A distinctive feature of Panitch and Gindin’s analysis is its emphasis on the role of the US Treasury and the Federal Reserve in making global capitalism. This focus draws us naturally towards the Anglo-American dimension since there has been a profound and unusual symmetry between the core institutional complexes of capitalist power in both countries. The ‘Federal Reserve-Treasury-Wall Street’ complex at the heart of American financial power, has been articulated in and through the central nexus of power within the British state; the City-Bank-Treasury nexus.
The integration of private banking power with key financial components of the state has been central to the modern development of both countries. It is through this central nexus between private finance, Treasury control and Central Banking that capitalist power is principally instituted within the state. The Treasury and the Central Bank function as two related components of the government account. The Treasury is empowered with the capacity to spend, tax and issue public debt, while the Central Bank sets interest rates, regulates credit supply, governs the exchange rate and pursues price objectives while also serving as the lender of last resort to private banks. Through these interrelated processes, the behaviour of Treasuries and Central Banks are crucial to regulating and shaping the overall flow of national economies and their situation within the broader world market.
The authoring power of state institutions within capitalism, exercised in close conjunction with private banks, is often grossly understated in neoliberal discourse, which tends to portray business and the state as antagonistic interests. In reality there is a fundamental ontological proximity between the central financial institutions of the state and the capitalist banking system that underpins economic activity at large. Public debt, for example, provides a major interest-earning asset to the banking system and the holding of accounts with the Central Bank by major private banks is foundational to the monetary system in capitalist states.
The British state and the making of global capitalism
The British state has played a special role in the formation of global capitalism. In the nineteenth century, Britain sponsored free trade and financed global capitalism through the commercial operations of the City of London. Under the classical gold standard, the pound sterling functioned as the key international currency, with the Bank of England and the British Treasury playing a crucial role in managing and underpinning the system. The precondition of American capitalism’s modern ascendance, then, with the dominance of American banks, American corporations and the US dollar, was the decomposition of the old international financial system centred around Britain. During the reconstruction of global capitalism under US leadership, the Federal Reserve and the US Treasury have played increasingly important managerial roles.
America’s ascendance did not, however, occur through a straightforward subordination of the British state. It actually took on a much more integrative form, particularly in the post-WWII era. This was not simply the passing of leadership from one phase into the next, but a complex and uneven co-articulation of capitalist development. Over time, Anglo-American financial integration produced a specifically Anglo-American field of capitalist development centred upon the international roles of London and New York. But the interactions between these two states have been neither straightforward nor linear. The post-war relationship between Britain and the United States has been punctuated by moments of crisis, during which the possibility for a radical reversal of trajectory existed.
The two World Wars greatly accelerated America’s supplanting of British dominance, sapping the strength of the British Empire and giving the United States leverage power as creditor over Britain’s spiralling national debt. It was a power they wielded with gusto. But although this dynamic of displacement was often beset with friction and rivalry, it was also marked by an underlying and developing compatibility of interest between key players on both sides of the Atlantic, none more so than the banking communities in London and New York.
The role of bankers in both countries has been hugely important. Anglo-American financial ties have deep roots, going back to the days of the nineteenth century when the great banking dynasty, the House of Morgan, straddled the Atlantic, with offices in New York and London, funnelling British finance into the development of the American railway system. Those ties continued into the twentieth century, with the House of Morgan playing a key role in funding the British effort during the Great War. And it was Anglo-American bankers who led the—ultimately unsuccessful—efforts to reconstruct the Gold Standard and resuscitate world trade during the 1920s.
Anglo-American foundations of Bretton Woods
The Anglo-American crux of the international economy was reflected in the creation of the Bretton Woods framework that heralded the end of WW2 and the birth of the post-war financial system. Bretton Woods was very much an Anglo-American project, but as John Maynard Keynes (Britain’s chief representative in the negotiations) was to learn, it was the Americans, led by Harry Dexter White, who were ultimately in the driving seat. What finally emerged from the negotiations was a compromise between British and American priorities that corresponded more closely to American interests. The agreement was hugely important because, as Panitch and Gindin suggest, it ‘institutionalized the American state’s predominant role in international monetary management as part and parcel of the general acceptance of the US dollar as the foundation currency of the international economy’.
The final agreement represented an attempt to balance an integrated international economy with the need to maintain national autonomy. Both Keynes and White were trenchant in their commitment to capital controls as a means to insulate national economies from speculative capital flows. Currency stability was seen as vital to stimulating the recovery of international trade and so a commitment to fixed exchange rates was enshrined. Under the new system, the dollar would act as the key international currency.
But despite the international recognition of the dollar’s predominance, British elites did not abandon their attempts to resuscitate sterling’s role as an international currency. This was to have disastrous effects upon Britain’s post-war development, leading to the notorious ‘stop-go’ cycle which bedevilled growth in the 1950s and 60s, with Britain falling behind other advanced industrialised states.
One of the main reasons for the reluctance to let sterling depreciate and abandon its international role was the concern that this would imperil London’s role as an international financial centre and threaten British banking. But defending sterling was also a key policy goal of the Americans, who viewed it as a central pillar of the Bretton Woods system and the first line of defence from speculative attacks on the dollar.
Although London had been surpassed by New York during the interwar years, the Conservative government of 1951, in conjunction with the City’s merchant banking elite, was desperate to restore London’s international standing. The way in which they finally accomplished this goal massively impacted not only Britain’s role within the global political economy, but also the future of global capitalism.
The Euromarkets and the collapse of Bretton Woods
Not only were Britain and America the principal founders of the Bretton Woods system, they were also central to the transformations in global finance that ultimately undermined the Bretton Woods system and led to its collapse in 1971, when Nixon unilaterally delinked the dollar from convertibility with gold.
Towards the end of the 1950s, restrictions upon the use of sterling, imposed in response to periodic balance of payments crises, prompted British merchant bankers to develop an innovative method for financing international trade. They tapped in to the large volume of offshore dollars that had developed as a consequence of massive overseas American spending through military aid and the Marshall Plan, using these dollars to finance trade between third parties. So was born the offshore ‘Eurodollar Market’. As Panitch and Gindin observe, this was a ‘crucial moment in the transition to global capitalism’. By switching their allegiance to the dollar, British bankers were able to restore the City’s international role and reassert their privileged position within the British state.
However, this development came at a price. The growth of the Euromarkets further entrenched the hegemony of the dollar and led to a massive influx of American banks into London during the 1960s. By the end of the decade the money markets in New York and London had become intimately connected, with interest rate shifts on each side of the Atlantic closely linked. The City’s role had been restored, but it was now a nodal point within the global expansion of American finance and the dollar.
Through the Euromarkets, a specifically Anglo-American field of development was emerging. As American banks integrated the Euromarkets into their business strategy, attempts by American monetary authorities to control credit were undermined by inflows of Eurodollars. The integration of Anglo-American finance undermined the policy autonomy of state officials on each side of the Atlantic. In doing so it aggravated the contradictions of the Bretton Woods system, unleashing a global capital market that undermined the system of capital controls and fixed exchange rates. Increasingly, the Fed-Treasury-Wall Street nexus was transmitting its growing influence through the City-Bank-Treasury nexus within Britain.
Embracing American power in this manner was also of crucial domestic importance for Britain. It enabled the City’s bankers and the Bank of England to maintain their predominance within British capitalism at a time when many in the business community were calling for a rethink of British industrial strategy. In accepting the dollar, British bankers insulated themselves from the fate of sterling. International banks in the City were now increasingly independent from the fortunes of the British currency and the British economy, tapping in to a wider circuit of global business. For the Americans, the City and the Euromarkets enabled the sidestepping of New Deal regulations and a window for expansion into Europe.
The IMF crisis of 1976
After the collapse of Bretton Woods the global economy entered a period of sustained turmoil. The oil shock of 1973 contributed to a severe ‘stagflationary’ crisis: a combination of high inflation and low growth. Britain suffered more than most advanced capitalist states during the 1970s. The IMF crisis of 1976, coming after several decades of British balance of payments difficulties and the inflationary expansion of the Heath government, drew the British state into the disciplinary embrace of the United States to a degree not seen since the early post-war negotiations over the Washington Loan. It also signalled the symbolic termination of Britain’s ill-starred Keynesian project.
That project had been gradually undermined by the liberalisation of global finance anchored in the City’s international restoration, but also by the incompatibility of defending sterling and stimulating economic expansion. The leverage of the American state played a crucial role in 1976. The Americans wanted to make an example of the British that sent a clear message internationally and within America about the future direction of the international economy. They did just that with the imposition of strict conditionality upon a major capitalist state for the first time in the post-war period.
The significance of 1976 is not confined to the symbolic abandonment of Keynesianism and the adoption of monetarist policy tools, an occurrence that Panitch and Gindin identify as a ‘defining moment in the politics of globalization’. It also represented a severe incursion into British sovereignty. The Americans had finally lost patience with what they saw as another spendthrift Labour Government (already in 1965, Lyndon Johnson had referred to Harold Wilson as a, ‘drunk, reckless boy’, writing cheques on his father, but unable to cash them).
The key financial institutions of the American state, their influence veiled by the IMF, aligned themselves directly behind the IMF conditionality dictates and used their power to shape Britain’s development. This was a key moment in what would come to be known as the ‘internationalization’ of the state, with domestic policy increasingly reconfigured to suit the needs of international markets rather than national welfare. In Britain, it was the Treasury that was the key focal point of the process.
The chief negotiators from the US Treasury, William Simon and Edwin Yeo, were both former Wall Street financiers, and Arthur Burns, the Governor of the Fed, described himself as ‘a Neanderthal conservative naturally suspicious of a Labour Government’. These American officials, recognising the importance of Britain to the international system and spooked by the radical strategy outlined by the Labour left, pushed relentlessly for austerity. But as well as American power pushing in on Britain (with notable resistance from members of the Labour Cabinet), it was also very much a case of powerful class interests within Britain, particularly in the City, pulling in American discipline by voraciously attacking the foundations of the post-war consensus through frequent pro-monetarist salvos launched in the financial press.
Thatcher and Volcker: internalizing discipline
By the end of the 1970s, as Panitch and Gindin point out, the Fed had become aware of the need to ‘discipline itself’ in the context of spiralling inflation. This led Paul Volcker, as head of the Fed, to adopt a radical monetary stance, pushing interest rates up to record highs in order to break inflation and undermine the wage militancy of American workers. Panitch and Gindin identify this as a project of class discipline, rather than a purely technical adjustment to high inflation, which signalled to the rest of the world the commitment of the American state to sound money and financial stability.
In the United States this restoration of class power, underpinning the neoliberal political project, relied upon high interest rates, recession and market liberalization. Across the Atlantic, the formula for capitalist restructuring under Thatcher exhibited remarkable parallels, something that must be understood as a consequence of the way that both the American state and Britain had positioned themselves as lynchpins of the global financial system; they intended to signal that the 1980s would be nothing like the crisis decade of the 1970s. Embracing the credo of monetarism, long advanced in West Germany, Thatcher and Reagan made clear that price stability would be restored and working class power broken. In the absence of the Bretton Woods framework, both states demonstrated their commitment to internalizing discipline through extreme applications of monetary policy and direct confrontations with the labour movement.
Eschewing the traditional Keynesian concern with full employment, Thatcher’s government explicitly prioritised the fight against inflation. Capital controls were abolished in 1979 as the new government championed financial liberalisation, and a huge hike in interest rates was undertaken, contributing to the severe depression and rising unemployment that hit Britain between 1979-1981. But Thatcher’s commitment to monetarism was contradictory; it went alongside the dismantling of quantitative controls on bank lending that had traditionally restrained credit creation. The importance of this strategy, just as it had been in the US, was to demonstrate credibility through ‘willingness to incur very large losses in output and employment to achieve a reduction in the rate of inflation’.
The Anglo-American roots of the current crisis
The 1980s remain the key decade for understanding the shape of the contemporary political economy on both sides of the Atlantic. The ‘Big Bang’ of 1986 continued the integration of Anglo-American finance, with American investment banks buying up their smaller British rivals and moving into the City in a second wave of Americanisation. In Britain, the heady days of New Labour largely entrenched the model developed by Thatcher, placing faith in the growth generating capacity of the City and deepening the commitment to monetary discipline with Bank of England independence in 1997.
As we now know, that financial services-driven growth model was disastrously fragile. The way both Britain and America mortgaged themselves upon it backfired spectacularly with the subprime crisis of 2007. The run on Northern Rock and the collapse of Lehman brothers, with the symbolic images of employees clearing their desks in London, attested to the deep integration of financial markets on both sides of the Atlantic and their significance for the wider world.
So where does this leave us today? Britain’s co-sponsorship of financial globalisation, alongside the American state, has left a devastating legacy. Just like America, Britain is wracked by spiralling inequality of wealth and power and a growing regional unevenness of prosperity and opportunity, with the gains of globalisation increasingly concentrated within the City of London and the South East. The preconditions of this development are to be found not only in Britain’s relationship to American power, but also in the parallel sociological developments that have scarred modern Britain just as they have the United States. Returning to ‘The Making of Global Capitalism’ is instructive here. Discussing the extension of credit as the basis for working class consumption in an era of stalled and falling wages, Panitch and Gindin note the ‘profoundly negative’ impact of this process upon working class culture and organisation:
These same processes lie at the root of the meek response to the savage austerity measures and war on the poor currently being enacted in Britain. Responding to the enormous injustices of contemporary capitalism will require, above all, a restoration and re-imagination of the capacity of workers to politically organise and resist the deepening of neoliberal capitalism.
This article is the second in our series, ‘Global Capitalism and the State’.
Jeremy Green is a research fellow at the Sheffield Political Economy Research Institute. He works on international political economy, British politics and international historical sociology and is currently finishing his PhD entitled, ‘The political economy of the special relationship: American power and British development’.