The Financial Tsunami: The Financial Foundations of the American Century

By F. William Engdahl

Global Research, January 16, 2008

Part II

[Part I The Financial Tsunami: Sub-Prime Mortgage Debt is but the Tip of the Iceberg]


The financial foundations of the American Century

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

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Debt becomes the vehicle

Soon, with the implicit threat of withdrawing its nuclear shield as its prime persuasion, successive US Administrations realized that rather than depending on its role as the world’s creditor as it had until 1971, the American Century could theoretically thrive as the world’s greatest debtor, so long as American finance and the dollar dominated world finance.

As long as major US postwar satrapies ⁶ such as Japan, South Korea or Germany, were forced to depend on the US security umbrella, it was relatively simple to pressure their Treasuries into using their US dollar trade surpluses to buy US government debt. In the process, the US bond or debt markets became far and away the world’s largest. Wall Street primary bond dealers were replacing Pittsburg steel and Detroit car manufacture as the “business of America.”

To paraphrase the famous quip of former GM president Charles Wilson from the 1950’s, the new mantra was, “What’s good for Wall Street is good for America.” It wasn’t. The name financial “industry” even became commonplace, as if to designate money as the legitimate successor to production of real physical wealth in the economy.

Debt—dollar debt—was to be the vehicle for a new role of New York banks, led by David Rockefeller’s Chase Manhattan and Walter Wriston’s Citibank. Their idea was to extend hundreds of billions of dollars in newly acquired OPEC and other petrodollars, which they “persuaded” Saudi and other OPEC governments to bank their new oil surpluses in London or New York banks. Then those dollar deposits from OPEC, called by Henry Kissinger and others at the time, “petrodollars” went in the form of recycled loans to oil importing and dollar-starved Third World economies. ⁷

The Carter dollar confidence crisis

This second phase, the post-gold era, fuelled by the manipulated 1973 oil shock and US pressure on Saudi Arabia and OPEC to price oil exclusively in dollars, Kissinger’s “petro-dollar recycling,”⁸ rolled along without major trouble until early 1979 when the dollar faced a major foreign sell-off during the end of the Jimmy Carter Presidency. The American Century faced one of its greatest challenges at that juncture. German, Japanese even Saudi Arabian central banks began dumping US Treasury holdings in what was called a loss of “confidence” in Carter’s world leadership role.

In August 1979, to restore world “confidence” in the dollar, President Jimmy Carter, himself a hand-picked protégé of David Rockefeller’s Trilateral Commission, was forced by the big New York banks, led by David Rockefeller’s Chase Manhattan, to accept Paul Volcker, a protégé of Rockefeller’s from Chase Manhattan Bank, as new Chairman of the Federal Reserve with an open mandate to do what was necessary to save the dollar as reserve currency.

On taking office, Volcker bluntly announced, “the standard of living for the average American has to decline.” He was Rockefeller’s hand-picked choice to save the New York financial markets and the dollar at the expense of the nation’s welfare.

The Volcker ‘shock therapy’

Volcker’s shock therapy, begun in October 1979, lasted until August 1982. Interest rates shot through the roof to double digits. The US and world economies were plunged into a monster recession, the worst since World War II. Within a year, the prime rate had shot up to the unheard-of level of 21.5%, compared to an average of 7.6% for the fourteen previous years, a more than threefold rise in weeks. Official US unemployment peaked at 11%, while unofficially when those who simply had given up seeking work were counted, it was far higher.

Source: AngryBearBlogspot.com

The Shock Therapy of Volcker doubled US official unemployment

The Latin American debt crisis, an ominous foretaste of today’s USA sub-prime crisis, erupted as a direct result of the Volcker shock. In August 1982 Mexico announced it could no longer pay in dollars the interest rate service on its staggering debt. It, as most of the Third World from Argentina to Brazil, from Nigeria to Congo, from Poland to Yugoslavia, had fallen for the New York banks’ debt trap. The trap was in borrowing what amounted to recycled OPEC petrodollars invested in the major New York and London banks, the Eurodollar banks, which lent the dollars to desperate Third World borrowers initially at “floating rates” tied to London LIBOR rates.

When Libor rose some 300% within months as a result of the Volcker shock therapy, those debtor countries were unable to continue. The IMF was brought in and the greatest looting binge in world history, misnamed the Third World Debt Crisis, was on. Volcker’s shock policy, predictably, triggered the crisis.

After seven years of relentlessly high interest rates by the Volcker Fed, sold to the gullible public as “squeezing inflation out of the US economy,” by 1986 the internal state of the US economy was horrendous. Much of America came to resemble a Third World country, with its growing slums, double-digit unemployment and growing crime and drug addiction problems. A Federal Reserve study showed that 55% of all American families were net debtors. Federal budget deficits were running at then-unheard-of levels of more than $200 billion annually.

In reality, Volcker, a personal protégé of David Rockefeller from Rockefeller’s Chase Manhattan Bank, had been sent to Washington to do one thing—save the dollar from a free fall collapse that threatened the role of the US dollar as global reserve currency.

That dollar reserve currency role was the hidden key to American financial power.

By letting US interest rates go through the roof, foreign investors flooded in to reap the gains by buying US bonds. Bonds were and are the heart of the financial system. Volcker’s shock therapy for the economy meant soaring profits for the New York financial community.

Volcker succeeded only too well in his mission.

The dollar rose to all-time highs against the currencies of Germany, Japan, Canada and other countries from 1979 through the end of 1985. The over-valued US dollar made US manufactured exports prohibitively expensive on world markets and led to a dramatic decline in US industrial exports.

[SE Times illustration]