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International cooperation - a way out?


The more the capitalist world falls into disarray, the louder rise the cries about the need for international cooperation to set thing aright. One does not have to look far to find the evidence of disorder. Wide swings in foreign exchange rates, enormous inter-nation capital flows, a long-lasting and growing U.S. trade deficit, complex interlinking of debt throughout the global financial network, and extensive worldwide speculation in foreign exchange and financial instruments--all in the midst of grinding stagnation adding up to a system tottering on the brink of a potential breakdown of international finance and severe economic decline.

Looking for a solution, the heads of the leading capitalist nations have been meeting since 1976 in so-called economic summits in search of coordinated economic policies to bring a measure of stability in international economic relations and a way out of stagnation. Although each of these meetings has ended up a greater fiasco than the preceding one, the dream lives on that harmonious cooperative leadership is feasible. So much so that one even hears these days voices on the left calling for a progressive program for the reorganization of world capitalist society. The aim is to be practical: since something must be done to straighten out the mess capitalism has gotten into, the right will do it its way unless the left comes up with a better alternative.

In order to fight on this terrain, however, one must have faith that cooperation among capitalist nations is possible, that the leading countries, whether led by regimes of the left or right, are able to coordinate their economic policies according to a mutually agreed-upon plan. At the same time, the call for a progressive type of international cooperation represents a sharp turn from earlier speculations by radical theoreticians. The massive growth of multinational corporations and international banks since the end of the Second World War was supposed to have given birth to a new international of capital--a kind of superimperialism--ruling over the world economy and greatly reducing the importance and viability of the nation state. History has of course proven the opposite to be the case: the more international capitalism became, the more pronounced became the nationalism of bourgeois states.

This generalization of course does not apply with equal force to all regions. Distinctions must be made between the periphery and the core of the global capitalist system, and between the weaker and stronger industrially advanced economies. Third world countries have long been subject to the influence and control of foreign capital. This subordination has been further entrenched by the latest outbursts of foreign investment and the operations of the IMF and the World Bank. But as far as the stronger core nations are concerned, the new stage of internationalization has in no way diminished the national struggle for power--a struggle that in the final analysis has to do with the division of the world's economic surplus. The essential nature of the advanced capitalist countries' jockeying to maintain or improve their position in the hierarchical ladder has not changed. What is different is that the arena of conflict has shifted more and more to global financial markets.

The fact that it was found necessary to hold economic summits is itself a sign and product of the widening scope of competition among nations. Although these meetings have done little beyond emphasizing the growing tensions, they have also been occasions for the United States to try to re-establish its hegemony. As a West German official recently noted with reference to the summits, "When the United States talks about coordination, it means, let's do things our way.' (Wall Street Journal, June 29, 1987) The contestants on the economic and political battlefields are well aware of what is at stake. But theoreticians continue to live in a world of illusions. The basic fallacy in their thinking about international cooperation is a belief that beneath the existing disunity there is an underlying harmony of interests among capitalist nations. This is as much a delusion as the belief in the harmony of class interests within the individual nations.

Disharmony between classes, nations, and regions within nations, is at the root of the capitalist way of life. It should not be necessary to explain to Marxists how so-called free markets reproduce inequality and conflicts of interest, nor how the state actively participates in promoting and sustaining the various types of inequality. Yet in the interest of playing a role in practical politics, even some Marxists tend to overlook these fundamentals and to fall back into the myths and illusions prevalent in bourgeois ideology. This is especially evident with respect to the time-honored doctrine of harmonious national interests in foreign trade.

The prevailing wisdom on international trade is based on a theory advanced by David Ricardo, which by now is accepted as self-evident truth even at times in centrally planned economies. A comparison between the doctrine in its original formulation with reality can be instructive. We are referring to what is known in economic literature as the theory of comparative advantage. According, to this theory, when the impersonal marketplace is in control, each country will concentrate on making those goods for which it is best suited and will buy from other countries the ones for which they are best suited. In this way, each country gets the maximum benefit from foreign trade.

To make this point, Ricardo used the following example: (1) Portugal and England as trading partners, and (2) wine and cloth as the items of trade. Since England produces cloth more efficiently than it could make wine, it pays for England to concentrate on the production of cloth and to exchange its cloth surplus for foreign wine. Portugal, on the other hand, is a relatively more efficient producer of wine than cloth. Hence Portugal specializes in wine and exchanges its wine surplus for cloth.

According to Ricardo's theory, Portugal ought to specialize in wine even if it were able to make cloth more efficiently than England. What is decisive is that each country should use its resources in such a way as to get the greatest amount of both wine and cloth. Thus, if Portugal could get more wine and more cloth by putting all its capital into wine and then importing cloth, the best course for Portugal's prosperity would be to concentrate on wine even if Portugal could produce cloth more efficiently than England. It follows that each country is better off under the banner of free trade, for with free trade each will make optimum use of its comparative advantage, which in turn arises from the quality of the soil, the skills of labor, the experience of capitalists, etc.

The comparative-advantage doctrine has, as noted, become almost universal dogma, to the point of being accepted as the common sense of our times. Not only is the doctrine itself treated as scientific in economics textbooks, but Ricardo's illustration is repeated over and over again. The frequent recurrence of this illustration is easy to understand, since it is plausible, and the facts seem to be consistent with the theoretical model. Indeed, at the time Ricardo wrote, and perhaps up to this day, he was absolutely right: England did have a comparative advantage in making cloth and Portugal in making wine. But the rub is that he was equally wrong in thinking that this was the inevitable result of "pure' economics or that it proved the inevitable superiority of free trade.

Here what is needed is not a knowledge of abstract economic laws but of history. And what a study of history reveals is that the respective comparative advantages of England and Portugal had their origin not so much in economics as in politics. What mattered was rooted not in soil or labor productivity, but in the superiority of British seapower and in Portugal's inability to hold on to its overseas empire without the protection of the British navy.1

The close ties between England and Portugal go back to the fourteenth century. In the early stages of this "friendly' relationship, Portugal was the dominant power owing to its strong navy and the use of that navy to obtain vast and rich colonial possessions. But Portugal had a small population and was unable to stand alone against the inroads of neighboring Spain. Conquered by Spain in 1580, Portugal required sixty years to regain its independence.

The many years of foreign control and the struggle for independence greatly weakened Portugal. To maintain its independence and to keep control over its far-flung colonial empire, it needed English help, support that became increasingly meaningful as a result of the rising strength of the English fleet. England, in turn, could make good use of Portugese harbors in its own striving for empire and for command of the sea lanes of the South Atlantic Ocean and the Mediterranean Sea. But a simple quid pro quo was not enough for England, given the great disparity of power between the two countries. In a series of four commercial treaties, beginning with the Treaty of 1642 and ending with the Methuen Treaty of 1703, England imposed the conditions which established and enforced the "ideal' international division of labor celebrated to this day as a prime example of the virtues of objective and independent economic laws. The terms of the several treaties increasingly fostered Portugal's economic dependence on England--a price Portugal had to pay for maintaining a colonial empire without adequate military resources.

The earlier treaties (1) opened the door to English ships in Portugal and Portugal's African and Indian territories, (2) gave special privileges to English traders in Portugal, and (3) required that Portugal buy all its ships from England. Each subsequent treaty broadened England's advantages, including the right to trade with all the Portuguese colonies (except for some trade monopolies Portugal retained in Brazil), the setting of limits to duties on imported British goods, and the exclusive right to rent ships to Portugal. The privileges thus obtained by England gave it access to the profitable. African slave trade and the trade with Portugal's American colonies strengthened the British ship-building industry, and opened up markets for British manufactures.

All this, however, was merely the setting for the definitive division of labor imposed by the Methuen Treaty of 1703. In barest outline, the background to this treaty can thus be summarized: (1) A series of economic problems in Portugal had led to the development of a protectionist policy. Since commercial treaties inhibited the raising of tariff barriers, Portugal practiced protection by forbidding its people to wear foreign cloth. A lucrative market for British manufacturers and merchants was thus cut off. (2) While the British people preferred the lighter French clarets to the heavier Portuguese wines, wars with France and France's own protectionist policies induced Britain to look for alternative sources of wine. (3) Gold had been discovered in Brazil, and over the years productive gold mines had been developed there.

Against this background, the provisions of the commercial Methuen Treaty were few, but they hit directly at the crux of Britain's problem: Portuguese restrictions on English woolen cloth and wool manufactures were lifted; in return, Britain guaranteed a lesser duty on Portuguese wine relative to French wine. The results were likewise clear and simple: Portuguese cloth manufacture was smothered in its infancy; instead of developing a dynamic manufacturing industry, Portuguese capital flowed into viticulture and wine-making--to such an extent that investment in these fields replaced not only manufactures but such investment as was needed to expand production of corn and foodstuffs. As for England, the Methuen Treaty contributed substantially to expansion of English cloth production, and the resulting larger-scale production helped reduce manufacturing costs and thus strengthened English ability to penetrate other foreign markets.

On top of all this, the gold obtainable in Portugal's Brazilian colony came to play a strategic role in these new trade arrangements, as well as in Britain's subsequent expanded economic development. Consequent to the treaty, Portugal's economy--with its concentration on wine, and in the absence of a manufacturing industry which would have given greater economic flexibility--became increasingly dependent on the British economy. With trade between the two countries flourishing, Portugal's imports of goods from England far exceeded its exports to England. A large portion of the ocean trade between the two nations was carried in English bottoms, thereby intensifying Portugal's unfavorable balance of payments. The solution: the gold mined in Brazil was used to settle the bulk of Portugal's accounts with England. Portugal thus became a transmission belt, actually more like a sieve. Brazil's gold was shipped to Portugal and then in large measure transshipped to England. Thus, Christopher Hill observes: "Especially after the Methuen Treaty of 1703, Portuguese trade, and particularly the gold of Brazil, contributed to the establishment of London as the bullion market of the world.'2 In other words, it was an important stimulus to England's evolution as the foremost capitalist nation and the world's banker.

Thus, what is generally taken to have been natural and the acme of efficiency when viewed as a "pure' example of the benefits of international trade, turns out to be historically created--created in the context of colonialism, war, nationalist rivalries, and military power. Moreover, this is but a mild example of the origins of the modern international division of labor: it occurred between two Christian, colonizing powers; it barely touches upon the kind of international division of labor imposed by the practices of outright colonialism, including changes in countries in which production ability had previously been superior to that of the colonizers. As the noted economic historian Carlo Cippola wryly comments, it was fortunate for England that India had no Ricardo of its own:

The story of the East India silks and calicos that were imported into England and caused difficulty for the English textile industry is so well known that it does not need to be told here. It was fortunate for England that no Indian Ricardo arose to convince the English people that, according to the law of comparative costs, it would be advantageous for them to turn into shepherds and to import from India all the textiles that were needed. Instead, England passed a series of acts designed to prevent importation of Indian textiles, and some "good results' were achieved.3

Cippola could have added the case of Japan to hammer home his point. Had Japan accepted Ricardo's doctrine as a guide, it would have remained a backward and impoverished agrarian nation rather than the industrial giant it has become.

It is of course not our intention to imply that foreign trade in and of itself is harmful. Obviously, it can be useful and necessary. What needs to be understood is simply that mutual benefit from trade arises not from comparative cost advantages at any given time but from a situation in which trading nations have a high degree of independence as well as flexibility in the use of their resources. Clearly, that is not the general case today. What we are living with is what history has produced: a world with a hierarchy of nations, major differences in power and wealth, and a foreign-trade pattern that reproduces these inequities. That is hardly the environment in which a constructive international order can be created. Without a degree of equality and independence, cooperative structures can only serve to disguise the perpetuation of differences.

Neither glaring inequities between the core and periphery nor the dream of a better world motivate the leading capitalist nations to seek coordination of their policies. Coordination of a sort has existed in the past whenever a hegemonic power has been able to impose the rules of the game. Hegemonic arrangements, however, are inherently unstable because of the uneven development of capitalist nations. The breakdown of hegemony, such as is now being experienced, creates confusion in money markets, intensifies struggles for power, and sets the stage for new crises. What is happening today, it seems to us, can best be understood against the background of the following historical sketch.

According to conventional wisdom, international economic relations were automatically regulated by the gold standard from approximately the mid-nineteenth century to the First World War. The facts, however, are quite different. It is true that a good measure of success was achieved in those years in maintaining exchange-rate stability, but it was a stability confined to the advanced capitalist countries. As explained by Robert Triffin, a leading authority in this field:

This success . . . was limited to the more advanced countries, which formed the core of the system, and to those closely linked to them by political as well as economic and financial ties. The exchange rates of other currencies--particularly in Latin American--fluctuated widely and depreciated enormously over the period. This contrast between the "core' countries and those of the "periphery' can be largely explained by the cyclical pattern of capital movements and terms of trade, which contributed to stability in the first group and to instability in the second.4

Moreover, even in the case of the core countries, stability was achieved not through the automatic mechanism of the gold standard, but because of Great Britain's dominant role in international finance. It was not the gold standard but Britain that ruled the roost.

The advantages that Britain enjoyed during most of the nineteenth century were its overwhelming military (naval) superiority, its vast colonial empire, and its leading position as manufacturer, trader, and banker. The unique role of the London money market--its influence on world prices and on the internal price structure of other countries--was bolstered by its ability to export capital. The flow of credit from London, and not the mechanics of the gold standard, cushioned imbalances arising from economic transactions among the leading nations. And the ability to perform this function was in turn based on Britain's hegemonic position. It was this that enabled Britain to move capital abroad beyond what its gold reserves and trade balance would in the normal course of events support. This foreign lending capacity was enlarged by two factors: (1) the acceptance by other countries of sterling as a reserve currency; and (2) the large deposits kept in London banks by members of its empire, countries that borrowed heavily in England, and allies that relied on British military support.

Britain's domination of international finance was for all practical purposes undisputed during most of the nineteenth century, but this situation began to change as the century drew to a close. British supremacy on the seas was challenged by other imperialist powers, and its lead in manufacturing and trade was cut into by the rise of competing industrial nations. Nevertheless, despite a gradual loss of absolute hegemony, London remained the world center of finance until the First World War. In part, this was due to the sophisticated banking institutions created during earlier years and to the continuous inflow of profits from foreign investment. But more important were the advantages arising from Britain's long-standing colonial possessions. When competition from other industrialized nations began to hurt, Britain was able to shift exports to its colonies. And control over the colonies, notably India, provided a source of great financial strength.

Although London remained in the driver's seat, there was growing uneasiness in British corridors of power as other money-market centers began to gather strength in the years preceding the First World War. U.S. banking power was on the rise and the U.S. Treasury (along with U.S. banks) stockpiled gold at a furious rate. Dependence on London was becoming increasingly irksome to U.S. financiers, but in the absence of a central bank and other needed institutional arrangements, the New York money market had little opportunity before 1914 to free itself from this yoke. On the other hand, the huge absorption of gold by the United States foreshadowed coming developments. By 1910 the United States controlled one third of all the gold held by the world's monetary authorities. The British managed the gold market and held onto their predominance even though they had less than 4 percent of all gold reserves held by monetary authorities. The U.S. gold reserves were for the moment idle, but they hung like a sword of Damocles over the world's financial system.

France too became a major gold holder, second only to the United States, and likewise a potential threat to British ascendancy. In addition, Paris became an important exporter of capital, for political as well as economic advantage. Its expanding banking system competed for deposits of foreign governments, once Britain's preserve. Yet troublesome as the emerging New York and Paris financial centers were, the most pressing and urgent threat came from Germany. It should be recalled that the practically universal use of sterling as the currency of international trade was a principal component of Britain's financial sway, and it was precisely into this strategic sphere that Germany began to penetrate, with the mark evolving as an alternative to the pound. The Deutsche Bank conducted "a stubborn fight for the introduction of the mark's acceptance in overseas trade in place of the hitherto universal sterling bill . . . this fight lasted for decades and when the war came, a point had been reached at which the mark acceptance in direct transactions with German firms had partially established itself alongside the pound sterling.'5

Rivalry among the advanced capitalist nations was the name of the game in the upsurge of imperialism toward the end of the nineteenth century. This was evident in the struggle for colonies and spheres of influence, the intensified competition in world trade, the growth of protectionism, and the arms race. And to this must be added measures taken by rival nations early in the twentieth century to unseat Britain from its unique privileged position in the monetary field. In this regard, Germany was the main threat to Britain's wealth and economic security. As one economic historian put it: "It seems that if war had not come in 1914, London would have had to share with Germany the regulatory power over world trade and economic development which it had exercised so markedly in the nineteenth century.'6

But whether regulatory power could have been shared for long by two rival nations is highly dubious. In the very nature of the case, the benefits accruing to one party in the exercise of such power come at the expense of the other. A more or less equal distribution of regulatory power between rival nations would tend sooner or later to lead to an economic and possibly a shooting war. And this indeed was one of the underlying causes of the First World War which drastically changed the entire pre-existing balance of forces and in the process produced havoc in the international monetary system.

The finances of Britain, France, and Germany were undermined by the war. Britain and France were faced with huge debts, while Germany was saddled with an enormous reparations burden. Britain, in addition, lost a source of foreign income because it had to sell off foreign investments to pay for munitions and other needed supplies. On the other hand, the international financial position of the United States began to measure up to its industrial strength. It had financed the Allies and was now in the envious position of a creditor nation. The destruction of industrial and agricultural capacity in Europe opened up opportunities for the expansion of U.S. exports, and the huge stockpile of gold amassed in previous years stood the country in good stead. On top of all this, the passage of the Federal Reserve Act in 1913 had created an effective central bank and removed earlier barriers to the development of international banking.

The shifting national fortunes created a new constellation of power at the heart of world capitalism. Britain was no longer able to control international monetary affairs as in the past. But it did retain its empire, its international banking network, and its traditional trade channels. As a result, the pound continued to be used as a reserve currency, though much less so than in prewar years. Increasingly, London had to contend with the growing use of the dollar as a competing reserve currency. Instead of the earlier hegemony, Britain had to cope with the rivalry of a vigorous new challenger.

As economic recovery took over after the war, the Western countries attempted a return to the gold standard and to more or less fixed exchange rates. But the resulting stability was short-lived. Neither the United States nor Britain alone had sufficient resources to dominate the international monetary system. The power structure was a divided one, with each nation striving mightily to protect its own interests at the expense of the interests of its rivals. As a consequence, the shaky stability of the mid-twenties, resting as it did on a weak and unreliable foundation, came tumbling down with the crash of 1929. And the fragility of the international monetary system of the 1920s contributed in turn to the depth and length of the ensuing depression.

The Great Depression brought with it a slew of bank failures and chaos in the international economy. World exports dropped precipitously, falling 25 percent between 1929 and 1933, and the export of capital dried up. Countries in the periphery went into a tailspin as the demand for their exports shrank and foreign capital was no longer available to help them cope, if only temporarily, with their balance-of-payments difficulties. The international monetary system simply disintegrated.

In these conditions it was inevitable that economic warfare among the leading capitalist nations should become the order of the day. From this bitter struggle, the following five currency and trading blocs emerged: (1) the sterling bloc: Britain, its colonies and Dominions (except Canada), and a number of countries that in the past had strong trading and banking ties to Britain; (2) the U.S. dollar area: the United States, countries in North and South America, and U.S. possessions; (3) the "gold bloc' led by France and including Switzerland, Belgium, the Netherlands, Italy, and Poland; (4) the German sphere of influence based on bilateral trade and currency agreements between Nazi Germany and Central and Eastern Europen countries; (5) the yen bloc: Japan, its colonies and newly conquered territory, and a number of other Asian countries. The common feature of each of these groupings was the binding of relatively weaker, dependent nations to a core country.

Some attempts at reconciliation among the blocs were made in this period, notably the Tripartite Monetary Agreement of 1936 between France, England, and the United States. But that feeble arrangement did not lead, as intended, to the reconstitution of an international monetary order; and the dominant feature of the 1930s remained a stagnating world economy divided into contending blocs. A noteworthy feature of these blocs, and the alliances formed among some of them, is that they pretty much prefigured the lineups of the belligerents in the Second World War.

The peace that followed the Second World War provided a new opportunity to unify the world capitalist system, this time under the leadership of the United States which had again emerged a tower of industrial and financial strength among devastated combatants. But whereas after the First World War the United States was a novice at the game and had to struggle to gain a place for itself at the top, this was no longer the case after the Second World War. For all practical purposes Great Britain had been knocked out: to finance the war it had consumed a good deal of its capital, again sold off its foreign investments, gone heavily into debt, and needed to borrow still more to get back on its feet. The United States, on the other hand, not only stood out as a creditor nation in a sea of debtors but also possessed the most powerful military force and the largest industrial capacity. In short, the United States was in a position to call the tune.

The architects of the international economic system which emerged from the Second World War were haunted by memories of the disarray among the major financial powers that characterized the 1930s: growing protectionism, moribund international capital flows, constantly fluctuating exchange rates, and trade and currency wars. The new order designed to overcome these evils consisted of three principal elements: liberalization of trade through removal or reduction of tariffs and other barriers to trade (GATT); provision of credit to stimulate development in the third world and hence demand for exports from the industrialized nations (World Bank); and stabilization of exchange rates (IMF). The primacy of the United States was directly or indirectly recognized in each of these new institutional arrangements, most notably in the fact that the new currency parities were expressed in a gold unit equal to the official gold price of the dollar ($35 per fine ounce). What this meant, in effect, was that all other currencies were tied to the dollar and the dollar itself to gold. The stage was thus set for the dollar to become the universal currency.

The innovations were geared to a revitalization and expansion of world trade which was expected to, and in fact for some two decades did, buttress a new long wave of prosperity. Underlying all this was the assumption that harmony of interests among the leading nations could be achieved and maintained. In the special circumstances of the time, and for a period thereafter, this was not too fanciful a notion. Frictions arising from conflicts of interest among the ruling classes of different nations were always present. Yet in the aftermath of war there were reasons for a degree of harmony to exist, some of them associated with the presumed self-interest of the capitalist nations and others imposed by the urgent needs of war-torn, resource-depleted countries for U.S. assistance. There was a strongly felt need, in view of the expansion of the socialist world, to prevent further revolutions, even including ones which seemed to be threatening some of the developed capitalist countries such as France and Italy. Finally, new and more reliable means of control over restive countries in the third world were urgently required. For all these reasons the colossal U.S. military machine, stradding the globe, was perceived by other capitalist nations to be a crucial defender of their own vital interests, while from an immediate economic standpoint they desperately needed loans and grants to rebuild their treasuries and get reconstruction under way.

Given these conditions of generalized dependence, "harmonious' submission to the will of the United States was the natural consequence. This is not to say that all the powers were happy about every aspect of the new order, especially the adoption of the U.S. dollar as the universal currency. Still, even this did not seem too onerous or dangerous in the light of the size of Washington's gold reserve. Dollar convertibility appeared to be well protected by the 70 percent of the world's monetary gold stock resting in U.S. vaults. Finally, there was a widespread belief, or at least hope, that the leading powers would become self-disciplined and cooperative, taking their lumps when needed for the good of the community of nations. Countries with a persistent surplus or deficit in their balance of payments, for example, would be expected to change their policies to restore equilibrium.

The system did work for nearly two decades. World trade expanded vigorously. After some initial postwar adjustments, exchange rates of the core countries remained relatively stable. (This was not true for the periphery where, as in the past, devaluations remained the norm.) Increasingly, however, the contradictions inherent in the new arrangements rose to the surface. Paradoxically, it was the reliance on U.S. military power as the protector of the capitalist world which generated the conditions that eventually led to increasing disharmony. The outflow of dollars from the United States to pay for its worldwide military machine, the major wars in Korea and Vietnam, and large-scale military and economic aid to client states generated severe strains in the U.S. balance of payments. Relations between the United States and the rest of the world were also thrown out of kilter by the export of capital by the expanding U.S. multinational corporations--itself a byproduct of the disproportionate concentration of economic power in the United States. The net result was a growing deficit in the U.S. balance of payments, beginning in the early 1950s, that ultimately led to a disruption of the postwar international monetary system. These unending balance-of-payments deficits were financed by flooding the world markets with dollars. Up to a point, the central bankers of the other powers gladly accepted the dollars. But when there seemed no end to the pile-up of U.S. money in their hands, they began to convert dollars to gold. Because of the ensuing depletion of its gold reserve, the United States in 1971 unilaterally abandoned the linchpin of post-Second World War "harmony' by suspending the convertibility of dollars to gold. This ended the relative stability of exchange rates that had existed in the early postwar decades. After that the dollar's exchange value with other currencies went on a roller coaster, declining 28 percent between 1970 and 1980, rising 80 percent to the first quarter of 1985, and then declining by 40 percent to the present, with no end to the decline in sight.

The United States is still the richest and most powerful country and the dollar is still the nearest thing to a universal currency. These were the solid foundations of the pre-1971 system. What has changed is not that the foundations are no longer in place but that they are no longer solid. Other capitalist centers, most notably Japan and West Germany, have been gaining in power relative to the United States since as far back as the Korean War. Most central banks still hold the largest part of their reserves in dollars, but the proportion held in yen and marks has been steadily inching up in recent years.

What is clear is that despite the continued primacy of the United States, there is no reason to assume that a new hegemonic order capable of enforcing a degree of stability is in sight. Central bankers outside the United States still hold onto their dollars and accept even more because for the time being they have no alternative. At the same time they as well as U.S. monetary authorities are on edge because of the growing disorder. There are four focal points of this disorder that have been causing their concern.

(1) The U.S. balance-of-payments deficit has been growing to unprecedented heights. The country's merchandise trade deficit has risen form $67 billion in 1983 to an annual rate of almost $160 billion thus far in 1987, despite the decline in the exchange rate of the dollar. The deficit keeps on being financed by an inflow of capital from other money centers. It is anybody's guess how long this inflow will last, but it is reasonable to assume that sooner or later a decline in the capital imported into the United States will take place. In that event, there would be imminent danger of a serious disruption of the U.S. economy and its financial markets.

(2) The wide fluctuations in exchange rates are partly caused and partly exaggerated by speculation. This can be seen in the very size of the transactions in foreign currencies. Thus, a day's transactions in the international trade of goods and services amount to about $3 billion, while the world foreign-exchange markets every day register $50 to $100 billion in transactions.

(3) The third world debt remains an unexploded bomb threatening the stability of the major banks in the United States and Europe.

(4) International banking has grown by leaps and bounds in recent years. The volume of international banking activity as a proportion of the total capitalist world's gross domestic product came to a little more than 1 percent in 1964; by 1985 it reached 20 percent. In the same period, banking activity rose from 11 percent of the world trade in goods and services to 119 percent. This new phenomenon is part of the global debt explosion as well as a new source of fragility. A great deal of the growth of the international banking market involves banks lending to each other, an interlinking that can occasion a chain reaction of failures if a break occurs in one of the links. Furthermore, international banking is on the whole unregulated.

It should be noted that all of these trouble spots emerged as stagnation spread throughout the capitalist world. Stagnation set the stage for the financial explosion as well as the heating up of competition in the face of global excess manufacturing capacity. The relative harmony among the core countries under U.S. hegemony, in contrast, was supportable as long as world markets were expanding at a good rate. The tensions smoldering underneath broke out on the surface when growth slowed down, with a resulting increase in the virulence of nationalist feelings.

The idea that far-reaching international cooperation is feasible under these conditions is about as remote from reality as one can get. Each step in an attempt to eliminate imbalances tends to produce a new set of problems. Thus, if the United States were to reduce imports sufficiently to eliminate its trade deficit, the economies of countries exporting to the United States would suffer. This would especially hurt third-world countries who would then have even greater difficulty servicing their debts. To achieve stability in the foreign-exchange markets a lid would have to be put on speculation and some means found to stabilize exchange rates. But how can stability be achieved if an exchange rate that favors one country harms another? To reap balance out of imbalance, some countries would have to accept a voluntary reduction in income, leading to growth in unemployment, reduction in welfare, and a possible financial collapse. The list of contradictions could go on and on: the main

point to keep in mind is that capitalism and its market system are by their very nature anarchic. To advocate eliminating anarchy--whether in domestic or international affairs--while maintaining the system serves only to foster the worst kind of illusions.

(October 1, 1987)

1. This point and what follows on the subject is based on S. Sideri, Trade and Power, Informal Colonialism in Anglo-Portuguese Relations (Rotterdam: Rotterdam University Press, 1970).

2. Christopher Hill, Reformation to Industrial Revolution (New York: Pantheon Books, 1967), p. 187.

3. Carlo M. Cippola, European Culture and European Expansion (Baltimore: Penguin Books, 1970), p. 152.

4. Robert Triffin, Our International Monetary System: Yesterday, Today, and Tomorrow (New York: Random House, 1968), p. 13.

5. H. Parker Willis and B. H. Beckhart, Foreign Banking Systems (New York: Henry Holt, 1929), p. 710.

6. J. B. Condliffe, The Commerce of Nations (New York: Norton, 1950), p. 378.
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Title Annotation:text prepared for the 12th annual conference on Socialism in the World - Socialism, Nations, and International Cooperation
Publication:Monthly Review
Date:Nov 1, 1987
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