The Americanization of Global Finance
Henwood, Doug
The last 20 years have been kind to the United States. It defeated its rival of 70 years and restructured a good bit of the economic and ideological world in its own image. Along with the...
...Besides polarization, the Americanized system has shown a great propensity for destructive crises...
...8. According to the flow of funds accounts, total financial assets in the United States at the end of 1998 were $73 trillion, more than eight times GDP That ratio to GDP is almost twice its 1952-79 average...
...Treasury bonds from 1941 to 1981 would have lost 79% of its value in real terms, not counting fees and taxes...
...In both cases, though, the consequences for Mexican and Asian workers when the bubble burst were savage, with jobs disappearing and incomes collapsing...
...The system's fate depends on how long the people of the world can stand to live with it...
...The Americanized system has proved remarkably unreliable at promoting prosperity...
...The classic Bretton Woods system encouraged trade flows, as did repeated tariff reductions agreed on through the mechanism of the General Agreement on Tariffs and Trade (GATT...
...That is, as national barriers to capital mobility have largely disappeared over the last 20 years-thanks primarily to U.S...
...A portfolio of long-term U.S...
...3. Erich Helleiner, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s (Ithaca: Cornell University Press, 1994), pp...
...We were convinced we were moving with the stream, and that our job was to make the stream move faster...
...The peak periods were the first decade of the century and the 1920s...
...Mexico and the rest of Latin America offer a precedent, though Korea's economic fundamentals are a lot stronger...
...A clue can be found in the prominence of mergers and acquisitions, venture capitalists, and IPOs...
...The United States emerged from World War II with a relatively small and tightly regulated financial system, with corporations run by professional managers and technocrats and Wall Street largely marginalized...
...Official finance-loans from governments and from public entities like the World Bankdwindled, and private finance took its place, and within the realm of private finance, loans from banks dwindled and were replaced by funds coming from bond and stock markets...
...These changing patterns have several important implications...
...Corporations, financial markets, central banks and imperial ambitions all helped create each other in their modern form...
...such an ideal portfolio would have gained 393% by mid-1999...
...Lobbying groups of large institutional investors, led by public-employee pension funds, pushed another wave of restructurings on U.S...
...If capital were free to seek its highest, best purposes-defined, of course, by its maximum profit opportunities-efficiency would rule and growth would accelerate...
...Managers of the new corporations and shareholders, all with international ambitions, also wanted the dollar to be a respectable currency on world markets, more like the British pound than the junk currency it was...
...The logic is that a purchase of a stake that large is not really a short-term trade, but part of a longerterm business strategy...
...This distinction has blurred in recent years, as stock and other financial markets have grown, but it still offers a useful way to think about the relations between finance and the real world...
...But mass prosperity is probably the last thing to expect from Americanization...
...productivity levels, meaning their currencies were chronically undervalued relative to the dollar.12 Starting in the 1970s, the United States began pressing for liberalization of capital accounts worldwide...
...Douglas Henwood is the editor of Left Business Observer...
...It did not...
...In the United States, the process was largely complete by the late 1920s, except for the imperial ambitions, which had to wait until 1945.10 The new American system did have its smashup in 1929...
...In the 1990s, with widely dispersed bondholders and stockholders as the principal source of foreign funds, a crisis can be precipitated practically overnight...
...But capital flows had been pretty tightly restricted...
...Firms do, of course, turn outside for capital...
...Clearly some of that is happening on the ground, but there is a lot to be done, and the apparent recovery of some major economies, particularly Korea's, has taken pressure off the process...
...2 That is a bit of an exaggeration...
...As the 1980s wore on, the U.S...
...British writers prefer "Anglo-American," and French writers often refer to an "Anglo-Saxon" style...
...A net debt inflow, for exi less the repayment of old loans...
...lobbying-the global financial scene has come to resemble the domestic U.S...
...Profits rose, inflation fell, unions shrank and financial markets grew enormously in size and influence...
...Countries can get punished in a financial panic merely for speaking the same language as-or being next door to--a country in crisis...
...Debtor countries privatized state firms, often turning them over to foreign owners...
...As the practice took off in the early 1980s, promoters and their theorists said it would result in great new feats of productivity...
...To anyone who has been following the economic news over the last few years, this will all seem familiar...
...As small firms went public by selling shares to absentee investors, or private firms were gathered up by larger public ones, the new shareholders would only buy and hold shares if they knew with reasonable certainty they could turn them into cash or some other shares on short notice...
...World Bank, Global Development Finance 1999: Analysis and Summary Tables (Washington: World Bank, March 1999), especially chapters 2 and 3...
...79, Second Quarter 1994, pp...
...Both portfolio and direct investment tends to be concentrated in a few countries, mainly the larger Latin ormer U.S...
...Though the stock-market crash did not cause the Depression, it was its opening act, and the implosion of the credit system in general helped propagate, deepen and prolong the collapse...
...Poorer countries need fully Americanized...
...gross domestic product (GDP...
...Minor shocks can get magnified into major disasters, and innocent bystanders may be punished by the so-called "contagion" effect...
...At the same time, it was becoming clear that corporations had largely become creatures of senior management and shareholders, largely passive and redundant...
...Two key steps taken in the early 1970s were crucial to capital-account liberalization-breaking apart the fixed exchange-rate system and severing the dollar's link to gold...
...definitions, the purchase of as little as 10% of the stock of an existing company by a foreign investor counts as direct investment, even though it resembles a portfolio transaction...
...Bondholders were tired of inflation, which had continued to surprise them by its persistent rise from World War II until its eventual peak in 1980.11 And stockholders were disappointed by sagging share prices...
...Raw data at <http:/wAww.bog.frb.fed.us/releases/z1/data.htm...
...At the same time, stockholders discovered their voice...
...that was last decade's truth...
...Strains began building on this fixed arrangement in the 1960s...
...See Table 2.) In 1998, almost 45% of Latin and Caribbean debt was in the form of bonds, nearly ten times 1980's share...
...labor...
...As a nation's industry becomes more productive relative to its competitors, it is able to buy more of their goods and services than it was before--and its competitors are able to buy less...
...Meanwhile debts were transformed into eouity holdings (that is, creditors were given ownership shares to replace debts that would never be fully paid off), and bank debts were transformed into bonds (that is, instead of a bank holding a credit until it matured, the newly minted bond could be sold on world financial markets...
...At a time when the trend towards Americanization seems like the tide of history, it is worth emembering how wrong past extrapolations have been...
...financial assets...
...And IPOs do not really raise that much capital for investment-their financial purpose is mainly to cash out the original investors, like venture capitalists...
...2. Nicholas D. Kristof and David E. Sanger, "How U.S...
...The designers of the Bretton Woods system knew that fixed exchange rates were incompatible with free capital flows...
...While FDI flows are relatively stable, purely financial flows are anything but stable...
...style to finance, it will not be an easy road, and political resistance to the social consequences of Americanization-instability, impoverishment, marginalization-is strong...
...There was intellectual opposition to the system from the free-market right, and some grumbling from Wall Street and the City of London, but those forces were fairly marginal in the 1950s and early 1960s...
...political economy...
...4 o, what are some of the features of U.S...
...Employment would become more volatile, the executive class would answer to a new set of masters-domestic and foreign financiers and foreign multinationals-and the country would be more subordinated to foreign economic and political power...
...Americanization" in Korea would certainly shake up the domestic social structure...
...The exchange rate can be considered a country's price on world markets...
...John Kenneth Galbraith advertised the coming of "technocracy" and the obsolescence of profit maximization as the goal of corporate behavior...
...anything that depresses it is bad...
...The figure on venture capital is from "Venture Economics," at <http://www.securitiesdata .com/news/newsve/1999VEpress/VEpres s02 03_99.html...
...The Mexican boom-and-bust cycle of the early 1990s and the Asian boom-and-bust cycle of the mid-1990s are textbook examples of this contagious volatility...
...now, the bulk comes from Americanization the bond and stock markets and FDI by financial system...
...And, along with the growth of so-called portfolio investment (flows from stock and bond markets), foreign direct investment (FDI) played an increasing role...
...Wall Street rethought its strategy and by the early 1990s had seized upon shareholder activism...
...But clearly, the main force for the liberalization of global finance has been the United States, especially during the Clinton years...
...But it concentrated the minds of corporate managers on maximizing profits and keeping shareholders happy...
...Official creditors include individual governments and multilateral bodies like th All percentages are of the totals...
...As pressures on the system grew, however, liberalization appeared to be a solution, especially to the United States...
...Besides the volatility of capital flows in this privatized, Americanized world, there's another serious problem--concentration...
...Economists and bankers assured everyone that bringing the debtor countries into the international product and financial markets would be best for everyone over the long term...
...scene was anything but stable and reliably liquid...
...In fact that is only a small part of what the markets do...
...7 And venture capital-pools of money gathered from rich people and financial institutions for embryonic, innovative firms-itself is remarkably small, given its mystique...
...If a stock remains depressed, the firm is exposed to the risk of takeover...
...The only regional exception to downward mobility outside the poorer countries was East Asia, which crashed in part because of liberalization...
...6. Federal Reserve Board, Flow of Funds Accounts, March 1999 release...
...The International Monetary Fund has made it clear that it wants to dismantle Asian governance systems and replace them with U.S.-style stock market-centered systems...
...stock market has been the medium for transmitting buckets of cash from firms to their stockholders-$509 billion in 1998, over 6% of GDP and three times the historical average...
...managers are guided by the stock market...
...Inflation rose, meaning that the dollar was effectively no longer worth the $35 an ounce it was declared to be...
...It may destroy itself one of these days, though the system's powers of recovery should never be written off...
...To put it bluntly, but not inaccurately, 20 years ago, the bulk of foreign finance for Latin America came from Robert Rubin, th commercial bank loans and official Secretary of Trea the main archite( institutions...
...In the United States and most of the other predominantly English-speaking countries, on the other hand, stock markets are large, busy, and have a great influence on corporate life...
...Wooed Asia To Let Cash Flow In," New York Times, February 16, 1999...
...The rows labeled "private debt" refer to private borrowers, wt sively private...
...In a panic, of course, it is easier for metropolitan capital to force reforms on countries when they are desperate for a debt rollover...
...The years since 1981 have been very sweet for bondholders, however...
...the United States has been pressing for the freer movement of capital since the early 1970s, and the Organization for Economic Cooperation and Development (OECD) set up a Code of Liberalization of Capital Movements at the time of the organization's birth in 1961.3 But there is little question that the passion for freer international money flows accelerated in the Clinton-Rubin years...
...To financiers, full employment policies are frequently equated with inflation, and any country pursuing such policies in a world of liberalized finance is now punished with capital flight...
...Financial markets are notoriously volatile, given to extremes of optimism and despair...
...Along with the obvious weapons of Hollywood and the Pentagon, no small part of this reassertion of power has been what has been called "the Americanization of global finance...
...The corporation and modern financial markets grew up side by side, with financiers and traffic controllers, marked the beginning of a great and successful war on labor and what little the United States offered as a social wage...
...dollar was set to a gold price of $35...
...Treasury and the International Monetary Fund (IMF) take a leading role in acting on the creditors' behalf...
...By the end of the nineteenth century, the modern corporation-with its full legal personality and dispersed, multiple shareholders-was on its way to dominance...
...You would need a soccer stadium to house all the creditors-though of course the U.S...
...Some Silicon Valley firms do offer options on stock that may exist someday--promises against a future IPO that may never materialize...
...Nearly 70% of the capital flows into the region were in the form of FDI, more than three times 1980's share...
...One by one, countries abandoned their attempts to fix the value of their currencies and surrendered to the whims of foreign exchange traders in New York and London...
...economy: vast, complex, freewheeling, polarizing, volatile and accident-prone...
...At the end of World War II, the international monetary system, known as Bretton Woods, was based on fixed exchange rates-the value of currencies were set relative to the U.S...
...Liberalization has been deeply discredited bv the Asian to invest in extremely long-term projects, but stock markets are notorious for tolerating only the surest, quickest pay-back investments...
...In the 1980s, the United States, with its savings-and-loan and junk-bond manias, was seen as dying of speculative short-termism, while patient Japan and Europe were on the rise...
...In other words, far from acting as a way of funneling capital from investors to real-world corporations, the U.S...
...He is author of Wall Street: How It Works and For Whom (Verso, 1997...
...Portfolio flows are also highly concentrated, confined mainly to countries that provincial U.S.-based portfolio managers have heard of...
...His article, "The Free Flow of Money" appeared in the January/February 1996 issue of NACLA Report...
...As the New York Times put it, Bill Clinton and his Treasury Secretary and former Goldman Sachs coVOL XXXIII, No 1 JULY/AUGUST 1999 13REPORT ON GLOBAL FINANCE chair Robert Rubin "took the American passion for free trade and carried it further to press for freer movement of capital...
...As economic and financial performance soured in the 1970s, Wall Street rose from its torpor...
...As Table I shows, under 4% of real investment by nonfinancial firms in this century has been financed with new stock issues...
...the 1970s were not yet the era of "emerging markets...
...The policy encouraged international trade while discouraging cross-border money flows...
...6 What the Federal Reserve calls the "financing gap"-the amount firms need to raise from outside markets to finance their investment programs-is thus just 8%, which equals 0.8% of U.S...
...Smaller and poorer countries, like those of the Caribbean, Africa or South Asia, are largely excluded from this circuit of private capital flows.14 he volatility of U.S.-style financial structures is pretty well known...
...The famed downsizings of the 1990s, typically blamed on abstract forces like globalization and technology, were most immediately the product of pressure from Wall Street portfolio managers...
...dollar, and the U.S...
...and British savants, these systems are ossified and prone to "cronyism...
...While the creation of a single giant financial market with the evolution of the euro will almost certainly bring a more U.S...
...They turn first to banks, to fund mundane things like building up inventory or buying raw materials...
...It is especially untrue that the stock market has much to do with funding real investment, though New York Stock Exchange press officers will tell you it does...
...But it is worth emphasizing again that financial flows are at least as much about arranging ownership as they are about providing funds for real economic activity...
...At first, liberalization concerned mainly the rich countries...
...pundits also trace Japan's troubles to similar faults...
...he "resolution" of the debt crisis contributed directly to the Americanization of global finance in several ways...
...During the 1980s debt crisis, the fact that the prominent creditors were banks meant that things were worked out by a relatively small group of negotiators over the course of years...
...The IMF in particular has repeatedly blamed the Asian crisis on poor corporate governance practices, a complaint that goes hand in hand with complaints about the lack of transparency...
...American countries (Brazil, Mexico, ry, was one of Argentina, Chile, Venezuela), a few of the the global Asian ones (China, Malaysia, Thailand), and a few "transition" countries (Poland, Russia...
...foreign multinationals...
...Wall Street was delighted...
...To understand the Americanization of world finance requires understanding a bit about that style of finance in its home country...
...The Americanization of Global Finance 1. Henry Kaufman, "Structural Changes in the Financial Markets: Economic and Policy Significance," Federal Reserve Bank of Kansas City Economic Review, No...
...Even the great initial-public-offering (IPO) boom in the 1990s has not been enough to change that...
...nonfinancial corporations have financed 92% of their capital expenditures with their own internal funds (profits and depreciation allowances...
...Trouble in Mexico can be bad news for Argentina...
...Whatever you think of that system in its homeland-my own evaluation is that it is deeply polarizing and profoundly unstable-it has little to recommend itself to "developing" countries...
...The markets are primarily about the organization and reorganization of ownership...
...94, 111...
...The share of national wealth and power shifted notably towards capital and away industrialists united in from their demand for sound money guaranteed by a central bank, since they knew the corporate form required stable and liquid markets...
...Since 1952, U.S...
...Historically, countries aiming to catch up to richer rivals-Germany in the late nineteenth century, Japan in the mid-twentieth century, Korea a bit later than Japan-have tightly controlled finance, ceding a large hand to the state, with firms mainly owned and/or controlled by banks, not impatient, volatile shareholders...
...in the exuberant year of 1998, venture capitalists invested $16 billion, or 0.02% of U.S...
...In the late 1970s, taking advantage of woefully depressed stock prices, financial adventurers began buying up public companies using borrowed funds...
...From the end of World War II through the late 1970s, stocks made a small contribution to funding investment...
...it is a system designed to drive down costs and maximize the flow of profits to shareholders...
...Between 1980 and the end of 1998, however, textbook logic was turned on its head: $1.1 trillion in stock disappeared from the market, as firms bought each other up in a massive and apparently endless mergers-andacquisitions binge, and as they also bought their own stocks to boost their price...
...5. Much of this overview of the U.S...
...In Mexico's case, the bubble was largely financial...
...5 Perhaps the broadest taxonomical distinction is that between stock-market and bankcentered systems...
...ny by a foreign firm would count as FDI, even though no new physical assets are created in the process...
...Continental Europe is a major nut to crack...
...finance that the rest of the world has been encouraged to adopt...
...It is fairly simple to draw parallels from the brief financial history of the United States to a global scale...
...private sectorfirms and the banks and investment boutiques that lent to them-was choking on debt...
...9 Before the founding of the Federal Reserve Board in 1913, the U.S...
...Instead of listening to colleagues (or "cronies," in the pejorative voice), bankers and bureaucrats, U.S...
...7. There are other reasons for going public...
...The Fed and the bond market were at the center of the process...
...In 1910, Rudolf Hilferding, the Austrian Marxist, wrote in Finance Capital that the AngloAmerican system was pass, and that German-style bank-dominated trusts and cartels were the wave of the future...
...It is a bit grandiose to call it just "American...
...8 If the markets do not do that much to fund real enterprise, what do they do...
...Almost none of these shareholders have contributed any capital to the corporation they own...
...The currency adjustment corresponding to that changing set of facts is an appreciation-from the more productive country's point of view, other nations' produce has become less expensive, and from the less productive countries' point of view, the more productive country's produce has become more expensive...
...and was likely to be the supervisor of his workers...
...As the world has been liberalized since the early 1980s, the worldwide income distribution has become more unequal...
...And certainly there has been plenty of creation of new plants and production networks by multinationals all across Latin America and Asia...
...The classic nineteenth-century capitalist was either a sole proprietor or a member of a small partnership, NACLA REPORT ON THE AMERICAS 14REPORT ON GLOBAL FINANCE In the 1990s, profits rose, inflation fell, unions shrank and financial markets grew enormously in size and influence...
...In both cases, the foreign inflows created a speculative bubble followed by a dramatic bursting...
...As former Commerce Department negotiator Jeffrey Garten put it, "I never went on a trip when my brief didn't include either advice or congratulations on liberalization...
...Quaintly, the point of national economic policy was thought to be the encouragement of full employment, and, in the eyes of Keynes and White, free international capital movements would undermine such policies...
...productivity growth in the 1980s was terrible...
...Any corporate policy that raises the stock price is good...
...All figures in Table 2b are stocks-the total amount of pri labeled "publc debt" refer not to the lender but to the borrower-that is, governments eitt behalf of private borrowers...
...Asia has a long way to go...
...Just as protectionist trade policies were said to "distort" prices and other economic relationships, restrictions on capital movements were said to inhibit the optimal global allocation of capital...
...9. James Livingston, Origins of the Federal Reserve System: Money Class, and Corporate Capitalism, 1890-1913 (Ithaca: Cornell University Press, 1986...
...In the Mexican case, ordinary people felt little benefit during the inflow...
...Such premature recovery is causing worry on Wall Street and in Washington because liberalization thrives on crisis...
...Those ten countries accounted for 70% of the FDI flows into the "developing" world in 1998...
...For a history of capital-account liberalization, see Helleiner, States and the Reemergence of Global Finance...
...That is the reason behind the endless bull market, though the fundamental gains have been compounded many times by exuberance...
...there was relatively little real-world investment financed by the inflow...
...Also, Western Europe and Japan were busily catching up to U.S...
...With the onset of the debt crisis in 1982, however, capital accounts were liberalized as part of the solution to the crisis...
...To U.S...
...In the 1930s, Adolph Berle and Gardiner Means argued in The Modem Corporation and Private Property that the shareholder had become vestigial, and that a new managerial capitalism was here...
...Despite the liberalization of international markets, it will be a long time before many domestic systems are smashup, though not all that much in the United States, which strenuously objects to any attempts to re-regulate global finance...
...What this means is that Asian corporations typically have intimate ties to each other, to banks, and to governments that are profoundly different from the system prevailing in the United States, where stockholdings are widely dispersed among thousands, even millions, of holders...
...It could, alternatively, be referred to as a style of capitalism prevalent in the predominantly Englishspeaking countries (besides the United States and Great Britain, Australia, Canada and New Zealand), with strong liberal (in the laissez-faire sense) and individualist traditions, small welfare states, and rampant financial sectors...
...But behind the highly visible melodramas-the manias, the panics, the bailouts--lies a reconfiguration of power between richer and poorer countries and between owners and workers nationally and internationally...
...Japan and China have barely started...
...1 3 For the last 25 years, currency values have been increasingly set by the foreign exchange markets, not governments...
...Wall Street came into serious disrepute...
...Wooed Asia...
...Firms would be slimmed down, and once lean and mean, resold to the public at a big profit...
...They are deeply political institutions, central to the constitution of social class and the exercise of economic power...
...Less obvious are the changes in so-called corporate governance that go along with a bigger role for stock markets...
...All of this together, from Volcker to shareholder activism, succeeded in restructuring the U.S...
...They turn next to the bond market, and only last to the stock market...
...Source: World Bank, Global Development Finance 1999: Analysis and Summary Tables...
...The lead designers of the fixed exchange-rate system, John Maynard Keynes from Britain and Harry Dexter White from the United States, thought it important to insulate countries from the pressures of international capital markets...
...That arrangement is no guarantee of success, of course, but it is a formula that has proved workable...
...The entire apparatus of Wall Street could not exist on 0.8% of GDP, so lots more has to be going on...
...Goldman Sachs, the investment banking partnership, did its IPO in part so it could use its stock as currency in buying other firms (that is, by offering shares of Goldman Sachs as payment for the shares of the target firm...
...Britain lagged badly behind, as too many firms stayed small and family-run, and much of the vast wealth of the City of London was invested abroad...
...FDI--cross-border investment by multinational corporations-is usually thought of as "real," as opposed to purely financial investment...
...corporations, demanding lower costs and higher profits...
...5-16...
...Indeed, by U.S...
...No matter that Japan and Korea were once touted in the same circles as models of development...
...The share of national wealth and power shifted notably towards capital and away from labor...
...It may surprise readers to learn that efficiency has ruled for the past 20 years, but that is the theory...
...But by official definitions, FDI also includes the purchase of existing corporate assets-for example, the purchase of a Drivatized national teleDhone comoaTable 2a shows net flows of capital into the region in a given year...
...4. Kristof and Sanger, "How U.S...
...Nationalist development policies, which had insulated countries from outside capital and trade flows, were dismantled wholesale...
...In the Asian case, a lot of the inflow did find its ef su cts of way into real investment, ranging from factories to office buildings, which turned out to be worthless when the bubble burst...
...financial system is based on my book Wall Street: How It Works and for Whom (Verso, 1998...
...Assertions not referenced here are fully developed and documented there...
...Firms, especially in high-tech, also use stock options in compensation packages, and having stock to offer makes the options more appealing...
...In most Asian and continental European countries, stock markets are relatively small, sleepy and not terribly relevant to how corporations are run...
...in the Asian case, real jobs (hardly dream jobs, for sure) were created and incomes rose...
...Most people, from academics to publicists to ordinary civilians, think that the vast set of institutions we collectively call Wall Street exists to channel cash savings into real investment-that a contribution to a pension plan funds a computer purchase or a new hire somehow, somewhere...
Vol. 33 • July 1999 • No. 1
