How the United States makes other countries pay for its wars

Super Imperialism

The Economic Strategy of American Empire

by Michael Hudson

2nd edition 2003

(1st edition 1972)

Last time around, in the 1991 Gulf War, America got its allies to bear most of the costs voluntarily. After all, U.S. diplomats claimed, wasn't the war fought to protect Kuwait and the next petro-domino, Saudi Arabia, from Iraqi attack – and in the process to protect Europe's oil and gas supplies from an aggressive grabber? Wasn't it therefore fair to ask the Saudis and Kuwaitis, along with the Germans, British and other countries to bear the lion's share of the cost of the oil war fought for their own benefit?

Europe and the Near East agreed to pay, and their central banks turned over some of the excess U.S. Treasury bonds they had accumulated by running year after year of trade and payments surpluses with America. And almost immediately, these central banks' dollar holdings filled up again with dollars that were unspendable and had little value, except to give back to the United States or let accumulate for no real purpose.

This Treasury-bond standard of international finance has enabled the United States to obtain the largest free lunch ever achieved in history. America has turned the international financial system upside down. Whereas formerly it rested on gold, central bank reserves are now held in the form of U.S. Government IOUs that can be run up without limit. In effect, America has been buying up Europe, Asia and other regions with paper credit – U.S. Treasury IOUs that it has informed the world it has little intention of ever paying off.

And there is little Europe or Asia can do about it, except to abandon the dollar and create their own financial system.

Michael Hudson's Super Imperialism: The Origins and Fundamentals of U.S. World Dominance explains how the dollar's being forced off gold in 1971 led to a new international financial system in which the world's central banks are obliged to finance the U.S. balance of payments deficit by using their surplus dollars in the only way that central banks are allowed to use them: to buy U.S. Treasury bonds. In the process, they finance the U.S. Government's domestic budget deficit as well.

The larger America's balance-of-payments deficit becomes, the more dollars end up in the hands of European, Asian and Near Eastern central banks, and the more money they must recycle back to the United States by buying U.S. Treasury bonds. Over the past decade American savers have been net sellers of government bonds, putting their own money into the stock market, corporate bonds and real estate. Foreign governments have been obliged to hold U.S. bonds whose interest rates have fallen steadily, while their volume now exceeds America's ability or willingness to pay.

What makes today's Super Imperialism different from past "private enterprise" imperialism

Past studies of imperialism have focused on how corporations invest in other countries, extracting profits and interest. This phenomenon occurs largely via private-sector investors and exporters. But today's novel form of international financial imperialism occurs among governments themselves, and specifically between the U.S. Government and the central banks of nations running balance-of-payments surpluses. The larger their surpluses grow, the more dollars they are obliged to put into U.S. Treasury securities. Hence, the book's title, Super Imperialism.

How the United States makes other countries pay for its wars

Since Europe's Middle Ages and Renaissance, going to war has left nations with heavy public debts, which in turn have needed to be financed by raising taxes. Two centuries ago Adam Smith gave a list of how each new war borrowing in Britain led to a new tax being imposed to pay its interest charges. Militarily ambitious nations thus became indebted, high-tax and high-cost economies.

When foreign funds could not be borrowed, belligerent countries had to pay out gold to defray the costs of their military spending or see their currencies depreciate against gold. After the Napoleonic Wars ended in 1815 and again after World War I, Britain and other countries imposed deflationary financial policies whose unemployment and trade depression imposed economic austerity until prices fell to a point where the currency achieved its prewar gold price. Domestic economies thus were sacrificed to pay creditors, saving them from having to suffer a loss as measured in gold.

America's war in Vietnam and Southeast Asia in the 1960s seemed to follow this time-honored scenario. U.S. overseas military spending ended up in the hands of foreign central banks, especially France, whose banks were the dominant financial institutions in Indo-China. Central banks cashed in these for gold nearly on a monthly basis from the 1965 troop buildup onward. Germany did on a quiet scale what General de Gaulle did with great fanfare in cashing in the dollars sent from France's former colonies.

By 1971 the U.S. dollar's gold cover – legally 25 percent for Federal Reserve currency – was nearly depleted, and America withdrew from the London Gold Pool. The dollar no longer could be redeemed for gold at $35 an ounce. It seemed at the time that the Vietnam War had cost America its world financial position, just as World War I had stripped Britain and the rest of Europe of their financial leadership as a result of their Inter-Ally arms debts to the United States.

But in going off gold the United States created a new kind of international financial system. It was a double standard, that is, the dollar-debt standard. The consequences can be seen today. This time around the Near East and Moslem world have announced their opposition to a new U.S. oil war, as have France and Germany. Popular opinion throughout Europe has turned against American adventurism, and at first glance it appears that America will have to finance its war alone.

And indeed it would, if today's global financial system were still what it was before 1971. America could not fight a conventional war and pay for its troop support costs without seeing the dollar plunge. In fact, it seemed that in 1971 no country ever again could go to war without seeing its international reserves depleted and its currency collapse, forcing its interest rates to rise and its economy to fall into depression. Yet in all the argument over the coming U.S.-Islamic war, Europeans have not seen that it is they themselves that will have to bear the U.S. military costs, and to do so without limit.

Please go to the PDF file to read the entire book.
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…and forgive them their debts