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Foreign Exchange Trader D Foreign Exchange Trader Foreign Szh 1 Foreign Exchange Trader The Rise of American Hegemony

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ndition for supporting the movement toward European economic unification, the West Europeans agreed to treat American multinational corporations as if they were European corporations and to avoid discriminating against them in their policies. Or, in more technical language, the West Europeans extended the principle of ’national treatment’ to American firms, While the United States did demand access to the Common Market for American corporations, it tolerated what it assumed would be the temporary discrimination against American agricultural and other exports in order to rebuild Western Europe and thwart Soviet expansionist designs.

The other important American initiative was the 1949 creation of the North Atlantic Treaty Organisation (NATO) to link the two sides of the Atlantic militarily. In effect, the United States brought Western Europe under the American nuclear umbrella through the strategy of extended deterrence and thereby communicated to the Soviet Union that an attack on Western Europe would be tantamount to an attack on the United States itself. The stationing of American troops on European soil became a visible sign of this commitment. The NATO Treaty identified and legitimated for Americans and West Europeans alike the linking of their security. In short, economic and security ties have been closely linked in defining the relationship of the United States and its West European allies since shortly after the end of World War II

The American-Japanese Component

In Asia the United States also found itself facing a serious political, economic, and strategic challenge. World War II and its aftermath had strengthened the position of the Soviet Union in East Asia, while China and North Korea had become communist countries and political allies of the Soviet Union. These important traditional Japanese markets were now in hostile hands. Similarly to West Germany, intense concern existed that the forces of economic gravity would pull Japan toward the Soviet Union and its Chinese ally. Moreover, the Japanese economy was a shambles; it had been much more devastated by the War than had initially been appreciated. Although in retrospect, it is difficult to understand, American officials truly despaired over the problem of ensuring Japanese economic survival.

In addition to guaranteeing Japanese security through the formation of the American-Japanese Mutual Security Treaty (MST), the United States wanted to integrate Japan into a larger framework of economic relationships and thereby remove the attractiveness of the communist-dominated Asian market. However, unlike West Germany, there were no large neighbouring non-communist economies to which the Japanese economy could be anchored. To overcome this problem of an isolated and vulnerable Japan, the United States took several initiatives. One was to expedite the decolonisation of southeast Asia (it should be remembered that one cause of the Pacific War was that European colonizers had largely closed these economies to Japanese exports). The United States also sponsored Japanese membership in the ’Western Club’. Despite strong West European resistance based on intense fear of Japanese economic competition, the United States eventually secured Japanese participation in the IMF, the World Bank, and other international organisations. In addition, the United States gave Japan relatively free access to the American market and to American technology. Furthermore, the United States used its vast financial resources to assist in the rebuilding of the Japanese economy, but it did not demand access to the Japanese economy for its multinational corporations. Instead, the quid pro quo for American economic concessions to Japan was Japanese permission to use their air and naval bases in order to deter the perceived threat of Chinese and Soviet expansion.

In order to guarantee Japanese security, the United States also spread its nuclear umbrella over Japan. The MST, however, differs fundamentally from the NATO alliance. Under the NATO treaty an external attack on any member obliges the other members to consider measures of mutual defense. In the MST, the United States agrees to defend Japan if Japan is attacked, but the Japanese are not obligated to defend the United States. Also, whereas the NATO agreement applies only to the territory of its members, the MST refers to the outbreak of hostilities in the entire Pacific region. Through this agreement the United States obtained the right to use air and naval bases in Japan to defend and secure its position in the Western Pacific. The Japanese were given access to the American market in exchange for the right to anchor on Japan the American strategic position in East Asia.

In these ways, the United States became the fulcrum of the American system; the American-West European and the American-Japanese components of the system had little to do with one another. Lines of cooperation, however, did and do run through Washington. Although Japan and Western Europe would become equal participants in the annual ’Western’ summits, Japanese-West European diplomatic relations were primarily a function of their ties to the United States. In the economic arena, Japanese-West European commerce was and still is relatively minor compared to the commerce of each with the United States. With respect to security, no military connections exist between Western Europe and Japan. In economic, diplomatic, and security affairs, the American system has, for nearly half a century, tested squarely on American leadership.

The American system of alliances across the Atlantic and the Pacific provided the political framework within which American political and economic influence expanded around the globe until the expansionism was brought to an end at least temporarily in the jungles of Vietnam. Although both the United States and the Soviet Union sought to expand their domain, the United States was the most successful expansionist power in the postwar era. In response to its intense fear of communism and in pursuit of its policy of containment of the Soviet Union, the United States, like other great powers before it, became the most expansive power in the international system. American influence expanded rapidly in Europe, Asia, and the Middle East. Thus, in its effort to contain Soviet expansion, the United States itself became a highly successful expansionist power.

The Liberal World Economy

The institutional framework of the postwar world economy was constructed at the Bretton Woods conference in 1944. Eventually known as the Bretton Woods System (BWS), this essentially American-British achievement reflected the thinking of Harry Dexter White and John Maynard Keynes. (In retrospect, the small number of principal players involved in formulating the agreement accounts in large part for the extraordinary success of the conference and is in marked contrast to subsequent efforts to agree on rules to govern the world economy.) Although a number of disagreements divided the American and British negotiators, the conference succeeded in reconciling its two major objectives. The first goal of the conference was to formulate unifying principles that would be embodied in the institutions to comprise the BWS: the International Monetary Fund (IMF), the World Bank, and what would become the General Agreement on Tariffs and Trade (GATT). These guidelines included (1) a commitment to trade liberalisation via multilateral negotiations and the principle of nondiscrimination, (2) agreements that current account transactions should be freed from controls, but that capital controls were permissible, and (3) agreement that exchange rates should be fixed or pegged and that their adjustment was of concern to all. The second goal of the conference was to leave mom within the BWS for governments to pursue Keynesian stabilisation and social welfare policies; individual nations would be free (within prescribed limits) to pursue economic growth and full employment policies. These fundamental principles and the international institutions embodying them created the framework within which the postwar international economy has flourished.

In subsequent years the original Bretton Woods System has been significantly modified in response to economic and political realities beginning immediately after the end of World War II. The prostrate European and Japanese economies, the problem of the ’dollar shortage’, and especially the exigencies of the Cold War brought about major changes in the original system. In the interest of forging an alliance system against the Soviet Union, the United States reversed its prior positions on a number of international economic issues and took a decisive leadership role in the creation of the postwar world economy. The emergence of the postwar international economic order cannot be understood without recognising the need for allied co-operation against the Soviet Union.

The world’s foremost creditor nation, the United States, used its financial reserves, primarily through the Marshall Plan, to facilitate the rebuilding of the West European economies as a buffer against Soviet expansionism. Despite its historic aversion to trading blocs, the United States pressured the West Europeans to pursue European integration. As a pre-condition for receiving American assistance, West European governments were required to remove intra-European trade barriers and to co-operate and co-ordinate their economic plans through the Organisation for European Economic Cooperation (OEEC); the West Europeans were also encouraged to carry out domestic economic ref orms, including the adoption of America’s more productive manufacturing and management
techniques. In order to promote European integration, the United States even tolerated European discrimination against American agricultural and manufactured exports. In a less dramatic but equally important way, the United States also used its financial and other resources to help rebuild the Japanese economy and integrate it into the Western system. Thus, during the Cold War, the postwar international economic order and the international security order became intimately joined to one another.

The core of the modified Bretton Woods System was composed of two international regimes with important roles in the early success of the international economy. The first regime was the international monetary system based on fixed but adjustable exchange rates, rates for which the International Monetary Fund (IMF) was given formal responsibility in reality, the United States used its economic resources and political influence to assure the early success of that monetary system. The second important regime was the international trading system based on the GATT; responsibility the the trading regime was diffused among a number of nations and, as this number increased during the postwar years, the trading regime became more and more unwieldy. There were plans for a third regime (based perhaps on the World Bank) to be responsible for promoting the economic development of the less developed countries. This regime never materialised, largely because of the strong opposition of the industrial economies; even at the end of the twentieth century, no full-fledged development regime or agreed-upon principles regarding economic development yet exists.

International Monetary System of Fixed Rates

Experts from many countries holding common views on the technical issues needing resolution played significant roles in the creation of the international monetary regime. The system had to provide monetary reserves and reserve credits in sufficient amounts to enable member governments to keep their exchange rates fixed or pegged to one another. (This is called the ’liquidity problem’.) The IMF would solve this problem by offering reserve credits to deficit states using contributions from member countries. Second, the system also bad to solve the so-called Nth problem. (This is called the ’adjustnent problem’.) In a monetary system based on fixed exchange rates covering N countries, if policy conflict is to be avoided, only N-I countries can, at any particular time, pursue independent exchange rate policies, i.e., the currency of at least one country must stay stable while others are free to vary the value of their own currencies. The requirement that countries had to obtain IMP approval to alter their exchange rate was designed to solve the Nth country problem. Third, the monetary system had to anchor its members’ monetary policies to some objective standard in order to prevent global inflation or devaluation. (This is the ’confidence problem’.) Stabilisation of a monetary system can be achieved in one of three ways: by (1) tying every currency to a ’non-monetary’ asset, gold being the asset of choice; (2) adopting a policy rule to co-ordinate national monetary policies, or (3) following a leader whose revealed policy preferences promise to provide the desired degree of economic stability. Although all three methods were in fact employed in the early postwar years, the monetary policies of member states were ’anchored’ by tying every currency to gold and the major powers coordinated (informally at least) their national economic policies.

The postwar international monetary system, which lasted until 1973, was extraordinarily successful. The system was designed to provide both domestic policy autonomy and international monetary stability; in effect, the system provided a compromise between the rigid gold standard of the late nineteenth century under which governments had very little ability to manage their own economies and the monetary anarchy of the 1930s when governments had too much license to engage in competitive devaluations and other destructive practices. In order to achieve both autonomy and stability, the system was based on the following principles: (1) fixed or pegged exchange rates, but with sufficient flexibility to enable individual states to deal with extraordinary situations including the pursuit of full employment; (2) the establishment of a reliable source of reserve credit in the event of an international payments problem; (3) an agreement among member countries to peg their currencies to gold at $ 35/oz. or to the dollar; (4) IMF approval of exchange rates and of adjustments in the event of a ’fundamental disequilibrium’ in a nation’s balance of payments; (5) monetary reserves provided by an IMF endowment to create a pool of national currencies or county quotas zForeign Exchange Trader D Foreign Exchange Trader Foreign Szh 1 Foreign Exchange Trader The Rise of American Hegemonya Naked uForeign Exchange Trader D Foreign Exchange Trader Foreign Szh 1 Foreign Exchange Trader The Rise of American Hegemonyj w j j Foreign Exchange Trader d d Trader Adult