The United States and indeed the entire Western world are now in the midst of the greatest economic crisis in many decades. The current Great Recession is comparable in depth and gravity to the Great Stagflation of the 1970s, and in some ways it has become similar to the Great Depression of the 1930s or the earlier deep economic crisis of the 1890s, which in its time was also called “The Great Depression.” It seems that major global economic crises come along about every forty years.Given the depth and gravity of our current crisis, it is not surprising that certain ideas and terms from those earlier eras should now reappear in analyses and discussions about public affairs. One of these terms is plutocracy. A recent series of articles in the January/February 2011 issue of The American Interest analyzed at length and in detail how the once prevalent idea of plutocracy might help us to better understand contemporary circumstances. The concept, which became popular during the first Gilded Age in the 1880s, and was revived for use in second such age in the 1920s, described the sharp increase in inequality and massive concentration of wealth and income that occurred in the United States during those eras. It is not surprising then, that the idea of plutocracy has made a comeback in this, the third Gilded Age of American history which, like the first two, produced economic catastrophe in its wake.1 The American Interest essays dealt extensively with both the causes and the consequences of plutocracy, with a particular focus on the consequences for the economy and for democracy. This essay takes up the question of how plutocracy might affect U.S. foreign policy and America’s place in world affairs. In the short run, it is clear enough that the current global economic crisis has seriously diminished U.S. leadership in the world and that it is now beginning to weaken the projection of U.S. military power. Of particular importance, the Chinese political elite appears to have drawn the conclusion that the economic crisis of America and its allies may be producing a tipping point in the distribution of power and leadership in world affairs.2 As the Chinese see it, the U.S. economic debacle has discredited the “Washington Consensus” and produced extraordinary partisan polarization and policy paralysis in the U.S political system, thus casting useful (from the Chinese perspective) doubts on the American democratic model. Also from their perspective, it has the potential to force substantial reductions in U.S. defense spending, in turn casting doubt on American military capabilities and credibility. This comes at a time when China is expanding and modernizing its military, particularly its navy, and is pressing claims of sovereignty—and exclusive and exclusionary authority—over its three littoral seas: the Yellow Sea, the East China Sea and the South China Sea. But it is not the short run that interests us most. The argument here, that a plutocratic system produces a different foreign policy and world role than would a more genuinely democratic system, is proved by its long-term consequences and illustrated by historical examples many decades old. These examples suggest that it is not plutocracy as such that determines long-term, structural outcomes, but rather the particular sectors of the economy that provide the basis for the plutocracy’s wealth and power. As it turns out, it makes a big difference if that wealth is based upon industrial sectors, or upon a financial one.3 The First American Plutocratic Era The first Gilded Age of the 1880s–90s certainly produced a plutocracy, and that plutocracy in due course produced the Great Depression of the 1890s.4 But of course, the 1890s were also the very decade when the United States dramatically and decisively ascended to the status of a great power. The annexation of Hawaii (1893–98), the successful deterring of Britain in the Venezuelan Crisis (1895), victory in the Spanish-American War (1898), and the subsequent annexation of the Philippines and dominion over the Caribbean provided impressive evidence for that rise. Thereafter, the United States was taken seriously by other great powers, particularly by the greatest power, Great Britain, which then acquiesced to U.S. primacy in the Western Hemisphere. If plutocracy is so bad for America, how could it have presided over this extraordinary rise in American power and influence? The American plutocracy of the post-Civil War era resulted from the recent and rapid development of a massive American industrial structure. This structure in turn was dominated by such industrial sectors as coal, steel, railroads and oil. These new industries generated great wealth, and by the 1880s they had been organized into great cartels and trusts, which then generated even greater wealth for the men, be they called captains of industry or robber barons, who organized and directed them. A substantial banking or financial sector existed alongside these large industrial ones, but its role was to facilitate the organization of the industrial sectors rather than to be the dominant sector itself. The industrial sectors each had their own preferred domestic public policies that suited their particular needs. Together, they also had their own preferred version of democracy, namely, a political system in which there were vivid democratic symbols and lively partisan elections, but whose legislation and administration normally allowed the industries to organize and operate as they wished, and allowed the plutocracy which was at the top of these industries to continue to accumulate and concentrate great wealth. In this system, which was democratic in form and plutocratic in content, the industrial sectors and their plutocracy controlled virtually all of the Republican Party and much of the Democratic Party as well. A more truly democratic system became the goal of the minority Populist Party and then, in 1896 and for a time thereafter, of the populist elements within the Democratic Party (famously represented by William Jennings Bryan). These populist or democratic forces could certainly make a lot of noise, and in the form of the famous Mugwumps, with spokesmen like Mark Twain, they could get a lot of attention. But plutocratic forces had the advantage not only of great wealth, with which they could readily buy politicians and policies, but also great concentration. A perfect example of the logic of collective action, they could readily negotiate decisions among themselves and then persist in seeing them through. Consequently, the plutocratic forces repeatedly prevailed over the democratic ones, at least until Theodore Roosevelt came along, with respect to their preferred public policies in domestic affairs. It would not be surprising if they also had preferred foreign policies and also got their way with them. This was most obvious with the most economic of foreign policies: those concerning foreign trade. American industries faced formidable competition from their counterparts in Europe, especially Britain and Germany, so the industries wanted a policy of trade barriers, of protectionism. They got it. But these same industries perceived market opportunities in underdeveloped countries where the United States might develop a preponderant political influence: the countries of Latin America, especially the Caribbean Basin and Central America, and in the Western Pacific, especially the emerging market of China. Here the industries wanted a policy of free trade (or even better, trade that would give preference to American products). They got it. This stance was often described as the “Open Door Policy.” Since other great powers were also interested in these Latin American and Pacific markets, it followed that the United States would need a strong navy to promote and protect its access to them. Of course, a big navy would itself provide a big market for the coal and steel industries, and, on occasion, the preservation of this secure access might require actual military intervention in some countries, usually employing a combination of the Navy and the Marines. These were the foreign and military policies of the plutocracy, and they were not spared opposition. Democratic forces specifically contested protectionist trade policies, the construction of a big navy and military interventions overseas. Had these forces gotten their way, they would have prevented, or at least delayed, much of the expansion and projection of U.S. military power into foreign countries. But as in domestic policies, so too in foreign and military policies: Plutocratic forces prevailed. One might therefore conclude that the industrial plutocracy of the late 19th century was necessary for the dramatic and decisive rise of the United States to great power status. The Second American Plutocratic Era The next era of plutocracy was in the 1920s, the second Gilded Age. Like the earlier era of the 1880s–90s, this plutocracy was largely based upon the now vast and diverse American industrial structure, but by now a substantial American financial sector had come into being. This sector provided new members for the plutocracy who had their own distinct economic interests and policy preferences. The American financial sector had been greatly expanded with the profits from World War I and with the rise of the United States to the status of a creditor country. Nevertheless, the character and direction of the American plutocracy as a whole was still set by industry rather than by finance. Despite the great transformation in the U.S. economy since the 1890s, the foreign policy preferences of the industrial plutocracy remained much the same: a protectionist trade policy toward Europe and a free trade or open door policy toward Latin America and East Asia. Industry for the most part also continued to support a large navy to protect and promote its interests in these regions. The major U.S. diplomatic achievement of the 1920s was the Washington Naval Treaty with Britain and Japan, along with a parallel treaty between all the major powers regarding their interests in China. Together, these produced the “Washington System” that established U.S. leadership in the Pacific. This system for the Pacific and China suited the interests and preferences of much of American industry, and its creation was greatly facilitated by the cohesive plutocracy that supported it. Similarly, the plutocracy supported an active U.S. policy of military intervention in the Caribbean Basin and Central America in order to maintain stability and predictability in that region. With respect to Latin America and East Asia, there certainly was no U.S. policy of isolationism during the 1920s. This was because the plutocracy, both its industrial and financial components, supported active and interventionist policies in those regions. With respect to Europe, however, the plutocracy was divided. Industry wanted protection from imports from European competitors’ imports. In contrast, finance wanted European borrowers to be able to pay off their loans from American banks, which required that European countries earn money from exports to the United States. This contradiction between industry and finance, and the corresponding division within the plutocracy, meant that U.S. policy toward Europe often lacked coherence and consistency in the 1920s. Since industry dominated the plutocracy and since it preferred protectionism, U.S. policy toward Europe indeed seemed to be isolationist. The onset of the Great Depression in the 1930s greatly weakened the American plutocracy and significantly pushed U.S. foreign policy to be more broadly isolationist. First, the contraction of markets worldwide made American industry even more insistent on protecting what market remained within the United States. Second, the stock market crash and the ensuing Depression destroyed much of the paper assets of the plutocracy; this loss was confirmed by New Deal legislation that imposed significant limitations upon great fortunes. Third, the destruction of paper assets naturally resulted in even greater losses for the financial component of the plutocracy than for the industrial one. This meant that what was left of the now-diminished plutocracy was more dominated by industry than before. All of these factors made for an even more isolationist policy toward Europe. However, even U.S. policies toward Latin America and East Asia became less active and interventionist. It was not that the United States adopted a policy of isolationism toward these regions. Rather, it simply became less willing to provide the economic and military resources necessary to sustain the previous policies. The populist and democratic forces in U.S. politics had rarely supported such policies, and now, with the plutocracy weakened and divided, democratic forces could at last get their way. This shift began under a Republican administration but accelerated in the subsequent Democratic one. What might have happened if somehow plutocratic forces had remained strong and united into the 1930s and the Great Depression? They probably would have produced outcomes similar to those that occurred anyway in policies toward Latin America (where the outcomes were benign) and toward Europe (where the outcomes were malign), but not with respect to the Pacific and China. A plutocratic foreign and military policy would have been much more vigorous and consistent in protecting U.S. interests in China, in building a strong U.S. Navy, and in restraining Japan. In the end, the history of the European war within World War II might have been much the same, but in this counterfactual world the history of the Pacific War would have been very different. Japan might have been deterred; there might not have been a war in the Pacific at all. The British Plutocratic Era: The Good Times During the same half-century (1880s–1930s) that the rising power of the United States experienced two eras or waves of plutocracy, the established power of Great Britain was experiencing its own variations on a plutocratic theme. But in Britain the plutocracy had a very different character from the American one, with very different consequences for foreign policy and for Britain’s place in world affairs. The origins of the British plutocracy’s wealth, like that of the American version, had originated in the Industrial Revolution. But the British plutocracy itself was not really based on industrial sectors; it was instead based on the financial one. The term plutocracy was little used in Britain during this half-century. Instead, public discussion talked about the aristocracy. That term had originated long before in application to the owners of great landed estates. (It was of course this same landed aristocracy that plantation owners in the American South–the “plantocracy”–had modeled themselves after during the decades before the Civil War. Indeed, this members of this Southern plantocracy, while imagining themselves as a sort of aristocracy, actually composed the first version of a plutocracy in America, in this case one based on a robust agricultural sector.) By the late Victorian era, the British aristocracy still affected the styles and symbols of a great landed upper class. However, the actual source of much of their wealth was no longer their landed estates, which were ceasing to be profitable. Rather, it was now derived from the growing financial sector, especially from investments in the British Empire and in foreign countries—and in rising great powers like the United States and Germany. And so by the late 19th century the British upper class was dominated by an aristocracy in form that was becoming a plutocracy in fact. The industrial revolution had begun in Britain, and by the middle of the 19th century Britain had become the “workshop of the world.” The great industries of this period were textiles, coal, steel, railroads and shipbuilding. But the great industrialists of Britain were not drawn from the old aristocracy. They came instead from a middling class of “tradesmen” and “tinkerers”, the most successful of whom rose to create a new capitalist class. British politics and policy were soon defined by the struggle between the old landed aristocracy and the new industrial capitalists, respectively represented by the Conservative Party and the Liberal Party. As long as British wealth was divided into these two economic sectors and these two political parties, no unified and cohesive plutocracy could develop. However, by the late 19th century much of the aristocracy based upon land had transformed itself to become an aristocracy based upon investments, which is to say finance. Moreover, by the early 20th century, much of the capitalist class based on industry had also transformed itself into an upper class based on investments and finance. The earlier conflict between agricultural and industrial interests was transcended by a new convergence around shared financial interests. The earlier partisan conflict between the Conservative Party and the Liberal Party was transcended by a new bipartisan consensus on many issues of public policy, and it is no surprise that the Liberal Party began a long decline into near political irrelevancy. The convergence of economic interests and the consensus on policy issues allowed the creation of a cohesive and effective plutocracy, but in this case one based upon an immense financial sector. Whereas in America the industrial sectors dominated the economy and produced the plutocracy, with the financial sector playing only a supporting role, in Britain the financial sector dominated the economy and produced the plutocracy, with the industrial sectors playing a supporting role. Among these industrial sectors, shipbuilding deserves special attention. The British shipbuilding industry, centered upon Glasgow in Scotland and Belfast in Ireland, was for decades the greatest in the world. The industry provided the vast number of merchant ships that linked the dominions and colonies of the British Empire with the political metropole and industrial center of Great Britain itself. The formidable Royal Navy protected and promoted the British Empire and the dense network of transportation and communication links between its far-flung parts, as well as the ocean trading links of much of the globe. The Empire was the hegemonic economy within the global economy, and so not surprisingly the ideology of the British Empire became, in effect, the ideology of this first era of globalization. The imperial and global economies provided raw materials for Britain’s industries and agricultural products to feed its workers. They also provided markets for these industries. All of this vast imperial and global economic activity produced vast profits, which flooded into Britain, and particularly into the rapidly expanding banking center, the City of London. Now, in addition to being the workshop and shipbuilder of the world, Britain also became its banker. The bankers of the City of London of course sought high returns on their activities, as did their associates in other lands. Given the availability of British capital and the influence provided by British naval power, emerging economies and independent countries had good reason to provide a friendly environment for British investment. The British role in this respect in Argentina is particularly fascinating. For several decades, there and elsewhere, such investments not only provided high returns but also seemed to operate with low risks. Problems arose, however, when certain developing economies began to build their own industries and their own supporting transportation infrastructures with the aid of British capital. This occurred first in Belgium, then in western Germany and then in the United States. Soon, these new foreign industries began to compete effectively with the original British ones. Britain ceased to be the only workshop of the world with respect to the industries it had pioneered: textiles, coal, steel, railroads and shipbuilding. The outbreak of World War I dramatically revealed the weakened state of British industry, particularly relative to Germany and the United States. Unable to produce what it needed for the war by its own industry, or even with the resources of the British Empire as a whole, Britain made vast purchases of manufactured products, including armaments from the United States. In wartime, British leadership in finance proved no substitute for British weakness in industry. The economic costs of the war soon transformed Britain from a creditor country into a debtor one (and conversely, the United States from a debtor country into a creditor one). It turned out that strong industrial sectors provided a nation with great resiliency when it faced existential challenges, and that a seemingly strong financial sector could disappear quickly. Was There Another Way? Might Britain have taken an alternative path in the first decade of the 20th century that would have provided a more robust economy and a stronger military, and that would have better preserved Britain’s power and leadership in world affairs? Americans rarely ask this question, since the United States, after all, eventually succeeded Britain in that power and leadership and in large measure benefitted from Britain’s decline. Many British scholars did ask this question in the second half of the 20th century. In the terms of our analysis, the question reads as follows: Was there a path that would have preserved and promoted the British industrial structure, using technological innovation to push it into new sectors, as occurred in the United States and Germany? Correspondingly, was there a path that would have constrained and confined the British financial sector so that it would have facilitated the movement of capital into new domestic industries (again, more like the United States) but not become the dominant sector, with its dominance solidified by a politically cohesive aristocracy (read: plutocracy) at its top? In fact, two such alternative paths found advocates in Britain at the beginning of the 20th century: industrial transformation, and imperial federation. Since these two paths could have been complementary to each other, together they could constitute one path. One obvious response to the new competing industrial powers of the early 20th century would have been for Britain to develop new industries to succeed its old ones. In the 1870s-80s, technological innovations in chemistry, electricity and engineering provided the basis for whole new industrial sectors such as chemicals, electric lights and machinery, and automobiles. To a degree Britain did develop these industries. By the 1900s, however, leadership in them had passed either to Germany (chemicals), or to the United States (automobiles), or to both (electrical products). Instead, much of British financial capital continued to flow out of Britain into the Empire or into foreign economies. It continued to build up foreign industries so that these were better able to compete with the industries in Britain itself. This was because finance generally preferred to invest in old industries located in new countries rather than in new industries located in the old country. The movement of British financial capital out of British industry matched the movement of British human capital. For several generations, the talented young had gone into business and engineering projects. Now they went instead into financial services and the civil service. By the eve of the World War, this diversion of financial and human capital out of British industry meant that British industrial expansion and innovation had slowed to a rate much lower than that of the now-booming industrial economies, and rising great powers, of Germany and the United States. At the beginning of the 20th century, the British elite understood well that their country was too small to provide the requisite market for the industries of the future. In particular, the automobile industry would thrive only with mass consumption and mass production, and an electrical machinery industry would thrive only with large factories and utilities serving large territories. The United States had the advantage of a large continental market within its own territory; Germany had a similar advantage with a large continental market within Mitteleuropa (Germany plus the Austro-Hungarian Empire). For Britain to compete effectively, it would need a continental-sized market of its own. Some thinkers and leaders saw this market within a politically reconfigured British Empire, especially in its major dominions (Canada, Australia, New Zealand and South Africa), which were dominated by populations that were British in origins and in culture. Thus it was that some British thinkers and leaders put forward proposals for a “Greater Britain” or an “Imperial Federation.” These proposals as they matured generally included the idea of an imperial parliament and cabinet in London, composed of representatives from the dominions as well as from Britain itself. This imperial government would implement policies common to all members of the imperial federation, particularly in the crucial arenas of defense, trade and finance, while other policy matters would be left to the member dominions themselves (as they were once left to the member states in the American federal system). Despite the practical obstacles to these proposals, they were far from whimsical. Such an arrangement could have been agreed upon and implemented had it not been for the strong opposition of the finance-based plutocracy. The British financial sector, the City of London, considered Imperial Federation to be merely a second-best choice that would obviate its first choice, which was, in effect, globalization. With its worldwide power and leadership in financial matters, this sector wanted to operate freely on the widest-possible scale. Particular commitments and concessions to the dominions would have meant particular constraints on the global ambitions the financial sector held at the time. An Imperial Federation might also in due course threaten the global interests of the City of London. Thus it was that after a major political struggle, industry’s Imperial Federation project went down to defeat at the hands of finance’s globalization project. Three decades later, when British finance itself was much weaker vis-à-vis its foreign competitors, particularly American finance, it willing embraced a pallid substitute for imperial federation in the form of “imperial preference.” This policy abandoned free trade in the global economy and tried to substitute for it with protected trade within the British Empire. By 1932, it was no longer possible to construct a true and robust Imperial Federation. Its time had come, and passed unrequited. The British Plutocratic Era: The Hard Times After World War I, Britain tried to restore its financial sector’s central role in the global economy. The financial leaders thought that the best way to do this was to restore the British pound to the same value it had held before the war. This was done in 1925 by Winston Churchill, who was then Chancellor of the Exchequer and a strong proponent of the City of London’s views. A strong, high-value pound was good for British finance, but it was bad for British industry, since it made its products even less competitive with foreign industries than before (particularly those, once again, of the United States and Germany). This policy quickly produced a serious recession in Britain, which continued into the 1930s, when it deepened into the Great Depression. Thus a recession or depression afflicted British industry years before it did America, lasting for a full decade and a half. The onset of the Great Depression soon produced a global financial crisis in 1931. Now it was the turn of the British financial sector itself to suffer. The financial panic produced a run on the pound, which then served as the primary global reserve currency. This forced the British government into desperate and unprecedented responses. At the Ottawa Conference of 1932, free trade gave way to imperial preference within the Empire, and at the Westminster Conference that same year Britain’s authority within the Empire shrank relative to that of the dominions in what now was called the British Commonwealth. As radical as these changes were, the most important consequences of the financial crisis of 1931, and of the demonstrated fragility of the pound, manifested in British military spending. British leaders knew that any significant deficit spending might trigger a new run on the pound. Consequently, they capped government spending, including military spending. This signaled far and wide that Britain chose no longer to afford a “Continental commitment” and, with it, the military capability required to be an effective ally for other European states, particularly France. This economic constraint formed the underlying basis of what would soon become the Appeasement Policy, which British financial and political elites in the 1930s thought was the only policy they could afford. Instead, British military policy focused on the one area where financial elites still thought that they could receive good returns: the Empire. “Imperial policing” became the military counterpart to imperial preference, particularly with respect to the most profitable parts of the Empire, such as the oil-producing countries of the Middle East. Of course, a military force designed around imperial policing looked very different from one designed around a Continental commitment. The former developed capabilities for counterinsurgency warfare, punitive expeditions and “small wars.” As important as these capabilities may be, they were inadequate for engaging in conventional warfare, armored invasions and big wars against great powers. It had been Britain’s industrial supremacy that had maintained the British Empire and its role as the leading world power. However, this legacy could not be preserved by a power that was now mainly a financial one. By the end of the 1930s, Britain faced military challenges from three great powers—Germany, Italy and Japan. During World War II each of these powers put the British military to the test. Against Germany, a truly great power with a formidable conventional military supplied by a massive industrial sector, the British military failed the test. Britain, even with the entire British Empire, could never have defeated Germany on its own. It took the massive industrial sectors, and consequent military power, of the United States and the Soviet Union to bring the Germans down and rescue Britain in Europe. Against Japan, also a truly great power, the British military proved unimpressive and inconsequential. Again, Britain, even with the entire British Empire, could not have defeated Japan on its own. It took the United States to defeat the Japanese and to rescue the British Empire in Asia. Only against Italy, always problematic as a great power, did the British military prove effective, as in its campaigns in North Africa and the Mediterranean. Of course, the Mediterranean had always been at the center of British imperial strategy, since it provided the crucial route to the Empire in the Middle East, India and the Far East. Clearly, the American experience in the first half of the 20th century suggests that a strong industrial sector will tend to think in terms of big wars against great powers, since it has the capacity to produce the weapons to deter or fight such wars (as well as an interest in doing so). Conversely, the British experience in the same era suggests that a strong financial sector will tend to think in terms of small wars and imperial policing, since it calculates that only these wars will provide an acceptable mix of costs and benefits. With little capacity to produce weapons and no particular interests in investing in such capacity, a financial plutocracy will see its most attractive investment prospects in other economic activities in other countries, indeed, in countries all over the globe. The Origins of the Third American Plutocratic Era The American plutocracy of our time is based on the American financial sector and not on its industrial ones. As such, it has far more in common with the British plutocracy of the early 20th century than with the two previous American ones. Like the earlier plutocracies, the contemporary American plutocracy has been able to buy public policies, and for much the same reasons. Plutocratic forces are far more concentrated and cohesive and therefore more coherent and consistent than democratic forces. Of course, the earlier direct buying (read: bribery) of elected officials is now rare. However, the high cost of electoral campaigns means that large corporate campaign contributions can achieve much the same result, and as a result of the Supreme Court’s January 2011 Citizens United decision, the legal obstacles to such contribution have all but disappeared. Moreover, the great complexity of much contemporary legislation and regulation means that well-funded business associations—lobbies, that is—can in effect shape many public policy. These include not only the obvious arena of financial policy, but also foreign and military policies. The power of the financial sector with respect to financial policy certainly has been demonstrated in the course of the Great Recession. Almost all sectors of the U.S. economy and almost all parts of the American population have been hurt, but the financial sector that actually produced the economic crisis was at first hurt the least and has since thrived.5 Indeed, many of the policies implemented during this Recession have preserved the health and wealth of the financial sector by subsidizing it at the expense of especially ordinary taxpayers and small savers. It is clear that the financial plutocracy has been able to shape financial policy in its own interests and its own image. But what about its effect on foreign and military policies and on America’s power and leadership in the world? For this we need to look into the origins of this third American plutocratic era. We get some intimation of these foreign and military effects by looking again at the earlier eras of American plutocracy, when finance was only one part of a plutocracy dominated by industry. Even then, finance had its own foreign interests and therefore foreign policy. One particular focus was to have the U.S. State Department be a consistent force pressing foreign governments to repay loans to American banks. This was the case in the first decades of the 20th century in those new U.S. spheres of economic interest–Latin America, especially the Caribbean Basin and Central America, and East Asia, especially China. This “dollar diplomacy” was backed up on occasion by military intervention, namely “gunboat diplomacy.” Since some industrial sectors, particularly those wishing to undertake direct investments in extractive industries in these countries, had interests similar to and compatible with the financial ones, the American plutocracy was largely united on such foreign and military policies and it largely got its way. However, as we have seen, in the new economic conditions after World War I, finance and industry were divided with respect to Europe and to free trade. In this case, industry largely got its way with its preferred trade policy of protectionism and foreign policy of non-involvement, when finance preferred the opposite policies. After World War II, the U.S. financial sector was even larger than before, and it continued to advance its vision of an open global economy. But several industrial sectors now joined finance in this project. Whereas after World War I European industry had largely remained intact and could quickly field competition for its American counterpart, after World War II much of European industry lay destroyed and most of what remained was obsolescent. As long as European industry was still rebuilding or modernizing (in the late 1940s–50s), American industry retained valuable markets in Europe and therefore could join finance in supporting free trade. And by the time European industry was rebuilt and modernized (the 1960s), several American industrial sectors—particularly the automobile industry—had discovered the cost advantage of directly investing in European countries in order to produce their products there. Thus began the era of the “multinational corporation”, which has continued to expand in both size and scope to the present day. This movement of American industrial production into foreign countries was facilitated by American banks, which provided all sorts of useful financial services to multinational corporations. Soon the banks became multinational, too. A grand alliance between the biggest and most important corporations in American industry and the biggest and most important banks in American finance now agreed not only on free trade but also on free investment and indeed on the openness of the entire international economy. This grand alliance provided a solid base for what soon became the dominant ideology shaping U.S. foreign policy and America’s place in world affairs: liberal internationalism, which became liberal multinationalism in the 1970s, and which culminated in liberal globalization in the 1990s. However, although there was a grand alliance between finance and industry around an open global economy, there was not yet a full plutocracy. That awaited the 1990s. The migration of American industries to foreign countries is, of course, an old and familiar story. Industrial history has always characterized by the successive waves of new industrial sectors in a grand parade stretching from textiles and shoes at the beginning of the Industrial Revolution; then to iron and steel, railroads and shipbuilding in the mid-19th century; then to chemicals and electrical production in the late 19th century; then to automobiles, aviation and consumer electronics in the early 20th century; and most recently to computers and telecommunications in the late 20th century. As each industry came along its own particular history was characterized by a life cycle (sometimes termed “the product cycle”) that consisted of the successive stages of (1) innovation and rapid growth in the home market; (2) export of the product to foreign markets; (3) direct investment and production of the product in those foreign markets, first in ones whose economic development was most similar to the home market (that is, comparable production skills but lower labor costs) and then to other ones as they developed to a level where they also had similar markets and production capabilities; and finally, (4) export of this foreign production back into the original innovating country and its home market.6 Thus, it is in the nature of industrial sectors to become pilgrims, born in one country, residing there as they grow up and mature, and then migrating from one country to the next for generations thereafter. When American industrial corporations move production overseas, this obviously has consequences for the industrial portion of the U.S. gross domestic product (GDP). Economists often argue that such foreign direct investment also directly aids the U.S. economy by increasing the profits of American corporations, which then increases the dividends of American investors and even increases jobs for American workers, if they provide services for this foreign production. However, the portion of the American economy actually producing these industrial products within the United States will of course decline. At the micro or local level, when a mature industry leaves home, it obviously causes all sorts of disruptions to the workers, their families and their communities. Sometimes the abandoned region never recovers, becoming a sort of ghost economy, depressed and depressing. At the same time, however, other regions in the United States have developed their own new industries, and these have been large and dynamic enough to raise the level of the national economy overall. As long as the grand parade of successive new industries has continued to move onward, the American economy has continued to rise higher. Although the consequences of overseas investment for American economic prosperity are complex and debatable, the consequences for American military security are clear and well defined. When the U.S. military needs to procure certain crucial weapons components from overseas sources, this obviously poses the problem that an enemy might disrupt vital supplies in wartime or during a protracted crisis. Even if a shrunken, rump production base remains in the United States, its costs will be higher because its scale will be smaller and therefore less efficient. However, not all industries are equal when it comes to military security. Although soldiers certainly need uniforms and boots, no one hit the panic button when the American textile and shoe industries migrated overseas. Somehow, it seemed, that these simple products would always be available from somewhere. But with some other industries, the military consequences were different. This problem was first posed in a serious way (in the 1960s) with the shipbuilding industry. It was posed again a generation later (1980s) with the electronics industry. Recently, yet another generation later (2000s), it has been posed with the computer and software industry. And it has appeared even more recently in terms of space launch capabilities. The migration of much of these industries overseas (especially to East Asia or South Asia) creates challenges and uncertainties for each of the U.S. military services. The biggest impact, however, has been on the U.S. Navy, which relies on the products of all of these industries. These holes in the Navy’s industrial base make for a more insecure and expensive, as well as smaller and weaker, U.S. Navy than would otherwise be the case. (The U.S. Navy fleet now consists of only 270 ships, fewer than at any time since the 1930s—and those numbers are due to drop even further.) To compound the challenge (and to enhance the historical irony), these three industries (shipbuilding, electronics and software) are now principally located in East Asia, especially within China. China is also rapidly developing its own navy in a way that will soon pose serious challenges to the U.S. Navy in China’s three littoral seas. The shipbuilding case is of particular interest (as it was with Britain). The United States has not had a strong commercial shipbuilding industry for more than half a century, and one consequence is that it has an enormously, now truly prohibitively, expensive naval shipbuilding industry. (The U.S. Navy fleet now consists of only 270 ships—less than at any time since the 1930s—and those numbers are due to drop even further.) This is the same Navy that will have to protect the flow of vital weapons components to the United States across the broad and vulnerable expanse of the Pacific Ocean. The Third American Plutocratic Era: The Good Times It is obvious that the 1990s was a decisive decade in shaping the future course of the United States in world affairs. It was then that the U.S. elite embarked upon a particular path, one that by now has brought it to its current condition of increasing economic crisis, increasing political paralysis, increasing relative military weakness, and declining power and leadership in the world. The choice of that path was not inevitable, although the spokesmen for the grand alliance of finance and industry often said so at the time. However, once chosen, the consequences of that path do seem to have been inevitable. Several developments came together in that decade to set the United States on this path. First and most obviously, the collapse of the Soviet Union left the United States as “the sole superpower”, even, as some called it, “the American empire” or the “hyperpower.” In this exuberant time, it seemed that the United States could do whatever it wished in the world. Second, the consensus ideology of liberal internationalism, now ripened into liberal globalization, was an ideology that perfectly suited America’s supreme global power. Third, the American financial sector greatly expanded in wealth and power, both in absolute terms and in relation to America’s industrial sectors. Finance became the dominant sector in the economy and also in politics.7 This is clearly evidenced by the success of America’s finance plutocrats in obtaining congressional legislation and executive decisions that almost completely deregulated the financial sector, destroying the regime established by the New Deal in response to the Great Depression. Finally, the great increase in wealth and income inequality in the United States at last culminated in the creation of a new plutocracy. Having been created by public policies with respect to deregulation and taxation, this plutocracy then set its sights as an even more cohesive and powerful force on locking in even more favorable versions of these policies. These in turn rendered the financial sector and the plutocrats running it even richer and more powerful. From the perspective of the American plutocracy, it was the beneficiary of a virtuous cycle; from the perspective of the American democracy, it was the victim of a vicious cycle. The first decade of the third American plutocratic era happened to be characterized by continuity with respect to the grand parade of successive industrial sectors, based on new technological innovations that had been going on in America for a century and a half. The 1990s was a time of a spectacular development (and speculative boom) in the computer and telecommunications industries, one centered on the Internet and the extraordinary opportunities and services it made available. When the speculative boom in high-tech stocks burst in 2000, it afflicted investors with the usual distress attending the end of a speculative boom in new industries. Its effects, however, should have been short-lived and sectorally limited. Following the pattern of the past, American capital should have shifted into the next new industry in the grand parade after a decent interval of sobering up after the bust. The most promising candidates were perhaps biotechnology and renewable energy. That shift never happened. At the beginning of the second decade of the third American plutocratic era, finance preferred to invest in old technologies located in new regions rather than in new technologies located in old regions. Finance’s conception of risk management makes it most comfortable with incremental changes within established investment fields (“portfolio diversification”); short-term profit horizons (quarterly or yearly balance sheets); and “financial engineering” thanks to the supposed predictive accuracy of complex computer models (“financial engineering”) based on data drawn from only the past ten to twenty years. Investing in new industrial sectors such as biotechnology and clean energy did not conform to any of these conceptions of good risk management. What did conform, and conformed perfectly, was real estate. Beginning in the early 2000s, the financial sector thus directed the great majority of its new investments into real estate within what seemed to be areas of rapidly growing demand. This was a perfect case of preferring an old (very old) industry in new regions (or in old regions that appeared to be new in some way). Moreover, real estate was largely a consumption sector; it did not contribute to new production or productivity increases in any significant way. It created construction jobs and jobs in related supplier industries, but in terms of both numbers and innovative potential this did not amount to much. There had been real estate booms and bubbles in the past, and these had almost always led to bursts and busts. But these real estate dramas had been limited to particular regions, not much affecting the national economy as a whole. And they had been only an accessory part of larger booms and busts in industrial sectors. This time, however, the dominance of finance within the economy, and the dominance of plutocracy within finance, made the boom and bust of the 2000s a pure, archetypical case of one made in finance’s own interests and in its own image. Thanks to the integration of the financial industry it was now national in scope; and it was now just financial, and not also industrial, in substance. When the financial crisis hit the U.S. economy in the autumn of 2008, the financial sector was powerful enough to ensure that it received first priority in the government’s response: bailouts on an unprecedented scale of major financial institutions that were deemed “too big to fail.” These bailouts included more than $150 billion to each of four financial corporations: AIG, Citigroup, Fannie Mae and Freddie Mac—the latter two being, of course, government-sponsored institutions. Together, these four bailouts alone amounted to more than the entire annual U.S. defense budget. Each individual $150 billion corporate bailout is sufficient to purchase for the Air Force either all of the F-22s or F-35s it seeks, or to purchase for the Navy either all of the new aircraft carriers or all of the new attack submarines it says it needs. An alternative course would have been for the U.S. government to liquidate or break up several major financial institutions. This course would have followed successful precedents from the savings-and-loan crisis of the late 1980s and from the paradigmatic banking crisis of the 1930s. This would have had not only the advantage of minimizing financial burdens put upon the Federal budget and the American taxpayer; it also would have reduced the overall financial sector (and the size of the business units within it) to a point at which it would return to being a facilitator of the real, industrial economy instead of being the dominant, and distorting, economic and political power it has become. Within that reduced financial sector, this course would have reduced the size of individual financial institutions so that none of them would be too big to fail, and all of them could be better supervised by the regulatory authorities. Of course, no such liquidations, reforms or financial sector reconstructions have occurred like those of the 1930s and 1980s. The Dodd-Frank legislation does not even deserve the label “band-aid” in this respect. Unlike the earlier eras of financial reform and reconstruction, the financial sector has retained its status as the largest sector in the American economy. Of even weightier consequence, it is now organized into a cohesive political force by the plutocracy at its top. So instead of the financial crisis reducing the power of these institutions and this plutocracy, it ended up increasing it. The Third American Plutocratic Era: The Hard Times The United States entered the present decade with the financial sector and its plutocracy fully in charge. There is little sign that domestic forces within the United States will replace this regime. The industrial sectors are now either too small or too subordinated to financial interests to be effective counterweights to the financial sector. Democratic forces are now too disorganized (the Tea Party) or too weak (the labor unions) to mount an effective opposition. The domestic power of the contemporary American financial plutocracy exhibits similarities to that of the British financial plutocracy of the 1930s, and the hard times of this era also exhibit striking similarities to the hard times of that one. The most likely economic prospect is that the current Great Recession will continue, or even deepen, for the rest of the 2010s. It would therefore not be surprising if other similarities between the American condition of the 2010s and the British condition of the 1930s were to manifest, particularly with respect to the growth of foreign threats and especially those posed by rising industrial economies and great powers. We can already see that some kind of challenge will likely come from China. In the 1930s, the established but weakened British financial sector confronted a large American one distinguished by great financial resources and a strong creditor position. Similarly, today the established but weakened American financial sector confronts a rising Chinese one also distinguished by great financial resources and a strong creditor position. Historically, periods that have been characterized by both a declining global financial power and a rising one have issued in substantial financial instability and even prolonged global recession or depression.8 The 1930s were one such period, and the 2010s could well be another. Also in the 1930s, an established but weakening British naval power confronted a rising Japanese naval power in the western Pacific. Similarly, today an established but weakening U.S. naval power confronts a rising Chinese naval power in the same region, particularly in China’s three littoral seas.9 We have already seen that a financial plutocracy is ill-suited for effective leadership in the global competition between great powers. Its neglect or even disdain for a healthy domestic industrial structure is one factor. Its attachment to a global reserve currency, despite the vulnerability and consequent sensitivity to government deficits this brings, is another. Its preference for small wars or imperial policing rather than for preparing the nation and its military for deterring great powers and large wars is a third. It is very likely, therefore, that we are steadily approaching the day, be it in this decade or the next, when the United States and China will confront one another in the seas that border China. These are seas that the United States considers to be part of the western Pacific but that China considers to be part of its historical patrimony one day to be redeemed. When the rising industrial and naval power of Japan confronted the British Empire and the Royal Navy in the Western Pacific, it was so strong that it easily got its way. It was only because Japan also had to confront the formidable industrial and naval power of the United States that it was defeated, and then only in a long and terrible war. When the new rising industrial and naval power of China confronts the United States and the U.S. Navy in the western Pacific, who will prevail? One can still imagine that the old financial power, with its small-war military (and diminished navy) will do so, and will do so without having to fight a long and terrible war. But to imagine this, one has to believe, as a financial sector on the make so often does, that “this time is different.”10 A financial power achieving this kind of outcome for itself against this kind of challenge from an industrial power has never before happened in history. If we cannot prevail, what greater power will save us in, say, the early 2020s, as America saved Britain in the early 1940s? 1For comparisons of these economic crises, see Peter Gourevitch, Politics in Hard Times: Comparative Responses to International Economic Crises (Cornell University Press, 1986); James Kurth, “A Tale of Four Crises: The Politics of Great Depressions and Recessions”, Orbis (Summer 2011), pp. 500–23. 2See Michael Auslin, “Tipping Point in the Indo-Pacific”, The American Interest (March/April 2011). 3See Tyler Cowen, “The Inequality That Matters”, The American Interest (January/February 2011). 4Economic historians still debate with some passion the particular nature of this Great Depression, which is dated from the Panic of 1873 to the crisis of the mid-1890s. By many measures before the mid-1890s, this was certainly an odd “Depression” in that industrial growth rose dramatically, unemployment was not high in the context of massive immigration, and also in that context general living standards rose. The problem, insofar as there really was one, was that business profits were plagued by deflation. The money supply did not keep pace with the real growth of the economy, making credit relatively scarce. In this regard, the term “Great Depression” refers to phenomenon unlike those of the late 1920s and today, but if it is taken to refer just to the crisis of the mid-1890s, the parallels hold. 5See Don Peck, “Can the Middle Class Be Saved?” The Atlantic (September 2011). 6In the case of the automobile industry, the classic product cycle has even been extended into a fifth phase, with the product being manufactured by foreign corporations within the original home market (the United States). 7See Jeff Madrick, Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present (Alfred A. Knopf, 2011). 8This was the classic thesis of Charles Kindleberger in The World in Depression, 1929–1939 (University of California Press, 1973). 9Contrasting views of the potential Chinese challenge are given in Auslin, “Tipping Point in the Indo-Pacific”; Henry Kissinger, On China (Penguin Press, 2011), chapter 18; and James R. Holmes and Toshi Yoshihara, Red Star over the Pacific: China’s Rise and the Challenge to U.S. Maritime Strategy (Naval Institute Press, 2010). 10See Carmen M. Reinhart and Kenneth S. Rogoff, This Time is Different: Eight Centuries of Financial Folly (Princeton University Press, 2009).
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Appeared in: Volume 7, Number 2The Foreign Policy of Plutocracies
Published on: September 27, 2011
Published on: September 27, 2011
A financial plutocracy contributed to Britain's demise as a global power. Is the same fate in store for America?