US Power in International Finance : The Victory of Dividends (International Political Economy Series)

International Political Economy Series General Editor: Timothy M. Shaw, Professor of Political Science and International Development Studies, Dalhousie University, Halifax, Nova Scotia Titles include: Francis Adams, Satya Dev Gupta and Kidane Mengisteab (editors) GLOBALIZATION AND THE DILEMMAS OF THE STATE IN THE SOUTH Preet S. Aulakh and Michael G. Schechter (editors) RETHINKING GLOBALIZATION(S) From Corporate Transnationalism to Local Interventions Elizabeth De Boer-Ashworth THE GLOBAL POLITICAL ECONOMY AND POST-1989 CHANGE The Place of the Central European Transition Edward A. Comor (editor) THE GLOBAL POLITICAL ECONOMY OF COMMUNICATION Helen A. Garten US FINANCIAL REGULATION AND THE LEVEL PLAYING FIELD Randall D. Germain (editor) GLOBALIZATION AND ITS CRITICS Perspectives from Political Economy Barry K. Gills (editor) GLOBALIZATION AND THE POLITICS OF RESISTANCE Takashi Inoguchi GLOBAL CHANGE A Japanese Perspective Stephen D. McDowell GLOBALIZATION, LIBERALIZATION AND POLICY CHANGE A Political Economy of India’s Communications Sector Ronaldo Munck and Peter Waterman (editors) LABOUR WORLDWIDE IN THE ERA OF GLOBALIZATION Alternative Union Models in the New World Order Michael Niemann A SPATIAL APPROACH TO REGIONALISM IN THE GLOBAL ECONOMY Ted Schrecker (editor) SURVIVING GLOBALISM The Social and Environmental Challenges Leonard Seabrooke US POWER IN INTERNATIONAL FINANCE The Victory of Dividends

Kendall Stiles (editor) GLOBAL INSTITUTIONS AND LOCAL EMPOWERMENT Competing Theoretical Perspectives Caroline Thomas and Peter Wilkin (editors) GLOBALIZATION AND THE SOUTH Kenneth P. Thomas CAPITAL BEYOND BORDERS States and Firms in the Auto Industry, 1960–94 Geoffrey R. D. Underhill (editor) THE NEW WORLD ORDER IN INTERNATIONAL FINANCE Amy Verdun EUROPEAN RESPONSES TO GLOBALIZATION AND FINANCIAL MARKET INTEGRATION Perceptions of Economic and Monetary Union in Britain, France and Germany Robert Wolfe FARM WARS The Political Economy of Agriculture and the International Trade Regime

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US Power in International Finance The Victory of Dividends Leonard Seabrooke Government and International Relations School of Economics and Political Science University of Sydney

© Leonard Seabrooke 2001 All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission. No paragraph of this publication may be reproduced, copied or transmitted save with written permission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London W1P 0LP. Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages. The author has asserted his right to be identified as the author of this work in accordance with the Copyright, Designs and Patents Act 1988. First published 2001 by PALGRAVE Houndmills, Basingstoke, Hampshire RG21 6XS and 175 Fifth Avenue, New York, N. Y. 10010 Companies and representatives throughout the world PALGRAVE is the new global academic imprint of St. Martin’s Press LLC Scholarly and Reference Division and Palgrave Publishers Ltd (formerly Macmillan Press Ltd). ISBN 0–333–92167–4 This book is printed on paper suitable for recycling and made from fully managed and sustained forest sources. A catalogue record for this book is available from the British Library. Library of Congress Cataloging-in-Publication Data Seabrooke, Leonard, 1974– US power in international finance : the victory of dividends / Leonard Seabrooke. p. cm. — (International political economy series) Includes bibliographical references and index. ISBN 0–333–92167–4 1. United States—Foreign economic relations. 2. Dividends– –United States. 3. International finance. I. Title. II. Series. HF1455 .S35 2000 332.'042'0973—dc21 00–053081 10 10

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Printed and bound in Great Britain by Antony Rowe Ltd, Chippenham, Wiltshire

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For Jessica

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Contents List of Tables

ix

List of Figures

x

Preface

xi

List of Abbreviations

xiv

1

The Political Economy of Direct Financing Globalization and international cooperation Finance and the hegemony debate Differentiating financial and political structures State capacity and interactive embeddedness The structure of the book

1 4 6 10 16 19

2

State Capacity and Finance in IPE Credit-money and innovation Weaknesses in neoliberalism and neorealism Weaknesses in `new realism' Weber and the `victory of dividends' State capacity and structural power

22 23 31 35 38 43

3

1960±68: From Orthodoxy to Heresy Keynes, White and Wall Street As good as gold People's capitalism The US and the Euromarkets IOUs and the `exorbitant privilege'

48 50 54 57 61 66

4

1969±81: The Privileges of Uncertainty The privileges of uncertainty `That's what friends are for' Disequilibrium and petrodollars Mayday, May Day Overlending and state power Adam Smith has to be curbed Regulatory twists, or shedding another skin vii

71 73 78 83 89 95 100 106

viii Contents

5

1982±91: Indebted Innovation Indebted innovation The Debt Crisis The Yen±Dollar Agreement and liberalization The October crash and hegemonic decline Basle Faulty Securities trading and the big bank thesis Financial strategy and isolation

112 114 119 124 131 136 140 144

6

1992±2000: Crises and Consumer Credit Recession and renewal Threats from Europe The Tequila Crisis The Bull Revolution Overlending and the Japan premium The Asian and Russian financial crises The Super-regulators Consumer credit and consolidation

151 155 160 165 168 174 180 187 192

7

Conclusion: The Victory of Dividends and the Dividends of Victory

198

Appendix: List of IPE and Related Websites

213

Notes

217

Select Bibliography

268

Index

272

List of Tables 4.1 5.1 5.2 6.1 6.2

Top Ten US multinational banks after tax earnings, Compound annual rate of change 1970±76 Percentages of commercial bank funding from non-deposit (or non-traditional) sources Performance of US commercial banks, 1986±90 Direct and indirect stock ownership of American families, 1989, 1992, 1995 Ownership of exchange-listed firms by percentage, 1995

ix

97 114 144 172 173

List of Figures 1.1 Matrix of character of regulatory guidance and character of financial structure 1.2 Matrix of traditional financial and political structures 2.1 Direct financing in the international/national vortex 3.1 Private market price of gold in dollars (London), 1955±75 4.1 Short-term interest rates during currency crisis, 1970±72 5.1 US prime rate, interbank rates on three-month Eurocurrency deposits (US dollar and DM), 1981±84 5.2 Trends in international financial markets, 1982±86 6.1 BIS reporting banks' credits to emerging economies ± Asia 6.2 BIS reporting banks' credits to emerging economies ± Latin America 6.3 BIS reporting banks' credits to emerging economies ± Eastern Europe

x

11 11 46 56 76 115 123 181 181 182

Preface Max Weber viewed sophisticated financial markets as vital to a state's international political and economic position.1 In a debate with protectionist agrarian interests over reforms to the Berlin stock exchange, Weber rejected legal restrictions on futures trading on agricultural goods, arguing that it would smooth price fluctuations and increase Germany's wealth.2 The protectionist (and winning) view was that financial modernization would disempower those controlling trade. Weber, however, was well aware that large banks and investors would often artificially influence prices to serve their own interests. Such activity was to be guarded against with regulation. An observer of American finance capitalism and the decay of France's financial position, Weber feared the `victory of dividends' ± that income derived from trading on financial markets would crowd out productive investment in enterprise.3 The `vast paper fortunes' rentier gained from debt financing were especially scorned, as at least stock market investment `meant that hard, demanding work had been done somewhere'.4 Even so, Weber warned that America's finance capitalism would lead towards a `benevolent feudalism' where the owners of production would be separated from the management of enterprise. He was adamant that states should maintain the will not to follow America's finance capitalism like `a flock of sheep'.5 In Weber's view the blind adoption of finance capitalism without state controls would lead to a loss of social and economic freedoms. As well as these concerns, Weber warned that the development of sophisticated financial markets would lead to the expansion of credit-money above the requirements of real economy. Such an enlargement threatened the substantive validity of money (as opposed to its formal validity) ± the ability to honor promises to pay.6 Should an overexpansion of credit-money occur, a state would need the power to shape international financial and monetary relations to its own ends to uphold its substantive validity. This has been the US's task in the post-war period. This book discusses US `structural power' in international finance from 1960 to 2000 and its promotion of `direct financing'. The term `direct financing' refers to greater trading on debt and equity markets by investors and intermediaries. It also refers to the process of securitization in financial markets. The progression of direct financing represents a shift away from traditional forms of financial intermediation. While xi

xii Preface

discussing personal investment in stock and debt markets, this book pays greatest attention to how commercial banks have changed. Direct financing for banks has been seen in a general shift away from bank held debt and from the extension of loans. Banks use securities trading and securitization to place capital off their balance sheets. Banks therefore act more like brokers. Their clientele therefore behave less like depositors and more like investors. Both Washington and Wall Street ± shorthand for the US state and financial regulators and US financial intermediaries at home and abroad ± have encouraged `direct financing' for their own advantage and for competitive advantages over major financial powers. Accordingly, this book also discusses the adoption of `direct financing' in Britain, Japan, and Germany. This book makes a theoretical claim about how we can study `structural power' and, more broadly, change in the international political economy (IPE). My perspective draws from Weber's works and the `second-wave' of Weberian historical sociology. With the tools derived from these works I hope to enliven Susan Strange's widely known concept of `structural power'. My use of Weber derives from an admiration of his work and a desire to challenge how Weber is commonly viewed in IPE, particularly American IPE. I contend that those who use Weber to support systemic studies of international political and economic change, and those who view him as a Realist, have ignored heuristically richer foundations. This Weberian analysis therefore differs from what one may expect. I have taken up the challenge of integrating the theoretical perspective into the historical chapters. Within those chapters I discuss microeconomic changes in direct financing alongside macroeconomic changes in international financial and monetary systems. Micro- and macroeconomic changes are discussed together, providing a more general history of change than indepth case studies. Like all works that seek to cover a significant span of time (four decades in this case) topics and details must be excluded for the greater good of the narrative. For some there will be glaring absences in my potted history. You will find little mention of the IMF's role in the development of direct financing. The same can be said for credit rating agencies. Most sacrilegious, when considering current literature on finance, is the amount of attention paid to technology. There is virtually nothing on technological innovation within these pages. Moreover, there is little discussion of derivatives trading, certainly the most dramatic sector in the financial marketplace. I do not focus on technology and derivatives because they are not the social powers promoting direct financing. This book is concerned with the political economy of

Preface xiii

financial relations, not how financial relations are conducted. Accordingly, technology has been underplayed for greater emphasis on government, financial community, and social relations. I have many people to thank for their time, effort, and interest. First and foremost I thank Richard Leaver and Martin Griffiths for their friendship, their humor, and for supervising my Master of Arts (Research) thesis ± most of which is presented here albeit in updated and modified form. I am indebted to Richard for our daily discussions on whatever financial or trade crisis was occurring at the time. I am grateful to Martin for his help with conceptual issues and knowledge of the academic business. My great thanks also to John M. Hobson for reading every word in this book and with whom I have discussed all things Weberian, historical, and sociological. I have benefited greatly from John's insight and enthusiasm and I am most pleased that he is supervising the development of my doctorial dissertation at the University of Sydney. David Scott Mathieson deserves my deepest thanks for his wonderful friendship and our far-ranging scholarly discussions. Many thanks to Ann Capling for recommending I send my Masters thesis to Timothy Shaw. In turn, I am greatly indebted to Tim for deciding to publish my work and for his encouragement during the process of revisions and writing of an additional chapter. My thanks to all at Macmillan/Palgrave for their considerable patience, particularly Nicola Vinikka, Aruna Vasudevan, and Peter Dent. My special thanks to Deborah Bennett for her excellent copy-editing. My thanks also to the BIS, the OECD, the US Federal Reserve, the Reserve Bank of Australia, Michael D. Bordo, and Edward J. Kane for granting permission to reprint tables and figures in this book. I am indebted to all with whom I have discussed the book and who commented on my work, including dear friends I met while at Flinders University: Maryanne Kelton; Lachlan Pontifex; Michael Coats; Rick De Angelis; Kylie Aitken; George Crowder, and David Moore. Preserve (not pickle) their brains. Thank you to my mother, Betty Seabrooke, father, Leonard Seabrooke II, and sister, Natalie Seabrooke, for their support over the years ± bronze their hearts. Other hearts worthy of bronzing belong to Simon Ellis, Sam Ellis, Peter Ellis, Carol Ellis, Jan Seabrooke, and all the Lumsdens. Finally, thanks to my love, Jessica Ellis, for removing the muddy boots from my workman-like prose. I am fortunate to have a partner who revels in the demands of study. In anticipation of a life of love and learning, this book is dedicated to her. LEONARD SEABROOKE Canberra, Australia

List of Abbreviations AMF Asian Monetary Fund È r das Kreditwesen BAKred Bundesaufsichtsamt fu È r das Wertpapierhandel BAWe Bundesaufsichtsamt fu BoE Bank of England BoJ Bank of Japan BIS Bank for International Settlements CARs Certificates for Automobile Receivables CCPC Co-operative Credit Purchasing Company CDs Certificates of Deposit CMOs Collateralized Mortgage Obligations CRA Community Reinvestment Act È rse DTB Deutsche Terminbo EC European Community ECB European Central Bank ERM Exchange Rate Mechanism ESF Exchange Stabilization Fund EMS European Monetary System EMU European Monetary Union FDIC Federal Deposit Insurance Corporation FDIP Foreign Direct Investment Program Fed US Federal Reserve FSAj Financial Supervisory Agency (Japan) FSAb Financial Services Authority (Britain) FSE Frankfurt Stock Exchange IBF International Banking Facilities ICU International Clearing Union IET Interest Equalization Tax ILSA International Lending Supervision Act IMF International Monetary Fund IOSCO International Organization of Securities Commissions IPE International Political Economy LSE London Stock Exchange MITI Ministry of International Trade and Industry MoF Ministry of Finance NYSE New York Stock Exchange OECD Organization for Economic Cooperation and Development xiv

List of Abbreviations xv

OPEC OTC S&L SEC SIPC SDRs TSE VFCR

Organization for Petroleum Exporting Countries Over-The-Counter trading Savings and Loans Institution Securities and Exchange Commission Securities Investors Protection Corporation Special Drawing Rights Tokyo Stock Exchange Voluntary Foreign Credit Restraint Program

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1

The Political Economy of Direct Financing

A strong stock exchange cannot be a club for mere `ethical culture', and the funds of the great banks are no more a `charitable device' than are rifles and cannons. From the point of view of national economic policy aimed at this-worldly goals, they could only be one thing ± a weapon for achieving power in that economic struggle Max Weber1 In the late twentieth century the United States promoted direct financing in the pursuit of this-worldly goals. The term `direct financing' describes a process which is changing the structure of finance in the international political economy. It is change in how government interests and financial communities manage capital and access credit. The umbrella term `direct financing' includes the disestablishment of the traditional role of financial institutions and the promotion of the use of debt and equity markets where capital and credit are created, bought, and sold. Direct financing is also known by the ungainly term `financial disintermediation'. Despite what this terms implies, direct financing does not remove intermediaries altogether. In fact, it has led intermediaries to expand the variety of financial services on offer to their clients, particularly for securities trading. Changes in how commercial banks operate, the class of intermediary given greatest attention in this book, demonstrate that direct financing allows the financial sector to offer more credit to the public and receive more in trading revenues. For commercial banks, direct financing includes a shift away from bankheld debt and direct bank loans toward securities trading and `securitization'.2 Banks thus act less as we traditionally think of them, as depositories of capital, and more like brokerage houses. Accordingly, if 1

2 US Power in International Finance

publicly accepted, banks' clientele begin to act more like investors than depositors. Investors acting more directly in finance markets promote the use of financial innovations to combat risks, affording competitive advantages to those who innovate first. The process of direct financing can be simply thought of as the greater use of securities markets by traditional intermediaries and investors. This book discusses the United States' (henceforth US) `structural power' in international finance between 1960 and 2000, and how it has promoted the use of direct financing in international finance. For the bulk of the post-war period, the US has done this by enforcing regulations at home while advocating freedoms for capital mobility abroad ± a policy mix captured by John S. Odell's phrase `international passivity with national activism'.3 Policies of international passivity and national activism have been vital to the extension of US structural power in international finance. National activism has been conducted through regulatory restrictions on US intermediaries that have forced them to produce financial innovations. International passivity (passive only in the official view of international finance, not in practice) has helped the US promote direct financing in other states. The combination of such activism and `passivity' has encouraged Britain, Japan, and Germany to gear their financial systems towards direct financing and helps explain the US's reluctance to support international finance and monetary regimes.4 I argue that US `structural power' is reliant upon the US's state capacity. This capacity, in turn, draws from the interactive embeddedness of the competitive/cooperative relationship between US government and financial interests (hereafter referred to as Washington and Wall Street) as well as the embeddedness of finance in American society.5 To support the notions of state capacity, interactive embeddedness and structural power, I provide a theoretical framework that differs strongly from neoliberal, neorealist and `new realist' perspectives.6 I argue (in Chapter 2) that these perspectives have an inadequate understanding of how government and financial communities cooperate and compete within the state and how a state can successfully play domestic and international realms against each other. The relationship between the international and domestic realms is viewed as either outside-in or inside-out. While the twain shall meet, either the structure determines what a state must adapt to, or the agency of the state is reified only at the executive level. These views have also led to the construction of the `strong state' in the field of international political economy (IPE) ± that which can override interest groups and centralize power either to adapt

The Political Economy of Direct Financing 3

to international change (or face the consequences) or to maintain constancy in a state's foreign policies.7 In short, these three perspectives in IPE abstract the state from society and downplay informal sources of state power ± they `black box' the state. Rather than study change, these perspectives have a conception of the IPE that gives too much prominence to the structural determinants of the inter-state system. In contrast to the `black box' state, I offer a view of the development of direct financing that emphasizes not only the external pressures placed upon states to adapt to change, but how domestic pressures (including financial regulation, the character of states' financial systems, and public acceptance of direct financing) affect a state's ability to enact structural power in international finance. I therefore offer an interpretation of how the domestic and international realms interplay. I argue that the above perspectives' understanding of `state strength' is heuristically inadequate when compared to the notion of state capacity, whereby the degree of a state's embeddedness in society tells us more about how it is able to adapt to and enact change in the international political economy. Drawing from Weber's work and the `secondwave' of Weberian historical sociology, I argue that state capacity, and hence state strength, is not premised upon formal structures alone.8 The interactive embeddedness within a state ± that is, the degree of competition and cooperation between state and key social actors ± is particularly important in understanding the sources of structural power within the international political economy.9 Interactive embeddedness generates state capacity, which provides the means for a state to create structural power; the power to `decide how things shall be done, the power to shape frameworks within which states relate to each other, relate to people, or relate to corporate enterprises'.10 Thus, to whittle down our understanding, state capacity may be understood as the capacity of a state to reconstitute itself to enact or adapt to domestic and international change by drawing upon the embeddedness of its relationship with society. State capacity also enhances a state's ability to play the international and domestic realms against each other in the process of reconstitution. For the purpose of this book the keystone to interactive embeddedness is competitive±cooperative relations between the government and the financial community, and the degree to which direct financing can be embedded within a society. This chapter outlines the argument of the book in light of the main debates within IPE. It also provides a section on the differentiation of financial and political structures for the states under study.

4 US Power in International Finance

Globalization and international cooperation Within IPE the post-World War Two era is commonly recognized as a `compromise of embedded liberalism' whereby societies welcomed international trade and financial liberalization in return for a greater social welfare role for states.11 It is often argued that since the 1970s `embedded liberalism' has eroded and given way to a decline in living standards, social unrest and recurring macroeconomic troubles.12 Globalization, particularly financial globalization, is often viewed as the culprit, a faceless parasitic force outside of state control. Within IPE literature the costs of globalization are often seen as compounded by the absence of a hegemonic stabilizer.13 As a consequence, globalization must be controlled by international cooperation to change `the context within which states make decisions based on self-interests' in a world where there is no benevolent hegemon who has the capacity to act as a stabilizer.14 While a study of financial and political change over the past four decades, this book is not concerned with `globalization'. I don't wish to dwell on this subject (or the term globalization!) but three points must be clarified. First, the integration of financial markets has increased the interdependence of states' economic and foreign policies, but integration and globalization are not one and the same ± nor are internationalization and globalization.15 As Benjamin Cohen asserts, it is still `premature to speak of a single financial market'.16 The speed of financial trade has increased with international electronic trading on securities markets, but the actual volume of what is being traded is somewhat less than late last century.17 Secondly, the term globalization embodies a holism that inhibits rather than enriches analysis. It conjures imagery of massive structural constraints upon states from market forces, the absolute ascendancy of technology; even the proclamation of the end of geography (as if the geography of financial centers themselves does not have strategic significance).18 The state under globalization is often posited as a fixed entity rather than a flexible accumulation of institutions and social networks. The doom and gloom version of globalization therefore inhibits any real analysis of the state beyond adaptation to fait accompli. The policy making processes of states is downgraded as reactionary rather than socially constructive. Under this cloud it is difficult to see how political, social, and economic freedoms can flourish rather than whither. The rhetoric behind globalization is thus in many ways anti-democratic and disempowering. Thirdly, globalization implies a sweeping, homogenizing process of change. As

The Political Economy of Direct Financing 5

will be shown, the rate of financial deregulation that has occurred within the four states under study staggers over a 30-year period.19 The staggering of this process has been a consequence of domestic political constraints interacting with pressures in the international arena. Domestic political factors such as ministerial rivalries, a need for capital controls to manage foreign exchange, anti-Americanization sentiment among the public, and, often, cooperative relationships between governments and financial communities that slow financial modernization, constrain how states can change. And as I demonstrate, how they change differs from popular perceptions of the `strong state' in IPE. The important point is that states have shaped the development of direct financing. Even in the late 1990s, a period of heightened internationalization in finance, states responded to `globalization' with the creation of national financial strategies, particularly the creation of new regulators. As Weber's quote which begins this chapter suggests, financial power is akin to military power in achieving `this-worldly goals'. The ability to structure financial relations, like the ability to determine the shape of battle, brings great rewards to those guiding preferences. As suggested, such structural power relies upon state capacity and interactive embeddedness. Greater financial internationalization has been facilitated by technology but states still regulate finance and are able to impose controls. States that can structure international finance unilaterally do so; certainly this has been the case with the US in the post-war period. However, like military strategy, states use financial diplomacy to form alliances for mutual benefit and to hobble the competitiveness of other states. Also like military strategy, states create bilateral ties within a multilateral framework (international regimes) for mutual advantage. Certainly the temporary alliance between the US and Britain in the formation of the Basle Accord, is an example of such strategy (and is discussed in Chapter 5). The Basle Accord is heralded as the most successful example of international cooperation and regime formation in finance in the post-war period. During the development of direct financing in the post-war period, there have been numerous calls for international cooperation to harness the ill effects of international financial and monetary systems through the formation of regimes. Most of them are discussed within these pages. According to advocates of international cooperation (predominantly in the neoliberal school of IPE), regimes internalize `negative externalities' in the international political economy through the institution of `principles, norms, rules and decision-making procedures

6 US Power in International Finance

around which actor expectations converge'.20 International cooperation allows states to create win±win situations, whereby all can enjoy greater access to information, greater accountability, greater wealth and, perhaps most importantly, greater security. It is not surprising that much of the literature in IPE over the past 15 years has devoted itself to support these fine aims or to dispelling their likelihood. This book engages with the literature on international regimes by demonstrating how the US has treated calls for international finance regimes and, more importantly, how Washington's and Wall Street's relationship has affected US foreign policy. I demonstrate that the US has given little serious support to international finance regimes in the post-war period. While this may surprise many who could point to the increased number of regimes created, I argue that there is little substance to regimes that do not support US strategic interests ± and the interests of both Washington and Wall Street. As demonstrated by the Basle Accord, the US can support regimes that hobble potential threats and aid Washington and Wall Street while, at the time, claiming the creation of an international public good. My general view of international regimes flies in the face of scholars who advocate regimes and international cooperation on the basis of creating an international public good, as well as those who argue that a decline in US hegemony has produced a demand for international regimes ± for the US's own good. Those who believe that the US has supported finance regimes as a consequence of perceived hegemonic decline have been misled. Because of its structural power in international finance, the US does not need to support finance and monetary regimes any more than it did when it was a supposed self-declared hegemon. I demonstrate that the US's involvement with international finance and monetary regimes has not been to internalize negative externalities but to generate positive externalities for US interests.21 The capacity to do so reflects its interactive embeddedness, its state capacity and its structural power in international finance.

Finance and the hegemony debate The question of US hegemonic decline `drives debate in the field of international political economy'.22 Nothing has received more attention within IPE than the debate over whether the international system requires a hegemonic stabilizer, and whether the US's hegemonic decline is the determinant of political and economic turbulence since the 1970s. As Michael C. Webb and Stephen D. Krasner aptly comment,

The Political Economy of Direct Financing 7

the main purpose of the `theory of hegemony stability' is to act as a `foil against which to test alternative theoretical explanations'.23 There are two main interpretations of the theory of hegemonic stability. The first is best characterized by Robert Gilpin's U.S. Power and the Multinational Corporation; this postulates a climacteric of how states ascend to hegemony, use their dominance to encourage the free movements of goods and capital, and then resort to protectionism as hegemony declines.24 States build themselves up from young debtors to mature creditors, only to become steeped in debt from the costs of hegemony. Their choice is to decline alone or to create partnerships with other states with greater resources. Gilpin's later work The Political Economy of International Relations proposes a combined leadership (the Nichibei economy) between the US and Japan to compensate for the lost hegemonic status.25 In the second popular interpretation, the absence of hegemony creates the demand for international regimes and the need for states to cooperate for the good of the international system. Robert O. Keohane's After Hegemony is the clearest expression of this argument.26 Both interpretations are discussed within this book. The hegemonic stability debate is not only useful as a foil to test other explanations. The way in which the hegemonic stability debate has developed also tells us a great deal about how IPE scholarship is conducted. This study adds to the debate by stressing the importance of `structural power' to how we think about how states enact and adapt to change in the international political economy. I argue that the US has extended its structural power ± the ability to shape the financial framework within which states, corporate enterprises, and people relate to one another, through direct financing. Included in this process has been the mass privatization of credit. As discussed further in the following chapter, credit, as a promise to pay, requires substantive validity. When extending credit the formal rationality in deciding whom to lend to is based on a quantitative calculation of what is technically possible. The substantive rationality of that same decision involves other factors behind price concerns, such as political, economic, and social factors.27 The proof in the pudding, so to speak, is whether political, economic, and social conditions permit repayment or can find ways of offsetting or even cancelling repayment. In order to understand credit risks, one has to know the political and economic conditions of the borrower. Furthermore, access to credit provides the borrower with a new set of preferences (how should this capital be spent?). Those lending have an ability to set preferences for borrowing. Those borrowing, provided they have borrowed enough,

8 US Power in International Finance

also have an ability to set preferences for repayment. More than a mere transfer of capital, credit shapes financial structures and political and economic relationships. Credit is thus far more than a collection of resources but an ability to shape preferences. I argue that it is `structural power', the ability to shape preferences that is more important to IPE scholarship than the power seen as an accumulation of resources. But for IPE, power is commonly seen as resources. In the hegemonic stability debate, most studies of hegemonic decline compare Pax Britannica with Pax Americana (and a few forecast a Pax Nipponica). For example, Gilpin's argument in the 1970s, that the US was too dependent upon extracting rents from its finance capital to the neglect of domestic production, drew from Britain's attempt to support itself through foreign bond earnings.28 While Gilpin's warnings were appropriate, his analysis viewed a decline of power as simply a decline in profits, the ability to extract resources. If anything, the British case demonstrates that a hegemon is not the largest economy but the one most able to shape how other states conduct their economic affairs. Michael Mann argues that the most enduring effect of British dominance was the spread of commercial capitalism, including the adoption of new financial instruments.29 As discussed in Chapters 4 to 6, despite arguments of hegemonic decline, the US was able to extend its structural power in international finance through the shaping of financial and monetary systems. A second problem with the hegemonic stability debate and of IPE scholarship in general is the use of the `power as resources' view as a way of systematizing change. While important, such a view does not tell us much about the societal composition of hegemons, nor their ability to extend structural power. Rather than deepening our understanding of how states help structure international relations by analysing their internal dynamics, IPE scholarship has tended to `black box' the state. What I mean by this is that there is a need to associate a state with the greatest command over resources (the hegemon) with benevolent or predatory behavior towards the international order. The state, as the primary unit of analysis, must have a rational view towards the inter-state system and the international political economy. As discussed in the following chapters, the view that `a hegemon should be benevolent, thus when a hegemon is not benevolent it must be in decline' distorts what we understand as hegemony and, more generally, power in the international political economy. It introduces a normative bias in a field that operates, for the bulk, in an otherwise normative vacuum.

The Political Economy of Direct Financing 9

For the bulk of IPE scholarship on the subject, hegemony must include cost to the hegemon itself, and conclusions abound that border on teleology. For Keohane, the creation of an open international economic system in the interest of all must lead to `the disease of the strong: refusal to adapt or change'.30 The view that states have a fixed rationality towards the international order is especially prevalent in debates on the demand for regimes. Not enough attention is paid to internal contradictions within states, or the notion that states can generate structural power on a long-term basis without providing effective international regimes. A further consequence of the characterization of hegemony as benevolent or predatory has been the distortion of history. For example, the supposed international benevolence of Pax Britannica's `Golden Age' has been used as a basis to assert US hegemonic decline ± certainly this is the key to Robert Gilpin's tale of American decline. However, John M. Hobson's analysis of British hegemony demonstrates very little of the apparent benevolence or willingness to act as a hegemon that is frequently associated (and complained about) with US hegemony. Rather than a `weary titan', as Aaron Friedberg would have it, Britain was a `wary titan'.31 For the British, an open international economic system was a `matter of survival'.32 A benefit of hegemony was the ability to impose costs on others, just as others may `free-ride' on the hegemon. The ability to generate positive externalities rather than internalize negative externalities is one of the more interesting aspects of hegemonic power. Mann asserts, for example, that Britain's allies and rivals supported its currency and its `fiscal transnationalism' that underpinned the international trading system.33 Fiscal transnationalism essentially represents the ability to tax other states for being part of a more or less stable international order. I postulate that by using its structural power to shape other states' financial systems towards direct financing, the US continues to `tax' its trading partners with little real cost to itself. This is achieved through the expansion of private dollardenominated credit and, in the bulk of the post-war period, the sale of US government debt. The role of Wall Street is vital in both of these achievements. The US has been incredibly successful in extending its structural power in international finance to access and create credit. A state's dependency upon credit, however, poses dangers should finance become the reserve of rentiers or a banking elite, and become too distanced from the public ± what Weber referred to as the `victory of dividends'.34 I will return to this problem once the historical evidence is presented.

10 US Power in International Finance

In order to understand the relationship between the development of the state and the development of financial systems it is necessary to recognize a state's ability to reconstitute itself from formal and informal sources of state power. Most analyses within the hegemonic stability debate have failed to do this, preferring to see states as governments and ignoring both the public at large and even, to a lesser degree, the marketplace. To ensure that I do not make the same mistake it is important, at the very least, to differentiate the financial and political structures within the states under analysis: the US, Britain, Japan, and Germany. These are states recognized as having the capacity to shape international finance because of their involvement with direct financing.

Differentiating financial and political structures While direct financing leads to greater use of securities trading and securitization, this book devotes its attention to banks rather than financial markets per se. In particular, the role of commercial banks has changed dramatically with the development of direct financing, and, due to their institutional form, they are easier to analyse than transformations on exchanges. Commercial banks are also more in the public eye as they draw deposits (or in a disintermediated world, investments) from the general public. Accordingly, their operations are politically sensitive, especially the prospect of them failing! Of course not all states have a separation between commercial and investment banking. However, how states have treated the traditional functions of commercial banks (retail lending for housing, commercial, industrial loans, for example) and investment banks (underwriting of bond or share issues to be sold to investors) provides a way to differentiate the states under study in this book. States' financial structures can be differentiated by their character (dominance of competitive or cooperative relationships among intermediaries) and by the character of regulatory guidance within the state (formal or informal). More traditionally, financial structures can also be differentiated by whether or not commercial banks and investment banks are separated. The matrices in Figures 1.1 and 1.2 differentiate the financial structures of states under analysis. Thus, the US traditionally had a separated financial system and a decentralized political structure. Its fragmented structure was a consequence of two Acts ratified to prevent a repeat of the Great Depression. The first, and critically important for the development of direct financing,

The Political Economy of Direct Financing 11

Character of regulatory

Character of financial structure

guidance

Competitive

Cooperative

Formal

United States

Japan

Informal

Britain

Germany

Figure 1.1 Matrix of character of regulatory guidance and character of financial structure

Financial Structure

Political Structure Decentralized

Centralized

Separated

United States

Japan

Integrated

Germany

Britain

Figure 1.2 Matrix of traditional* financial and political structures * For the bulk of the post-war period, states' financial structures were fixed, changing only in the 1990s. `Traditional' is specified to indicate established structures in the post-war period rather than contemporary financial structures in the states under study.

was the 1933 Glass±Steagall Act that separated commercial and investment banks. The second was the 1927 McFadden Act that placed all intermediaries under the control of state as well as federal government regulations. Despite perceptions that the US has the most liberal system, it was the most heavily regulated among the states under study. At the federal level there are a number of independent agencies that report to Congress and to the White House as well as regulating and supervising financial relations. They are the Federal Deposit Insurance Corporation, the Securities and Exchange Commission, the Securities Investor Protection Corporation, the Commodity Futures Trading Commission, and, most importantly, the Federal Reserve System (Fed). In addition to these agencies, the Office of Thrift Supervision and the Office of the Comptroller of the Currency report back to the Department of Treasury, which then reports to the White House. The separation of commercial and investment banking has increased competition for financial innovations. Competition for financial services is cutthroat and aggressive mergers and acquisitions of intermediaries increasingly common. The character of US finance is thus formal competitive.

12 US Power in International Finance

Japan traditionally has a separated financial structure and a centralized political structure. In 1948 the Supreme Commander of Allied Powers revised Article 65 of the 1947 Securities and Exchange Law to separate commercial and investment banks in a similar way to the Glass±Steagall Act.35 However, the centralization of authority over the financial system in Japan allows banks to have greater involvement with corporate ownership than is permissible in the US.36 Thus the character of the financial structure is more cooperative, and corporations and banks commonly have large crossholdings in each other. For the bulk of the post-war period, authority over financial activity has been controlled by `the most powerful and informed among the ministries', the Ministry of Finance.37 Within the Ministry, control is managed through the Banking Bureau and the Securities Bureau, who have close ties with the Financial Systems Research Council and the Securities and Exchange Council. The Ministry of Finance also has control over the Bank of Japan's activities in the money market (although the Bank of Japan is legally entitled to change interest rates). Control over foreign exchange, again for the bulk of the post-war period, has been shared between the Ministry of Finance and the Ministry of International Trade and Industry. The Ministry of Posts and Telecommunications has authority over the enormous postal savings system. The dominance of the Liberal Democratic Party from 1948 until 1993 provided Japan with `the longest epoch of conservative electoral continuity and dominance of any modern industrialized democracy'.38 Such internal consistency allowed long-term financial planning, particularly the allocation of loans to promote industrial growth. Unlike the US, Japanese financial intermediaries' approach to financial modernization has been to `avoid gray areas and await government approval before introducing questionable instruments'.39 Consequently a `convoy' approach developed whereby the pace of financial reform was tied to the slowest vehicle. This approach also allowed imprudent relationships to develop between banks and borrowers ± as demonstrated by Japanese `overlending' in the mid-1990s, discussed in Chapter 6. Recently, and as a consequence of the Japanese financial crisis from 1990±99, a Financial Supervisory Agency (FSAj) was created to rescue Japan's financial system from its fall from grace. Many of the FSAj's proposed changes alter the dynamics of the collusive capitalism that created the Japanese miracle. Despite these proposed changes, Japanese finance can be described as formal cooperative. Germany has an integrated financial structure and decentralized political structure.40 While the balance shifted to a federal system in the 1990s, for most of the post-war period authority over financial relations

The Political Economy of Direct Financing 13

belonged to the LaÈnder state governments, with a minor role played by the federal government. German banks are `universal' in the sense that they can engage in both commercial banking and investment banking, including the underwriting of securities. The interconnectedness of financial intermediaries and corporate management has two main streams: Hausbanken, major banks that have long-term relationships with corporations; and Mittelstand companies that derive long-term funding from small saving banks and credit unions.41 The provision of `patient capital' for long-term funding in corporations is a good example of informal cooperative relations in the financial system.42 In Germany bank competition operates in an environment of `bounded competition' and securities trading is dominated by banks to the extent that `some might characterize securities markets as interbank markets'.43 Thus the `universal bank'-based financial system plays a large part in the organization and reorganization of industrial sectors. Public involvement in securities trading has been low compared with the US, Britain, and Japan, and as discussed in the chapters to follow, public resentment towards a perceived `Americanization' of German finance has retarded financial reform. The central bank, the Bundesbank, is independent of the government in a similar manner to the US Federal Reserve and for most of the post-war period has an excellent reputation for price control. Because of their interconnectedness with corporations, `universal' banks have a great deal of autonomy and self-regulation. Formal financial supervision is coordinated between two federal offices, one for banking, the Bundesaufsichtsamt fuÈr das Kreditwesen (BAKred), and the other for securities trading, the Bundesaufsichtsamt fuÈr das Wertpapierhandel (BAWe). Overall, however, the government has played an informal yet active role to the extent that `contrary to the finance capitalism model [of the US and Britain], the banks and the state should be viewed . . . as increasingly interdependent or complementary mechanisms'.44 German finance can thus be described as informal cooperative. Finally, Britain has an integrated financial structure and centralized political structure. Britain provides an interesting case because of the extent of informal sources of power within the institutional structures. Banking and investment activities are regulated within an integrated national framework whereby financial services are provided by a range of specialized institutions. Finance has traditionally been specialized into sectors (commercial banking, investment banking, credit unions, etc.) where there have been norms concerning who may encroach on whose territory. Relations are not cooperative, however. Due to

14 US Power in International Finance

the extent and internationalization of securities trading in the City, competition is fierce. The government's executive body within the financial structure for the bulk of the post-war period, the Bank of England, is not an independent central bank as in the US and Germany, but performs a similar role as a marginal stabilizer for the money supply. It has not, as in Japan, provided credit through the allocation of funds. Importantly, for the bulk of the post-war period, the Bank of England did not intervene in the activities of private financial institutions but took a `permissive informal approach' to financial regulation.45 The extent to which financial supervision was informal changed somewhat with the recent introduction of the Financial Services Authority (FSAb) and a general bureaucratization of British finance with codified rules and regulations. Nevertheless, the character of British finance can be understood as informal competitive. Within the field of IPE the most important study to differentiate financial and political structures is John Zysman's 1983 Governments, Markets, and Growth.46 His study intends to `isolate the dominant domestic structural elements that determine the domestic ramifications of an international economic development'.47 The causality of change is `outside-in' from the international political economy to the state, testing how `strong states' adapt to change. Zysman looks at three different types of financial systems: first, a capital market based system, where there is an arm's length relationship between government and industry and no `conscious strategy of adjustment or of development'.48 He attributes this system to the US. Second is a credit based financial system with government-administered prices that facilitate government intervention ± represented by France and Japan. Third is a credit based financial system dominated by financial institutions that have market power over industry ± Germany. Britain does not neatly fit into Zysman's typology due to a `case of failure to make any particular choice about an approach to adjustment'.49 Zysman's three systems are thus, respectively, `company-led', `state-led', and `tripartite negotiated'. The British example is thus omitted due to its messiness and the prominence of informal sources of financial power. Zysman looks at the `negotiating' between states and their financial systems. He analyses the capacity of the British, US, German, French, and Japanese states to allocate credit to industry in order to strengthen industrial leadership and use `state power at home to create competitive advantages in international markets'.50 He finds that the close link between the government and financial intermediaries in Japan and France enhances their capacity to change more than the US system

The Political Economy of Direct Financing 15

allows. The Japanese and French advantage is a centralized bureaucracy that permits the formation of a coherent, rational approach to financial policy. The implication is that a centralization of power increases a state's ability to adapt to change in the international political economy. Competitiveness in this sense is thus associated with, in Philip Cerny's words, `strong-state technocratic disrigsme' and the power of such analyses diminishes as the `technocratic patron-state and its client firms' face further economic and financial internationalization.51 In contrast to France and Japan, Zysman argues (like many other IPE scholars) that the US's inability to adjust to change is a consequence of its `complicated, competing, and overlapping regulatory and supervision structures' that do not `enhance market efficiency and institutional competitiveness'.52 My findings differ. Rather than representing a case of regulatory confusion and inefficiency, the complications within US financial regulation have created a `pressure-pot' that has resulted in the creation of financial innovations. My understanding of the term capacity also differs from Zysman's analysis. Zysman understands capacity as the ease with which executives can intervene, by discretion (with minimal public scrutiny) or by administrative allocation or legislative program (heightened public scrutiny).53 The former is viewed as a sign of state strength. For Zysman, as for others like Krasner, a state's isolation from interest groups increases its allocative efficiency. However, the ability to compete and coordinate with interest groups and societal interests, interactive embeddedness, increases state capacity and thus a state's capacity not only to adapt to but also to enact change in the international political economy. It is not insignificant that Zysman's study is made against a backdrop of the US's hegemonic decline and abandonment of a liberal international order. More importantly, Zysman isolates the state from society. As indicated above, how British financial and political structures are understood displays inadequacies within popular perspectives of IPE. While Zysman finds a lack of continuity in Britain's adjustment process, I suggest that he has failed to analyse the informal sources of state capacity and thus its ability to generate structural power. William Coleman's analysis in Globalization, Financial Services and Domestic Policy Change (1996) provides a more recent analysis of state capacity and financial services. Coleman argues that `a state maximizes its capacity when policy processes allow both central banks and finance ministries to be heard without one dominating the other'.54 The exemplar of state capacity is Germany where there is strong policy coordination between these bodies. In contrast, the US has weak state capacity because `the highly fragmented economic organization of financial

16 US Power in International Finance

services has generated a similarly fragmented intermediary system'.55 The number of competing regulatory agencies in the US decreases its ability to react to changes in international finance. Thus, for Coleman, state capacity is related to simplicity of policy coordination. This simplicity allows the formation of anticipatory policies in a globalized world, and according to Coleman the stronger state capacity is at the domestic level, the more `important is the role [the state] can play at the international level'.56 Like Zysman, Coleman's argument favors states with centralized bureaucracies and thus produces a similar conception of the `strong-state'. My understanding of the US's role in the development of direct financing is at odds with this view of state capacity. However, Coleman does make the important point that a study of financial lobbying groups in the US is almost impossible because of their fragmented nature and issued-based representation. It is also true that in financial policy the US has a `reactive approach to policy-making focusing on narrow, shortterm issues'.57 But at the same time short-term responses have not crowded out the longer-term anticipatory policies admired by Coleman and with which he associates centralization and parsimony. In fact, short-term reactive policy has been permissible only because of US structural power in international finance, which not only anticipates change in the international political economy but enacts it. The power to influence the structure of international finance does not lie solely in the simplicity of policy coordination. It is the fragmented nature of regulation and interest groups in the US that has assisted the competitive and cooperative relationship that has promoted direct financing to the benefit of US structural power in international finance. While `messy', the interactive embeddedness between Washington and Wall Street has produced a system that, with official support and market competitiveness, produces financial innovations that alter the structure of international finance and benefit US interests. The development and promotion of direct financing demonstrates the importance of informal sources of structural power and how, when positively engaged with formal sources, they can enact change in the international political economy.

State capacity and interactive embeddedness I argue that the US is by far the strongest state in international finance and has been able to shape the international financial system to its own advantage. For the bulk of the post-war period, formal regulations in the US have generated competition (intentionally and inadvertently, I has-

The Political Economy of Direct Financing 17

ten to add). It has been able to do so by generating domestic competition through formal regulations while advocating the free movement of capital in international finance ± the aforementioned policies of international passivity and national activism. Only the US has been able to construct and implement such policies, due to its unique domestic financial system and because of its structural power in international finance. However, despite these immense advantages, the US has not been the most financially wealthy state for all of the post-war period. It is interesting to note that for the majority of the period under study, Japan and Germany have been net creditors and Britain and the US have been net debtors. An analysis of `who has what' rather than `who structures preferences' would immediately suggest that Germany and Japan should be in a stronger position than the US and Britain. For example, Webb and Krasner assert in their assessment of US hegemonic decline that as `a major debtor rather than creditor, it has less ability to influence the policies of borrowers even if it can still hold its lenders hostage'.58 Robert Gilpin has made a similar argument concerning the ascension of Japanese power vis aÁ vis US power.59 In many studies of `state strength' within IPE, the US and Britain are characterized as weak states in comparison to Japan and Germany.60 But the mere accumulation of resources does not generate structural power in international finance. And here we have a paradox: that in finance, where the accumulation of capital would appear to be all-important, it is the ability to create capital through credit that extends financial power. Two points about power in finance must therefore be outlined: i) access to resources rather than command of resources is more important; and, consequently, ii) the ability to shape preferences is more important than an accumulation of resources. The importance of innovation within a state, especially the creation of new financial instruments, relies upon competitive structures within an economy, including the role of government. To understand how structural power in international finance is generated it is necessary to study how access to credit can increase a state's power and the role of the financial communities in how that credit is provided. Taking this on board helps one see state power as capacities rather than resources, including the capacity to gear financial relations towards the greater use of securities markets ± to make direct financing the norm rather than the exception. In the US, personal, corporate and public indebtedness has led to greater financial innovation and to the greater socialization of finance. US structural power in international finance has benefited as a consequence.

18 US Power in International Finance

The involvement of the financial community with broader society to form collective power with the state is what distinguishes perspectives based on `structural power' from statist understandings of benevolent and predatory hegemonies. The notion of `structural power' presented in this book includes the ability of the state to diffuse its power through dominant classes domestically, and to use that source of power to shape the framework of the international political economy.61 For enduring structural power in international finance, a state must be able to embed direct financing not only in elite circles but also through its middle classes. I cannot stress this point enough, as it emphasizes the interplay between the domestic and international realms, stresses the importance of state± societal relations, and helps us to understand informal sources of power. Many scholars misconstrue the strength of states in international finance because they exaggerate the role of the formal features of states, and downplay the existence of informal sources of power, particularly the interactive embeddedness of a state's relationship with its financial community and capitalist class. Even scholars who emphasize the importance of `formal and informal institutional networks that bind them [banks] to the central authorities' concentrate almost entirely upon formal institutions.62 It is from the failure to treat a state's informal sources of power seriously that I offer suggestions for the study of finance drawing from Weber's work and from the `second-wave' of Weberian historical sociology. I offer an approach to IPE that emphasizes the capacity of states to play domestic and international realms against each other, and their capacity to encourage cooperation and competition among interests within the state. Direct financing advantages both Washington and Wall Street, and has been generated by the capacity of the US state to embed `high finance' as a daily activity within the American middle classes.63 While such activity includes everything from the use of cash management accounts to bond financing, the share market provides the most dramatic example. During the period under study, the percentage of adult Americans involved in the stock market has risen from ten per cent to over 40 per cent. US corporations are more heavily involved in the bond market than those of other advanced industrialized states, and have a close relationship with the Fed in times of interest rate fluctuations.64 In short, direct financing is accepted and promoted by the government, financial intermediaries and the dominant classes ± investors. Direct financing has been socialized, embedded into American society and American culture. Moreover, the promotion of direct financing through the activities of US-based banks, or even through the trade

The Political Economy of Direct Financing 19

in dollar-denominated assets, enhances US structural power in the international financial system. In this way, direct financing benefits the US at the international, national and domestic levels, allowing the identification of `US' structural power.65 Unfortunately these benefits do not filter down to the worse-off in American society. I certainly do not claim that the promotion of direct financing is good for all Americans. The propensity for rentiers, investors reliant on `predatory' income from debt financing rather than from `productive' enterprises, to emerge in states with sophisticated financial systems poses a real social danger that calls into question the substantive value of increased financial activity.66 To put this question differently: what are the costs of America's victory of dividends? I address this question in the concluding chapter. As will be demonstrated, the promotion of direct financing gives Washington and Wall Street the ability to provide and access enormous amounts of credit. The interactive embeddedness, the competitive± cooperative relationship between Washington and Wall Street, enhances this ability and the US's state capacity, its capacity to adapt and enact change. This state capacity, especially seen in the promotion of policies of international passivity and national activism, promotes US structural power in international finance.

The structure of the book This book offers a perspective on how we can understand structural power and change in the international political economy through an analysis of direct financing in the period 1960±2000. The perspective offered in this book differs greatly from popular perspectives in IPE and in Chapter 2 I critique neoliberalism, neorealism, and what Strange refers to as `new realism'. In contrast, I propose a Weberian alternative that draws from Weber's political writings on the state and international finance and also from the `second-wave' of Weberian historical sociology. In this chapter I also hope to dismiss common perceptions about Weber and the application of his work to the field of IPE. In establishing the relationship between the state and international finance I provide a section on credit-money, which outlines the importance of formal and substantive views of `money' and links together the substantive validity of credit-money with structural power in international finance. With the theoretical perspective established, I move on to the historical chapters. Those who would prefer to read my potted history and steer clear of theory may wish to skip Chapter 2 and move straight onto Chapter 3 from here. The historical chapters can be read without the

20 US Power in International Finance

theoretical background, although I do refer back to points made in Chapter 2. The reverse, however, is not true. Readers interested in theory need to read the historical chapters in order to provide some body to the notion of structural power and international political and economic change. Chapter 3 analyses the period between 1960±68. It sets the scene for the development of direct financing through the debate between John Maynard Keynes and Harry Dexter White over the extent of capital controls in the post-war system. The chapter continues by discussing the role of the US dollar, the emergence of the Euromarkets, and US domestic regulations designed to expand the volume of private capital in the international financial system. While it is not necessary to qualify the link between monetary relations and financial relations, it is vital to understand the relationship between the dollar's numeraire status and the encouragement of direct financing via US banks' interaction with the Euromarkets.67 Monetary relations therefore receive attention and are placed in the context of changes in the structure of the international financial system. Chapter 4 analyses the period 1969±81. Similar to Chapter 3, it discusses the freedoms given to the dollar during this period of massive credit expansion. The chapter discusses the collapse of Bretton Woods, the monetary negotiations that followed, the effects of `petrodollars' after the first oil crisis, the Franklin and Herstatt banking crises, the `overlending' activities of US international banks in the mid-1970s, and the regulatory renewal at the end of the decade. The chapter stresses monetary relations to demonstrate Washington's willingness to compete and cooperate with Wall Street rather than cooperate in the construction of an international monetary or finance regime. The move to floating exchange rates is especially important to the expansion of private dollardenominated assets in international finance. In turn, this expansion promoted direct financing to the benefit of US structural power. Chapter 5 analyses the period 1981±91, and focuses less upon the role of the dollar than previous chapters to place greater emphasis upon changes within financial markets. The chapter focuses upon the emergence of financial innovations, the effects of the Debt Crisis, the institution of the Basle Accord, the decline in the number of US banks, and states' general reassessment of their financial strategy in the late 1980s. I argue that US banks' decline in numbers does not constitute a loss of US structural power in international finance. On the contrary, direct financing increased US structural power by changing the structure of the commercial banking game away from traditional forms of intermedi-

The Political Economy of Direct Financing 21

ation (loans, for example) to greater involvement with securities trading and the greater use of securitization. The chapter also demonstrates that the US continues to prefer policies of international passivity and national activism over support for international financial regimes despite rhetoric about US hegemonic decline. In the discussion of the Basle Accord, I emphasize the role of financial diplomacy between states in a more internationalized world, to demonstrate that states still hold control and fight for competitive advantage in international finance. Support for international regimes reflects strategic interests more than the provision of an international public good. Chapter 6 discusses the development of direct financing, financial crises, and financial reform in the period 1992±2000. This period was characterized by frequent financial crises and calls for a `new financial architecture'. Accordingly, I study the European Exchange Rate Mechanism Crisis of 1992±93, the Tequila Crisis of 1994±95, and the Asian and Russian financial crises of 1997±98. In all cases they reflect how direct financing has changed the structure of international finance. The chapter also discusses the development of national strategies for the supervision of financial activity while states placed greater emphasis on getting a share of international financial markets. Special emphasis is given to Japan's financial crisis and its attempts at reform, because of the financial power and `state strength' attributed to Japan in the previous decade. In contrast to Japan's woes, I discuss the development of the `Bull Revolution', whereby America's paper wealth expanded rapidly with increased public participation in direct financing. The 1990s certainly demonstrated how embedded finance had become in American society, a financial socialization pushed forward by Washington as it `liberalized' many of its own domestic financial regulations to allow commercial banks to engage in direct financing, particularly to expand `securitization' and consumer credit. These regulatory changes altered the international passivity and national activism dynamic that supported the extension of US structural power in international finance. Accordingly, the impact of this change is discussed. Chapter 7 concludes the book and considers the US's `victory of dividends'. It emphasizes that the interactive embeddedness between Washington and Wall Street and the embeddedness of finance in American society are the key sources of US state capacity and therefore its structural power in international finance. Reflecting on how we can advance the notion of structural power, the chapter summarizes the benefits of a `Weberian' approach to change in the international political economy.

2

State Capacity and Finance in IPE

It is true that by law and administrative action a state today can insure the formal validity of a type of money as the standard in its own area of power, provided it remains itself in a position to make payments in this money Max Weber1 This chapter draws from Weber's work and from the `second-wave' of Weberian historical sociology to provide a perspective on the sources of structural power and international political and economic change. The chapter begins by tying together the development of a state's power with the development of credit-money, emphasising the social and political underpinnings of credit-money's substantive validity. This is followed with critiques of what I consider to be the three most popular perspectives in IPE: neoliberalism, neorealism, and `new realism'. Following this critique I offer a Weberian alternative through a discussion of Weber's view on the state, finance, and state±societal relations and by drawing from `second-wave' Weberian historical sociology. In contrast to neoliberal, neorealist, and `new realist' perspectives this Weberian perspective provides a dynamic view of change by giving prominence to state capacity rather than the structural constraints of the interstate system and, in particular, pays special attention to state± society relations. I stress how the interactive embeddedness between a state and its financial community enhances state capacity and adds to a state's structural power in the international political economy. I argue that a dynamic view of change must analyse the interplay of the international and domestic realms. Correspondingly, one requires three levels of analysis, the domestic, the national (mediating point) and the international. The ability of a state to diffuse its formal authority 22

State Capacity and Finance in IPE 23

through society increases its capacity to reconstitute itself to adapt to or enact domestic and international change. Thus a diffusion of authority is seen as a sign of `state strength' or state power. This view conflicts with those who assess state strength by the ability to centralize authority away from society, and those who argue that greater authority to the market necessarily implies a loss of state power. Both views are predicated on the notion that the state acts in response to constraints imposed by the interstate system and the international political economy. As the state is separated from its societal foundations, state strength is assessed by the ability to intervene domestically to weather change. State strength is determined by the ability of the executive to adapt to the structural constraints of the interstate system. In the perspective offered here, causality is both `outside-in' and inside-out', reflecting the dynamic interplay of domestic, national and international realms.2 I argue that balance-of-power frameworks posit power as a finite resource between states and between states and markets and should, consequently, shoulder a great deal of the blame for the lack of dynamism within popular perspectives of IPE. For purposes of clarity in this wide-ranging chapter, I have four main points: (i) to discuss the importance of formal and substantive validity in the development of credit-money, and how the innovation of creditmoney informs IPE perspectives derived from microeconomic theory; (ii) to discuss the weaknesses in neoliberalism and neorealism; (iii) to critique the popular alternative to neoliberalism and neorealism, what Susan Strange refers to as `new realism'; and (iv) to elaborate a Weberian perspective of state capacity and interactive embeddedness that draws from Weber's work and the `second-wave' of Weberian historical sociology. I believe that the Weberian perspective offered here has greater relevance to the political economy of finance than those dominant in IPE literature.3 In discussing Weber's work I defend the heuristic value of the `historical interpretive' Weber for contemporary IPE. This defence seeks also seeks to debunk perceptions in IPE that: a) Weber is a `Realist' (as neorealist scholars have interpreted him); and b) Weber proposed the study of political economy be supported by objective scientific explanation.

Credit-money and innovation The importance of credit-money to the development of direct financing and US structural power in international finance cannot be overstated. The quote that begins this chapter can be related to structural power in

24 US Power in International Finance

international finance; that a state with substantial political and economic power can underwrite the formal validity of a type of money in areas where its administrative control over the money supply is recognized as legitimate. In the same section from Economy and Society, Weber continues this formal power implies nothing as to the substantive validity of money; that is, the rate as which it will be accepted in exchange for commodities . . . Experience shows that it is possible for the political authority to attain, by such measures as the rationing of consumption, the controls of production and the enforcement of minimum and maximum prices, a high degree of control of this substantive validity.4 As demonstrated in the chapters that follow, Washington's political autonomy and Wall Street's financial prowess have allowed the US a high degree of control over the substantive validity of money: the dollar. US operations in the Bretton Woods system exemplify this, as does the mass privatization of credit after 1973. Indeed, the section from Economy and Society above takes on new meaning for the post-war period when Bretton Woods is considered. Gary Burn, for example, asserts that the `rise of credit money displaced the fiduciary role of money so that during the Bretton Woods era money took on an international commodity form'.5 Furthermore, the development of the Eurodollar markets, discussed in the following chapter, has been viewed as the most significant monetary innovation since the creation of the bank note.6 The privatization of credit-money as an international commodity in the 1960s and 1970s extended US structural power in international finance through the `know-how' of US banks and the creation of US-led financial innovations. Financial innovation has been a key to structural power in international finance. It follows that any study of structural power and direct financing must discuss the development of creditmoney and financial innovation. The development of credit-money has a history that is very much tied to the development of the modern state.7 Accordingly, how creditmoney is understood has parallels to how the state is understood. The neoclassical view of the development of credit-money is parallel to how perspectives which draw from microeconomic theory view the state. The most dominant perspectives in IPE, neoliberalism and neorealism, draw from neoclassical microeconomic theory. Discussing the inadequacies of the neoclassical view of credit-money is valuable not

State Capacity and Finance in IPE 25

only as a means to understanding the social, political and economic underpinning of the substantive validity of credit-money, but also as an implicit critique of the microeconomic foundations of neoliberalism and neorealism. This critique is provided below. But first, a fleeting history of credit-money is required, and the best example is the development of bills of exchange. The first sophisticated use of what are understood as bills of exchange can be traced to Islamic merchants in the early medieval period. By the fourteenth and fifteenth centuries bills of exchange were widely established throughout Europe. They became popular as a means of financing wars and facilitating commerce and, in doing so, of assisting the development of the state and the development of capitalism.8 The bills were independent from (but did not supplant) specie and served as media of exchange; `they were no longer based directly on goods, but rather on promises'.9 In their most simplified form the bills were a means of payment by distance through a third party who owed a debt to the issuer of the bill and then paid this sum to the drawer of the bill. (A more complicated example from an actual fourteenth-century bill of exchange is provided in the notes to this chapter.)10 Bills of exchange allowed financiers to shift around debts without the physical transportation of specie and provided means of credit to facilitate trade. Thus bills did not `create' credit at this stage. However, as their popularity increased so did the prospects for an international system to coordinate them. In the fifteenth century, the formation of international exchange fairs (for example, the establishment of the Lyons fair in 1462) and subsequent centralization and periodization of their clearance dates allowed bills of exchange to become even more sophisticated instruments of credit.11 Essentially, these fairs allowed bills to act as international money of account rather than mere specie. Importantly, the predicability of the fairs allowed banks to extend credit independent of the balance of their deposits (a bank that lends the coined money deposited in it merely redistributes purchasing power, it does not create credit). In doing so money was depersonalized from its depositors as, in Weber's words, `the modern bank circulates notes independently of any deposit by a particular individual'.12 The trading of bills rather than the use of coinage allowed banks to extend credit on the bases of promises to pay. In late sixteenth century Florence, for example, merchant banks extended credit beyond the capital of their depositors and attracted short-term deposits to make up any shortfalls. They also decided to separate household and business accounts to limit families' liabilities, a foundation of our modern

26 US Power in International Finance

capitalist system.13 The quarterly exchange fairs mentioned above (now highly developed by the sixteenth century) operated not only as clearing houses for bills but also as providers of international market information. Interest rates for long-term loans became tied to foreign exchange markets rather than local rates. Banks subsequently became more exposed to charges of usury as wealthy investors gained information about international markets.14 This was not the only benefit of international markets; they also provided what today is understood as risk management. In the transition to the system of absolutist rule bills of exchange became popular as wealthy investors and bankers sought means to send their financial assets out of territories where there was a threat of war or plunder.15 Thus the exchange fairs provided means of avoiding authority and freed the money supply of Europe from the `natural scarcity and the need for military control of the supply of precious metals'.16 The development of credit-money above natural scarcity increased the importance of its substantive validity, and thus increased rewards to states with structural power in international finance. Credit-money as a `promise to pay' increasingly became linked to states' guarantees, which in turn were supported by political and economic power. In the great Italian trading city-states of Genoa, Florence, and Venice, private money and public finance were joined to the extent that promises to pay were legal tender and rulers acted as guarantors for each others' debts.17 Moreover, bankers were given long-standing privileges from political authorities in order to secure lines of credit to their operations. The potential for credit to assist the development of empires, trading or otherwise, was obvious. For monarchs, access to credit provided a means to purchase technologies, conscript armies, and aid the centralization of the state.18 The expansion of the absolutist state and access to credit were inextricably tied. Indeed, according to Richard Goldthwaite, the development of exchange fairs, was the `final stage in the development of international banking before the rise of central banks of Amsterdam and London in the seventeenth century'.19 Britain provides an excellent example of structural power in international finance, and an attempt to draw finance from a state's embeddedness within a society. The Bank of England (BoE), founded under William III in 1694 to fund the war against Louis XIV, imitated the practices of goldsmiths who regularly used notes and bills to avoid moving specie and to develop credit markets.20 Through the regulation and promotion of financial innovations, such as the Promissory Notes Act of 1704, the BoE developed English credit markets to `connect savers

State Capacity and Finance in IPE 27

and the English Treasury' and allowed the state to greatly expand its issue of debt.21 The BoE's systematic way of discounting and dealing with bills of exchange rapidly increased the turnover of capital in England and facilitated commerce. In doing so the BoE assisted the rise of capitalist classes. By the mid eighteenth century note-issuing banks in London spread through England to create a national banking network ± what Geoffrey Ingham describes as `a most telling creation of infrastructural power' (more on this concept, and the Bank of England, later).22 Under absolutist rule monarchs regulated the activities of commercial interests locally and promoted them internationally to give more power to the upper and middle classes and further their state-building objectives.23 The emergence of a civil society and the bureaucratization of the state that followed, which disempowered absolutist rulers, relied upon the upper and middle classes' aspirations for political power and their access to credit from their privileged place in financial communities. Thus the development of credit-money and capitalism was essential to the development of the state. Both developments ran parallel in a process of, in Weber's understanding, `the gradual expropriation of independent producers'.24 The creation of a state that successfully engaged the will of the people required the bureaucrats to be expropriated from owning the means of bureaucracy ± to be removed from all vestiges of patrimonial and absolutist rule. The new constitutionalism of the state in the nineteenth century reflected the political and financial interests of the upper and middle classes to provide a legitimate public structure that would provide stability (primarily from war) to facilitate their private interests. As Daniel Verdier's excellent study of capital market internationalization in the late nineteenth century argues, greater capital mobility relied upon financial communities' demand for short-term debt.25 Capital flows were de-linked from tightly-knit banking communities and became more impersonal. The spread of industrialization allowed increased public savings, which then increased banks' deposits. Consumer credit developed in the sense that there was an increase in the use of cheques (credit transfers). At the local level bills of exchange were replaced by overdrafts. Banks became more sensitive to fluctuations in their capital base, deposits, and required financial innovations to minimize risks, provide liquidity, and generate higher profits. At a time when Western states were transforming into a centralized bureaucratic structure, banks centralized in financial centers to aid internationalization and their access to short-term debt. Widespread support of the Gold Standard by the close of the nineteenth century provided a monetary

28 US Power in International Finance

system that minimized currency risks in trading international shortterm debt, particularly government securities. At the same time, however, finance was perceived to be above the productive needs of the economy. As suggested by Verdier's work, over-investment in debt financing was considered counter-productive for industrialization; banks' vigorous interest in short-term debt markets `threatened the estrangement of bank and industry'.26 Finance was not dependent on the demands of industry, but the further development of the state certainly was dependent upon the provision of credit. Quite simply, a state could not have infrastructural power internally or create structural power internationally without the support of a financial community. Just as the development of the modern state was a constituted rather than a `given' reality, the development of credit-money demonstrates that it is, as Geoffrey Ingham argues, `a force of production in its own right'.27 This `force' must have social foundations and ongoing support. By the seventeenth century money of account, `book money', depersonalized monetary relations and created the distinction between moneta reale and moneta immaginaria.28 Again, this distinction between `real' and `imaginary' money relates to Weber's distinction between the formal and substantive validity of money, whereby the substantive validity of money is socially embedded ± the ability to substantiate a promise to pay.29 To understand the substantive validity of money it is necessary to analyse the political, economic, and social constitution of the environment within which it is used. Weber noted the capacity for paper money to become `autonomous' in free market operations and inflate above its nominal value and create political catastrophe ± especially under a paper-money standard.30 The need to recognize the political, economic, and social foundations of credit-money is not reflected by all schools of thought in social sciences, as Geoffrey Ingham's excellent work points out. The neoclassical view of the development of money and credit-money is that it is merely a response to the real economy and nothing more. Money, in this view, is a `voucher for unspecified utilities' to symbolize the exchange of commodities in the real economy.31 Accordingly, creditmoney is seen as the provision of money to be repaid at a later date reflecting `the needs of an expanding economy whose dynamic lies elsewhere in `real' material or social factors'.32 Thus in the neoclassical view credit-money is tied to production, to `real' not `imaginary' forces within the economy. Power (political and otherwise) is derived from resources (monetary assets). The forces that create credit-money are reduced to a functional logic of economic demand and removed from

State Capacity and Finance in IPE 29

their substantive political and economic foundations. But the substantive validity of credit-money relies upon its political and economic foundations, that promises to pay can be honored. Those promises to pay reflect not an abstract value but a claim against the societies from which they are issued. As Weber argued, credit-money is a social construct that has power to transform and structure political and economic relationships. Money and credit-money are a means of struggling for power, not merely a means of exchange.33 Furthermore, power from credit-money does not derive from resources but from capacities. As will be demonstrated, the capacity to shape the structure of international finance has allowed the US to extend its access to credit far beyond its own monetary resources. Access to this credit through the promotion of direct financing has been supported by Washington and Wall Street and has enhanced US structural power in international finance. It is difficult to trace this process if money and credit-money are disempowered as a `voucher for unspecified utilities'. Credit-money is constitutive of capitalism and not merely a function of capitalism. Joseph A. Schumpeter, one of Weber's contemporaries, recognized the phenomenon of credit as the differentia specifica of capitalism from other economic systems.34 For Schumpeter the difference between a substantive and a functional understanding of change is the role ascribed to innovation. The role of the equilibrium to modern economic theory provides an example. Schumpeter argued that the concept of equilibrium is fundamental to a capitalist society as entrepreneurs learn to balance their opportunities with their liabilities. But at the same time entrepreneurs rely upon a process of `creative destruction' to maintain the capitalist dynamic.35 The notion of equilibrium in isolation from social realities increases theoretical parsimony but does not lead to a real understanding of change. Studying innovation is essential to understanding change; as Schumpeter commented, `the problem that is usually being visualized is how capitalism administers existing structures, whereas the relevant problem is how it creates and destroys them'.36 The search for what creates change is missing from the circular logic of the neoclassical view of monetary relations. By reducing monetary relations, to `purely abstract exchange relations between rational maximizing agents' the neoclassical view removes social foundations.37 Similar to the neoclassical understanding of credit-money, neorealist, and neoliberal perspectives provide a static view of change that does not give innovation a priority and rests upon a notion of equilibrium derived from microeconomic theory. The most prominent neoliberal scholar in IPE, Robert O. Keohane, comments that the formation of

30 US Power in International Finance

international regimes depends upon `political entrepreneurs who see a potential profit in organizing collaboration'.38 Such `entrepreneurs' are supplied by states attempting to optimize self-interest and meet the demands produced by the structure of the international system.39 Such entrepreneurship would suggest a role for innovation in Keohane's perspective. But it is a minimal role at best. Within Keohane's schema, regimes must encourage adherence to a fixed rationale of behavior, since `nonconformity to the expectations of others entails costs'.40 Furthermore, regimes adapt to international change through negotiations `on the basis of previous conventions, [which] then typically expand . . . [to] clarify the rules governing the issues concerned'.41 Thus, this view of change limits itself to the formal role of institutions that exhibit a consistent order of preferences under the constraints of a logic of anarchy.42 We are left with a variation of Schumpeter's dilemma, that the problem being visualized is how regimes administer existing structures, whereas the relevant problem is how existing structures are created and destroyed. Again the use of equilibrium in neoliberal and neorealism must shoulder some of the blame. By studying supply and demand factors within an equilibrium removed from its social context, these perspectives favor theoretical parsimony over historical interpretation. Microeconomic theory has been adopted for two reasons. First, its theoretical parsimony is attractive because it limits the number of variables within an analysis and thus helps generate predictions that, for Keohane, will be `on the whole, both richer and more accurate'.43 Secondly, microeconomic theory ties in well to the balance of power model of state behavior in the international political economy.44 Within neoliberalism and neorealism the structure of the international system determines what choices are open to `states [that] will select equilibria that tend to work to their advantage' within the logic of anarchy.45 Even in neoliberalism, where the stress is for states to work together to form international `regimes', the absence of cooperation forces states to act for self-interest under the constraints of the logic of anarchy. Similarly, much of the theory behind the advocacy of international regimes, found particularly in neoliberalism, stems from a `supply±demand equilibrium' of international coordination.46 The demand side of the equation is drawn from the microeconomic theory of market failure, stressing that problems arise not from actors themselves (or their internal dynamics), but from the structure of the system and the institutions that characterize it.47 The supply side of the equation comes from the self-interested preferences of states to opti-

State Capacity and Finance in IPE 31

mize their outcomes. When supply and demand meet, a regime may be formed to internalize `negative externalities' through the formation of common `principles, norms, rules, and decision-making procedures [which then] come to have their own exogenous impact on outcomes and behavior'.48 In the absence of a hegemon, it is international regimes that can prevent market failures that arise from `negative externalities'.49 Greater efficiency and equilibrium are promoted to lower transaction costs, and improve how information is recorded and communicated ± all sound microeconomic principles. For neoliberalism and neorealism the adoption of microeconomic theory reinforces the treatment of `states like firms in a competitive market system whose behaviour is determined by the system within which they exist'.50 Such a perspective encourages abstraction from political and economic realities, producing a `black box' view of the state. Furthermore, the adoption of microeconomics in these perspectives favors the formal validity of how states and regimes behave in the international political economy and ascribes continuity to policy formation to reinforce the applicability of its theoretical pretensions.51 But as Richard Ashley, Christian ReusSmith, Alexander Wendt and others point out, international political structures are not fixed entities that dominate states and other agents, presenting a timeless rationality of how change in international politics occurs. Rather, international political structures, and any rationality guiding them, are socialized by domestic and international forces that reflect the norms, values and principles of the period in question.52 The question of how structures and agents are constituted is ignored for the benefit of theoretical parsimony and ahistorical cyclical patterns of state behavior in neorealism and neoliberalism.53 The substantive validity of state and regime behavior can only be established by an analysis of their domestic political, economic, and social underpinnings. Such abstraction for the benefit of theoretical rigor constitutes, in the words of Susan Strange, `phoney science, not social science'.54

Weaknesses in neoliberalism and neorealism Many IPE scholars would gag at any critique that placed neorealism and neoliberalism together. However, as conceded by neoliberals and neorealists, conflicts between the two perspectives are not because of `deep epistemological or methodological conflicts'.55 Indeed, both perspectives move towards a more systemic study of IPE and `formulate theories in testable ways'.56 The vital point, and my main objection, is that both neoliberalism and neorealism `black box' the state. Both ignore

32 US Power in International Finance

processes at the domestic level which inform either state capacity or state behavior in the international system. As discussed above, neoliberalism and neorealism embrace microeconomic theory in part because of its similarities to a balance of power model of the international political economy. Both perspectives share the notion that the logic of anarchy forces states to optimize their self-interest. In the determination of selfinterest, both perspectives recognize states as sovereign political entities wherein a linear policy rationale can be found.57 A dispute arises between the perspectives in assessing whether a state's self-interest is to achieve relative gains over other states (neorealism) or to achieve absolute gains in coordination with others (neoliberalism).58 Despite any disputes on the outcome, `there is agreement that anarchy causes it'.59 The disjuncture between neoliberalism and neorealism lies in agency. Neoliberalism reifies the agency of the state, while neorealism reifies the international structure and ignores the agency of the state. Despite pretensions otherwise, both neglect domestic politics and treat the state as the executive level of government. For neoliberals, a state's policy choices are rational and constant. Its response to a demand for international regimes reflects not only its interests but also the interests of creating an international public good. In short, neoliberalism gives agency to the state in the face of external constraints from the interstate system. More importantly, neoliberalism exaggerates the role of international regimes and states' willingness to participate in them. Keohane, for example, argues that his neoliberal institutionalism has greater predictive powers than other perspectives because as mutual interests between state and market actors increase, international institutions will then grow, cooperate and subsequently expand upon their own decision-making procedures.60 Keohane recognizes that `[r]egimes observed from behavior cannot ``explain'' behavior.'61 Very true, which troubles his ability to provide a substantive definition of regimes, especially as there is an implicit assumption that the existence of a regime demonstrates its worth. Moreover, there is also the assumption that regimes will reflect neoliberal principles and norms, which, as an aside, are far removed from liberalism!62 By contrast, the neorealist view expressed by Stephen Krasner argues that rather than states cooperating for overall positive gains, states will seek relative, short-term aims from a regime. States participate in regimes for relative gains when an established regime alters the `egoistic interests and power configurations that led to their establishment in the first place'.63 States thus use regimes to maximize short-term interests in response to constraints from the interstate system.

State Capacity and Finance in IPE 33

The disagreement over the importance of relative or absolute gains is best discussed through the neorealist/neoliberal debate about the role of international regimes and international institutions. Neoliberals argue that international cannot be understood without studying institutionalization within it. Of course this cannot be denied. However, neorealists assert that because states operate within a condition of anarchy, institutions are a means of state power rather than an independent agent of change.64 Institutionalization is thus a response to states' relative interests rather than the achievement of absolute gains for all involved in a regime. The debate over whether international institutions matter centers not only on the dependence/independence of the institutions, but also on how problems between states are negotiated. In neoliberalism, `reciprocation' is designed to ensure that imperfect information and `market failures' do not threaten optimal scenarios.65 Even when a market failure arises, raising the demand for an international regime, states may `cheat' by not giving their full cooperation.66 Cheating will then skew the distribution of power within the regime and encourage states to concentrate on reaping relative rather than absolute gains.67 From this basis much of the discussion surrounding how states bargain with each other is related to the notion of the Pareto frontier and Pareto optimality. Both neoliberalism and neorealism acknowledge that there is a Paretian relationship between means and ends that helps one to understand how these perspectives attribute a rationale to state action.68 The concept of the Pareto frontier, and of Pareto optimality, is simple: it is where State A and State B can make an agreement such that one party cannot benefit at the expense of the other. In the words of Lisa L. Martin, the neoliberal±neorealist debate `revolve[s] around disputes over where on the Pareto frontier states will find themselves rather than the less contentious question of how to reach the frontier'.69 For neoliberals the formation of international regimes provides an excellent example of Pareto optimality. However, in a Pareto suboptimal situation, where there is no common agreement, an uneven distribution of power comes into play.70 Stephen Krasner argues that the focus on cooperation and absolute gains within neoliberalism pushes such scenarios into the background of analysis.71 More pertinently, this debate reflects the need to determine winners and losers in how states respond to structural constraints of an anarchical interstate system by studying the rationale behind states' decisions to support or reject international cooperation. This form of analysis is worsened by neorealism and neoliberalism's understanding of state rationality and state strength.

34 US Power in International Finance

First, state rationality in neoliberalism and neorealism is linked to the notion that a state is a fixed sovereign political entity.72 The notion of sovereignty is important within neoliberalism and neorealism, and thus within discussions of international regimes, because it is linked to the autonomy of the state. It also facilitates the idea of `reciprocation' that is fundamental to the recognition of a state's ability to participate in an international regime.73 Sovereignty also includes a demarcation of where a state's power lies within a given territory, and for policy purposes, within the executive government.74 Moreover, sovereignty is important because it allows scholars to treat states as analytically uniform and `simultaneously abolishes their domestic relations with society as conceptual variables in international politics'.75 While sovereignty says little about a state's capacity to adapt to change, the ability to abstract states as `like units' allows one to form a linear rationale for state action. In the words of Keohane, `taking rationality as a constant permits one to attribute variations in state behavior to variations in characteristics of the international system'.76 According to advocates of systemic perspectives, this affords the scholar greater predictive powers. By focusing solely upon external factors, one can exclude discontinuities that may disrupt the parsimony of a `linear world of complete information' wherein the rationality of states' policy choices is presumed to be constant.77 The assumption of linear preferences also reflects the neoliberal and neorealist perspective of state strength: that rational preferences are most efficiently made by states that have a strong command over what happens at home.78 A strong, centralized command of the domestic political economy then allows one to focus solely on a state's external relations. Accordingly, states that have mediated or diffused their authority with domestic actors are perceived as weak or suffering from `power disinvestment'.79 For example, Stephen Krasner argues that the United States is a weak state in comparison to Japan, because of the involvement of interest groups in Washington's decision-making processes.80 This weakness has assisted American hegemonic decline and the US's consequent need to support international regimes. As Richard Leaver comments, this view of state strength arose from a need to prevent the `creeping sociologization' of the discipline, and to retain the integrity of the state as an analytical construct.81 As demonstrated, the state as an analytical construct within neoliberalism and neorealism has limited dynamism and no social depth. Similarly, the lack of `sociologization' within neoliberalism and neorealism has hindered the recognition of informal sources of power within the state and

State Capacity and Finance in IPE 35

within the international political economy. In both neoliberalism and neorealism the internal dynamics of the state are ignored in order to concentrate on how states behave in relation to the balance of power within the international political economy.82 While the international system is anarchical, the domestic system is hierarchical, placing the state in opposition to society. State strength is thus assessed by the ability of the government to concentrate power and override society.83 Such a view is incapable of studying how state power can be diffused through society or shared with market actors. The claims of neorealist and neoliberal writers that their perspective is the only one that `actually does treat domestic and international politics as a whole', and that the only alternative to their collective research program is Classical Realism, displays a broader ignorance of theoretical innovation in IPE.84 Even when domestic politics are explicitly included, they are placed at the beginning of the `food chain' of how states' self-interests are calculated.85 Reflexivity between domestic and international realms is absent, producing a static rather than dynamic view of change. In short, while these perspectives are state-centric, they in fact debase the state and its capacities. Within `new realism' similar weaknesses can be found, although there is much more with which to sympathize.

Weaknesses in `new realism' From as early as 1970, Susan Strange criticized international relations scholars for their blindness to economic forces and economists for their failure to understand the dynamics of international politics.86 Strange was also a vocal critic of neoliberalism and neorealism, chastising them for `aping' microeconomics theory, dismissing the heuristic value of equilibrium as a `totally unreal notion, obliterating time', and denouncing the concept of regime formation as `wooly'.87 She also criticized neoliberalism and neorealism for maintaining a resource-based understanding of power, arguing that risks and opportunities within the structure of the international political economy are far more important. Strange's greatest advance for the field of international political economy is the proposition that the ability to shape preferences is more important that the ability to command resources.88 And it is this innovative idea that underpins her notion of `structural power'. This notion of power was also the basis for her views on finance and IPE, wherein she proclaimed that `the management of credit is necessarily highly political'.89 Strange's perspective on IPE is eclectic, drawing from Gramscian theory, debates in historiography, and even a bit of post-structuralism. It

36 US Power in International Finance

is only relatively recently that she reluctantly ascribed the label of `new realism' to her work.90 While not many scholars are keen to describe themselves as `new realists', Strange's work is incredibly influential for a number of perspectives. New realism recognizes that structural power is fundamental in assessing one's relative capabilities when considering the larger consequences of one's actions. It does so by focusing upon `bargains' and how others' preferences are shaped.91 For Strange a `bargaining' perspective prevents one from equating means with ends and introduces discontinuities into the study of the policy process. In opposition to neoliberalism and neorealism, Strange argues that bargains include not only the decisions, but non-decisions. Importantly, bargains are conducted between state and market actors through the `authority-market nexus'. Indeed, new realism, according to Strange is: [A] realism quite different from the neo-realism developed by writers in international relations. That merely added new issues to the agendas of inter-state diplomacy and new bit-players to the cast of actors in international politics. It left the state and its concerns still always at the centre of the stage.92 Thus new realism looks at the power of state and non-state actors, with an emphasis upon how the two constrain each other. The bulk of Strange's work is on how state and non-state power is diffused through the international political economy to create structural power ± particularly the US's reluctance to stabilize international finance.93 However, rather than viewing the diffusion of state power as a sign of state capacities, the US is seen as having created `a monster, a Franckenstein'.94 Moreover, as Robert W. Cox, points out, the `only power capable of reregulating the world financial order, in her analysis, is the United States government'.95 Thus Washington is recognized as having the final say. Although Strange recognizes that Washington and Wall Street mutually benefit from the existing order, it is in the opposition between state and market power that new realism's weaknesses come to the surface. Unfortunately, the very useful notion of `structural power' falls prey to the zero-sum thinking whereby more power to the market necessarily translates to a `deterioration of legitimate authority of the state over the economy'.96 Strange writes: Structural power has greatly increased the costs for, if not yet quite removed, the options of protection of national champions and the

State Capacity and Finance in IPE 37

award of monopoly privileges hitherto available to states. It is not that some international institution or regime has made new rules to be obeyed. It is that the world market economy has just made such options increasingly costly to the whole economy on whose growth and viability powers of government ultimately depend.97 Importantly, the notion of structural power stands in opposition to those scholars who maintain that `[t]here are still no political entities other than the state that can make the final authoritative decisions' and are reluctant to recognize how power can be diffused through the international political economy.98 While this criticism is valid, the opposition between state and market continues. Moreover, structural power according to Strange becomes even more problematic due to its reliance on a balance of power model of change and the partial removal of the state from its societal base. In these ways, `new realism' has some commonalities with neoliberalism and neorealism. The stated objective of new realism is to apply the traditional notion of the balance of power to the diffusion of authorities throughout the world economy.99 As Strange asserts, the `market-share game is necessarily a zero-sum one at any given moment of time'.100 Where states no longer have power over market actors, the world of `conflict' between states has become `competition' for world market shares where states `have very little control'.101 This logic extends to the relationships between state and market actors ± greater power to market actors necessarily leads to less power and therefore fewer options for states. To combat what is now considered the overwhelming power of market actors, new realism advocates international cooperation.102 Similar to neoliberalism and neorealism, the involvement of states in international cooperation is premised on the recognition of sovereignty.103 And as stated above, sovereignty permits the abstraction of the state from society, and does not reflect a state's capacities and ironically therefore does not reflect state power. Like its foes, new realism presents structural constraints on states and downplays the ways states may positively engage the changing international political economy. State rationality is not assumed to be constant, as in neoliberalism and neorealism, but new realism does downgrade how states may play the domestic and international realms against each another. While there are problems in the new realist view of the relationship between state and market, the notion of structural power is critical in developing a better understanding of political and economic change. Strange's valuable legacy of `new realism' provides an

38 US Power in International Finance

eclectic toolkit with which to begin to expand the notion of structural power. It allows a return to a less systemic and more historical and interpretive way of studying the international political economy. I argue that the notion of structural power can be enlivened with Weber's political economy and can benefit what has been referred to as the `second-wave' of Weberian historical sociology in international relations.

Weber and the `victory of dividends' Weber's influence on the field of IPE is immense. Robert Gilpin's immensely popular The Political Economy of International Relations cites Weber as the source of his concepts of states and markets. Krasner's Structural Conflict cites him as the most important figure to distinguish between functional and substantive reason in political economy. Keohane's After Hegemony cites Weber's `ideal type' as the cornerstone of regime analysis.104 My understanding of Weber differs strongly from those found in neorealist and neoliberal perspectives. Rather than a father of modern sociology that provided a means to systemize change, I stress the historical, interpretive, and political aspects of Weber's work. This view of Weber has much more in common with `interest mediation', or `cock-up-foul-up' perspectives that stress the interaction between government and financial interests within a domestic political economy, and how that interaction affects a state's capacity to reconstitute itself to enact change in the international political economy.105 From these perspectives, power is more the ability to shape preferences than the ability to command resources. The state and the market are not opposing forces but share parallels in how they develop and whose interests they serve. One of Weber's seldom mentioned yet important scholarly legacies is that finance and the state cannot be removed from another ± and that the state must cooperate with as well as competitively regulate financial interests to prevent a loss of freedom domestically. Thus, state power can be much more effective when diffused through financial interests instead of concentrated within the government. Rather than states responding at the executive level of government to achieve relative gains under a `logic of anarchy', government and financial interests cooperate and compete for absolute gains. Relationships between government and financial interests are seen as competitive as well as cooperative. Such a perspective embodies theoretically-informed historically grounded comparisons, which have a more open understanding of the sources of change in the international

State Capacity and Finance in IPE 39

political economy. But popular perspectives of IPE do not associate Weber's methodology with theoretically-informed, historically grounded comparisons. Rather, Weber is associated with positivist social science and with Realism. Along with his admiration of Weber's `ideal type', Keohane recently asserted that Weber's concept of objectivity in social science is fundamental to the theoretical progress of neoliberalism and neorealism.106 From this basis neoliberalism could become more theoretically rigorous and `scientific'. Thus we have a disjuncture between `historical, interpretive Weber' and `objective social scientist Weber'. And this debate is not new. Keohane's view of Weber is akin to Talcott Parsons' opinion of Weber's capacity for `genuine scientific explanation'; that `he did not do it rigorously and systematically enough'.107 Such perspectives downgrade the heuristic importance of the historical and interpretive aspects of Weber's work. Analyses that assert reliance upon an evolutionary concept of change do not take into account Weber's clear rejection of teleology or any theory that proposed evolutionary stages. Weber admired historicism over philosophic or positivistic systems. He argued that generalizations were useless without detailed historical knowledge, without an understanding of why periods could not be related to each other.108 For example, Weber wrote in an essay on method: Where the individuality of a phenomenon is concerned, the question of causality is not a question of laws but of concrete causal relationships: it is not a question of the subsumption of an event under some general rubric as a representative case but of its imputation as a consequence of some constellation. It is in brief a question of imputation.109 History is thus neither an isolated event nor representative of a definite recurring pattern of change. Theoretical parsimony is outweighed by historical complexity. As Michael Mann argues, `Weberians develop a multifactor theory where social totality is determined by the complex interplay of dimensions'.110 Accordingly, the accusation that Weber rationalized international politics towards a statist, positivist approach is false and grossly unfair.111 Such misguided views help support the widely held perception of Weber as a Realist ± especially among those who view Realism from a neorealist perspective.112 Weber's connection with Realism is well documented, especially his definition of a state as a body that has `a monopoly of legitimate violence' in times of unrest.113 Such statements are

40 US Power in International Finance

used to affirm realist or neorealist viewpoints. Robert Gilpin, for example, uses the definition to affirm the legal reciprocity of sovereign authority within a balance of power model.114 The `monopoly of legitimate violence' definition of the state is widely accepted in the field of IPE precisely because it allows the `black boxing' of the state. Those able to enact the violence are all important. For neoliberalism and neorealism this view of the state allows scholars to consider the impact of systemic variables upon state behavior ± to enhance the theoretical parsimony of their research programs. Furthermore, the use of the `monopoly of legitimate violence' to support the exclusion of state-societal relations sanctions the `normative vacuum' in which much of the work in IPE operates. Certainly neoliberalism, as David Long argues, `stifles the prospects for change in liberalism and a renewal of its emancipatory project' through an approach that `reduces substance to process'.115 This is where one finds a great irony in the depiction of Weber as a paramount Realist. The Weberian view of the state does not rely on a `monopoly of legitimate violence' or sovereign authority. Certainly state power is not equated with sovereignty. Similar to the discussion of credit-money above, Weber's `monopoly of legitimate violence' definition of the state was a formal not substantive definition.116 The character of its institutions, the development of political consciousness, and the economic prosperity among its peoples provide the substantive definition. Upon further investigation into Weber's views on the state, particularly through his political writings, one finds how he elaborated on his conception of what a state should be. In Staatssoziologie the `monopoly of legitimate violence' is qualified with the practical concern that the state works with society rather than over society ± state power is exercised in a way in which the `hand is united with the ladder'.117 In his political writings on Germany and Russia, Weber consistently emphasized the need for democratic parliamentary reform.118 For Russia he strongly advocated `the old individualistic basic idea of the ``inalienable rights of man'' among the masses, rights which have become as ``boring'' to us Western Europeans as black bread is for the person who has enough to eat'.119 Weber emphasized the need for a state to be deeply embedded within its society and warned governments not to `play tag with a nation's political liberties', as the consequence would be domestic upheaval and international decline.120 The obverse was true as well. Liberal social reform could enhance a state's structural power in the international political economy. Indeed, Weber's left-wing liberal view of how states should constitute themselves did not blunt his views on the necessity of expanding a state's international power.

State Capacity and Finance in IPE 41

Weber's Realpolitik saw the state not as an ethos but as a `state-society complex' that could reconstitute itself to domestic and international change.121 Importantly for Weber, `reason of state' required a dynamic interaction between state and society, including a degree of government intervention in economic life.122 From this view, a state with interactive embeddedness, with cooperation and competition between the government and financial, commercial, and social interests, is more able to respond to and enact international change. Thus the state is constitutive ± its interests cannot be reduced to a self-interested, linear rationale.123 For Weber, an ambitious foreign policy would only be successful with domestic political change, including the breaking-up of rigid political structures. Liberal social reform, such as the introduction of a true parliamentary democracy that removed patrimonial rule, would enhance foreign policy. Self-interested Realpolitik would not. Thus a successful Great Power would have a collaboration of power between state and society. State power in this sense is collective, the state working with society rather than over society. This view differs greatly from states acting upon `self-interest' determined by the logic of anarchy. On Weber's grounds, uniting the hand with the ladder (a diffusion of state power through society) is a logical strategy to increase the state's flexibility and resilience to change. The argument here is that the ability to diffuse state power through government and financial interests (as in direct financing) demonstrates state capacity that recognizes, like Weber, the `commercial calculus' of the day.124 Within his assessment of how states respond to and enact change, Weber stressed the relationship between the state and financial communities.125 The type of relationship developed reflects the state's embeddedness in society and thus the prospects for social, political and economic change. It is critical that finance is embedded in society rather than concentrated in an elite. Power must be diffused, not concentrated, to enhance state capacity. The state cannot allow rentier interests to dominate. More specifically, the state cannot allow `unproductive' forms of investment to crowd out `productive' investment. In the following extract from his essay on suffrage and democracy in Germany, Weber relates the `vast new paper fortunes' of the rentier to the retardation of democracy: The ignorance of the litteÂrateurs who do not recognise the difference between the unearned fortune of the coupon-cutting investor and the productive capital of the entrepreneur, and who show as much ressentiment towards the latter as they do covetous benevolence towards the former, have heard something of the role played in France's

42 US Power in International Finance

parliamentary regime by `finance capital', both in regulations of a material kind (taxes) and in the selection of ministers, and they think of course that this is a consequence of the `parliamentarism' they fear. In truth, however, it results from the fact that France is a nation of rentiers, that the credit-worthiness of whatever government is in power, as expressed in the stock-market value of government bonds, is the single most important question for the millions of small and medium-sized investors in assessing the worth of ministers, and that this is the reason why banks are so often involved in, or are even consulted about, the selection of ministers. Every government would be bound to take into account their views, regardless of whether it was monarchic or parliamentary or plebiscitarian . . . because these things were demanded by the mood on the foreign stock-exchanges supplying the state with credit. Any progressive extension here of statefinanced activities funded by issuing states bonds, and particularly any growth in the numbers of medium and small investors in such securities, would have exactly the same consequences here, regardless of whether we have `democracy', `parliamentarism' or `monarchic' government. The relation of the English state to capitalism, by contrast, was primarily a relation with entrepreneurial capitalism (Erwerbkapitalismus) which served to spread England's power and people across the face of the earth.126 The consultation of bankers for ministerial appointments and the political power attributed to credit creation outlines the interactive embeddedness between the state and the financial community.127 In this case financiers had too much power over the state. Indeed, within the relationship between the state and financial community lies not only the possibility for a more wealthy yet cohesive society, but the possibility for political and social decay. This decay is not only associated with banking magnates but also the investing public.128 For Weber, the `victory of dividends' (Rente) over profits (Gewinn) changed the relationship between intermediaries and the state, increasing a state's dependence on access to credit.129 Without the structural power at the international level and liberal social reforms at the domestic level, a dependency on lines of credit would lead to a state `at the mercy of the cool, hard hand of the banks and stock exchanges'.130 Conversely, Weber sees the relatively liberal social order in England and its encouragement of entrepreneurial capitalism as the cornerstone of its politico-economic power, which was able to diffuse its `power and people across the face of the earth'. The development of English financial power and entrepreneurial

State Capacity and Finance in IPE 43

capitalism assisted foreign direct investment into colonial territories, such as the British East India Company, and thus the maintenance of the British Empire. Weber's message concerning a state's involvement in establishing financial power was not to depend upon a rentier class ± not to allow `the unearned fortune of the coupon-cutting investor' to transform into political power. In Weber's view an excess of rentiers within the German economy would lead to economic stagnation and a loss of freedom for German workers as owners of shares and debt securities could place pressure upon those involved in the physical production of goods to cut costs. Importantly, Weber recognized the diffusion of power as the basis of British strength, not its direct command on resources. Weber argued that the Bank of England provided an excellent example of an institution capable of coordinating two capitalisms normally at war with each other: (i) state `capitalism' through the expansion of empire to harness resources for fiscal means; and (ii) market capitalism that allowed the pursuit of profit with no overarching state intervention.131 Weber argued that `capitalism developed at first in England alongside the fiscal monopoly policy'.132 A state that gains from both forms of capitalism is able to enact rather than simply adapt to changes in the international political economy. The developments of the state and credit-money run parallel. Both seek to embed themselves in the upper and middle classes within a state, and such support is necessary for the extension of structural power. As discussed earlier, the Bank of England's ability to draw from the capital of the financial community to further the expansion of the state was essential for the eventual establishment of Pax Britannica. Later on, in the nineteenth century, the portfolios of small-scale investors propped up British financial power.133 In the postwar period the empowerment of investors and intermediaries under the encouragement of direct financing has supported US structural power and created a `victory of dividends' for the US. In understanding the structural linkages between the domestic, national and international realms that support US structural power and promote direct financing, I borrow from the `second-wave' of Weberian historical sociology.

State capacity and structural power I argue that Weber's conception of the state is not separated from society but embedded in society, including the relationships between states and financial communities. This perspective does not represent a statist, realist understanding of a state's capacity to adapt to change. A socially

44 US Power in International Finance

embedded, non-realist view of state power (and state capacity) is what distinguishes the `second-wave' of Weberian historical sociology and its perspective of change in the international political economy. Weberian historical sociology, more broadly, is premised on the notions of state autonomy and state capacity. Scholars within the `first-wave' of Weberian historical sociology viewed state autonomy as the ability of the state to `pursue goals at variance with dominant classes or any other social group'.134 From this viewpoint, exemplified in Theda Skocpol's work, state strength resides in the executive government.135 Accordingly, Weberian historical sociology has been branded as a sociological form of neorealism, including the assumption of a logic of anarchy. However, for the `second-wave' of Weberian historical sociology `the state is merely and essentially an arena, a place, and yet this is the very source of its autonomy'.136 In this sense, autonomy means the state is institutionally separate from society but implies functional embeddedness within society.137 This concept of state capacity, unlike the concepts of the `first-wave' and unlike neoliberalism and neorealism, does not imply opposition to but collaboration with society. `Strong' state capacity, then, reflects a developed interactive embeddedness; competition and cooperation between a state and its key social actors. This dynamic minimizes the costs for a state, in the sense that coercion and repression to enforce participation is much more expensive than voluntary participation. Thus, a diffusion of power through society is less costly for a state than a centralization of power against society, and increases the ability of a state to reconstitute itself in response to or to enact international and domestic change. This proposition applies for the political economy of direct financing. As John M. Hobson has written, `where the capitalist class provides states with much-needed resources, it enhances the bargaining power vis-aÁ-vis the state, and can demand something in return'.138 This competitive±cooperative relationship enhances state power and the ability to generate structural power. Of course this does not imply unceasing complementarity between the state and a financial community, conflicts do naturally arise. But overall, the competitive±cooperative relationship, the interactive embeddedness, must create absolute gains for the state. It must also increase state capacity and make the state more capable of enacting and adapting to change in the international political economy. Bargaining between Washington and Wall Street has facilitated the sale of US government debt (state revenue-seeking activities) and increased the use of securities markets and securitization (and the profits and competitiveness of Wall Street). The relationship between Wall

State Capacity and Finance in IPE 45

Street and Washington thus reflects interactive embeddedness and enhances state capacity. Drawing from Weber, state capacity is the ability of a state to constitute itself through society rather than serve its own `self-interest' in opposition to society. As will be demonstrated, Washington, Wall Street, and the American upper and middle classes have supported direct financing through investment, increased demand for credit, and, as to be demonstrated, indebtedness. The interactive embeddedness between Washington and Wall Street, and the embedding or socialization of direct financing into American society, can be seen as a diffusion of power that enhances US state capacity, allowing it to enact and adapt to international and domestic change. In turn, this state capacity has increased the US's ability to play the international and domestic financial realms against each other, to the benefit of the US. It also allows the US to extend its structural power. The notion of structural power can be `fleshed out' if we borrow from Michael Mann's concepts `extensive power' and `diffused power'. `Extensive power' is the ability to `organize large numbers of people over far-flung territories'. Diffused power is not commanded directly but `spreads in a relatively spontaneous, unconscious, decentred way. People are constrained to act in certain ways, but not by the command of any particular person or organization'.139 The combination of extensive power with diffused power can be neatly united under the term `structural power' and establishes the framework within which state and market actors operate. The exercise of power within this framework is more persuasive than coercive. It is more collective than distributive.140 There is not a `zero-sum' game between state and market actors as both benefit from the generation of structural power. Accordingly, because authority is diffused through society, state power is not determined by the ability of the state to respond to the logic of anarchy. Those acting collectively to generate structural power draw from the interactive embeddedness of state-society relations. I argue that the interactive embeddedness between Washington and Wall Street creates an ability to play the domestic and international realms of finance against each other, enhancing the US's state capacity and generating US structural power in international finance. In understanding the relationship between interactive embeddedness, state capacity and `structural power' I illustrate the structural linkages shown in Figure 2.1 based on John M. Hobson's `Taxation in the international/national vortex' in The Wealth of States.141 Within the figure, the two pressures from the international system are the major challenges to the US's structural power in international

46 US Power in International Finance Inter-state system

International

Calls for formation of finance/ monetary regimes

International financial system Rising costs of claims upon dollardenominated assets /macroeconomic turbulence

INPUT

National

INPUT

Privatization of credit, sale of us government debt, liberalization of financial systems, financial innovation, promotion of direct financing/ US structural power

State capacity OUTPUT Direct financing

INPUT

Domestic

Interactive embeddedness competition/cooperation between Washington & Wall Street

Figure 2.1 Direct financing in the international/national vortex

finance between 1960 and 2000. The first are calls for the formation of monetary and finance regimes that have dogged the US since the creation of the Bretton Woods system. These calls, as will be shown, have not been successful. The US does not need to support international finance and/or monetary regimes because of its structural power. In fact, US participation in regimes does not internalize negative externalities through international cooperation, but generates positive externalities for US interests. This view conflicts with those who argue that the demand for international regimes provides evidence of US hegemonic decline. The second demand from the international realm is the rising costs of dollar-denominated assets in circulation and macroeconomic turbulence. Throughout the bulk of the period under study the US has been a debtor state. Washington's ability to persistently sell US government debt on international financial markets, particularly US Treasury bonds, has been one of the great achievements of US structural power. Moreover, the use of regimes to support the sale of US government debt has demonstrated, again, the ability to externalize the US's fiscal problems. In this way the ability to sell debt can be seen as a form of `taxing' its major trading partners. The rising cost of the claims to US government debt has been a constraint strategically avoided by the US since the 1960s. Furthermore, as a consequence of the `dollar weapon', inflation,

State Capacity and Finance in IPE 47

trading politics and, particularly, US domestic politics, increases in US (and thus world) interest rates have led to severe macroeconomic problems, inducing financial and monetary crises. Of course these crises are not the US's `fault' but are deeply affected by changes in American finance. They are especially affected by the structure of international finance and therefore US structural power. Crises raise questions about the reach of US structural power in international finance and international perceptions that such power should be supported. Indeed, in many cases calls for the formation of finance and monetary regimes in the post-war period have sought to limit the privileges given the US by the international financial system. While the US has constituted itself to enact change in international finance, the two international pressures in Figure 2.1 are constraints that test the state capacity of the US. The US's state capacity is enhanced by the interactive embeddedness of Washington and Wall Street ± their competitive/cooperative relationship. In the chapters that follow I demonstrate how this interactive embeddedness can be seen in the use of domestic level regulations to foster financial innovations in the domestic arena. Those innovations go on to give US intermediaries an advantage in the international arena ± they represent a policy mix of international passivity and national activism. I also demonstrate how this interactive embeddedness assists US state capacity in dealing with international constraints and enacting change to the benefit of US structural power in international finance. Domestically, nationally and internationally, this has been assisted by direct financing. The US's promotion of direct financing has facilitated the mass privatization of credit in the 1960s and 1970s, the ongoing sale of US government debt, the encouragement of financial liberalization in other states, and the creation of international environments in which US intermediaries have competitive advantages. Of course, the American public are also important here, as they have also supported financial innovations and the promotion of direct financing. As a consequence of direct financing, the US has been able to reconstitute itself to extend its structural power in international finance. Naturally, evidence is required to support these theoretical assertions. I now turn to the era when the US `laid the tracks' for direct financing, the 1960s.

3

1960±68: From Orthodoxy to Heresy

What used to be a heresy is now endorsed as orthodox John Maynard Keynes1 John Ruggie refers to the post-war international economic order as a `compromise of embedded liberalism', whereby states accepted a relatively open trading and monetary system in return for greater control over their domestic economies.2 Reflecting the US's post-war politicoeconomic dominance, the reconstruction of the international monetary system under Bretton Woods established the dollar as the numeraire currency. The extension of US structural power in international finance depended upon the new role of the dollar and the interactive embeddedness of Washington and Wall Street. The dollar's numeraire status offered US international banks an opportunity to monopolize the issue of dollar-denominated liabilities with zero exchange rate risk and commercial loans, investment services and foreign exchange earnings provided fertile ground for corporate expansion.3 With Washington's encouragement, Wall Street developed syndicated loans to assist with post-war reconstruction.4 The extent of international lending fuelled the development of an American-led international banking network. In 1950 there were only seven US banks operating 95 international branches. By 1965, 13 US banks had established 211 international branches.5 Accordingly, the new role of the dollar directed credit access towards a `New York-centered global credit system' that would promote direct financing.6 Although heavily intermediated by a small group of banks, this system was already gearing itself towards greater securities trading, particularly in short-term debt securities. As will be demonstrated, debt securities markets deepened dramatically during this period as the risks and opportunities of the new 48

1960±68: From Orthodoxy to Heresy 49

international financial and monetary system were realized. The US domestic financial system also increased in size, as the `long boom' allowed Americans to increase both their consumption, their savings, and their use of financial services. At home, investment banks benefited as stock market investment from `ordinary' Americans quickly doubled, and commercial banks benefited as the demand for commercial and personal credit increased.7 To use a Weberian metaphor, the 1960s were a moment of `tracklaying', whereby the interaction of Washington, Wall Street, and the Euromarkets converted international finance to a `new gauge' of direct financing.8 This chapter discusses the establishment of the dollar as the numeraire currency after the Second World War, and Washington's and Wall Street's use of numeraire status to generate US structural power in the 1960s. Direct financing commenced in the 1960s, largely as a consequence of yield differentials of up to 4 per cent in financial assets between national investment and investment in the burgeoning Euromarkets.9 As will be explained later, the difference in assets was a consequence of US banks' need to diversify financial interests outside the US. Banks played upon policies of international passivity and national activism to provide the liquidity that strengthened the US's structural power in the international financial system and, in doing so, encouraged the greater use of direct financing. This chapter has four points to make: (i) that Wall Street opposed the establishment of post-Second World War capital controls; (ii) that Wall Street played upon policies of international passivity and national activism; (iii) that Washington encouraged the involvement of US banks in the growth of the Euromarkets despite the stated objectives of domestic economic policy; and (iv) that from 1960±68, the capacity to play international and domestic realms against one another rested on the back of the `n-1' problem which provided macroeconomic constraints but also allowed the US to supply liquidity to expand international credit and US business.10 Importantly, this view of Washington's and Wall Street's role in providing credit to extend US structural power disputes the notion that in expanding the amount of dollar-denominated assets, the US sacrificed its own interests for the good of the international system. Furthermore, contrary to neoliberals and neorealists, the period between 1960 and 1968 does not display a liberal order supported by a hegemon that `did not try to fully exploit its commercial advantages' and thus suffered the consequences of decline.11 I do not believe that the period witnessed an era of `investment' by the US to the detriment of its national interest

50 US Power in International Finance

that ended when it could no longer stand the pressures of hegemony and collapsed for short-term domestic gain.12 Therefore, although shortterm goals were fulfilled at the expense of international stability, the US extended its structural power in international finance to establish the framework upon which it could bank upon in future decades. Once the supremacy of US hegemony in finance and trade is taken as given, the US's involvement in international regimes during the 1960s also reflects the interests of extending its structural power. However, while US dominance is clear, popular perspectives have overblown the extent of the US's ability `by itself' to enforce its trading partners to comply with regimes.13 The supposed ability of the US `by itself' to guide the international political economy in the 1950s and 1960s is important. Exaggerating hegemony in the 1950s and 1960s allows one to demonstrate hegemonic decline in the 1970s and 1980s. Furthermore, in neorealist and neoliberal literature `by itself' implies coercion ± reflecting their view of a hegemon as a `strong state' that is not only able directly to override domestic interest groups but also to override other states. Underlying this perception is the view of power as commanded by resources and under the control of the executive level of government ± that power is directed from above rather than diffused along with informal sources of state power. In the international arena, structural power in finance does not rely on direct state coercion but `extensive power' and `diffused power', as elaborated in the previous chapter. The trend towards direct financing was not enforced by the overt powers of a hegemon. Rather, it was promoted by US structural power, drawing from the interactive embeddedness of Washington and Wall Street, and demonstrated in Washington's policies of international passivity and national activism.

Keynes, White and Wall Street A suitable place to begin to understand policies of international passivity and national activism is the debate between the adviser to the British Treasury, John Maynard Keynes, and the assistant to the US Secretary of the Treasury, Harry Dexter White, over what currency would act as fixed numeraire and reserve for the post-WWII monetary and financial system. Their ideas helped establish the International Monetary Fund, the World Bank, and the Bretton Woods regime. Keynes and White both argued that capital controls measuring transactions from where they left and where they arrived were essential to the provision of national policy autonomy. Fundamentally, they agreed on

1960±68: From Orthodoxy to Heresy 51

three aims necessary for the construction of a financial order compatible with the post-WWII welfare state: iii. iii.

iii.

To stop the evasion of taxes by sending funds abroad. To maintain a welfare and industrial base, which would be otherwise harmed if domestic borrowers and savers had readily available access to foreign markets. To protect social policy against short-term outbursts or inflows of capital.14

Whilst they agreed on these three aims, they did not agree on what currency should be used as a numeraire. Keynes' suggestion for a new post-war financial order was based upon the establishment of a new international currency fixed (not unalterably) to gold: the `bancor'. His suggestion for the bancor stemmed from the political implications of having an existing currency playing the reserve role, and associated fears of `massive sweeping and highly capricious transfers of short-term funds . . . [which] constituted a major source of damage to the international monetary system'.15 Keynes was concerned that excess liquidity in securities markets would encourage a short-run analytic focus among investors that would then impair long-term investment and financial stability. It would also advantage the development of a rentier class of investors who `owned' but did not `manage' business enterprises.16 For Keynes, to permit rampant speculation in highly liquid markets would recall the decadence of `individualistic capitalism, in the hands of which we found ourselves after the war [WWI]'.17 Such a decisive victory for rentier interests would widen inequalities between and within national economies. Keynes was also concerned with the political ramifications of using an existing currency as the numeraire, worrying that the burden of economic adjustment would be on the debtors rather than creditors of international finance.18 In response to these concerns and to ease volatile financial movements, fiscal distress and domestic economic turbulence, Keynes suggested (along with the bancor) the establishment of an International Clearing Union (ICU).19 The ICU would require states in surplus to increase imports to assist deficit countries with their adjustments. Under the guidance of the ICU, surpluses and deficits would effectively be accounted as debits or credits rather than real assets. States in surplus would thus have credit with the ICU, and would have to pay the ICU when credits exceeded a multilaterally agreed limit. This would encourage states not to run large surpluses whilst others were in deficit,

52 US Power in International Finance

and thus promote financial stability. Access to $26 billion in credit, with each state's borrowing rights determined by its share of international trade, would also assist balance of payments adjustments.20 This system supported Keynes' distinction between productive and speculative capital flows; the former being an engine for productive capital, the latter threatening it. The ability of states to determine interest rates with the assistance of capital would aid in successful policy formation: Freedom of capital movements is an essential part of the old laissezfaire system and assumes that it is right and desirable to have an equalisation of interest rates in all parts of the world . . . In my view the whole management of the domestic economy depends upon being free to have the appropriate rate of interest without reference to the rates prevailing elsewhere in the world. Capital controls are a corollary to this.21 Keynes therefore advocated the regulation of international finance ± government intervention in finance which was once defiled as heresy was to become the new orthodoxy. Harry Dexter White supported this new orthodoxy ± in part. He agreed with Keynes' distinction between productive and speculative capital, and stressed that capital controls should not affect the former.22 White agreed with the principle of capital controls and suggested they be obligatory alongside transparency of information on deposits, investments, and securities for signatories to the Bretton Woods Agreement.23 Vitally, he disagreed that the best way of achieving them was with a new international currency, arguing that the dollar would provide greater stability under the supervisory powers of the US.24 Under the weight of the world's largest creditor at a time when credit was scarce, the numeraire status of the dollar was affirmed. Furthermore, post-war reconstruction required more credit-money than money. Accordingly, the financing requirements of reconstruction surpassed what was in official reserve deposits. As credit-money was elevated in political importance, the fact that it was dollar-denominated increased Washington's and Wall Street's power in the international political economy. From the post-war politicization of credit-money, Washington and Wall Street established an environment from which they could both profit, politically and economically. Capital controls were not to be placed on the US, as it would constrain its flexibility and the dollar's status as numeraire. Wall Street feared that capital controls, such as those proposed by Keynes and White, would inhibit the spread of US banking into Europe and thwart their challenge

1960±68: From Orthodoxy to Heresy 53

to the City of London's financial power. On the grounds that speculative flows would discipline governments from choosing `unsound' economic policies and prevent inflation, Wall Street lobbied heavily for an absence of capital controls and opposed multilateral coordination (such as Keynes' ICU) of ad hoc stabilization agreements tied to gold.25 Instead, they argued that there should be no differentiation between productive and speculative flows, and that such an infringement would stagnate the investment climate necessary to reconstruct Europe.26 Some bankers even went so far as to view the institution of capital controls as a `Hitlerian monetary system', arguing that it is an individual's right to determine the movement of their capital.27 This combination of the need to protect investors' rights and the need for those investors to exert their own discipline on governments' fiscal choices (most prominently through bond markets) would continue to be part of Wall Street's rhetoric for the remainder of the century. Due to the possibility of capital controls, the US Congress House Banking Committee opposed the ratification of the Bretton Woods Agreement, threatening to duplicate `President Wilson's unhappy experience with the Versailles Treaty'.28 The Agreement was subsequently reformulated with numerous revisions on the issue of capital controls. Wall Street's lobbying to oppose controls has not been at the front of scholars' minds when discussing the formation of the Bretton Woods regime. G. John Ikenberry, for example, argues that Wall Street was not part of the policy elite that legitimated political interests under the Bretton Woods Agreement.29 True enough, Wall Street did not have official legitimacy as a political interest in the international arena. Nevertheless, the rejection of capital controls on the dollar provides an obvious example of how Washington's and Wall Street's interactive embeddedness impacted upon the framework of international finance. Wall Street's opposition to capital controls also underpinned Washington's `passive' approach to international financial regulation. While officially passive (the advocacy of free flows of capital), Washington's informal approach was certainly active. The decimation inflicted by WWII required reconstructing states to run massive deficits on their capital accounts. As the world's largest creditor, the US was able to provide capital for reconstruction. In doing so, US businesses gained access to markets that allowed a continuation of the domestic production levels attained during wartime. Providing credit for new customers to buy US goods and services played no small role in the need for greater liquidity. Private financial intermediaries were needed to boost the gap between the supply and demand for credit.

54 US Power in International Finance

Furthermore, under the Bretton Woods system, the US's position as the largest subscriber (and thus holder of votes) in the IMF afforded it a great deal of influence in determining the political and trade performance goals with which states seeking IMF assistance would have to comply.30 When combined with its own currency fixed at a value of $35 per ounce of gold, the seigniorage rights from the dollar (savings made by the US Treasury from the difference between the cost of producing dollars and their value) helped distribute the gains of the new monetary system to those with the most; a scenario that Richard Cooper aptly described as `perverse'.31 Sterling's seigniorage rights became limited under the burden of post-war reconstruction and the exhaustion of British finance during the war. Britain's accrual of debts meant that it could no longer afford to live off the rents it generated from its diminished foreign investments, nor could it expand exports without reconstruction of its industrial base.32 Dependence on international credit was the only alternative. This meant a larger role for the dollar, and an explicit British commitment to multilateral negotiations on issues of trade and finance. As a consequence, the dollar rather than sterling became the currency used for private exchange as well as the preferred currency used to fill central bank reserves.33 The dollar's new role offered a unique opportunity for Wall Street virtually to monopolize the issue of dollar-denominated liabilities.34

As good as gold Despite its `perverse' benefits, the dollar's role as a numeraire was something of a double-edged sword for Washington and Wall Street. The growth of banks and corporations using the dollar off-shore compounded the need to protect a strong dollar, although at the same time a strong dollar made export industries less competitive. Macroeconomic policy headaches ensued as the dollar's numeraire status constrained policy choice. Any devaluation of the dollar was ruled out as other countries could negate the action by simply devaluing as well. This `n-1 problem' was a basic flaw in the design of the Bretton Woods monetary system, as the dollar acted not only as a vehicle for exchange but also as source of international liquidity. Thus, as foreign governments accumulated the dollar, its convertibility to gold at $35 per ounce was assumed, which effectively meant that the incentive to build international reserves was marginal unless the US was prepared to adjust the price of gold.35 At the same time, however, states needed to build dollar reserves to facilitate international trade, of which a large portion was

1960±68: From Orthodoxy to Heresy 55

conducted in dollars. Domestic politics ruled revaluation out as the US depended not only upon the fixed conversion rate, but also the willingness of foreign governments to accumulate dollars so that it could finance its own spending through issuing its own currency.36 In 1958, the year when Bretton Woods currency convertibility began the final stage of implementation (completed in 1961), the US lost $2 billion in gold reserves as European states began to run current account surpluses and convert dollars into gold.37 Although it was consistent with the principles of Bretton Woods, Washington discouraged this as it directly undermined the basis upon which credit could be generated from the dollar's role as numeraire. The creation of credit required states to accept dollar-denominated assets as IOUs with Washington's guarantee that those assets could be exchanged for gold at $35 per ounce. While the formal validity of this guarantee had been determined at Bretton Woods, states rightly questioned its substantive validity. Problems emerged in 1961 as intermediaries and states attempted to keep the value of the dollar stable in respect to its official gold price. As a consequence, calls were raised for the formation of an international finance regime conducted through the Bank for International Settlements (BIS). The BIS's original role was to assist with the repayment of German World War I reparations in 1929, to free banking of `political entanglements', and to `relieve credit dislocation, to build a bridge between countries overstocked with capital and those understocked with it.'38 In the post-war era, the BIS's main role was to combat speculative pressures by coordinating the actions of central bankers through swap networks, and to provide short-term credit to states in balance of payments troubles. As will be seen, the BIS's role in the formation of international finance regimes would be more ambitious in decades to come. In March 1961 the `Group of 10' (the Finance Ministers of Belgium, Canada, France, Germany, Italy, Japan, the Netherlands, Sweden, Britain, and the USA) met at BIS headquarters in Basle, Switzerland, to discuss forming a General Agreements to Borrow. The intention of this legislation was to allow greater freedom for short-term capital and to provide greater liquidity for the IMF. It was one of many cooperative declarations that would become known as `Basle Agreements'. The basic aim of the agreement was to facilitate cooperation for states to hold each other's currencies at greater levels (rather than converting them to gold or dollars) to counteract any speculative attacks or rapid capital outflows. Between March and July 1961, Britain received $900 million from this arrangement to counter sterling's instability.39 At Basle that same

56 US Power in International Finance

year, the dollar-gold liquidity problem was addressed with the formation of a `Gold Pool', designed to prevent fluctuations in the private market price of gold. In October 1961 the private market price (best demonstrated by the competitive London climate) rose to $40 per ounce whilst the official rate remained at $35 per ounce, as illustrated by the hiccup in Figure 3.1. The coordination and supply of gold to the marketplace stabilized the price of gold at just under $36 per ounce. The establishment of a two-tier (official/market price) gold standard pointed out problems lying ahead for states wanting to covert their dollars into gold at $35 per ounce. The discrepancy between actual holdings of gold and comparable holdings of dollar-denominated assets increased over the following decade.41 The Gold Pool lasted seven years until March 1968, when Washington endorsed an official two-tier gold system to defuse speculation on the dollar and became reluctant to exchange gold at $35 per ounce despite the promise of Bretton Woods.42 Also in 1961, the OECD established an agreement, under the Code of Liberalization of Capital Movements, to `progressively abolish' the restrictions on capital movements `to the extent necessary for economic cooperation.'43 In contrast to the aims of Keynes and White only 15 years earlier, capital controls were targeted alongside tariffs as inhibitors of a fairer international economic order. Like most of the international regimes for finance to follow, the rules of the Codes of Liberalization were not effectively enforced, and the vagaries of the agreement allowed member states to set aside capital account liberalization under balanceof-payments stress.44 The most prevalent exception was the continuation of capital controls first implemented in June 1960 by the Bundesbank, where the purchase of domestic money market paper was subject to an authorization requirement for non-residents. This reflected the 45 40 35

1972

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1967

1966

1965

1964

1963

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30

Source: Bordo, Michael D., `The gold standard, Bretton Woods and other monetary regimes: a historical appraisal', Federal Reserve Bank of St. Louis Review, Vol. 75, No. 2, March±April 1993: 174.

Figure 3.1 Private market price of gold in dollars (London), 1955±7540

1960±68: From Orthodoxy to Heresy 57

fear that an influx of capital into Germany would cause a revaluation of the deutschmark and slow Germany's export performance.45 Even with a revaluation of the deutschmark in 1961, the controls remained until 1969. Germany did not want extensive credit-creating powers in Europe, as the use of the deutschmark as a reserve currency would inflate its value.46 Even more importantly, Germany's exuberance for capital controls arose from concerns that dependence upon a European monetary regime, such as the European Payments Union, would send the wrong signal to the US and jeopardize the ancillary role the deutschmark played to the dollar.47 Germany had already demonstrated its willingness to comply with Washington's requests. In 1961, for example, Germany purchased US Treasury bonds to support the role of the dollar and to compensate the US for the costs of maintaining a military presence.48 Germany's development of financial innovations in what can certainly be understood as a time of German financial mercantilism also reflected such prudence, including the establishment of a new federal financial regulator, the Bundesaufsichtsamt fuÈr das Kreditwesen (BAKred).49 The informal cooperative financial system relied upon the heavy use of bank intermediation to maintain stable economic redevelopment. Long-term bank lending dominated and securities markets were not developed. In fact, Germany's official association to coordinate its stock exchanges, the Arbeitsgemeinschaft der deutschen WertpapierboÈrsen, was not even provided with a single full-time staff member!50 Similarly, in the 1960s Japan had a system `centred almost entirely on intermediation' through banks rather than securities markets as they were `more easily monitored by the bureaucrats'.51 Japanese involvement in international financial markets was coordinated between the Bank of Japan (BoJ), the Ministry of Finance (MoF) and the government. An example is the rescue of Yamaichi Securities in 1965, only to have them fall in 1997 (see Chapter 6). As in Germany, securities markets remained undeveloped in preference for long-term bank lending; partially as a consequence of limitations placed on securities trading during the US Occupation.52 While securities markets remained dormant in Germany and Japan, the same did not apply to the US and Britain. During this period the US sought ways of extending its structural power in international finance while deepening its own domestic financial system.

People's capitalism In 1961 the Federal Reserve Bank of New York became the instrument through which the US Treasury made its transactions. This partnership

58 US Power in International Finance

between the FRBNY and the Treasury marked a clear move to affect the foreign exchange market through the use of the Exchange Stabilization Fund (ESF). This fund's purpose was to halt the drain on US gold supplies created by dollar-gold convertibility through purely national action.53 (This fund would later be used to `bail-out' Mexico from the Tequila Crisis in the mid-1990s. See Chapter 6). During this period, other policies of international passivity and national activism emerged that increased competition among US intermediaries at home, producing the need for financial innovations, and making it more lucrative to operate abroad ± and to use homespun financial innovations for competitive advantage in international markets. National activism to regulate domestic finance was clear with the passing of the Bank Holding Company Act of 1956 and the Bank Merger Act of 1960, both which curried disfavor with Wall Street. Both Acts placed restrictions on the use of umbrella financial services, securing the segmentation of American finance, and preventing bank mergers that were deemed to create or encourage monopolies in financial services. Both Acts increased competition among intermediaries and provided banks with a reason to produce financial innovations. Importantly, the use of domestic regulation extended to conditions on interest rates. In 1961 President Kennedy responded to domestic political pressures to stabilize short-term demand on the dollar by introducing a number of regulatory changes. Included in these changes were higher rates of interest for deposits in US government securities (Treasury bonds, for example) held by foreign governments, and exemption from US taxes on their interest payments.54 The aim was to encourage foreign governments not to convert dollars into gold, thus allowing Washington and Wall Street to continue creating credit in the form of dollar-denominated assets. Indeed, this was the problem of the decade. Washington was faced with the dilemma of preventing capital outflows from the US whilst supporting greater freedoms for speculation and innovations in dollardenominated assets. This problem related directly to the dollar's role as both reserve and vehicle currency. To extend structural power in international finance, Washington and Wall Street required ways to expand dollar-denominated credit while minimizing domestic repercussions from an overheated dollar.55 Financial innovations were the key, as were policies of national activism. The development of `Roosa bonds' is an excellent example of official financial innovation. `Roosa bonds' were offered to foreign central banks denominated in their own currencies rather than in US dollars. They were also a substitute for gold transfers, as they were relatively risk-free.56 When for-

1960±68: From Orthodoxy to Heresy 59

eign central banks purchased `Roosa bonds' with their dollar reserves, any devaluation of the dollar would be adjusted by a revaluation of the currency in which the Roosa bond was denominated.57 Thus, the US government assumed the risk of possible devaluation, but offset it against its credit-creating powers. Another official innovation was the widespread introduction of credit-swap facilities. For example, in 1962 the Federal Reserve of New York purchased $33.5 million from the ESF to `warehouse' opening balances in deutschmarks, lira, Swiss francs, and guilders to be used as credit to swap with other central banks.58 Credit swaps enhanced the abilities of central banks to match interest rates and offset disequilibriating flows of capital. Rather than adjusting to the `n-1' problem and suffering domestic inflation, Washington externalized inflation by adjusting domestic policies related to government securities. Indeed, the US's use of the Bretton Woods regime was not to internalize monetary or financial `negative externalities' in order to provide a stable international monetary system, but to create dollar-denominated assets to achieve positive externalities for US interests.59 This interpretation contrasts heavily with those that argue that liquidity in the postwar international monetary system was premised upon US self-sacrifice.60 The extension of dollar-denominated assets and US structural power in international finance relied upon policies of international passivity and national activism. Such policies reflected US interests in international finance and also the interactive embeddedness between Washington and Wall Street. As US Treasury Undersecretary Robert Roosa commented: `Separating the [private] roles from the reserve currency role might be as delicate as separating Siamese twins'.61 In the mid-1960s further examples of international passivity and national activism reflected Washington's Siamese-twin relationship with Wall Street and how both could benefit from this policy mix. When Wall Street lent over $2 billion overseas in 1963, President Kennedy introduced an Interest Equalization Tax (IET, effective from July 1963 and made law in September 1964) to temper lending by taxing loans and foreign bonds issued by US banks on US soil to foreign clients.62 The rationale behind the tax was that other states, most particularly European states, had not sufficiently deregulated their capital markets, thus making US interest rate controls necessary to match interest rate differentials between countries.63 The IET exempted Japan but encouraged European states not to borrow from Wall Street, inhibiting capital outflows of the dollar to assist the US balance of payments.64 This clever piece of financial policy prevented over-zealous foreign

60 US Power in International Finance

lending from US soil and forced US intermediaries abroad. Wall Street immediately found ways to circumvent the IET by shifting foreign lending to banks loans not covered by the tax.65 Much of this capital found its way into (and out of) the newly formed Eurobond market that had been created to hold large amounts of money made available through Eurocurrency trading (more on this below).66 Following the IET, under the Johnson administration, was the 1965 Voluntary Foreign Credit Restraint Program (VFCR) and the Foreign Direct Investment Program (FDIP). The former curbed borrowing by foreign firms and governments in the US domestic financial markets, and the latter restrained the amount of capital a US firm could send abroad.67 Importantly, the regulations did not cover foreign subsidiaries of US banks, so loans could simply be made offshore. The IET, VFCR, and FDIP should be seen as financial innovations rather than policies to constrain capital flows. These policies resulted in further credit-creation as the vast majority of foreign subsidiaries of US banks provided credit facilities rather than acting as traditional depository institutions.68 The use of credit facilities required greater use of securities markets and therefore promoted direct financing. In 1968, rules issued by the VFCR and the FDIP became mandatory and triggered what Michael Moffitt referred to as the `greatest banking exodus in history'. The 375 foreign branches belonging to 26 US banks expanded to 536 foreign branches belonging to 79 banks, with over $52 billion in assets.69 Thus from the mid-1960s, a competitive climate for international banking was truly established. As a result of the above regulatory initiatives, international banking grew 25 per cent annually (compared with 7.25 per cent for world trade) well into the 1970s.70 During this same period of national activism to push US banks offshore, Washington actively encouraged the deepening of the domestic financial sector. The social acceptance of both `high' and `low' finance increased throughout the 1960s as securities trading and, particularly, access to credit expanded. Under the Democrats access to credit was more socialized with the 1963 Community Investment Plan, which provided easier finance for low and lower-middle income earners. Private financial innovations also allowed the middle classes to access credit and debt on a more flexible basis. John Kenneth Galbraith wrote in 1958 that the `process of persuading people to incur debt, and the arrangements for them to do so, are as much a part of the modern production as the making of goods and the nurturing of wants'.71 The introduction of VISA in 1963 and MasterCard in 1965 provided temptation. As will be demonstrated in Chapters 5 and 6, the development of

1960±68: From Orthodoxy to Heresy 61

consumer credit would provide an important source of capital and competitive advantage for US intermediaries. The revolution in consumer finance also extended to the stock market. Indeed, increasing share ownership was important for the American political economy and stemmed from the collapse of American finance in the Great Depression. When the fallout from the 1929 crash had been accounted, only 1.2 per cent of Americans held brokerage accounts.72 Institutional investors and banks dominated investment on the stock market, but still the concentration of power in the market was a weakness that deepened the crash and its effects. Increasing American share ownership and general participation in securities trading was therefore a rational strategy for risk diversification. Accordingly, the NYSE president, George Keith Funston, promoted share ownership as `People's Capitalism'. His campaign was successful, and for some too successful! For example, in 1967±68 the NYSE faced a crisis when brokers were unable to meet demand as the volume of shares traded daily increased threefold.73 While Americans started to invest more in the share markets, foreign investors and corporations also increased their interest in American domestic finance ± particularly after full foreign membership to the NYSE was passed in 1967.74

The US and the Euromarkets The most important change in international finance during the 1960s was the development of the Euromarkets. These markets promoted direct financing through the trading of a myriad of dollar-denominated securities that could be customized to an investor's needs. The Eurocurrency and Eurobond markets uniquely offered the freedoms of low transaction fees and an immediate source of liquidity.75 Furthermore, being a secondary market the issuer of securities (whether they be loans, bonds, or deposits) was not important. In the words of Susan Strange, Eurocurrency transactions `were untaxed, anonymous and profitable.'76 Currencies and bonds could be traded with minimal fuss, allowing swift access to liquidity and avenues to diversify risk. The Euromarkets were also free of domestic regulations such as ceilings on interest rates, stipulations on reserve requirements, and the need for deposit insurance. Accordingly, the Euromarkets' popularity increased during the 1960s. Between 1960 and 1970 the size of Eurocurrency market expanded from two billion to 57 billion dollars, and the Eurobond and foreign bond market from 0.8 billion to 5.3 billion dollars.77 As Gary Burn argues, the Euromarkets allowed `financial capital to regain the position of relative

62 US Power in International Finance

independence from the state which it had lost in 1931'.78 Like the use of bills of exchange in previous eras, the Euromarkets offered wealthy investors and banks a means to send their financial assets out of territories where there was a threat of plunder or, in the American case, interest rate caps that impeded profits. Like the emergence of fairs for international finance discussed in the previous chapter, the Euromarkets exerted discipline on governments' financial positions. Again, like the use of bills of exchange from the sixteenth century onwards, the amount of capital in the Euromarkets was above the supply of precious metal, in this case gold. The Euromarkets were a product of state action, private enterprise and the Bretton Woods fixed exchange rate system. The Euromarkets' origins can also be found in the turbulence associated with sterling's decline and political opportunity. In 1955 during a period of tight monetary policy, London's Midland Bank set off alarms when the Bank of England (BoE) discovered that it was attracting dollar deposits beyond the needs of its commercial operations.79 The Midland Bank was attracting dollar depositors, converting the dollars into sterling for investment into the highly profitable Treasury Bills, then converting sterling back into dollars at a cost that gave the bank a profit and offered US depositors greater returns than permissible under their Regulation Q interest cap.80 This was the beginning of the Eurodollar market (Eurobonds began in 1963), although not all dollar deposits came from the US. In the 1950s Chinese and Soviet financial interests took great interest in the ability to deposit dollars in a place where the US authorities could not seize them.81 The Euromarkets offered safety from plunder, a role they would perform for members of the Organization of Petroleum Exporting Countries (OPEC) after the first oil crisis in the early 1970s. The Euromarkets also offered the City of London an opportunity to maintain a competitive advantage in international finance while the power of sterling continued to decline. In fact the 1957 sterling crisis gave a great boost to the Eurodollar market. Following the crisis and to add monetary stability, Britain's Chancellor of the Exchequer prohibited (until 1959) the use of sterling to finance foreign trade between third parties. As a consequence British banks began attracting dollar deposits to facilitate refinancing operations ± most particularly for Japanese clients.82 Japanese banks themselves were drawn to London, attracting over $200 million of deposits (then converted to yen) by 1960.83 Despite its concerns about the Midland Bank in 1955, by 1960 the BoE supported the involvement of British banks in the development of the

1960±68: From Orthodoxy to Heresy 63

Euromarkets as a means of retaining financial power. And the BoE's influence increased as the authority of Her Majesty's Treasury over financial markets was removed in 1959 with the phasing-out of its Capital Issues Committee. Despite the regulatory confusion surrounding London's offshore market (the Eurodollar market was inside British legal and territorial boundaries but outside British banking regulation), the BoE continued to promote Euromarket trading ± and to keep it secret from US interests! Lord Cromer, governor of the Bank of England, declared in 1962 that the `time has come when the City once again might provide an international capital market where the foreigner cannot only borrow long-term capital . . . but will once again wish to place his long-term placement capital'.84 In 1963 the British merchant bank S. G. Warburg and Company issued the first Eurobond for a foreign entity (the Italian highway authority, Autostrade) in dollars.85 Because of the anonymity of the market, the avoidance of national regulations, and loose accounting standards, Autostrade had no problem finding investors. The City was making a strategic offensive against American dominance in the post-war financial order. British paranoia over the decline of sterling and the need to innovate to compete with US banks was warranted. Due to policies of national activism, US banks were already producing new financial instruments that the City had no experience with and that afforded US banks a competitive advantage. The most prominent example was Citibank's 1966 introduction of Certificates of Deposit (CDs), that offered investors a greater yield than US Treasury bonds, involved less paperwork than deposits in banks, and could be sold after a couple of months in secondary markets (as opposed to a year with most government securities).86 These instruments were emerging faster than regulators could come to grips with how they should be measured. Moreover, as Washington was encouraging the development of the Euromarkets with its policies of international passivity and national activism, the City was accordingly keen to gain advantage. In the new international capital markets the US and Britain had a clear advantage over Germany and Japan. As the following chapters demonstrate, the US and Britain would continue to form strategic alliances and to mount attacks against one another for the remainder of the century. Washington's official line of international passivity prevented intervention in the Euromarket other than a quiet word to BoE in the early 1960s. As described above, by the mid-1960s policies of national activism (the IET, VFCR, and the FDIP) encouraged US banks to expand abroad, including the Euromarkets. The Euromarket's benefits for

64 US Power in International Finance

American investors were great (as described above). The Euromarket's benefit for Washington was to allow the expansion of dollar-denominated assets in the international financial system without corresponding domestic adjustment. As Michael Webb explains, the Euromarkets also offered other states a means to adjust their financial positions in coordination with central banks: Commercial banks were sometimes encouraged to deposit funds in the Eurodollar market to reduce a country's balance-of-payments surplus, at other times to borrow funds to finance a balance-ofpayments deficit. European central banks also deposited a portion of their dollar holdings into the Eurodollar market. Central banks in surplus countries initially did not realize that investors would convert these dollars into surplus country currencies, thereby adding directly to the domestic money supply and inflation. High interest rates made Eurodollar deposits especially attractive to central banks seeking to export dollars to avoid currency appreciation or inflation. Thus, the emergence of large international capital flows in the form of Euromarket transaction can be traced directly to state decisions, which created incentives for private economic actors to increase their international financial transactions.87 Thus the Euromarkets provided states with a way to manage their financial position in cooperation with private intermediaries. At the same time, however, private intermediaries' unrestrained activities in Euromarket trading placed pressure upon states' financial positions. Importantly, the Euromarkets gave governments and private interests the means to hedge their bets on the value of the dollar ± to test the substantive validity of the dollar. The Euromarkets' flexibility was seductive to states and fed into competitive/cooperative relations with their private intermediaries. In this way a diffusion of power occurred that centered on the trade in dollar-denominated assets and helped extend US structural power in international finance. At the same time the authority who could insure the formal validity of the dollar had no claim over the Euromarkets, nor was responsible for what happened to them. As Fred Block wrote about the Euromarkets, `the central weakness of this new international capital market has been the absence of strong regulation . . . to provide a lender of the last resort should a crisis develop'. For Block the Euromarkets were a consequence of US domestic financial regulation, the controls on interest rate ceilings that added `immeasurably to the fragility of the world economy by elevating the

1960±68: From Orthodoxy to Heresy 65

shaky Eurodollar market to the role of dominant international capital market.'88 Washington's policies of national activism without corresponding international activism thus allowed an expansion of dollardenominated assets beyond their formal validity ± the fixed exchange rate of $35 dollar per ounce of gold. Surely, Washington's passivity towards the Euromarket demonstrated, at least in financial matters, a lack of hegemonic benevolence or self-sacrifice. But within neorealist and neoliberal perspectives of IPE, the 1960s are a classic era when the US acted as a hegemon to provide a regime of `embedded liberalism' for the greater good of the international community.89 The development of the Euromarkets is seen as an accident and even as the cost of upholding a liberal international order. Ethan B. Kapstein, for example, has written that the `Euromarkets were the ironic result of US policy to keep capital at home'.90 Ironic, perhaps, in their political origins, but not by trying to keep capital at home. Kapstein is over-zealous in appraising the aims of US policy, as are other neorealists. He attributes a continuity and linearity to US policies that cannot include the policy mix generated by the interactive embeddedness of Washington and Wall Street. The policies of international passivity and national activism that promoted the Euromarkets provide evidence of the collective power of Washington and Wall Street to influence the shape of international finance. Due to their `black boxing' of the state, neorealist and neoliberal perspectives ignore both the interactive embeddedness between Washington and Wall Street, as well as policies of international passivity and national activism vital to the emergence of the Euromarkets and the overseas expansion of US intermediaries. In doing so, neorealism and neoliberalism also discount the interplay between domestic and international realms and concentrate on the structure of the interstate system instead. During the 1960s the mixture of US foreign, domestic, and economic policies sought to externalize what would be internally harmful. As demonstrated in the following chapters, the advantages given to US interests as a consequence of greater international securities trading (which promoted direct financing) were great ± for Washington, Wall Street, and the American public. Neoliberalism and neorealism are unable to explain the interaction of microeconomic change with broader changes in the international political economy. Accordingly the US's use of the Bretton Woods system to increase the volume and use of dollar-denominated assets to extend structural power in international finance is viewed as a weakness. Such views focus on the formal validity of the dollar ± the exchange rate set at Bretton Woods. However, because of its structural power in international finance the US

66 US Power in International Finance

was able to stretch the formal validity of the dollar and wait for other states to question the dollar's substantive validity.

IOUs and the `exorbitant privilege' Towards the end of the 1960s, the perceived difference between the formal and substantive validity of the dollar increased as the political importance of credit creation for the US heightened to fund deficits in the current account and the Vietnam War effort. Due to the `n-1' problem, US gold stocks were difficult to measure in comparison with the amount of dollar-denominated assets in international circulation. Washington was counting on such difficulties and, as the development of Roosa bonds discussed earlier demonstrates, provided other states with alternatives to converting dollars for gold. For Washington the temptation to overextend the dollar's real convertibility was too great. By issuing dollars to national governments and into the international arena, the United States could effectively create IOUs behind the guise of formal convertibility ± what Charles de Gaulle referred to as the `exorbitant privilege'.91 The privilege was not only taken by Washington but also by Wall Street, which was able to `borrow short and lend long' in a manner that, in the words of Susan Strange, both `national interest and corporate interest could be reconciled'.92 Borrowing short and lending long also meant that US intermediaries could benefit from increased revenues from short-term debt trading while having capital to loan for long periods of time. Moreover, private intermediaries had no responsibility for the official value of the dollar as it was up to Washington to control the official price of gold. The `exorbitant privilege' thus allowed Washington and Wall Street to have the best of both worlds without great costs to themselves. As long as the dollar was mobile and available it was business as usual ± and business as usual meant no devaluation of the dollar. Washington was not prepared to import inflation to adjust the dollar to its real value. Simply put, the `n-1' problem meant that the US could `sit on the sidelines and watch as foreign central banks were forced to absorb huge quantities of dollars'.93 Business as usual, however, couldn't last forever. Suspicion over the impossibility of dollar-gold convertibility initiated `financial guerilla warfare against the dollar' that, in turn, encouraged the growth of money and capital markets for more accessible and faster trading.94 It also affected the value of other currencies pegged against the dollar. Monetary pressures upon European states forced a break away from the cooperative behavior that allowed currency convertibility in 1958,

1960±68: From Orthodoxy to Heresy 67

as neither France nor Germany contacted their European trading partners or the IMF before adjusting their currencies during the late 1960s. Britain was forced to devalue sterling and, embarrassingly, arrange stand-by loans from the BIS of $3.5 billion. The BIS also provided temporary funds ($1.5 billion) to the French for their 1967 devaluation of 11 per cent. Furthermore, the German government allowed the deutschmark to float and appreciate nine per cent.95 In all cases the currency revaluations were viewed as a consequence of the US's `exorbitant privilege' and its perceived inability to adjust the value of the dollar. During these monetary troubles, Washington continued to encourage US business leaders to participate in the expansion of Euromarkets, and US banks' share of Euromarkets assets increased as the markets continued to grow. The percentage of external liabilities represented by Eurocurrency assets of US banks operating in Britain grew from 23 per cent in 1963 to 43 per cent in 1968 to 49 per cent to 1969. During these same years the Eurocurrency market in London grew at 25 per cent, 50 per cent and 75 per cent respectively.96 The consequent increase in international capital mobility showed a quantum leap from Keynes and White's post-war ideals of nationally controlled flows of productive capital. The new orthodoxy of capital controls was forsaken and the `heresy' of large private flows of capital returned. The two parties that had once agreed on the fundamental virtues of capital controls, the US and Britain, now placed a great deal of emphasis upon the operations of private interests to manage finance. Both the Fed and the BoE supported the increased trade in debt securities and encouraged their private intermediaries to increase their market share. The City of London invested heavily overseas in the hope that it would rejuvenate the supremacy of sterling.97 However, sterling's power had waned and when coupled with macroeconomic difficulties (described in the previous section), British bankers were pressured to deal in dollars. The City was also under pressure to provide various regulatory and tax concessions to compete with Wall Street (whose practitioners, as stated, campaigned for limited capital controls to compete with the City of London).98 US power in international finance was clear before World War II but had not been diffused throughout the international political economy. Due to the Bretton Woods system and policies of international passivity and national activism, US structural power in international finance was extended. Wall Street ± not the City ± was the source of financial innovation, even when it came to Euromarket trading. Michael Moran, for example, argues that the Euromarket operations helped the City became `a laboratory for American financial innovations',

68 US Power in International Finance

including the promotion of direct financing.99 With the assistance of US intermediaries to expand the base of credit, London was used as an offshore base to assist the US's `unique ability. . . to avoid international market consequences of domestic policy choices'.100 The `tracks' laid down during the 1960s to switch finance to a `new gauge' represented a diffusion of power, not a loss of power, and would help the US promote direct financing in decades to come. The 1960s thus represented a starting point for this diffusion built upon the interactive embeddedness of Washington and Wall Street. This diffusion of power through the dollar, internationally through credit expansion and domestically through new avenues for consumer finance and financial innovation, extended US structural power in international finance. It increased US power in the international political economy. This view contrasts with the neoliberal and neorealist view of the 1960s. These perspectives measure power in resources and are unable to view seemingly contradictory policies from a state. Moreover, a diffusion of power is seen as a loss of power. From this view, the more power is concentrated within a state, the more it is able to adapt to change. The state with the most power (the most resources) in the international political economy is able to structure the international order. For example, Robert Keohane's study of monetary regimes in the post-war period is correct in asserting that a `fragmentation of power between competing countries leads to fragmentation of the international economic regime'. This much is obvious. However, this leads Keohane to conclude that the `concentration of power leads to stability'.101 Keohane sees the United States as the world's leading financial power in the 1950s and 1960s, but that in the `longer run the hegemonic leadership strategy was self-liquidating; rather than perpetuate the conditions of its success, it permitted their demise.'102 Rather than produce `self-liquidating' behavior, Washington and Wall Street added liquidity to the international financial system that afforded them in the 1960s the `exorbitant privilege'. As evidence of US hegemonic decline, Keohane cites a drop in the US monetary reserves relative to Britain, Japan, Germany, and France (the G-5). From 1960 to 1970 the US share of G-5 monetary reserves dropped from 56 per cent to 39 per cent. By 1975 the figure had dropped to 21 per cent. In contrast, Germany increased its monetary reserves from 21 per cent in 1960 to 27 per cent in 1970 to 40 per cent in 1975. Likewise, Japan increased its monetary reserves from six per cent in 1960 to 13 per cent in 1970 to 16 per cent in 1975.103 Keohane accompanies these figures with the following explanation:

1960±68: From Orthodoxy to Heresy 69

[R]eserves are not necessarily an indication of a country's net position. Measures of the U.S. net liquidity position, however, would also show a sharp decline. The figures on economic resources provide prima facie evidence of the hegemonic stability thesis . . . U.S. financial resources in the form of reserves fell sharply, reflecting the shift from U.S. dominance in 1960 to struggles over exchange rates of the 1970s. In view of the continued ability of the United States to finance its deficits with newly printed dollars and treasury bills rather than with reserves, . . . [these figures] should not be overinterpreted: it does not mean that Germany was `twice as powerful as the United States' in the monetary area by 1975. Yet it does, as indicated above, signal a very strong shift in the resource situation of the United States.104 Yes, the decline in reserves does represent a loss of resources but not a loss of power ± and this is to say nothing of the US's need for reserves to facilitate trade when compared to Germany and Japan. The dollar was the numeraire. Keohane focuses upon formal monetary relationships rather than the context within which credit was extended in the 1960s. Furthermore, as Duncan Snidal comments, assertions such as the above `are nothing more than simple comparative statistics' and do not constitute a theory of hegemonic decline.105 Although Keohane concedes the above is a crude measure, this does not deter him from using it to support his argument about US hegemonic decline: Any strategy that is viable in the long term has to re-create the conditions for its own existence. If the strategy requires maintenance of national strength, following the strategy must generate strength, or the strategy will eventually collapse. Any hegemonic leadership strategy, therefore, must seek to maintain the national base of resource upon which governmental influence, and leadership, rest. Over the whole postwar period, U.S. policy has failed to assure this condition for long-term success.106 Keohane defines power as `as a fungible set of tangible economic resources that can be used for a variety of purposes in world politics', but falls short of recognizing how the fungibility of power has been diffused through the collective power of Washington and Wall Street.107 Moreover, Keohane specifies that resources must be maintained as they are the measure of power. The expansion of credit-money is not understood as a resource that carries power for the US, even if US is narrowly

70 US Power in International Finance

defined as Washington. Similarly, Keohane's test of hegemonic decline focuses upon the formal rationality of monetary and financial relations and does not `flesh-out' how the US was able to extend structural power in international finance. What is clear is that the post-WWII period offered the US a unique chance to transform the international financial system to its interests and to its domestic need for politico-economic stability. During the 1960s Washington and Wall Street were able to establish the foundations upon which direct financing could be promoted for their mutual benefit. Indeed, according to Charles Kindleberger, the accrual of US deficits in the 1960s and the expansion of credit should be seen as `an example of efficient financial intermediation performed by New York rather than the cause of post-war international monetary instability'.108 As I will show, Wall Street's role in the collapse of Bretton Woods demonstrated its competitive/cooperative relationship with Washington and the extension of US structural power in international finance.

4

1969±81: The Privileges of Uncertainty

We had a problem and we're sharing it with the world ± just like we shared our prosperity. That's what friends are for John Connally1 If the `tracks' for direct financing were laid in the 1960s, the train was set in motion between 1969 and 1981. To push the analogy further, after putting in place changes to the international financial and monetary system that promoted both Washington and Wall Street, the direct financing locomotive travelled onward dragging other states behind it.2 As a consequence of `super-exorbitant' privileges, US capacity to play the international and domestic realms against each other increased, as did its structural power. The decade was characterized by expanding financial markets, monetary instability, and greater international capital mobility as, in the words of Benjamin J. Cohen, `microeconomic commercial interests . . . [became] irrevocably intertwined with national and international macroeconomic issues'.3 The most important change in the relationship between microeconomic interest and macroeconomic issues was the expansion of private capital. Before the collapse of Bretton Woods the major advanced industrialized states exported equal proportions of private and public long-term capital. By the mid-1970s private funds outweighed public funds by a ratio of 2:1.4 With the aid of direct financing, the mass privatization of dollardenominated assets initiated in the 1960s accelerated. As Jonathan Aronson states, the collapse of the Bretton Woods system `turned the treasurer's office into a profit centre for many corporations'.5 Indeed, the decline of Bretton Woods can be seen as an example of the efficiency of Wall Street in reforming its financial intermediation to adapt to changing macroeconomic conditions and to extend US 71

72 US Power in International Finance

structural power in international finance. Direct financing expanded rapidly under a new system of floating exchange rates, continuing dollar supremacy, and greater US prominence in international banking. Furthermore, Washington encouraged financial liberalization as a way forward for the US's major trading partners, leading the way by partially deregulating itself. Drawing from the unique depth of its domestic financial markets, finance within the US became much more reliant upon short-term debt securities and short-term profits. This transition gave US intermediaries a competitive advantage in international finance and compelled Britain, Japan, and Germany to follow suit. For most IPE scholars, the collapse of Bretton Woods signifies the decline of US hegemony and points to its inability to persuade `others to follow a given course of action which might not be in the follower's short run interest'.6 In this chapter I argue that the collapse of Bretton Woods did not induce or represent US hegemonic decline. The US demonstrated its ability to persuade others through its private financial intermediaries, rather than in response to calls for the formation of international regimes. For those calling for regimes, the aim was to internalize negative externalities in the international financial and monetary systems. States were concerned about the volatility of capital as the volume of cross-border financial transactions had grown at approximately 20 per cent per annum throughout the 1960s.7 During the 1970s, advanced industrialized states suffered massive swings in their current accounts as crises, inflation and sluggish domestic growth (known as `stagflation') hampered macroeconomic stability.8 Towards the end of the decade, stagflation led the Fed to impose the highest interest rates since the Second World War (13 per cent).9 Furthermore, sluggish domestic growth led intermediaries to place greater emphasis upon revenues gained from their international operations. Macroeconomic stability was a priority for the US's trading partners who, in the absence of US led change, called for change by multilateral means. In the early 1970s what was most important to the US's trading partners was stripping the dollar of its numeraire status and replacing it with a new monetary standard, such as the IMF's Special Drawing Rights. Calls for the formation of such a new international finance and monetary regime were supported by Japan and Germany, but not by Britain. The US rejected them outright, arguing that the market should be allowed the fall back into equilibrium. International cooperation in finance also aimed to guide the massive expansion of credit that emerged with the `recycling' of petrodollars from the first oil crisis of 1973±74. Rather than intergovernmental support, the `recycling' was

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handled by private financial intermediaries at the US's bequest. Similarly, bank failures in 1974 prompted calls for a regime to regulate international banking through the BIS. The petrodollars emerging from the OPEC crisis provided international banks with an enormous pool of funds that could be used to increase loans and the amount of securities trading in the Euromarkets.10 Great opportunities for profit emerged, accompanied by great risks. With the mass-privatization of credit and increased securities trading, banks felt pressure to compete and moved further away from their traditional roles in two directions. The first was to become more involved in direct financing and to encourage financial innovations. The second was to put as much of their capital as possible to work. With the use of funds from the Euromarkets, banks lowered their standards on creditworthiness and increased the amount of capital they were prepared to lend, which led to `overlending'. Developing states borrowed heavily, as did industrialized states supplementing current account problems caused by the OPEC crisis. Banks' capital adequacy (the capital they held as a buffer for emergencies) declined dramatically. The setting upon which the Debt Crisis would unfold was thus established. I have four points to make in this chapter: (i) that the collapse of Bretton Woods and the US failure to support a fairer monetary regime thereafter reflects the interactive embeddedness between Washington and Wall Street. Indeed, the speculation surrounding the dollar supported the promotion of direct financing and US structural power in international finance; (ii) that calls for a regime to handle the petrodollars that emerged after the first oil crisis were rejected to support US structural power and the promotion of direct financing; (iii) that during, and partially as a consequence of, `stagflation' US international banking rose to absolute prominence, promoting direct financing and altering international finance regimes; and (iv) that regulatory twists in the late 1970s created policies of international passivity and national activism, particularly in the US's changing relationship with the Euromarkets. This resulted in the emergence of domestic financial innovations and the greater socialization of direct financing.

The privileges of uncertainty From 1969±71, uncertainty surrounding the dollar impelled financial intermediaries to increase securities trading in the Euromarkets and create what became known as the `Eurodollar slop' ± a slush fund of capital which was arbitrated between the official and private reserves of

74 US Power in International Finance

different states and banks. The `slop' was created by the volume of credit accumulated during the massive expansion of international banking and by the US's `exorbitant privilege'. As Susan Strange explains, financial intermediaries that Washington encouraged to go abroad during the mid-1960s generated the `slop', as: the large and ever-expanding pool of expatriate credit funds which, though free to move around the globe, tended mostly to slosh back and forth across the Atlantic. This was partly because the major dealers in the market were the foreign branches of American banks, and their parent banks in the United States could easily raise or lower their total liabilities to them. Clearly, the Eurodollar slop made it increasingly difficult for the United States both to manage its domestic economy, whether by promoting growth or restraining inflation, and, at the same time, to avoid sudden explosive increases in its external deficit.11 Arbitrage in foreign exchange markets became a necessity as governments, banks and corporations became increasingly skeptical of the US dollar's ability to represent the official gold price at Bretton Woods, or the free market price the US had endorsed. In March 1968, there was a `credit crunch' within the US which led banks to circumvent the restrictions by drawing from Eurodollar markets.12 As a consequence, US banks' liabilities to foreign branches rose from $6.9 billion to $14.3 billion between 1968 and 1969, then fell back to $10.5 billion in 1970 after Washington implemented initiatives to keep the dollar at home.13 Foreign affiliates began to expand their business via direct financing techniques, primarily through raising funds from debt instruments issued on the US domestic market, but also by using foreign markets and the Euromarkets. Much of the borrowed capital was used within the US, expanding the supply of credit-money in the US domestic market. In order to compete with the Euromarkets, the Fed would have to remove interest rate ceilings on CDs, one of its primary controls to prevent credit expansion in the US economy and a devaluation of the dollar.14 Meanwhile, during what would become known as the `all-outwar on the American dollar', US banks used the Euromarkets as a means of diversifying risk and further added to the volume of dollar-denominated assets in circulation. The use of the Euromarkets in this way delayed the `collapse of Bretton Woods'.15 Before the collapse, speculative activity on the dollar allowed Nixon time to find means to ease inflation without making any direct govern-

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75

ment intervention in international financial markets.16 Wall Street's part in speculation surrounding the dollar between 1969 and 1971 focused upon short-term profits derived from foreign currency trading.17 Many banks also became interested in the profits that could be derived from trading in the Eurobond market. The interest in managing securities accelerated the process of direct financing as the Euromarkets facilitated the short-term trading of debt securities to finance day-to-day business operations.18 The uncertainty created by speculation also afforded the US time to smooth domestic troubles and force adjustment onto Japan and Germany, who feared a revaluation of their currencies. For example, in April±May 1969 the Bundesbank was forced to intervene in foreign exchange markets by purchasing $4.4 billion within ten days to stop the deutschmark appreciating under continued currency speculation.19 Nevertheless, the deutschmark was floated in 1970 and valued upwards. Uncertainty over the dollar's status furthered speculative activity on the deutschmark to the extent that German authorities curbed speculation on foreign exchange markets by prohibiting all international telephone calls!20 In Britain the BoE introduced Competition and Credit Controls that led, inadvertently, to further speculation and credit-expansion.21 Currency speculation was a politically charged issue and all states sought to hedge their bets. Wall Street sought financial innovations to facilitate risk diversification and trading revenues. Indeed, in 1971 the widespread introduction of futures trading on foreign currencies allowed banks to buy and sell currencies, in the words of Charles Geisst, as freely as `soybeans and live hogs'.22 As seen in Figure 4.1, the lure of Euromarket interest rates beat any competition the Fed could provide, especially as US domestic rates needed to remain stable for Nixon's re-election chances. A November 1971 reduction in reserve requirements on US domestic banks heightened capital outflow, as it effectively allowed new banks to start exporting capital.23 As a consequence, foreign exchange activity forced Germany's reserves to balloon out to nearly double the size of the previous year. The Fed pushed dollar-denominated assets onto the Bundesbank and the BoJ, despite their reluctance to purchase these overvalued securities. During the early 1970s, and most prominently in the third quarter of 1971, the Fed placed extreme pressure upon its allies to keep taking dollars to prevent US domestic inflation.24 Washington's refusal to officially adjust the dollar's fixed value, whilst hindering internal adjustment by US banks through domestic restrictions on the foreign lending of dollars and interest rate ceilings, forced macroeconomic constraints upon its allies through a policy of `benign neglect'.25

76 US Power in International Finance 3-month Eurodollar Prime commercial paper German 3-month deposit rates

10 9

Official discount rate 3-month Treasury Bills

8 7 6 5 4 3 IV

1970

II

III

IV

1971

II

III

IV

1972

Source: BIS, Forty-Second Annual Report, April 1 1971±March 31 1972: 43.

Figure 4.1 Short-term interest rates during currency crisis, 1970±72

It also provides a clear example of international passivity and national activism. Uncertainty caused by Washington's `benign neglect' promoted direct financing as `short-term flows of private capital, undertaken to profit from interest differentials or as hedges against currency fluctuations, help to promote the very thing they seek protection from: speculative pressures on currency parities'.26 Many US banks prospered by exploiting the opportunities for profits in the short-term debt market, demonstrating the efficiency with which Wall Street could handle the collapse of Bretton Woods. Of course Wall Street's aims were not commensurate with Washington's need for political (and electoral) stability. Consequent to the `all-out-war on the American dollar', Wall Street called for further deregulation on interest rate ceilings to allow markets to equilibrate. They were successful in raising Washington's attention through the 1971 President's Commission on Financial Structure and Regulation.27 However, Washington was not yet prepared to release all controls. No action would be taken on interest rate ceilings until 1980, although general capital controls were removed in 1974. Different sectors of the financial community and financial regulators disagreed bitterly over the necessity of financial reform. While wholesale financial deregulation was not embraced, financial innovations were. A number of these innovations emerged to relieve liquidity problems suffered by financial intermediaries. At the local level, mortgage-backed securities (backed by conventional loans) were introduced by the Federal Home Loan Mortgage Corporation and were quickly accepted by

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the market.28 These securities provided mortgage-lenders a means of shifting assets off their books. It also provided a means for banks to shift capital while attracting funds without breaking interest rates ceilings imposed by Regulation Q. Furthermore, to promote direct financing at a more personal level, Washington instituted investor protection measures through the Securities Investors Protection Corporation (SIPC). This provided for investors' losses that were held with SIPC member firms.29 At the international level, in January 1971 the Fed offered the foreign branches of US banks three-month US Treasury bills at six per cent through the Export±Import Bank. These bills provided an alternative to the Eurocurrency markets as a means to maintain funds. This offer was lucrative, risk free, and successful, leading the Export±Import Bank to issue another $500 million at five per cent the following month.30 In June the same year, Washington coordinated with the Bundesbank to issue up to $5 billion of Treasury securities, this time in notes.31 By the end of June over $3 billion in US Treasury securities (bills and notes) had been issued to foreign branches of US banks, capital that would have otherwise moved into official reserves.32 Washington was thus able to externalize its monetary problems with further promises to pay. It was not, however, all smooth sailing. In April 1971, the Bundesbank refused to continue to buy dollars in the forward market.33 During March 1971, France demanded $282 million of gold for its dollars on the grounds it needed to pay IMF debts. De Gaulle's `run on banks' to get some gold before the `big bust' was echoed in Switzerland (which asked for $75 million), the Netherlands ($55 million) and Belgium ($80 million).34 Germany hesitantly asked for some gold but later retracted its request. On May 14 1971 the US Federal Treasury revealed that it only had $10 billion of gold at the official rate, and $18.5 billion of hard currency.35 Bretton Woods officially ended with the August 15 1971 decision to halt the exchange of dollars for gold at $35 per ounce. The use of short-term liabilities in relation to gold holdings successfully allowed the US to buy time and transfer the burden of its financing to its allies. The gold component of official reserve holdings did not significantly expand despite increases in dollar claims in Britain, Japan, and Germany. Fort Knox's gold holdings were hopelessly inadequate compared to the amount of dollars in international circulation. The international expansion of US banks in the late 1960s increased the volume of dollars in circulation, as represented by the `Eurodollar slop'. However, as indicated, Washington continued to support the international expansion of US banks and provided profitable incentives

78 US Power in International Finance

to do so. Washington's `benign neglect' complemented Wall Street's empire building. Moreover, Washington and Wall Street were able to perpetuate this relationship and continue to `tax' the US's major trading partners. They were also able to extend US structural power in international finance and negate the formation of an effective international regime to implement capital controls.

`That's what friends are for' Washington's and Wall Street's power in international finance postBretton Woods era did not reflect a decline in the US hegemonic power as neoliberals and neorealists suggest.36 Robert O. Keohane argues that during the 1960s and early 1970s, the US's `hegemonic leadership strategy [in international finance] was self-liquidating; rather than perpetuate the conditions of its success, it permitted their demise.'37 From Keohane's understanding, Washington compromised its own interests during the 1960s to facilitate `principles of multilateralism and unfettered capital flows' and to continue the liberal ideal of `shared interests in the efficiency and welfare benefits of international economic exchange'.38 The collapse of Bretton Woods thus reflects the inability of the US to continue providing an international public good. Similarly, the expansion of credit from Wall Street's domestic and international operations assisted US hegemonic decline. Keohane's account of `selfliquidating' behavior makes two assumptions. The first is that Bretton Woods was able to internalize negative externalities through international cooperation under the guiding hand of the US. Indeed, the collapse of Bretton Woods was, at least in part, due to the inability of Washington to convince other states directly, notably Germany and Japan, to revalue their currencies to support the regime. Keohane's lament continues by arguing that as a consequence of this inability, the United States was forced to used short-term measures to defend the dollar, despite a long-term `equally powerful desire to maintain the essential principles of liberalism.'39 This leads to the second assumption: that the US maintained a fixed exchange rate system to assist other states to export competitively.40 Benjamin J. Cohen argues that while `the Europeans acquiesced in a system which accorded the United States special interests to act abroad unilaterally to promote US interests', the system allowed European states to prosper `largely at the expense of the United States.'41 Of course there is some truth to this, but the flip-side of enhanced export competitiveness for European states was a US domestic political economy that would not adjust the official fixed exchange rate.

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During the 1960s and until the closing of the gold window, the US used Bretton Woods to create positive externalities for Washington and Wall Street. A stable dollar-gold price in official and private markets only lasted during the late 1950s and early 1960s until the two-tier system of 1968 and the rapid emergence of the Euromarkets.42 As Michael Webb's work demonstrates, the Bretton Woods regime was not independent of US interests, but the US's trading partners were.43 As Webb argues, hegemon decline in a later period is more easily proven if the powers of the hegemon in an earlier period are inflated. Keohane views the collapse of Bretton Woods as a consequence of the US's inability to continue to act as a hegemon. However, in assessing the capabilities of the state, Keohane looks only at what Washington declared or asked other states to do in its interest. The decline in state power is viewed as a decline in the ability of Washington to act by itself. This view of power, as discussed in Chapter 2, is related to the balance of power model that is prominent in popular perspectives of IPE. Because the state is `black-boxed' the competitive/cooperative relationship between Washington and Wall Street that generates US structural power in international finance is obscured. Consequently the failure of the US to deliver on its promises at Bretton Woods, to substantiate the validity of dollar-denominated credit in international circulation, is viewed as a lack of political clout and, above all, a lack of resources. Because market actors are obscured, Keohane accounts for the collapse of Bretton Woods as hegemonic decline rather than seeing it as Kindleberger does ± an example of efficient Wall Street-based financial intermediation and political decisiveness by Washington for US interests.44 The US used its structural power to extend its privileges during and after the collapse of Bretton Woods. This conflicts with Keohane's view that the US suffered `the disease of the strong' by providing a favorable environment for the international political economy while not being able to adapt to change itself.45 In IPE discussions on the collapse of Bretton Woods, there is a portrayal of the US as a well-meaning fieldmarshal who jumps on a grenade to save his troops but in doing so loses command of the battle. This view can be traced back to the view of power and the association of a hegemon with the establishment of a benevolent international order. The work of neorealist Stephen Krasner provides an example. Krasner argues that the Nixon decision to collapse Bretton Woods signified the decline of US hegemony and he questions how the US could sacrifice international stability and confidence in the dollar when the `size of the American economy assured a capital market in which large transactions could

80 US Power in International Finance

be made without affecting interest rates'.46 Krasner's question reflects the popular view of power in IPE ± that power is linked to the command of resources within the economy. Thus Krasner's dilemma is: if the US had the ability to keep Bretton Woods running along, then why was it not willing?47 The distinction between ability and willingness denotes not only government attitudes to other states but also the political and economic considerations of private interests within a state. Before the collapse of Bretton Woods, there were no means to force the US to maintain the formal validity of the exchange rate, allowing it to continue its exorbitant privilege. The US managed to collapse Bretton Woods without real significant cost to itself because of its structural power in international finance. Krasner's perspective is unable to recognize the need to view power beyond resources and beyond executive politics within a state. Again, the international passivity and national activism of US foreign and economic policies is ignored in favor of a `black box' view of the state. Accordingly, Krasner asserts that the insecurity displayed by the Nixon decision signalled the end of US financial hegemony, as a hegemon has the ability to sacrifice short-term interests in favor of long-term political and economic objectives. Krasner is correct in that Nixon's goals had limited political horizons which reflected domestic concerns, international trade concerns, and congressional advocacy of devaluing and floating the dollar.48 But Krasner ignores the US's structural power in international finance, which allowed Nixon to behave so boldly. While he states that hegemons establish `regimes that are congruent rather than dynamically stable', his perspective of the collapse of Bretton Woods does not include discussion of how a state may use a regime as an extension of its own structural power.49 Again this points to a recurring pattern: the US uses regimes not to internalize negative externalities, but to produce positive externalities for US interests. The relationship between private finance and political strategy reflects the interactive embeddedness of Washington and Wall Street and their capacity to generate US structural power in international finance. If the `run-up' to the collapse of Bretton Woods demonstrated US `benign neglect', then the policies immediately following the `Nixon Shock' presented `malign neglect'. The administration imposed a 90± day wage, rent and price freeze, and cuts in government spending. Washington also targeted Britain, Germany, and Japan. Nixon's most drastic declaration was the imposition of an import surcharge onto half of the $2 billion of goods imported in the US. Coupled with the closing of the gold window and the freezing of swap networks between

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81

central banks and the Fed, the US's major trading partners were not impressed.50 The US, according to Robert Keohane was no more willing `to play a responsible, constrained international role than it had been during the six years before the destruction of the Bretton Woods regime.'51 As discussed in the previous chapter, policies of international passivity and national activism promoted the expansion of dollardenominated credit in international finance during the mid-to-late 1960s. In financial matters Washington and Wall Street had not been constrained. What had changed was the need for Washington temporarily to negotiate with its trading partners on monetary and financial matters rather than maintaining its normal passivity towards the international arena. In the discussions that followed the collapse of Bretton Woods, US Secretary of the Treasury John Connally's view was that `We had a problem and we're sharing it with the world ± just like we shared our prosperity. That's what friends are for'.52 Through international cooperation, the US's trading partners needed to find ways to adjust their currencies now that the option of gold convertibility had officially been terminated. In September 1971, the Group of Ten heard a brash series of demands from Connally, whose primary concern was to balance the US's external deficit. In order to do so, the other G-10 members would have to realign their currencies. Again, the impetus to adjust was upon the US's trading partners, not the US by itself. The new regime was to be agreed to by the G-10 at Washington's Smithsonian Institute in December 1971. The US held the most bargaining chips from the start: the G-10 only agreed to a realignment of fixed exchange rates on the provision that Nixon's import surcharge would be removed. The request was granted although it did not represent much of a concession. The surcharge had only ever been a short-term measure to help with the balance of payments and to add credibility to Connally's declaration that no longer would the US trade `with one hand tied behind its back.'53 (The bound hand was the `n-1 problem' discussed in the previous chapter.) Whilst Washington used the suspension of convertibility as a means to protect itself from the increasing difficulty of balance-of-payments financing, international monetary cooperation was deemed by all to be the way forward. As Connally's own hilarious description of the negotiations illustrate, policy rhetoric about international cooperation did not reflect political realities: In the Rome meeting when I suggested the possibility, not necessarily offered it, when I merely suggested the possibility of a ten per cent

82 US Power in International Finance

devaluation, there was stunned silence for 40 minutes by the clock. Not a word was said in an entire room full of people. Not a word. Finally one of the ministers spoke up and said that is totally unacceptable; we can't agree to that; 5 per cent would be the most we would be willing to accept . . . So then we went from there to where we finally wound up at the Smithsonian at 8.57 per cent.54 Thus, the dollar was devalued by 8.57 per cent and the official gold price increased to $42.22 an ounce.55 Other states' currencies appreciated, most notably the yen (up 16.88 per cent) and the deutschmark (up 13.58 per cent).56 The exchange rates set at the `Smithsonian Agreement' (as it became known) collapsed within 15 months as states were forced to float their currencies in order to retain macroeconomic control. They eventually abandoned fixed exchange rates in 1973. Interestingly, during the Smithsonian negotiations Germany asked the US to retain its existing capital controls so that the new exchange values would be not be interrupted by `liquid capital'.57 The request was granted as the Fed was encouraging other central banks to curb speculative activity in order to support the stability of the revalued dollar.58 That the Germans requested this as a concession is important. It illustrates that the activities of Wall Street imposed macroeconomic constraints on foreign governments, including its use of the Euromarkets. In April 1971 the governors of Europe's central banks met at Basle to discuss the relationship between the Euromarkets and its adverse effects on their macroeconomic autonomy.59 They agreed that not reinvesting in their own dollar holdings would add stability to the international finance and monetary system and reduce the credit-creating powers of the Eurodollar market.60 However, the agreement was difficult to implement, as the once authentic division between official and private credit creation (and reserves) became blurred with the expansion of direct financing through the Euromarkets and intrabank activity. During the month of the agreement, central banks were the principal sources of funds into the Euromarkets, as US interest rates did not provide competition.61 With the threat of inflation, all investors wanted to ensure that their returns would compensate for any rise in interest rates or any devaluation in the dollar. Investors were right to be worried. As funds shifted between official reserves and private banks, dollar-denominated assets re-appeared as new currency reserves. Thus, dollar-denominated credit was created without an external constraint to the US domestic money supply.62 The G-10 also considered restricting private European banks' involvement with the Euromarkets, as simply halting central

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banks Euromarket trading would prove ineffectual if private intermediaries were not compelled to follow suit.63 European banks used the Euromarkets to compete with US banks in providing capital and credit in times of continuing politico-economic uncertainty, and to benefit from the flexibility of securities trading. Through direct financing in the Euromarkets, European states were tempted to follow the US's lead and `massage' dollar-denominated assets. The large rift between the private worth of the dollar and its official worth also allowed European banks to make some short-term profits from Euromarkets and interbank trading. The difference between real dollar assets and traded Eurodollars became known as the `Euro-gap' and troubled the working definition of official and private reserves.64 The ongoing expansion in private assets added to international liquidity and afforded those with creditcreating powers (to access or create liquid assets) greater flexibility in a tough economic climate.65 Accordingly, the Euromarkets presented states and markets with more choice, even though the consequent expansion in liquid assets did not create more order. The call from the G-10 to stop trading within Euromarkets did not halt the privatization of international liquidity provision, or, by virtue of the means to play this role, the process of direct financing. The G-10 could not address the fact that the Euromarkets offered higher returns than domestic markets and banks, and provided `no questions asked' credit from private intermediaries. Private actors rather than intergovernmental ones had gained the power to finance not only corporate activities, but also greatly influence balance of payments financing. Only the US's unique domestic financial markets afforded Washington the ability to externalize its problems, and only US international intermediaries could draw benefits from the dollar's numeraire status and from the uncertainty over the dollar's value. The US alone held this state capacity to play the domestic and international arenas against one another. It generated US structural power in international finance and relied upon the interactive embeddedness of Washington and Wall Street. Increasingly, it also relied upon embedding finance into American society.

Disequilibrium and petrodollars In 1972, European states met to clarify banking regulations within the region. The focus of the meeting was to outline the precise responsibilities of banks under a new era of floating exchange rates. Capital mobility following the collapse of Bretton Woods had already thrown Britain out of the currency bands set at the Smithsonian Institute, and raised

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concern over the responsibilities of the City of London to foreign banks within its financial system. European states called for a new international finance regime through the IMF's technical group, the C-20, to institute capital controls to `cool down' international finance. Like Keynes' proposal for the ICU and the bancor during the formation of Bretton Woods, this proposal centered upon a centrally administered system that would run not on an established currency but a medium of exchange independent of any state's treasury. The proposal also railed against the use of direct financing in short-term debt securities market to manage states' macroeconomic positions. As the formation of such a regime would restrict the privileges of the dollar, it would impair the extension of US structural power in international finance. Accordingly, Washington and Wall Street opposed it. The events that led to the decision not to implement capital controls and change the numeraire currency are interesting, especially when taking into account the structural power of the US in international finance, and US treatment of international regimes that do not support its interests in a time of supposed hegemonic decline. One important objective of the committee was the need to deal with `disequilibriating flows' of capital, which disturbed exchange rates and toyed with `stop±go' inflationary pressures.66 As with the Bretton Woods Agreement, Wall Street lobbied Washington and US officials argued against any action to rectify `disequilibriating flows' other than a new agreement on exchange rates. Indeed (and make note of this), Washington even objected to the use of the term `disequilibriating'. Instead, it appealed to the logic that if such flows occurred in response to varying interest rates and inflation rates, then they were restoring market equilibrium.67 Like Wall Street's opposition to a `Hitlerian monetary system' in the construction of the post-war monetary and financial, capital controls were viewed as detrimental to investors' rights to determine where their capital was invested, and their accompanying right to discipline governments pursuing wayward fiscal strategies. Wall Street lobbied Washington on the basis of home advantage. It was obvious to all that other states could not replicate the depth of US financial markets, nor the advantages of numeraire status attributed to the dollar. As movements in the flows of European and Asian currencies had dramatic macroeconomic consequences, the need to finance `disequilibriating' flows of capital commonly depended upon the sale or purchase of Eurodollars. This in turn generated ongoing interest in the maintenance of the Eurodollar market and also the use of US private intermediaries' `know how' in dealing within these markets. Further-

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more, there was now no threat of converting dollars in circulation into gold, and to a greater extent than its trading partners the US was able to externalize monetary problems. Through the competitive/cooperative relationship between Washington and Wall Street, the US could externalize its monetary problems while protecting its internal financial system. The consequences of the 1972±73 monetary negotiations turned out well for the direct financing process, and for the interests of US international banks, as the dollar's numeraire status was extended, albeit in a different format. What did result from the 1972±73 agreements was the legalization of floating exchange rates under the IMF's Articles of Agreement ± an inevitable decision secured by Nixon's devaluation of the dollar (to better their terms of trade) in February 1973.68 At the 1973 negotiations, the C-20 planned to replace the dollar with the IMF's Special Drawing Rights (SDRs) as `principal reserve asset', and thus increase the responsibility of the IMF for the provision of international liquidity.69 SDRs offered a reserve currency that gave no direct privilege to any state and could thus provide an intergovernmental regime that would instil a more equitable fixed exchange rate system. However, like capital controls, the suggestion to increase the usage of SDRs was abandoned for a floating system of exchange rates based upon a `paper dollar' standard. Such an international monetary system allowed market forces to push currency values into equilibrium without the inhibition of a fixed asset such as gold. By installing a floating exchange rate, the US effectively trumped the C-20's plan for the SDR and increased its trading partners' dependence upon the dollar. Due to foreign exchange needs and particularly the management of short-term monies, floating exchange rates encouraged direct financing. States had already started to introduce financial innovations to cope with uncertainty. Japan, for example, introduced `Samurai' bonds in 1971 to fund the government through the turbulence of Bretton Woods' collapse. To further these bonds' ability to add to government coffers it listed Samurai bonds on the Tokyo Stock Exchange (TSE) in 1973 ± a radical change in Japanese financing arrangements that gave greater power to private intermediaries.70 The change in the international financial system was clear: states would simply have to adjust to the new framework of international finance through direct financing, the majority of which was conducted through dollar-denominated assets.71 In addition to this major change another event in 1973 accelerated direct financing and added to the US's structural power in international finance: the OPEC oil crisis.

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The financial management of the first oil crisis was the most dramatic event to cement US structural power in international finance during the 1970s and to confirm the interactive embeddedness between Washington and Wall Street. The 1973±74 oil embargo imposed by the OPEC quadrupled world oil prices and dramatically increased the number of dollardenominated assets in the Euromarkets ± adding to the effects of the early 1970s `dollar overhang'.72 States such as Saudi Arabia and Kuwait became cash wealthy virtually overnight as OPEC's revenue increased from $23 billion in 1973 to more than $90 billion in 1974 (compared with approximately $140 billion in total reserves for all non-oil states in 1973).73 As OPEC states had an investable surplus that they could not reasonably spend on their own populations without macroeconomic upheaval, they required alternative avenues of investment. Proposed uses for OPEC's petrodollars centered on funding for developing states. (Similar calls would be repeated in the 1980s as bureaucrats and scholars alike pushed for Japan to use its surplus capital to assert itself as a `civilian power'.) With the capital accumulated from the oil crisis, OPEC states could have fuelled Third World development and asserted themselves as `civilian powers'. But this did not occur. The most important concern from the first oil crisis for European states was how petrodollars could be managed without general macroeconomic upheaval. Similar to the negotiations over floating exchange rates, European states called for the establishment of an international finance regime administered by the IMF. This regime would `recycle' petrodollars on an equitable basis and avoid disequilibriating flows of capital or a further mass expansion of private capital in international finance.74 As with other regimes, Washington and Wall Street opposed the suggestion with the standard rebuttal: a regime would limit individuals' freedom to invest where they choose, and funds could be more effectively administered through private financial markets.75 Under the continued weight of the dollar, Washington's decision represented an effective veto. It ensured that private financial markets would deal with the massive influx of dollar-denominated assets, and that its allies would have to compete with US intermediaries if they wished to increase their access to the credit these new funds provided. The Euromarkets were an obvious choice for OPEC members. As discussed in previous chapters, financial innovations have developed alongside the need for risk diversification and, for states, to avoid threat of plunder. Like China and Russia in the 1950s and 1960s, OPEC members were fearful that investing in American banks would prove precarious if funds were frozen during a political crisis (as the Iranian crisis in

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1979 later exemplified) and wanted to invest in safe short-term financial assets. Trading in the Euromarkets in the 1960s and 1970s thus represented the same opportunities as bills of exchange in previous centuries. The exemplars of safe short-term debt securities are US Treasury bills. That covered security, but what about privacy? The anonymity of the Euromarkets solved that problem and the coordinating capabilities of offshore banks proved extremely capable in recycling petrodollars. For example, in 1974 offshore banks took approximately $30 billion in deposits from OPEC members, and lent out $60 billion to non-oil exporting states whose balance of payments where sent into disarray from the embargo, particularly the Japanese.76 The importance of private intermediaries during the first OPEC crisis cannot be overstated. As the following quote by Ethan B. Kapstein suggests, Washington promoted US debt securities to oil producers to assist with financing the US's balance of payments deficit whilst retaining the numeraire status of the dollar. [W]hat is perplexing is that the astute Arabs continued to buy Treasury bills even as their paper investments were losing money, owing to pressures on the dollar. . . the United States government actively lobbied the Saudis and other oil producers to continue their purchases of Treasury bills, and to keep denominating oil sales in dollars. Thus, with the changing value of the dollar, oil prices in real terms had dropped significantly by 1976 from their 1974 peak, and Arab investments in U.S. Treasury bills therefore declined in value. In short, a major beneficiary of petrodollar recycling was the United States itself.77 A major attraction of US Treasury bills to Arab investors was that they could be re-sold in the highly liquid Euromarkets. Washington and Wall Street profited heavily from petrodollar recycling while avoiding the influence of any intergovernmental regime and while furthering the internationalization of a market in which both Washington and Wall Street had a clear competitive advantage ± the market for short-term debt securities.78 Once the notion of disequilibriating flows had been dismissed, Wall Street was most capable of providing the `know-how' to handle petrodollars. The OPEC crisis demonstrated Washington's and Wall Street's capacity to engage international change to the benefit of US interests. As Eric Helleiner writes, after the first oil crisis it became clear that `the basis of American hegemony was being shifted away from one of direct power over other states to a more market-based or ``structural'' form of power'.79

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The structural power of US intermediaries also allowed Wall Street and the City of London to remain the world's financial centers. Wall Street was the home of the US's enormous financial markets and the headquarters for large US international banks, and London was the host of many US international banks operating in the Euromarkets. From US structural power in international finance, US international intermediaries could operate with little harm to the domestic political economy. Thus, while US domestic commercial banking experienced a slump, the expansion of offshore banking continued to increase ± especially in tax havens such as the Grand Cayman Islands and the Bahamas. By 1973 one-fifth ($24 billion) of the total assets of the foreign branches of US banks were `held' in such places.80 Importantly, the securities-based US financial system also allowed a restructuring of debt either through the elaborate domestic system, or, alternatively, through sending dollardenominated assets to foreign branches which in turn would send them into the Euromarkets. Due to the numeraire status still attributed to the dollar, transaction costs for US intermediaries were considerably less than their counterparts. Japanese and German competitors could not compete without adjusting to US-led changes. Moreover, the Japanese and German economies were rocked by the oil crisis as increased industrial costs threw their balance of payments into deficit. At the time, bank lending in Japan and German represented 74 and 67 per cent of corporations' financing needs respectively (compared with 28 per cent for the US).81 Japanese and German banks were not geared to short-term changes and pressure for financial reform mounted. Unlike the US, however, the incentive for financial innovations did not come from the interplay of international and domestic realms, but merely the international. Rather than enact change and reconstitute their political economies, they had to adapt. For example, Japan suffered `crazy prices' and was forced to introduce gensaki bonds (repurchase agreements coordinated through securities firms) to assist with deficit financing.82 NonUS states called for regimes to assist in financing their deficits. In 1974, a $3.5 billion IMF oil facility was established to assist with balance of payment financing, but despite an upgrading to $6 billion in 1975 it was scrapped in 1976. The OECD suggested a second oil financing facility with provisions for up to $25 billion in financing. As before, the facility was not established due to a lack of support from Washington and Wall Street.83 An international finance regime for petrodollars could not benefit US interests. Washington had its own interests in the petrodollar market as OPEC capital could be funnelled into US debt. Wall Street would also

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benefit from the increased trading of debt securities in secondary markets. In this regard, the US could finance shortfalls in the balance of payments and forestall domestic adjustment. In fact, a 1974 US government report stipulated that the `the size and depth of the US financial market' would allow it to attract `the largest share of Arab investment, even if no special incentives are offered.'84 Clearly US structural power in international finance had been extended over this period. This view clashes with neoliberal and neorealist interpretations. They view this as a new era of international cooperation to compensate for US hegemonic decline. For Keohane the US's inability to persuade OPEC not to raise oil prices is confirmation of hegemonic decline.85 Importantly, for neorealist and neoliberal interpretations of cooperation `after hegemony', US hegemonic decline is equated with `power disinvestment' and the subsequent need for `decentralized enforcement' via international regimes.86 Similarly, the establishment of a hegemonic power is also premised upon the notion of `investment' in international economic stability.87 But power was not disinvested; it was diffused. As commented by Helleiner above, this period represents a shift from direct power to structural power. The role of international regimes in structural power is to create positive externalities for US interests. The demand for regimes increased as a consequence of increased uncertainty ± a situation the US used to increase its privileges in the international financial and monetary systems. US banks gained privileges from uncertainty but, at the same time (and due to the greater diversification offered by direct financing) took on greater risks. Domestic economic sluggishness at the time only increased US banks' need to internationalize. Banks from other states soon followed into the international arena and the risks for the international financial system as a whole increased. International organizations like the BIS heightened their concern for prudential regulation. They were right to do so. Indeed, calls for a new international finance regime coordinated through the BIS were heard loud and clear after the collapses of the Herstatt and Franklin banks.

Mayday, May Day With the new system of floating exchange rates, banks sought ways of minimizing trading risks associated with increasingly wild fluctuations in currency values. As with all types of risk, currency fluctuations presented opportunities and `large profits for banks that bet correctly on currency movements but the certainty of heavy losses for banks that did not'.88 In 1974 the collapses of the Germany's Bankhaus I.D. Herstatt

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and the US's Franklin National Bank of New York demonstrated the dangers of short-term currency trading and raised calls for an international regime on banking regulation.89 During a period of speculative activity in international currency trading in 1973 and 1974, German authorities became concerned about the security of banks' assets. In June 1974 authorities insisted on an audit of Herstatt's offshore commitments, most particularly its international currency transactions. After the discovery that Herstatt's external liabilities exceeded German regulations and could create massive insolvency problems, the authorities closed the bank's doors and froze all capital transfers ± including a currency transaction worth over $200 million that Herstatt had received but not paid for.90 Consequently, a handful of Wall Street's banking giants were left without payment for dollars Herstatt had contracted.91 Wall Street cried `mayday' to Washington, who then insisted that the Bundesbank secure a safe landing for the delinquent accounts. The Bundesbank, however, did not agree to do so on the same day, causing havoc in the US bank-clearing system and the overnight money market.92 Under pressure from Washington and with the enactment of legal proceedings, the Bundesbank reluctantly agreed to pay.93 The incident reflected not only the heightened risk in international banking but Wall Street's capacity to call upon Washington to provide that help. In this sense, the Herstatt collapse was a threat to US interests and justified intervention by Washington. While Wall Street was concerned about overseas banks' ability to secure their financial assets, a similar yet not so dramatic collapse occurred in its own neighborhood. In October 1974, a few weeks after the Herstatt collapse, the US Comptroller of the Currency declared the Franklin National Bank of New York insolvent. The Federal Deposit Insurance Corporation subsequently assumed its deposits.94 Unlike Herstatt, the Franklin bank underwent a `managed collapse', arranged over a five-month period. Similar to Herstatt, the Franklin National failed because of its speculative activities on foreign exchange markets. Between 1971±73, its daily foreign currency trading positions increased from under $20 million to $3.8 billion.95 In the early months of 1974, the Franklin experienced a series of massive losses it could simply not recoup. The Fed was well aware of the Franklin National's actions and provided a loan (coordinated with the BoE) to settle accounts in offshore branches in London, Nassau, and the Bahamas. The Fed (through the auspices of the Federal Reserve Bank of New York) also purchased the Franklin's foreign exchange contracts to guarantee their fulfilment.96 They then wound

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down their operations, declared insolvency, and sold the bank to a European financial consortium.97 At face value, the Fed's role in the Franklin National Bank collapse was that of a government body securing the funds of its citizens. However, the Fed's response demonstrated that while an official policy of international passivity and national activism was the norm, a shift to international activism was swift when US structural power in international finance was threatened. At the international level, the Fed wanted to demonstrate that the US financial system provided investment assurances other states, such as Germany, were reluctant to make. At the domestic level, the Fed feared a `run on banks' if the Franklin National's clients were left without their deposits. As a consequence of the Herstatt and Franklin collapses, international bank activity slowed in the latter half of 1974. Most banks sought to lower their risk profiles and large banks refused to lend large amounts to their smaller counterparts. For the first time in decades, the interbank market recorded a decline in growth and foreign exchange trading decreased by almost two-thirds from its 1973±74 high.98 The US Comptroller of the Currency responded to the Herstatt and Franklin collapses by declaring that banks should not loan more than ten per cent of their capital surplus plus retained earnings.99 The action to dampen lending domestically was not reflected internationally. In fact, Washington encouraged greater US involvement in international banking by lowering the reserve requirement for foreign borrowing from eight to four per cent for its member banks.100 Thus, policies of international passivity and national activism continued, especially in relation to the international private functions of US banks. As with other crises, the Herstatt and Franklin collapses raised calls for an international finance regime, this time on banking regulation. In September 1974 the BIS announced that lender-of-the-last-resort (LOLR) provisions would be established to protect depositors and investors from bank collapses.101 Who the lender would be, however, was ambiguous. In December 1974, the G-10 governors, in association with bank supervisors from Luxembourg and Switzerland, established the Standing Committee on Banking Regulations and Supervisory Practices (the `Cooke Committee') at Basle. The Basle Concordat was prepared in 1975 (although not made public until 1981) and gave recommendations on the regulation of international banking. The BIS made host states responsible for the liquidity of foreign branches on their territory, and for the solvency of intermediaries that acted as joint ventures or foreign subsidiaries. The BIS also urged states to have a `moral commitment' to their subsidiaries operating abroad.102 In this regard, the BIS

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implemented a regime to internalize the negative externalities of international banking through international cooperation. As Robert Keohane and Van Doorn Ooms argue, one could expect: extensive international regulation on a global scale where the principal issues pit the state against the enterprise, rather than state against state with the enterprise as a willing or unwilling intermediary.103 The Concordat sought to institutionalize a set of principles, norms, rules, and decision-making procedures through the creation of `an informal but important international warning system for international banking.'104 However, while the Basle Concordat created a temporary supposed `normalization' of financial markets and put states on alert, it did not slow the promotion of direct financing.105 Indeed, the disestablishment of the traditional role of banks had already progressed too far. Accordingly, the attempt to internalize negative externalities was overwhelmed by financial innovations, as Michael Moffitt explains: Parking became crucial in the aftermath of the Franklin- Herstatt failures, when European governments tightened regulations on currency trading to prevent excessive speculation. But governments had no sooner imposed new controls on currency speculation than Citibank employed new tactics to get around them. Essentially, Citibank's European branches took larger positions in deutsche marks, Swiss francs, and other currencies than were allowed by local authorities. They would then park the excess positions in Nassau or New York, effectively removing them from local books and thereby concealing them from local authorities. To facilitate speculation, Citibank's senior management allowed European branch managers to take positions four times larger than local governments allowed. In Switzerland, for instance, Swiss authorities allowed Citibank an overnight position in Swiss francs between $16 and $20 million. Citibank's internal limit for its Swiss branch was $75 million. As SEC [Securities Exchange Commission] attorneys Thomas von Stein, David Doherty and Robert Ryan pointed out, Citibank `considered its overnight position limits from a business risk standpoint regardless of governmental limits'. 106 For international banks like Citibank, the dangers associated with `parking' currencies were outweighed by the profits from short-term speculation. Despite the calls from European states to `cool' international

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finance, the US was keen to further its structural power. Washington's decision to get rid of its existing capital controls in 1974 affirmed the role its intermediaries played in the fulfilment of its foreign and economic policy aims.107 While mayday signals were alerted by the BIS and generally dismissed by international banks, another kind of May Day was promoting direct financing within the US domestic financial system. As banks abandoned their traditional roles and became more involved in direct financing, non-banks (such as insurance companies, savings and loans organizations, trust management funds, and investment groups) did the same. All of these non-bank intermediaries rallied around the same marketing ploy ± to offer investors greater flexibility. Within the US, domestic regulations allow them to do so, placing greater pressure on banks to compete with their own innovations. For example, Washington permitted financing companies such as American Express to accept interstate deposits while the 1927 McFadden Act prevented banks from doing so. The most exciting changes, however, were in the US debt and equity markets. After intense lobbying from Wall Street and deliberations in Congress and the Executive, Washington accelerated direct financing in May 1975 with the deregulation of the New York Stock Exchange (NYSE).108 The most important change was the abolition of fixed brokerage fees for dealers in financial markets.109 This change marked the end of the `old boys club' among brokers and allowed dealers to command their own prices and, accordingly, to undercut each other.110 The decision to deregulate stood in great contrast to the stock exchanges in Britain, Germany, and Japan where fixed commissions dominated. The existence of an `old boys club' was especially pronounced in Britain where calls for public accountability compelled the government to revise the Restrictive Trade Practices Act and examine market practices of the London Stock Exchange (LSE) under jurisdiction of the Office of Fair Trading. (The battle between the government and the LSE continued for another decade and resulted in the `Big Bang' of 1986.) In Japan and Germany, the dominance of corporatebank relationships removed brokerage fees and commissions from public accountability.111 Another consequence of the `May Day' 1975 deregulation was a change in the workplace sociology of debt and equity market traders. As commissions were negotiable, the incentive for dealers to provide clients with short-term profits and higher dividends increased. Over the next decade commission prices dropped nearly fourfold.112 Reputations became more based on short-term profits rather than research. The

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decision also increased the use of financial innovations to provide clients with customized financial services. Index stocks emerged (where one's stock is adjusted against movement in an exchange index's value), as did `Ginny May' (Government National Mortgage Agency) futures contracts. Furthermore, OTC (`over-the-counter') trading accelerated as investors sought customized financial assets that were not readily available on conventional markets. Washington also permitted securities firms to move into areas of finance that were traditionally reserved for banks. For example, securities firms began to offer cash management accounts (where a client's capital would be used within short-term debt markets) which challenged banks' interest-bearing deposits and, more often than not, offered greater returns on investment. As US intermediaries found new ways to raise capital, securities trading in the enormous domestic financial market grew rapidly.113 Greater use of direct financing within the US domestic markets exerted pressure upon British, Japanese, and German intermediaries to find similar ways of raising capital. In Germany the `Big Three' banks (Deutsche, Dresdner, and Commerzbank) were facing a serious decline in their market share of financial services (from 28.2 per cent to 18.2 per cent from 1972±82) to savings and cooperative banks.114 The Germans' rejection of changes to traditional intermediation would continue to inhibit financial innovation while pressure for direct financing would continue upon Germany's larger financial intermediaries. In Japan, the centralized allocation of funds to commercial banks through the MoF had become inefficient and, due to demand from Japanese corporations, costly. Indeed, from internal pressures to find capital for growth, and from external pressure to compete with US intermediaries, `[d]irect financing through the equities markets became a more attractive avenue for raising funds as interest rates rose on commercial loans'.115 The debt market became extremely attractive as investment banks offered an alternative form of capital raising through the issue of high-interest long-term bonds.116 Smaller investment banks attempted to enter the Japanese financial system and placed significant pressure on the `Big Four' investment banks (Nomura, Daiwa, Nikko, and Yamaichi) who dominated 60±80 per cent of all stock exchange activity.117 While overwhelmingly dominant, the Big Four wanted to be able to increase their competitiveness by gaining access to financial innovations. Tension within the marketplace spilled out into the government, culminating in the investment banks refusing to buy more government bonds until the MoF allowed the introduction of Certificates of Deposit (CDs).118 The emergence of a CD market subsequently placed pressure upon other

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sectors of the Japanese financial system to increase their flexibility. The outcome of this pressure would not manifest itself until the early 1980s. Another consequence of deregulation in the mid-1970s was the development of a clear distinction between how industrialized and developing countries financed their government and commercial operations. A two-tier system had developed: an international bond market for industrialized states, and an international bank credit/syndicated loans market for developing states.119 The use of direct financing, most particularly through the Eurobond market, reflected the sophisticated methods available to industrialized states ± and especially in states like the US where the domestic market was enormous.120 In contrast, developing countries could not enjoy the benefits of direct financing and relied upon bank credit derived from recycled petrodollars funds.121 Similar to the currency trading emergencies provided by the Franklin and Herstatt collapses, banks lending to developing states would lead to further `mayday' calls.

Overlending and state power During the mid-1970s, lending from international banks to developing countries became an especially lucrative business in comparison to domestic lending. The average size of international banks loans increased from $49.6 billion in 1975 to $92.2 billion in 1979.122 Loans were enormous, with some governments borrowing what became known as `jumbo' loans of in excess of $500 million and `mammoth' loans in excess of one billion US dollars. Only 20 per cent of borrowers were private corporations, with most loans going to governments of developing states. The grounds upon which such `overlending' occurred was that whilst corporations can liquidate and cease to exist, states cannot and are therefore bound to their claims.123 Many loans lent during the mid-to-late 1970s were `syndicated loans', where a number of banks held a part of the loan to diversify its default risk and its interest repayments. Such lending became commonplace during the late 1970s, leading the BIS to openly express their concern about how banks could possibly be `building up adequate provisions against future losses.'124 The drive for profits meant that available capital was out working and not being stored to bail banks out of trouble. US banks dropped their capital adequacy levels. The biggest US international banks almost halved their holdings during the decade, storing only 3.5 per cent of their assets in 1979.125 One reason why capital adequacy ratios dropped was the fragmented character of lending during the period. Banks

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measured states' credit-worthiness individually rather than comparatively and calculated a loan's profitability by how much the bank would make overall rather than the viability of individual loans. Banks protected themselves by issuing loans with maturities that were disproportionately small in comparison to similar funds in the international bond market. Profit superseded this protection, however, as the average maturity on a loan grew from 5 years and 11 months in 1976 to 9 years and 3 months in 1979. The prime spread (how much the bank gained from the loan) also declined throughout the decade by half. The governments of industrialized states decided not to implement restrictions on such lending. In fact, they encouraged private banks to do so, increasing the ratio of private loans to official sources of capital to 4.5:1 within the G-10.126 The main reason for the growing reliance of states upon private international banks was that private lending would not place pressure upon intergovernmental lending via the IMF regime. At the same time, the dangers of overlending were recognized by governments, including the US government, as this statement by the 1977 Congressional Subcommittee on Foreign Economic Policy demonstrates: The viability of the whole international financial system is premised on the assumption that all the players stay in the game: that the banks continue lending and the borrowers keep repaying their interest so that, although the principal may be refinanced and `rolled over' for individual borrowers, the money continues to circulate. The biggest threat to the system lies in the possibility that one of the passengers on this merry-go-round will decide to get off.127 A number of US regulatory agencies expressed similar concerns, most particularly the Fed. Under recommendations of the Committee on Foreign Lending of the Fed, all US-based international banks were required to give a `country-risk' report by the end of 1977, to be updated every six months thereafter.128 By 1979, the Office of the Comptroller of the Currency and the Federal Deposit Insurance Corporation also required such reports and a Federal Financial Institutions Examinations Council was formed.129 The `merry-go-round' of international finance continued, as did the profits for those turning the cogs and selling tickets. Restrictions and regulations imposed at home did not hamper international financial relations and, as before, US regulations to keep banks in check did not constrain banks' international activities in any significant way. As discussed in the following chapter, when overlend-

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ing stopped and the Debt Crisis began ± or to continue the merry-goround analogy, when a passenger threw a spanner into the cogs and jumped off, also throwing the other children from their horses ± Wall Street called upon Washington for help. Overlending in the 1970s was viewed as being in the US public interest and necessary for the growth of the financial system. As Chapter 6 demonstrates, a similar overlending story would emerge from Japan in the 1990s and fuel the Asian financial crisis. As demonstrated by Table 4.1, by the mid-1970s banks' international after-tax earnings were doing far better than their domestic earnings and actively encouraged the growth of syndicated lending. Between 1971± 78, the international earnings of major US banks grew by 24 per cent in comparison to seven per cent growth in the domestic market.130 By 1976±77 over half of the $63 billion worth of capital lent from the Euromarkets to governments and private borrowers was issued from ten commercial banks. Eight of these ten banks had home offices in the US.131 Furthermore, from 1970±76, assets held in foreign branches by US banks increased more than twenty-fold (to $219 billion). The domestic loan market, however, merely tripled.132 Consequently, the fall in domestic profits increased international banking activity supported by (and in turn extending) US structural power in international finance. The importance of international earnings to US banks during the 1970s cannot be overstated. In 1975, the peak, international earnings Table 4.1 Top ten US multinational banks after-tax earnings, compound annual rate of change, 1970±76 Domestic Citicorp Corporation Bank of America Corporation J.P. Morgan & Co. Corporation Chase Manhattan Corporation Manufacturers Hanover Corporation Chemical New York Corporation Bankers Trust N.Y. Corporation Continental Illinois Corporation First Chicago Corporation Security Pacific Corporation Total

4.3 6.1 3.6 22.8 3.1 5.0 12.6 7.8 4.0 3.6 1.4%

International 31.0 32.4 27.1 17.8 38.4 32.1 29.6 N/A 53.7 72.7 33.4%

Source: Federal Reserve Bank of Boston cited from Moffitt, Michael, The World's Money: 52.

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were 52.5 per cent of total earnings, and for the ten largest banks in the US international earnings as a percentage of total earnings did not drop below 47.9 per cent between 1975±81.133 These changes exemplify the continued ability of US intermediaries to seek international expansion whilst the domestic economy was re-modelling. As with the mid-1960s, mid-1970s US domestic banking conditions prompted banks to go abroad and expand their activities in an ambiguously regulated international financial arena. The perpetuation of dollar supremacy assisted such aims, as did the process of direct financing, providing innovations for US intermediaries to introduce to international markets. As discussed above, the promotion of direct financing by Washington and Wall Street during the mid-1970s also gave a great deal of power to non-bank intermediaries and placed pressure upon banks to lend big in the international arena. As a consequence of domestic economic sluggishness and increased competition at home, banks' overlending to developing states emerged from banks' need to increase profits from international operations. In terms of the Washington±Wall Street relationship overlending provided Wall Street with profits and Washington with continued, active means to support the dollar, and to generate international dependencies (interbank lending rates largely reflected US interest rates) and the ongoing benefit of externalizing financial problems through the Euromarkets, as discussed previously. The further internationalization of US intermediaries in the mid-1970s also reflected the capacity of the US to play the international and domestic realms against one another. The notion that a state can diffuse its power through financial interests is important in understanding the political economy of direct financing and its benefits for Washington, Wall Street, and the American public. The interactive embeddedness between Washington and Wall Street allowed this relationship to continue and to enhance US state capacity. In turn it also furthered US structural power in international finance. Again, this view contrasts with the popular view of power in IPE. Popular perspectives in IPE understand the ability to control other states and a state's ability to control resources, but not a state's capacity to enact and adapt to international change with the assistance of financial interests. A zero sum game between the state and the market is normally posited rather than recognizing that the collective power of the state may derive from a combination of government and financial interests. Neoliberal and neorealist understandings are founded on a reification of the executive level of power within the state and the rational choices states make when confronted with external forces for

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99

change. In neoliberalism, the agency of the state is emphasized; in neorealism the interstate system is emphasized. Both, however, seek to explain how states adapt to change rather than how states can constitute themselves. Because of their view of the state as the executive, a government's inability to make states adjust to its foreign and economic policies `by itself' is equated with a loss of state power.134 This is certainly the common view of the US in the 1970s. Furthermore, as discussed earlier, the possibility of a state sharing power with private interests is considered `power disinvestment' rather than a diffusion of power that enhances a state's ability to change other states' preferences for political and economic development. For example, the generation of dollardenominated credit above the formal validity of the exchange rate regime is associated with a self-inflicted loss of domestic productive capacity in exchange for `an era of grave uncertainty'.135 The capacity for structural power to be shared by government and commercial interests and to be diffused rather than centralized is not recognized. Rather, for Keohane and others power is considered greater when centralized into a single body. Accordingly, the objective of international regimes is to provide a framework where negative externalities can be internalized. Thus the neoliberal and neorealist view of US hegemonic decline is that it is a consequence of a fragmentation of power and an inability to persuade others to adjust `by itself'. For neoliberals and neorealists, the consequence of hegemonic decline is an increased demand for international regimes (though they differ on whether absolute or relative gains are states' interest in regimes). As discussed in Chapter 2, neoliberalism and neorealism have borrowed from microeconomics and used the concept of equilibrium to give their perspectives greater theoretical rigor. Thus, the uncertainty surrounding the breaking of `hegemonic equilibrium' through a fragmentation of power then becomes a catalyst for `a cycle of disintegration' which produces a demand for international regimes to arrest it.136 It makes sense that perspectives that draw from microeconomic theory should understand how states are `adapting to new volumes and new forms of transnational economic activity.'137 Indeed, on face value neoliberalism and neorealism's microeconomic credentials make them ideal candidates, especially their emphasis upon lowering transaction and information costs to prevent `market failure' and achieve utilitymaximizing policy choices. However, while neoliberalism `marries the best of commercial and regulatory liberal approaches' it ignores market sources of power.138 It has nothing to say about how a state and a financial community can form collective power to increase state capacity.

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Again this failure can be traced to the treatment of power, the `blackboxing' of the state. There is continued treatment of the state as a fixed entity rather than, in the Weberian tradition, as a flexible accumulation of institutions and social networks that can reconstitute itself. The `black-boxing' of the state allows neoliberalism and neorealism to abstract it from its societal underpinning and place it within a balance of power framework where the use of equilibrium makes sense. Thus the domestic and international realms are separated. The domestic realm is only relevant when forced to adapt to the international realm. The domestic realm in this view is fixed and is not constitutive in how a state can enact change in the international political economy. The separation of domestic and international realms in neoliberalism and neorealism also precludes an understanding of the policies of international passivity and national activism. Moreover, it perpetuates the treatment of states as like±units within an interstate system. Such a perspective allows neoliberalism and neorealism to compare the US with other states without sufficient differentiation of the political and economic context in which the states operate. In the words of Susan Strange, neoliberals and neorealists view the world from `level goalposts . . . seen from the US goalposts'.139 The formal rationality of international relations is thus favored over substantive rationality. Neoliberalism and neorealism's avoidance of the `details and vagaries of domestic politics', and their ignorance of non-state sources of power, severely limits their heuristic value for the study of change in the international political economy.140

Adam Smith has to be curbed While scholars reflected on the 1970s as a time when `hegemonic equilibrium' was thrown out of balance, Washington questioned an equilibrium of another kind. During the 1972±73 C-20 monetary negotiations, US officials rejected the use of capital controls to manage `disequilibriating flows' of capital. With strong support from Wall Street, Washington's logic for rejecting capital controls was that market pressures would equilibrate such flows by forcing states to adjust their interest and inflation rates.141 According to the US delegates, states should play a passive role in taming capital mobility to minimize possible political and economic distortions. Floating exchange rates, they argued during their inception, would allow states to achieve equilibrium without the `n-1' problem of the Bretton Woods regime.142 The advice was not self-prescribed. In contrast, the US relied more heavily on the

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dollar's numeraire status after the demonetarization of gold through the generation of dollar-denominated assets. Direct financing assisted the US's re-financing arrangements by providing a variety of ways to sell its debt to its trading partners. In short, the processes of direct financing offered greater though less obvious powers to manipulate debt than those available during the Bretton Woods regime. Re-financing was vital as the US current account deficit worsened (from $4,300 million in the black in 1976 to $15,292 million in the red in 1977) and inflation began to increase. Britain was also in a bad state, demonstrated by the embarrassing situation of requiring a loan from the IMF in 1976 (with normal conditionality rules) when sterling suffered from speculative attacks.143 At the same time Japan and Germany increased their current account surpluses over the ten billion dollar mark.144 Japanese and German success contrasted with sharp increases in the cost of living in the US.145 Washington, as in previous decades, sought to externalize its problems. Washington wanted to externalize its burdens by asking Germany and Japan to reflate their currencies. Such action would correct the imbalance created by `disorderly market conditions' and restore equilibrium.146 In contrast to official US opinion in the early 1970s, equilibrium was no longer a vague term of reference but a prescription to the US's trading partners enjoying current account surpluses. Of course, the change in the US's attitude towards equilibrium was spurred on by its financial woes. In part, the new attitude towards equilibrium was a consequence of the US attitude towards the C-20 talks and, more generally, advanced industrialized states' attempts to fight the `stagflation' of the 1970s. The combination of the paper-dollar exchange rate regime and soft monetary policy within industrialized states during the mid-1970s allowed the volume of financial assets in the international arena to grow unabated.147 Inflationary pressures were a consequence. To remedy this situation, industrialized states tightened monetary policy by raising interest rates and adopting a more interventionist approach to capital movements, particularly the money market. The Fed raised interest rates and attracted capital, which added to inflationary pressures.148 The Carter administration was thus presented with a large financial problem it could only deal with by massively curbing domestic economic expansion or by trying to externalize the problem through international markets. Accordingly, Washington and Wall Street looked at ways to re-finance their re-financing operations. Issuing US Treasury securities was by far the easiest method of financing for Washington and the most attractive for Wall Street because of the large secondary market in securities trading. By the late 1970s, the US

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government had sold its debt at a staggering rate, displaying the unique ability of Washington to use its structural power in international finance. As Robert Triffin commented: Our [the US] government indebtedness (mostly Treasury securities) and banks' (including their branches abroad) liabilities to foreigners nearly doubled in the years 1970±2 (rising from $78 billion at the end of 1969 to $146 billion at the end of 1972) and increased further 2‰ billion times in the following five years (to $363 billion at the end of 1977). Their total increase of $285 billion over these eight years is exactly equal to the total increase of our Federal debt over this period, from $279 billion at the end of 1969 to $564 billion at the end of 1977: a bizarre coincidence undoubtedly, but arguably not entirely fortuitous.149 Innovations on Wall Street promoted the use and flexibility of US government debt with the introduction of futures trading on Treasury bonds in 1977.150 The consequence was increased trading of Treasury bonds. Increased flexibility for trading US government securities was intended to provide domestic and international investors with an alternative to debt instruments circulated in the Euromarkets. The US was already the clear leader in these markets but it also took its cues from international markets. Moreover, the size and depth of the US domestic financial system provided not only a source of financial innovations but also a partial `buffer' to international capital movements. Despite its structural power in international finance, the US was (and would continue to be) one of the least internationalized states among the G-10. The US domestic financial system provided a source of innovation as well as a `buffer'. National activism through financial regulation provided (relative to other states) an ultra- competitive environment and ensured that this domestic `pressure pot' kept financial innovations on the boil. No other state could replicate this role and no other state was able to play the international and domestic realms against another with the same success. Despite the economic turbulence of the period, the dollar's ongoing numeraire status, backed by the size and sophistication of the US domestic financial system, provided Washington and Wall Street a unique advantage, as Anthony Solomon of the US Treasury stated: You must understand, though, that for other currencies to become meaningful reserve currencies, they have to open their capital markets the way the United States has, and they have been reluctant to

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do that to the degree we have. There is no way of having a really important reserve function for a currency unless it has large capital markets to which the world can have access, can borrow.151 In 1978±79, the issue of reserve currencies remerged when a weak dollar led to weak demand for credit in the US domestic economy. Repeating what happened during the collapse of Bretton Woods and what would happen again during the 1980s, Washington asked Japan and Germany to reflate their economies so it could pursue an expansionary policy to boost domestic economic growth. Of course this required a devaluation of the dollar to make US exports more competitive and German and Japanese exports less competitive. The request was initially knocked back, especially by Germany. Washington then called upon the interdependence of the German, Japanese, and US economies to get its way. Similar to the degree of internationalization in the US financial system, the US's degree of trade internationalization was low compared with its major trading partners (exports represented nearly 23 per cent of German GNP in 1978 compared with seven per cent for the US).152 Due to this asymmetric interdependence, Germany and Japan conceded to a revaluation of their currencies and provided a temporary boom in US economic growth. Within IPE literature much has been made of the reluctance with which Germany and Japan revalued their currencies. Keohane, for example, clearly regards the events surrounding the dollar during 1978 as a sign of weakness and hegemonic decline by the United States. The failure of the United States to convince Germany and Japan to reflate their currencies to offset its depreciation was not `conspicuously successful', despite the fact that the Germans and Japanese rallied behind the dollar to the sum of $20 billion during 1978.153 Keohane finds a causal link between hegemonic decline and the failure not only to maintain the Bretton Woods system, but also to construct new financial and monetary regimes.154 Moreover, Keohane cites the failure of Germany and Japan to reflate their currencies in accordance with President Carter's initial request at the 1977 London economic summit as a sign of the declining power of the US to determine events `by itself'. His argument concerning the United States' `power disinvestment' logically follows: In absence of effective coordination among advanced industrial countries, expansionary economic policies in the United States would contribute to extremely large current account deficits without necessarily assuring prosperity abroad. Even if the United States

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could finance its deficits indefinitely without creating grave monetary instability, it would be acquiring external liabilities ± thus engaging in power disinvestment ± without achieving its objective of world prosperity or acquiring countervailing external assets. It would not even necessarily secure political `goodwill' for its economic sacrifices, and it would be in a weak position to cope with future adversity. No prudent American government could complacently accept such a prospect.155 For Keohane the ability `to finance its deficits with newly printed dollars and treasury bills rather than with reserves' is an indication of US decline rather than its structural power in international finance.156 He obscures the creation of interdependencies to enhance US interests and ignores the role of credit-money in state-building. Moreover, as Strange commented earlier, Keohane is viewing what he sees as level goalposts from US goalposts. Keohane's argument lacks an understanding of the uniqueness of the US domestic financial system, including the basis upon which its intermediaries operate internationally. Again, this failure to look within the state can be traced back to the treatment of states as like-units within an inter-state system. During mid-to-late 1978, in the period of the dollar's decline, Washington raised domestic interest rates (by increasing the discount rate from 8.5 to 9.5 per cent) and provided a $30 billion support fund for the New York Federal Reserve to use to intervene into foreign exchange operations.157 This had two effects. First, a rise in US interest rates had a direct impact on interest rate prices in other financial centers.158 For example, after the second oil crisis, US interest rates rose at breakneck speed. Germany's capital source dried up and their 1978 DM17.5 million surplus became a 1979 DM10.5 million deficit that forced them in 1980 to dip into their reserves for DM8 million. This placed pressure on the US's trading partners to arrest a falling dollar in order to stop inflation and halt further interest rate rises. Secondly, despite US insistence that the marketplace determine the dollar's external value, the Fed engaged in furious trading of Treasury bills in the short-term debt market and US bonds in the long-term market. According to a US Treasury official, the time had come when `Adam Smith has to be curbed'.159 The renewed intervention of the Fed was intended to `lean against the wind', buying the dollar when its price was low or selling it when high; and making profits along the way.160 The new, more market-oriented approach towards the trading of debt securities and support for the dollar was mistaken at the time for a disappearance of `dollar hegemony'.161 Such was the substance of argu-

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ments surrounding the November 1978 decision to issue US government bonds in Deutschmarks and Swiss Francs and borrow $30 billion in foreign currency to intervene in foreign exchange markets.162 The US had to build up foreign currency reserves as it had managed its monetary operations without a large volume of reserves since the post-war reconstruction of financial and monetary systems. However, similar to the experience of the issue of Roosa bonds and `warehousing' of foreign currencies during the 1960s, the issuing of these bonds should be recognized as a financial innovation to support the value of dollar-denominated assets. Before proclaiming that `dollar hegemony' declined, one must take into account that unlike other states, the US had a minimal amount of foreign exchange reserves because of the dollar's numeraire status, not in spite of it. The promotion of direct financing in the 1960s and early 1970s that led to the massive increases in Eurodollar trading, and the expansion in short dollar-denominated debt in general, allowed Washington to operate without a strong base of foreign currencies. While neoliberals and neorealists may point to a fall in monetary reserves to support the theory of hegemonic decline, the promotion of direct financing and the expansion of dollar-denominated credit allowed the US to run its economy without large reserves. The only proviso was that it had a liquid domestic financial system and could attract buyers for its securities in the international market. Furthermore, world interest rates were largely based upon US interest rates, which were influenced by activity within the US financial community ± particularly the competitive/cooperative relationship between the Fed and commercial banks that supplied credit to the public.163 With these two factors combined, the issue of the bonds affected interest rates and the value of Deutschmarks and Swiss Francs. As these currencies were recognized as stable, the diversification of bond denominations `pulled in' Britain, Japan, and Germany (especially) to rally behind the value of these assets for fear of dragging the value of other securities down (particularly in Eurocurrency markets). Thus, the issue of these bonds does not show the failure of a state to act `by itself', but its continued ability to shape the preferences of others and the ability of Washington to form collective power with Wall Street. It is a fine example of how financial innovation enhances US state capacity. From this perspective, the US's ability to constantly re-finance its debt obligations is not a sign of weakness but evidence of its great structural power in financial relations. Again this view contrasts with those who view power as based upon the ability to command resources, not the ability to shape prefer-

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ences. For example, Stephen Krasner points to the US's failure to use `resources [that] could be utilized by central decision makers'.164 Importantly during this period of international financial uncertainty, Democrat-led legislation sought to embed finance further into the lower-middle and working classes. The impetus for the Community Reinvestment Act of 1977 was community concern that banks were too distanced from the public and that information problems (perceptions of creditworthiness) encouraged banks not to lend to the lowermiddle and working classes. While the CRA did not directly feed into international finance it provided greater means for the public to produce financial wealth and equity. The CRA, which focused on loans for housing and businesses, reflected Washington's concerns about the US financial system away from Wall Street. (From 1977 to 2000 over a trillion dollars would be lent under the provisions of the CRA.)165 Such lending became an important component in the development of mortgage-backed securitization that would become vital to direct financing in the 1980s. The CRA is important in the development of direct financing as it demonstrated national activism to embed finance into the wider public and promoted the development of consumer credit markets and securities trading. All of these factors benefited the promotion of direct financing and, in turn, US structural power. Clearly, Washington was able to regulate to increase links between domestic financial needs and national concerns. Similarly, it was able to link international concerns with national needs with another series of regulatory change that, again, endorsed the ongoing policy of international passivity and national activism.

Regulatory twists, or shedding another skin While finance was becoming more embedded in American society, Washington was increasingly concerned about US bank activity in international financial markets. Between 1976±81, US banks increased their overseas assets from $80 billion to $300 billion.166 The capital was put to short-term use in the Euromarkets and medium-to-long-term use through the issue of loans. Trading in short-term debt markets allowed banks to change their balance sheets overnight, including the management of interest rates payments on international loans. Increased financial flexibility afforded US banks competitive advantages in international markets, especially in contrast to the US's major trading partners. Offshore banking was a sector in which Germany and Japan had not successfully engaged. In fact at this time, the BoJ restricted all

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offshore activity, fearing inflationary effects from the recycling in Euroyen market. By going offshore, US intermediaries could rely upon the dollar and enhance their competitive position in relation to its major trading partners. Furthermore, risks from international currency trading were also perceived to be greater as the volume of capital in the Eurocurrency market increased enormously ± from approximately $110 billion in 1970 to $1,120 billion in 1979.167 Washington became increasingly concerned about the effects of US banks' international operations. In the first three quarters of 1979, US banks borrowed $30 billion from their foreign subsidiaries, bringing a great deal of it back to US soil ± accounting for over 50 per cent of the increase in bank credit over that period.168 The subsequent increases in the domestic money supply created inflation and prompted the Fed to adopt an even more interventionist approach. The Fed tried to counter disequilibriating flows of capital through aggressive open market operations in the short-term debt market. Short-term interest rates for 90-day Treasury Bills and 90-day CDs increased four and eight times, respectively, above previous levels.169 Such trading volumes increased as investors sought to capitalize from yield differentials. As US intermediaries profited from the uncertainty surrounding the dollar during a period of monetary stabilization (Citibank showed a 700 per cent increase in its foreign exchange profits!), the competitive/cooperative relationship between Washington and Wall Street reflected much more competition than cooperation.170 Accordingly, the period between 1978±81 was marked by a number of regulatory changes in the relationship between Washington and Wall Street. The policy of intervening in domestic financial markets whilst allowing capital to flow freely in international markets was openly called into question as policymakers sought to maintain the US's newfound economic buoyancy.171 In 1978 the Fed declared that it wanted to discuss a means of regulating the Euromarkets with other central bankers to stop US intermediaries and corporations using loopholes to import capital into the domestic economy.172 Their proposal was to introduce reserve requirements for Euromarkets trading and strip its comparative advantages over domestic markets. Naturally the plan was opposed by Wall Street (particularly by the American Bankers' Association) and was placed on the backburner after receiving insufficient attention from G-10 members.173 In 1980 the BIS reflected on the idea, deciding that regulation of the Euromarkets was impossible. In the late 1970s Britain also supported this view and Germany rejected any regulation of the Euromarket on the grounds that the proposal was impossible to enforce under its regulatory

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system.174 Objections to the proposal were really based on domestic pressures within competing states. The Euromarkets had become vitally important to Britain, Germany, and Japan. National financial strategies turned towards introducing more direct financing techniques and towards gaining a greater share of international financial market activity. Given the options available, Washington chose to continue promoting the activities of US intermediaries in the Euromarkets through changes in US domestic regulations ± to `bring the Euromarket home to the greatest extent possible'.175 First, in August 1978, Washington dropped the reserve requirements on funds sourced from overseas banks.176 Wall Street's international banks responded by turning this regulatory change into a cost-cutting measure and began to handle most of their accounts through the head offices on US soil. The change in regulation was enacted to draw capital in to support the dollar. And it worked. The capital, however, did not remain dormant for long, as Treasury Secretary Paul Volcker re-instituted reserve requirements on banks' Eurodollar holdings in October 1979.177 Similar to the introduction of the IET in 1965, US banks swiftly found a way around these domestic regulations, as Michael Moffitt explains: Rimmer de Vries of Morgan Guaranty told the Joint Economic Committee how U.S. banks could get around the new reserve requirements by lending directly to the foreign subsidiaries of U.S.-based companies. The multinationals, over which the Fed has no control, could then bring back the funds to the United States with no questions asked. Chase Manhattan's London branch, for example, could lend to an Exxon subsidiary in Europe which could transfer the funds to New York for use in the United States. Other forms of financial innovation were also used. According to Vries, blue-chip borrowers could tap nonbank channels of credit, such as the commercial paper markets in New York and London. Finally, foreign banks could lend directly to U.S. companies and Volcker could only protest. 178 Volcker's reimposition of the reserve requirement was a direct response to this fear: that if banks continued to lend domestically from funds drawn externally, the circulation of extra dollars in the domestic economy would worsen the already worrying inflationary climate. The immediate effect of the reimposition of the reserve requirement was that credit provisions to US corporations based in the US dried up, as it meant that 8 per cent of loanable funds drawn from the Euromarkets

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would have to be held with the Fed. For banks running on tight profit margins, this was a poor use of capital. Instead of keeping capital within the US it could be more wisely invested in Eurocurrency securities and then `recycled' through credit provision back on US soil. On top of pressure from Washington, the allure of deficit financing from the second oil crisis attracted US intermediaries to the Euromarkets. As in 1971 under dollar speculation and in 1973±74 under the first oil crisis, activity in the Euromarkets increased as states organized their financing arrangements as did private intermediaries. What distinguished this crisis from the first was that the US had reversed its current account deficit through austerity measures and clever debt financing, whilst the other members of the G-10 (with the inclusion of Switzerland) shifted from a $34 billion surplus to a $23 billion deficit.179 For Germany and Japan the tables had turned dramatically within twelve months. Deutschmark-denominated bonds dropped from a high of 37 per cent of market share in 1978 to 19 per cent in 1979, while USdenominated bonds bounced back from 51 per cent in 1978 to 67 per cent in 1979; 17 per cent higher than during the 1960s!180 The dollar as well as American `know-how' in international finance still dominated, leading the way for others to learn. Increased intensity in the trading of debt securities for states' financing needs increased pressures for financial reform within many states during the late 1970s. Pressures within Britain had already led to a partial overhaul of its financial system. In 1978 the London Stock Exchange introduced the Third Market for unlisted securities from small and medium-sized businesses.181 More importantly, a 1979 Banking Act removed Britain's remaining capital controls to ensure the City's competitiveness in gaining a larger portion of Euromarket trading.182 In Japan, pressure from corporations to extend their access to credit led the MoF to grant permission for non-residents to trade gensaki bonds and to introduce CDs.183 Germany was cautious about financial reform following the introduction of the European Monetary System and its need to act as a stabilizer for Europe. A review of the German financial system found no basis for change despite the poor development of securities markets ± especially the Euro-DM that had developed in London rather than in Frankfurt.184 And once again, during this period, Washington and Wall Street sought means to adjust their domestic financial system to extend US structural power but without creating inflationary pressures. Domestic pressures at the time called for greater choice in how depositors could use their money, which, due to inflation, was actually diminishing in

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real terms.185 Washington had to account for an investing public eager to increase their wealth without inflation wiping it away. Washington was also keen to appease US banks, who were under competitive pressures at home from non-bank intermediaries whose issued debt between 1976±81 had doubled from $600 billion to $1.2 trillion.186 Unsurprisingly, financial innovations emerged to meet consumer demand. Merill Lynch's 1978 introduction of a Cash Management Account (that operated in money markets) provided such an alternative, but was hampered by Regulation Q interest rate cap restrictions. As Thomas Hammond and Jack Knott explain, financially savvy consumers called for the removal of Regulation Q: Large numbers of middle-class savers realized how much interest they would lose by returning to the old regime . . . Banks consequently supported the removal of Regulation Q so they could compete in money markets. The Federal Reserve also favored deregulation of interest rates because it wanted to allow the interest rate to rise even further in its fight against continuing inflation.187 As discussed in Chapter 3, interest rate caps (and consequent interest rate differentials) had assisted the development of the Euromarkets, the beast the Fed now wanted to tame. But clearly Washington's 1978 consideration to regulate the Euromarkets was just that, a consideration. Internationally the proposal wasn't popular and would hamper the operations of US banks. Furthermore, Washington was actively encouraging the American public to become more involved in more flexible methods of finance. At the lower end of the market the CRA sought to provide credit for housing and business. Less significant to the strength of the US domestic financial system, but indicative of Washington's will to embed finance into the American public, in 1980 the Internal Revenue Code was adjusted to direct tax-exempt mortgage bonds from state and local governments into the construction of housing for lower and middle-income earners.188 Pressure for more flexible means of investment came from both uptown and downtown. At the middle and upper end of the market investors no longer wanted interest rate caps. Thus continued controls were opposed internationally and domestically ± by the US's trading partners, by Wall Street, and by the middle classes. If direct financing was to be more socialized or embedded to promote US interests, a change was required. Accordingly, in 1980 the congressional establishment of a Depository Institutions Deregulation Committee (to oversee the phasing-out of deposit interest rates restrictions) led to the

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ratification of the Depository Institutions Deregulation and Monetary Control Act and the International Banking Act.189 The Acts were intended to `effectively work in the same direction to increase competitive pressures throughout the country'.190 Washington's policies of international passivity and national activism were perpetuated, albeit slightly adjusted. The biggest regulatory change in these Acts was the introduction of `International Banking Facilities' (IBFs) in December 1980. Adopting a 1978 proposal from the New York Clearing House Association, their purpose was to permit US banks to establish special depositing facilities where foreign capital of over $100,000 could be stored without interest rate ceilings or reserve requirements. They were for all intents and purposes Euromarket-enabled banks located on US soil. Unsurprisingly, 80 per cent of them were situated in New York. Following their introduction, the competitiveness of US banks' (those actually located in the US) Euromarket activities increased dramatically.191 Japan soon followed in 1980 with the establishment of similar facilities in Tokyo and a revision of its Foreign Exchange and Foreign Trade Control Law on financial transactions in international markets. This revision, according to Ulrike Schaede, began the process of direct financing in Japan. As a consequence the value of unsecured bonds increased from 40 billion to 268 billion between 1980±81.192 At the same time, however, administrative guidance on banking was tightened. By the early 1980s, Washington had decided that the best way to deal with the Euromarkets was to internalize aspects of them within the US domestic financial system, such as the creation of IBFs and introduction of new institutions like the New York Futures Exchange in 1980.193 Furthermore, while socially questionable, Reagan's 1981 Economic Recovery Tax demonstrated the increased importance given to financial markets, by lowering taxes on long-term capital gains to assist investment.194 By the end of the 1970s, the Euromarkets were aptly described `as a 51st state outside the Federal Reserve System . . . an integral part of the nation's financial system'.195 Accompanied by the 51st state, the US sought to further its structural power in international finance with policies of international passivity and national activism in the 1980s. The focus now more than ever was on financial innovations, financial reform, and financial diplomacy to liberalize other states' financial systems. All three promoted direct financing and US structural power in the international political economy.

5

1982±91: Indebted Innovation

Your markets are not open to our financial institutions. Your markets are not open to the capital for the rest of the world to enjoy as in the United States market . . . How much more patience do you want? My response is: action, action, action, that's what I want now. I'm through with patience. Donald Regan1 This chapter discusses the period 1982±91, when the US `borrowed back much of the credit it had created and exported under the Nixon formula'.2 In response to worldwide inflation and interest rate fluctuations, Robert Keohane proclaimed in 1982 that without `a dynamic response', the `political-economic future looks bleak for this country [the US], and probably for the other economically advanced, capitalist democracies as well'.3 In international finance, the US provided a dynamic response to politico-economic complexities, though not through the construction of international finance regimes. To combat economic turbulence of sensitive interest rates, the Debt Crisis and problems with the value of the dollar, Washington and Wall Street promoted direct financing to provide better risk protection and to find innovative means of raising capital and selling debt. Following the Debt Crisis, US banks conducted a `search for life beyond lending' and focused their operations upon financial instruments that were essentially debt securities rather than bank loans.4 The promotion of direct financing was in full swing and commercial banks that chose to remain deposit-geared rather than participate in the new investment environment would become antiquated. Competitive pressures upon Britain, Germany, and Japan compelled them to follow suit. Britain rapidly deregulated and formed bilateral ties with the US to promote securities 112

1982±91: Indebted Innovation 113

trading. Japan began to deregulate its financial system after the 1984 Yen-Dollar Agreement with the US. Germany's financial system geared itself more towards securities trading under a new national plan, Finanzplatz Deutschland, to make Frankfurt the financial center of Europe. Drawing from their interactive embeddedness, Washington and Wall Street were able to extend US structural power in international finance during the 1980s. As in previous decades support for structural power came from both the international and domestic arenas. At home new levels of indebtedness increased the need for financial innovations and embedded finance further into American society, particularly the American middle classes. Ongoing national activism forced intermediaries to compete against each other and to produce innovations in the domestic system that then provided competitive advantages in the international system. The 1980s were thus an era of indebted innovation. Internationally, the extension of US structural power can be seen in continued US reluctance to engage in international regimes. US treatment of regimes reflected the continued use of unilateral and bilateral financial diplomacy. Consequently (and most notably seen in the Basle Accord of 1988), regimes were not used to internalize `negative externalities' but to create positive externalities for US interests. Through canny financial diplomacy, Washington was able to increase the international competitiveness of US intermediaries to promote direct financing and generally increase securities trading for US interests ± including the sale of US government debt en masse to Japan. Washington assisted Wall Street in enacting change in international finance as well as assuring a market for US debt. This view of the relationship between Washington and Wall Street is not commonly accepted. The 1980s are popularly characterized as a time of further US decline, especially in finance. As a consequence of the shift away from traditional forms of financial intermediation the number of US commercial banks declined during the 1980s. Some scholars in IPE have viewed this decline as an indicator of US hegemonic decline and its need to support regimes. On the contrary, during the 1980s there was a broad shift from loans coordinated through banks to the use of securities markets for capital. This area of finance was clearly dominated by US investment banks and supported by the enormous growth of institutional investors, particularly pensions funds. Commercial banks were not isolated from increased direct financing ± indeed, they pushed it forward to increase the flexibility with which they managed their books. Partial financial deregulation in the US supported the promotion of direct financing among all types of intermediaries.

114 US Power in International Finance

In this chapter I have four points to make: (i) during the 1980s US personal, commercial and government indebtedness along with domestic financial regulation and financial innovation promoted direct financing; (ii) the Debt Crisis of the early 1980s assisted the process of direct financing through microeconomic financial reform and increased financial regulation upon US banks; (iii) direct financing helped the US bilaterally determine the conditions of the Basle Accord with Britain, to the detriment of Japan and Germany; and (iv) the shift within the US from banking to securities trading displays the capacity of the US to enact and adapt to change despite arguments of hegemonic decline.

Indebted innovation In 1982, after the small slump in international banking experienced during the late 1970s, international earnings increased to represent over half the earnings of the US's top ten banks.5 At this stage of the early 1980s, banks endured as the most popular suppliers of credit. They provided the easiest way to match creditors with debtors, including the continued supply of syndicated loans to developing states. While banks continued to dominate credit provision, by 1982 their source of capital shifted away from their traditional base of deposits to non-deposit sources such as CDs, commercial paper and government debt notes, bills and bonds. As Table 5.1 demonstrates, the US led this change in comparison to its major trading partners. Support for flexible financial instruments came for two overwhelming economic reasons: increased sensitivity within financing arrangements due to interest rate volatility; and the new indebtedness of Washington, Table 5.1 Percentages of commercial bank funding from non-deposit (or nontraditional) sources (including time deposits of $100,000 and more and certificates of deposit)

United States Britaina Japan Germany

1976

1978

1980

1982

31.5 8.1 22.3 23.7

34.5 8.8 21.7 24.9

49.9 9.4 22.2 31.2

59.9 12.9 24.0 36.3

Source: Aktar, M.A., `Financial Innovations and Their Implications for Monetary Policy: An International Perspective', BIS Economic Papers, No. 3, December 1983: 9. a Calculations for Britain only include CDs and understate the development of nontraditional sources.

1982±91: Indebted Innovation 115

Wall Street, and the US public in general. As Figure 5.1 demonstrates, US domestic interest rates and international interest rates were particularly high during the beginning of the decade, especially when compared to more stable economies like Germany. Indebtedness and volatility prompted Washington and Wall Street to innovate. The volatility in interest rates spurred on the 1982 introduction of Money Market Deposit Accounts to allow banks to compete with money market mutual funds. The American public took to them with vigor. Greater flexibility in management accounts reflected an increasing financial sophistication and indebtedness in society. Furthermore, reflecting the volatility of the period, futures trading on stock market indices was introduced on the NYSE in 1982.6 Treasury bonds were introduced with interest payments separated from the principal, with the former floating in accordance with the official rate of the day. In addition, derivative products came onto the markets, such as options on Treasury note futures and currency futures, and the trading of interest rate caps. Quite simply, greater direct financing required the greater use of derivative products to address risk. Washington supported such innovations as means to increase the competitiveness and flexibility of the domestic financial system. It worked, as a bull market developed that would endure until the 1987 crash. Of course the effects of interest rate volatility were not only felt in the US. In 1982 Britain introduced the London International Financial Futures Exchange (LIFFE) for trading interest rates, foreign exchange and stock index futures and options ± and also for the trading of US 22 US Prime Rate US dollar Deutschmark

20 18 16 14 12 10 8 6 4 %

1981

1982

1983

Source: BIS, Fifty-Fourth Annual Report, June 18 1984: 106

Figure 5.1 US prime rate, interbank rates on three-month Eurocurrency deposits (US dollar and DM), 1981±84

116 US Power in International Finance

Treasury bonds.7 In Germany, facing domestic pressure for financial services and external pressure from Citibank and American Express, the Gesellschaft fuÈr Zahlungssysteme established a `Eurocard' to develop a system of personal consumer credit markets established in the US during the 1960s (see Chapter 3). While an invasion of US credit-cards was guarded against, Bonn recognized that it would not be able to protect its financial system from the influence of US intermediaries much longer. Accordingly, in 1982 an Association of Foreign Banks was formed to manage the eventual increase in foreign banks in Germany.8 In Japan, following the reforms of 1980, more flexible financing methods for consumers were slowly being introduced. During the early 1980s the spread of new time deposits provided a more flexible way for Japanese to save their money.9 As in previous decades, national activism encouraged financial innovations and direct financing through changes in US domestic regulations. In contrast to the common perception of US financial regulation as in a state of `gridlock' or a `financial Vietnam' (discussed below), Washington was willing to experiment. For example, while the introduction of International Banking Facilities promised greater freedom in international finance, the privileges were restricted to only a handful of banks.10 One of them, the Bank of America, was even permitted to offer brokerage services through Charles Swab, but was not permitted actually to underwrite securities.11 This early relaxation of national financial regulation provided a preview of a deregulatory process that would stagger on for nearly two more decades. For the main part, US banks were still strictly separated in the early 1980s, a separation that allowed space for other competitors to challenge them ± and especially to challenge commercial banks. Greater competition for commercial banks came from the Garn±St. Germain Depository Institutions Act of 1982, which deregulated non-bank financial intermediaries allowing, for example, Savings and Loans to invest in high-risk bonds and expand commercial property lending ± decisions that would later end in tears. Like the establishment of IBFs, Washington intended the changes to attract foreign capital to the US instead of the Euromarkets. The need to draw capital into the US came from the massive increase in the US federal deficit under the Reagan Administration, from $9 billion in 1981 to $207 billion by 1983.12 Much of the increased deficit was a consequence of tax cuts promised under the largely regressive Economic Recovery Tax Act of 1981 with which Reagan intended to boost the domestic economy and increase defence expenditure.13 For financial markets `Reaganomics' was characterized by the faith placed in

1982±91: Indebted Innovation 117

intermediaries and corporations for the `entrepreneurial drive as vehicles of development'.14 However, persistent high interest rates damaged the US industrial base and placed pressure upon the credit creating capacities of banks.15 Consequently the Reagan administration targeted financial innovations and the promotion of direct financing as means of weathering the turbulent economic conditions and deepening consumer credit markets. These markets would, in turn, help provide a basis for the extension of US structural power in international finance. To manage their books more flexibly, US intermediaries in the 1980s increased short-term debt trading. While in 1960 71 per cent of all corporate debt was long-term, by the early 1980s long-term debt had fallen to just over half. Between 1983±85, for example, US banks' underwriting of Euronotes increased fifteen-fold to $50 billion.16 Short-term debt trading was a political and economic necessity and the further promotion of direct financing benefited as a consequence. More importantly, in the 1980s Wall Street looked not only towards the international arena to manage its funds but also to the American public. During the early-to-mid 1980s the increase in consumer credit in the US was enormous. Between 1980±85 the total credit market debt of all sectors within the US economy expanded from $4.7 trillion to $8.2 trillion. The debt of the domestic non-financial sector also increased rapidly from $3.9 trillion to $6.9 trillion. To demonstrate the importance of this increase in another way, during the 1970s domestic non-financial sector debt fluctuated between 136 and 138 per cent of GNP. By 1985 domestic nonfinancial sector debt had expanded to 169 per cent of GNP.17 US growth was led by the provision of credit as government, corporate and personal debt escalated to record highs. Between 1980±85 household debt increased at a rate of 10.5 per cent per annum while personal income grew at only eight per cent. Despite, even because of, household indebtedness increasing by 64 per cent between 1981±85 to a record $2.4 trillion, Americans became more involved with direct financing. Indeed, rather than leading to financial stagnation, indebtedness led to greater investment. For every year during the same period household purchases of securities (debt or equity) exceeded personal savings by margins of $150 billion±$250 billion per year. Furthermore, institutional investment also increased rapidly under the Reagan administration. During the late 1970s investment in mutual funds hardly registered any growth. However, between 1981±85 net investment increased by $195 billion ± of which $148 billion had been directed into bonds. Pension funds' share of household portfolio investment had risen from only three per cent in 1945 to more

118 US Power in International Finance

than 22 per cent in 1985.18 Finance was clearly becoming more embedded in American society, and while direct financing was conducted overwhelmingly by intermediaries (whether banks, brokers or institutional investors), ownership and the source of financial assets was changing. In short, what most would consider `high finance' ± investment activity as opposed to holding deposits with a bank ± was becoming embedded in the American middle and, to a lesser extent, lower-middle classes. In Reagan's America finance credit-money clearly ascended to a grossly dominant position above the household `money-economy' of the 1950s. For households as well as banks and corporations, debts and assets were separated. Credit allowed the management of both and as asset-backed securitization demonstrated, provided both. The emergence of securitization and banks' development of `off-balance-sheet' activities were crucially important innovation to the US domestic system and embedding finance within the American public. The 1984 Secondary Mortgage Market Enhancement Act led to a market for mortgage-backed securities from 1985. These Collateralized Mortgage Obligations (CMOs) allowed `homeowners to draw against a line of credit supported by the appreciated value of their homes' or other assets.19 Thus commercial banks could, with the permission of the mortgagee, package the outstanding debt on the mortgage and all payments thereafter and sell this package as a block to an investment bank. The investment bank would then use this package to create asset-backed securities and sell them as bonds of various values to investors. By packaging debts and selling them off, commercial banks were able to remove the asset from their balance sheet (which would become particularly important after the Basle Accord, discussed below). Investment banks were provided with a secured supply of debt capital. Washington received the political benefit of increasing homeownership and increased public involvement in the domestic financial system. In 1986 issued CMOs amounted to $48 billion and kept rising rapidly.20 The growth towards securitization was vitally important for the provision of credit in the 1980s and for continuing financial dominance for the remainder of the century. Another reason for the raising of capital through `off-balance sheet' activities was the paucity of banks `on-balance sheet' assets. The primary reason for the lack of on-balance sheet assets was simple: turbulent economic conditions and the search for greater profits encouraged banks to put all their available capital out to market. This new wave of financial innovations that did not appear on banks' balance sheets provided the potential for what finance journalists referred to as a

1982±91: Indebted Innovation 119

`dangerous new global debt bomb'.21 However, a more immediate concern was apparent. As banks fought harder for profits and tried to put as much capital as possible out to market, they reduced their capital adequacy ratios ± capital put away in case of emergencies.22 Thus, capital adequacy ratios in the early 1980s were low for most US banks (an average of 4.63 per cent for the 17 largest US banks).23 This problem was not isolated to US banks. British, Japanese, and German banks all `overlent' to Eastern Europe and Latin America through the syndicated loan markets that emerged after the first oil crisis.24 The reason for `overlending' came from the challenge of direct financing. As discussed in the previous chapter, the freedoms given to non-bank intermediaries and greater flexibility in securities trading placed pressure upon commercial banks to lower costs and increase revenues. The practice of `overlending' led to a disregard of default risks. And disregard led to the Debt Crisis. The consequences of the crisis would promote direct financing even further.

The Debt Crisis Most loans to developing states had variable interest rates, so rises in world interest rates dramatically increased their payments. Consequently, states like Mexico and Brazil were lumped with an extra bill of $3 million or $4 million every time interest rates rose.25 In most developing states that had borrowed on international markets, the debt service ratios (ratio of debt repayments to export earnings) had increased sharply during the 1970s.26 To make matters worse, `surplus capacity' in advanced industrial states reduced imports from developing states, making the demands upon loan repayments unrealistic.27 Furthermore, as investors (both domestic and foreign) grew nervous about a possible financial meltdown, they withdrew their investments. Low export earnings, capital flight, and, consequently, increased debt service ratios continued into the early 1980s. Many developing states (overwhelmingly in Latin America) threatened to default on their repayments. In August 1982, Mexico requested a 120±day moratorium on its debt payment. Of Mexico's $81 billion debt, $23 billion was owed to US banks.28 The Mexican request marked an unsettling end to a process already winding down ± bulk lending to developing states from large international banks. Overlending in the 1970s had created an dangerous situation for the US as, when totalled, the top nine US banks had lent 140 per cent of their capital to Latin America.29 Accordingly, once the threat of default was realized, US banks immediately stopped lending to

120 US Power in International Finance

the Latin American region.30 Default on debt repayments would not only signal a major crisis in the US domestic financial system but for the international financial system as a whole. Mexico's threat of default created a `run by banks' and initiated extensive debt rescheduling under the auspices of the IMF, the G-5, and private intermediaries.31 Two `creditor clubs' emerged: the `Paris club' to reschedule debts for the G-5, and the `London club' to reschedule loans for commercial banks.32 Rescheduling arrangements differed greatly between the two clubs, primarily due to the fragmented nature of the London club and its emphasis on debt recovery rather than debt relief.33 The London club included large and small banks, which created coordination problems in determining a common interest in debt rescheduling. Banks were extremely reluctant to change interest payments on the grounds that it would create imbalances within their own volume of capital and send the wrong message to developing states. Such `tough love' extended to the organization of new loans, which were viewed as merely a needless band-aid for deep economic structural problems. Importantly, banks did not have the necessary clout to implement structural reforms and relied upon the IMF to implement change. Private banks thus relied on an intergovernmental body to assist with debt recovery; an organization that had warned about overlending in the 1970s. Still, banks' reasons for lending so heavily were related to reasons of state. US banks rejected accountability for the volume of capital lent to developing states, arguing that `they loaned so much because they were encouraged to do so by Washington and other Western governments, as a matter of public interest'.34 As discussed in the previous chapter, the expansion of credit during the 1970s was both in Washington's and Wall Street's interests. While the US did not provide an extensive lender of the last resort function, it did provide the most funds for financial stabilization. For example, in 1982 the US provided $700 million in cash payments to Mexico to help avoid the crisis, and during the crisis supplemented about half of a $1.85 billion loan coordinated by the BIS to the Bank of Mexico.35 Responsibility for the remainder of stabilization funds was shared among the creditors of bad loans ± the US, Japan, Britain, Germany, and France.36 Like complaints about the US's ability to force other states to comply with its wishes `by itself' in the 1970s, neorealists like Stephen Krasner use the US's response to the Debt Crisis to prove its hegemonic decline. Krasner points specifically at US inability to `dictate policies virtually unilaterally' to the IMF and similar institutions.37 Even for Kahler, a non-neorealist, the US failure to support intergovernmental regimes

1982±91: Indebted Innovation 121

indicates `how little concerned the United States appeared to be with system stability'.38 Hegemonic decline therefore implies costs for the hegemon as `we [the US] are no longer able to determine the course of events on our own at comparatively low costs to ourselves'.39 But the extension of US structural power allowed Washington and Wall Street to shape preferences in international finance without the administrative/lender of the last resort costs that direct control would carry. However, this view has not been popular in interpretations of the US's role in the Debt Crisis. Like the notion of `power disinvestment' put forward by neoliberal and neorealists in the previous chapter, a lack of command or resources (seen in terms of funding to official international financial regimes) is identified as a sign of hegemonic decline.40 Furthermore, in assessing the willingness of the US to act as a hegemon, there is the implication that the US should have resumed its supposed role as a benevolent provider of public goods in a time of discontinuity.41 As stated previously, it is easy to demonstrate hegemonic decline if the original powers attributed to the hegemon are exaggerated. As the evidence so far has demonstrated, the depiction of the US as a benevolent hegemon is inaccurate as the US was involved in regimes to extend its structural power rather than selflessly to provide international public goods.42 The US's reluctance to act as a benevolent hegemon in the Debt Crisis stemmed not from a lack of capabilities but from the need to generate structural power in international finance in accordance with its domestic sources of power. On this very point, the US's domestic regulatory system of separate commercial and investment banking combined with the Federal Reserve system impacted heavily on how Washington handled the rescheduling of debt after the crisis. In accordance with US financial regulation, loans with payments more than 90 days in arrears were downgraded. The immediate consequence of downgrading a loan is a drop in the price of bank's shares. Under the scrutiny of financial markets, US banks were reluctant to capitalize overdue interest on loans (add the overdue interest to the outstanding principal). This contrasted heavily with the treatment of the Debt Crisis by the German banks, who capitalized the overdue interest because they could legally hide their losses.43 The approach of German banks was in part a consequence of criticism levelled against them from their experience with bad loans to Poland in 1981, where private banks relied on their own debt rescheduling due to a lack of IMF assistance.44 Although they were far less heavily involved with lending to Latin America, the Japanese approach to the Debt Crisis was similar to the

122 US Power in International Finance

Germans. While the top US banks had exposures to Mexican debt equal to, on average, around 50 per cent of bank capital, a handful of Japanese banks had overlent just as heavily. The Bank of Tokyo, for example, was exposed to the sum of 83 per cent of its capital, and the Long-Term Credit Bank of Japan's exposure was 53.6 per cent.45 Like US banks, the first action by Japanese banks was to suspend all new loans to Mexico. However, the Fed and the BoE pressured the MoF to not allow its banks to do so. Japanese banks continued to place pressure on the MoF and the BoJ for relief ± and the banks got their way. The MoF permitted more loans to developing states and organized the purchase of bad loans by Japanese factoring companies who could claims losses as tax deductions.46 A few years after the debt crisis is was clear that `the Japanese government had purchased for Japanese banks a clear path for retreat'.47 The Fed and BoE's influence over the MoF in this case contrasts with the notion of a strident new financial power. In response to Fed and BoE's requests, MoF saw its role as an international stabilizer. Its command of capital resources allowed Japan to absorb losses from the Debt Crisis, but despite its resources Japan was not able to shape preferences in international finance. In fact, the MoF's provision of a retreat for Japanese banks would allow the continuation of overlending to developing states (but this time in Asia) well into the 1990s. Both the German and Japanese responses to the Debt Crisis demonstrated the cooperative relationship between government and banks ± to the extent of absorbing and hiding losses. The formal competitive character of the US financial system wouldn't allow similar actions. Washington could not engage in a multilateral regime that would require banks to absorb loan losses since that would compromise its relationship with Wall Street. Furthermore, on a more cynical note, a debt regime premised on the renewal and extension of loans to developing states would establish intergovernmental support for a market that was already exhausted.48 While net capital inflows to Latin American states in 1981 represented around six per cent of host-country GDP, during the 1983±90 period they hardly registered at all.49 For US banks the syndicated loans market simply dried up. From 1985±90 US international lending through securities peaked at 92.4 per cent while syndicated loans represented only 7.6 per cent.50 As Figure 5.2 demonstrates, this trend was already underway internationally. While Washington did not undertake the creation of a multilateral finance regime, it began to establish the framework within which it sought to establish its own risk diversification measures with the formation of the International Lending Supervision Act (ILSA). In 1984,

1982±91: Indebted Innovation 123

250 Syndicated bank loans

US$ bn 200

International bonds and notes Euro-note facilities

150

100

50

0 1982

1983

1984

1985

1986

Source: BIS, Fifty-Seventh Annual Report, June 15 1987: 106 Figure 5.2 Trends in international financial markets, 1982±86

shortly after the establishment of the ILSA, the Continental Illinios Bank collapsed.51 Quite clearly commercial banking needed better means to protect itself, and Washington wanted to minimize the financial assistance required from the federal government in times of emergency. The prospect of tax payers' monies being used to `bail-out' big banks was very unpopular. Washington needed to abate domestic political concerns, and as discussed later, Washington found a way to finance its ballooning deficit with help from a capital adequacy regime that would require banks to shore up their existing assets with US government debt. The Debt Crisis and bank crises made the financial community understandably nervous about risk management.52 Agreement on the need to raise capital adequacy levels came from Wall Street with the recognition that as depositors realized that their banks did not have the capital to cover potential losses, they would withdraw their money.53 Furthermore, as a consequence of public concern, Washington toughened-up its treatment of commercial banks. Banks identified as having particularly low capital adequacy levels were landed with premiums on interbank lending to reflect the risks attributable to developing states within their loan portfolios.54 (Such premiums would be used as market discipline by the US and Britain against Japanese banks in the mid-1990s. See Chapter 6.) For the early-to-mid 1980s, the required increase in safety standards `imposed higher costs on US banks relative to their expanding

124 US Power in International Finance

array of competitors based in other national banking markets and in domestic or foreign securities markets'.55 Again, this was a consequence of the US's formal competitive system in comparison to more cooperative systems that permitted banks to carry on with low capital adequacy ratios. For many US corporations, a consequence of the increased cost of obtaining loans from banks was to change to direct financing on debt and equity markets.56 Indeed, as Eric Helleiner notes, the 1982 Debt Crisis `encouraged a trend toward securitization in international financial markets'.57

The Yen±Dollar Agreement and liberalization The Debt Crisis and bank failures of the early 1980s placed pressure upon the banks of the US, Britain, Japan, and Germany to find new means to diversify risk. As stated above, increased banking costs made trading on debt and equity markets a cheaper and more efficient way of raising capital for many corporations. Increased direct financing heightened pressure for financial liberalization, especially upon states with undeveloped capital markets and high savings ratios. Indeed, the earlyto-mid eighties was a period of great financial `liberalization' as states attempted to increase the flexibility of their financial systems and adopted what the BIS appropriately called a `diffusion of innovations' from the US domestic financial system.58 In contrast to the common perception that financial liberalization is a consequence of multilateral pressure, pressure for liberalization came primarily through unilateral actions and bilateral diplomacy. As in the 1970s, financial reform was tied to monetary relations. Bilateral negotiations that reflected US monetary concerns were used to push liberalization and to further the development of direct financing in other states. Also like the early 1970s, the formal task at hand was to reduce the value of the dollar.59 A decline in US trade competitiveness placed pressure upon the Reagan administration to lower the value of the dollar and to encourage the Japanese and German governments to boost domestic growth.60 Of course this was a recurring problem, a problem that, according to Robert Gilpin, would not be resolved unless `the dominant powers can resolve the N-1 problem in some formal and systematic way'.61 But the opportunity to solve this problem had been rejected in the negotiations that followed the collapse of the Bretton Woods regime. As persistent monetary problems affected the US competitiveness in the international political economy, Washington continued to use the `dollar weapon' to extend its structural power in

1982±91: Indebted Innovation 125

international finance. Debtors can retain power over their creditors if they are able to structure relations within the international financial system. The `dollar weapon' was especially effective in easing the US's concerns into a more indebted society. Within nearly all IPE literature of the decade, American indebtedness was interpreted as confirmation of US hegemonic decline, particularly when compared with states with enormous reserves of capital. Robert Gilpin, for example, argues that during the mid-1980s Japan `supplanted the United States as the dominant creditor nation and financial power'.62 The capital resources of Japan and the indebtedness of the US suggested to many political economists that Pax Americana could be laid to rest and that it was now time for Pax Nipponica.63 As commented in earlier chapters, hegemony in the sense of Pax Britannica, Pax Americana and Pax Nipponica are commonly premised on the idea that power reflects the resources that a state can muster.64 But power is the ability to shape preferences from the basis of state capacity. Certainly, the capacity of Washington and Wall Street to draw upon US structural power in international finance was clearly demonstrated during the mid-1980s.65 The Yen±Dollar Agreement of 1984 provides an excellent example. In response to the hindrances of a strong dollar, President Reagan and Prime Minister Nakasone formed the Yen/Dollar Group in November 1983 to discuss the internationalization of the yen and to secure permission for US intermediaries to access Japan's closed financial markets.66 The US team represented a `coalition of American Treasury and big American banks and securities firms'.67 The `team' reflected the interactive embeddedness between Washington and Wall Street and more generally the different character and structure of the US and Japanese financial systems. The US team represented a fragmented collection whose power derived from the commercial power of international markets and national financial regulation ± the supporters of US policies of international passivity and national activism. In contrast, the Japanese negotiators represented a centralized authority who governed financial relations. The US's task was therefore to demonstrate the advantages of financial flexibility and to combat the MoF's control over Japanese money and bond markets, and particularly its restrictions upon the establishment of secondary securities markets.68 Furthermore, US banks wanted the opportunity to access Japanese savings. Under pressure from the Washington±Wall Street coalition, the US and Japan formed an agreement which set an agenda for the liberalization of the Japanese financial system. Similar to the `democratization' of the Japanese financial system during the Occupation period, US officials acted in

126 US Power in International Finance

coordination with Japanese officials to oversee and establish a timetable for financial deregulation. As C. Fred Bergsten suggested, the agreement represented a coup in finance: Pressure from one country to another to liberalize its markets is common in trade policy, but never before has one country so pressed another to integrate its financial markets with the rest of the world.69 Michael Moran refers to the Yen±Dollar Agreement as an example of the US's structural power in international finance `not because American power was able to steamroller Japanese opposition, but because American intervention decisively altered the balance between the domestic coalitions formed in the Japanese arguments about reform'.70 Indeed, the US coalition played successfully upon political rivalries within the Japanese government. Before and during the agreement talks, the Washington±Wall Street coalition fostered support for financial deregulation within the Japanese finance sector on the grounds that it would offer them greater financial flexibility.71 US structural power was effective. After lobbying the MoF on the basis that the Japanese financial system was uncompetitive, banks were allowed to sell Japanese government bonds in 1983, and resell them in a secondary market after three months in 1984. This, in turn, created greater pressures for liberalization as Japanese banks' dependency on Japanese government bonds swelled to 25 per cent of capital raising activity ± leading to calls for the MoF to permit investment banks to sell foreign CDs and commercial paper.72 In this way the US diffused power, and through the shaping of market preferences challenged the formal authority of the MoF. As a direct consequence of the Yen±Dollar Agreement, the market for CDs was opened up, banks were allowed to trade public bonds and limits on the purchase of yen in foreign exchange markets were removed. Furthermore, the Tokyo Stock Exchange (TSE) opened its doors to foreign membership (although no one joined until 1986).73 One important reason why Washington wanted the Japanese financial system to be liberalized was to allow more capital to flow into the US to purchase US government debt, which by 1985 showed its worse balance of payments ($80 billion in the red) since the First World War.74 Despite predictions that liberalization would create greater capital outflows and depress the value of the yen ± and valuation problems between the US, Japan, and Germany persisted over following years ± US Treasury Secretary Donald Regan pushed to secure liberalization.75 Again the strategy was successful as when the value of the yen declined

1982±91: Indebted Innovation 127

and capital controls were suggested as a means to ease pressure on the currency, the US was able to persuade the MoF to drop the idea.76 The Washington±Wall Street coalition involved in these agreements was incredibly successful in liberalizing Japan. Between 1983±86 outflows of Japanese capital increased from $20 billion to $134 billion, making Japan the largest exporter of long-term capital in the international political economy.77 The financial liberalization provisions of the Yen±Dollar Agreement were re-emphasized in the 1985 Plaza Accord, whereby (as discussed below) Washington requested that Germany and Japan stimulate domestic demand for imports (hopefully US imports). Japanese support in purchasing the lion's share of US government debt required a tradeoff between government and business at home. The BoJ introduced a `cheap money' policy to compensate for a less internationally competitive yen. Low interest rates followed and banks were given more leeway in their lending decisions and, importantly, use of short-term debt to manage positions.78 Thus for most of the 1980s, Japanese banks (particularly city banks) operated with low, regulated interest rates on their deposits and on their interbank borrowings. As increased demand for credit grew, Japanese banks responded by lending more and borrowing more from foreign subsidiaries in offshore markets, an `unconstrained source of funds in terms of both price and quantity'.79 After further liberalization `offshore' banking was also introduced in 1987, which after 18 months `was six times as large as that in New York'.80 Capital adequacy ratios dropped and Japanese banks also increased the riskiness of their operations by borrowing short, through interbank markets, to lend long. Bank activity expanded strongly, supported by a strong savings base at home ± between 1986±90, net savings in Japan exceeded Japan's investment needs by $345 billion.81 With all these factors combined Japanese banks were aggressive international operators and able to run at lower costs than other states ± including the US. As is discussed below, the US and Britain would hobble Japanese competitiveness through the 1988 Basle Accord. But, for the time being, the mid-1980s represented a revolution in terms of Japanese investment opportunities. In the late 1970s, Japanese investment in equities represented two per cent of all major industrial nations. By the mid-1980s investment in equities rose to 23 per cent. Similarly, investment in bonds increased from 15 per cent to 55 per cent and from two per cent to 50 per cent in short-term bank loans.82 Furthermore, futures trading began in the debt and equity markets, and on stock market indices. Futures trading also opened up on the

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TSE in 1989. In addition, the Tokyo Financial Futures Exchange opened its doors to the trading of dual currency bonds to compensate for an appreciating yen.83 While direct financing did not significantly alter the domestic financial system, it was drawing capital out of Japan at an incredibly rapid pace. Importantly, liberalization in the Japanese financial system benefited those at the top of the hierarchy, with financial innovations coming down from the MoF rather than emerging within the private marketplace.84 External pressure (gaiatsu) to transform the Japanese financial system and access its capital was working, yet an ongoing competitive/cooperative relationship between the Japanese financial sector and the Japanese government that would generate Japanese-led innovations did not emerge. Despite its capital resources Japan had to adapt to rather than enact change in the international political economy. Britain and Germany also had much to learn from financial innovations generated by the US and the Yen±Dollar Agreement. As the Yen± Dollar Agreement affirmed the role of bilateral financial diplomacy, Britain and Germany were anxious not to isolate themselves. Quite clearly strategic alliances were being formed and financial `liberalization' did not mean access for all. In Germany, speculation that the bilateral agreement between Japan and the US would exclude German intermediaries from accessing Japan's financial markets led to a bilateral agreement between Germany and Japan.85 Furthermore, following pressures to modernize the German financial system a bevy of financial innovations were adopted, including the introduction of floating-rate notes, zero-coupons, and currency and interest rate swaps in deutschmarks.86 In 1985 the Bundesbank allowed foreign bank subsidiaries to issue domestic bonds and changes in the federal regulations created a `Free Market' to permit the sale of unlisted securities.87 But German financial modernization was slow and indecisive ± a consequence of public opposition and sluggishness among German intermediaries in adopting direct financing. One notable example of indecisiveness is when Germany followed the US's lead in 1984 and removed its withholding tax on foreign holdings of German securities.88 It withdrew the tax to encourage the liberalization of the German financial system and to attract capital to Germany in order to adjust short-term financial positions. This withdrawal was made in the same period as the Bundesbank's temporary withdrawal from money market operations, and the abolition of capital controls and regulatory constraints on the international use of the deutschmark.89 The German withholding tax was reinstated in 1988, removed

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again in 1989, then again reinstated in 1993.90 The conflict surrounding the withholding tax is indicative of the pressures upon `German financial mercantilism' and its public sensitivity. In contrast, Washington's reform of the 30 per cent withholding tax on interest paid to foreign investors reflected the continued use of policies of international passivity and national activism. Before the reform of the US withholding tax, US corporations took advantage of a US±Netherlands tax treaty that removed disclosure requirements and withholding tax. US corporations naturally began to exploit the loophole to issue bonds. By 1983 onethird of interest paid by the US to foreign investors went to addresses in the Netherlands Antilles! Following the reform of the withholding tax, the volume of securities booked in the US increased from $19 billion to $50 billion between 1984±85.91 The tax reform was spurred on by an `American thirst for world savings' and to assist the sale of Treasury bonds to finance the US deficit.92 As Tony Porter comments, the fact that the treaty was not reformed earlier provides some evidence for the notion that Washington and Wall Street cooperated to `escape United States regulations by using the Euromarkets'.93 It also demonstrates US state capacity; how clearly Washington was able to play the international and domestic realms against each other for US interests. Enhanced by deep, liquid domestic securities markets, direct financing was assisting US state capacity by promoting innovations and international competitive advantages. Americans were in favor of increased access to direct financing, Germans were not. Indeed, Germans did not want their financial system to be `Americanized', and Germany was having difficulties in promoting direct financing among its citizens and its banks. Again, Germany was placed in a position of `catching-up' to the US as the adoption of direct financing techniques reflected concerns about the `increasingly conspicuous' underdevelopment of its securities markets ± a concern affirmed by the relocation of Deutsche Bank's international banking operations to London.94 Quite simply, Germany required more regulatory changes than the insulation of its financial markets from `democratic control' would permit.95 The structure and character of its financial system retarded the adoption of direct financing. In many ways German banks were the meat in the sandwich. The German public, and consequently the Kohl government, did not want to push greater securities trading yet German corporations were `leap-frogging' banks by going straight to international capital markets, increasing their level of `self-financing' and relying less on bank loans. On top of these constraints for German banks, during the mid-1980s the state-owned Landesbanken, that accounted for

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15 per cent of turnover, began to enter markets traditionally catered to by private banks.96 It was all too much: German banks cried foul and called for reform. The German government responded by promoting Kapitalbeteiligunggesellschaften (equity participation companies) to fund equity capital and boost Germany's securities markets.97 Due to the reluctance of German businesses their success was minimal. German financial modernization was therefore suffering due to a lack of embeddedness ± ordinary Germans at this stage did not want direct financing even though banks and corporations sought ways to increase their financial flexibility. In contrast, financial reform in Britain allowed it to `retain and capture a niche in the emerging global financial market-place' despite, according to John Zysman, the absence of a `basic strategy for using existing private financial institutions as a technical arm or political ally'.98 In Britain, financial regulations changed at a rapid pace and financial markets quickly adopted direct financing techniques. During the early 1980s trading on the LIFFE doubled for stock options and stock index futures, and tripled for US Treasury bond futures (from under ten million contracts in 1980±81 to nearly 35 million in 1984±85).99 Much of the internal impetus to liberalize the financial sector came from a decade-old Restrictive Trade Practices Order concerning the uncompetitive practices of commissions within the `old boys club' of stockbrokers.100 The BoE wanted reform and provided it with a 1984 agreement with the LSE that led to the ratification of the Financial Services Act in 1986.101 The subsequent `Big Bang' on October 27 1986 removed high entry barriers to trading on securities markets and liberalized brokerage commissions. It also separated brokers from `jobbers' (or `market makers', dealers who act as principals) and created a Securities and Investments Board (SIB) to oversee the whole affair. Similar to May Day 1975 on the NYSE, the `Big Bang' changed workplace sociology, the casual lunch hours were ruined and profit took precedence over research abilities ± changes attributed to `the damn Yanks'.102 More important than how brokers felt about their lunch hours, the changes in Britain were critical in trying to increase public participation in securities trading. In order to attempt to embed finance more deeply into `ordinary Britain', the BoE and the Thatcher government needed to provide assurances to the public. Accordingly, financial relationships became more formal, including the resurrection of the City Working Party founded in 1959 to reform the City's `Notes' for takeovers into a `City Code'.103 Furthermore, the new International Stock Exchange emerged, composed of the LSE and a range of brokerage

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associations.104 The motivation for the Big Bang, according to Robin Leigh-Pemberton, the Bank of England Governor, was that: `Change in the US has already gone further, leading and requiring change here'.105 Despite very different levels of public involvement in securities trading in the states under study, the premiere stock markets increased trading dramatically during the 1980s. Capitalization on the NYSE tripled, increased fourfold on the LSE, tenfold on the TSE, and threefold on the FSE.106 The adoption of direct financing techniques in the debt and equity markets of Britain, Japan, and Germany reflected US structural power and the ongoing power conferred by the dollar's numeraire status, despite its problems.

The October crash and hegemonic decline Just as Washington changed its opinion on the possible regulation of the Euromarkets in the late 1970s, it changed its mind about regulations to support the value of the dollar. Turning away from the supposedly laissez faire economics of the first Reagan administration, the principle of `automaticity' was adopted to establish internationally agreed rules and procedures to support the value of the dollar.107 While the sophistication and depth of US domestic finance was a great attraction to overseas investors, the dollar's 53 per cent increase against the deutschmark, 49 per cent increase against the pound and 21 per cent increase against the yen between 1980±85 decreased the incentives to keep investing in the US.108 The dollar's strength was a consequence of domestic politics ± from a expansive domestic economy, a strong hold on interest rates (to keep the strong dollar) and from the political confidence associated with President Reagan. For the US's trading partners the dollar was overvalued and damaging their economies. More importantly, because of the domestic political importance of a `strong dollar', no relief was in sight. Investment in US Treasury bonds increased rapidly ± $53.5 billion of the $81.1 billion Japan invested abroad in 1985 went into bonds, mostly into US Treasury securities ± but the worsening of the US's current account position and the possibility of the dollar crashing compelled many investors to rethink their American investments.109 The Plaza Accord was meant to alleviate concerns and demonstrate a new era of US fiscal austerity. It didn't. Washington's promises to reduce its deficits and Germany and Japan's promises to induce growth with low inflation were only partially met. Further discussions in 1986 heightened tensions between the US, Japan, and Germany. The US wanted Germany and Japan to lower their interest rates to stimulate demand for

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US exports so it could lower its deficit. Germany and Japan insisted that the US cut its spending further to reduce its deficit. Furthermore, Germany and Japan considered a large devaluation of the dollar to be detrimental to their export interests. German and Japanese investors feared that a fall in the value of the dollar would damage any profits on their investments, and prompted Washington to establish the 1987 Louvre Accord to gain support from other central banks to defend the dollar.110 By now the threat of a dollar crash was real. Despite negotiations at the Louvre Accord international monetary cooperation simply did not work. Washington threatened trade protectionism unless Japan and Germany took more direct action to stimulate their economies. Germany failed to provide a committed stimulation package. The Japanese also fell short of their promises. Fearing a dollar crash private investors withdrew their capital ± in August and September Japan was a net importer of capital from the US for the first time since the beginning of the decade. Washington rallied for the dollar by calling upon British, Japanese, and German central banks to purchase dollars to delay the inevitable. Finally, triggered by Germany's rise in interest rates, the Treasury Secretary James Baker bitterly announced that Washington would allow the dollar to fall, a scenario characterized by Robert Reich as `the town drunk . . . criticizing everyone else for excessive sobriety'.111 Given to drink, between September and December 1987 the dollar fell 15.6 per cent against the yen and 13.4 per cent against the deutschmark. As a consequence bond markets began to decline.112 International equity markets also began to decline, including Wall Street. On October 19 1987 the Dow Jones fell 508 points, ending the five-year bull market that began in 1982.113 The movement of capital during the crash is particularly illuminating in discussing the resilience of states' financial systems. On October 19 daily trading on the NYSE was three times greater than its normal average. Similarly, trading was 40 per cent above its normal volume on the LSE. By contrast, trading was 50 per cent lighter on the TSE. Trading volumes differed with the number of investors in the respective markets. In Tokyo there was only a small number of investors, and the MoF intervened to stop the `Big Four' investment banks (Nomura, Daiwa, Nikko, and Yamaichi) from withdrawing their investments.114 The TSE recovered to pre-crash levels within six months while the LSE and NYSE took two years. In contrast, the 1990 Tokyo crash (discussed later in this chapter) had no effect on the NYSE and LSE, which both continued to rise. Reactions to the crash also reflected the structure and character of

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states' financial systems in that in both the US and Britain, fierce competition on stock exchanges drew no government intervention. Their long recovery time reflected, again, competition and risk diversification, but that was also the reason why when they recovered in the 1990s they were much more resilient. In Japan, as mentioned above, the state played a strong role in lessening competition and cooperated with the Big Four. Although this allowed for a faster recovery time, the ongoing cooperative behavior between the Japanese financial system and the government permitted investments that would bring down the TSE in 1990 and damage the financial system for the decade that followed (see Chapter 6). At the intergovernmental level, the major effect of the October 1987 crash was the coordinated action of central banks to provide liquidity to halt the crash from spreading. Pressure rose to implement fiscal-policy commitments made at the Louvre Accord earlier that year. Within these commitments were, again, domestic stimulus packages in Germany and Japan, and a coordination of interest rate adjustments between the Fed and BoJ to encourage further Japanese investment in US government securities ± albeit with a premium to cover exchange rate risk.115 Like the Debt Crisis, the crash also prompted calls for the expansion of a new international finance regime and confirmed opinions of US hegemonic decline. According to Robert Gilpin, the crash showed: market gyrations to a host of short- and long-term factors: the advent of programmed trading by huge institutional investors; the inability of the President and the Congress to resolve their impasse over the federal budget deficit; the free fall of the dollar and the huge trade deficit causing the market's fear of renewed inflation; higher interest rates and eventual recession; the continuing refusal of certain other countries to open their markets, stimulate their economies, and import more American goods; the consumption binge and low saving rate of the American people; or the relative decline of American power and the decreasing capacity of the United States to give direction to the world economy.116 Giplin's view reflects the common perception of power as resources in IPE. Hegemonic decline is equated not only with Germany and Japan's reluctance to stimulate their economies but with the `consumption binge and low saving rate of the American people'. As discussed above, indebtedness was a source of innovation for Wall Street. Increased consumption and low savings rates both point to depleted resources, but

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during this period Americans were investing more in the US financial system. In fact, the October crash did not damage US structural power in international finance. Susan Strange's assertion that `participation in America's financial empire depends on the possession and use of US dollars and dollar-denominated assets' continued to hold true as in the mid-1980s the dollar was still the denomination of 75 per cent of all financial assets traded.117 The continued dominance of the dollar went against predictions of an ascendant yen or deutschmark, with the yen only representing 7.6 per cent of world reserves and only 2.3 per cent of Eurocurrency deposits. Furthermore, although Japan was held at the time to be the a great economic power overtaking the US, its economic success depended, to a significant extent, on American consumerism.118 Indeed, the relationship between the US and Japan exemplifies the ability of debtors to have leverage over their creditors.119 As a consequence of the October crash and perceived problems with the US financial system in general, Wall Street and the American investing public increasingly called for financial reform. It did not take much to rally support. The Savings and Loans (S&L) crisis of 1985±86 had already brought together `various segments of the finance capitalist class unified in an attempt to establish corporate welfare policy that serve[d] their collective interests'.120 The S&L crisis, which cost Washington more than $300 billion, exposed holes in the Federal Deposit Insurance Corporation (FDIC).121 Accordingly, the regulatory consequences of the crisis was the Financial Institutions Recovery and Enforcement Act of 1989, which provided a Resolution Trust Corporation for thrifts and raised $50 billion to pay out failed S&Ls.122 It also led to support for a 1991 FDIC Improvement Act, which provided $70 billion for the bank insurance fund.123 The investing public, however, were not satisfied and turned to commercial banks and direct financing. Not unlike the Debt Crisis, the consequence of the S&L crisis was a movement away from traditional forms of intermediation. In 1985, when the S&L crisis was in full bloom, the trading of mortgage-backed securities increased rapidly. This growth, and the process of securitization in general, would create an enormous boon for the promotion of direct financing and US structural power. As Washington soaked up losses from the S&L failures, US commercial banks bought up the properties from failed S&Ls.124 Despite a decline in the number of commercial banks during this period, and the perception that commercial banks were losing power, the S&L crisis enhanced their position. Furthermore, national financial regulation sought to protect commercial banks and thrifts. The Competitive Equality Banking Act of 1987 forbade non-bank

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intermediaries from encroaching on broader banking services provided by commercial banks and thrifts.125 At the time large scale financial deregulation was being debated in Washington and on Wall Street. Alan Greenspan, the new Chairman of the Federal Reserve, announced that the repeal of Glass±Steagall was `one of the Board's highest priorities'.126 However, extensive reform would not occur for a few years, as sections of the financial community and financial regulators strongly opposed their repeal ± particularly the Securities Industry Association. While the argument over the repeal of Glass±Steagall continued within various committees, the Fed was actively making concessions. The big commercial banks' lobbying efforts were rewarded in 1987 when the Fed allowed J. P. Morgan, Bankers Trust, and Citicorp to underwrite and deal commercial paper (as long as it did not exceed ten per cent of its activities).127 These reforms recognized the importance of direct financing for the US economy and the potential role that commercial banks could play ± under the eyes of the Fed. The fact that the Fed granted these concessions is important. While the Securities Industry Association and the American Bankers' Association feuded over how Glass±Steagall affected them, the Fed was engaged in a similar battle with the Securities and Exchange Commission. The Fed was willing to grant concessions to Glass±Steagall as long as the banks benefiting were under their control. The SEC felt the same way. However, as discussed in the next chapter, the Fed won out and while not able to draw more types of intermediaries under its watchful eye, it was able to allow banks to perform more tasks ± especially those that promoted direct financing. The Fed, quite simply, had greater diplomatic powers. In the mid-to-late 1980s the Fed engaged these powers to secure privileges for US commercial banks in the international arena. It did so through the creation of a new finance regime ± the Basle Accord. Indeed, by the mid-to-late 1980s Washington was prepared to support this international finance regime. While this regime on capital adequacy standards for commercial banks was not directly linked to the S&L crisis, it reflected long-term strategic interests in financial diplomacy to, as Thomas Oakley and Richard Nabors argue, `redistribute income from Japanese to American commercial banks'.128 The impetus for this decision came from the problems surrounding the Debt Crisis and the extended involvement of banks in direct financing, including off-balance sheet activities. As in the 1960s and 1970s, the Basle Accord was supported because it allowed the US to create positive externalities for US interests in international finance. The US supported the Basle Accord

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because it advantaged US intermediaries and the sale of US government debt.

Basle Faulty The Basle Accord was signed in 1988 and represented the development of the Basle Concordats formulated in 1975 and in 1983. To date the Basle Accord is held as the most effective creation of `an international banking regime, with formal principles, norms, rules, and decisionmaking procedures'.129 Importantly, the Basle Accord has been used to demonstrate the US's need to support international regimes as a consequence of its hegemonic decline. Despite claims of the US's involvement in multilateral forms of international cooperation, the origins of the Basle Accord lie in bilateral relations between the US and Britain.130 This bilateral relationship developed when the ILSA was established in the US after the Debt Crisis. During post-Debt Crisis discussions with the IMF, Washington rejected the institution of stringent capital requirements on the basis that it would place US banks `at a competitive disadvantage to German, Japanese, or other banks'.131 While the formation of a capital adequacy regime at an intergovernmental level was rejected at this stage, the ILSA included provisions for discussions between the Fed and other central banks about increasing capital adequacy requirements for commercial banks in order to make their lending operations safer. The immediate reaction to the possibility of further regulatory restrictions enraged Wall Street. The American Bankers' Association, for example, argued that any new plans for a capital adequacy regime would undermine `the ability of US banks to compete', particularly in relation to Japanese banks.132 But the competitiveness of Japanese banks was already well known to the Fed, and a real source of concern. During the Debt Crisis when capital adequacy ratios were under intense scrutiny and commercial banks scorned by the American public for endangering the whole financial system as a consequence of their overlending activities, the Fed assessed the capital adequacy ratios of Japanese banks. They were low in comparison to US banks. Low capital adequacy ratios were therefore seen (and were) a source of competitive underpricing for the Japanese and presented a threat to US banks. And there was much to be feared during the period when the Fed considered implementing the Basle Accord. Between 1984±88, over half of the growth in international banking activity could be attributed to Japanese banks. Between 1984± 86, large Japanese banks increased their assets 75 per cent more than

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large US banks (in part due to the light treatment they received from the MoF in regard to the Debt Crisis).133 Japanese banks were borrowing from their foreign subsidiaries then using their ability to undercut US banks in issuing fresh loans. While US banks did not want a capital adequacy regime that would disadvantage them in relation to their Japanese counterparts, a regime that disadvantaged their Japanese counterparts and provided them with advantages was certainly supported. Consequently in January 1986 the Fed announced that it would begin work on a unilateral risk-based capital plan.134 The reaction of the US's trading partners was, as could be expected, negative ± except for Britain. During 1986 British bankers had voiced their complaints about Japanese price-undercutting and called upon the BoE to do something about it. More importantly, in 1986 US and Britain banking associations began a campaign for new regulations on capital adequacy. With the official aim to restore public confidence in international banking, the Fed and the BoE began working on a common capital adequacy standard.135 In January 1987 the BoE and the Fed announced new terms of capital adequacy under which capital reserves must account for risk-weighted assets. This would force banks to keep enough capital as deposit insurance to cover the riskiness of their asset portfolios.136 The new terms marked a change from the fixed capital-toasset ratio system used by the Fed, which made banks hold $5.50 of capital (defined as shareholders' equity and the loan loss reserve) for every $100 of assets.137 The Fed regarded the new capital adequacy standard as `a breakthrough . . . a step toward international consistency' that would `minimize the distortion in international competition'. The BoE, more to point, announced that the new standard would `provide a basis which other countries, notably Japan . . . can follow'.138 Japan and Germany were not asked for their input on how the new capital adequacy terms should be determined. However, in the words of Ethan Kapstein, with the agreement of the US and Britain, `commercial and central bankers in Paris, Frankfurt, and Tokyo recognized that an international agreement on capital adequacy had become a fait accompli'.139 In December 1987 the Cook Committee of the BIS proposed that the new capital adequacy base for all banks would be eight per cent of total risk assets.140 The Cook Committee supported the recommendations given by the US and Britain and in July 1988 the `International Convergence of Capital Measurement and Capital Standards' (the Basle Accord) cemented the new terms. These assets were divided into core capital (equity plus disclosed reserves) of at least four per cent and another four per cent of `supplementary capital' that passed through

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an intermediary's profit and loss account. Much of the supplementary capital represented subordinated long-term debt and off-balance sheet securities that, like equity holdings, were within securities markets rather than housed within commercial banks. Their inclusion favored the US and British financial systems. During the BIS negotiations toward the Accord, the Germans were not happy about the addition of supplementary capital, insisting that the requirement be only core capital.141 Fears of financial instability in the early 1980s had already encouraged Germany to reform its capital adequacy provisions.142 In contrast, the Japanese wanted a more liberal definition of supplementary capital so their banks could operate internationally on a small capital base and continue to undercut US banks. Since the Plaza Accord stock prices on the Tokyo Stock Exchange had doubled and real estate investment had boomed.143 The Basle Accord would hobble the competitiveness of Japanese banks if its investments could not be counted in the capital requirements. Accordingly, the Japanese Federation of Bankers' Associations lobbied the MoF to negotiate for their inclusion.144 Through negotiation, the Japanese bargained for 70 per cent of unrealized capital gains as supplementary capital. The US and Britain wanted 30 per cent but compromised at 45 per cent.145 Japanese bankers complained that they were being treated unfairly and that their banks had enough to cover potential losses. For them Washington's attack on Japan's low capital adequacy levels was `politically motivated and triggered by a Japan-bashing mood'.146 The US also made adjustments to the Accord and argued that the proceeds of issues from perpetual preferred shares should be included as core capital. Their request was granted. In organizing the riskiness of assets, the BIS gave cash a zero weighting, as they did for short-term government securities, while long-term securities, municipal bonds, and securities issued by governments outside the OECD were given rating from 10 to 100 per cent. As US government securities were risk-weighted at zero per cent and were the most tradeable debt securities, they became the most popular means of meeting the capital requirements of the Basle Accord. Indeed, Wall Street recognized that the `underlying purpose of the regulation is to finance the government deficit, this proposed bias for. . . government debt violates common sense'.147 The British also benefited as only one bank, Lloyds, needed to boost its capital adequacy ratio.148 German banks suffered minor inconvenience. Japanese banks suffered major inconvenience. In order to meet the requirements of the Accord, the Fed estimated that US banks would

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need to raise $15 billion to purchase Basle-approved securities. The Fed also estimated that Japanese banks would need to raise between $31 billion and $46 billion, while other estimates suggest that $50 billion was more reasonable.149 Either way, if Japanese banks hoped to continue participating in international financial markets they needed to put a lot of capital out of service and purchase Basle-approved securities. Following the Basle Accord, Japan purchased $21.8 billion of US Treasury notes and bonds.150 If, as Henrik and MicheÁle Schmiegelow argue, Japan's biggest problem was to `recycle the staggering wealth of its external assets', the Basle Accord provided a solution that served Washington's interests.151 From the need to meet Basle capital adequacy standards by 1992, commercial banks soaked up $150 billion of government securities, mostly US government securities.152 Banks' stocks of government securities rose 25 per cent above predicted forecasts and the needs of the `real' economy, while commercial and industrial loans from banks dropped 25 per cent below their forecast level.153 Bank profitability plummeted as banks' `were forced to restrict asset growth and increase equity as a result of the 1988 Basle Accord'.154 At the signing of the Accord, foreign sources of capital already comprised a third of the US federal debt and even more of corporate debt. In short, the Basle Accord assisted the US in its ability to `borrow well beyond domestic sources of credit . . . to subsidize public and private deficit spending'.155 Clearly the Basle Accord depended upon the support of the US and Britain and benefited both states as signatories needed to access and trade upon securities markets to meet its requirements. Thus the City of London directly benefited, as did both Washington and Wall Street. Seen this way Washington's involvement with the Basle Accord does not reflect US hegemonic decline and a consequent need to support an international regime, as some suggest: The US role in the negotiation [Basle Accord] appears to be one of a declining power drawing on international regulatory techniques to deal with the shortcomings of its own system, while doing all it could to slow the decline of its market share.156 Again, Washington's support for a regime was conditional upon the ability to create positive externalities for US interests rather than internalize negative externalities within the international political economy.157 Washington's and Wall Street's attitude towards international financial regimes could best be seen in meetings, conducted at the same time as the Basle Accord, to form an international securities regime

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through the International Organization of Securities Commissions (IOSCO). Established in 1984, IOSCO's main aim was to increase international convergence in securities regulation through Memorandums of Understanding.158 From the evidence thus far, convergence means compliance to US securities regulation. Despite the membership of 91 countries, IOSCO has been ineffective in providing a regime anywhere near the Basle Accord. The US's lack of support for IOSCO does not reflect, as William Coleman argues, a deficiency of `intellectual leadership in international fora found in securities'.159 This deficiency was more a consequence of the fragmentation of power associated with direct financing. Even so, regulators and the chief investment banks had the intellectual leadership to create a successful regime but did not have the political will. Unlike the Basle Accord, IOSCO did not support the same capital raising needs in accordance with standard US financial diplomacy. Consequently the US's SEC took a bilateral approach to international regulation through a `patchwork network' of Memorandums of Understanding.160 Like the beginnings of the Basle Accord, the US formed bilateral agreements with Japan, Germany, and Britain to allow access to records under extraordinary circumstances. Importantly, in 1988 the US's SEC cooperated with the Bundesbank to push for capital adequacy provisions that would increase the competitiveness of US securities houses trading in London relative to their British counterparts. The BoE was not amused.161 The temporary US±German alliance demonstrated the ongoing importance of the state in conducting financial diplomacy on behalf of the state's intermediaries. The bilateral cooperation between the US and Britain on the Basle Accord was not to create a long-term strategic allegiance but to extend US structural power in international finance. It is in the securities sector that the US's structural power was most effective during the late 1980s and early 1990s.

Securities trading and the big bank thesis By the late 1980s, Japanese and German banks had `supplanted American and British banks at the apex of the global financial hierarchy'.162 Inappropriate comparisons abounded between the US's financial power in the 1950s and its power in late 1980s.163 More dramatically Japanese intermediaries were accused of having infiltrated US markets through a `termite strategy', targeting `vulnerable financial houses of the West'.164 Reminiscent of wartime propaganda, racist depictions of buck-toothed Japanese appeared in business publications and stereotypes of Japanese

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efficiency, diligence, and cunning were used to explain, poorly, Japan's financial status. More down to earth, though, was the fact that the size of the Japanese banks outweighed the US giants of the 1970s.165 Despite Washington's success in implementing the Basle Accord, the sheer size of Japanese banks led to calls of US hegemonic decline. But a concentration of wealth in a handful of banks, like a centralization of power within a state, is not the best means of judging the ability to shape the framework of international finance. More importantly, by the late 1980s the locus of power within the US financial community had shifted to securities trading rather than traditional mediation, and commercial banks were undergoing a period of change and reregulation to adapt to and promote direct financing. While long-term bank lending represented approximately 30 per cent of all long-term capital flows in the US during the 1970s, by the late 1980s it accounted for ten per cent at the most. Again, the decline in the number of loans was interpreted as a decline in the power of US banks vis aÁ vis Japanese banks. Commercial banks had lost ground while intermediaries became more adept at using direct financing. As a percentage of financial institutions' assets in the US, commercial banks had declined from 38.2 per cent in 1960 to 28.2 per cent in 1990. In contrast, pension funds increased their share over the same period from 9.7 to 21.5 per cent, while investment companies increased their share from 2.9 to 10.5 per cent. While these figures do not outweigh commercial banks, it must be remembered that the figures reflect assets held by intermediaries and not individual investors. During the same period securities brokers and dealers only increased their assets from 1.1 to 2.4 per cent. The growth of the securities market in the US during the 1980s is largely attributable to the public acceptance of direct financing. Within IPE literature, the decline of commercial banks in the US is associated with inefficacious and antiquated government regulation and the growth of Japanese financial power. The US is considered a `weak' state in comparison to Japan whose command over finance through institutions such as the MoF make it a `strong' state.166 Ranked by their assets and profits, there were only three US banks in the top 40 in 1987 (compared with 20 of the top 50 in 1960).167 Britain also only had three, and Germany five. Japan's domination with 20 of the top 40 displays its hold on commercial banking in the late 1980s, a hold that would wane in the 1990s. If one adopts the power as resources perspective of IPE ± as in neoliberalism and neorealism ± the ascension of Japanese banks and the role of strong state is confirmed.168 Further confirmation for the popular view of the `strong state' was the idea

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that Washington was doing nothing to arrest the decline of US commercial banks ± the implication being that Washington was unable to override interest groups to implement reforms required to adapt to change in the international political economy. Political indecisiveness and inefficiency was producing what two authors termed a `financial Vietnam' ± an inability to win a decisive victory for financial reform while suffering the guerilla tactics of lobby groups.169 More importantly, the decline in the asset size and number of US banks has been used to assert not only the decline of US banks but evidence of US hegemonic decline in general. Philip Cerny's work on the `gridlock' within the US government and its financial regulatory system provides an excellent example. Cerny asserted that the fragmentation of US political power and the consequent `democratic deficit' was responsible for the drop in the number of banks in the US from 14,500 banks in 1984 to 12,500 in 1990 ± and possibly, according to Cerny, only 5,000 in the early part of the twenty-first century.170 For Cerny the decline in banks confirmed fears that despite the ability of the US to guide international financial and monetary relations, it was fundamentally incapable of domestic reform to arrest this decline, or able to engage constructively in international regimes. Its inability to change would lead to stagnation and the ascendancy of the universal banks of Germany and the `mega'-banks of Japan as the new models. Not dissimilar to Keohane's concept of the US's `disease of the strong', Cerny wrote that in the late 1980s/early 1990s, the `failure of banking reform is not only symptomatic of American failure to adapt to the loss of hegemony more widely, but also a central cause of this loss'.171 Although Cerny identifies himself with neither neorealism nor neoliberalism (he may be considered a `new realist' like Susan Strange) the emphasis is on the adaptive capacity of the US. The causality of change is outside-in ± what is happening in the interstate system requires states to adapt and, according to Cerny, the US is unable to change and is therefore in decline. Furthermore, like neoliberals and neorealists, Cerny links hegemonic decline to loss of international public good: `US financial hegemony has been in decline for some time and the US is not likely to take a leading role in establishing a new transnational regime'.172 But as demonstrated with the Basle Accord, the US could organize regimes that could generate positive externalities for US interests. Regimes that did not benefit US interests, like IOSCO, were not given support. Within the field of IPE there is a tendency to assume that current structures are the way things have always been ± in fact such a perspective encourages the measurement of power through numbers,

1982±91: Indebted Innovation 143

size and resources rather than the ability to structure others' preferences. In such cases it is assumed that a bank is a bank is a bank. Furthermore, the number of banks in the US had not significantly increased since the 1960s and only returned back to 1960s levels. As Michael Webb writes in relations to trade issues and US hegemonic decline: When is a country big enough to be called `hegemonic'? In the absence of strong theoretical reasons for claiming that a country is hegemonic when it accounts for 50 per cent of total OECD economic output but not when it accounts for 40 per cent, the argument comes close to tautology.173 Cerny's argument falls into a similar trap ± a decline in bank numbers does not necessarily imply a loss of power in the international political economy. Moreover, financial reform was underway but undergoing a series of checks and balances. Rather than reflecting a `democratic deficit' the US's formal competitive financial system was heavily promoting direct financing and, compared with other states, was democratic. Efforts were being made to increase the competitiveness of US commercial banks in the late-1980s. While conflict between Senators and Congresspersons did not provide clarity in efficiently pushing through reforms, Washington certainly made efforts to provide a more favorable environment for Wall Street. In any case, a restructuring of the US financial system was well underway. Large US commercial banks were merging. Smaller banks were doing much better, as was public investment in direct financing. As can be seen in Table 5.2, the largest of US commercial banks declined rapidly, particularly after the formation of the Basle Accord (demonstrated in `Banks losing money' where there is an increase from 2.6 per cent to 25 per cent between 1987±88). Furthermore, despite Cerny's perception of gridlock, plans were well underway on financial reform. As mentioned previously, the S&L crisis demonstrated the need for financial reform within the US.174 In the late 1980s, the Brady Plan for financial reform included changes to deposit insurance, the introduction of interstate banking and permission for some commercial banks to underwrite securities.175 With the Financial Institutions Reform, Recovery and Enforcement Act, which removed legal impediments to bank take-overs of and mergers with savings and loans institutions, the American financial landscape was changed for the promotion of direct financing. Comparisons of what banks held the largest assets on their balance sheets as indicative of who had the greatest power were delimiting ± in the US, banks were trying to get capital off

144 US Power in International Finance Table 5.2 Performance of US commercial banks, 1986±90 (percentages) Return on assets 1990 1989 1988 1987 1986

0.50 0.49 0.84 0.12 0.63

1990 1989 1988 1987 1986

0.40 0.10 0.97 0.65 0.57

Return on equity

Non-current loans relevant to assets

Equity Capital ratio

7.84 2.92 8.13 2.28 13.61 2.14 2.00 2.46 9.94 1.95 Banks with assets over $10 billion 7.83 3.82 2.20 3.12 20.58 2.96 14.74 3.47 11.09 2.30

Banks losing money

6.47 6.21 6.28 6.04 6.19

12.6 11.6 13.9 17.7 19.8

5.26 4.86 5.10 4.41 5.14

24.5 25.0 2.6 n.a. n.a.

Source: Kane, Ed, `Regulatory Competition and the ``Generic'' Financial Services Firm' in MacFarlane, Ian (ed.) The Deregulation of Financial Intermediaries: Proceedings of a Conference, Canberra: Research Department, Reserve Bank of Australia, 1991: 222.

their balance sheets! At the end of 1989 only 62 per cent of commercial banks' assets were in loans, and only 30 per cent of those loans were to commercial and industrial customers.176 Banks were becoming more and more involved with direct financing and with Washington's approval. In February 1991 the Fed allowed J. P. Morgan to underwrite the first public stock offering by commercial banks since 1933. By November 1991 it was the US's seventh largest underwriter.177 The Fed's reasoning behind the reforms was that it wished to `lower the concentration levels and correspondingly, to lower customer and financing costs' for investment banking services.178 Furthermore, in 1991, Washington legislated to allow anyone or any organization to borrow from Federal Reserve Banks, using US government securities as collateral, if a lack of access to funds would hurt the economy. The legislation, as Jane D'Arista argues, gave securities markets `explicit access to the lender-of-last-resort' to support the `new securities hegemony'.179 The financial reforms represented an official examination of US financial strategy in troubled times. Indeed, by the end of the decade most advanced industrial states had slipped (or were about to slip) into recession.

Financial strategy and isolation Troubled times forced states to reassess their financial strategies and to restructure their financial system to be more receptive to US-led innova-

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tions. The recession of the late 1980s/early 1990s placed stress upon governments to find ways to boost their economies. In states that did not recreate financial strategy, financial isolation was more apparent. One state that eagerly sought to avoid financial isolation was Britain. During its biggest recession in post-war history, the financial sector contributed more and more to national income (14 per cent in 1990 compared with eight per cent in 1975).180 Domestically, the promotion of Britain as a `shareholding democracy' was a key government objective as the number of direct and indirect shareholders in Britain increased from three million in 1979 to 10.5 million in 1990.181 Half of the securities were owned by pension funds, insurance funds, and unit trusts ± more than any other state and a direct consequence of government promotion of these financial vehicles. Of course the financial success of the City of London was not derived solely from increased domestic interest in financial trading. Much of the increases in national revenue came from the further internationalization of London's financial intermediaries.182 Following the `Big Bang', foreign intermediaries, particularly US securities houses, increased competition within the City. By opening its doors even wider to foreign competition and foreign investors, the City's ongoing dominance in Europe was being asserted. In 1990, 57.2 per cent of assets in the London market were held by foreign funds, compared with 18.4 per cent in the US and 3.7 per cent in Germany.183 Of these assets, securities dominated. Futhermore, from 1986±91 dividends from British banks more than doubled while retained earnings decreased eightfold.184 Bank lending fell to half of the issue of bonds. Clearly Britain was following the US lead in adopting direct financing and using it to dominate its European competitors. With increased securities trading (including the introduction of commercial paper in the mid-1980s), the City also increased its share of equity trading for corporations located on the Continent, particularly German corporations. In stark contrast to Britain, Germany's financial system was not internationalized. Frustrated with the lack of financial modernization, Alfred Herrhausen from Deutsche Bank characterized `German capitalism' as `legitimate only within a tightly-specified, ``responsible'' national community'.185 In October 1989 the FSE fell dramatically. German investors hit by the 1987 crash were hit again.186 Distrust towards the adoption of direct financing techniques increased. The Kohl government's national strategy to reform German finance and push Frankfurt as an international financial center, Finanzplatz Deutschland, had to account for the sensitive German public. It also had to assert Germany's financial and

146 US Power in International Finance

monetary leadership in the European Community. Indeed, following on from a 1988 agreement for all members to remove capital controls, financial integration was further supported by the 1989 EC directive on banking services.187 Finanzplatz Deutschland as a national financial strategy came into fullswing in 1989±90 when the stock exchanges under the jurisdiction of the LaÈnder governments came under the umbrella of the Deutsche TerminboÈrse (DTB) and futures and options trading was introduced.188 At the same time, amendments to the Stock Exchange Act allowed the listing of securities denominated in foreign currencies. This development was followed up with the passing of a Financial Market Promotion Law (FinanzfoÈrderunggesetz) that removed stock exchange tax and allowed more diverse types of securities to be included in investment funds. Also in 1990, the FSE was privatized out to a group of banks and brokers.189 Securities trading was still concentrated among a number of key players and US±British suspicions of the heavy cross-shareownership between corporations in Germany and Japan continued to be a sore point. The German public continued to distance themselves from direct financing. In 1991 these fears were further entrenched when 45 stock exchange members in Germany came under severe scrutiny for insider trading.190 This German experience of insider trading, however, was trivial in comparison to the problems that would emerge in Japan. In contrast to the competitive/cooperative relationship between Washington and Wall Street in the US, the relationship between the Japanese government and the Japanese financial community represented cooperation, bordering on collusion, predominantly from the centralization of regulatory political power within the MoF. The persistence of hierarchies within the Japanese system hindered the development of direct financing and the fostering of financial innovations, as a foreign banker in Tokyo commented: Japan had a financial system that was inappropriate for the needs of the world's second largest economy. The institutions and rules from the postwar period were simple and appropriate for a simple economy. The simple structure and keiretsu suppressed the market and led to a hierarchical financial system. This was simply not workable today in the current situation. There are too many players (banks and industries) to be centrally coordinated.191 Between 1971±91 the value of the yen had tripled, and persistent `cheap money' policies (low interest rates) made overseas investment lucrat-

1982±91: Indebted Innovation 147

ive.192 In the 1980s many Japanese corporations bypassed Japanese banks and directly raised capital on international debt and equity markets (approximately $144 billion in 1989). At the same time, Japanese banks continued to play a role for Japanese corporations by taking deposits, some $165 billion in 1988.193 The LDP's strong political ties with the banking sector meant that it needed to provide them with an ongoing role in the Japanese `bubble' economy. Consequently, in the late 1980s the MoF made a large push for banks to invest in real estate.194 Banks, however, could not buy land directly. They required housing loan companies (jusen) to buy them for them. Regulated by the MoF and the Ministry of Agriculture (whose ties to the LDP were well established), their financial investments were careless. Long Term Capital Banks were also allowed to invest in real estate through jusen ± a big mistake, as discussed in the following chapter. By 1991 the jusen had captured 12 per cent of the market for housing loans, up from 3.7 per cent in 1976.195 In contrast to the perception that the US was a weak state of fragmented interests and Japan was a strong state, the MoF and the BoJ did not foresee the real estate bubble and the crash on the Toyko stock exchange. Japanese banks were protected, which, in turn allowed overlending to occur well into the 1990s. As described by a former dealmaker, Bungo Ishizaki, credit checks were easily dismissed: It got to the point where it was an embarrassment even for us. We did these bullshit feasibility studies with flowery words and some glorified numbers . . . They [the Long-Term Credit Bank] wouldn't even scrutinize it but would rip the cover off, put their own cover on it, and syndicate the damned thing.196 As a consequence of such wild lending activity asset prices inflated, as did stock prices. Moreover, the centralization of power in the Japanese financial system meant that there were no substantial checks on banks' activities as the MoF encouraged such lending. The MoF was unable to produce a serious financial strategy to implement reform in the Japanese financial system because of its political interests, nor was it able to protect Japanese commercial banks. Domestically, the Japanese government provided concessions by giving permission to banks to offer customers more flexible deposits and term accounts with high rates of interest, but still no major changes to the structure of Japanese finance had been implemented.197 Further proof of the inadequacy of the Japanese financial system to compete and to diffuse its power in international finance can be seen in

148 US Power in International Finance

the collapse of the Tokyo Stock Exchange in 1990. Under the weight of grossly inflated real estate prices, the collapse resulted in $1 billion loss on the value of stocks.198 Unlike the October 1987 crash, support from the US, Britain, and Germany did not rally, and trading actually increased on the NYSE, LSE, and FSE. Furthermore, because of Japan's insistence that 45 per cent of unrealized gains from stockmarkets make up `supplementary capital' in the Basle Accord, the collapse forced Japanese banks to increase their risk-weighted assets.199 While in 1988 capital gains represented 93 per cent of Tier 2 capital (under Basle Accord provisions), by 1990 capital gains amounted to 70 per cent and fell further to 40 per cent in 1992.200 The Basle Accord proved to be a double-edged sword for the Japanese and, as discussed in the following chapter, encouraged further overlending in the mid-1990s. As a consequence of the Tokyo crash, between 1989±91 Japan's share of international banking fell from over 40 to less than 30 per cent.201 Japan fell into relative financial isolation. Indicative of this isolation, in 1991 there was a net outflow of Japanese capital from the US. The obvious implication of this withdrawal of capital was that Washington may have had problems selling its debt. Due to the interactive embeddedness between Washington and Wall Street this was not a problem. US commercial banks increased their demand for US Treasury securities elevenfold.202 Washington was able to call upon Wall Street for support that would help augment their structural power in international finance. Indeed, as part of the financial reforms of the period, holdings of US government securities lessened the riskiness of banks (also in accordance with the Basle Accord). Washington was able to call upon the unique depth and complexity of the US domestic financial system. International passivity and national activism continued. In 1970, the share of private financial intermediaries' assets as a percentage of national assets was 43.1 per cent. By 1991 the figure has risen to 67 per cent.203 US structural power had been extended on the back of the expansion of mass privatization of credit and the expansion of debt. Critically, the expansion of government, corporate and personal debt provided a source of structural power and financial strength upon which, due to their interactive embeddedness, Washington and Wall Street could call. The growth of securitization is a clear demonstration of this relationship. By placing assets off balance sheets, securitization allowed banks to keep their capital lower than with more traditional forms of intermediation. More importantly, and as stated above, securitization was a credit

1982±91: Indebted Innovation 149

innovation that allowed banks to tap into already existing debts on fixed payments, such as mortgages, car payment, and even credit card receipts.204 Securitization fed off direct financing and promoted its extension by tapping into consumer credit markets. The growth of securitization since its approval in the mid-1980s was remarkable. Between 1984±88 approximately one-third of all mortgages in the US had been securitized ± a sum of $600 billion.205 The Fed commented in 1987 that by `broadening the base of mortgage finance, securitization helped reduce housing vulnerability to nonprice credit rationing'. Increased financial flexibility met increased demand for mortgages, and mortgage costs as a percentage of disposable income fell from 45 per cent in the early 1980s to around 20 per cent in 1987.206 Furthermore, as well as Collateralized Mortgage Obligations, the development of Certificates for Automobile Receivables (CARs) was a significant innovation ± they were bonds sourced from car repayments! In 1985, for example, General Motors Acceptance Corporation sold a package of $525 million CARs to the First Boston Corporation.207 These securities represented the ongoing link between indebtedness and innovation. While I disagree with Cerny's understanding of `gridlock' in the US financial system, he does provide an excellent explanation of how the growth of securitization was incredibly important for banks to develop and promote direct financing: Securitization ± the shift of financial services from traditional `relationship banking' to the trading of negotiable securities ± is probably the most important single factor in reshaping different markets and institutions into a single system. The key advantage of securitization is that it provides geometrically increased prospects for flexibility and price sensitivity. Securitization cuts across once distinct sectors of the overall financial marketplace . . . With regard to securitization in particular, the capacity of institutions to avoid being burdened over long periods with specific assets and liabilities, i.e. their ability to trade those assets and liabilities in liquid secondary markets at a discount, has always played a role in the development of banking as well as being at the heart of stock and bond markets.208 Securitization was US-led and a consequence of their strong domestic securities markets and national financial regulation. More importantly, securitizaton was a success because of the embeddedness of finance within American society. The American public were more willing to experiment with different forms of investments than other states. As

150 US Power in International Finance

stated earlier, indebtedness had become a source of innovation. An ordinary American may have limited savings but a portfolio of stock or bonds. Indeed, the size, depth, and regulation of US domestic securities markets provided the US with a buffer against international effects. The BIS referred to the growth of securitization as a means for `banks to obtain finance at a lower cost . . . as a response to tougher capital requirements on the part of the supervisors' that was supported by the `depth of the securities markets in the United States'.209 Policies of international passivity and national activism were still helping the US extend its structural power in international finance. The growth of securitization and similar financial innovations reflected the ongoing ability of the US to excel in financial innovation. As suggested in a US Senate Committee: Creativity and innovation have been the hallmarks of the [securities] industry and the reason that its survival and continued wealth are critical to our Nation's economy. . . The financial alternatives provided by our industry have added and continue to add enormous value to America. The value has been added through risk-taking and innovation, commercial paper, assets securitization and the creation of numerous derivative products to facilitate hedging and risk management.210 The growth of securitization also provided US securities houses with a source of capital to use in international markets. Indeed, while in the late 1980s Japanese banks filled the ranks of the top commercial banks, the majority of top underwriters of debt and equity were from the US.211 Washington's and Wall Street's financial strategy, the process of regulatory reform and promotion of direct financing had been incredibly successful. The continued dominance of US intermediaries in this new `disintermediated' era also meant that for those wishing to participate in `America's financial empire', the continued use of dollar denominated assets was also necessary.212 As Alan Greenspan stated to a US Senate Committee on the Globalization of Securities Markets in 1990, part of the US's foreign economic policy is `diversifying international securities portfolios . . . disproportionately in dollars' with the support of Washington and Wall Street.213 Fulfilling this foreign policy aim in the remainder of the 1990s would require an extension of US structural power in international finance and the astute promotion of direct financing.

6

1992±2000: Crises and Consumer Credit

Remember the song, We Are the World? In matters of finance and politics, if not culture, we are becoming the world and much of the world wants to become us. Richard Grasco, Chairman of the NYSE1 This chapter discusses the period 1992±2000, when financial markets provided `the largest single accumulation of wealth in the history of the United States'.2 This wealth was a product of increased investment by the US public. In the US, Washington relaxed its regulatory restrictions on banks' securities activities to promote direct financing. The 1990s represent a period of `financial socialization' as the links between consumer credit (mortgages, for example) and financial market investment were truly linked. While participation in direct financing still belonged overwhelmingly to intermediaries (such as banks, brokers, or managed funds), the ability to repackage debt and credit became commonplace. The structure of the financial marketplace changed as direct financing was adopted within the US and by the US's major trading partners. The socialization of finance in the US was not what made headlines in the financial press. Much more dramatically, greater direct financing in the international arena required the greater use of risk diversification as the links between monetary and financial relations increased in sensitivity. High finance reigned as the supreme terror for many states as crises befell financial markets and monetary systems roughly every 18 months. But these crises were not simply a repeat of the Debt Crisis of the early 1980s. Loans were more `disintermediated'. In the 1990s, investments from banks in advanced industrial states to developing economies differed from the massive loans that banks made to Latin America and 151

152 US Power in International Finance

Eastern Europe in the late 1970s. The growth of international markets for short-term debt, and the increasing involvement of commercial banks in them, allowed borrowers a wider choice of financing from a wider array of lenders. The fragmented nature of lending made it much more difficult to harness a herd of investors to `cool down' markets in time of crisis. The consequence of financial crises was an expansion in the number and aims of international finance regimes. US involvement in them, however, continued to generate positive externalities for US interests rather than internalize negative externalities. US structural power in international finance was extended further from a more financially embedded domestic base. This differed from the 1970s when domestic sluggishness sent banks overseas in search of profits. The use of policies of international passivity and national activism reflected a more financially embedded society and changed accordingly. Rather than experience a long process of hegemonic decline, as many had predicted in the 1980s, the US regenerated itself in the 1990s. Enormous deficits no longer posed a problem by the end of the decade. Banks, too, experienced a renaissance, leading the Fed to declare that US banks were having the most success since World War II.3 Through the development of securitization, domestic indebtedness assisted US structural power in the international financial arena. Developments in consumer credit were supported by relaxed financial regulation and fuelled the promotion of direct financing. In the mid-1990s the McFadden Act, which forbade interstate banking, was revised. By 2000 the Glass±Steagall Act of 1933, which separated commercial and investment banks, was repealed by the Financial Services Modernization Act of 1999. In effect, this 1999 Act affirmed changes in the marketplace that had taken place during the early and mid-1990s. All of the regulatory and market-driven changes promoted the involvement of commercial banks in direct financing and altered the competitive±cooperative relationship between Washington and Wall Street. Mergers between banks flourished, dropping the number of banks dramatically; from 18,700 in the mid-1970s, to 14,500 in the mid1980s, to fewer than 9,000 by the end of the decade.4 While mergers did not reflect a decline in US finance, it did represent a shift in the composition of the American financial marketplace. Quite simply, the big banks were becoming bigger as they swallowed up smaller ones. Community concerns arose as some sections of the US public thought that commercial banks were becoming increasingly removed from lending to local communities; particularly lending to low-income groups.

1992±2000: Crises and Consumer Credit 153

Despite such concerns, the American middle classes increasingly adopted direct financing. The most obvious changes were the massive increases in stock market capitalization. This phenomenon was not only evident in the US but also in its trading partners. The process was not uniform, however. The adoption of direct financing reflected the structure and character of states' financial systems as well as political and economic sensitivities. While `shareholding democracies' in the US and Britain adopted direct financing and grew strongly, Germany and Japan experienced political difficulties with financial reform. A more confident City of London allowed Britain to strengthen its share of international financial markets and to offer itself as the financial nexus for a more integrated Europe. The reforms initiated at the `Big Bang' in 1986 continued, with more formal relations between the government and financial community. Importantly, the City expanded public interest in its domestic financial system, particularly through institutional investment. In stark contrast, Japan, the world's largest creditor, experienced a decline in its structural power in international finance. The Japanese case, which receives a great deal of attention in this chapter, clearly demonstrates the importance of interactive embeddedness and the notion that power should not be seen as the possession of resources but state capacities. Despite the claim about Japan having a `strong state' that could resolve inefficiencies faster than the American system, political connections between ministries and banks worsened Japan's financial woes. The cooperative environment between banks and government in Japan was successful in the post-war period but not in a mature economy. Indeed, the clear absence of competition between the financial community and the government allowed inefficiencies to establish that, due to political affiliations, could not be simply removed. Furthermore, despite Japan's significant private creditor status, financial markets were not embedded in the Japanese public, leading many Japanese either to rely on a system that did not encourage private investment (or direct financing) or to look towards US intermediaries for help with their investments. In short, Japan lacked the interactive embeddedness that was clearly a source of US structural power in international finance. With Japan's prolonged financial difficulties, perceptions of its financial system changed from a much feared cannonade of capital, with a `termite strategy' to take over Western financial systems, to `quasi-Soviet'.5 Suffering its worst recession in Japanese postwar history, the Japanese economy as a whole stagnated over the 1992±2000 period.6

154 US Power in International Finance

Germany also had financial woes. Its fiscal troubles from the costs of reunification conflicted directly with its commitment to the exchange rate mechanism (ERM) of the European Monetary System (EMS). As will be demonstrated, domestic political considerations were more important than Germany's commitments to the region. The financial crisis that followed damaged Germany's international reputation as a place to conduct financial activity, placing a spanner in the wheels of Finanzplatz Deutschland. While powerful within Europe, Germany did not have the support to impose costs unilaterally upon its neighbors without penalty. Germany's financial diplomacy, like its structural power in international finance, was poorly developed. Furthermore, reforms to introduce direct financing did not sit comfortably with German corporations or the German public, since they threatened long-standing ties between corporations, banks, and investors. As in the Japanese case, many corporations looked to the US for investment know-how and, as discussed below, operated through the City and Wall Street rather than Frankfurt. Furthermore, the German public was not keen to adopt direct financing on a broad base. Bank-based finance was deeply embedded in Germany and the German public was resistant to change. The few German banks or corporations that promoted direct financing were publicly condemned as `Americanizing' German finance. Needless to say, while greater investment choices were desired by many in Germany, enthusiasm for stock market investment was much less than in Britain and the US. In all states a division emerged between high finance, supported by investors and large banks, and `low' finance, such as credit provided by credit unions, thrifts and others. While many argue that banks have converged towards a universal bank model, the trend has really been `towards banking concentration, concomitant with the current surge in global finance'.7 For states with developed consumer credit markets the segmentation between `low' and `high' finance did not hinder the supply of capital or the development of financial innovations. In fact, Wall Street had close links with `Main Street' ± for example, debt from credit cards was being used to create marketable debt securities! Washington supported the development of `financial supermarkets' and in doing so furthered direct financing. Britain, Germany, and Japan also created national programs to liberalize and institutionalize financial reform and the development of consumer credit markets. For many this is a surprising aspect of greater financial internationalization. `Globalization' as popularly imagined places the state in a subservient role to international finance, not as a strategist able to use financial markets to further its power in the international political economy. In

1992±2000: Crises and Consumer Credit 155

contrast to `retreat of the state' arguments, the greater internationalization of direct financing has led to greater recognition of the relationship between state power and financial power. As this chapter will illustrate, within the US, Germany, Japan, and Britain governments have created `super regulators' to supervise finance and to harness a greater share of the market for international finance. I have four points to develop in this chapter: (i) in order to cope with financial crises and direct financing, the US, Germany, and Britain, and to a much lesser extent Japan, developed national strategies to increase their power in international finance and their ability to supervise direct financing; (ii) as in previous decades, the US used bilateral agreements rather than the serious support of international finance regimes to press for financial liberalization, particularly upon Japan during its financial turmoil in the 1990s; (iii) the Asian and Russian financial crises demonstrate that direct financing fragmented the structure of lending and raised important questions about moral hazards and the ability to coordinate credit risks; and (iv) within the US, the growth of debt and equity markets and the increasing involvement of commercial banks in direct financing (notably via the securitization of consumer credit) has important implications for the future of US structural power in international finance ± and for America's `victory of dividends'.

Recession and renewal By 1992 commercial banks in advanced industrial states had met the requirements of the Basle Accord and the BIS announced that it would begin work on amendments through a new Concordat.8 Following an EC Common Capital Adequacy directive, the BIS required international commercial banks to hold extra capital for non-investment grade bond inventories.9 This decision reflected changes in international finance ± that international finance had become more `disintermediated' ± and the BIS's desire to keep up with developments in the marketplace with new regulations. The Basle Accord continued to provide the most effective example of an international finance regime with `principles, norms, rules, and decision-making procedures [which then] come to have their own exogenous impact on outcomes and behavior'.10 The Basle Accord continued to have an exogenous impact on the outcomes and behavior of banks, particularly in Japan. However, despite the success of the Basle Accord, national governments continued to provide financial regulation and formulate national financial strategies. As discussed in Chapter 5, the period during the implementation of the

156 US Power in International Finance

Basle Accord, 1988±92, was a time of re-regulation and the formation of new financial strategies. It also coincided with economic recession and political change for the majority of advanced industrialized states. Changes of government in the US and Japan reflected the public's economic frustration. To secure electoral support governments explicitly viewed financial reform as a key to pulling their economies out of the economic doldrums. In states with high interactive embeddedness between the government and financial community and a high degree of state capacity, financial reform was possible with public support. In states with low interactive embeddedness and state capacity, reform was retarded. As this chapter demonstrates, the US and Japanese cases illustrate the importance of interactive embeddedness and state capacity. In Japan reform was slow due to collusion between the financial community and the government. In contrast, financial renewal was most prominent in the US because of the capacity of Washington and Wall Street to adapt and enact change with public support. By 1992 the United States had recovered from the recession of 1989± 91. It began to export enormous amounts of capital ($46 billion in 1992, a $78 billion turnaround on 1991) and experienced growth with `a twofold increase in the quoted values on Wall Street with little inflation'.11 As a 1992 British study on international financial competitiveness argued, `United States success in the older markets has been translated into success in the younger ones'.12 Financial innovation, particularly in the securitization of debt and expansion of consumer credit, was responsible for this flexibility. While derivatives markets are not discussed in any detail within this book, derivates trading volumes do give an indication of financial flexibility and the use of risk management. As one would expect, the most dramatic gains in derivatives trading were made in the US. In 1992 the world's two largest futures exchange were the Chicago Board of Trade (CBoT) with 150 million contracts per annum, and the Chicago Mercantile Exchange (CME) with 134 million contracts. The trading volumes of these exchanges nearly doubled by the end of the decade. Following the CBoT and the CME in 1992 was the London International Financial Futures Exchange (LIFFE) with 72 million contracts. Surprisingly, fourth place was awarded to neither Germany nor Japan; but France's Marche aÁ Terme d'Instruments FinancieÁre with 55 million contracts.13 As well as derivatives trading, US financial intermediaries extended their lead over other states with financial innovations based on corporate and consumer debt. The impetus for further innovations were impressive levels of indebtedness. For example, in 1993 the amount of

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corporate bonds outstanding as a percentage of GDP was 26.9 per cent in the US, compared with 7.5 per cent for Japan, 2.7 for Britain, and 0.1 for Germany.14 The innovations of the 1980s to use indebtedness to fuel the American financial system and maintain US structural power were built upon in the 1990s. This included tapping into the personal indebtedness of `ordinary' Americans. Since the development of the market proper in the early 1980s, mortgage-backed securitization boomed. By 1992 more than a third of the residential mortgages financed by commercial banks were securitized.15 While securitizing their debts, ordinary Americans were putting more of their liquid assets into direct financing, particularly investment in the stock market. While it is easy to exaggerate the extent of Americans' actual participation in trading securities, by 1992, 37 per cent of Americans held securities of some kind due to growth in pension funds, mutual funds and direct share ownership.16 Direct financing had become embedded in the American middle classes. Quite simply, Americans were borrowing more and investing more, adding depth to the US domestic financial system and its need to offer its participants an increasingly diverse array of financial vehicles. At the same time, the US continued its policies of international passivity and national activism as Washington continued to assure the investing public that Wall Street was stable while advocating financial `liberalization' abroad. For example, in 1993 the SEC adopted Rule 3a-7 to make credit ratings a necessity for asset-backed securities, following up on the 1991 implementation of Rule 2a-7, which imposed credit ratings restrictions on money-market mutual funds.17 On the back of a domestic recovery and under the new Clinton administration, the size of the domestic financial system increased faster than growth in the real economy. As in earlier decades the sheer size of the US financial system continued to provide a `buffer' and source of innovation that other states could not replicate. Britain, the most financially internationalized state under study, was also in recession in 1992. During this recession, the contribution of financial services to the British GDP increased, a contribution the government sought to secure by altering the structure of the British financial system. As John Major succeeded Margaret Thatcher the relationship between the government and finance changed to a more formal structure. Representative of this change, the BoE began to make the presentation of financial reports for intermediaries under its supervision a duty rather than a request.18 The character of the British financial system also changed. One consequence of the Big Bang of 1986 was increased competition for brokerage services, essentially a

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fragmentation of what was considered by many to be an `old boy's club'. Furthermore, the Big Bang introduced foreign competition for financial services, particularly from US firms, en masse. In the early 1990s, British merchant banks seeking to compete with American investment banks bought out brokers to create more institutionalized, formalized intermediaries.19 The City was now much more geared to investment from the general public than before. Public interest in the stock markets increased and commission prices for British brokers almost halved from their 1986 levels.20 While US success with mortgage-backed securitization was not replicated, public sensitivity to changes in short-term interest rates increased, particularly for those with mortgages. The extent of internationalization of British financial markets increased such sensitivity (and discontent in the electorate) but was an important reason for the City's financial success. In 1992 trading in overseas equities made up 60 per cent of London's nominal capitalization.21 The British financial system was thus in a time of transition. The City began looking deeper into the British domestic economy as a source of capital while continuing to play its traditional role in international markets. In fact, the City extended its role in providing financial services to corporations whose home states had not sufficiently adopted direct financing. For example, many British intermediaries provided financial services to trade debt and equities for German corporations.22 This occurred to such an extent that in 1995 the Dresdner Bank bought British bank Kleinwort Benson in order to capture some of the market.23 Dresdner Bank's need to capture some of the London market did not come from a desire to extend beyond its domestic base but from a wish to complement it. Similarly, foreign firms conducted a third of trade on Japanese stock exchanges. In the late 1990s the two biggest traders on the TSE were Morgan Stanley and Goldman Sachs.24 As discussed in the previous chapter, in October 1990 the TSE experienced a crash accompanied by a massive decline in the value of real estate assets. As in other states a loss of electoral support followed financial woes and economic recession. In 1993 the Liberal Democratic Party lost power for the first time since 1955. Significant support for the Japan New Party and the new Prime Minister, Hosokawa Morihiro, came from those dissatisfied with the close cooperation between Japanese government and the financial community. Following the collapse of the TSE, large scale financial reform was required. However, it was not implemented in full and not geared towards the public. Partial reforms were provided in 1992 with a Financial System Reform Act that removed barriers between commercial

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and investment banking, and allowed banks and securities companies to enter each other's businesses in 1993.25 Also in 1992, the MoF coordinated 162 banks to create a Cooperative Credit Purchasing Company to begin to deal with Japan's mass of non-performing loans.26 Unlike the US and Britain, the reforms did not help develop public support for direct financing or consumer credit. Rather, the reforms were directed at managing banks' financial woes and reflected the interdependency between the financial community and the government ± an interdependence seen as a strength in the mid-1980s but identified in the mid-1990s as `collusive capitalism'.27 The continued links between Japanese banks and Japanese corporations also provided a source of concern in the financial crisis, as in 1993 Japanese banks continued to own just under a quarter of all Japanese corporate equity.28 Japanese corporate confidence in Japan's financial system waned over the decade, as did public confidence in securities trading. Rather than engage in direct financing, the public continued to place its savings in the postal savings system while at the same time calling for greater access to foreign investment opportunities. Pressure for financial reform also came externally. As in the 1980s, gaiatsu (foreign pressure) was applied by the US to `liberalize' Japanese finance, creating diplomatic conflicts. Despite these pressures, the Japanese government did not implement serious financial reform until 1998. The incapacity to reform demonstrated how a centralization of power is not an advantage in enacting or adapting to international political and economic change. Germany also suffered a financial identity crisis during the 1990s. 1992 was a much-heralded year for the development of the European Union, most particularly the establishment of the Single Market program and the signing of the Maastricht Treaty, which gave the Euro-Fed regulatory powers to ensure price stability. Torn between the ambition to act as Europe's banker and the public need to retain long-standing ties between banks and business, Germany's Finanzplatz Deutschland met many obstacles to financial modernization. Public resentment towards changes to established financial practices hindered the development of direct financing and created a public relations dilemma for German banks. Compounding this problem were public perceptions of change in monetary matters, particularly the prospect of a common European currency. A more immediate concern for the German government was the fiscal blow-out following reunification. The costs of reunification changed Germany into a net importer rather than exporter of capital. The consequence was a currency crisis within Europe. As discussed below, Germany was confronted with a choice between domestic and

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international obligations. It chose the former. In a climate of financial and monetary volatility, the currency crisis threatened to stir increased support from Europe for greater international financial regulation that would impede US intermediaries' power. Combined with the possibility of an exclusionary European financial group, the extension of US structural power in international finance faced a threat from Europe. A threat that would also spur on regulatory reform within the US.

Threats from Europe With the Bundesbank's reputation, Germany provided the most obvious foundation for the transition from the European Monetary System (EMS) to a European Monetary Union (EMU). Much to the disgust of the French Financial Minister Balladur, who proposed the establishment of the European Central Bank (ECB, also known as and hereafter referred to as the Euro-Fed), Germany won support for the bank to be based in Frankfurt in 1992.29 Support for the Euro-Fed to be based in Germany was due to the recognized independence of the Bundesbank and its ability to support price stability through monetary policy rather than the Banque de France's more explicitly political approach to monetary policy.30 Furthermore, according to Robert Boyer, support for the EuroFed to be based in Frankfurt also came from the expectation that `German institutions will permeate the restructuring of Europe'.31 A diffusion of sensible German monetary governance was to keep in check an otherwise Americanized structure of regulation. The `EuroFed' was called as such because it introduced a US-like federal structure to financial regulation by acting as a central independent agency ruling over European states. Germany's role in ensuring price stability was essential in keeping at bay what many Europeans saw as negative elements in the American financial system ± rabid individualism in search of short-term profits.32 Indeed, when it came to financial services, the European Single Market program was not US friendly. In contrast to rhetoric of the time that pronounced the emergence of free flowing global capital, Europe threatened to exclude US intermediaries from operating in the new Single Market on the basis of national treatment provisions. As banks in Europe were predominantly universal and US banks were not, there was some contention about how to deal with US banks. The 1988 EC directive on capital liberalization and the 1989 directive on banking services included national treatment provisions that could exclude or certainly hinder the competitiveness of US intermediaries active

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in Europe. The reason for this was regulatory constraints placed on European banks on US soil. The European threat recognized Washington's use of policies of international passivity and national activism and pushed for changes to US domestic financial regulation to support European interests. The European strategy worked. Washington's nervousness about exclusion led to the 1988 Fair Trade Act which assured European states that legislative changes to the Glass-Steagall and McFadden Acts were forthcoming.33 While the Europeans were appeased, the necessary changes would not occur for another decade, as attempts to repeal the Acts in the late 1980s and early 1990s failed. Still, the threat from Europe remained and in 1992±93, Washington's view was that it would seem particularly contradictory to push for further financial deregulation in Europe without honoring promises made in 1988. As noted in earlier chapters, when faced with sweeping macroeconomic change, European states were not shy in advocating the use of capital controls. Washington and Wall Street paid close attention to the possibility of financial protectionism as the ERM crisis emerged. With Germany at the epicenter of the crisis, all eyes understandably turned to the Kohl government. In the midst of a recovery from the `Eurosclerosis' of the late 1980s, reunification came at a financially sensitive time for Germany. Following the reunification process, net annual transfers to the eastern LaÈnder were estimated at DM400 billion ($250 billion), throwing Germany into serious public indebtedness.34 Ongoing reunification costs equivalent to 5.5 per cent of German annual GNP made an inflation-wary Bundesbank very anxious about a wavering deutschmark.35 On top of this pressure came political factors. In the rush for reunification, Kohl promised the West German public that the `Solidarity Tax' necessary to pay for it would not result in any permanent rise in taxation. But should the costs of reunification exceed predictions and should inflation threaten German living standards, Kohl would still confront widespread discontent among the electorate. Both factors came into play as a result of another political promise made to East Germans. Concerns about how East Germans would handle the transition to a unified Germany led Kohl to place the DM±OstMark exchange rate at parity ± a decision Otto Pohl, the president of the Bundesbank, called `a perfect example of what ought not to be done in the European Community'.36 The costs associated with this decision were enormous for the German government and a great boon for those in the former East. The decision also placed enormous political pressure upon the Bundesbank, the kind of pressure the Bundesbank was acclaimed for avoiding. It had become clear that

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market demand from `Ossis' was heating up the economy at a time when fiscal expenditure had placed Germany significantly in the red. In response, the Bundesbank made its objections towards domestic political considerations clear by raising interest rates to levels not seen since 1931.37 It did so knowing that the Fed had recently dropped US interest rates to stimulate their economy. Domestic concerns had quite clearly outweighed the Bundesbank's concern for successful European monetary integration. The consequent interest rate differential made investors nervous about the ERM's stability and sent capital flooding into Germany and out of other European currencies, particularly those perceived as weak ± the pound and the lira. During August 1992 the BoE spent nearly half of its reserves buying pounds to try and stay in the ERM. Such spending could not be maintained and on September 16 1992 the BoE raised Britain's minimum lending rate from 10 to 12 per cent. Unlike Germany, further investment in Britain was perceived as a bad risk ± quite simply the pound was not strong enough. Consequently, the pound fell through the floor and out of the ERM. As 80 per cent of credit in Britain was linked to short-term interest rates, the monetary instability also created widespread domestic discontent amongst commercial interests and (especially) from those paying mortgages.38 To rub salt into the BoE's wounds, a repetition of the above experience would occur nine months later. In short, Germany's protectionist monetary policy had Europe floundering. Once the key to European monetary integration and a model of institutional restructuring, by 1993 Germany could not meet the criteria to participate in the ERM ± its government financial deficit exceeded the established three per cent of GDP cap (Germany had a DM125 billion deficit equalling four per cent of GDP).39 Reminiscent of a fiscal crisis a century earlier, LaÈnder governments had to be called in to share some of the reunification costs. Quite clearly Germany privileged its own political and economic interests over those of the European Community. In Europe the finger of blame was not directly pointed at Germany but at structural factors, including US power in international finance. Somewhat predictably, French officials characterized the financial crisis as an `Anglo-Saxon plot to undermine the movement towards European unity'.40 The Fed's decision to lower interest rates for the benefit of the US domestic economy was seen by the French as a means to disrupt the drive towards the EMU. Moreover, blame for the crisis was also attributed to pressures placed upon Europe for financial liberalization. Eric Helleiner argues that the European 1992±93 exchange rate crisis was

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representative of the power speculative financial flows have over the ability to coordinate policy and maintain stable exchange rates.41 The BIS referred to the ERM crisis as the most significant since the collapse of Bretton Woods.42 A parallel can be drawn between Germany's bucking of the ERM system in 1992 and US motivations to close the gold window in 1971. In order to cope with the costs of reunification Germany was prepared to inflict pain on its trading partners and seriously damage a regime for which it professed to lead and act as stabilizer. Indeed, Germany's actions reflected what the US had done many times over in monetary and financial matters. However, Germany suffered greater long-term costs (particularly to its reputation for price stability) because of its lack of structural power in international finance. Also, Germany was not able to generate positive externalities with little cost to itself because of an inability to play the international and domestic realms against each other ± again due to a lack of structural power. Of course the US was able to externalize costs through the numeraire status of the dollar, which in effect negated the damage done to the US's reputation for price stability (which was flimsy even in 1958). Germany's actions in the crisis reflected not only domestic political concerns but a monetary and financial system with little capacity for using indebtedness (public and private) as a means of innovation and power. It reflected the shallowness of Germany's securities markets. Importantly, Germany's troubled financial reform cannot be removed from the macroeconomic troubles of the ERM crisis. Germany's behavior did damage its credibility as a future financial center of Europe and reinforced perceptions of `German financial mercantilism' in times of vulnerability.43 Despite the BoE's own intervention, the City was seen as a superior financial center. Indeed the French conspiratorial claim of an `Anglo-Saxon plot' was a consequence of such perceptions and concern with the diffusion of US and British finance capitalism on the Continent.44 While this claim can be dismissed (the costs to Britain were too great for it to force a crisis in cahoots with the US), the ERM crisis produced two views on German financial reform, both which concurred that half-measures were not appropriate ± Germany had to implement reform or reinstate controls. The German withholding tax that was removed, reinstated, removed then reinstated over the previous decade provides an interesting example. In 1992±93 it was driving out approximately DM80 million ($50 million) and was publicly denounced as indicative of Germany's half-hearted approach to financial reform.45 Consequently, during the

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same period, Germany introduced a range of reforms as part of the Finanzplatz Deutschland project. In 1993 a new financial regulator, the Bundesaufsichtsamt fuÈr den Wertpapierhandel (BAWe), was introduced to oversee securities trading.46 Furthermore, also in 1993, a new, more centralized stock exchange system, the Deutsche BoÈrse AG, came into effect under the control of Rolf Breuer, the head of Deutsche Bank's capital market operations.47 These changes consolidated the privatization of the FSE a few years earlier and signalled a trend. In 1994 Bankgesellschaft Berlin was introduced to create a transition from public to private ownership of banks, including the Landesbanks that were under the control of states.48 These reforms were intended to alter the bank-dominated character of German finance. In 1994, for example, the assets of banks as a percentage of all financial institutions in Germany was 77 per cent, compared with 23 per cent in the US.49 Mittelstand firms (small to medium enterprises) were still largely dependent upon local banks who, rather than looking to securities markets, were becoming `increasingly embedded in local and regional institutional networks'.50 While the promotion of direct financing was an ongoing success with larger German banks, it did not have wide public support. The two-tier system of small banks for Mittelstand firms and large banks dealing in `high finance' was perceived by many Germans as susceptible to the `Americanization' of German finance. For example, Daimler-Benz's decision to list on the NYSE in October 1993 was greeted in Germany `as a betrayal of German principles of long-term commitments by investors'.51 Public disapproval of involvement in `Americanized' finance extended beyond German corporation's choice of trading locations to trading itself. For example, in 1994 when the German firm Metalgesellschaft lost six billion dollars trading in oil futures, the public called for a return to a more stable form of finance in Germany.52 The German public's opposition to direct financing proved a problem for those pushing financial reform in Germany, and also for Washington and Wall Street. In accordance with policies of international passivity and national activism, financial liberalization was encouraged in Germany, not financial protection. Moreover, Germany's problems had the potential to generate international activism in Europe and increase financial protectionism ± a hindrance to the extension of US structural power. But for the time being, Washington and Wall Street had a crisis in their own region to worry about ± a crisis that had the potential to sour the financial recovery of the mid-1990s.

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The Tequila Crisis While Japan was in financial crisis and Britain and Germany were recovering from the ERM crisis, another crisis emerged in Latin America. Like the Debt Crisis of the early 1980s, Mexico's `Tequila Crisis' in 1994±95 involved the possibility of default on international financial obligations and affirmed the promotion of direct financing within the US. That is where the similarities end. As Susan Strange notes, the Tequila Crisis `did not involve foreign banks as creditors'.53 In stark contrast to Mexico's situation during the Debt Crisis, the Tequila Crisis was affected by debt securities, not default on bank loans. The Tequila Crisis reflected the problems associated with the promotion of direct financing in states that did not have the appropriate infrastructural power to manage credit and market risks within a more liberalized international financial system. The Tequila Crisis also reflected how a state can over extend its ability to generate short-term debt through the greater use of securities ± and the consequences of this extension of debt when the state does not have significant financial power, let alone structural power. Moreover, the Tequila Crisis demonstrates the value of embedding finance within a society to create a broad domestic base that can provide flexibility in times of financial crisis. Certainly financial embeddedness has been a source of American financial power. It was also a source of weakness for Mexico in that fragmented US investors spurred on and worsened the Tequila Crisis. During the early 1990s a `dollar-carry trade' emerged with Mexican government securities that were denominated in US dollars (known as tesobonos). This dollar-carry trade was quite simple. Investors could borrow money from Wall Street at five or six per cent then invest in tesobonos at 12±14 per cent. Between 1990±93, $91 billion of capital flooded into Mexican financial markets, a fifth of net capital inflows to developing countries.54 This mass inflow of capital, and the Mexican governments' mass issue of tesobonos, was due to the confidence placed in Mexico's capacity for growth. Furthermore, the American recovery and cuts in interest rates (which helped create the ERM crisis discussed above) increased the profitability of the dollar-carry trade. From December 1993 to December 1994 the value of the dollar against the peso increased nearly 60 per cent, increasing the foreign currency denominated liabilities of Mexican banks from 89 billion to 174 billion pesos.55 The trade was very profitable for all involved, and before the crisis hit in December 1994 the Mexican government issued $30 billion worth of tesobonos bonds.56 When the Fed decided to raise interest rates in

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December 1994, the Zedillo government raised interest rates and used foreign reserves to boost the demand for pesos. Eighty per cent of tesobonos were owned by non-residents of Mexico, the grand bulk being US investors. As tesobonos were denominated in dollars, US investors were nervous that Mexico wouldn't be able to pay on their value. They were right to be nervous, as the difference between Mexico's assets and liabilities was approximately $55 billion! To appease the market the peso was floated and its value quickly halved.57 In order to combat the run on the peso, the Mexican government raised interest rates, eventually doubling them (from 11 per cent in February 1995 to 22 per cent in April 1995).58 Spiralling into debt, Mexico required some assistance if a major financial catastrophe was to be avoided. Just as investors were unprepared for the crash in the value of the peso, so was the IMF. While stabilization measures were required as soon as possible, Mexico's ability to borrow from the IMF (in accordance with the General Agreements to Borrow) was not sufficient. Thus another lender of the last resort was required. Unlike the Debt Crisis that was characterized by protracted debt restructuring negotiations, the most distinguishing feature of the Tequila Crisis was the amount of financial `aid' provided by Washington. Much of this aid was to assist the Mexican government to service its debt obligations and to pull out foreign-currency-indexed debts from the marketplace. At first the Clinton administration proposed a $40 billion loan, which Congress promptly ruled out. Instead, Washington called upon an Exchange Stabilization Fund (ESF) established during the 1930s and used during the 1960s to prevent the depletion of US gold supplies (see Chapter 3) and support `the' currency ± presumably the US currency rather than those of its neighbors!59 In any case, the ESF provided $20 billion. Washington, much to the chagrin of Europe and Japan, placed pressure on the IMF to make up the difference. Despite breaking its own rules concerning the General Agreement to Borrow, the IMF ponied up $17.8 billion.60 Mexico had enough capital to avoid financial devastation and in return provided Washington with the future oil revenues from its largest profit maker, the national oil company PEMEX, as collateral. The swiftness of Washington's response to the Tequila Crisis can be related to the development and promotion of direct financing. The Tequila Crisis differed from the Debt Crisis in that the possibility of default was on debt securities not bank loans. Thus the risk associated with the crisis was more `disintermediated' than in the early 1980s as US investors rather than US commercial banks were at risk. Also, had Washington not organized `bail-out' funds, the newly signed North

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American Free Trade Agreement would have been damaged. Consequently, Washington was eager to ensure confidence in an economic recovery driven by growth in financial markets. The use of the forgotten ESF and the pressure placed upon the IMF to provide `bail-out' funds beyond the provisions of its own regulation demonstrated the ongoing persistence of `national activism' to affirm `international passivity' (ongoing financial liberalization in other states). It also demonstrated the speed with which Washington could act when US financial interests are threatened ± in contrast to the commonly perceived inefficiency of Washington in IPE literature. Indeed, the example of a `strong state' bureaucracy, Japan, floundered in responding to the Tequila Crisis; a consequence of, as Saori Katada argues, Japanese decision-making inefficiency in times of crisis.61 As commented in the previous chapter, the Fed and the BoE leaned on the BoJ and the MoF to assist with debt restructuring during the Debt Crisis. Washington's reaction to the Debt Crisis and the Tequila Crisis illustrate its interests in the promotion of unfettered direct financing. Washington's reaction to the Debt Crisis was to introduce capital adequacy regulations that would later be extended at an international level through the Basle Accord. No similar response resulted from the Tequila Crisis. The sources of investment were too fragmented and the imposition of capital controls was deemed unhealthy for the international financial system. What was organized, however, at a June 1995 meeting of G-7 leaders, was the establishment of a common special data dissemination standard (SDDS) for governments' publication of economic and financial statistics.62 However, the SDDS could hardly be considered an international finance regime with shared `principles, norms, rules, and decision-making procedures'. The SDDS was more a consensus on the need for accurate market information. The formation of the ILSA in 1983 was clearly in response to public concerns over the use of US tax dollars to bail out banks that were deemed `too big to fall'. Despite public outcries that tax dollars were used to support the Mexican economy, seen most expeditiously in Congress's rejection of Clinton's first plan to bail out Mexico, no substantial increase in regulatory restrictions occurred. Investors' rights were not tampered with and banks had not been involved on any scale approaching the Debt Crisis. In stark contrast to the early 1980s, US banks were now considered safe. The regulatory changes of the late 1980s and early 1990s had slowed the number of bank failures from 125 in 1991 to less than ten in 1995 and 1996.63 On the wave of a `bull revolution' in financial market activity Washington began to liberalize

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its own financial system to further the process of direct financing and encourage the creation of financial innovations for US international advantage.

The Bull Revolution Fuelled by public demand for credit, strong economic growth, and pressure from Wall Street to allow its commercial banks to participate more fully in direct financing, Washington enacted regulatory change. The two major reforms came through the Riege±Neal Community Development and Financial Modernization Act of 1994 and the Financial Services Competitiveness Act of 1995. The Riege±Neal Act superseded the McFadden Act of 1927 and the Douglas Amendment to the 1956 Bank Holding Company Act to allow interstate banking with the anti-trust provision that one organization could not control more than ten per cent of the national bank deposits.64 The Republican backed legislation also intended to repeal the ability to require banks to demonstrate efforts to lend to low-income groups under the 1977 Community Reinvestment Act. While this proposal was subsequently removed from the legislation, the 1977 Act was altered by a new Community Development Lending Act. Community groups were concerned that the new `financial supermarkets' would not lend to poor areas. As would be clear by the end of the decade, they were right to be concerned. The Financial Services Competitiveness Act of 1995 was designed to supplant the Glass±Steagall Act. While the Act was passed, the banking sector of Wall Street ensured that Glass±Steagall was not repealed ± becoming another failed attempt to repeal the Act over the previous 15 years. The length of time to reform the US financial system should not be interpreted as `gridlock' or representative of governmental inefficiency. Rather, it reflected the interactive embeddedness between Washington and Wall Street ± and all the competition and cooperation between them that generated financial innovation. It also reflected `national activism' in segmenting the market to make the components battle each other. Glass±Steagall was essential to the `pressure-pot' environment in the US financial system responsible for the generation of innovations. In 1995 reform failed due to lobbying from the banking community which argued that repeal of the Glass±Steagall Act would not allow them to engage in full-scale insurance activities. By 1996 the traditional distinctions really did not matter as bank holding companies were allowed to act as an umbrella over commercial and investment banking services under the supervision of the Fed.65

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While in 1950 commercial banks could not offer underwriting services and securities firms could not offer business and consumer lending, in 1996 both types of institution could offer all services. In December 1996 the Fed increased the limit on the amount of bank holding companies' revenues that could come from underwriting and dealing securities from ten to 25 per cent. Moreover, the Office of the Comptroller of Currency announced that it would allow bank subsidiaries to engage in previously prohibited activities with informal guidance. In 1997 the US Treasury followed this lead by allowing commercial and investment banks to affiliate.66 While direct stock ownership was still prohibited, through `financial services holding companies' US banks could offer a full-range of services provided by universal banks in Germany and their counterparts in Britain. Bank mergers were a consequence as banks reorganized to increase their participation in direct financing. A series of `megamergers' developed and large commercial banks formed strategic alliances with securities firms. For example, Bankers Trust merged with Alex Brown Inc., a major brokerage house, to increase its share of underwriting activity.67 Some banks were already trailblazing, particularly those that had been granted permission by the Fed to underwrite securities in the late 1980s (see previous chapter). J. P. Morgan, for example, secured a significant share of the market for underwriting securities. While the 1980s had been characterized as a time of banks' decline and regulatory `gridlock', the shedding of bank numbers consolidated positions in a securities-driven financial system. More generally, merger activity in stock markets distinguished the character of the US financial system in comparison to its major trading partners. As a percentage of stock market capitalization, mergers in the US represented 41.1 per cent in 1995, compared with 18.7 per cent in Britain, 3.1 per cent in Japan, and 2.3 per cent in Germany.68 Direct financing had transformed how commercial banks operated and how they attracted deposits and made profits. The decline of the traditional functions of banks can be seen in commercial and industrial loans. During the 1990s bank lending to US businesses declined to the lowest levels since the 1950s. Banking assets had grown only 4.8 per cent between 1985±95, compared with 26.7 per cent and 14.1 per cent for mutual funds and securities firms respectively.69 At the same time, banks were having the most success since the 1950s. The promotion of direct financing during the 1980s had engendered a dual process. From the top-down banks were consolidating and gearing towards securities trading in both debt and equity markets, and towards

170 US Power in International Finance

off-balance sheet securitization. From the bottom-up consumer demand was expanding with the resurgent growth of the US economy and providing a source of capital (and indebtedness) to promote direct financing. Consumer demand for credit demonstrated the social and political importance of credit-money over money ± and also the view that power is derived from capacities not resources. Embedded consumer credit markets and increased indebtedness were mutually compatible. From 1994±96 inflation remained low at around two per cent, but consumer credit expanded at an average of 12 per cent.70 Household debt burdens increased to 16 per cent of income, as greater access to credit markets became available.71 The market for bank issues of consumer-loan asset-backed securities expanded accordingly ± 53 per cent in 1995 alone. By 1995, 93 per cent of asset backed securities were issued by banks, totalling some $116.25 billion. To put this figure in perspective it represented 1.6 per cent of the US's GDP for 1995 ± eight times larger than the US contribution to foreign aid.72 Consumer demand for credit exceeded banks' ability (or desire) to extend loans without violating domestic and international financial regulation.73 Due to Basle restrictions for on-balance sheet assets, banks preferred to `securitize' loans to get them off their books. By the mid-1990s commercial and industrial loans, which were traditionally assumed to be the bread and butter of bank revenues, were actively being moved off of banks' books through Collateralized Loan Obligations.74 Thus while banks' profitability increased through the decade, the number of conventional loans issued decreased. The successful promotion of direct financing reflected the unique size and depth of US domestic financial markets. Britain, Germany, and Japan were a long way behind in adopting such innovations. While personal indebtedness increased during the 1990s, US government indebtedness decreased. In the mid-1990s, however, continued indebtedness led Washington to call (as in previous decades) for a little help from its friends. Despite persistent predictions of hegemonic decline and the growing resilience of the US's trading partners in monetary and financial matters, Japan and Germany continued to comply with Washington's wishes on the sale of US government debt.75 In 1995 half of new US Treasury securities, $70 billion worth, were purchased by foreign central banks, as well as $100 billion of securities purchased in secondary markets by private foreign investors. With these purchases foreign investors (the majority were Japanese and German) held 26 per cent of US government debt ± repeating a record set in 1978.76 The extent of foreign ownership of US debt reflected Washington's ongoing

1992±2000: Crises and Consumer Credit 171

ability to retain the support of its major trading partners. At the same time, however, the Clinton administration sought domestic means of funding government debt. Washington supported Wall Street's fervent promotion of direct financing and the market for US government debt with some financial innovations of its own. In 1996 the US Treasury announced the release of `inflation-protection securities' ± government debt indexed to changes in the consumer price index. Not only did this financial innovation appeal to the risk-averse, but the securities could be bought in sums as little as $1,000.77 Both Washington and Wall Street actively sought investment from the American middle-classes. And the American middle-classes had much to offer. The dramatic (and revered) change in direct financing during the 1990s was the growth of stock markets as the Dow Jones broke the 6,000 then the 7,000 mark in the mid-1990s. In 1996 the Economist reported that a 50 per cent rise in the Dow Jones index and strong consumer spending had added $2.4 trillion to the US since 1994; `consumers' were growing `wealthier ± on paper ± by the month'.78 The `Bull Revolution' was well under way on the back of gains in stock markets and the increased use of consumer credit. Between 1991±95 household investment in corporate equities increased 11.7 per cent. Likewise between 1991±96 household use of credit market instruments increased 5.7 per cent and household financial assets in mutual funds increased 20.8 per cent.79 In comparison gross fixed capital formation only increased two per cent over the same period.80 The further promotion of direct financing through the expansion of consumer credit and stock markets rests, according to Richard Grasco, Chairman of the NYSE, upon the financial awareness of the American middle-classes. On the back of `baby boomers' concern for their financial future and their need for creatures comforts `now', Grasco argued that the difference between Wall Street and `Main Street' had been eliminated.81 He boasted that in 1995 two-thirds of Americans had an equity stake, 40 per cent of whom had incomes under $40,000 and 80 per cent incomes under $100,000.82 Table 6.1 demonstrates that while Grasco may have exaggerated the level of participation, there was certainly increased interest in the share market across a broader base of the community. As shown in Table 6.1, the importance of stock holdings as a percentage of American families' financial assets had grown significantly, providing Washington and Wall Street with good grounds to maintain both economic security and financial competition. The increased competi

172 US Power in International Finance Table 6.1 Direct and indirect stock ownership of American families, 1989, 1992, 1995 Families with direct of indirect share holdings 1989 1992 1995

Stock holdings' share of group's financial assets 1989 1992 1995

Percentages All families Income* < 10,000 10,000±24,999 25,000±49,999 50,000±999,999 100,000 ‡

31.7

37.2

41.1

26.3

34.4

40.4

2.3 13.1 33.1 54.0 79.7

6.9 19.4 41.6 64.1 79.1

6.0 25.3 47.7 66.7 83.9

10.0 10.3 20.3 25.6 31.4

15.2 18.6 25.4 35.1 40.2

21.1 21.6 33.0 39.9 47.6

Source: Kennickell, Arthur B., Starr-McCluer, Martha, and SundeÂn, Annika E., `Family Finances in the U.S.: Recent Evidence from the Survey of Consumer Finances', Federal Reserve Bulletin, Vol. 83, No. 1, January 1997: 12. * Income is represented in 1995 US dollars.

tion on share markets in the US was supported by the publicizing of share markets, again to attract a greater number of Americans. As represented in Table 6.2, the role of households in the US distinguished it from Japan, Germany, and Britain. This table indicates that banks played a minor role in the ownership of shares in the US and British markets in contrast to those of Japan and Germany. The table also indicates the role of corporate crossshare holdings in the German and Japanese financial systems (in the `Non-financial enterprises' row) and the role of mutual funds in Britain (`Other'). The high percentage of assets held in equities in Britain is a consequence of the role of prominent institutional investors who, because of lax restrictions on portfolio investment, controlled equity markets to a degree unseen in other states. In 1994 the top 25 British institutional investors, for example, controlled 42 per cent of the value of shares held by all institutional investors. Furthermore, the top 50 British institutional investors accounted for half of the stock market value.83 At the same time, despite fanfare about Britain being a `shareholding democracy', personal investment accounted for around 20 per cent of the market, half the percentage of the late 1960s.

1992±2000: Crises and Consumer Credit 173 Table 6.2 Ownership of exchange-listed firms by percentage, 1995

Financial institutions Banks Insurance firms Other Non-financial institutions Households Non-financial enterprises Public authorities Non-residents

United States

Japan

Germany

Britain

31.2 0.3 23.9 7.0 68.8 48.1 14.1 .. 6.6

48.0 26.7 17.2 4.1 52.0 22.6 24.8 0.7 3.9

22.0 10.0 12.0 .. 78.0 17.0 42.0 5.0 14.0

58.8 0.9 18.4 39.5 41.2 21.3 3.6 3.9 12.4

Source: OECD, OECD Economic Surveys, 1995±1996, United States: 127.

While not adequately represented in the above table, mutual funds were the largest herd in US securities markets. By the end of 1996 there were more than 5,000 mutual funds registered, with the top three (Fidelity, Vanguard, and Capital Research) holding assets of over $850 billion. Mutual funds were also geared to attract ordinary investors and, as Charles Geisst writes, during the mid-1990s `[m]utual fund advertising on television became common and their values were reported in the press on a daily basis'.84 From 1980±95, the assets of institutional investors as a percentage of GDP had increased from 20.3 per cent to 48.9 per cent in Germany, 23.1 per cent to 87 per cent in Japan, 59.3 per cent to 158.6 per cent in the US, and 64.1 per cent to 176 per cent in Britain.85 Between 1980±95 US institutional investors' assets had increased tenfold to $20 trillion. To provide a basis for comparison, the combined GDP of the G-7 in 1994 was $17.5 trillion.86 The wealth accumulated during the Bull Revolution required the continued growth of consumer credit markets not only in the US but also overseas. As in earlier decades, Washington had to juggle macroeconomic policy conditions while implementing successful financial microeconomic reform. For example, in 1994±95 the appreciation of the dollar against the yen combined with persistent current account deficits warned of future pressure on interest rates. More so than in previous decades, macroeconomic turbulence could dramatically revalue much of the private paper wealth accumulated during the Bull Revolution.87 As discussed in Chapter 2, the substantive validity of any increases in creditmoney requires a social foundation and political and economic support. Strong growth, low inflation, and low unemployment (at a 25-year low in 1997) were needed to maintain the value of inflated asset values.88

174 US Power in International Finance

Even with such prosperity many scholars, like Aaron Friedberg, warned of a decline in the relative and structural power of the US, particularly with reference to the formation of international regimes.89 In order to maintain structural power in international finance, Washington and Wall Street needed to continue to push for financial liberalization in other states. As with banks in the 1950s and 1960s, US mutual funds looked overseas to capitalize on the trading knowledge and sophistication they had gained from US domestic markets. Thus, in order to continue to appease Wall Street's new giants, Washington needed to open up markets for mutual funds. Demonstration of such leverage in the financial realm can be found in numerous calls for the Japanese to reform. With a 1995 exchange rate of ¥80:$1 capital was flooding out of Japan and the US was anxious to deregulate the Japanese financial system in order to bring even more yen its way. More than a decade after the Yen±Dollar Agreement had been negotiated and close to the anniversary of the Plaza Accord, monetary agreements were once more used to push financial reform. In 1995 the US±Japanese talks for a `New Economic Partnership' resulted in a Financial Services Agreement whereby US intermediaries gained access to the Japanese financial system, particularly in the lucrative area of investment management for Japan's substantial public pension funds.90 US investment firms came to secure much of the Japanese markets (especially prominent names like Merrill Lynch). Permission for foreign intermediaries to offer investment management advice came as much from Japanese domestic pressure for more flexible investment vehicles as it did from US±Japanese financial diplomacy. Indeed, by 1995 Japan's financial collapse had sagged into a protracted financial crisis. Japanese banks' bad loans had increased more than sixfold in the 1992±95 period. On the positive side, most of Japanese banks' capital adequacy ratios were officially above the eight per cent required by the Basle Accord. Like the Basle Accord, US and Britain added to Japan's financial woes with the institution of a `Japan premium'. Similar to the deleterious effects of the Basle Accord, the premium hobbled Japanese banks' foreign operations. Indeed, during the 1990s, scandals and bank collapses destroyed any remnants of the perception that Japan's administrative guidance over finance was assisting the creation of Pax Nipponica.

Overlending and the Japan premium Despite the dismal prospects for Pax Nipponica, neorealists and neoliberals continued to view Japan as an exemplar of a `strong state' with a

1992±2000: Crises and Consumer Credit 175

strong centralized bureaucracy. For example, in 1996 Stephen Krasner wrote: In polities with strong states, power is concentrated in the hands of a small number of actors in the executive branch who can set policy and secure, through coercion or incentives, the support of major groups in civil society. Japan is, arguably, the illustrative case.91 In the realm of finance Japan was anything but strong as the prolonged financial crisis of the 1990s pitted ministries against each other. For example, the Ministry of International Trade and Industry's (MITI) publication of two reports that advocated financial deregulation in 1994 enraged the Ministry of Finance.92 Squabbles over financial reform between the ministries were telling of a broader coordination problem in Japan, which, in turn, was related to `deals' between ministries and different parts of the financial sector. The centralization of power that was viewed as the means of success in the post-war period became fragmented when placed under stress. This is seen most dramatically in the electoral collapse of the Liberal Democratic Party in 1993 ± the politics of consensus had come to an end. In the financial system, the worldwide shift to the creation of `mega-banks' was seriously damaging consensual relationships. The centralization of banking reform within a `convoy' system (all banks move at the pace of the slowest) led to an approach whereby if there was `some danger of putting a small bank at risk, then no change would occur'.93 Importantly, the `convoy' system also led to a `socialization of risk' between banks, which were connected through cross-shareholdings and closely tied to the MoF's oversight.94 In stark contrast to the view that the government had the ability to coordinate and control Japan's financial intermediaries, the MoF's soft approach to financial supervision and `socialization of risk' ensured that Japan's financial woes spread quickly throughout the entire financial system without support from Japanese society. As discussed in the previous chapter, in October 1990 the TSE collapsed, losing 45 per cent of the value of stocks.95 By 1997 the value of the stock had fallen 58 per cent below its record high in December 1989.96 Due to Japan's insistence in the Basle Accord that 45 per cent of unrealized gains from stockmarkets make up `supplementary capital', the collapse forced Japanese banks to increase their risk-weighted assets.97 Again, it was necessary to take capital out of active service and keep it as reserves (commonly in the form of US Treasury bonds) to meet capital adequacy requirements. Banks' stocks of government

176 US Power in International Finance

securities rose 25 per cent above predicted forecasts and the needs of the real economy, while commercial and industrial loans from banks dropped 25 per cent below their forecast level ± a decline that was not due to the banks' adoption of financial innovations, as in the US.98 Japanese banks' equity holding in companies were no longer producing capital but creating losses.99 Compounded by the severely damaged real estate market and the tightening of corporate capital investment, a `credit crunch' emerged in Japan.100 Between 1990±95 real estate and stock price losses in Japan accounted to two years' national output, or $6 trillion.101 Despite numerous attempts by the MoF to bail-out jusen and rescue the worst hit banks, the declines in real estate value contributed to a liquidity crisis in the mid-1990s. In 1997 the MoF estimated nonperforming loans to be $230 billion, while private estimates were $700 billion.102 On top of the masses of non-performing loans, the Japanese financial system was severely tarnished by a series of financial scandals. In 1995 it was discovered that Toshihide Iguchi, Daiwa's chief bond manager in New York, had hidden losses accumulating to $1.1 billion over the previous decade. Similar to Krasner's view of Japan, Ethan B. Kapstein demonstrated how interactive embeddedness is ignored in popular perspectives of IPE. He supported his argument that the international financial system was `shockproof' with the assertion that when `American regulators closed Daiwa Bank's New York office . . . the markets did not squeal'.103 But closing the offices is not important. What is important is that when the scandal happened the markets squealed like stuck pigs. Wall Street squealed to Washington. The Fed then acted on behalf of US interests and began asking the Japanese government some hard questions. Indeed, the Daiwa scandal dramatically changed the relationship between the Fed and the MoF. It also changed perceptions concerning the relationship between the Japanese financial community and the MoF. Following the shock of the sheer volume of lost capital under Iguchi's control, it was revealed that the MoF had prior knowledge of Daiwa's problems and had not informed Federal Reserve regulators.104 In fact, the MoF had known of Daiwa's problems for nearly two months before Daiwa told the BoJ, who then decided to contact the Fed!105 International opinion of the MoF continued to worsen when in 1996 it failed to pull the rug out from under Yasuo Hamanakam, a trader for the Sumitomo Corporation, before he lost $1.8 billion in copper trading on the London Metal Exchange.106 Japanese financial selfconfidence then hit new lows when the Tokyo government turned to foreign underwriters for its municipal bonds.107

1992±2000: Crises and Consumer Credit 177

Furthermore, in contrast to Kapstein's view of the formal relationships between states, market actors also responded to Japan's financial woes to impose their own authority. The US and British reaction to the aforementioned scandals was to institute a premium on Japanese involvement with all Eurodollar and Euroyen transactions.108 The Japan premium was established to measure the level of transparency within the Japanese financial system. While the premium existed in the Eurodollar market, Euroyen market, and dollar±yen swap market, for the majority of time the three premiums were in sync (allowing me to talk about the Japan premium) and added up to 1.2 percentage points to Japanese banks' lending of uncollateralized foreign currency funds.109 This was a serious imposition for the Japanese, however, as the volume of their fund-raising on Euromarkets was double that of the US or the Germans ± approximately $1.7 trillion in 1995.110 The premium forced banks to withdraw from low-margin operations in Asia and in the US. It also added to the woes many Japanese banks felt as non-performing loans threatened to (and in some cases did) throw them out of the Basle Accord. While Japan was clearly in need of reform it was constrained at all levels, both official and market based. One way around Japan's `credit crunch' of the mid-1990s would have been to sell US government debt. Wall Street immediately dismissed talk of doing so in 1997 on the grounds that the selling of US government debt would put Japanese banks under the eight per cent capital adequacy ratio required to meet the conditions of the Basle Accord. Furthermore, as commented by Kathy Matsui, the chief market strategist for Goldman Sach's Japanese operations, `the implications of a largescale liquidation of US Treasuries . . . [would be] higher interest rates worldwide and an increase in the Japan premium'.111 Increases in the premium rose sharply with each announcement of a bank collapse and fell with the announcement of policies that sought to implement financial reform. The later half of 1997 was exceedingly disturbing when the premium reached nearly 120 basis points (1.2 per cent additional interest).112 Japan desperately needed financial reform. In August 1997 Yasuo Matsushita, the Governor of the Bank of Japan, proclaimed that the Japanese government was implementing financial reforms comparable to the drastic restructuring measures adopted by U.S. commercial banks in the latter half of the 1980s and in the early 1990s to solve their management problems.113

178 US Power in International Finance

Yasuo Matsushita was speaking particularly about the restructuring of the Hokkaido Takushoku Bank (known as Takugin) that was threatened with collapse in the early part of 1997. Stringent measures and a merger with the Hokkaido Bank would ensure that Takugin would `be able to complete the disposal of their non-performing loans'.114 However, the merger did not go ahead and in November 1997 Takugin was the first major bank in Japanese history to collapse without a government bailout.115 Importantly, the lesson for other Japanese banks was that the MoF was, as Jennifer Amyx argues, `no longer a sufficient guarantee of success'.116 In the mid-1990s the Resolution and Collection Bank (RCB) and the Co-operative Credit Purchasing Company (CCPC) were created to bail-out banks. By the end of 1996, the CCPC alone had purchased ¥12 trillion of bad loans from Japanese banks that, in return, received 30 per cent of the face value of the loans.117 So the fall of Takugin sent shock waves through the Japanese financial system. Either the MoF had allowed it to fall or Takugin was in too deep to be saved. The latter prospect frightened investors, as did the revelation that while Takugin was known as the bank with the highest capital adequacy ratio of 9.34 per cent, once bankruptcy was declared it was revealed that its real capital adequacy was zero. Soon after Takugin, Yamaichi Securities fell and the Japan premium soared to 110 basis points (or 1.1 per cent). The Japanese public withdrew its money from banks and placed it in the postal savings system insured by the government.118 The reforms to which Yasuo Matsushita alluded were not comparable to the US in the late 1980s and early 1990s. One important difference between the two states' processes of financial reform was that although the US reforms were made in a time of economic recession they did not depend upon the financial sector to finance them through troubled times. As discussed in the previous chapter, Japan financed US government debt during that period. Even in 1991 when Japanese capital was withdrawn following its collapse, Washington was able to package its debts in a way that was attractive to American investors ± finance was embedded in American society. Japan did not have this ability. The Japanese government could not call upon a foreign power to buy its debt en masse, nor was finance socially embedded to the extent that it could attract the Japanese public to purchase debt directly. Thus the centralization of control and the many ties between the Japanese government and the Japanese financial community increased the interdependence and sensitivities of both parties. Japan's public indebtedness was alarming to investors at home and abroad. In 1995 Japan's public indebtedness was 7.6 per cent of GDP,

1992±2000: Crises and Consumer Credit 179

compared with 2.8 per cent in the US.119 Knees wobbled in the MoF when journalists pointed out that Japan's fiscal position was akin to Italy's!120 In response to the fiscal deficit the Hashimoto government increased taxes, worsening Japan's recession and generating a great deal of criticism from Washington.121 In 1997 consumption tax was also raised, leading to further calls of economic mismanagement from the US. Japan quite clearly had to remedy its fiscal situation and reform its financial system to regain investor confidence from the US and its other trading partners. Some steps had been taken. In 1995 the MoF had established a Financial System Stabilization Committee. More importantly, in 1996 the Hashimoto government announced its `Big Bang' plan to deregulate foreign exchange rules, remove fixed brokerage commissions (implemented in the US in 1975 and the UK in 1986), remove securities taxes, ease restrictions on derivatives, legalize the securitization process, and lower remaining barriers between banks and securities companies. All of these reforms were to stagger over a five-year period.122 The Japanese government found its relations with the Japanese financial community severely strained. US pressure for financial reform and the ongoing credit crunch did not ease the relationship, nor did Japan's public indebtedness or the need for banks to meet Basle requirements. One way to buy time for financial reform and win some favor with the financial community was to continue the `cheap money' policy initiated after the Plaza Accord. `Cheap money' continued to present Japanese banks with the tempting prospect that they could lend their way out of their financial woes. In 1995 the BoJ had lowered the discount rate to an historical low of 0.5 per cent and the MoF encouraged banks to increase lending ± just as Washington had encouraged Wall Street to lend to developing states in the mid-1970s.123 Furthermore, following the period of acute financial crisis in late 1997, the Obuchi government responded with a Fiscal Investment and Loan Program which increased lending by government institutions by 17.4 per cent to provide some relief from the `credit crunch'. The program explicitly recognized the constraint the Japan premium was having upon private Japanese banks.124 All the same the program could not make up for bad loans, nor was it as profitable as overseas lending. Of course by late 1997 the Asian financial crisis was underway. In the run-up to the crisis Japanese banks `overlent' to Southeast Asia. In 1996±97 30 per cent of international loans to Southeast Asia were from Japanese sources, up from 26 per cent in 1995.125 Furthermore, as a consequence of the policy of cheap money, credit was going into

180 US Power in International Finance

economies that had undergone capital account liberalization without implementing regulatory structures sufficient to manage their new vulnerabilities. Banks within these economies could borrow foreign capital cheaply and then lend domestically at higher rates. This `yen-carry' trade boomed from the extremely low rates of interest in Japan and consequent interest rate differentials between Japan and borrowing states.126 Lending to Southeast Asian states increased, as did their commercial banking sectors, way ahead of the growth in GDP.127 Real estate prices climbed. The inward flow of capital placed enormous potentially inflationary pressure upon economies' money supplies; supplies on pegged exchange rates. The Thais were by far the largest Southeast Asian borrowers of Japanese capital. It is not surprising that Thailand was the state in which the Asian financial crisis began.128

The Asian and Russian financial crises Only a couple of months before the Thai baht crashed, the IMF dismissed the potential for `overheating' in Asia. In fact the institution was preparing to use the economic success in Asia as an example of the benefits of capital account liberalization.129 A major consequence of the Asian financial crisis for developing economies was the glaring need to address the pace of financial liberalization and the need for institution-building and greater `social capital'. While the literature on the causes and mechanics of the Asian financial crisis is vast, comparisons with the Debt Crisis have been largely absent. However, a brief comparison is necessary in understanding the impact of direct financing. For the states in this study the consequences were dramatically different and in stark contrast to the Debt Crisis of the early 1980s. There are similarities between Japanese banks' `overlending' to Southeast Asia in the mid-1990s and US banks `overlending' to Latin America in the mid-to-late 1970s. In both cases lending was encouraged by sluggish domestic growth. In both cases the governments of the day promoted lending as `a matter of public interest'.130 However, as discussed in the previous chapter, due to strong government intervention Japanese and German banks responded to the threats of default from economies in Latin America by absorbing many of the losses. The same did not occur in the US and Britain. In the US's case the Debt Crisis secured the promotion of direct financing and led to the introduction of domestic financial regulation (the ILSA), which in turn led to discussions with the Britain and the formation of the Basle Accord.131 Burnt by the experience of the Debt Crisis, US bank lending to developing

1992±2000: Crises and Consumer Credit 181 180

Asia

Japanese Banks U.S. Banks European Banks

160 140

US$Billions

120 100 80 60 40 20 0 1990

1991

1992

1993

1994

1995

1996

1997

1998

Figure 6.1 BIS Reporting Banks' Credits to Emerging Economies ± Asia

180 Japanese Banks U.S. Banks European Banks

160

Latin America

140

US$ Billions

120 100 80 60 40 20 0 1990

1991

1992

1993

1994

1995

1996

1997

1998

Figure 6.2 BIS Reporting Banks' Credits to Emerging Economies ± Latin America

182 US Power in International Finance

180 Japanese Banks U.S. Banks European Banks

160

Eastern Europe

140

US$ Billions

120 100 80 60 40 20 0

1990

1991

1992

1993

1994

1995

1996

1997

1998

Figure 6.3 BIS Reporting Banks' Credits to Emerging Economies ± Eastern Europe Source: Bank for International Settlements, International Financial Markets as Viewed from BIS Statistics: Changes in the International Flow of Funds in the 1990s: 39.

economies dried up. In the run-up to the crisis, loans from European and Japanese banks outweighed US banks by a ratio of 6.9:1 and 5.6:1 respectively.132 Figures 6.1±6.3 demonstrate the levels of US bank lending to developing states in contrast to Japan and Europe. Lending to developing states reflected the development of direct financing in lender-states. Germany's high level of lending (which comprises the bulk of `Europe' in Figures 6.1±6.3) to Eastern Europe (discussed below) reflected its still bank-oriented system. Similarly, and as discussed in the previous section, Japanese lending to Asia reflected its banks' need to increase revenues. German and Japanese lending to developing states also reflected their experience of the Debt Crisis. When the Asian financial crisis hit, the Germans and the Japanese responded in a similar way to the Debt Crisis, with strong government intervention. Although for German banks more serious consequences were to be faced with the Russian financial crisis, the Kohl government tried to ease the pressure on Asia that came from German banks. For example, when the Thai government sent a letter asking the Bundesbank to pull the reins in on German banks speculating against the baht, Hans Tietmeyer, the Bundesbank president, asked for a list of names. Speculation from German banks halted soon thereafter. Similar letters to the US had been flatly

1992±2000: Crises and Consumer Credit 183

rejected on the grounds that Washington would not interfere with Wall Street's operations.133 Unlike the Debt Crisis and in stark contrast to the Tequila Crisis, Washington was determined to maintain its distance. The Japanese government could not afford to distance itself as the Asian financial crisis deepened its banks' financial woes. In 1998 the top nine Japanese commercial banks put aside ¥300 billion ($2.6 billion) for non-performing loans from Asian economies. For the same year the unrealized loans from the same economies amassed to ¥750 billion (approximately $6.5 billion).134 Furthermore, because Japan placed greater priority on its own recovery, it worsened the crisis by devaluing the yen in order to boost exports. Consequently imports from the region were reduced by approximately $32 billion in 1997.135 As discussed above, the collapse of Takugin and Yamaichi increased the costs of the Japan premium for Japanese banks. The depreciation of the yen and reduction of imports led to further charges of broad economic mismanagement and regional irresponsibility from Washington. Unlike the Japanese, Wall Street and the City of London were not troubled by the Asian financial crisis in any significant way. While in the fourth quarter of 1997 trading revenue on equity for the US's ten largest banks decreased by over 200 per cent (also due to strife in Latin America), profits from foreign exchange trading increased over 50 per cent. Indeed, in its yearly report the Fed stressed the value of foreign exchange revenues and stated that US banks increased profits for the year overall.136 The success of direct financing combined with the enormity of the US domestic financial system helped insulate the US from the negative effects of the Asian financial crisis. In the British case the vulnerabilities of the City's high degree of financial internationalization were offset by the `arm's length' character of its trading in debt securities. For the political economy of direct financing the most important issue raised by the Asian financial crisis was how to coordinate debt restructuring when most lending to the region was `disintermediated'. Also interesting for the political economy of direct financing were the consequences for international financial diplomacy and a possible challenge to US structural power in international finance. Unlike the Debt Crisis, debt restructuring was not as simple as opening the doors to the London and Paris Clubs. On the contrary the `disintermediated' character of lending in the Asian financial crisis explains, in part, Wall Street's requests to the IMF to get Asian states into good fiscal shape to repay any debts owed. The IMF's response to the Asian financial crisis ± the advocacy of reducing imports, lowering public spending and raising interest rates to support currencies ± demonstrated that the les-

184 US Power in International Finance

sons of the Great Depression remained unlearned. Moreover, it created widespread dissent against the `Washington Consensus' (the US Treasury, the IMF, and the World Bank) as Asian governments complained that the IMF had used stabilization policies derived from the Debt Crisis that were inappropriate for Asian economies. This dissent provided Japan with an opportunity to increase its structural power in finance within the region and distance itself from the IMF, regarded by many in the region as an `instrument of US financial diplomacy in the high-profile cases'.137 The opportunity was taken with a proposal from Japanese Finance Minister Miyizawa for an Asian Monetary Fund (AMF) in late 1997. Based on a Taiwanese proposal, the fund was intended to provide support to ailing economies in Asia and to re-establish Japan's credibility in the region as a financial power. With a proposed capitalization of $100 billion, the main distinction between the AMF and the IMF was to be an emphasis on medium to long-term financing.138 Importantly, the proposed AMF would not impose the same rules of conditionality as the IMF. The AMF proposal thus represented a serious challenge to the prevailing financial orthodoxy. In the provision of medium and longterm capital for productive investment it also posed a challenge to the promotion of direct financing and US access to potentially lucrative markets. Accordingly, the IMF and the Clinton administration argued strongly against the establishment of the AMF with the rationale that the AMF would not impose the appropriate market discipline necessary to reform Asia's economies.139 Rather than establish an AMF, Washington and the IMF argued that Japan would be better served by deregulating its financial system and removing elements of what became referred to as `crony capitalism'.140 The proposal was soon dropped and replaced with a Japanese fund to disperse capital to Asia bilaterally. The failure of the AMF demonstrated the lack of Japanese structural power in international finance and, consequently, its inability to manipulate international regimes for its own advantage. The charge of `crony capitalism' was not only levelled at Asian states. The Russian financial crisis of 1998 provided an interesting case of how `old boys' networks' operated in developing states as well as in advanced industrial states. As with the Asian crisis, the Russian crisis provoked government intervention from Germany and the rallying of funds from Washington and the IMF. Importantly the crisis also rattled Wall Street right to its core. After a 43 per cent decline in GDP from 1989±96, Russia experienced a stock market rally in 1997 of some 285 per cent!141 Russia's enormous

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growth and healthy trade surplus on the back of energy resources gave optimism to would-be financiers. Russian government bonds dropped 200 per cent to 19 per cent in 1997 and the Russian government's revenues increased by nearly 70 per cent. With interest rates of 150 per cent the `bet was an appealing one to investors with a high tolerance for risk'.142 Accordingly, capital flooded in from US hedge funds and from German banks building upon loans and investments made earlier in the decade. However, in 1998, following troubles with tax collection, the suspension of Russian Treasury bond trading, and disputes with the IMF, investors withdrew their capital. In August the ruble fell. In September it was devalued by 35 per cent and a 90±day moratorium on some of Russia's foreign debt repayments was announced.143 The Russian government seized 75 per cent of all exporters' export earnings in a desperate attempt to bolster the central bank's borrowing, which, in turn, supported the rising government deficit. By the end of the year Russia owed more than $100 billion of Soviet-inherited foreign currency debt and the possibility of honoring Russia's own $60 billion looked bleak. The British bank Barclays announced losses of £250 million from the crisis.144 Financial markets throughout Europe panicked and the deutschmark came under pressure soon after. The market perception was that German banks were overexposed to Russian turmoil. Similar to Japan's financial relationship with Southeast Asia, where 30 per cent of all loans to the region in 1997 were from Japanese sources, approximately 40 per cent of all foreign investment in Russia in 1998 was from German sources ± adding up to more than $30 billion owed to German banks. However, unlike Southeast Asia, Russia's financial problems were not greatly exacerbated by a withdrawal of capital by German banks. After watching currency markets pull out of the deutschmark due to nervousness about the extent of bad loans owed to Germany, the German government decided to guarantee 90 per cent of loans to Russia.145 But such ongoing state intervention did not appease the German financial community, which viewed the problems in Russia as `the straw that broke the camel's back'.146 The experience rattled German investors and damaged confidence in the adoption of direct financing within Germany. The term `crony capitalism' was used in association with the Russian crisis because of the perception that Russian politicians were more interested in securing their own fortunes than implementing necessary political, economic, and social reforms. In the US the term `crony capitalism' referred not only to the ill-effects of close ties between government and business in Asia and Russia, but affirmed the virtues of American finance capitalism, and of direct

186 US Power in International Finance

financing. Absurdly, for some IPE scholars, this affirmation symbolized not the victory of dividends but the victory of regimes ± or at least calls for their formation. Ethan Kapstein, for example, argues that the financial crises demonstrated that `crony capitalism', the `familial and old boy network[s]', should have been the starting point of any creditor's analysis and that creditors in advanced industrial states should not have been allowed to invest in developing states until meeting the standards of the Basle Accord.147 It can be argued that the Basle Accord was in part responsible for Japanese lending but not in the way Kapstein intends! More importantly the term `crony capitalism' was used to affirm the virtue of the complete separation of government and business while, as discussed, interactive embeddedness, the competitive±cooperative relationship between Washington and Wall Street, has been the key to the promotion of direct financing. While Washington and Wall Street did not exhibit the overtly cooperative ties between the government and the financial community that allowed Japanese banks to overlend, cooperation did exist that opened Washington and Wall Street up to charges of hypocrisy. One important fallout of the Russian crisis, the collapse of Long Term Capital Management (LTCM), certainly strengthened these claims. From its inception in 1994, LTCM tripled the capital of its investors (who had to invest a minimum of $10 million) and was so successful that it had to return $2.7 billion to investors in 1997 on the grounds that it did not know where to put it!148 But not all was roses. After the Russian collapse LTCM lost $1.8 billion, reducing its capital base to $600 million by mid-September 1998. This sharp decline was worrisome, as the value of LTCM's assets was $80 billion. More terrifying was that the notional value of its derivatives trading was $1 trillion.149 Should LTCM's derivative trading operations turn sour, widespread financial collapse was at stake. Consequently, on September 23 1998 the chairmen of Merrill Lynch, Travelers Group, J. P. Morgan and the president of the New York Fed gathered together to discuss LTCM's woes.150 As a consequence of this meeting $3.6 billion was hurried together as a rescue package. As a result, LTCM was saved although its investors were, as reported by the OECD, `wiped out'.151 The meeting of the powerful from Washington and Wall Street proved successful, but, as a former member of the Fed stated, was open to criticism that in the US there was still an `old boy network . . . at a time when we are criticizing cronyism in Russia and Asia'.152 Indeed, when the Japanese made similar moves the Japan premium increased to punish what was seen as collusion.

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The collaboration of the Fed and major bankers in the rescue of LTCM was reminiscent of 1910 when, after a spate of major and minor financial crises, J. P. Morgan met his contemporaries at his duck-hunting club to create the Aldrich Plan that led to the creation of the Federal Reserve system in 1913. Similarly, the financial crises of the 1990s have increased calls for new national regulatory bodies. States' financial strategy for adapting to and enacting change in the international political economy turned to concentrating supervisory powers into what could be described as `super-regulators'.

The super-regulators As with all financial crises in the post-war period, the Asian and Russian financial crises increased calls for a new international finance regime. Following the crises, anger generated towards currency speculation increased talk about the implementation of capital controls. Entry controls on incoming capital (such as those introduced in Chile then faded out in 1998) were proposed to stop speculators, and exit controls to deter nervous investors from withdrawing their capital were also flagged. As in previous decades there was support from the US's trading partners for such controls, particularly from Japan and, as always, France. Support for proposals for capital controls was not only due to the crises but from resentment towards what was perceived as the ongoing `Americanization' of finance. This included resentment from continental Europe towards the Multilateral Agreement on Investment, which was supported by the US and British Treasuries.153 As could be expected, proposals for capital controls were strongly discouraged by Washington and Wall Street. And as demonstrated in the Tequila Crisis, the Clinton administration preferred to provide short-term credit for `bail-out' operations than to see capital controls imposed. Capital controls would reduce investment in developing states made through short-term debt securities. As demonstrated in Figures 6.1±6.3, US bank loans to developing states had declined dramatically since the 1980s and reflected the emphasis given to direct financing. Nevertheless, international calls to abate the financial volatility of the decade naturally led to calls for a new international finance regime. As Robert Keohane writes, `increases in issue density will lead to a demand for the creation of international regimes'.154 And regimes were created. Following the crises of the mid-1990s, the G7, G8 and G10 established discussions on international finance, and fora were coordinated by the BIS.155 From 1995 onwards (following the Tequila Crisis), G-7 leaders

188 US Power in International Finance

met to discuss plans for a new `Global Financial Architecture'. IOSCO increased their membership rapidly from 80 in 1990 to 159 in 1998 and, significantly, created a Tripartite Group with the BIS and insurance regulators.156 Along with the World Bank, the IMF and the G-10, the BIS created an Institute for Financial Stability in 1998 (and Financial Stability Forum in 1999) to play a public service role in promoting good, prudential financial practice for banks lending to developing economies.157 The proliferation of finance regimes met with some success. At all levels there was an increase in data sharing. However, the structure of international finance changed little. Indeed, despite the increase in the number of regimes, many saw the challenge of changing the structure of finance through regimes as more problematic. William Coleman, for example, argues that an expansion of the membership of the Basle Accord to include more crisis-prone states would result in a `heterogeneity [that] would make reaching decisions more difficult'.158 Coleman's statement is important, as the Basle Accord continued to be the most effective regime. In 1997±98, for example, more than 30 Japanese banks withdrew from international operations to avoid the eight per cent capital adequacy requirement in favor of the Japanese government's four per cent.159 US support for the Basle Accord also began to wane in the mid to late 1990s once its strategic advantages declined. In the 1980s the US provided leadership to produce positive externalities for itself ± particularly the hobbling of the Japanese financial system through the Basle Accord. However, contrary to Ethan Kapstein's assertion that the success of modern finance regimes came from their being `increasingly removed from their domestic political setting', Washington did not support regimes that did not directly create positive externalities for US interests.160 Further support of the Basle Accord would not have helped extend US structural power in international finance. Washington's changed perception of the value of the Basle Accord provided an example of the ongoing importance of the domestic political setting. In a 1999 consultative paper, the Basle Committee proposed changes to the Accord that would enhance `competitive equality', cover interestrate risk, and strengthen the use of common accounting standards.161 While arguing that `securitisation is providing better risk diversification and is enhancing financial stability', the BIS noted that through securitization US banks were able to have more capital at work in the marketplace than was reflected by their capital adequacy ratios.162 The new Accord sought to cover securities trading to a much greater extent. US

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support was not forthcoming. Jane D'Arista notes that by the late 1990s US regulators saw capital adequacy rules as making US banks promote `evasive innovation that is making them ineffective, outmoded and inefficient'.163 Washington's shift in opinion reflected the permission given to US commercial banks to underwrite securities. Furthering the reach of Basle would diminish US banks' competitive advantages in international finance and impede US structural power. It would also damage the interactive embeddedness between Washington and Wall Street. Reflecting on the relationship between regime formation and financial innovation Ethan Kapstein wrote in 1996 that: We have found a way to contain crises, but `creative destruction', to borrow from Joseph Schumpeter's phrase, could be the victim. The next challenge for banking regulators is to maintain a watchful eye on the marketplace without choking the very dynamism they seek to encourage.164 Washington's decision not to support the extension of the Basle Accord into the realm of securitization reflected Kapstein's concern. However, in contrast to Kapstein's intentions, it is not international finance regimes that were able to prevent or contain crises, nor would they be allowed to impede innovation. The main watchmen over threats to innovation were national regulators. In the mid to late 1990s, it was national regulators who viewed financial modernization as a means of promoting the national interest. The centralization of financial supervision into a national regulator was a trend that complimented a perceived global drive for greater transparency and efficiency and also the increased concentration of banks in size and number. Indeed, in Weberian fashion, the development of the state and the development of banks were parallel processes.165 At a time when many argued that financial globalization revealed the obsolescence of national economic policy, in reality it produced national financial strategies. In the US, the 1991 draft of Financial Institutions Safety and Consumer Choice Act proposed to integrate the Comptroller of the Currency with the Office of Thrift Supervision into a Federal Banking Agency under the Treasury.166 The proposal was rejected by both Houses and by the Fed. In 1999 the Financial Services Modernization Act altered the structure of US financial regulation. It repealed the 1933 Glass±Steagall Act and the 1956 Douglas Bank Holding Company Act, to give permission to banks to merge commercial and investment banking activities

190 US Power in International Finance

under bank holding companies. Unlike the 1991 proposal for supervisory change, the Fed was placed in the position of `super-regulator' over bank holding companies, effectively placing other regulators in a secondary position (the effects of this change are discussed further in the concluding chapter). In other states, the centralization of financial supervision had already progressed, a trend used to great effect by lobby groups for the Financial Services Modernization Act in the US. Britain, for example, introduced a Financial Services Authority (FSAb) with the June 1998 Bank of England Act, replacing nine regulators, nearly 30 rulebooks and codes of conduct, and, most importantly, the BoE's role as the chief supervisor. The introduction of the FSAb clearly represented a bureaucratization of British financial supervision. Financial supervision had traditionally been performed by the BoE, whose informal approach was a reason for both its close relationship with the City and the perception of Britain's financial community as an `old boys club'. Following the Big Bang of 1986 and the introduction of foreign competition, the BoE's ability to monitor the City weakened. The increased internationalization of British financial markets and the need for Britain to compete for the position of top financial services dog within Europe increased opinion that the BoE was antiquated. Furthermore, the BoE was perceived to be out of step with increased public participation in the British financial system. Howard Davies, the first chairman of the FSAb, stated that `as these large financial supermarkets develop, you need a regulatory supermarket to match'.167 In contrast to a supermarket, the BoE was viewed more as a Threadneedle Street boutique, with private access to only premiere clientele. The creation of the FSAb represented a deliberate attempt to bureaucratize financial supervision in the promotion of national interest ± for the continued development of domestic involvement in finance and to promote the City's role as a financial services center for Europe. In Japan, the creation of a `super-regulator' related directly to the MoF's failure to implement its own clean-up of the Japanese financial system. Following crass remarks from the international financial press that the MoF's relationship with Japanese banks consisted of `few rules, only nods and winks',168 reform had to be enacted by the Diet. Under domestic and international pressure, the Japanese government implemented a series of regulatory reforms in 1998. First, the resignation of Finance Minister Mitsuzuka over bribery charges in January demonstrated the Obuchi government's desire to reform not only the ailing financial system but the bureaucracy as well. In October 1998 a Financial Revitalization Commission (FRC) was created, removing much of

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the MoF's powers to allocate funds to ailing banks. It also created a new post, a Minister for Financial Reconstruction.169 Changes were not limited to administrative issues. In 1998 the Long Term Credit Bank and the Nippon Credit Bank were nationalized, the first nationalizations in the post-war period.170 Most important, however, was the creation of a new `super-regulator', the Financial Supervisory Agency (FSAj). With an enormous budget of ¥60 trillion, the FSAj's task was to reform the Japanese financial system, to lessen the powers of the MoF and reduce the spectre of the Japan Premium. Staffed by ex-MoF bureaucrats, the FSAj was given the task of cleaning up the MoF ± in effect, to `oversee the overseerers'. The creation of the FSAj also recognized the need to introduce a more diverse range of investment products to a rapidly ageing society. As part of the Big Bang reforms, OTC securities trading was introduced in 1998 and brokerage fees were completely liberalized in 1999.171 Furthermore, from October 1999 banks were permitted to issue bonds, a move that followed relaxed regulations in the US and appeased domestic political pressures. According to Dick Beason and Jason James, Japan's `Big Bang' financial reforms (to be fully implemented by the end of 2001) will make the Japanese system `more liberal than that in the US and many other industrialized nations'.172 Clearly, the regulatory centralization within the FSAj was intended efficiently and transparently to reform Japanese finance and assert Tokyo's capacity as a financial center for the region. Indeed, the reforms also included a `New Miyazawa Initiative' which provided $30 billion for short and long term lending to the ailing economies of the region ± a way to provide AMF-like funds to heighten opinion of Japanese financial power without stepping on American toes.173 The FSAj was therefore given the charge of cleaning up Japanese finance, increasing international regard of Japanese finance and preventing a recurrence of real estate problems through jusen or any other institution. Demonstrating an amazing ability not to learn from others' mistakes, in the late 1990s German financial authorities argued that the BIS's riskweighting for commercial property assets ought to be reduced from eight to four per cent ± on the grounds that commercial property loans are safe assets!174 Despite such daring, German financial strategy sought to consolidate the reforms of 1993±95, to extend Frankfurt's challenge to the City of London, and to further establish the `EuroFed' following the embarrassment of the ERM crisis. Similar to the Fed, German financial regulation copied and anticipated changes in the US system as financial regulation became more and more centralized

192 US Power in International Finance

within a super-regulator. Despite the creation of the Bundesaufsichtsamt fuÈr den Wertpapierhandel (BAWe) in 1994, amendments to the Banking Act in 1998 placed an increasing number of intermediaries actively trading securities under the supervision of the Bundesaufsichtsamt fuÈr das Kreditwesen (BAKred). Like the Fed, the BAKred was especially keen to keep an eye on securities trading and to promote direct financing among its banks. The change in official opinion towards direct financing came, in part, from the success of the Finanzplatz Deutschland program. In 1996 Ronaldo Schmitz, a board member of Deutsche Bank, announced that in Germany the `private shareholder was dead many times and now, look, here he is'.175 Indeed, by that year German equity capitalization had increased sixfold and the volume of turnover forty-eightfold. Deutsche BoÈrse AG had introduced a Neue Markt for trading smaller companies and to increase public participation. Furthermore, the Kohl government reduced transaction costs on securities with its Third Financial Market Promotion Law.176 Despite these reforms securities trading was still viewed (and practised) as an elite activity for those with DM to spare. In order to strengthen the pulse of Germany's securities markets, BAKred permitted the use of asset-backed securities in 1997 ± more than a decade after the market had emerged in the US. Asset-backed securities had been allowed to be issued in Japan from 1996, though their legal status was murky and their use low.177 In contrast, US private issues of asset-backed securities (primarily from mortgages and credit-card receivables) in 1998 were equivalent to 3.2 per cent of GDP ($259.7 billion) ± double the percentage in 1995.178 It is the US's capacity to `feed off itself' through the encouragement of greater public participation in direct financing that is one source of its structural power in international finance.

Consumer credit and consolidation As Paul Krugman states, the US experienced growth in the 1990s as `giddily prosperous' as Asia and Latin America.179 Naturally, fears that the US financial system could face similarly unexpected declines increased as much as the euphoria grew from ever-increasing stock market indices. The Brazilian financial collapse of 1998/9 demonstrated how sensitive the US markets were when they imposed, without differentiation between states in the region, a `Latin American premium' of 15 per cent above the normal rate of interest for foreign lending.180 When the real lost 40 per cent in January 1999 the IMF proffered a

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$41.5 billion loan.181 As with the Tequila Crisis, the offer of funds was Washington's initiative. Importantly, the problems in Brazil led American investors to send their funds out of higher risk investments. Following the collapse in Brazil and general nervousness about what may happen on Wall Street, capital left high-risk bonds and asset-backed securities to go into low-risk US Treasury bonds.182 The importance of the Brazilian collapse for direct financing was how the US markets reacted with the shift to US Treasury bonds. The reaction lent towards that of a rentier state ± that which relies on `coupon-cutting' income from debt financing. As asset-backed securitization assists in increasing homeownership and thus stimulates consumption, a shift away from it is, in itself, a shift away from a more productive form of direct financing. In order to combat threats, banks undertook a process of financial consolidation in the late 1990s. In short, the fear of financial collapse led to a centralization of banking activity and financial supervision (as discussed above). Both processes were a consequence of greater risks in international finance and both represented a capacity for greater risk for domestic political economies. Bank mergers provide a prominent example. Bank mergers were, in part, a consequence of direct financing and furthered its promotion as banks sought to offer greater investment services to their clients. The involvement of commercial banks in securities trading posed dangers in the new climate of big banks, just as the Herstatt and Franklin banks had fallen into danger in the new financial environment following the first oil crisis. In the late 1970s, the BIS warned that it was difficult to see how banks were `building up adequate provisions against future losses'. Similarly, in the late 1990s the BIS warned that financial consolidation was resulting in `competitive pressures [that] interact with stubborn cost structures and heighten incentives for risk-taking'.183 As in the late 1970s, BIS warnings were not heeded. As 2000 approached, bank mergers increased in the US, Britain, Japan, and Germany. Even before the Financial Services Modernization Act of 1999 was signed, bank merger activity in the US was rampant. For example, a merger between Citicorp and Travelers created Citigroup, with a market capitalization of $144 billion. In September 2000 the financial press questioned Chase Manhattan's rationale for initiating merger talks with J. P. Morgan, arguing that all Chase would gain was size and that Wall Street's new `big is beautiful' thinking would lead to the overlending practices of previous decades.184 Banks in the US swelled in size, as did the range of financial instruments on offer to the general public. Bank mergers and the increased adoption of direct

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financing also led to a change in the relationship between banks and their clientele, as discussed below. In Britain merger activity increased and raised the hackles of those who preferred the old school approach ± where informal guidelines set boundaries on when and who may encroach on another's territory. For example, in the rumble to purchase National Westminster from the Bank of Scotland, the Royal Bank of Scotland and HSBC were sharply criticized by NatWest as mercenary and unfair.185 Furthermore, large British banks like Lloyds TSB (the consequence of an earlier merger) consumed smaller fish like the Cheltenham & Gloucester Building Society to expand its domestic deposit base.186 The expansion of nontraditional intermediaries also grew. Even supermarkets got in on the game as Tesco and Sainsburys began to take deposits from customers.187 The further internationalization of the City did not stop either, as British banks sought strategic partnerships. For example, in 1999 Barclays Bank and Switzerland's Credit Suisse Group searched for a euro zone partner with which to dominate the Continent.188 Furthermore, the LSE formed an alliance with the FSE in the hope of sharing some euro trading, which comprised over 40 per cent of the LSE's turnover in 1999. Frankfurt was not going to miss out on the opportunities the euro offered. While C. Fred Bergsten and others predicted that the euro would rank equal with the dollar in its use as an international currency, others were more suspect about its monetary effects and benefits for financial services. Adam Posen, for example, states that While the euro might contribute a spirit of excitement in the city of Frankfurt, and might give banks an opportunity to promote brand loyalty by instructing clueless depositors at length in advertisements, presentations, and publications about the complications of the euro, the arguments for direct benefits are meager. . . the financial effects of a eurozone depend critically upon the development of the market in government debt.189 The ability to pay government debts in one's own currency would, of course, be of great importance. Although the Euro-Fed would govern a federal structure of states, there was no equivalent of the US Treasury to sell and purchase European government bonds.190 To repay European public debts in Euros would require great stability in the value of the Euro, which would rely on the Euro-Fed to place stability above domestic political agendas. The ERM crisis of 1992±93 demonstrated the problems associated with maintaining stability ± and the prom-

1992±2000: Crises and Consumer Credit 195

inence given to domestic political considerations. Furthermore, in the late 1990s there were no signs of general dissatisfaction with the dollar as an international currency. However unwise, states such as Argentina underwent `dollarization' to add stability to their own systems and to gain greater international acceptance. In Europe bank merger activity reflected a process of `catching-up' to trends in the US. In Germany the four pillars of finance, Deutsche Bank, Hypo Vereinsbank, Dresdner, and Commerzbank, were all rumored to be considering mergers with each other in 1999. There was even talk of a $1 trillion super-merger between Dresdner and Hypo Vereinsbank.191 Furthermore, German banks were also moving to Wall Street despite earlier public outcries about non-German behavior. In 1998, for example, the Deutsche VerkehrsBank moved to Wall Street after purchasing the Long Term Credit Bank of Japan's aviation and shipping finance portfolios.192 In 1999, on the Western coast, Commerzbank acquired the Korean Exchange Bank to establish a bank holding company in California.193 Germany sought to externalize its lack of internationalization. As for Japan's ongoing problems, one financial journalist aptly stated that `cats have nine lives, but Japan has had nine deaths'.194 Investors who put their money in the top ten Japanese banks in 1990 (which were also the world's top ten) would have lost 75 per cent of their investment by 1999.195 In the late 1990s, US firms were delisting from the TSE.196 US intermediaries did not need the Japanese financial system but access to Japanese investors. Merrill Lynch's takeover of Yamaichi Securities' offices, and subsequent share of the domestic market for brokerage services, is one example. Japan's response to the infiltration of foreign intermediaries was to create larger banks. In 1999 three Japanese banks, DKB, Fuji Bank, and the Industrial Bank of Japan, announced that they would merge to form the world's biggest bank with assets to the tune of ¥140 trillion (approximately $1.3 trillion).197 While Japan followed the bank merger trend, it did not enhance consumer credit markets. Indeed, the MoF continued to assert in the late 1990s that `the concept of investor self-responsibility is not yet established and the market is not yet mature'.198 Evidence would suggest the contrary. For example, in the three months following the removal of foreign exchange controls on April 1 1998, investment out of Japan amounted to a record ¥7.8 trillion or $56 billion dollars.199 The failure to develop consumer credit markets in Japan compounded the problems facing the Obuchi government in motivating its citizens to spend and boost the economy. With a rapidly ageing population (one in four Japanese will be over 65 in 2020) and a

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dependence upon company rather than state pensions, such frugality among the public could be expected, as could the demand for greater returns on investment.200 In contrast, Robert Wade and Frank Veneroso argued that the Clinton administration was `unusually responsive to the interests of Wall Street' and that Wall Street was supported by `savers and pensioners who wish to ensure that their savings are put wherever returns are highest'.201 Indeed, the promotion of direct financing in the US meant that `high finance' had more direct significance for an increasing numbers of Americans. Unlike the `oversaving' of the Japanese and the Obuchi government's failure to stimulate domestic growth, greater involvement with direct financing went together with greater personal indebtedness. At the end of the century personal savings in the US amounted to 15 per cent of GDP, the lowest in the OECD and approximately one per cent of Americans' disposable income. In 1998 personal savings as a percentage of disposable income fell to negative one per cent. Americans, on average, spent 17 per cent of their income paying off debts.202 Despite, and in part because of, such debts, finance had been embedded as a daily activity in the US. Again, the unquenchable propensity to consume debt and access credit can be viewed as a source of financial power. Cronic indebtedness, however, can also be a force for social dislocation and a potential source of state±society disembeddedness. Finance must be carefully guarded to allow freedoms backed by regulation that promote embeddedness and a diffusion of power rather than a concentration of power within financial monopolies. Writing at the end of the recession in 1992, Gary Dymski argued that having bigger banks would not necessarily increase US international competitiveness. On the contrary, Dymski's concern was that bigger banks `will cause prosperous areas that receive substantial credit flows to become more prosperous while speeding the decline of underdeveloped areas'.203 In 1998 low-income borrowers received approximately 29 per cent of home mortgage loans ± up from 18 per cent in 1990.204 That was the good news. The bad news was that by the late 1990s, less than half of mortgages provided in the US come from a locally based bank. As commercial banks overtook a substantial portion of the S&L market following the 1986 crisis, many raised concerns about the effects bank mergers have on mortgage lending to lower-income areas.205 Furthermore, while the Financial Services Modernization Act permitted the centralization of financial and regulatory actors, it did not extend greater power to enforce the Community Reinvestment Act of 1977 upon bank holding companies. Despite this concern (which is addressed

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in the concluding chapter), at the end of the century US structural power in international finance was supreme. In the late 1990s US banks had 28 per cent of the financial services market, up from 14 per cent at the close of the 1970s.206 Wall Street had done exceedingly well, as had Washington. In 2000 the US Treasury initiated `reverse buyback' mechanisms to repurchase government debt before they reached maturity. To reiterate, US structural power rests upon state capacity, which in turn rests upon the interactive embeddedness of Washington and Wall Street and the embeddedness of finance in American society. As demonstrated, US structural power promoted direct financing to shape international finance and to use international regimes to generate positive externalities for US interests. By doing so through policies of international passivity and national activism, the US continued to successfully play the international and domestic realms against each other to reconstitute itself in the international political economy. In the late-twentieth century the privileges afforded to the US as a consequence of its structural power in international finance were extraordinary ± privileges that resulted from what can appropriately be described as the US's `victory of dividends'.

7

Conclusion: the Victory of Dividends and the Dividends of Victory

The bankers and capitalist entrepreneurs they hate so much would then have unlimited and uncontrolled command over the state! For who on earth is the `state', as distinct from this machinery of large and small capitalist cartels of every kind into which the economy is to be `organised', if the formation of the state's own will (Willensbildung ) is to be placed in the hands of precisely these `co-operative' organisations? Max Weber1 To return to Max Weber's quote with which this book began, great banks and stock exchanges are not places for `ethical culture' but weapons for achieving power in a national economic struggle for this-worldly goals.2 The US promotion of direct financing in the postwar period has been fundamental to its extension of structural power in international finance. Direct financing greatly assisted the US to achieve ± in the most literal sense of profit returned from investment ± a `victory of dividends'. And for Washington, Wall Street, and the American public, the `dividends of victory' were worth procuring. As a consequence of this `victory' the US was able to extend financial and monetary privileges over its major trading partners. US intermediaries were able to shape an international financial system that provided ongoing profits and rewarded their role as innovators. The privileges afforded to American society were also extraordinary, including increased access to consumer credit, which allowed increased consumption such as homeownership. Of course the counterpart of increased consumer credit was increased indebtedness. Altogether, however, the US 198

Victory of Dividends, Dividends of Victory 199

has increased its financial privileges, including indebtedness, with little costs to itself because of its structural power in international finance. As the evidence in Chapters 3 to 6 demonstrates, the US `victory of dividends' was achieved through the political and economic manoeuvring of Washington and Wall Street; Washington's financial diplomacy with other states, the embedding of direct financing in American society, the ongoing numeraire role of the dollar and a mass expansion of private credit in the international financial system. Dollar-denominated credit was expanded to diffuse US structural power in international finance ± to expand US financial networks, to shape other states' preferences in how they altered their financial systems and to find means of financing growth in the US political economy. In the international arena and the US domestic arena credit was expanded to meet government, corporate and consumer needs. One of the US's impressive feats from its promotion of direct financing and extension of structural power was to transform indebtedness into a strength rather than a weakness. For the two most important parties in the US financial system, the US government and US intermediaries (or as the shorthand in this book has described them, Washington and Wall Street), indebtedness provided stimuli for financial innovation. Indebtedness led to Washington's and Wall Street's need to manage debt securities more flexibly. In turn, these needs spurred on direct financing in the US, affording Wall Street competitive advantages over its counterparts in the international arena, and providing Washington with the means to implement fiscal strategies and further the US's `exorbitant privileges' over its trading partners. Effectively, the US's structural power and ability to generate and access credit in international finance enabled it to `tax' its major trading partners. Even at the end of the millennium, Japan, Britain, and Germany, respectively, continue to be the primary holders of US government debt.3 Furthermore, indebtedness (especially in the 1980±2000 period) helped direct financing become more embedded in American society. The success of asset-backed securitization and increased share ownership (discussed in Chapters 5 and 6) both point to how Americans were prepared to lower personal savings and increase their indebtedness while consuming more and investing more in securities. Importantly, the successful promotion of direct financing at home provided the US with a deeper, more liquid domestic financial system that effectively acted as a `buffer' to rapid changes in international finance. Through its interactive embeddedness with Wall Street, Washington supported this expansion of credit and debt with national financial

200 US Power in International Finance

regulation. Although US financial regulation is most often seen in the IPE literature as antiquated or anti-competitive, its importance for the 1960±2000 period cannot be overstated. Regulatory restrictions forced banks to compete for innovations that produced competitive advantages vis aÁ vis banks from other states. The disestablishment of the traditional practices of commercial banks in the period under study clearly demonstrates how national financial regulation and competitive market pressures encouraged direct financing. Again, the introduction of securitization in the 1980s provides an example of US intermediaries innovating and furthering direct financing because of national financial regulation and with the support of national financial regulation.4 The formal competitive structure of the US financial system was essential for the maintenance of US structural power in international finance. It allowed Washington to diffuse its power through the financial system while still having the power to alter its shape. Furthermore, because the formal competitive structure made intermediaries compete for clientele through financial innovations, it helped embed direct financing into American society. In turn, the embeddedness of finance in the US augmented the basis from which the US enhanced its state capacity and its structural power in international finance. Thus direct financing operated at all three levels of the state: domestically interactive embeddedness enhanced the US's state capacity, nationally, to enact and adapt to change in the international political economy. State capacity enhanced US structural power in international finance which provided positive `dividends' for the American political economy. As stated in Chapter 1, state capacity can be thought of as the capacity of a state to reconstitute itself to enact or adapt to domestic and international change by drawing upon the embeddedness of state±societal relations, and by playing the international and domestic realms against one another. The US's ability to do this was seen in policies of international passivity and national activism. In every decade under study the US used this policy mix to extend its structural power in international finance. As discussed above, national activism encouraged intermediaries, particularly commercial banks, to innovate and produce competitive advantages for the US in the international arena. These competitive advantages were enhanced when allowed to operate in an open, passive international financial order. Consequently, Washington's official view towards the international financial order was one of international passivity. Unofficially, however, Washington was active in maintaining an open environment in which US intermediaries wielded their homespun

Victory of Dividends, Dividends of Victory 201

competitive advantages. In addition, Washington's and Wall Street's rejection of international finance and monetary regimes helped the US extend structural power in international finance and to maintain a passive international financial order. To use the lingo associated with the study of international regimes, the US only supported regimes that created positive externalities for US interests. It did not, as neoliberals would have it, support international regimes to internalize negative externalities in the international political economy. Washington and Wall Street had sound grounds for pushing forth policies of international passivity and national activism. As demonstrated in Chapter 3, the active use of national financial regulation pushed US intermediaries abroad to trade in the burgeoning Euromarkets. The volume of dollar-denominated assets expanded rapidly thereafter and, because of Washington's reluctance to adjust the Bretton Woods fixed exchange rate to match the volume of dollar-denominated financial assets in international circulation, the US was able to extend an `exorbitant privilege'. To simplify the situation, national activism provided a stable climate for the US while ongoing international passivity allowed US intermediaries to trade off the nominal value of the dollar. The US used the formal validity of the dollar set by the Bretton Woods exchange rate to expand dollar-denominated assets. It was up to the US's trading partners to question the substantive validity of the dollar ± which they did. However, with the assistance of Wall Street's efficient financial intermediation Washington was able to transform the dollar-gold standard into a paper-dollar standard that afforded the US `super-exorbitant privileges'.5 Accordingly, following the collapse of Bretton Woods, Washington opposed the formation of a new monetary regime with capital controls as it would hamper Wall Street's interests. This pattern would repeat itself later albeit with important variations. Following the first oil crisis, Washington opposed the formation of a new finance regime to recycle petrodollars because it would hamper Wall Street's interests and not allow Washington to sell US government debt en masse to OPEC interests (discussed in Chapter 4). Following the Debt Crisis, national restrictions on bank behavior led US banks to turn to securities trading, and again, calls for a new finance regime were dismissed. As demonstrated in Chapters 3 to 6, these are but a few examples. All the examples of policies of international passivity and national activism in the period discussed resulted in an expansion of private capital in international finance and promoted direct financing in the US as well as Britain, Germany, and Japan.

202 US Power in International Finance

In expanding the amount of dollar-denominated private capital in international finance, the US promotion of direct financing was successful in heightening the importance of credit-money over `money' as simply a means of exchange. In the fourteenth to sixteenth centuries, the development of bills of exchange separate from the physical transportation and control of specie increased the importance of `promises to pay'. Similarly, in the modern period the increased trade in dollardenominated securities, especially US government securities, heightened US trading partners' reliance on the US to meet its promises.6 As major shareholders of US government debt, Japanese and German requests for the US to lower its deficit in the mid-1980s provide an example (see Chapter 5). The US promotion of direct financing altered the relationship between money and credit-money in the post-war period by elevating the political and economic importance of the latter. Accordingly, the state with the most power over how credit-money was created, the US, was afforded benefits and chose to promote direct financing further. As discussed in Chapter 2, the development of the modern state has relied upon the development of credit-money. A state does not need resources when it can command credit and shape the preferences of its creditors. The development of the modern state and the development of capitalism, as argued by Weber, are parallel processes. Both involve the `the gradual expropriation of independent producers' ± bureaucrats are separated from owning the means of bureaucracy, capitalists are eventually separated from personal ownership of the enterprise, and workers separated from the control of the means of production.7 This process created the modern state and modern capitalism. Both processes involve a depersonalization of power into more structured yet diffuse forms. Certainly, the depersonalization of credit was vital to the development of credit-money in the fourteenth to sixteenth centuries. In the late twentieth century the ultimate extension of this depersonalization was the Euromarkets, which, as discussed, the US used to expand the volume of dollar-denominated assets in international circulation. More generally, direct financing furthered the depersonalization of financial markets while increasing public participation in them. In the US, increased stock market investment increased, in the most literal sense, the number of owners of US corporations. (Of course, however, these owners (stockholders) were removed from the day to day management of the enterprise.) In the international realm, US promotion of direct financing increased pressure to depersonalize credit provision. The ongoing pressure upon the German and Japanese banks to adopt direct financing

Victory of Dividends, Dividends of Victory 203

rather than maintain long-term bank lending operations with specific corporations is an example. Moreover, German and Japanese corporations' actions to directly access international debt markets rather than operate through banks increased pressure to adopt direct financing and `catch-up' to US-led innovations. Like credit-money, direct financing is not a function of capitalism but is constitutive of capitalism.8 Direct financing proved to be a diffuse source of power that states have wanted to integrate into their financial systems. Direct financing offered more choice and more flexibility. Like the development of bills of exchange to provide credit and avoid threat from plunder, direct financing has appealed to both state and commercial interests. Again, credit-money has its own power to shape political and economic relations, and states able to shape the preferences of credit provision reap the benefits of being innovators. Geoffrey Ingham argues that the development of credit-money above the `natural scarcity and the need for military control of the supply of precious metals' is `arguably the greatest ever single increase in humanity's infrastructural social power'.9 Certainly the promotion of direct financing and extension of US structural power in international finance afforded American society privileges that are virtually unparalleled. Michael Mann argues that the development of coinage that allowed commodities to be exchanged at a value agreed to by a state represented the creation of a `universal infrastructure' that could diffuse and enhance state power.10 In the late-twentieth century the US provided a `universal infrastructure' through the trade in dollar-denominated securities. Moreover, Washington's and Wall Street's promotion of direct financing at home and abroad expanded its ability to diffuse its power ± or to put it another way, to enhance its structural power. Of course there are other examples of states attempting to create `universal infrastructures' to enhance their interests. Britain in the late nineteenth/early twentieth century is an often cited case of a state able to spread commercial capitalism and its power through financial instruments. Britain was able to encourage its investing elites to put their capital into foreign bonds that helped service the Empire.11 While these investments secured trade links that would help Britain during the Great War, British structural power in international finance collapsed after the war because it was inflexible ± it wasn't diffused enough. In the late twentieth century the `universal infrastructure' promoted by direct financing did allow power to be diffused domestically and internationally. Furthermore, the US promotion of direct financing and extension of structural power was able to avoid the direct administrative

204 US Power in International Finance

costs that burdened Britain and other prior empire-builders. The US rejection of international regimes can be seen an extension of this view. Rather than invest its energies in regimes, the US preferred to rely upon its own financial and societal foundations. As stated above, the US was able to extend its structural power in international finance by drawing upon its state capacity, which drew upon the interactive embeddedness between Washington and Wall Street and the embeddedness of finance in American society. From this relationship we can propose that: A diffusion of power through society is less costly for a state than a centralization of power against society; and that A diffusion of power through society increases the ability of a state to reconstitute itself to enact or adapt to international and domestic change. Popular perspectives of IPE are not equipped to handle the notion of a state diffusing power through society, or of a state sharing power with market actors, and are therefore incapable of furthering the notion of structural power. The neorealist Stephen Krasner asserts that `[t]here are still no political entities other than the state that can make the final authoritative decisions ± the litmus test of organized political life'.12 Krasner has a point: governments still do have regulatory powers than can dramatically alter the environment within which market and societal actors operate. However, it is needlessly limiting to confine the `state' to the executive level of government and to exclude the possibility that power can be shared with market actors or diffused through society. It certainly does not allow one to understand structural power ± to understand how states shape the preferences of other states through diffuse rather than coercive means. As demonstrated throughout this book, neoliberalism and neorealism have an inadequate understanding of state power. To briefly reiterate, neoliberalism, neorealism, and `new realism' fail to realize how states and market actors can share power. Premised upon a view that states operate within the logic of anarchy where states and markets compete in zero-sum games for power, and where the state is viewed as separate from society and equated with either sovereignty or the executive level of government, these perspectives can only offer a poor understanding of change in the international political economy. Furthermore, despite their microeconomic founda-

Victory of Dividends, Dividends of Victory 205

tions, neoliberalism and neorealism have a poor understanding of the relationship between microeconomic change (how intermediaries have geared themselves towards direct financing) and state power. Neoliberalism and neorealism have borrowed from microeconomics only to affirm their view of states as like-units within a competitive market system. Society is removed and the state `black-boxed' to concentrate on the interstate structure.13 As Martin Griffiths suggests, the interstate structure by itself tells us nothing about how states constitute and are able to reconstitute themselves: Once one abandons the idea that international political structures are ontological social facts, the question of just how socialization takes place among states (as opposed to between states and postulated structures) remains wide open.14 In short, by `black-boxing' the state, popular perspectives of IPE fail to treat the state seriously. The fundamental failure in neoliberalism and neorealism that underpins all others is the view of power as resources that are most effective under a centralized command. As I have demonstrated, power should be seen not as resources but the ability to shape preferences. It follows that state power is most effective when diffused through society rather than centralized. The view of power as resources combined with the reductionism of popular perspectives has not only inhibited the development of the notion of structural power, but of IPE as a field of study. It has also led to a concentration of debates around issues like hegemonic decline and international regimes which, by themselves, have limited heuristic value. First, hegemony is a value-laden concept that warps historical analyses of the period. In particular, as Michael Webb's work points out, the extent of US post-war hegemony is commonly overblown in order to exaggerate hegemonic decline from the 1970s onwards.15 Moreover, hegemony is associated with benevolence, self-sacrifice and the `the disease of the strong: refusal to adapt or change'.16 A hegemon should be self-sacrificial and benevolent in order to sustain its power. Its size (again from the view of power as resources) prevents it from adapting to change yet it must be able to convince other states `by itself' to change and lead by example. Hegemonic decline debates thus lead into a minefield of distortions that are the consequence of teleological thinking and the theoretical parsimony that neoliberalism and neorealism uphold for its predictive value.

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Secondly, debates surrounding the demand for international regimes fall into similar traps. US demand for international regimes is an assumed consequence of its supposed hegemonic decline (see Chapter 4). US rejection of intergovernmental regimes (see the Debt Crisis, Chapter 5) is viewed as evidence of decline. US support of regimes (see the Basle Accord, again in Chapter 5) is viewed as evidence of decline. But as seen throughout Chapters 3 to 6, the US did not support international regimes that did not further its structural power in international finance. The study of regimes suffers from the same problems as hegemony debates. Again, these problems can be traced back to fundamental weaknesses in neoliberalism and neorealism: the view of power and the `black-boxing' of the state. As Robert Keohane argues, neoliberals and neorealists ignore the `vagaries of domestic politics' in order to provide their theoretical perspectives with greater rigor.17 While there has been an attempt to reintroduce domestic politics to popular perspectives in IPE, state-societal relations are continually underplayed and informal sources of state power are ignored or, at the most, viewed as a threat.18 The domestic realm only gains any significance when it encounters problems adapting to change from the inter-state structure. Ethan Kapstein, for example, recently argued that regimes formed to regulate international finance were `increasingly removed from their domestic political settings'.19 But the domestic political settings within states are what enhance our understanding of how processes like direct financing affect states differently and provide a deeper understanding of an often assumed process of homogenization. As demonstrated, Britain, Germany, and Japan reacted differently to the US's promotion of direct financing because their domestic political and economic settings were different. In the late twentieth century financial deregulation and liberalization were not globalizing, homogenous process. Rather changes to how intermediaries operated (particularly commercial banks) reflected domestic political concerns, the structure and character of states' financial systems and the social embeddedness of finance. Direct financing impacted differently upon (to use the first matrix presented in Chapter 1) the US's formal competitive financial structure, Britain's informal competitive financial structure, Germany's informal cooperative financial structure, and Japan's formal cooperative financial structure. As discussed, the US formal competitive structure provided a source of innovation and state capacity that enhanced US structural power in international finance. Britain moved to a more formalized system, to provide assurances to its emergent investing public. Germany encountered problems with

Victory of Dividends, Dividends of Victory 207

financial modernization due to long-established informal linkages between government, banks, and the corporate sector. The Japanese government's formal cooperative ties with the financial sector fettered Japan's ability to adapt to change, prolonged Japan's financial woes and retarded the development of consumer credit. The Japanese case is especially important, if only because Japanese financial power was viewed as a real threat in the 1980s and because Japan represented an example of a `strong state'. Reflecting on the problems associated with Japanese financial reform, Jennifer Amyx rightly asserts that the key for the ability of states to adapt to change is not just whether `a state is empowered by its embeddedness with other actors [but also whether it] . . . is constrained by its embeddedness'.20 As the sad case of Japanese financial power exemplifies, a command of capital resources does not confer structural power in international finance. Nor does a seemingly centralized bureaucratic structure increase a state's capacity to enact or adapt to change in the international political economy. But this view persists ± especially when related to the US. William Coleman, for example, argues that within the US there is a `strong boundary between state and civil society' in financial matters, leading to weak state capacity.21 Similarly, John Zysman argues that the US suffers from `structural incapacity' compared with states with more centralized bureaucracies and state-guided financial systems.22 In this view, the simplicity with which a government can implement its strategies (the capacity to override interest groups) to enhance a state's resources reflects strong state capacity. Coleman and Zysman's perspectives rely on the traditional notion of power as most effective when centralized. As I have suggested, in the period 1960±2000, US state capacity in international finance was enhanced by the interactive embeddedness between Wall Street and Washington and the embeddedness of finance in American society. US structural power was not generated from a centralized command of resources but from a diffusion of power domestically and internationally that allowed it to shape the preferences of other states. If theoretical progress is to be made in the study of IPE we must allow for the notion of a diffuse form of state power and, more especially, enliven the notion of structural power. Of course this would require a more historical interpretive study of political economy that would stretch the boundaries of `theoretical rigor' within both neorealist and neoliberal perspectives. However, in the words of Susan Strange, `better catholic complexity than protestant parsimony!'23 As discussed in Chapter 2, Strange does replicate some of the negatives found in neorealism and neoliberalism, particularly her use of the

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balance of power model and positing of a zero-sum game between state and market power. But vitally, she does offer the concept of structural power. The notion of structural power is an important advance in the study of IPE. And as Strange asserts in States and Markets, the best way to answer cui bono? ± whose interest is served? ± is to select your own mix of heuristic tools.24 I draw from Weber's approach to political economy and from the `second-wave' of Weberian historical sociology. More importantly, however, I believe that this perspective more than any other can enliven structural power to help us understand the sources of change in the international political economy. For this work the primary benefits of the second-wave of Weberian historical sociology are the concepts of interactive embeddedness and state capacity, which provide state-societal foundations for the concept of structural power. These concepts have been discussed throughout the book, so there is no need to reassess their value here. However, it is important to quickly summarize what the second-wave of Weberian historical sociology offers IPE. First, it offers complex notions of change that do not view history as a process of repetition or continuity. Teleological logic is eschewed and discontinuities within history are recognized. Moreover, although the ability to generalize heuristically powerful concepts to establish historical interconnections exists, the historical specificity of the period under study must be examined. Secondly, multicausality is emphasized ± one must recognize that there is more than one source of power if one hopes to depict the realities of a situation and avoid reductionist logic.25 Power can be derived from formal or informal sources. It can also come from the domestic and international realms, without primacy given to one or the other. Thirdly, and most importantly for IPE, the second-wave of Weberian historical sociology offers a non-realist view of state power (and state capacity) that emphasizes a state's ability to embed its power in society. The exercise of power within this framework is more diffused rather than centralized, persuasive rather than coercive, collective rather than distributive.26 There is not a `zero-sum' game between state and market actors as both benefit from the generation of structural power. Because authority is diffused through society, state power is not determined by the ability of the state to respond to the logic of anarchy. Consequently, the state cannot be reduced to the executive level of government nor is a state's capacity to adapt to change derived from the ability of the executive to override domestic interest groups. Again, the critical point is that state capacity is understood by focusing `not simply on institutional factors but also on social power residing within

Victory of Dividends, Dividends of Victory 209

society'.27 Unlike popular perspectives of IPE, the second-wave of Weberian historical sociology insists that the state should be taken seriously, but should not be reified. The perspective offered here also draws from Weber's work on the state and finance. In Chapter 2 I demonstrated the inadequacies in the portrayal of Weber as a Realist and provided evidence of Weber's substantive view of the state. I stressed the historical interpretive side of Weber's political economy and the rich heuristic foundations it provides for the notion of structural power. Furthermore, I discussed Weber's view of the relationship between the state and finance. The quotation from Weber that begins this chapter reflects Weber's view on the formation of an economy with strong links between banks and government but without a strong political voice from the public. To recall a segment from this quotation, the `bankers and capitalist entrepreneurs they hate so much would then have unlimited and uncontrolled command over the state!'. The `they' Weber refers to is the `litteÂrateurs', a terms used to describe academics uninformed about the real world. Weber called for them to support parliamentary reform in Germany to allow a broader base of society to voice their concerns about financial matters between banks and the state. Weber's view was that while finance assisted the development of the modern state, social, political, and economic freedoms were needed to check the power of intermediaries and to augment a state's international position. Furthermore, his concern was that too much cooperation between the state and banks, and between banks themselves, would be detrimental to the state. In short, Weber supported a financial system that was regulated by the state, allowed competition between intermediaries and, most importantly, permitted public voice and public access, allowing the state and finance to become more embedded in society. The state and financial intermediaries therefore have a competitive±cooperative relationship. A formal competitive system of financial regulation was the best means to achieve a sustainable financial system and a platform to pursue thisworldly goals. Of course this is not to suggest that the US financial system in the late twentieth century was the most socially desirable. Indeed, in the early twentieth century Weber believed that the blind adoption of American finance capitalism would lead to a loss of political, economic, and social freedoms. A centralization of capital in a handful banks and a centralization of authority in government would lead to a `completely rationalized, bureaucratic, and stationary economic and social order'.28 As discussed in Chapter 2, Weber also expressed his concern about the `victory of dividends'. For Weber, the `victory of dividends' (Rente) over

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profits (Gewinn) altered the relationship between a state and a financial community in the favor of the latter and to the detriment of society.29 The warning of the victory of dividends is that the state should guard against power falling into the hands of the rentier. As I have demonstrated, the US in the late twentieth century achieved ± in the most literal sense of return from investment ± a victory of dividends. Certainly the US is in no danger of becoming a rentier state in the early twentieth century form of French `coupon-cutting' investing elite living off dividends from debt financing. Nor is the US likely to evolve into an `international rentier economy' like Britain before the Great War ± if only because of the US's lack of internationalization compared with the City of London at its peak, which traded over half of the world's stocks and shares.30 Unlike early twentieth century Britain, direct financing is embedded in the American society. And this embeddedness combined with the interactive embeddedness is a great source of strength for US state capacity if it is protected. The warning of the `victory of dividends' for the US is not to undermine the basis upon which its structural power in international finance rests: the interactive embeddedness between Washington and Wall Street, and the embeddedness of finance in American society. And at the end of the period under study there is cause for concern. The main one comes from the initiation of a process of centralising regulatory authority and encouraging banks to become all-in-one financial supermarkets. The Financial Services Modernization Act of 1999, which repealed the Glass±Steagall Act, promoted both these processes. On the signing of the Financial Services Modernization Act, Senator Phil Gramm, a longterm campaigner for Glass±Steagall reform, stated that: `We are here today to repeal Glass±Steagall because we have learned that government is not the answer. We have learned that freedom and competition are the answers'.31 The Act was generally heralded as the final blow to Great Depression legislation that had become antiquated and uncompetitive.32 As discussed in the Chapters 5 and 6, while the Act confirmed changes already in the marketplace throughout the 1990s (remember, J. P. Morgan was given permission from the Fed to underwrite securities to make up to ten per cent of its revenue in the late 1980s), it also made important regulatory changes. The Act streamlined financial regulation, `anointing the Federal Reserve System as a regulatory czar'.33 The Fed's increased powers from the Financial Services Modernization Act have the potential to alter the US financial system's formal competitive structure and thus the interactive embeddedness between Washington and Wall Street. With a greater centralization of regulatory authority

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and a greater centralization among banks, the danger is that the broader embeddedness of finance in American society could be damaged. The consequences of such actions would be harmful for US state capacity and therefore to US structural power in international finance. To paraphrase Weber, if the US's will is to be placed in the hands of two centralized powers to the degradation of the formal competitive structure of American finance, the consequences can only be socially detrimental. In part this is a consequence of direct financing. As commercial banks sought means to lower costs and move away from their traditional role as depository institutions, fees and charges increased. These changes hurt the least well-off.34 Moreover, in the run-up to the Financial Services Modernization Act, `mega-banks' lobbied for an easing of the restrictions put in place by the Community Reinvestment Act of 1977 (see Chapter 4) ± namely to ease regulations that encouraged banks to lend to lower-middle and working class communities. At the time of debate, one prominent commentator remarked that to do so would be `like rolling back the GI Bill or Social Security because too many veterans had received higher education or too many senior citizens had escaped poverty'.35 Direct financing has afforded the US extraordinary privileges but if national financial regulation is rolled back it is difficult to see how they could be sustained for American society. In the late twentieth century the `victory of dividends' for Washington, Wall Street, and the American public were certainly worth procuring. However, in the twenty-first century all three parties must guard against a concentration of power within the US financial system to protect the dividends of victory. As demonstrated, `national activism' through financial regulation encouraged US financial competitiveness. A winding back of financial regulation accompanied by a greater concentration of capital in a handful of banks would allow for predatory, even rentier behavior. In contrast to Senator Gramm's comments, government is the answer for the US as it did ± and can ± provide the interactive embeddedness that produced financial innovations, promoted direct financing, and embedded finance deeper into American society. At the risk of sounding overly-alarmist, the main threat to the US promotion of direct financing and US structural power in international finance in the twenty-first century relates to domestic political settings. As discussed, popular perspectives in IPE do not have the means to understand the dynamics at play within a state, nor do they have the conceptual tools to understand `structural power'. Consequently they are unable to study the foundations of US structural power in international finance, nor how the US's promotion of direct financing allowed

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it to extend privileges over other states. By treating states as like-units within an interstate system by `black-boxing' them and ignoring their domestic politics, neorealism and neoliberalism fail to treat the state seriously. As argued, the state should be seen as a flexible accumulation of institutions and social networks that can reconstitute itself to enact and adapt to change in the international political economy. From this basis we can understand how states diffuse power through society and market actors and, therefore, how structural power can be generated. Weber's work on finance and the state and the second-wave of Weberian historical sociology provide us with rich heuristic foundations to study the state, structural power, and change in the international political economy. With such tools we can understand processes like the US's promotion of direct financing to extend its structural power in international finance. Perhaps the historical, interpretive methodology is `messier' than the theoretically parsimony of popular perspectives in IPE ± but the results are more realistic. IPE as a discipline can only benefit from the second-wave of Weberian historical sociology and from rediscovering Weber's historical interpretive view of political economy. Further research along these lines will allow us to develop the concept of structural power and better our understanding of the sources of change in the international political economy.

Appendix: List of IPE and Related Websites While technological innovations in finance have received scant attention in this book, the Internet's importance to IPE scholarship increases as more and more publications become available on-line. This list (which is by no means extensive) provides the web addresses for on-line publications and research centers, where one can download papers, reports, and so on. As with the suggested bibliography, I have included some lesser- known websites.

Electronic journals and working papers Asia-Pacific Economic Review

http://www.asiaecon.com/APER/

Australian National University, Department of International Relations Working Papers Berkeley Roundtable on the International Economy

http://rspas-bookshop.anu.edu.au/

http://socrates.berkeley.edu/~briewww/

Carnegie Bosch Institute Working Papers Flinders Journal of History & Politics

http://cbi.gsia.cmu.edu/newweb/ workingpapers.html http://www.ssn.flinders.edu.au/Politics/ journals/fjhp.htm

Foreign Affairs

http://www.foreignaffairs.org/

Foreign Policy

http://foreignpolicy.com/

Harvard Institute for International Development

http://www.hiid.harvard.edu/

Human Rights Quarterly

http://muse.jhu.edu/journals/ human_rights_quarterly/

International Centre for Trade and Sustainable Development BRIDGES Weekly Trade Digest Institute for International Economics Working Papers

http://www.ictsd.org/html/ newsdigest.htm http://www.iie.com/CATALOG/WP/ apecwp.htm

Journal of World Systems Research

http://csf.colorado.edu/wsystems/ jwsr.html

Max Planck Institute for the Study of Societies Discussion Papers

http://www.mpi-fg-koeln.mpg.de/ publikation/mpifg.html

213

214 US Power in International Finance Online Journal of Peace and Conflict Resolution

http://trinstitute.org/ojpcr/

Proceedings of American Political Science Association Conferences Resources for Economists on the Internet

http://pro.harvard.edu/ http://econwpa.wustl.edu/EconFAQ/ WorkPap/index.html

United Nations University World Institute for Development Economics and Research

http://www.wider.unu.edu/

Warwick University's CSGR Working Papers World Bank Economic Review

http://www.warwick.ac.uk/fac/soc/ CSGR/wpapers.html http://www.worldbank.org/html/extpb/ review/reviewco.htm

World Politics Zeitschrift fuÈr Internationale Beziehungen

http://muse.jhu.edu/journals/ world_politics/ http://www1.uni-bremen.de/~iniis/zib/ zib-e.htm

Research centers and databases APEC Tariff Database Center for International and Security Studies at Maryland

http://www.apectariff.org/ http://www.puaf.umd.edu/CISSM/ Publications/ cissm_publications.htm

Centre for Foreign Policy Studies at Dalhousie University

http://is.dal.ca/~centre/

Columbia International Affairs Online

http://www.ciaonet.org/

Commission for a Sustainable Future

http://csf.colorado.edu/

Copenhagen Peace Research Institute European Institute of Japanese Studies G8 Information Centre Institute for International Economics

http://www.copri.dk/ http://www.hhs.se/eijs/ http://www.g7.utoronto.ca/ http://www.iie.com/

Institute on Global Conflict and Cooperation

http://www-igcc.ucsd.edu/

International Institute for Asian Studies

http://iias.leidenuniv.nl/

Appendix: List of IPE and Related Websites 215 International Relations and Security Network

http://www.isn.ethz.ch/

International Studies Association Network

http://csf.colorado.edu/isa/

Japan Information Access Project

http://www.nmjc.org/JIAP/ mframe.html

Japan Information Network National Bureau of Asian Research (US)

http://jin.jcic.or.jp/ http://www.nbr.org/

National Institute for Research Advancement (Japan)

http://www.nira.go.jp/

Nordic Institute of Asia Studies

http://nias.ku.dk/cont.html

Nouriel Roubini's Global Macroeconomic and Financial Policy Site

http://www.stern.nyu.edu/globalmacro/ asia/

Political Economy Research Centre

http://www.shef.ac.uk/uni/academic/NQ/perc/

Rhodes International Studies Resources

http://blair.library.rhodes.edu/ishtmls/ asia.html

Royal Institute of International Affairs

http://www.riia.org/

Social Sciences Data Collection

http://ssdc.ucsd.edu/

Social Science Research Network

http://www.ssrn.com/

Stanford University Asia±Pacific Research Center Stockholm International Peace Research Institute Trade and Environment Database WWW International Affairs Resources

http://aparc.stanford.edu/ http://www.sipri.se/ http://gurukul.ucc.american.edu/ted/ super.htm http://www.etown.edu/vl/

International organisations Asia Pacific Economic Cooperation (APEC) Asia Pacific Parliamentary Forum (APPF)

http://www.apecsec.org.sg/ http://www.appf.org.pe/index.htm

216 US Power in International Finance Asian Development Bank (ADB)

http://www.adb.org/

Association of South East Asian Nations (ASEAN)

http://www.asean.or.id/

Bank for International Settlements (BIS)

http://www.bis.org/

International Monetary Fund (IMF)

http://www.imf.org/

International Labor Organization International Trade Centre

http://us.ilo.org/ http://www.intracen.org/

Organisation for Economic Cooperation and Development (OECD)

http://www.oecd.org/

Pacific Economic Cooperation Council (PECC)

http://www.pecc.org/

United Nations Department of Economic and Social Affairs

http://www.un.org/esa/desa.htm

World Bank World Trade Organisation (WTO)

http://www.worldbank.org/ http://www.wto.org/

Notes Preface 1 Weber, Max, `The Stock Exchange' in Runciman, W. G., Weber: Selections in Translation, trans. Eric Matthews, Cambridge: Cambridge University Press, 1978: 376. More recently, Weber Max, `Stock and Commodity Exchanges' and `Commerce on the Stock and Commodity Exchanges', trans. Steven Lestition, Theory and Society, Vol. 29 No. 3, June 2000: 305±71. 2 Weber, Max, `The Stock Exchange': 374. The debate lasted from 1892 until 1908. In 1896 the Reichstag passed a stock exchange law that imposed legal restrictions on trading, only to be eliminated in a 1908 stock exchange law. In a letter to Friedrich Naumann shortly before the repeal of these restrictions Weber clearly emphasizes his position that a liberal stock exchange would enhance German power in the international political economy. See Weber, È bingen: J. C. B. Mohr (Paul Siebeck), 1990: 546. See Max, Briefe 1906±1908, Tu also Mommsen, Wolfgang J., Max Weber and German Politics 1890±1920, trans. Michael S. Steinberg, Chicago: University of Chicago Press, 1984 [1959]: 73±6. È rgerlichen Demokratie in Rualand' in Weber, 3 Weber, Max, `Zur Lage der bu È bingen: J. C. B. Mohr (Paul Siebeck), Max, Gesammelte Politische Schriften, Tu 1988 [1921]: 63. 4 Weber, Max, `Suffrage and Democracy in Germany' in Weber, Max, Political Writings, ed. Peter Lassman and Ronald Spiers, Cambridge: Cambridge University Press, 1994: 85. È rgerlichen Demokratie in Rualand': 63±4. 5 Weber, Max, `Zur Lage der bu 6 Weber, Max, Economy and Society: An Outline of Interpretive Sociology, Vol. I, eds È nther Roth and Claus Wittich, Berkeley, University of California Press, Gu 1978: 169.

1

The Political Economy of Direct Financing

1 Weber, Max, `The Stock Exchange' in Runciman, W. G., Weber: Selections in Translation, trans. Eric Matthews, Cambridge: Cambridge University Press, 1978: 377. 2 `Securitization' will be explained in Chapter 5. Definitions of what direct financing is are disputed. I have chosen to take a broad definition that may conflict with stricter economic definitions. In their 1991 article on securitization, Allen and Udell, for example, differentiate disintermediation-type securitization from off-balance sheet securitization. In the former there is a shift from bank loans to securities trading. In the former a `bank retains the credit risk of the loan without supplying the funds directly', thus placing the asset off its balance sheet. I have chosen to include both these forms of securitization under the banner `direct financing', as well as increased trading in securities more generally. See, Berger, Allen N. and Udell, Gregory, F., 217

218 Notes 4 `Securitization, Risk, and the Liquidity Problem in Banking', Finance and Economics Series No. 181, US Federal Reserve, Washington, DC, 1991: 2±3. 3 Odell, John S., `From London to Bretton Woods: Sources of Change in Bargaining Strategies and Outcomes', Journal of Public Policy, Vol. 8, No. 3±4, 1989: 292. 4 Moran, Michael, `The State and the Financial Services Revolution: A Comparative Analysis', West European Politics, Vol. 17, No. 3, July 1994: 166. Moran argues that the `financial services revolution' is essentially an American creation that has forced other nations, Britain in his analysis, to follow. 5 Of course both groups are internally fragmented in their administrative roles and market functions. These `umbrella' terms therefore refer to the collective voice of each group in advocating changes to international finance. In instances where there is much fragmentation, I have tried to specify different groups within `Wall Street' and `Washington'. The debate over the reform of Glass±Steagall discussed in Chapter 5, for example, pitted commercial and investment banking associations against each other and is noted. 6 Strange, Susan, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge: Cambridge University Press, 1996: xv. 7 Most notoriously in Krasner, Stephen D., `State power and the structure of international trade', World Politics, Vol. 28, No. 3, 1976: 317±47. Robert Keohane provides a critique of this work in Keohane, Robert O., `Problematic Lucidity ± Stephen Krasner's ``State Power and the Structure of International Trade'' ', World Politics, Vol. 50, October 1997: 150±70. 8 Hobson, John M., The Wealth of States: A Comparative Sociology of International Economic and Political Change, Cambridge: Cambridge University Press, 1997: 3±4. 9 Hobson, John M., The Wealth of States: 240. 10 Strange, Susan, States and Markets, London: Pinter, 1988: 24±5. 11 Ruggie, John Gerard, `International Regimes, Transactions, and Change: Embedded Liberalism in the Postwar Economic Order', International Organization, Vol. 36, No. 2, 1982: 379±415. 12 Cerny, Philip G., `Globalization and the changing logic of collective action', International Organization, Vol. 49, No. 4, Autumn 1995: 618. 13 Gilpin, Robert, The Political Economy of International Relations, Princeton: Princeton University Press, 1987: 389, Ruggie, John Gerard, `Globalization and the Embedded Liberalism Compromise: The End of an Era', MPIfG WorkÈ r Gesellschaftsforschung, Ko È ln, ing Paper 97/1, Max-Planck Institut fu January 1997: 1±12. 14 Quote from Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy, Princeton: Princeton University Press, 1984: 13. On the need for cooperation in international finance see Kapstein, Ethan B., `Governing Global Finance', Washington Quarterly, Vol. 17, No. 2, Spring 1994: 77±87. 15 See Brown, Robin, `Globalization and the end of the national project' in Macmillan, John, and Linklater, Andrew (eds.), Boundaries in Question: New Directions in International Relations, London: Pinter Publishers, 1995: 58. 16 Cohen, Benjamin J., `Phoenix Risen: The Resurrection of Global Finance', World Politics, Vol. 48, No. 2, January 1996: 270.

Notes 219 17 For a theoretically innovative account of the internationalization of capital markets in the late nineteenth century see Verdier, Daniel, `Domestic Responses to Capital Market Internationalization Under the Gold Standard, 1870±1914', International Organization, Vol. 52, No. 1, Winter 1998: 1±34. 18 O'Brien, Richard, Global Financial Integration: The End of Geography, London: The Royal Institute of International Affairs, Pinter Publishers, 1992. On the strategic importance of the geography of financial centers, see Budd, Leslie, `Globalisation, Territory and Strategic Alliances in Different Financial Centres', Urban Studies, Vol. 3, No. 2, 1995: 345±60. 19 On this point see Eric Helleiner's excellent account of the development of `competitive deregulation', Helleiner, Eric, `Explaining the globalization of financial markets: bringing the states back in', Review of International Political Economy, Vol. 2, No. 2, Spring 1995: 335. See also, Moran, Michael, `The State and the Financial Services Revolution': 176. 20 Krasner, Stephen (ed.), International Regimes, Ithaca: Cornell University Press, 1983: 2. On the issue of why the US cooperated more with states during its hegemony than after its supposed decline, see Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945, Ithaca: Cornell University Press, 1995. 21 See, Moran, Michael, The Politics of the Financial Services Revolution: the USA, UK and Japan, London: Macmillan, 1991. 22 Loriaux, Michael, France After Hegemony: International Change and Financial Reform, Ithaca: Cornell University Press, 1991: 5. 23 Webb, Michael C. and Krasner, Stephen D., `Hegemonic stability theory: an empirical assessment', Review of International Studies, Vol. 15, No. 2, 1989: 183. 24 Gilpin, Robert, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment, London: Macmillan, 1976. For a critique see Strange, Susan, The Retreat of the State: 23. 25 Gilpin, Robert, The Political Economy of International Relations: Chapter 10. 26 Keohane, Robert O., After Hegemony: Parts II and III especially. 27 Weber, Max, Economy and Society: An Outline of Interpretive Sociology, Vol. I, ed. È nther Roth and Claus Wittich, Berkeley, University of California Press, Gu 1978: 85±6. 28 Gilpin, Robert, U.S. Power and the Multinational Corporation: 96. 29 Mann, Michael, The Sources of Social Power, Vol. II, Cambridge: Cambridge University Press, 1993: 257, 265. 30 Keohane, Robert O., After Hegemony: 179. 31 Hobson, John M., The Wealth of States: 202, contra Friedberg, Aaron L., The Weary Titan: Britain and the Experience of Relative Decline, 1895±1905, Princeton: Princeton University Press, 1988. See also, Hobson, John M., `The Military-Extraction Gap and the Wary Titan: The Fiscal- Sociology of British Defence Policy, 1870±1913', Journal of European Economic History, Vol. 22, No. 3, 1993: 461±507. 32 Offer, Avner, `The British Empire, 1870±1914: a waste of money?', Economic History Review, Vol. 46, No. 2, 1993: 231. 33 Mann, Michael, The Sources of Social Power, Vol. II: 291.

220 Notes 34 Weber, Max, `On the Situation of Constitutional Democracy in Russia' in Weber, Max, Political Writings, ed. Peter Lassman and Ronald Spiers, Cambridge: Cambridge University Press: 68. 35 Nevile, Ann, `Financial Deregulation in Japan', Australian Journal of Political Science, Vol. 32, No. 3, 1997: 370. 36 Edey, Malcom and Hviding, Ketil, `An Assessment of Financial Reform within OECD countries', OECD Economics Department Working Papers, No. 154, Paris: OECD, 1995: 51. 37 Kato, Junko, The Problem of Bureaucratic Rationality: Tax Politics in Japan, Princeton: Princeton University Press, 1994: 61. 38 Pempel, T. J., Regime Shift: Comparative Dynamics of the Japanese Political Economy, Ithaca: Cornell University Press, 1998: 5. 39 Sobel, Andrew C., Domestic Choices, International Markets: Dismantling National Barriers and Liberalizing Securities Markets, Ann Arbor: The University of Michigan Press, 1994: 30. 40 Throughout the book I refer to `West Germany' as `Germany' for simplicity. 41 Casper, Stephen and Vitols, Sigurt, `The German Model in the 1990s: Problems and Prospects', Industry and Innovation, Vol. 4, No. 1, June 1997: 8. 42 Deeg, Richard, `Banks and Industrial Finance in the 1990s', Industry and Innovation, Vol. 4, No. 1, June 1997: 53. 43 First quote from Deeg, Richard, Finance Capitalism Unveiled: Banks and the German Political Economy, Ann Arbor: The University of Michigan Press, 1999: 220. Second from Coleman, William D., Financial Services, Globalization, and Domestic Policy Change, Sasingstoke: Macmillan Press, 1996: 91. 44 Deeg, Richard, Finance Capitalism Unveiled: 23. 45 Zysman, John, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change, Oxford: Martin Robertson, 1983: 68. Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 175. 46 Louis W. Pauly's work on the ideal-types of financial and political structures is also important although more related to Canada and Australia, states not included in this book. See Pauly, Louis W., Opening Financial Markets: Banking Politics on the Pacific Rim, Ithaca: Cornell University Press, 1988: Chapter 2. 47 Zysman, John, Governments, Markets, and Growth: 56. 48 Ibid. 18. 49 Ibid. 93. 50 Ibid. 15, 76, 318. 51 Cerny, Philip G., `Paradoxes of the Competition State: The Dynamics of Political Globalization', Government and Opposition, Vol. 32, No. 2, Spring 1997: 265. 52 Pauly, Louis W., `Institutionalizing a stalemate: national financial policies and the international debt crisis', Journal of Public Policy, Vol. 10, No. 1, 1990: 40±1. 53 As Weiss states, it is not sufficiently clear whether Zysman's study explains the policy instruments important to the adjustment process or simply restates them. Weiss, Linda, The Myth of the Powerless State: Governing the Economy in a Global Era, Oxford: Polity Press, 1998: 32. 54 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 73±5. 55 Ibid. 66.

Notes 221 56 Ibid. 78. 57 Ibid. 79. 58 Webb, Michael C. and Krasner, Stephen D., `Hegemonic stability theory': 189. 59 Gilpin, Robert, The Political Economy of International Relations: Chapter 10. 60 Katzenstein, Peter J., `International Relations and Domestic Structures: Foreign Economic Policies of Advanced Industrial Societies', International Organization, Vol. 30, No. 1, Winter 1976: 17. See also Weiss, Linda, The Myth of the Powerless State: 28. 61 `Dominant classes' refers to those with the upper and middle classes. As I will demonstrate, the US's capacity to embed direct financing through its middle classes has been vital to its structural power in international finance. See also Hobson, John M., The Wealth of States: 240. 62 Kapstein, Ethan B., `Governing Global Finance': 79. 63 Hobson, John M., `The historical sociology of the state and the state of historical sociology in international relations', Review of International Political Economy, Vol. 5, No. 2, 1998: 313. 64 Epstein, Gerard A. and Schor, Juliet B., `Corporate profitability as a determinant of restrictive monetary policy: estimates for the postwar United States' in Mayer, Thomas (ed.), The Political Economy of American Monetary Policy, Cambridge: Cambridge University Press, 1990: 52±3. See also, Corbett, Jenny and Jenkinson, Tim, `The Financing of Industry, 1970±1989: An International Comparison', Journal of the Japanese and International Economies, Vol. 10, No. 1, March 1996: 77. 65 On the recognition of the economic role of the state, see Mann, Michael, `The Autonomous Power of the State: its Origins, Mechanisms and Results' in States, War and Capitalism, Oxford: Basil Blackwell, 1988: 28. 66 Weber, Max, Economy and Society, Vol. I: 205. 67 Susan Strange differentiates finance from money by the creation, purchase and sale of credit as opposed to the determination of currency values. Strange, Susan, `Finance, information, and power', Review of International Studies, Vol. 16, No. 3, July 1990: 259.

2

State Capacity and Finance in IPE

1 Weber, Max, Economy and Society: An Outline of Interpretive Sociology, Vol. I, ed. È nther Roth and Claus Wittich, Berkeley, University of California Press, Gu 1978: 178. 2 On `ouside-in' and `inside-out' perspectives of finance see Cohen, Benjamin J., `Phoenix Risen: The Resurrection of Global Finance', World Politics, Vol. 48, No. 2, January 1996: 280. John M. Hobson refers to this multi-causality as `dual reflexivity', see Hobson, John M., `The historical sociology of the state and the state of historical sociology in international relations', Review of International Political Economy, Vol. 5, No. 2, 1998: 290. 3 I have not explicitly included Gramscian, Marxist, or postmodern perspectives of IPE. A critique of Gramscian, Marxist and postmodern perspectives can be found in Seabrooke, Leonard, `Programming the k Coefficient: Risk

222 Notes 4 4 5 6 7

8 9 10

and Uncertainty in International Politics', The Flinders Journal of History & Politics, Vol. 19, 1997: 162±80. Weber, Max, Economy and Society, Vol. I: 178. Burn, Gary, `The state, the City and the Euromarkets', Review of International Political Economy, Vol. 6, No. 2, Summer 1999: 227. Budd, Leslie, `Globalisation, Territory and Strategic Alliances in Different Financial Centres', Urban Studies, Vol. 3, No. 2, 1995: 350. Skocpol, Theda, `Bringing the state back in: Strategies of analysis in current research' in Evans, Peter B., Rueschemeyer, Dietrich and Skocpol, Theda (eds) Bringing the state back in, New York: Cambridge University Press: 17. Mann, Michael, `Has globalization ended the rise and rise of the nationstate?', Review of International Political Economy, Vol. 4, No. 3, Autumn 1997: 477. Weber, Max, Staatssoziologie, Berlin: Duncker and Humbolt, 1956: 19. See also Weber, Max, Economy and Society, Vol. I: 89. Ingham, Geoffrey, `Capitalism, money and banking: a critique of recent historical sociology', British Journal of Sociology, Vol. 50, No. 1, March 1999: 87. An initially brain-busting example of a Bill of Exchange is provided in Lopez, R. S. and Raymond, W. (eds), Medieval Trade in the Mediterranean World, New York: Columbia University Press, 1955: 231. It reads as follows: Avignon, October 5, 1339 In the name of God, amen. To Bartolo and partners, Barna of Lucca and partners greetings from Avignon. You shall pay by this letter on November 20, 1339, to Landuccio Busdraghi and partners, of Lucca, gold florins three hundred twelve and three fourths for the exchange of gold florins three hundred, because I have received such money from Tancredi Bonogiunta and partners at the rate of 41/4 per 100 to their advantage. And charge [it] to our account. Done on October 5, 1339. Francesco Falconetti has ordered us to pay in your behalf 230 gold scudi to the Acciajuoli. If I understand this bill of exchange correctly, the issuer owes Landuccio Busdraghi, Bartolo owes Falconetti, and Falconetti owes the Acciajuoli. The issuer has borrowed from Tancredi Bonogiunta to create this bill of exchange. Through what is an obviously established network of bills of exchange, at the completion of this bill the issuer is paying Bartolo's debt to Falconetti by paying Falconetti's debt to Acciajuoli. In turn, Bartolo pays the issuer's debt to Landuccio Busdraghi. The issuer still owes Tancredi Bonogiunta (300 florins plus 41/4 per cent interest) and Bartolo (12 3/4 florins). These debts and others remaining between this network would be placed on account and be sorted out at a later date. Importantly, Falconetti has been able to facilitate all of his transactions without (at least at this stage) an actual transfer of physical capital. Furthermore, the issuer has been able to pay Landuccio Busdraghi without transporting his physical capital from Avignon to Lucca.

11

Goldthwaite, Richard A., `Banking in Florence at the End of the Sixteenth Century', Journal of European Economic History, Vol. 27, No. 3, Winter 1998: 493.

Notes 223 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34

Weber, Max, General Economic History, New Brunswick, NJ: Transaction Publishers, 1992 [1927]: 191±2. Weber, Max, General Economic History: 172. In order to boost lost profits, banks became more reliant on revenue from brokerage and accounting fees. Goldthwaite, Richard A., `Banking in Florence at the End of the Sixteenth Century': 497±9. Thrift, Nigel, `A phantom state? The de- traditionalization of money, the international financial system and international financial centres', Political Geography, Vol. 13, No. 4, July 1994: 301. Ingham, Geoffrey, `Capitalism, money and banking': 84. Ingham, Geoffrey, `Capitalism, money and banking': 90. See also Ingham, Geoffrey, `Money is a social relation', Review of Social Economy, Vol. 54, No. 4, Winter 1996: 520. Schumpeter, Joseph A., Capitalism, Socialism and Democracy, London: George Allen and Unwin Ltd., 1961 [1943]: 116. Goldthwaite, Richard A., `Banking in Florence at the End of the Sixteenth Century': 487±8. Quinn, Stephen, `Goldsmith-Banking: Mutual Acceptance and Interbanker Clearing in Restoration London', Explorations in Economic History, Vol. 34, 1997: 411±13. Also Weber, Max, General Economic History: 197±9. Quinn, Stephen, `Goldsmith-Banking': 427. Ingham, Geoffrey, `Capitalism, money and banking: 91. Poggi, Gianfranco, The Development of the Modern State: A Sociological Introduction, Stanford: Stanford University Press, 1978: Chapter 4. Weber, Max, Staatssoziologie: 31. Verdier, Daniel, `Domestic Responses to Capital Market Internationalization Under the Gold Standard, 1870±1914', International Organization, Vol. 52, No. 1, Winter 1998: 5. Verdier, Daniel, `Domestic Responses to Capital Market Internationalization': 12. Ingham, Geoffrey, `On the Underdevelopment of the ``Sociology of Money'' ', Acta Sociologica, Vol. 41, No. 1, 1998: 7. Ingham, Geoffrey, `Money is a social relation': 513. See also Schumpeter, Joseph A., A History of Economic Analysis, London: Routledge, 1994 [1954]: 296±7. Weber, Max, Economy and Society, Vol. I: 93±4, 108, 169. Weber, Max, Economy and Society, Vol. I: 178±80, 192. ibid.: 108. Ingham, Geoffrey, `Capitalism, money and banking': 78. Weber, Max, Economy and Society, Vol. I: 108. Schumpeter's definition of capitalism was a `form of private-property economy in which innovations are carried out by means of borrowed money. . . [the] creation of credit.' Schumpeter, Jospeh A., Business Cycles: A Theoretical, Historical, and Statistical Analysis of the Capitalist Process, Vol. 1, È rgen, `Varieties New York: McGraw-Hill, 1939: 233. See also Osterhammel, Ju of Social Economics: Joseph A. Schumpeter and Max Weber' in Mommsen,È rgen (eds), Max Weber and his ContemporWolfgang J. and Osterhammel, Ju aries, London: Unwin Hyman, 1987: 112±14.

224 Notes 35 36 37 38 39 40 41 42

43 44 45 46

47 48 49 50 51

52

Schumpeter, Joseph A., Capitalism, Socialism and Democracy: Chapter VII. See also Oakley, Allen, Schumpeter's Theory of Capitalist Motion: A Critical Exposition and Reassessment, Aldershot: Edward Elgar, 1990: 27. Schumpeter, Joseph A., Capitalism, Socialism and Democracy: 84. Ingham, Geoffrey, `Money is a social relation': 513. Keohane, Robert O., `The Demand for International Regimes', International Organization, Vol. 36, No. 2, Spring 1982: 339. Haggard, Stephan and Simmons, Beth A., `The Theories of International Regimes', International Organization, Vol. 41, No. 3, Summer 1987: 506. Keohane, Robert O., `Neoliberal Institutionalism: A Perspective on World Politics' in Keohane, Robert O., International Institutions and State Power: Essays in International Relations Theory, Boulder: Westview Press, 1991: 4. Keohane, Robert O., `Neoliberal Institutionalism': 4±5. Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy, Princeton: Princeton University Press, 1984: 88, 97, 257. See Grieco, Joseph M. `Anarchy and the Limits of Cooperation: A Realist Critique of The Newest Lliberal Institutionalism' in Kegley, Charles W., Jr., (ed.), Contemporary Debates in International Relations: Realism and the Neoliberal Challenge, London: Macmillan Press, 1994: 159. Keohane, Robert O., `The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967±1977' in Keohane, Robert O., International Institutions and State Power: 95. Kapstein, Ethan B., `Is realism dead? The domestic sources of international politics', International Organization, Vol. 49, No. 4, Autumn 1995: 771. Martin, Lisa L., `An Institutionalist View: International Institutions and State Strategies', paper delivered at the 1998 Annual Meeting of the American Political Science Association, Boston, September 3±6 1998: 454. Keohane, Robert O., `The Demand for International Regimes' in Keohane, Robert O., International Institutions and State Power: 111±14, reprinted from International Organization, Vol. 40, No. 2, Spring 1982: 325±55. See also, Zacher, Mark W., `Toward a Theory of International Regimes', Journal of International Affairs, Vol. 44, No. 1, Spring 1990: 139±57. Schweller, Randall L., `A Tale of Two Realisms: Expanding the Insitutions Debate', Mershon International Studies Review, Vol. 41, Suppl. 1, May 1997: 6. Krasner, Stephen D., `Regimes and the limits of realism: regimes as autonomous variables', International Organization, Vol. 36, No. 2, Spring 1982: 501. Keohane, Robert O., `The Demand for International Regimes': 108±9. Hobson, John M., The Wealth of States: A Comparative Sociology of International Economic and Political Change, Cambridge: Cambridge University Press, 1997: 253. Strange, Susan, `Cave! hic dragones: a critique of regime analysis', International Organization, Vol. 36, No. 2, Spring 1982: 489. See also, Wendt, Alexander E., `The agent-structure problem in international relations theory', International Organization, Vol. 41, No. 3, 1987: 343. Ashley, Richard K., `The Poverty of Neorealism' in Keohane, Robert O. (ed.) Neorealism and its Critics, New York: Columbia University Press, 1986: 258±65. Rens-Smit, Christian, The Moral Purpose of the Stabe: Culture, Social Identity, and Institutional Rationality International Relations, Princeton: Princeton University Press, 1999: 19, 64, 159±62. Wendt, Alexander, Social Theory

Notes 225

53 54 55

56 57 58

59 60 61 62 63 64

65

66

of International Politics, Cambridge: Cambridge University Press, 1999: Ch. 1. See also Waltz, Kenneth, Theory of International Politics, Reading: AddisonWesley, 1979: 120. Waltz, Kenneth, Theory of International Politics: 66. Gilpin, Robert, War and Change in World Politics, New York: Cambridge University Press, 1981: 211. Strange, Susan, `Wake up, Krasner! The world has changed', Review of International Political Economy, Vol. 1, No. 2, Summer 1994: 217. Keohane, Robert O., `The Analysis of International Regimes': Towards a European-American Research Programme' in Rittberger, Volker (ed.), Regime Theory and International Relations, with the assistance of Peter Mayer, Oxford: Clarendon Press, 1993 30. ibid. Crawford, Robert M.A., Regime Theory in the Post-Cold War World, Aldershot: Dartmouth, 1996: 47. See Mearscheimer, John J., `The False Promise of International Institutions', International Security, Vol. 19, No. 3, Winter 1994/5: 5±49, and Keohane, Robert O. and Martin, Lisa L., `The Promise of Institutionalist Theory', International Security, Vol. 20, No. 1, Summer 1995: 39±51. Also, Ruggie, John Gerard, `The False Premise of Realism', International Security, Vol. 20, No. 1, Summer 1995: 62±70. Shimko, Keith, `Realism, Neo-realism, and American Liberalism', Review of Politics, Vol. 54, No. 2, Spring 1992: 299. Keohane, Robert O., `Neoliberal Institutionalism': 2±4. Keohane, Robert O., `The Analysis of International Regimes: 27. On this point see Long, David, `The Harvard School of Liberal International Theory: A Case for Closure', Millennium: Journal of International Studies, Vol. 24, No. 3, 1995: 489±505. Crawford, Robert M.A., Regime Theory in the Post-Cold War World: 503. Contradictions abound within this literature. Keohane, for example, writes in his International Institutions and State Power that international institutions are of `relatively modest significance in world politics' but a few pages on argues that international institutions `exert significant effects on the behavior of governments'. From Keohane, Robert O., `Neoliberal Institutionalism': 2, 7. For an argument with regimes as independent variables in analysis see Zacher, Mark W., `Mulitlateral Organizations and the Institution of Multilateralism: The Development of Regimes for Nonterrestrial Spaces' in Ruggie, John Gerard (ed.) Mulitlateralism Matters: The Theory and Praxis of an Institutional Form, New York: Columbia University Press, 1993: 427. For a critique of both see Schweller, Randall L., `A Tale of Two Realisms': 4. Keohane, Robert O., `The Demand for International Regimes': 108±13. Also, Axelrod, Robert and Keohane, Robert O., `Achieving Cooperation Under Anarchy: Strategies and Institutions', World Politics, Vol. 38, No. 1, October 1985: 235, and Keohane, Robert O., `Reciprocity in International Relations' International Organization, Vol. 40, No. 1, Winter 1986: 4. Hansenclever, Andreas, Mayer, Peter and Rittberger, Volker, `Interests, Power, Knowledge: The Study of International Regimes', Mershon International Studies Review ± A Supplement to International Studies Quarterly, Vol. 40, Supplement 2, October 1996: 199. Krasner, Stephen D., `Global Communications and National Power: Life on the Pareto Frontier' in Baldwin, David A. (ed.),

226 Notes

67 68

69 70 71 72 73 74 75 76 77

78 79 80

81 82 83

Neorealism and Neoliberalism: The Contemporary Debate, New York: Columbia University Press, 1993: 242±3. Grieco, Joseph M. `Anarchy and the Limits of Cooperation': 161. Leaver, Richard, `International Political Economy and the Changing World Order: Evolution or Involution' in Stubbs, Richard, and Underhill, Geoffrey R.D. (eds), Political Economy and the Changing Global Order, London: Macmillan, 1994: 133. For an example, see Krasner, Stephen D., Defending the National Interest: Raw Materials Investments and U.S. Foreign Policy, Princeton: Princeton University Press, 1978: 12±16. Martin, Lisa L., `An Institutionalist View': 439. Krasner, Stephen D., `Structural causes and regime consequences: regimes as intervening variables', International Organization, Vol. 36, No. 2, Spring 1982: 191. Krasner, Stephen D., `Global Communications and National Power: Life on the Pareto Frontier', World Politics, Vol. 43, 1991: 243. See Barkin, J. Samuel and Cronin, Bruce, `The state and the nation: changing norms and rules of sovereignty in international relations', International Organization, Vol. 48, No. 1, Winter 1994: 130. Keohane, Robert O., `Closing the Fairness-Practice Gap', Ethics and International Affairs, Vol. 3, 1989: 103. Caporaso, James A., `International Relations Theory and Multilateralism: The Search for Foundations' in Ruggie, John Gerard (ed.) Mulitlateralism Matters: 77±8. Hobson, John M., `The historical sociology of the state': 295. Keohane, Robert O., `Theory of World Politics': 41. Sobel, Andrew C., Domestic Choices, International Markets: Dismantling National Barriers and Liberalizing Securities Markets, Ann Arbor: The University of Michigan Press, 1994: 15. See also Kratochwil, Friedrich, and Ruggie, John, `International Organization: a state of the art on the art of the state', International Organization, Vol. 40, No. 4, Autumn, 1986: 762. Keohane, Robert O., `The Theory of Hegemonic Stability': 76. See also, Krasner, Stephen D., `State power and the structure of international trade', World Politics, Vol. 28, No. 3, 1976: 317±47. Keohane, Robert O., `Bargaining Perversities, Institutions, and International Economic Relations' in Guerrieri, Paolo, and Padoan, Pier Carlo, (eds) The Political Economy of International Co-operation, London: Croom Held, 1988: 29. Krasner, Stephen D., Defending the National Interest: 60±1, and more recently, Krasner, Stephen D., `The accomplishments of international political economy' in Smith, Steve, Booth, Ken and Zalewski, Marysia (eds), International Theory: Positivism and Beyond, Cambridge: Polity Press, 1996: 121. The same view has been expressed by a first wave Weberian historical sociologist Theda Skocpol. Leaver, Richard, `Evolution or Involution': 132. On the preservation of the state as an analytical construct see Krasner, Stephen D., `State power and the structure of international trade': 317. A point admitted in Keohane, Robert O., and Nye, Joseph S. Jr., `Power and Interdependence revisited', International Organization, Vol. 41, No. 4, Autumn 1987: 728. Krasner, Stephen D., Defending the National Interest: 55±8.

Notes 227 84 Quote from Kapstein, Ethan B., `Is realism dead?': 773. Reference to Classical Realism (Morgenthau) from Rittberger, Volker, `Research on International Regimes in Germany: The Adaptive Internationalization of an American Social Science Concept' in Rittberger, Volker (ed.), Regime Theory and International Relations: 22. È rn, Michael, `Bringing the Second Image (Back) In: About the Domestic 85 Zu Sources of Regime Formation' in Rittberger, Volker (ed.), Regime Theory and International Relations: 285. 86 Strange, Susan, `International Economics and International Relations ± A Case of Mutual Nelgect', International Affairs, Vol. 46, No. 2, 1970: 304±15. 87 Strange, Susan, `International Political Economy: The Story So Far and the Way Ahead' in Hollist, W. Ladd and Tullis, F. La Mond (eds) An International Political Economy, Boulder: Westview Press, 1985: 13±25. Strange, Susan, `Political Econony and International Relations' in Smith, Steve, (ed.) International Relations Theory Today, Cambridge: Polity Press, 1995: 164. 88 Strange, Susan, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge: Cambridge University Press, 1996: 17, 25. Strange's notion of structural power, I believe, can be traced back to the third dimension of power in Stephen Luke's Power. See Lukes, Steven, Power: A Radical View, London: Macmillan Press, 1974: 25. 89 Strange, Susan, `Intepretations of a Decade' in Tsoukalis, Loukas, (ed.) The Political Economy of International Money ± In Search of a New Order, London: The Royal Institute of International Affairs, 1985: 1±43. 90 In her 1996 book, The Retreat of the State: xv. 91 Strange, Susan, States and Markets, London: Pinter Publishers, 1988: 42. Strange asserts that a focus upon bargains appears to be a far more practical option, and `more likely to result in feasible prescription for policy-makers in business or in government and politics than other approaches'. 92 Strange, Susan, The Retreat of the State: xv. 93 Strange, Susan, States and Markets: 11. 94 Strange, Susan, `Who Governs? Networks of Power in World Society', Hitotsubashi Journal of Law and Politics, Special Issue, 1994: 16. 95 Cox, Robert W., Approaches to World Order, with Timothy J. Sinclair, Cambridge: Cambridge University Press, 1996: 185. 96 Strange, Susan, `Wake up, Krasner! The world has changed': 213. See also, Strange, Susan, The Retreat of the State: 13. 97 Strange, Susan, The Retreat of the State: 81. 98 Krasner, Stephen D., `Westphalia and all that' in Goldstein, J., and Keohane, Robert O., Ideas and Foreign Policy, Ithaca, NY: Cornell University Press, 1993: 301. Keohane, Robert O., `Neoliberal Institutionalism': 4. 99 Strange, Susan, The Retreat of the State: 198. 100 Strange, Susan, `Finance, information, and power', Review of International Studies, Vol. 16, No. 3, July 1990: 267 101 Stopford, John M., and Strange, Susan, Rival States, Rival Firms: Competition for world market shares, with John S. Henley, Cambridge: Cambridge University Press, 1991. Strange, Susan, `Political Econony and International Relations': 161. See also Strange, Susan, `Still an Extraordinary Power: America's Role in a Global Monetary System' in Lombra, Raymond and Witte, Willard (eds) Political Economy of International and Domestic Monetary Rela-

228 Notes

102 103

104

105

106 107

108 109 110 111 112 113 114 115 116 117

tions, Ames: Iowa State University Press, 1982: 75. Strange, Susan, `Supranationals and the State' in Hall, John (ed.), States in History, Oxford: Basil Blackwell, 1986: 292. Strange, Susan, `The Defective State', Daedelus, Vol. 24, Part 2, Spring 1995: 57. Kratochwil, Friedrich, `Norms Versus Numbers: Multilaterlism and the Rationalist and Reflexivist Approaches to Institutions ± a Unilateral Plea for Communicative Rationality' in Ruggie, John Gerard (ed.) Mulitlateralism Matters: 444±5. Gilpin, Robert, The Political Economy of International Relations: Princeton: Princeton University Press, 1987: n. 11. Krasner, Stephen D., Structural Conflict: The Third World Against Global Liberalism, Berkeley: University of California Press, 1985: 17. Keohane, Robert O., After Hegemony: 70. Respectively: Hawley, James P., `Protecting capital from itself: U.S. attempts to regulate the Eurocurrency system', International Organization, Vol. 38, No. 1, 1984: 131±65, and Mann, Michael, The Sources of Social Power, Vol. II, Cambridge: Cambridge University Press, 1993: 88. Keohane, Robert O., `The Analysis of International Regimes': 24±6. Parsons, Talcott, `Weber's Methodology of Social Science' in Weber, Max, The Theory of Social and Economic Organization, trans. A.M. Henderson and Talcott Parsons, New York: Oxford University Press, 1947: 25. See also, Keohane, Robert O., `The Analysis of International Regimes': 31. For a similar criticism about Parson's interpretation of Weber see Ingham, Geoffrey, `On the Underdevelopment of the ``Sociology of Money'' ': 6. Levi, Margaret, Of Rule and Revenue, Berkeley: University of California Press, 1988: 196. As cited in R. I. Frank's introduction to Weber, Max, The Agrarian Sociology of Ancient Civilizations, trans. R. I. Frank, London: Verso Press, 1998 [1896, 1909]: 21. On this point about Weber, see Mann, Michael, The Sources of Social Power, Vol. I, Cambridge: Cambridge University Press, 1986: 12. This accusuation is made by Jim George in Discourses of Global Politics: A Critical (Re)Introduction to International Relations, Boulder: Lynne Rienner Publishers 1994: 20±1. Should neorealists wish to find a German sociologist of the state to support their worldview, they can look beyond Weber to Schmitt ± as discussed by Poggi in The Development of the Modern State: 5±9. Quote from Weber, Max, Economy and Society, Vol. I: 54. On Weber as a realist see Smith, Michael J., Realist Thought from Weber to Kissinger, Baton Rouge: Louisiana State University Press, 1986. Gilpin, Robert, War and Change in World Politics, New York: Cambridge University Press, 1981: 17. Long, David, `The Harvard School of Liberal International Theory': 490, 501. Mommsen, Wolfgang J., Max Weber and German Politics 1890±1920, trans. Michael S. Steinberg, Chicago: University of Chicago Press, 1984 [1959]: 41. Weber, Max, Staatssoziologie: 31. See also Beetham, David, Max Weber and the Theory of Modern Politics, Cambridge: Polity, 1985; Mann, Michael, The Sources of Social Power, Vol. II: Chapter 9; Hobson, John M., The Wealth of States: 2±3.

Notes 229 118 See Weber, Max, The Russian Revolutions, trans. and ed. Gordon C. Wells and Peter Baehr, Cambridge: Cambridge University Press, 1997, as well his essays on Germany in Political Writings. 119 Weber, Max, `Bourgeios Democracy in Russia' in The Russian Revolutions: 108. 120 Weber, Max, `Russia's Transition to Pseudo-Constitutionalism' in The Russian Revolutions: 173. On Weber's view on the state and its responsibility to reproduce international society (not anarchy), see: Hobson, John M. and Seabrooke, Leonard, `Reimagining Weber: Constructing International Society and the Social Balance of Power', European Journal of International Relations, Vol. 7, No. 2, June 2001. 121 Weber, Max, Economy and Society, Vol. I: 14, 27. Weber, Max, `Suffrage and Democracy in Germany' in Political Writings: 119. See also, `The Profession and Vocation of Politics': 310 and `The Nation State and Economic Policy': 16±17, also in Political Writings. See also Mommsen, Wolfgang J., Max Weber and German Politics 1890±1920: 43±5. 122 Weber, Max, `The Nation State and Economic Policy' in Political Writings: 16±17. In the Russian case, agrarian reform for peasants required wide parliamentary reforms. See also, Weber, Max, `Russia's Transition to PseudoConstitutionalism': 197. 123 Much thought has been given to what adjective should precede the `state' (the adaptive state, etc.). My thanks for John Hobson for suggesting the constitutive state, by far the most appropriate term. See Hobson, John M., The State and International Relations, Cambridge: Cambridge University Press, 2000: Chapter 7. È rgen, `Varieties of Social Economics': 110. 124 Osterhammel, Ju 125 Weber, Max, `Suffrage and Democracy in Germany': 85. 126 Ibid. 86±7. 127 See also, Weber, Max, `The Prospects for a Liberal Democracy in Russia' in Runciman, W. G., Weber: Selections in Translation, trans. Eric Matthews, Cambridge: Cambridge University Press, 1978: 275. 128 In the French case, to which the long extract refers, Weber noted a `rentiermentality, [as] the typical mental attitude to economic life of the petit bourgeios and peasant strata in France' (his italics). While I do not doubt that investment from these groups were miniscule, Weber's comment relates to a social change representative of a general economic change in financing. See Weber, Max, `Suffrage and Democracy in Germany': 86. 129 Weber, Max, `On the Situation of Constitutional Democracy in Russia' in Political Writings: 68. 130 As was the case in Russia in 1905±6, 1917. Weber, Max, `Bourgeios Democracy in Russia': 102, `Russia's Transition to Pseudo-Constitutionalism': 228. 131 Weber, Max, Staatssoziologie: 26. 132 Weber, Max, General Economic History: 258. 133 Offer, Avner, `The British Empire, 1870±1914: a waste of money?', Economic History Review, Vol. 46, No. 2, 1993: 119±20. 134 Evans, Peter B., Rueschemeyer, Dietrich and Skocpol, Theda `On the Road toward a More Adequate Understanding of the state' in Evans, Peter B., Rueschemeyer, Dietrich, and Skocpol, Theda (eds), Bringing the State Back in, Cambridge: Cambridge University Press, 1985: 350; Skocpol, Theda,

230 Notes

135

136

137 138 139 140

141

3

`Bringing the state back in: Strategies of analysis in current research' in same volume: 13. As Gordon C. Wells and Peter Baehr argue in their excellent introduction, Skopcol's view of Weber's conception of state-society relations `at best, represents a very partial and particular reading of Economy and Society. It also quite evidently ignores the entire corpus of Weber's writing on revolutionary Russia', in Weber, Max, The Russian Revolutions: 23. Mann, Michael, `The Autonomous Power of the State its Origins, Mechanisms and Results' in Stats, War and Capitalism, Oxford: Basil Blackwell, 1988: 3. On the `embedded autonomy' of state±society relations, see Evans, Peter B., Embedded Autonomy: States and Industrial Transformation, Princeton: Princeton University Press, 1995: 12. Weber, Max, Economy and Society, Vol. I: 49±50. Hobson, John M., The Wealth of States: 239. Mann, Michael, The Sources of Social Power, Vol. II: 6. Mann, Michael, The Sources of Social Power, Vol. I: 8. For an excellent application of this view that stresses state-societal relations and counters simplistic views of the `strong state' and `oriental despotism', see Mathieson, David Scott, `Burma: A State of Cachexia. The State Law and Order Restoration Council (SLORC) in Burma/Myanmar, 1988±1997', Master of Arts by Research thesis, School of Political and International Studies, Flinders University, 2000. See also, Mathieson, David Scott, `The Burma Road to Nowhere. The Failure of the Development State in Myanmar', Policy, Organisation & Society, No. 17, Summer 1999: 105±28. Hobson, John M., The Wealth of States: 6.

1960±1968: From Orthodoxy to Heresy

1 Quoted from Helleiner, Eric, `Great Transformations: A Polanyian Perspective on the Contemporary Global Financial Order', Studies in Political Economy, Vol. 48, Autumn 1995: 151. 2 Ruggie, John Gerard, `International regimes, transactions, and change: embedded liberalism in the postwar economic order', International Organization, Vol. 36, 1982: 379±415. 3 Tsoukalis, Loukas, The Politics and Economics of European Monetary Integration, London: George Allen & Unwin Ltd., 1977: 47. Cohen, Benjamin J., Organizing the World's Money: The Political Economy of International Monetary Relations, London: Macmillan, 1977: 71. 4 Aronson, John David, Money and Power: Banks and the World Marketing System, London: Sage, 1977: 39. Aronson writes that such syndication (which would be replicated in a different form in the mid-1970s) was common, the most notable transacton being $75 million lent by the Chase National Bank and the Guaranty Trust Company after the devaluation of the franc in 1949, and the capital raising by Chase National and J.P. Morgan & Co. the following year to the sum of $225 million. 5 Krasner, Stephen D., `State power and the structure of international trade', World Politics, Vol. 28, No. 3, 1976: 342. Moffitt, Michael, The World's Money:

Notes 231

6 7 8 9 10 11

12

13

14 15 16

International Banking from Bretton Woods to the Brink of Insolvency, London: Michael Joseph Ltd, 1984: 44. Germain, Randall D., The International Organization of Credit: States and Global Finance in the World Economy, Cambridge: Cambridge University Press, 1997: 78. Geisst, Charles R., Wall Street: A History, New York: Oxford University Press, 1997: 280. Weber, Max, `Social Psychology of the World's Religions', Gerth, Hans and Mills, C. Wright (eds) From Max Weber, New York: Oxford University Press, 1946: 280. Edwards, Franklin, and Miskin, Frederic S., `The Decline in Traditional Banking: Implications for Financial Stability and Regulatory Policy', Economic Policy Review, Vol. 1, No. 2, July 1995: 31. The supply of international liquidity can be understood as freely available credits in national currencies and the total of international assets held in national reserves. Krasner, Stephen D., `American Policy and Global Economy Stability' in Avery, William P., and Rapkin, David P., (eds) America in a Changing World Political Economy, New York: Longman, 1982: 35. Keohane, Robert O., `The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967±1977' in Keohane, Robert O., International Institutions and State Power: Essays in International Relations Theory, Boulder: Westview Press, 1991: 91, reprinted from Holsti, Ole R., Siverson, Randolph and George, Alexander L. (eds) Change in the International System, Boulder: Westview Press, 1980: 131±62. Keohane, Robert O., `Hegemonic Leadership and U.S. Foreign Economic Policy in the ``Long Decade'' of the 1950s' in Avery, William P., and Rapkin, David P., (eds) America in a Changing World Political Economy: 50. Krasner, Stephen D., `American Policy and Global Economy Stability': 30. Michael Webb provides convicing evidence that the amount of deviation in monetary supply during the 1960s was significantly high whilst the fiscal balance remained relatively stable. If coordination towards a liberal international financial regime existed, fiscal policy would have responded more to balance of payments troubles or joys. This did not happen, and Webb outlines a contradiction that does not sit well with the principle of international coordination in response to fixed exchange rates. See Webb, Michael C., `International economic structures, government interests, and international coordination of macroeconomic adjustment policies', International Organization, Vol. 45, No. 3, Summer 1991: 309±42. Helleiner, Eric, `From Bretton Woods to Global Finance: A World Turned Upside Down' in Stubbs, Richard, and Underhill, Geoffrey R.D., (eds) Political Economy and the Changing Global Order, London: Macmillan, 1994: 164. Keynes quoted in Bloomfield, Arthur, `The postwar control of international capital movements', American Economic Review, Vol. 36, 1946: 687±8. On Keynes and the `psychological attitude to liquidity' of rentier see Jensen, Hans E., `J. M. Keynes's Theory of the State as a Path of His Economics of Reform in ``The General Theory'' ', Review of Social Economy, Vol. 49, No. 3, Fall 1991: 212±316.

232 Notes 17 Keynes, John Maynard, The General Theory of Employment, Interest and Money, London: Macmillan, 1936: 760±1. 18 Davidson, Paul, `Reforming the world's money', Journal of Post Keynesian Economics, Vol. 15, No. 2, Winter 1992±3: 155. 19 Tussie, Diana, `Trading in Fear? U.S. Hegemony and the Open World Economy in Perspective' in Murphy, Craig .N., and Tooze, Roger (eds), The New International Political Economy, Boulder: Lynne Reiner Publishers, 1991: 82. 20 Block, Fred L., The Origins of International Economic Disorder: A Study of United States International Monetary Policy from World War II to the Present, Berkeley: University of California Press, 1977: 48. Eichengreen, Barry, `Hegemonic Stability Theories of the International Monetary System' in Cooper, Richard N. (ed.), Can Nations Agree?, Washington, DC: Brookings, 1989: 265. 21 Keynes quote in Helleiner, Eric, `When finance was the servant: international capital movements in the Bretton Woods order' in Cerny, Philip G., (ed.) Finance and World Politics: Markets, Regimes, and States in the Post-Hegemonic Era, Aldershot: Edward Elgar, 1993: 26±7. 22 Pauly, Louis W., `Capital Mobility, State Autonomy and Political Legitimacy', Journal of International Affairs, Vol. 48, No. 2, Winter 1995: 375. 23 Helleiner, Eric, `When finance was the servant': 30. 24 Cohen, Benjamin J., Banks and the Balance of Payments: Private Lending in the International Adjustment Process, in collaboration with Fabio Basagni, London: Croom Helm, 1981: 466. In a twist worthy of docu-drama, White died from a heart attack in August 1948 after being thrown out of his position as US representative to the IMF, and appearing before the Un-American Activities Committee where he was accused of participating in a Soviet spy network. See Galbraith, John Kenneth, Money: Whence It Came, Where It Went, London: Andre Deutsch, 1975: 258. 25 Helleiner, Eric, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press, 1994: 40±2. 26 Ikenberry, G. John, `The Political Origins of Bretton Woods' in Bordo, Michael D., and Eichengreen, Barry, (eds) A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, Chicago: The University of Chicago Press, 1993: 166. 27 Helleiner, Eric, `When finance was the servant': 32. 28 Odell, John S., `Comment' to G. John Ikenberry's `The Political Origins of Bretton Woods' in Bordo, Michael D., and Eichengreen, Barry, (eds) A Retrospective on the Bretton Woods System: 186. 29 Ikenberry, G. John, `A world economy restored: expert consensus and the Anglo-American postwar settlement', International Organization, Vol. 46, No. 1, Winter 1992: 304. 30 Strange, Susan, `IMF: Monetary Managers' in Cox, Robert W., and Jacobson, H.K., (eds) The Anatomy of Influence, New Haven: Yale University Press, 1974: 264. 31 Cooper, Richard N., `Prolegomena to the choice of an international monetary system', International Organization, Vol. 29, No. 1, Winter 1975: 70. 32 Block, Fred L., The Origins of International Economic Disorder: 47. 33 Cohen, Benjamin J., The Future of Sterling as an International Currency, London: Macmillan, 1971: 240.

Notes 233 34 Tsoukalis, Loukas, The Politics and Economics of European Monetary Integration: 47. 35 Cooper, Richard N., `Prolegomena': 86. 36 Frieden, Jeffry A., Banking On The World: The Politics of American International Finance, New York: Harper & Row Publishers, 1987: 83. Cooper, Richard N., `Prolegomena': 89. 37 Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945, Ithaca: Cornell University Press, 1995: 102: Full convertibility came in 1961 when Germany and Japan both accepted the right of nonresident holders of currencies to be able to present them to banks in other states and exchange a sum for dollars or other convertible currencies. 38 Frieden, Jeffry A., Banking on the World: 42: Quotes are from Chase's Shepard Morgan in 1929. 39 Fraser, Robert, The World Financial System, Essex: Longman, 1987: 29. 40 For 1960 this figure accentuates the Spring quarter when gold rose to $40 per ounce. Averaged annual figures for 1960 show the price at approximately $35.6 per ounce. See also, Gavin, Francis J., `The legends of Bretton Woods', ORBIS, Vol. 40, No. 2, Spring 1996: 183±98. 41 Strange, Susan, States and Markets, London: Pinter Publishers, 1988: 103. 42 Block, Fred L., The Origins of International Economic Disorder: 194. 43 Goodman, John B., and Pauly, Louis W., `The Obsolescene of Capital Controls? Economic Management in an Age of Global Markets', World Politics, Vol. 46, No. 1, October 1993: 53. 44 Pauly, Louis W., `Capital Mobility': 376. 45 Goodman, John B., and Pauly, Louis W., `The Obsolescene of Capital Controls?': 59. 46 Tsoukalis, Loukas, The Politics and Economics of European Monetary Integration: 57. 47 Block, Fred L., The Origins of International Economic Disorder: 123. 48 Henning, C. Randall, `Systemic conflict and regional monetary integration: the case of Europe', International Organization, Vol. 52, No. 3, Summer 1998: 548. 49 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change, Basingstoke: Macmillan Press, 1996: 129. 50 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe, Manchester: Manchester University Press, 1997: 176. 51 Beason, Dick and James, Jason, The Political Economy of Japanese Financial Markets: Myth versus Reality, Houndsmill: Macmillan Press, 1999: 33. 52 Shinji, Takagi, `Recent Developments in Japan's Bond and Money Markets', Journal of the Japanese and International Economies, Vol. 2, March 1988: 65±7. 53 Schwartz, Anna J., `US Foreign Exchange Market Intervention Since 1962', Scottish Journal of Political Economy, Vol. 43, No. 4, September 1996: 380. 54 Fraser, Robert, The World Financial System: 26±7. 55 Keohane, Robert O., `The International Politics of Inflation' in Lundberg, L. N. and Maier, C. S. (eds), The Politics of Inflation and Economic Stagnation, Washington, DC: Brookings, 1985: 83. 56 Moffitt, Michael, The World's Money: 33. 57 Webb, Michael C., The Political Economy of Policy Coordination: 120.

234 Notes 58 Schwartz, Anna J., `US Foreign Exchange Market Intervention Since 1962': 381±2. Private banks also benefited from the relief of `Roosa' bonds and credit swaps, especially their ability to do business with minimal government intervention. On the intergovernmental level, access to more credit was reflected in the 1962 General Agreements to Borrow, which provided greater liquidity to the IMF, and which in turn could be lent out to member countries facing deficits. 59 Cohen, Benjamin J., Organizing the World's Money: 25±6. 60 Krasner, Stephen D., `State power and the structure of international trade': 338. 61 Esptein, Gerard, `The Triple Debt Crisis', World Policy Journal, Vol. 2, No. 4, Fall 1985: 629. 62 Frieden, Jeffry A., Banking on the World: 84. 63 Helleiner, Eric, States and the Reemergence of Global Finance: 85±6. Webb, Michael C., The Political Economy of Policy Coordination: 106. 64 Block, Fred L., The Origins of International Economic Disorder: 184. 65 Helleiner, Eric, States and the Reemergence of Global Finance: 86. 66 Burn, Gary, `The state, the City and the Euromarkets', Review of International Political Economy, Vol. 6, No. 2, Summer 1999: 237. 67 Kapstein, Ethan B., Governing the Global Economy: International Finance and the State, Cambridge, Massachusetts: Harvard University Press, 1994: 34±5. Also, Frieden, Jeffry A., `Capital Politics: Creditors and the International Political Economy', Journal of Public Policy, Vol. 8, No. 3±4, July-December 1988: 274. 68 Moffitt, Michael, The World's Money: 50±1: Prior to 1965, Citibank, Bank of America, and Chase Manhattan invested over 10 per cent of their total deposits abroad, yet the top ten US banks (on 1964 calculations) only recevied approximately 6 per cent of their total deposits from overseas. 69 Moffitt, Michael, The World's Money: 41, 47±8. 70 ibid. 67. 71 Galbraith, J. K., The Affluent Society, London: Pelican Books, 1962 [1958]: 167. 72 Geisst, Charles R., Wall Street: 191. 73 Seligman, Joel, `The Obsolescence of Wall Street: a contextual approach to the evolving structure of federal securities regulation', Michigan Law Review, Vol. 93, No. 4, Feb. 1995: 7. 74 Sobel, Andrew C., Domestic Choices, International Markets: Dismantling National Barriers & Liberalizing Securities Markets, Ann Arbor: The University of Michigan Press, 1994: 26±7. 75 A Eurobond is a debt security issued via an international syndicate of banks or securities firms in a currency not of the country in which the bond is issued. The currency denomination of the bond is indicated by the name such as Eurodollars. The Eurocurreny market is a market for banks' liablities (deposits) that are denominated in a currency not of the country in which the bank is based. Typically, London banks and London-based US subsidiaries issued Eurodollars or traded in the Eurocurrency market in dollars. 76 Strange, Susan, `From Bretton Woods to Casino Economy' in Corbridge, Stuart, Martin, Ron, and Thrift, Nigel, (eds) Money, Power and Space, Oxford: Blackwell, 1994: 58. 77 Webb, Michael C., The Political Economy of Policy Coordination: 98.

Notes 235 78 Burn, Gary, `The state, the City and the Euromarkets': 228. The italics belong to Burns. 79 Schenk, Catherine R., `The Origins of the Eurodollar Market in London: 1955±1963', Explorations in Economic History, Vol. 35, 1998: 225 80 Schenk, Catherine R., `The Origins of the Eurodollar Market in London': 225± 6. 81 Frieden, Jeffry A., Banking on the World: 81. Burn, Gary, `The State, the City, and the Euromarkets': 229. 82 Schenk, Catherine R., `The Origins of the Eurodollar Market in London': 223, 231. 83 ibid. 231. 84 Moran, Michael, The Politics of the Financial Services Revolution: the USA, UK and Japan, London: Macmillan, 1991: 55. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 227. On the secrecy surrounding the Euromarkets see Geisst, Charles R., Wall Street: 310±11. 85 Both Cromer's quote and reference to Autostrade are from Geisst, Charles R., Wall Street: 311 86 de Cecco, Marcello, `International Financial Markets and US Domestic Policy Since 1945', International Affairs, Vol. 52, No. 3, July 1976: 390. Moffitt, Michael, The World's Money: 57: Certificates of Deposit are certificates of denominations of $100,000 or more which have a maturity period of anywhere between 30 and 180 days, and variable interest rates. They are sourced from corporate savings, and in the 1970s and 1980s became a major source of income for banks. 87 Webb, Michael C., The Political Economy of Policy Coordination: 96±7. 88 Block, Fred L., The Origins of International Economic Disorder: 162. 89 Keohane, Robert O., `Hegemonic Leadersip and U.S. Foreign Economic Policy': 252. 90 Kapstein, Ethan B., Governing the Global Economy: 36. 91 The `exorbitant privilege' is often referred to, as is de Gaulle's view that the US had a `monumentally overprivileged position' In the international monetary system. See, for example, Cooper, Richard N., `Prolegomena': 73n; Loriaux, Michael, France After Hegemony: International Change and Financial Reform, Ithaca: Comell University Press, 1991: 189±8. 92 Kindleberger, Charles P., `The Eurodollar and the internationalization of United States monetary policy' in International Money: A Collection of Essays, London: George Allen & Unwin, 1981: 43. Strange, Susan, `The world's money: expanding the agenda for research', International Journal, Vol. 36, 1980±1: 698. 93 Block, Fred L., The Origins of International Economic Disorder: 194. 94 Walker, Martin, `The Euro: why it's bad for the dollar but good for America', World Policy Journal, Vol. 15, No. 3, Fall 1998: 9. 95 Webb, Michael C., The Political Economy of Policy Coordination: 110. 96 Versluysen, EugeÁne L., The Political Economy of International Finance, Westmead: Gower, 1981: 42±3. 97 Strange, Susan, Sterling and British Policy, London: Chatham House, 1971: 209. See also Strange, Susan, `The Politics of International Currencies', World Politics, Vol. 23, No. 2, January 1971: 226.

236 Notes 98 Helleiner, Eric, `Explaining the globalization of financial markets: bringing the states back in', Review of International Political Economy, Vol. 2, No. 2, Spring 1995: 321. 99 Moran, Michael, `The State and the Financial Services Revolution: A Comparative Analysis', West European Politics, Vol. 17, No. 3, July 1994: 169. 100 Webb, Michael C., `International economic structures': 325. My italics. 101 Keohane, Robert O., `The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967±1977' in Keohane, Robert O., International Institutions and State Power, 76. 102 Keohane, Robert O., `Hegemonic Leadersip and U.S. Foreign Economic Policy' in International Institutions and State Power: 252. 103 Keohane, Robert O., `The Theory of Hegemonic Stability': 76. 104 ibid. 87±8. Emphases in original. 105 Snidal, Duncan, `The limits of hegemonic stability theory', International Organization, Vol. 39, No. 4, Autumn 1985: 584. 106 Keohane, Robert O., `Hegemonic Leadership and U.S. Foreign Economic Policy': 67±8: My italics. 107 Keohane, Robert O., `The Theory of Hegemonic Stability': 85. 108 Kindleberger, Charles P., `The Eurodollar and the internationalization of United States monetary policy': 45.

4

1969±1981: The Privileges of Uncertainty 1 US Secretary of the Treasury, John Connally, statement at September 1971 Group of Ten meeting. Cited from Strange, Susan, `The Dollar Crisis 1971', International Affairs, Vol. 48, No. 2, April 1972: 205. 2 While this imagery is effective, I do not wish to give the impression that Germany, Japan and Britain simply had to adapt and fall in line. As will be demonstrated, `catching-up' to US financial innovations is a long staggered process in which the states, `catching-up' are able to constitute themselves in ways which do not always reflect US preferences. 3 Cohen , Benjamin J., Banks and the Balance of Payments: Private Lending in the International Adjustment Process, in collaboration with Fabio Basagni, London: Croom Helm, 1981: x. 4 These figures account for the US, Britain, Japan, Germany, and France. Germain, Randall D., The International Organization of Credit: States and Global Finance in the World Economy, Cambridge: Cambridge University Press, 1997: 119. 5 Aronson, John David, `Banking and Insurance' in Strange, Susan, and Tooze, Roger, (eds) The International Politics of Surplus Capacity: Competition for market shares in the world recession, London: George Allen and Unwin, 1981: 111. 6 Kindelberger, Charles P., `Dominance and Leadership in the International Economy', International Studies Quarterly, Vol. 25, No. 2, June 1981: 243. 7 Pecchioli, Rinaldo M., The Internationalisation of Banking, Paris: The Policy Issue, 1983: 106. 8 Kapstein, Ethan B., Governing the Global Economy: International Finance and the State, Cambridge, Massachusetts: Harvard University Press, 1994: 62.

Notes 237 9 Strange, Susan, `Still an Extraordinary Power: America's Role in a Global Monetary System' in Lombra, Raymond and Witte, Willard (eds) Political Economy of International and Domestic Monetary Relations, Ames: Iowa State University Press, 1982: 88. 10 Loriaux, Michael, `The End of Credit Activism in Interventionist States' in Loriaux, Michael, Woo-Cumings, Meredith, Calder, Kent E., Maxfield, Sylvia and PeÂrez, Sofia, Capital Ungoverned: Liberalizing Finance in Interventionist States, Ithaca: Cornell University Press, 1997: 7±8. 11 Strange, Susan, `The Dollar Crisis 1971': 198. 12 Reinicke, Wolfgang H., Banking, Politics and Global Finance: American Commercial Banks and Regulatory Change, 1980±1990, Aldershot: Edgar Elgar, 1995: 39. 13 Strange, Susan, `The Dollar Crisis 1971': 198. 14 D'Arista, Jane, `Financial Regulation in a Liberalized Global Environment', Center for Economic Policy Analysis, Working Papers Series III, International Capital Markets and the Future of Economic Policy, Working Paper No. 2, May 1998: 5. Also, Hammond, Thomas H. and Knott, Jack H., `The Deregulatory Snowball: Explaining Deregulation in Finance Industry', Journal of Politics, Vol. 50, No. 1, February 1988: 16. 15 Aronson, John David, Money and Power: Banks and the World Marketing System, London: Sage, 1977: 128. 16 Robinson, H.L., `The Downfall of the Dollar' in Miliband, Ralph and Saville, John (eds), The Socialist Register 1973, London: The Merlin Press, 1973: 412, 421. Gilpin, Robert, The Political Economy of International Relations, Princeton: Princeton University Press: 138. 17 Frieden, Jeffry A., `Economic Integration and the Politics of Monetary Policy in the United States' in Keohane, Robert O., and Milner, Helen V. (eds), Internationalization and Domestic Politics, Cambridge: Cambridge University Press, 1996: 122. More generally, see Hawley, James P., `Protecting capital from itself: U.S. attempts to regulate the Eurocurrency system', International Organization, Vol. 38, No. 1, 1984: 135. 18 Versluysen, EugeÁne L., The Political Economy of International Finance, Westmead: Gower, 1981: 7. Kapstein, Ethan B., Governing the Global Economy: 20±2. 19 Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945, Ithaca: Cornell University Press, 1995: 41. 20 Helleiner, Eric, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press, 1994: 103. 21 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe, Manchester: Manchester University Press, 1997: 234. 22 Geisst, Charles R., Wall Street: A History, New York: Oxford University Press, 1997: 307. 23 Aronson, Jonathan David, Money and Power: 75. 24 Garber, Peter M., `The Collapse of the Bretton Woods Fixed Exchange Rate System' in Bordo, Michael D., and Eichengreen, Barry (eds), A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, Chicago: The University of Chicago Press, 1993: 474. 25 Aglietta, Michel, `The Creation of International Liquidity' in Tsoukalis, Loukas (ed.), The Political Economy of International Money: In search of a new order, London: Royal Institute of International Affairs, 1985: 184.

238 Notes 26 Germain, Randall D., The International Organization of Credit: 91. 27 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change, Houndsmill: Macmillan Press, 1996: 162. 28 Greenspan, Alan, `Mortgage markets and economic activity', speech before a conference on Mortgage Markets and Economic Activity sponsored by America's Community Bankers, Washington, DC, November 2 1999: 1. 29 Domestic Choices, International Markets: Dismantling National Barriers & Liberalizing Securities Markets, Ann Arbor: The University of Michigan Press, 1994: 27. 30 Strange, Susan, `The Dollar Crisis 1971': 199, 204±5. 31 The Bundesbank had previously co-operated in March 1971 to make the bills more competitive by dropping the interest rate on DM securities to five per cent. 32 First National City Bank `Eurodollar banking: entering a new phase?', Monthly Economic Letter, July 1971: 14. 33 Strange, Susan, `The Dollar Crisis 1971': 200. The forward market is a money market where a contractual obligation to buy dollars at a certified time (such as three months) is set at a discount price. 34 Cohen, Benjamin J., `The Revolution in Atlantic Economic Relations: A Bargain Comes Unstuck' in Hanreider, W. F., (ed.) The United States and Western Europe, Cambridge: Winthrop Publishers, 1974: 119. 35 Strange, Susan, `The Dollar Crisis 1971': 203. 36 An example of this argument is provided in Eichengreen, Barry, `Hegemonic Stability Theories of the International Monetary System' in Cooper, Richard N. (ed.), Can Nations Agree?, Washington, DC: Brookings, 1989: 277. 37 Keohane, Robert O., `Hegemonic Leadership and U.S. Foreign Economic Policy in the `Long Decade' of the 1950s' in Keohane, Robert O., International Institutions and State Power: Essays in International Relations Theory, Boulder: Westview Press, 1991: 252. 38 Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy, Princeton: Princeton University Press, 1984: 139, 208±9. 39 Keohane, Robert O., After Hegemony: 208. 40 The assumption is made in Keohane, Robert O., `The World Political Economy and the Crisis of Embedded Liberalism' in Goldthorpe, John H. (ed.), Order and Conflict in Contemporary Capitalism, Oxford: Clarendon Press, 1984: 20. 41 Cohen, Benjamin J., `The Revolution in Atlantic Economic Relations': 118. Of course the over-valued dollar made overseas labour and production costs more attractive for US multinationals, which, in turn, needed financing from the foreign branches of US banks or the Euromarkets. See Gilpin, Robert, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment, London: Macmillan, 1976: 125. 42 Strange, Susan, `Cave! hic dragones: a critique of regime analysis', International Organization, Vol. 36, No. 2, Spring 1982: 489. 43 See Webb, Michael C., `Understanding Patterns of Macroeconomic Policy Coordination in the Post-War Period' in Stubbs, Richard, and Underhill, Geoffrey R.D., (eds) Political Economy and the Changing Global Order, London: Macmillan, 1994: 176±89.

Notes 239 44 Kindleberger, Charles P., `The Eurodollar and the internationalization of United States monetary policy' in International Money: A Collection of Essays, London: George Allen & Unwin, 1981: 45. 45 Keohane, Robert O., After Hegemony: 179. 46 Krasner, Stephen D, `American Policy and Global Economic Stability' in Avery, William P., and Rapkin, David P. (eds), America in a Changing World Political Economy, New York: Longman, 1982: 35. 47 For a recent addition on the ability to pay and willingness to pay debate in economic history see Kelly, Trish, `Ability and Willingness to Pay in the Age of Pax Britannica, 1890±1914', Explorations in Economic History, Vol. 35, 1998: 31±58. 48 Frieden, Jeffry A., `Economic Integration and the Politics of Monetary Policy in the United States' 123: The Congressional Subcommittee on Internatioanl Exchange and Payments called for a float of the dollar in June 1971 and for a devaluation of the dollar on August 6 1971. 49 Krasner, Stephen D., Structural Conflict: The Third World Against Global Liberalism, Berkeley: University of California Press, 1985: 76. 50 Strange, Susan, `The Dollar Crisis 1971': 204±5. 51 Keohane, Robert O., `The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967±1977' in International Institutions and State Power: 91. The italics are mine. 52 Statement at September 1971 Group of Ten meeting, cited from Strange, Susan, `The Dollar Crisis 1971': 205. 53 John Connally cited from Odell, John S., U.S. International Monetary Policy: Markets, Power and Ideas as a Source of Change, Princeton: Princeton University Press, 1982: 152. 54 US Congress House Committee on Banking and Currency, To Provide for a Modification of the Par Value of the Dollar, Hearings, 92nd Congress, 2nd session, on H.R. 13120, March 1, 2, 3, and 6, 1972: 11, paragraphs 19±20. 55 Cohen, Benjamin J., Organizing the World's Money: The Political Economy of International Monetary Relations, London: Macmillan, 1977: 125. 56 Strange, Susan, `The Dollar Crisis 1971': 208±9: The Swiss franc also went up by nearly 14 per cent, the Netherlands florin by 11.5 per cent, the British pound by 8.5 per cent, the French franc by the same, the Belgian franc by 11.5 per cent, the Italian lira by 7.5 per cent. Interestingly, the Canadian dollar retained its long history of floating its dollar, and incurred no official change. 57 Helleiner, Eric, States and the Reemergence of Global Finance: 104±5. 58 Webb, Michael C., The Political Economy of Policy Coordination: 168. 59 Sneddon Little, Jane, Euro-Dollars: The Money-Market Gypsies, New York: Harper and Row, 1975: 198±9. 60 Cohen, Benjamin J., Banks and the Balance of Payments: 30, 65. 61 $3.5 billion that month by G-10 central banks. First National City Bank `Eurodollar banking: entering a new phase?': 13. 62 Cohen , Benjamin J., Organizing the World's Money: 140. 63 Cohen , Benjamin J., Banks and the Balance of Payments: 68. 64 Cohen , Benjamin J., Organizing the World's Money: 140: The shifting of dollars could appear on different institutions balance sheets due to dollar's numeraire status. In order to use Eurodollar credits in their home state, central banks

240 Notes

65 66 67 68 69 70 71 72 73 74 75 76

77 78 79 80 81 82 83 84 85

86

had to exchange them for their local currency with, most often, another central bank. Thus, the debt issued from one bank to its customers was registered as the original intake of dollars, whilst the sale of those dollars to another central banks meant that it too would record a new currency intake. This process is referred to as recycling. Llewellyn, David, `The Role of International Banking' In Tsoukalis, Loukas (ed.) The Political Economy of International Money: In Search of a New Order, London: Royal Institute of International Affairs, 1985: 208±9. Pauly, Louis W., `Capital Mobility, State Autonomy and Political Legitimacy', Journal of International Affairs, Vol. 48, No. 2, Winter 1995: 377. Helleiner, Eric, States and the Reemergence of Global Finance: 108. Pauly, Louis W., `Capital Mobility, State Autonomy and Political Legitimacy': 378. Frieden, Jeffry A., `Economic Integration and the Politics of Monetary Policy in the United States': 124. Cohen , Benjamin J., Organizing the World's Money: 125. Sobel, Andrew C., Domestic Choices, International Markets: 31. Frieden, Jeffry A., `Invested interests: the politics of national economic policies in a world of global finance', International Organization, Vol. 45, No. 4, 1991: 432. Gilpin, Robert, The Political Economy of International Relations: 141, 315. Cohen , Benjamin J., Banks and the Balance of Payments: 3, 11. Helleiner, Eric, `Explaining the globalization of financial markets: bringing the states back in', Review of International Political Economy, Vol. 2, No. 2, Spring 1995: 323. Spiro, David, `Policy Coordination in the International Political Economy: The Politics of Petrodollar Recycling', PhD dissertation, Princeton University, 1989: 444. Especially non-OPEC developing states whose deficits increased $32 billion during the 1973±4 crisis. Frieden, Jeffry A., Banking on the World: The Politics of American International Finance, New York: Harpet & Row Publishers, 1987: 88, 130. Cohen, Benjamin J., `Balance-of-payments financing': 457. Kapstein, Ethan B., Governing the Global Economy: 63. Ironically, Arab investors preferred short-term debt securities because of political uncertainties in America's relationship with OPEC. Helleiner, Eric, `Explaining the globalization of financial markets': 323. My italics. Moffit, Michael, The World's Money: 49. Schaede, Ulrike, `The 1995 Financial Crisis in Japan', Berkeley Roundtable on International Economics, Working Paper 85, February 1996: 3. Moran, Michael, The Politics of the Financial Services Revolution: the USA, UK and Japan, London: Macmillan, 1991: 102. Cohen , Benjamin J., Organizing the World's Money: 136. Quoted in Helleiner, Eric, States and the Reemergence of Global Finance: 114. Keohane, Robert O., `The Theory of Hegemonic Stability': 84. Also, Keohane, Robert O., `State Power and Industry Influence: American Foreign Oil Policy in the 1940s' in Keohane, Robert O., International Institutions and State Power: 216. Keohane, Robert O., `Bargaining Perversities, Institutions, and International Economic Relations' in Guerrieri, Paolo, and Padoan, Pier Carlo (eds), The

Notes 241 100 Political Economy of International Co-operation, London: Croom Held, 1988: 29. Keohane, Robert O., After Hegemony: 246. 87 Krasner, Stephen D, `American Policy and Global Economic Stability': 33. 88 Kapstein, Ethan B., Governing the Global Economy: 22. È mper, Thomas, `Wenn Reden Silber und Handeln 89 Genschel, Philipp, and Plu Gold ist: Kooperation und Kommunikation in der internationalen Bankenregulierung', Zeitschrift fuÈr Internationale Bezeihungen, Vol. 3, No. 2, 1996: 231±2. 90 Cohen, Benjamin J., Organizing the World's Money: 138. 91 Frieden, Jeffry A., Banking on the World: 117. 92 Helleiner, Eric, States and the Reemergence of Global Finance: 173. 93 Spero, Joan, The Failure of the Franklin National Bank: Challenge to the International Banking System, New York: Columbia University Press, 1980: 112± 14. 94 Federal Reserve Bank of New York, Sixtieth Annual Report, New York: FRBNY, December 31 1974: 21. 95 Frieden, Jeffry A., Banking on the World: 117. 96 Federal Reserve Bank of New York, Sixtieth Annual Report: 25. The Federal Reserve's motives were not purely altruistic as the Franklin payed a risk premium to the bank as part of the deal to takeover their foreign currency obligations. See also Spero, Joan, The Failure of the Franklin National Bank: 164. 97 Frieden, Jeffry A., Banking on the World: 117. Pauly, Louis W., Opening Financial Markets: Banking Politics on the Pacific Rim, Ithaca: Cornell University Press, 1988: 36. 98 Kapstein, Ethan B., Governing the Global Economy: 42. 99 Strange, Susan, Casino Capitalism, Oxford: Basil Blackwell, 1986: 142. 100 Bank for International Settlements, Forty-Fifth Annual Report, April 1 1974± March 31 1975, Basle: BIS, June 1975: 132. 101 Helleiner, Eric, States and the Reemergence of Global Finance: 173. 102 Kapstein, Ethan B., Governing the Global Economy: 49. 103 Keohane, Robert O., and Ooms, Van Doorn, `The multinational firm and international regulation', International Organization, Vol. 29, No. 1, Winter 1975: 184. See also, Strange, Susan, `The world's money: expanding the agenda for research', International Journal, Vol. 36, 1980±1: 712. 104 Spero, Joan, The Failure of the Franklin National Bank: 164. 105 Bank for International Settlements, Forty-Sixth Annual Report, April 1 1975± March 31 1976, Basle: BIS, June 1976: 76. See also, Bank for International Settlements, Forty- Fifth Annual Report: 134. 106 Moffit, Michael, The World's Money: 152. Italics in the original. 107 Helleiner, Eric, `Freeing money: Why have states been more willing to liberalize capital controls than trade barriers', Policy Science, Vol. 27, No. 4, 1994: 307. 108 Cerny, Philip G., `The deregulation and regulation of financial markets in a more open world' in Cerny, Philip G., (ed.) Finance and World Politics: Markets, Regimes, and States in the Post-Hegemonic Era, Aldershot: Edward Elgar, 1993: 73. 109 Cerny, Philip G., `American decline and the emergence of embedded financial orthodoxy' in Cerny, Philip G., (ed.) Finance and World Politics: 173.

242 Notes

110 111

112 113 114

115 116 117 118

119

120

121

122

Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 167. Sobel, Andrew C., Domestic Choices, International Markets: 6. On the history of the insulation of German financial markets from public accountability see Moran, Michael, `A state of inaction: the state and stock exchange reform in the Federal Republic of Germany' in Bulmer, Simon (ed.), The Changing Agenda of West German Politics, Aldershot: Gowever, 1989: 110±27. Seligman, Joel, `The Obsolescence of Wall Street: a contextual approach to the evolving structure of federal securities regulation', Michigan Law Review, Vol. 93, No. 4, Feb. 1995: 5. Strange, Susan, `Finance, information, and power', Review of International Studies, Vol. 16, No. 3, July 1990: 265. From 1972 to 1982 the Big Three's share of the market decreased from 28.2 per cent to 18.2 per cent. In the same period savings and cooperative banking groups increased their share of the market from 26.1 to 33.2. Deeg, Richard, `Banks and Industrial Finance in the 1990s', Industry and Innovation, Vol. 4, No. 1, June 1997: 58. Sobel, Andrew C., Domestic Choices, International Markets: 99. Nevile, Ann, `Financial Deregulation in Japan', Australian Journal of Political Science, Vol. 32, No. 3, 1997: 372. Sobel, Andrew C., Domestic Choices, International Markets: 100. Calder, Kent A., `Assault on the Banker's Kingdom: Politics, Markets, and the Liberalization of Japanese Industrial Finance' in Loriaux, Michael, WooCumings, Meredith, Calder, Kent E., Maxfield, Sylvia and PeÂrez, Sofia, Capital Ungoverned: Liberalizing Finance in Interventionist States, 21±3. Cohen, Benjamin J., Banks and the Balance of Payments: 50: A syndicated loan is a loan with which a number of banks have bought part of the debt issued from the primary bank. Banks share the risk of default, but also the benefit of an informal `regime' for security purposes. Of course the profits come from the payment of interest. In the late 1970s, a secondary and unregulated short- term market for longterm government bonds emerged in Japan, the gensaki market. In 1980 another market for medium-term government bonds emerged, the chugoku market. Germany, J. David and Morton, John E., `Financial Innovation and Deregulation in Foreign Industrial Countries', Federal Reserve Bulletin, Vol. XX, October 1985: 748. The importance of such Japanese bond market innovations cannot be overstated as demonstrated in the following chapter. Kapstein, Ethan B., Governing the Global Economy: 63: Kapstein writes that of the $125 billion in traceable OPEC invesmtents, $48 billion was invested in government paper, portfolio and long-term investments in industrial countries; another $9.75 billion was loaned to international organizations. The most part, $49 billion, went to private commerical banks in New York and London, and only $16 billion (12 per cent), went to developing countries, and mostly in the form of grants to Muslim countries. Direct aid through the IMF acccounted for only $26 billion. Basagni, Fabio, `Recent Developments in International Lending Practices' in Cohen , Benjamin J., Banks and the Balance of Payments: 94.

Notes 243 123 Bank for International Settlements, Forty-Seventh Annual Report, April 1 1976±March 31 1977, Basle: BIS, June 1977: 102. 124 Cohen, Benjamin J., Banks and the Balance of Payments: 52. 125 Basagni, Fabrio, `Approaches to the Prudential Supervision of International Lending' in Cohen , Benjamin J., Banks and the Balance of Payments: 152. 126 Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945: 173. 127 United States Senate, Committee on Foreign Relations, Subcommittee on Foreign Economic Policy, International Debt, the Banks, and U.S. Foreign Policy, Washington: United States Government Printing Office, 1977: 61. 128 Included in these regulatory changes was the replacement of the Federal Financial Institutions Examination Council with the establishment of the Interagency Supervisory Committee in 1978. 129 Reinicke, Wolfgang H., Banking, Politics and Global Finance: 137. 130 Lomax, David F. and Gutmann, P. T. G., The Euromarkets and International Financial Policies, with a foreword by Samuel Brittan, London: Macmillan, 1981: 31. 131 Strange, Susan, `Still an Extraordinary Power: America's Role in a Global Monetary System': 82. 132 Moffit, Michael, The World's Money: 51. 133 Moffit, Michael, The World's Money: 53. See also, Aronson, John David, Money and Power: Banks and the World Marketing System, London: Sage, 1977: 48. 134 Keohane, Robert O., `U.S. Foreign Economic Policy Toward Other Advanced Capitalist States: The Struggle to Make Others Adjust' in Oye, Kenneth A., Rothchild, Donald, and Lieber, Robert J., (eds) Eagle Entangled: U.S. Foreign Policy in a Complex World, New York: Longman, 1979: 95, 105. 135 Rapkin, David P., and Avery, William P., `America in the World Political Economy: Prognoses, Prescriptions, and Questions for Future Research' in Avery, William P., and Rapkin, David P., (eds) America in a Changing World Political Economy, New York: Longman, 1982: 237. Gilpin, Robert, U.S. Power and the Multinational Corporation. 136 Keohane, Robert O., and Nye, Joseph S., Power and Interdependence, Boston: Little Brown, 1977: 46. While I would argue that Keohane and Nye's complex interdependence literature is involves a much richer and complex understanding of the international political economy than Keohane's work to follow, the criticism still holds. 137 Keohane, Robert O., and Nye, Joseph S., Power and Interdependence: 40. 138 Long, David, `The Harvard School of Liberal International Theory: A Case for Closure', Millennium: Journal of International Studies, Vol. 24, No. 3, 1995: 492. Keohane, Robert O., and Martin, Lisa L., `The Promise of Institutional Theory', International Security, Vol. 20, No. 1, 1995: 39±51. 139 Strange, Susan, `Political Econony and International Relations' in Smith, Steve, (ed.) International Relations Theory Today, Cambridge: Polity Press, 1995: 159. 140 Keohane, Robert O., `Theory of World Politics: Structural Realism and Beyond' in Keohane, Robert O., (ed.) Neorealism and its Critics, New York: Columbia University Press, 1986: 166.

244 Notes 141 Helleiner, Eric, States and the Reemergence of Global Finance: 108. Webb, Michael C., The Political Economy of Policy Coordination: 182. 142 Cohen , Benjamin J., Organizing the World's Money: 225. 143 Bank for International Settlements, Forty-Seventh Annual Report: 144. In 1976 the Bank of England was given the provision of a credit stand-by facility backed by the central banks which comprise the BIS. In 1977 the available credit in this stand by facility was extended to $3 billion. 144 Triffin, Robert, `Gold and the Dollar Crisis: Yesterday and Tomorrow', Foreign Affairs, December 1978: 68. 145 Federal Reserve Bank of New York, Sixty-Fourth Annual Report, New York: FRBNY, December 31 1978: 4±6. After peaking with an annual increase at around 12 per cent in 1974 (in wake of the first oil crisis), the US Consumer Price Index (excluding food) remained at between six and nine per cent during the latter half of the decade, in comparison with 2±4 per cent between 1971 and 1973. 146 Kahler, Miles, `American Foreign Economic Policy: Is the Old-Time Religion Good Enough?', International Affairs, Vol. 56, No. 3, Summer 1980: 461. 147 Keohane, Robert O., `The International Politics of Inflation', in Lundberg, L N. and Maier, C. S. (eds) The Politics of Inflation and Economic Stagnation, Washington, DC: Brookings, 1985: 85. Keohane, Robert O., `Economics, Inflation, and the Role of the State', World Politics, Vol. 31, No. 1, October 1978: 116. 148 Mayer, Helmut, `Credit and Liquidity Creation in the International Banking Sector', BIS Economic Papers, No. 1, November 1979: 7, 12. 149 Robert Triffin quoted from Strange, Susan, `Still an Extraordinary Power': 83. 150 Sobel, Andrew C., Domestic Choices, International Markets: 168. 151 Quoted from Helleiner, Eric, States and the Reemergence of Global Finance: 134±5. 152 Strange, Susan, `Europe and the United States: The Transatlantic Aspects of Inflation' in Medley, Richard (ed.), The Politics of Inflation: A Comparative Analysis, New York: Pergamon Press, 1982: 71. 153 Keohane, Robert O., `U.S. Foreign Economic Policy Toward Other Advanced Capitalist States: The Struggle to Make Others Adjust' in Oye, Kenneth A., Rothchild, Donald, and Lieber, Robert J. (eds), Eagle Entangled: 124. Figures from Strange, Susan, `Still an Extraordinary Power': 88. 154 Keohane, Robert O., `The International Politics of Inflation': 92. Keohane, Robert O., `U.S. Foreign Economic Policy Toward Other Advanced Capitalist States': 96. Keohane, Robert O., and Nye, Joseph S., Power and Interdependence: 136±7. 155 Keohane, Robert O., `U.S. Foreign Economic Policy Toward Other Advanced Capitalist States': 95, 103±5. My italics. 156 Keohane, Robert O., `The Theory of Hegemonic Stability': 87±8. 157 Hawley, James P., `Protecting capital from itself': 148. 158 Goodman, John B., and Pauly, Louis W., `The Obsolescene of Capital Controls? Economic Management in an Age of Global Markets', World Politics, Vol. 46, No. 1, October 1993: 61±2. 159 Kahler, Miles, `American Foreign Economic Policy': 461. Keohane, Robert O., `U.S. Foreign Economic Policy Toward Other Advanced Capitalist States': 106.

Notes 245 160 Wonnacott, Paul, `U.S. Intervention in the Exchange Market for the DM, 1977±80', Princeton Studies in International Finance, Princeton: International Finance Section, Princeton University, No. 51, 1982: 21. 161 Cohen , Benjamin J., Organizing the World's Money: 244. 162 Strange, Susan, `Europe and the United States': 74. Webb, Michael C., The Political Economy of Polciy Coordination: 211. 163 On this topic see Pierce, James L., `The Federal Reserve as a Political Power' in Mayer, Thomas (ed.), The Political Economy of American Monetary Policy, Cambridge: Cambridge University Press, 1990: 151±69. 164 Krasner, Stephen D., `United States Commercial and Monetary Policy: Unravelling the Paradox of External Strength and Internal Weakness' in Katzenstein, Peter J. (ed.), Between Power and Plenty: Foreign Economic Policies of Advanced Industrial Nations, Madison: University of Wisconsin Press, 1978: 56. 165 `NCRC Reiterates Support for Presidential Veto of Banking Bill', U.S. Newswire, November 4 1999. 166 Frieden, Jeffry A., Banking on the World: 202. 167 Versluysen, EugeÁne L., The Political Economy of International Finance: 38. 168 Moffit, Michael, The World's Money: 206. 169 Simpson, Thomas D., `Developments in the U.S. Financial System since the Mid-1970s', Federal Reserve Bulletin, January 1988: 5. 170 Moffit, Michael, The World's Money: 148. The Republic National Bank increased their profits by 350 per cent and Chase Manhattan by 54 per cent. 171 Cited in Moffit, Michael, The World's Money: 208. 172 Helleiner, Eric, `Freeing money': 304±5. 173 Dombrowski, Peter, Policy Responses to the Globalization of American Banking, Pittsburgh: University of Pittsburgh Press, 1996: 75. 174 Helleiner, Eric, `Explaining the globalization of financial markets': 327. Helleiner, Eric, States and the Reemergence of Global Finance: 137. 175 Kapstein, Ethan B., Governing the Global Economy: 52. 176 Funds that must be held in interest-free accounts with the Federal Reserve. 177 Parboni, Riccardo, `The Dollar Weapon: From Nixon to Reagan', New Left Review, No. 158, July/August 1986: 9. 178 Moffit, Michael, The World's Money: 208. 179 Bank for International Settlements, Fiftieth Annual Report, April 1 1979±March 31 1980, Basle: BIS, June 1980: 108±10. 180 Versluysen, EugeÁne L., The Political Economy of International Finance: 214. 181 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 230. 182 Helleiner, Eric, `Freeing money': 301. See also Palan, Ronen, `Trying to Have Your Cake and Eating It: How and Why the State System Has Created Offshore', International Studies Quarterly, Vol. 42, No. 4, 1998: 633. 183 Calder, Kent A., `Assault on the Banker's Kingdom': 29. 184 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 126, 136. 185 Hammond, Thomas H. and Knott, Jack H., `The Deregulatory Snowball': 17. 186 Moffit, Michael, The World's Money: 218. This is an estimate by Henry Kaufman of Salomon Brothers. 187 Hammond, Thomas H. and Knott, Jack H., `The Deregulatory Snowball': 19.

246 Notes 188 Gabriel, Stuart A., `Housing and Mortgage Markets: The Post-1982 Expansion', Federal Reserve Bulletin, Vol. 73, No. 12, December 1987: 896. 189 Federal Reserve Bank of New York, Sixty-Sixth Annual Report, New York: FRBNY, December 31st 1980: 33. Strange, Susan, Casino Capitalism: 57. 190 Pauly, Louis W., `Institutionalizing a stalemate: national financial policies and the international debt crisis', Journal of Public Policy, Vol. 10, No. 1, 1990: 27±8. 191 Hultman, C.W., The Environment of International Banking, Englewood Cliffs, New York: Prentice Hall, 1990: 183. Dombrowski, Peter, Policy Responses to the Globalization of American Banking: 77, 93. Roberts, Susan, `Fictitious Capital, Fictitious Spaces: the Geography of Offshore Financial Flows' in Corbridge, Stuart, Martin, Ron, and Thrift, Nigel, (eds) Money, Power and Space, Oxford: Blackwell, 1994: 100. 192 Schaede, Ulrike, `The 1995 Financial Crisis in Japan': 4. Weinstein, David E. and Yishay Yafeh, `On the costs of bank-centered financial system: evidence from the changing main bank relations in Japan', Journal of Finance, Vol. 53, No. 2, April 1998: 637. Moran, Michael, The Politics of the Financial Services Revolution: 102. 193 Sobel, Andrew C., Domestic Choices, International Markets: 28. 194 Geisst, Charles R., Wall Street: 326. 195 Cited in Moffit, Michael, The World's Money: 209. The comment was made by Jeffrey Nicols of New York's Argus Research Corporation.

5

1982±1991: Indebted Innovation 1 Regan in a talk to Japanese business people in March 1984 cited from Frankel, Jeffrey A., The Yen/Dollar Agreement: Liberalizing Japanese Capital Markets, Washington, DC: Institute for International Economics, 1984: 71±2. 2 Calleo, David P., `America's Federal Nation State: a Crisis of Post Imperial Viability?', Political Studies, Vol. XLII, No. 4, 1994: 24. 3 Keohane, Robert O., `Inflation and the Decline of American Power' in Lombra, Raymond E., and Witte, Willard E. (eds), Political Economy of International and Domestic Monetary Relations, Ames: Iowa State University Press, 1982: 22. Similar sentiments are expressed in Calleo, David P., The Imperious Economy, London: Harvard University Press, 1982: 195. 4 Kirkland, Richard I. Jr., `Banks seek life beyond lending', Fortune, March 3 1986: 54. 5 Cohen, Benjamin J., In Whose Interest? International Banking and American Foreign Policy, New Haven: Yale University Press, 1986: 31. Germain, Randall D., The International Organization of Credit: States and Global Finance in the World Economy, Cambridge: Cambridge University Press, 1997: 120. 6 Aktar, M.A., `Financial Innovations and Their Implications for Monetary Policy: An International Perspective', BIS Economic Papers, No. 3, December 1983: 17. 7 Corkish, Jo, Holland, Allison and Fremault Vila, Anne, `The determinants of successful financial innovation: an empirical analysis of futures innovation on LIFFE', Bank of England Occasional Paper, 1997: 9.

Notes 247 8 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe, Manchester: Manchester University Press, 1997: 170±1, 175. 9 OECD, OECD Economic Surveys, 1990/1, Japan, Paris: OECD, 1991: 139. 10 Federal Reserve Bank of New York, Sixty-Sixth Annual Report, New York: FRBNY, December 31 1980: 33. 11 Reinicke, Wolfgang H., Banking, Politics and Global Finance: American Commercial Banks and Regulatory Change, 1980±1990, Aldershot: Edgar Elgar, 1995: 66±7. 12 Helleiner, Eric, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press, 1994: 147. 13 Gilpin, Robert, The Political Economy of International Relations, Princeton: Princeton University Press, 1987: 154. 14 As pointed out to me by Richard Leaver, the monetarist ideology associated with Reaganomics is out of sync with the economic practices of the administration, which can be more appropriately described as `super-Keynesian'! The first quote is from Schmiegelow, Henrik and Schmiegelow, MicheÁle, `How Japan affects the international system', International Organization, Vol. 44, No. 4, Autumn 1990: 578. Second quote from Oye, Kenneth A., `International Systems Structure and American Foreign Policy' in Oye, Kenneth A., Lieber, Robert J., and Rothchild, Donald (eds), Eagle Defiant: United States Foreign Policy in the 1980s, Boston: Little, Brown, 1983: 26. 15 Epstein, Gerard, `Mortgaging America', World Policy Journal, Vol. 8, No. 1, Winter 1990±91: 32. Helleiner, Eric, States and the Reemergence of Global Finance: 202. See also Frieden, Jeffry A., `Invested interests: the politics of national economic policies in a world of global finance', International Organization, Vol. 45, No. 4, 1991: 433. 16 Wilson, John F., Fogler, Elizabeth M., Freund, James L., and van der Ven, Guido E., `Major Borrowing and Lending Trends in the U.S. Economy, 1981± 85': 518. Kirkland, Richard I. Jr., `Banks seek life beyond lending': 56. 17 Wilson, John F., et al, `Major Borrowing and Lending Trends in the U.S. Economy, 1981±85', Federal Reserve Bulletin, Vol. 72, No. 8, August 1986: 511±12. 18 Wilson, John F., et al, `Major Borrowing and Lending Trends in the U.S. Economy, 1981±85': 513, 520, 522. 19 Bank for International Settlements, Recent Innovations in International Banking, Basle: BIS, 1986: 177. See also Simpson, Thomas D., `Developments in the U.S. Financial System since the Mid-1970s', Federal Reserve Bulletin, January 1988: 5. 20 BIS, Fifty-Seventh Annual Report, June 15 1987: 83. 21 Kirkland, Richard I. Jr., `Banks seek life beyond lending': 56. 22 Hawley, James P., `Protecting capital from itself: U.S. attempts to regulate the Eurocurrency system', International Organization, Vol. 38, No. 1, 1984: 140. 23 Porter, Tony, States, Markets and Regimes in Global Finance, Houndsmill: Macmillan, 1993: 63. 24 Kapstein, Ethan B., `Resolving the Regulator's Dilemma: International Coordination of Banking Regulations', International Organization, Vol. 43, No. 2, Spring 1989: 331±4. 25 Lipson, Charles, `Banker's Dilemma: Private Cooperation in Rescheduling Sovereign Debts' in Oye, Kenneth A. (ed.), Cooperation Under Anarchy,

248 Notes

26 27 28 29 30 31 32 33 34 35

36 37 38

39 40

41

42 43

Princeton: Princeton University Press, 1986: 201. See also, Feinberg, Richard E., `Reagonomics and the Third World' in Oye, Kenneth A., Lieber, Robert J., and Rothchild, Donald (eds), Eagle Defiant: 140. Kapstein, Ethan B., Governing the Global Economy: International Finance and the State, Cambridge, Massachusetts: Harvard University Press, 1994: 71. See Strange, Susan, and Tooze, Roger (eds), The Politics of International Surplus Capacity: Competition for market shares in the world recession, London: George Allen and Unwin, 1981. Reinicke, Wolfgang H., Banking, Politics and Global Finance: 142. ibid. 142. Cohen, Benjamin J., In Whose Interest?: 218. Lipson, Charles, `Banker's Dilemma': 207. Italics in original. Kearney, Christine A., `The Creditor Clubs' in Biersteker, Thomas J. (ed.) Dealing with Debt: International Financial Negotiating and Adjustment Bargaining, Boulder: Westview, 1993: 61±76. Lipson, Charles, `Banker's Dilemma': 203. Frieden, Jeffry, Banking on the World: 203. Cohen, Benjamin J., In Whose Interest?: 40. See also, Frieden, Jeffry, Banking on the World: The Politics of American International Finance, New York: Harper & Row Publishers, 1987: 119, 182. Helleiner, Eric, `Explaining the globalization of financial markets: bringing the states back in', Review of International Political Economy, Vol. 2, No. 2, Spring 1995: 333. Strange, Susan, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge: Cambridge University Press, 1996: 196. Also, Kapstein, Ethan B., Governing the Global Economy: 88±9. Kapstein, Ethan B., `Between Power and Purpose': 270. Krasner, Stephen D., Structural Conflict: The Third World Against Global Liberalism, Berkeley: University of California Press, 1985: 164±74. Epstein, Gerard, `The Triple Debt Crisis', World Policy Journal, Vol. 2, No. 4, Fall 1985: 657. Kahler, Miles, `Politics and international debt: explaining the crisis', International Organization, Vol. 39, No. 3, Summer 1985: 373. Italics in original. See also Esptein, Gerard, `The Triple Debt Crisis': 649. Cohen, Benjamin J., In Whose Interest?: 8. Strange, Susan, `The Credit Crisis: A European View', SAIS Review, Summer 1983: 181. Cohen, Benjamin J., `An Explosion in the Kitchen? Economic Relations with Other Advanced Industrial States' in Oye, Kenneth A., Lieber, Robert J. and Rothschild, Donald (eds) Eagle Defiant: 109. Krasner, Stephen D., Structural Conflict: 149. See also, Epstein, Gerard, `The Triple Debt Crisis': 652, which includes a comparison of US and British hegemonies, stating that Britain's attempt to restore the pound in the 1920s `warns us of the pitfalls the United States seems to be taking'. Krasner, Stephen D., `Regimes and the limits of realism: regimes as autonomous variables', International Organization, Vol. 36, No. 2, Spring 1982: 499±500, 504. Oye, Kenneth A., `International Systems Structure and American Foreign Policy': 10. Zysman, John, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change, Oxford: Martin Robertson, 1983: 52. Gilpin, Robert, The Political Economy of International Relations: 166. Lipson, Charles, `Banker's Dilemma': 212.

Notes 249 44 Poznanski, Kazimierz, `Economic adjustment and political forces: Poland since 1970' in Comisso, Ellen and Tyson, Laura D'Andrea (eds), Power, Purpose, and Collective Choice: Economic Strategy in Socialist States, Ithaca: Cornell University Press, 1986: 299±300. 45 Katada, Saori N., `The Japanese government in two Mexican financial crises: an emerging international lender-of-last-resort?', Pacific Affairs, Vol. 71, No. 1, Spring 1998: 65, 71. 46 Pauly, Louis W., `Institutionalizing a stalemate: national financial policies and the international debt crisis', Journal of Public Policy, Vol. 10, No. 1, 1990: 33. 47 Rosenbluth, Frances, `Japanese Banks in Mexico: the Role of Government in Private Decisions', International Journal, Vol. 46, Autumn 1991: 684. 48 This perspective contrasts with that of Robert Axelrod and Robert O. Keohane, who argued that cooperation after the Debt Crisis was made in `the shadow of the future' that would make banks cooperate in order to gain ongoing access to Mexico and Brazil. Axelrod, Robert and Keohane, Robert O., `Achieving Cooperation Under Anarchy: Strategies and Institutions', World Politics, Vol. 38, No. 1, October 1985: 233±8. 49 Goldstein, Morris and Turner, Philip, `Banking Crises in Emerging Economies: Origins and Policy Options', BIS Economic Papers, No. 46, October 1996: 10. 50 Reinicke, Wolfgang H., Banking, Politics and Global Finance: 43. 51 Pauly, Louis W., `Institutionalizing a stalemate': 29. Kapstein, Ethan B., Governing the Global Economy: 94±5. 52 Underhill, Geoffrey R. D., `Markets beyond politics? The state and the internationalisation of financial markets', European Journal of Policy Research, Vol. 19, 1991: 216. 53 Kapstein, Ethan B., `Supervising International Banks: Origins and Implications of the Basle Accord', Princeton Essays in International Finance, Princeton: International Finance Section, Princeton University, No. 185, December 1991: 9. 54 Simpson, Thomas D., `Developments in the U.S. Financial System since the Mid-1970s': 8. 55 Pauly, Louis W., `Institutionalizing a stalemate': 29. 56 Kahler, Miles, `Politics and international debt': 381. 57 Helleiner, Eric, States and the Reemergence of Global Finance: 183. 58 Bank for International Settlements, Recent Innovations in International Banking: 185. 59 Leyshon, Andrew, `Under Pressure: Finance, Geo- economic Competition and the Rise and Fall of Japan's Postwar Growth Economy' in Corbridge, Stuart, Martin, Ron, and Thrift, Nigel (eds), Money, Power and Space, Oxford: Blackwell, 1994: 130. Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945, Ithaca: Cornell University Press, 1995: 194. 60 Freiden, Jeffry A., `Invested interests': 33. 61 Gilpin, Robert, The Political Economy of International Relations: 165. 62 ibid.: 328. 63 For an example see Vogel, Ezra, `Pax Nipponica?', Foreign Affairs, Vol. 64, No. 4, Spring 1986: 752±67.

250 Notes 64 Mann, Michael, `Has globalization ended the rise and rise of the nationstate?', Review of International Political Economy, Vol. 4, No. 3, Autumn 1997: 481±2. Mann writes that the mobility of finanical movements has been used to argue the decline of the state. However, he points out that volatlity in interest rates and currency valuations do not reflect power relationships, only the resources available. 65 Underhill, Geoffrey R. D., `Negotiating financial openness: the Uruguay Round and trade in financial services' in Cerny, Philip G. (ed.), Finance and World Politics, Aldershot: Edward Elgar, 1993: 125±6. 66 Goodman, John B., and Pauly, Louis W., `The Obsolescene of Capital Controls? Economic Management in an Age of Global Markets', World Politics, Vol. 46, No. 1, October 1993: 68. Sobel, Andrew C., Domestic Choices, International Markets: Dismantling National Barriers & Liberalizing Securities Markets, Ann Arbor: The University of Michigan Press, 1994: 32±3. In 1998 the committee was renamed the Japan/US Working Group on Financial Relations. 67 Moran, Michael, `The State and the Financial Services Revolution: A Comparative Analysis', West European Politics, Vol. 17, No. 3, July 1994: 170. 68 Germain, Randall D., The International Organization of Credit: 138. 69 Cited from Frankel, Jeffrey A., The Yen/Dollar Agreement: preface. 70 Moran, Michael, The Politics of the Financial Services Revolution: the USA, UK and Japan, London: Macmillan, 1991: 111. See also Aktar, M.A., `Financial Innovations and Their Implications for Monetary Policy': 9, 17±19. Also, Mochizuki, Mike M., `To Change or to Contain: Dilemmas of American Policy Toward Japan' in Oye, Kenneth A., Lieber, Robert J. and Rothchild, Donald (eds.), Eagle in a New World: American Grand Strategy in the Post-Cold War World, New York: Harper Collins Publishers, 1992: 340. 71 Kane, Edward J., `What Lessons Should Japan Learn from the U.S. DepositInsurance Mess', Journal of the Japanese and International Economies, Vol. 7, No. 7, December 1993: 347. 72 Sobel, Andrew C., Domestic Choices, International Markets: 32. 73 OECD, OECD Economic Surveys, 1990-1: 141. Sobel, Andrew C., Domestic Choices, International Markets: 108. 74 Parboni, Riccardo, `The Dollar Weapon: From Nixon to Reagan', New Left Review, No. 158, July/August 1986: 11. 75 Odell, John S., `From London to Bretton Woods: Sources of Change in Bargaining Strategies and Outcomes' Journal of Public Policy, Vol. 8, No. 3±4, 1989: 311. 76 Helleiner, Eric, States and the Reemergence of Global Finance: 155. 77 Germain, Randall D., The International Organization of Credit: 147, 114. 78 Beason, Dick and James, Jason, The Political Economy of Japanese Financial Markets: Myth versus Reality, Houndsmill: Macmillan Press, 1999: 87. See also Kim, Sun Bae and Moreno, Ramon, `Stock prices and bank lending behavior in Japan', Federal Reserve Bank of San Francisco Economic Review, No. 1 1994: 2±3. 79 Terrell, Henry S., Dohner, Robert S., and Lowrey, Barbara R., `The activities of Japanese banks in the United Kingdom and in the United states, 1980±88', Federal Reserve Bulletin, Vol. 76, No. 2 February 1990: 44. 80 Moran, Michael, The Politics of the Financial Services Revolution: 104.

Notes 251 81 Winters, Jeffrey, `The Financial Crisis in Southeast Asia', paper presented to the Conference From Miracle to Meltdown: The End of Asian Capitalism?, Asia Research Centre, Murdoch University, Perth, August 1998. Thanks to Richard Leaver for this reference. On Arab investment following the first oil crisis see Kapstein, Ethan B., Governing the Global Economy: 63. 82 Pempel, T. J., `Structural Gaiatsu: International Financial Movements and Domestic Political Change', Paper presented at the Association for Asian Studies, Chicago, Illinios, March 1997: 24±5. 83 OECD, OECD Economic Surveys, 1990/1: 145. 84 Sobel, Andrew C., Domestic Choices, International Markets: 34. 85 Goodman, John B. and Pauly, Louis W., `The Obsolescence of Capital Controls?: 63. 86 Germany, J. David and Morton, John E., `Financial Innovation and Deregulation in Foreign Industrial Countries', Federal Reserve Bulletin, October 1985: 751. Zero-coupons are bonds or preference shares that do not give the investor interest payments but are sold at a discount to its redemption value. In effect the interest is paid at the time of the security's maturity rather than during its life. 87 Deeg, Richard, `Banks and Industrial Finance in the 1990s', Industry and Innovation, Vol. 4, No. 1, June 1997: 62. 88 Helleiner, Eric, `Freeing money: Why have states been more willing to liberalize capital controls than trade barriers', Policy Science, Vol. 27, No. 4, 1994: 302. 89 Helleiner, Eric, States and the Reemergence of Global Finance: 157. 90 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe Manchester: Manchester University Press, 1997: 178. 91 Porter, Tony, `Capital mobility and currency markets: can they be tamed?', International Journal, Vol. 51, No. 4, Autumn 1996: 684. 92 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 277. Helleiner, Eric, `Explaining the globalization of financial markets': 329. 93 Porter, Tony, `Capital mobility and currency markets': 684. 94 Deeg, Richard, `Banks and Industrial Finance in the 1990s': 62. Moran, Michael, `The State and the Financial Services Revolution': 161. 95 Moran, Michael, `The State and the Financial Services Revolution': 164. 96 Story, Jonathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 168. Deeg, Richard, Finance Capitalism Unveiled: 84. 97 Deeg, Richard, Finance Capitalism Unveiled: 118. 98 First quote from Plender, John, `London's Big Bang in International Context', International Affairs, Vol. 63, 1986±87: 41, the second quote is from Zysman, John, Governments, Markets, and Growth: 210. 99 Strange, Susan, Casino Capitalism Oxford: Basil Blackwell, 1986: 114. 100 Bisignano, Joseph, `European Financial Deregulation: The Pressures for Change and the Costs of Achievement' In Macfarlane, Ian, and Stevens, Glenn (eds) Studies in Money and Credit: Proceedings of a Conference, Canberra: Research Department, Reserve Bank of Australia, October 1989: 253. 101 Moran, Michael, The Politics of the Financial Services Revolution: 58. Underhill, Geoffrey R. D., `Negotiating financial openness': 136±7. No such change

252 Notes

102 103 104 105

106

107

108 109

110 111 112 113 114 115

116 117 118 119 120 121

occurred on the TSE, with the deregulation of commissions postponed until 1994. An interviewee cited from Sobel, Andrew C., Domestic Choices, International Markets: 7. Moran, Michael, The Politics of the Financial Services Revolution: 65. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 242. Enkyo, Yoichi, `Financial Innovation and International Safeguards: Causes and Consequences of ``Structural Innovation'' in the U.S. and Global Financial System, 1973±86', PhD dissertation, London School of Economics, 1989: 198. Sobel, Andrew C., Domestic Choices, International Markets: 6. Deeg, Richard, `Banks and Industrial Finance in the 1990s': 63. Capitalization of the Frankfurt Stock Exchange is an estimate from the capitalization of equity markets within Germany as a whole between 1982 and 1990. Gilpin, Robert, `Reagan's Ambiguous Economic Legacy', Ethics and International Affairs, Vol. 2, 1988: 4. Like earlier monetary regimes supported by the US, its principles were only supported while the US was in trouble, and it was judged as antiquated by 1988 after the immediate crisis subsided. Gilpin, Robert, The Political Economy of International Relations: 156. Nau, Henry R., The Myth of America's Decline: Leading the World Economy into the 1990s, Oxford: Oxford University Press, 1990: 268. Webb, Michael C., `International economic structures, government interests, and international coordination of macroeconomic adjustment policies', International Organization, Vol. 45, No. 3, Summer 1991: 330. Gilpin, Robert, The Political Economy of International Relations: 333. Helleiner, Eric, States and the Reemergence of Global Finance: 184. Reich, Robert B., `The Economics of Illusion and the Illusion of Economics' Foreign Affairs, Vol. 66, No. 3, 1988: 518. Spero, Joan, The Politics of International Economic Relations, Fourth Edition, New York: St. Martin's Press, 1990: 62. Webb, Michael C., The Political Economy of Policy Coordination: 227±8. Schmiegelow, Henrik and Schmiegelow, MicheÁle, `How Japan affects the international system': 571. Moran, Michael, The Politics of the Financial Services Revolution: 95±6. Webb, Michael C., The Political Economy of Policy Coordination: 228, 248. On Japan's assertiveness during the October crash see Helleiner, Eric, `The challenge from the East: Japan's financial rise and the changing global order' in Cerny, Philip G. (ed.), Finance and World Politics: 217±18. Gilpin, Robert, `Reagan's Ambiguous Economic Legacy': 1. Strange, Susan, `The Future of the American Empire', Journal of International Affairs, Vol. 42, No. 1, Fall 1988: 11. Strange, Susan, `Finance, information, and power': 269. Webb, Michael C., `Capital mobility and the possibilities for international policy coordination': 411. Glasberg, Davita Silfen and Skidmore, David, `The dialectics of state intervention: bank deregulation and the savings and loans bailout', The Sociological Quarterly, Vol. 38, No. 1, Winter 1997: 6. Strange, Susan, The Retreat of the State: 144.

Notes 253 122 Coleman, William D., `Policy Convergence in Banking: A Comparative Study', Political Studies, Vol. 42, No. 2, 1994: 281. 123 Dymski, Gary A., `How to Rebuild the U.S. Financial Structure': Level the Playing Field and Renew the Social Contract in Dymski, Gary A., Epstein, Gerard, and Pollin, David. (eds), Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century, Armonk: M.E. Sharpe, 1993: 103. 124 Glasberg, Davita Silfen and Skidmore, David, `The dialectics of state intervention': 20. 125 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change, Houndsmill: Macmillan Press, 1996: 162. 126 Greenspan, Alan, `Innovation and Regulation of Banks in the 1990s', Federal Reserve Bulletin, December 1988: 786. 127 Reinicke, Wolfgang H., Banking, Politics and Global Finance: 60, 103. Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 166. 128 Oakley, Thomas and Nabor, Richard, `Redistributive Cooperation': 37. 129 Kapstein, Ethan B., Governing the Global Economy: 118. See also Oakley, Thomas and Nabor, Richard, `Redistributive Cooperation': 35. È mper, Thomas, `Wenn Reden Silber und Handeln 130 Genschel, Philipp, and Plu Gold ist: Kooperation und Kommunikation in der internationalen Bankenregulierung', Zeitschrift fuÈr Internationale Bezeihungen, Vol. 3, No. 2, 1996: 243. 131 Quote by Charles Schumer, cited from Kapstein, Ethan B., `Supervising È mper, Thomas, International Banks': 13. See also, Genschel, Philipp and Plu `Wenn Reden Silber und Handeln Gold ist': 235±6. 132 Wagster, John D., `Impact of the 1988 Basle Accord on international banks', Journal of Finance, Vol. 51, No. 4, September 1996: 1322. 133 Terrell, Henry S., et al `The activities of Japanese banks': 39. 134 Wagster, John D., `Impact of the 1988 Basle Accord on international banks': 1331±2. 135 Oakley, Thomas and Nabor, Richard, `Redistributive Cooperation': 45.Kapstein, Ethan B., `Between Power and Purpose': 266. È mper, Thomas, `Wenn Reden Silber und Handeln 136 Genschel, Philipp and Plu Gold ist': 236. Kapstein, Ethan B., `Between Power and Purpose': 279. 137 Kapstein, Ethan B., `Resolving the Regulator's Dilemma': 337. 138 Wagster, John D., `Impact of the 1988 Basle Accord on international banks': 1323. 139 Kapstein, Ethan B., `Supervising International Banks': 2. 140 Underhill, Geoffrey R. D., `Markets beyond politics?': 218. 141 Kapstein, Ethan B., `Resolving the Regulator's Dilemma': 341. 142 Porter, Tony, States, Regimes, and Global Finance: 64. 143 Yoshitomi, Masaru, `Surprises and Lessons from Japanese External Adjustment in 1985±91' in Bergsten, C. Fred (ed.), International Adjustment and Financing: The Lessons of 1985±91, Washington: Institute for International Economics, 1991: 132. 144 Reinicke, Wolfgang H., Banking, Politics and Global Finance: 172. 145 Underhill, Geoffrey R. D., `Markets beyond politics?': 219. 146 Wagster, John D., `Impact of the 1988 Basle Accord on international banks': 1336.

254 Notes 147 Bryan, Lowell. `Capital Guidelines Could Weaken Banks', Wall Street Journal, April 23 1987: 35. 148 Revell, Jack, `Strategies of Major British Banks since the Big Bang' in Revell, Jack (ed.), The Changing Face of European Banks and Securities Markets, Houndsmill: Macmillan Press, 1994: 99. 149 Porter, Tony, States, Markets and Regimes in Global Finance: 71. 150 Germain, Randall D., The International Organization of Credit: 166, 151 Schmiegelow, Henrik and Schmiegelow, MicheÁle, `How Japan affects the international system': 560. 152 Bank of England, `Major internaitonal banks' performance: 1980±91', Bank of England Quarterly Bulletin, August 1992: 290. 153 Hall, Brian J., `How has the Basle Accord affected bank portfolios?', Journal of the Japanese and International Economies, Vol. 7, No. 4, December 1993: 421±2. 154 Porter, Tony, States, Regimes, and Global Finance: 87. 155 Sobel, Andrew C., Domestic Choices, International Markets: 115. 156 Porter, Tony, States, Regimes, and Global Finance: 71. 157 Oakley, Thomas and Nabor, Richard, `Redistributive Cooperation': 43±4. 158 Coleman, Willian D. and Porter, Tony, `Regulating International Banking and Securities: Emerging Co-operation among National Authorities' in Stubbs, Richard, and Underhill, Geoffrey R.D. (eds), Political Economy and the Changing Global Order, London: Macmillan, 1994: 199. 159 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 233. 160 Porter, Tony, States, Regimes, and Global Finance: 114±15, 122. 161 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 243, 284. 162 Germain, Randall D., The International Organization of Credit: 127. 163 For an example from the banking community see McNees, Donald, `Global strategies of U.S. banks: can they succeed?', Bank Management, Vol. 67, No. 5, May 1991: 10±13. 164 Wright, Richard and Pauli, Gunter A., The Second- wave: Japan's Global Assault on Financial Services, Exeter: A. Wheaton & Co., 1987: 98. 165 Kaufman, George G., `The Diminishing Role of Commercial Banking in the U.S. Economy' in White, Lawrence H. (ed.) The Crisis in American Banking, New York: New York University Press, 1993: 156. 166 Krasner, Stephen D., `The accomplishments of international political economy' in Smith, Steve, Booth, Ken, and Zalewski, Marysia (eds), International Theory: Positivism and Beyond, Cambridge: Polity Press, 1996: 121. 167 Reinicke, Wolfgang H., Banking, Politics and Global Finance: 40. 168 Zysman, John, Governments, Markets, and Growth: 236. 169 Gilpin, Robert, `Economic Evolution of National Systems', International Studies Quarterly, Vol. 40, 1996: 417. `Financial Vietnam' reference from Crawford, Richard and Sihler, William W., The Troubled Money Business: The Death of an Old Order and the Rise of a New Order, New York: HarperBusiness, 1991: 253. 170 Cerny, Philip G., `Gridlock and Decline: Financial Internationalization, Banking Politics, and the American Political Process' in Stubbs, Richard and Underhill, Geoffrey R.D. (eds), Political Economy and the Changing Global Order: 433.

Notes 255 171 172 173 174 175 176 177 178 179

180 181 182 183 184 185 186 187

188 189 190 191 192 193 194 195 196

Cerny, Philip G., `Gridlock and Decline': 426. My emphasis. ibid. 435. Webb, Michael C., `International economic structures': 339 By far the best account of the crisis is given in Kane, Edward J., The S&L Insurance Mess: How Did It Happen?, Washington.: Urban Institute Press, 1989. Reinicke, Wolfgang H., Banking, Politics and Global Finance: 121. Dymski, Gary A., `How to Rebuild the U.S. Financial Structure': 114. Reinicke, Wolfgang H., Banking, Politics and Global Finance: 118. Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 166. Cited from Geisst, Charles R., Wall Street: 356. D'Arista, Jane, `Financial Regulation in a Liberalized Global Environment', Center for Economic Policy Analysis, Working Papers Series III: International Capital Markets and the Future of Economic Policy, Working Paper No. 2, May 1998: 18±19. Budd, Leslie, `Globalisation, Territory and Strategic Alliances in Different Financial Centres', Urban Studies, Vol. 3, No. 2, 1995: 351. Hayri, Aydin and Yilmaz, Kamil, `Privatisation and the Stock Market Efficiency: the British Experience', Scottish Journal of Political Economy, Vol. 44, No. 2, May 1997: 113±16. Moran, Michael, The Politics of the Financial Services Revolution: 69. Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 33. Revell, Jack, `Strategies of Major British Banks since the Big Bang': 102, 124. Dividends increased from £57 billion to £129 billion while retained earnings decreased from £191 billion to £24 billion. Cited from Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 293. `Finanzplatz Deutschland', The Economist, December 16 1989: S19. Helleiner, Eric, `Freeing money: Why have states been more willing to liberalize capital controls than trade barriers', Policy Science, Vol. 27, No. 4, 1994: 302. Grieco, Joseph M., `States Interests and Institutional Trajectories: A Neorealist Interpretation of the Maastricht Treaty and European Economic and Monetary Union', Security Studies, Vol. 5, No. 3, Spring 1996: 276. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 302. Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 139±42. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 182. Sobel, Andrew C., Domestic Choices, International Markets: 97. Pempel, T. J., Regime Shift: Comparative Dynamics of the Japanese Political Economy, Ithaca: Cornell University Press, 1998: 11. Hartcher, Peter, 1998. `Can Japan Come Back?', The National Interest, Issue 54, Winter: 36. Pempel, T. J., Regime Shift: 143. Schaede, Ulrike, `The 1995 Financial Crisis in Japan', Berkeley Roundtable on International Economics, Working Paper 85, February 1996: 13. Cited from Hartcher, Peter, 1998. `Can Japan Come Back?': 37.

256 Notes 197 Beason, Dick and James, Jason, The Political Economy of Japanese Financial Markets: Myth versus Reality, Houndsmill: Macmillan Press, 1999: 55. 198 Schmiegelow, Henrik and Schmiegelow, MicheÁle, `How Japan affects the international system': 565. 199 Kapstein, Ethan B., Governing the Global Economy: 116. 200 Jackson, Patricia, `Capital Requirements and Bank Behaviour: the Impact of the Basle Accord', Basle Committee on Banking Supervision Working Papers, No. 1, April 1999: 33. 201 Dymski, Gary A., `How to Rebuild the U.S. Financial Structure': 119. 202 English, William B. and Reid, Brian K., `Profits and balance sheet developments at U.S. commercial banks in 1993', Federal Reserve Bulletin, June 1994: 485. 203 OECD, OECD Economic Surveys, 1991/2, United States, Paris: OECD, 1992: 161. 204 For an excellent overview of the securitization process see OECD, Securitization: An International Perspective, Paris: Organization for Economic Cooperation and Development, 1995. 205 Hammond, Thomas H. and Knott, Jack H., `The Deregulatory Snowball': 21. 206 Gabriel, Stuart A., `Housing and Mortgage Markets: The Post-1982 Expansion', Federal Reserve Bulletin, Vol. 73, No. 12, December 1987: 893±4. 207 Luckett, Charles A., `Recent Developments in Automobile Finance', Federal Reserve Bulletin, Vol. 72, No. 6, June 1986: 363. 208 Cerny, Philip G., `The dynamics of financial globalization: Technology, market structure, and policy response', Policy Sciences, Vol. 27, No. 4, 1994: 336. 209 BIS, Fifty-Seventh Annual Report, 15 June 1987: 83. 210 Quoted from the US Senate Committee on Banking, Housing, and Urban Affairs, One Hundred First Congress, First Session on the Globalization of the Securities Market and S. 646., The International Securities Enforcement Cooperation Act of 1989, Washington: US Government Printing Office, 1990. S. HRG.101±483: 56. 211 In 1989 the Top Ten global underwriters of debt and equity were Merrill Lynch Capital Markets, First Boston/CSFB, Goldman Sachs, Nomura Securities, Salomon Brothers, Morgan Stanely, Daiwa Securities, Nikko Securities, Shearson Lehman Hutton, Yamaichi Securities Company. Wall Street Journal, April 3 1989: C12. 212 Strange, Susan, `The Future of the American Empire': 11. 213 US Senate Committee on Banking, Housing, and Urban Affairs, One Hundred First Congress, First Session on the Globalization of the Securities Market and S. 646., The International Securities Enforcement Cooperation Act of 1989, Washington: US Government Printing Office, 1990: 25. S. HRG.101±483.

6

1992±2000: Crises and Consumer Credit

1 Grasco, Richard, `The best is yet to come: globalization, American and the New York Stock Exchange', Vital Speeches, Vol. 63, No. 7, January 15 1997: 218.

Notes 257 2 Zuckerman, Mortimer B., `A Second American Century', Foreign Affairs, Vol. 77, No. 3, May/June 1998: 18. Zuckerman is referring to the $4 trillion accumulated on the NYSE and NASDAQ from 1994±98, though the statement applies to American wealth creation in general. 3 English, William B. and Reid, Brian K., `Profits and balance sheet developments at U.S. commercial banks in 1993', Federal Reserve Bulletin, June 1994: 483. 4 `On a Wing and a Prayer' in a special section `A Survey of International Banking', The Economist, April 17 1999: 5 5 `On a Wing and a Prayer': 23. 6 `The Japanese (banking) crisis', Dresdner Bank Trends, November 13 1998: 27. 7 Verdier, Daniel, `Domestic Responses to Capital Market Internationalization Under the Gold Standard, 1870±1914', International Organization, Vol. 52, No. 1, Winter 1998: 29. 8 Kapstein, Ethan B., Governing the Global Economy: International Finance and the State, Cambridge, Mass.: Harvard University Press, 1994: 172. 9 Cantor, Richard and Packer, Frank, `The Credit Rating Industry', FRBNY Quarterly Review, Summer/Fall 1994: 7. 10 Krasner, Stephen D., `Regimes and the limits of realism: regimes as autonomous variables', International Organization, Vol. 36, No. 2, Spring 1982: 501. 11 Albert, Michel, `The Future of Continental Socio- economic Models', MPIfG È r Gesellschaftsforschung, Ko È ln, Working Paper 97/6, Max-Planck Institut fu June 1997: 5, paragraph 1.3. 12 Smith, Anthony D., International Financial Markets: The Performance of Britain and its Rivals, National Institute of Economic and Social Research, Occasional Papers XLV, Cambridge: Cambridge University Press, 1992: 70. 13 Budd, Leslie, `Globalisation, Territory and Strategic Alliances in Different Financial Centres' Urban Studies, Vol. 3, No. 2, 1995: 357±8. 14 White, William R., `International Agreements in the Area of Banking and Finance: Accomplishments and Outstanding Issues', Bank for International Settlements Working Papers, Working Paper 38, October 1996: 29. 15 Brunner, Allan D. and English, William B., `Profits and balance sheet developments at U.S. commercial banks in 1992', Federal Reserve Bulletin, July 1993: 655. 16 `Wall Street and the Economy', The Economist, July 6 1996: 25. 17 Cantor, Richard and Packer, Frank, `The Credit Rating Industry': 7. 18 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change, Basingstoke: Macmillan Press, 1996: 189. 19 `The Morning Ten Years After', The Economist, October 26 1996: 91±2. 20 White, William R., `International Agreements in the Area of Banking and Finance': 38. 21 Budd, Leslie, `Globalisation, Territory and Strategic Alliances': 355. 22 `The Battle of the Bourses', The Economist, February 1 1992: 81. 23 Deeg, Richard, Finance Capitalism Unveiled: Banks and the German Political Economy, Ann Arbor: The University of Michigan Press, 1999: 90. 24 Testimony of Richard Katz to US House of Representatives, Japan's Role in the Asian Financial Crisis, Hearing before the Subcommittee on Asia and the Pacific and the Subcommittee on International Economy Policy and Trade

258 Notes

25 26 27 28 29 30

31 32

33 34 35 36 37 38 39 40 41 42 43 44 45

on the Committee on International Relations, House of Representatives, 105th Congress, 2nd Session, April 23 1998: 27. Testimony of Ricki Helfer, Chairman of the FDIC, on `The Financial Services Competitiveness Act of 1995': 20. Cargill, Thomas, Hutchison, Michael, and Takatoshi Ito, `Japan's ``Big Bang'' Financial Deregulation: Implications for Regulatory and Supervisory Policy', Working Paper of the Japan Information Acess Project, June 1997: 6. See Schaede, Ulrike, `The 1995 Financial Crisis in Japan', Berkeley Roundtable on International Economics, Working Paper 85, February 1996. Hale, David, `Asset Deflation Opens the Door to Increased FDI in Japan', East Asian Executive Reports, August 15 1993: 9. Grieco, Joseph M., `States Interests and Institutional Trajectories: A Neorealist Interpretation of the Maastricht Treaty and European Economic and Monetary Union', Security Studies, Vol. 5, No. 3, Spring 1996: 296. Boyer, Robert, `An Essay on the Political and Institutional Deficits of the Euro', paper presented at the Political and Institutional Deficits of the European Integration Process conference, European University Institute, Florence May 30±31, 1997: 34, 74. Boyer, Robert, `An Essay on the Political and Institutional Deficits of the Euro': 12, Table 2. See, for example, Albert, Michel, Capitalism vs. Capitalism: How America's Obsession with Individual Achievement and Short-Term Profit Has Led It to the Brink of Collapse, trans. Paul Haviland with a foreword by Felix G. Rohatyn, London: Four Walls Eight Windows, 1993. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe, Manchester: Manchester University Press, 1997: 286. OECD, OECD Economic Surveys, 1992±3, Germany, Paris: OECD, 1993: 10. Sperling, James, `German foreign policy after unification: the end of cheque book diplomacy?', West European Politics, Vol. 17, No. 1, January 1994: 3. Cited from Albert, Michel, Capitalism vs. Capitalism: 223. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 62. Eisenhammer, John, `View from Frankfurt: the long and the short of two money cultures', The Independent, May 8 1993: 19. Italy followed under similar circumstances. OECD, OECD Economic Surveys, 1992±3, Germany: 74. Gilpin, Robert G., `No One Loves a Political Realist', Security Studies, Vol. 5, No. 3, Spring 1996: 17. Helleiner, Eric, `Freeing money: Why have states been more willing to liberalize capital controls than trade barriers', Policy Science, Vol. 27, No. 4, 1994: 313. Sperling, James, `German foreign policy after unification': 9. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 175. The French response to the ERM crisis can also be related to the perception that British and US interests used the `backdoor' to undermine the EMS after the British proposal for a more market-led monetary system was rejected. The Economist, October 30 1993: 93.

Notes 259 È tz, Susanne, `Internationalization and Financial 46 Deeg, Richard and Lu Federalism: The United States and Germany at the Crossroads?', MPIfG È r Gesellschaftsforschung, Discussion Paper 98/7, Max-Planck Institut fu È ln, September 1998: 20. Ko 47 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 181. 48 `Germany's protective wings', The Economist, May 22 1999: 81. 49 Goldstein, Morris and Turner, Philip, `Banking Crises in Emerging Economies: Origins and Policy Options', BIS Economic Papers, No. 46, October 1996: 19. 50 Deeg, Richard, Finance Capitalism Unveiled: 75. My italics. 51 Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe: 302. 52 Deeg, Richard, Finance Capitalism Unveiled: 104. 53 Strange, Susan, `The New World of Debt', New Left Review, No. 230, July/ August 1998: 95. 54 Strange, Susan, `The New World of Debt': 96±7. 55 Goldstein, Morris and Turner, Philip, `Banking Crises in Emerging Economies': 15. 56 Strange, Susan, `The New World of Debt': 96. 57 ibid. 98. Eichengreen, Barry and Portes, Richard, `Managing the Next Mexico' in Kenen, Peter (ed.), From Halifax to Lyons: What has been done about Crisis Management?, Princeton Essays in International Finance, Princeton: International Finance Section, Princeton University, No. 200, 1996: 28. 58 Fraga, Arminio, `Crisis Prevention and Management: Lessons from Mexico' in Kenen, Peter (ed.), From Halifax to Lyons: What has been done about Crisis Management?: 49. 59 Krugman, Paul, The Return of Depression Economics, New York: W.W. Norton & Company, 1999: 56. 60 Eichengreen, Barry and Portes, Richard, `Managing the Next Mexico': 29. 61 Katada, Saori N., `The Japanese government in two Mexican financial crises: an emerging international lender-of- last-resort?', Pacific Affairs, Vol. 71, No.1, Spring 1998: 70. 62 Summers, Lawrence H., `Introduction' in Kenen, Peter (ed.), From Halifax to Lyons: What has been done about Crisis Management? 2. 63 Kaufman, George G., `Preventing banking crises in the future: lesson from past mistakes', Independent Review, Vol. 2, No. 1, Summer 1997: 70±1. 64 Coleman, William D., Financial Services, Globalization, and Domestic Policy Change: 163±5. 65 Testimony of Ricki Helfer, Chairman of the FDIC, on `The Financial Services Competitiveness Act of 1995': 12±13. È tz, Suzanne: 25. OECD, OECD Economic Surveys, 1995± 66 Deeg, Richard and Lu 1996, United States, Paris: OECD, 1996: 82±3. 67 ibid. 83. 68 ibid. 143. 69 Testimony of Ricki Helfer, Chairman of the FDIC, on `The Financial Services Competitiveness Act of 1995': 3. 70 Nelson, William R. and Owen, Ann L., `Profits and balance sheet developments at U.S. commercial banks in 1996', Federal Reserve Bulletin, June 1997: 398.

260 Notes 71 OECD, OECD Economic Surveys, 1995±1996, United States: 23. 72 Calculated from Nelson, William R. and Reid, Brian K., `Profits and balance sheet developments at U.S. commercial banks in 1995': 448 and OECD, OECD Economic Surveys, 1995±1996, United States: vii. 73 Nelson, William R. and Reid, Brian K., `Profits and balance sheet developments at U.S. commercial banks in 1995': 488. 74 Nelson, William R. and Owen, Ann L., `Profits and balance sheet developments at U.S. commercial banks in 1996': 398. 75 For an example from the period see Friedberg, Aaron L., `The Future of American Power', Political Science Quarterly, Vol. 109, No. 1, Spring 1994: 1±21. 76 OECD, OECD Economic Surveys, 1995±1996, United States: 49. 77 ibid., 46. 78 `Wall Street and the Economy': 23. 79 OECD, OECD Economic Surveys, 1995±1996, United States: 23. 80 Calculated from OECD, OECD Economic Surveys, 1995±1996, United States: vii and OECD, OECD Economic Surveys, 1991/2, United States: vii. 81 Grasco, Richard, `The best is yet to come': 217. 82 Grasco, Richard, `The best is yet to come': 216±217. 83 OECD, OECD Economic Surveys, 1997±1998, United Kingdom: 132±3. 84 Geisst, Charles R., Wall Street: A History, New York: Oxford University Press, 1997: 366. 85 Grenville, Stephen, `Capital Flows and Crises', Talk to the Credit Suisse First Boston Australia Conference, The Global Financial System ± The Risks of Closure, Sydney, November 13 1998: 7. 86 Kristof, Nicholas D. and Wyatt, Edward, `Who Went Under in the World's Sea of Cash', The New York Times, February 15 1999: A1. 87 `Wall Street and the Economy': 24. The historical risk premium for share ownership compared with US Treasury bonds was five per cent. In 1996 US Treasury bonds were valued at seven per cent requiring a yield of 12 per cent on stocks. The Economist warned that in order to maintain share values the return on stocks would need to rise two per cent above the five per cent historical average to avoid a major readjustment. 88 Krugman, Paul, `America the Boastful', Foreign Affairs, Vol. 77, No. 3, May/ June 1998: 33. 89 Friedberg, Aaron L., `The Future of American Power': 8. 90 Lincoln, Edward J., `Evaluating Japan's ``Big Bang'' Financial Deregulation', paper prepared for the Trilateral Forum on U.S.±Japan±China Cooperation in the Asia±Pacific Region, OECD Economic Surveys, 1994±1995, Japan, Paris: OECD, 1995: 74. Berkeley, November 11±12 1997: 10. 91 Krasner, Stephen D., `The accomplishments of international political economy' in Smith, Steve, Booth, Ken, and Zalewski, Marysia (eds), International Theory: Positivism and Beyond, Cambridge: Polity Press, 1996: 121. 92 Vogel, Steven K., `Can Japan Disengage?' Winners and Losers in Japan's Political Economy, and the Ties that Bind Them', Berkeley Roundtable on International Economics, Working Paper 111, December 1997: 11. 93 Schaede, Ulrike, `The 1995 Financial Crisis in Japan': 4. 94 Mikuni, Akio, `The Changes Taking Place in the Japanese Financial System', Conference on Forces of Change in International Banking, Interna-

Notes 261

95 96 97 98 99 100 101 102

103 104 105 106 107 108 109 110 111 112 113 114 115 116

117

tional Center for Monetary and Banking Studies, Geneva, November 7±8 1996. Asher, David L., `What became of the Japanese ``miracle'' ', ORBIS, Vol. 40, No. 2, Spring 1996: 217. Pempel, T. J., Regime Shift: Comparative Dynamics of the Japanese Political Economy, Ithaca: Cornell University Press, 1998: 138. Kapstein, Ethan B., Governing the Global Economy: 116. Hall, Brian J., `How has the Basle Accord affected bank portfolios?', Journal of the Japanese and International Economies, Vol. 7, No. 4, December 1993: 421±2. Asher, David L., `What became of the Japanese ``miracle'' ': 218. Hall, Brian J., `How has the Basle Accord affected bank portfolios?': 408. Also, Bank of England, `Major international banks' performance: 1980±91', Bank of England Quarterly Bulletin, August 1992: 290. Hartcher, Peter, `Can Japan Come Back?', The National Interest, Issue 54, Winter 1998. To provide a comparison this figure is equal to seven-eighths of all commercial and industrial loans made in the US. See Lincoln, Edward J., `The ``Big Bang''? An Ambivalent Japan Deregulates its Financial Markets', The Brookings Review, Vol. 16, No. 1, Winter 1998: 37. Kapstein, Ethan B., `Shockproof: The End of the Financial Crisis', Foreign Affairs, Vol. 75, No. 1, January/February 1996: 2. Asher, David L., `What became of the Japanese ``miracle'' ': 217. Fukunaga, Hiroshi, `The Culture of Corruption', Tokyo Business Today, January 9 1996: S1, 4. Kharouf, Jim, `The copper trader who fell from grace', Futures, August 1996. Available from http://www.futuresmag.com/library/august96/intrends.html Pempel, T. J., Regime Shift: 139. The premium began in 1995 after the collapses of the Hyogo Bank and Kizu Credit. Tetsuro Hanajiri, `Three Japan Premiums in Autumn 1997 and Autumn 1998: Why did premiums differ between markets?', Bank of Japan, Financial Markets Department Working Paper Series 99±E-1, August 1999. Fukunaga, Hiroshi, `The Culture of Corruption': S1, 4. Strom, Stephanie, `Talk in Japan of Selling U.S. Bonds Has Little Effect', The New York Times, December 9 1997: D2. Bank of Japan, Annual Review 1998 for Fiscal 1997, Tokyo: Bank of Japan, 1998: 122 Yasuo Matsushita, `Recent Monetary and Economic Conditions in Japan and the Reform of Financial Markets', Bank of Japan Quarterly Bulletin, August 1997: 9. Yasuo Matsushita, `Recent Monetary and Economic Conditions in Japan': 9. Woo, David, `In Search of the ``Capital Crunch'' ': 15. Amyx, Jennifer A., `The Informal Ties that Bind: Institutional Linkage and System Change in Japanese Financial Regulation', paper presented at the 1999 Annual Meeting of the American Political Science Association, Atlanta Marriott Marquis and Atlanta Towers, September 2±5 1999: 16. OECD, OECD Economic Surveys, 1995±1996, Japan, Paris: OECD, 1996: 47, 51. In 1992 a Japanese bank would have received 66 per cent of the face value of bad loans.

262 Notes 118 Woo, David, `In Search of the ``Capital Crunch'': Supply Factors Behind the Credit Slowdown in Japan', International Monetary Fund Working Papers, Monetary and Exchange Affairs Department, WP/99/3, January 1999: 17. 119 McCormack, Gavin, `Afterbubble: Fizz and Concrete in Japan's Political Economy', JPRI Working Papers, No. 21, June 1996: 2. 120 My thanks to Jennifer Amyx for this point. See, Amyx, Jennifer A., `Political Impediments to Far-Reaching Banking Reforms in Japan: Implications for Asia', in Noble, Gregory and Ravenhall, John (eds) The Asian Financial Crisis and the Architecture of Global Finance, Cambridge: Cambridge University Press, 2000: 144±5. 121 Krugman, Paul, The Return of Depression Economics: 75. 122 OECD, OECD Economic Surveys, 1994±1995, Japan: 57. Vogel, Steven K., `Can Japan Disengage?': 13. 123 Amyx, Jennifer A., `Political Impediments': 139. 124 OECD, OECD Economic Surveys, 1997±1998: 72. This program was announced around the same time as the Fiscal Structural Reform Act which, with added US pressure, reduced public investment and introduced temporary tax cuts. 125 OECD, OECD Economic Surveys, 1997±1998: 59. 126 See Klee, K., `The Buck is Bruised', Newsweek, October 19 1998: 58, and also Roach, S., `Angst in the global village', Challenge, 40(5), 1997: 102±3. My thanks to Richard Leaver for his help on this point. 127 Reisen, Helmut, `Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance' paper presented at the East Asian Crisis Workshop at the Institute of Development Studies, Brighton, July 13±14 1998: 5. 128 OECD, OECD Economic Surveys, 1997±1998: 60. From 1995±1997 Thailand borrowed on average $35.8 billion annually from Japanese banks. The second largest borrower during the same period was Korea with $22 billion annually. See also Weiss, Linda, `State Power and the Asian Crisis', Institute on Globalization and the Human Condition, McMaster University, Working Paper 99/2, February 1999: 11. 129 See Kirshner, Jonathan, `Keynes, capital mobility and the crisis of embedded liberalism', Review of International Political Economy, Vol. 6, No. 3, Autumn 1999: 315±16. Also in May 1997 the IMF proposed changes to its Articles of Agreement to promote capital account liberalization. 130 Cohen, Benjamin J., In Whose Interest?: 40. 131 The story of financial diplomacy in the 1980s and the financial crises of the 1990s can be found in a more condensed form in Seabrooke, Leonard, `The Gunslinger and the Samurai: Financial Protectionism and the Crisis in Asia' in Brookfield, John (ed.), Proceedings of 1999 Conference of the Australasian Political Studies Association, Vol. III, Department of Government, University of Sydney, 1999. 132 The World Bank, East Asia: The Road to Recovery, Washington: World Bank Group, 1998: 7. Thanks to Alex Stephens for passing on this information. 133 Kristof, Nicholas D. and Wyatt, Edward, `Who Went Under in the World's Sea of Cash': A1. 134 Amyx, Jennifer A., `Political Impediments': 143.

Notes 263 135 Figure from James Glassman of the American Enterprise Institute in a speech made at the Japan's Role in the Asian Financial Crisis Hearing before the Subcommittee on Asia and the Pacific and the Subcommittee on International Economy Policy and Trade on the Committee on International Relations, House of Representatives, 105th Congress, 2nd Session, April 23 1998: 9. Available from http://commdocs.house.gov/committees/intlrel/hfa 49008. 000/hfa4900 136 Nelson, William R. and Owen, Ann L., `Profits and balance sheet developments at U.S. commercial banks in 1996', Federal Reserve Bulletin, June 1997: 410. 137 Testimony of Walden Bello before Banking Oversight Subcommittee, Banking and Financial Services Committee, US House of Representatives, April 21 1998. 138 Leaver, Richard and Seabrooke, Leonard, `Can the IMF be Reformed?', in Bello, Walden, Bullard, Nicola, and Malhortra, Kamal (eds), Global Finance: New Thinking on Regulating Speculative Capital Markets, London: Zed Press, 2000: 97, 102±3, 107±8. Also, Kamal Malhorta, `Renewing the Governance of the Global Economy', same volume. 139 Testimony of Walden Bello before Banking Oversight Subcommittee, Banking and Financial Services Committee, US House of Representatives, April 21 1998. 140 From an address by Managing Director of the International Monetary Fund, Michel Camdessus, to the Parliamentary Assembly of the Council of Europe. Camdessus, Michel, `From the Asian Crisis Toward a New Global Architecture', Strasbourg, France, June 23 1998. 141 Ellison, Herbert J., `Russia: Crisis and Reform', NBR Analysis, National Bureau of Asian Research, Vol. 9, No. 4, Essay 3: 2. 142 Krugman, Paul, The Return of Depression Economics: 131. 143 Eisuke Sakakibara, `Mr. Yen ± Managing Crises', The Daily Yomiuri, August 4 1999: 1. 144 BIS, Bank for International Settlements 69th Report: 52. Also, `Barclays loses £250m in crisis', The Times, September 2 1998: 78. 145 Kazyonnov, Sergei Yuryevich and Kumachev, Vladimir Nikolayevich, `German ``No'' May Mean ``Yes'' ', Current Digest of the Post-Soviet Press, Vol. 50, No. 48, December 30 1998: 22. 146 Andrews, Edmund L., `Turmoil in Russia: In Germany', The New York Times, August 30 1998: 10. 147 Kapstein, Ethan B., `Global Rules for Global Finance', Current History, November 1998: 357, 360. 148 Longman, Phillip J. and Egan, Jack, `Close to the brink: a bailout of a hedge fund rattles investors', U.S. News and World Report, Vol. 125, No. 13, October 5 1998: 50. 149 OECD, OECD Economic Surveys, 1999, United States: 85. 150 Longman, Phillip J. and Egan, Jack, `Close to the brink': 48. 151 OECD, OECD Economic Surveys, 1999, United States: 85. 152 Longman, Phillip J. and Egan, Jack, `Close to the brink': 51. 153 Wade, Robert and Veneroso, Frank, `The Gathering World Slump': 37. 154 Keohane, Robert O., `The Analysis of International Regimes Towards a European±American Research Programme' in Rittberger, Volker (ed.) Regime

264 Notes

155

156

157 158 159 160 161 162 163 164 165 166 167 168 169 170 171 172 173 174 175 176 177 178 179 180 181

Theory and International Relations, with the assistance of Peter Mayer, Oxford: Clarendon Press, 1993: 36. Keohane's italics. Kono, Masamichi and Schuknecht, Ludger, `Financial Services Trade, Capital Flows, and Financial Stability', Staff Working Paper ERAD-98±12, World Trade Organization, Economic Research and Analysis Division, November 1998: 13±14. Porter, Tony, `Representation, Legitimacy and the Changing Regime in Global Financial Regulation', paper presented at the 1999 Annual Meeting of the American Political Science Association, Atlanta Marriott Marquis and Atlanta Towers, September 2±5 1999: 6±8. BIS, Bank for International Settlements 69th Report: 154±5. These parties were also involved in a Financial Stability Forum, which, like talks in the past, has discussed the `new global financial architecture'. Coleman, William D., `Private Governance and Democracy in International Finance': 10th Conference on Socio-Economics, July 13±16 1998, Vienna, Austria: 27. Woo, David, `In Search of the ``Capital Crunch'': Supply Factors Behind the Credit Slowdown in Japan', International Monetary Fund Working Papers, Monetary and Exchange Affairs Department, WP/99/3, January 1999: 4, 9n. Kapstein, Ethan B., `Shockproof': 8. Bank for International Settlements, `A New Capital Adequacy Framework', consultative paper issued by the Basle Committee on Banking Supervision, Basle, June 1999: 8±12. Bank for International Settlements, `A New Capital Adequacy Framework' 36. Jackson, Patricia, `Capital Requirements and Bank Behaviour': 24. D'Arista, Jane, `Financial Regulation in a Liberalized Global Environment': 2. Kapstein, Ethan B., `Shockproof': 8. Weber, Max, Staatssoziologie, Berlin: Duncker & Humbolt, 1956: 31. OECD, Banks Under Stress, Paris: OECD, 1992: 84. `Follow the money', Time International, July 27 1998: 36. See also `Financial regulation: Dangerous watchdog', The Economist, January 23 1999: 67. `Shooting the messenger', The Economist, 7 August 1999: 15. Amyx, Jennifer A., `The Informal Ties that Bind': 17. `Troubled Bank is Nationalized by Japanese', New York Times, October 24 1998: C1. OECD, OECD Economic Surveys, 1997±1998: 132. Beason, Dick and James, Jason, The Political Economy of Japanese Financial Markets: Myth versus Reality, Houndsmill: Macmillan Press, 1999: 202. Amyx, Jennifer A., `Political Impediments to Far- Reaching Banking Reforms in Japan': 148. `Germany's protective wings': 81. Coonan, Clifford, `Telekom Sell-Off Heralds for New Era for German Shares', The Reuter European Business Report, November 17 1996. Deeg, Richard, Finance Capitalism Unveiled: 89, 93. Lincoln, Edward J., `The ``Big Bang''?': 38. OECD, OECD Economic Surveys, 1999, United States: 52. Krugman, Paul, The Return of Depression Economics: 159. Eisuke Sakakibara, `Mr. Yen ± Managing Crises': 1. Washington Post, February 1 1999: A15.

Notes 265 182 Eisuke Sakakibara, `Mr. Yen ± Managing Crises': 1. 183 Cohen, Benjamin J., Banks and the Balance of Payments: 52. `The Bank Merger Splurge', The Economist, August 28 1999: 15. 184 `On a Wing and a Prayer': 5±6. `Big financial mergers beg for rationale', Australian Financial Review, September 16±17 2000: 12. 185 `Banks of Scotland', The Economist, October 2 1999: 7. `Two More Banks Join Bid for NatWest', United Press International, September 28 1999. Electronic source. 186 Wallace, Paul, `Farewell, Captain Mainwaring', New Statesman, September 13 1999, v128 i4453: iv. 187 `The Business of Banking', The Economist, October 30 1999, v353 i8143: 89. 188 `The Bankers' Waltz', Business Week, September 6 1999, i3645: 20 189 Posen, Adam S., `Why EMU is Irrelevant for the German Economy', Institute for International Economics Working Paper 99±5, April 1999: 5. Available from the IIE's website. 190 Bergsten, C. Fred, `The Dollar and the Euro': 88. 191 McCathie, Andrew, `Germany's four pillar's shaken', Australian Financial Review, November 15 1999: 30. `Coming Soon: Europe's First $1 Trillion Bank?', Business Week, November 1 1999: 60. 192 `German Banks Eye New York Offices', Thomson's International Banking Regulator, Vol. 10, No. 33, August 31 1998: 1. 193 `Order Approving the Formation and Acquisition of a Bank Holding Company', Federal Reserve Bulletin, Vol. 85, Issue 5, May 1999: 336. 194 Trefgarne, George, `New Dawn in the Land of the Rising Sun', Daily Telegraph, March 20 1999: 33. 195 `On a Wing and a Prayer': 4. 196 OECD, OECD Economic Surveys, 1997±1998: 131. 197 `Japanese banks in super merger', The Australian, October 8 1999: 31. 198 A MoF official cited from Harchter, Peter, The Ministry: Can One Small Bureaucracy Sabotage World Markets?, Sydney: HarperBusiness, 1997: 165. 199 Hartcher, Peter, `Can Japan Come Back?'. 200 Tamamoto, Masaru, `The privilege of choosing: the fallout of Japan's economic crisis', World Policy Journal, Vol. 15, No. 3, Fall 1998: 27±8. 201 Wade, Robert and Veneroso, Frank, `The Gathering World Slump and the Battle Over Capital Controls', New Left Review, No. 231, September/October 1998: 36. 202 Wade, Robert and Veneroso, Frank, `The Gathering World Slump': 17±18. Federal Reserve, `Monetary Policy Report to the Congress Pursuant to the Full Employment and Balance Growth Act of 1978', July 22 1999: 5. 203 Dymski, Gary A., `How to Rebuild the U.S. Financial Structure: Level the Playing Field and Renew the Social Contract' in Dymski, Gary A., Epstein, Gerard, and Pollin, David (eds), Transforming the U.S. Financial System: Equity and Efficiency for the 21st Century, Armonk: M.E. Sharpe, 1993: 116, 121. 204 `NCRC Reiterates Support for Presidential Veto of Banking Bill', U.S. Newswire, November 4 1999. 205 Avery, Robert B., Bostic, Raphael W., Calem, Paul S., and Canner, Glenn B., `Trends in Home Purchasing Lending: Consolidation and the Community Reinvestment Act', Federal Reserve Bulletin, February 1999: 81, 84.

266 Notes 206 `On a Wing and a Prayer': 4.

7 Conclusion: the Victory of Dividends and the Dividends of Victory 1 Weber, Max, `Suffrage and Democracy in Germany' in Weber, Max, Political Writings, ed. Peter Lassman and Ronald Spiers, Cambridge: Cambridge University Press, 1994: 104. 2 Weber, Max, `The Stock Exchange' in Runciman, W. G., Weber: Selections in Translation, trans. Eric Matthews, Cambridge: Cambridge University Press, 1978: 377. 3 The US Treasury update the statistics on major foreign holders of US Treasury securities monthly. For June 2000 Japan held 27 per cent of treasury securities, with Britain holding 18 per cent and Germany trailing with 7.5 per cent. See http://www.treas.gov/tic/mfh.txt 4 Interest rate caps, the separation of commercial and investment banking in the first example; capital adequacy regulations that forced banks to find ways of increasing their `off-balance sheet' assets in the second. 5 Kindleberger, Charles P., `The Eurodollar and the internationalization of United States monetary policy'in International Money: A Collection of Essays, London: George Allen & Unwin, 1981: 45. 6 Ingham, Geoffrey, `Capitalism, money and banking a critique of recent historical sociology', British Journal of Sociology, Vol. 50, No. 1, March 1999: 80. 7 Weber, Max, Staatssoziologie, Berlin: Duncker & Humbott, 1956: 31. 8 Ingham, Geoffrey, `Capitalism, money and banking: a 84. 9 ibid. 85. Ingham's italics. 10 Mann, Michael, The Sources of Social Power, Vol. I, Cambridge: Cambridge University Press, 1986: 10; and Mann, Michael, `The Autonomous Power of the State: its Origins, Mechanisms and Results' in Mann, Michael, States, War and Capitalism: Studies in Political Sociology, Oxford: Basil Blackwell, 1988: 9. 11 See Avner Offer's brilliant work on the Great War and Empire: The First World War: An Agrarian Interpretation, New York: Clarendon Press, 1989; and `The British Empire, 1870±1914: A Waste of Money?', Economic History Review, Vol. 46, No.2, 1993: 215±38. 12 Krasner, Stephen D., `Westphalia and all that' in Goldstein, J. and Keohane, Robert O., Ideas and Foreign Policy, Ithaca, NY: Cornell University Press, 1993: 301. 13 See Hobson, John M., The State and International Relations, Cambridge: Cambridge University Press, 2000: Chapter 7. 14 Griffiths, Martin, Realism, Idealism and International Politics: A Reinterpretation, Routledge: London, 1992: 120. 15 Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945, Ithaca: Cornell University Press, 1995. 16 Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy, Princeton: Princeton University Press, 1984: 179.

Notes 267 17 Keohane, Robert O., International Insitutions and State Power ± Essays in International Relations Theory, Boulder: Westview Press, 1991: 41. 18 See Keohane, Robert O. and Milner, Helen V. (eds), Internationalization and Domestic Politics, Cambridge: Cambridge University Press, 1996. 19 Kapstein, Ethan B., `Shockproof: The End of the Financial Crisis', Foreign Affairs, Vol. 75, No. 1, January/February 1996: 8. 20 Amyx, Jennifer A., `Political Impediments to Far- Reaching Banking Reforms in Japan: Implications for Asia', in Noble, Gregory and Ravenhill, John (eds) The Asian Crisis and the Architecture of Global Finance, Cambridge: Cambridge University Press, 2000: 136. 21 Coleman, William D., `Policy Convergence in Banking: A Comparative Study', Political Studies, Vol. 42, No. 2, 1994: 290. 22 Zysman, John, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change, Oxford: Martin Robertson, 1983: 274. 23 Strange, Susan, `Wake up, Krasner! The world has changed', Review of International Political Economy, Vol. 1, No. 2, Summer 1994: 218. 24 Strange, Susan, States and Markets, London: Pinter Publishers, 1988: Chapter 11. 25 Hobson, John M., The State and International Relations: Chapter 6. 26 Mann, Michael, The Sources of Social Power, Vol. I: 8. 27 Hobson, John M., The Wealth of States: A Comparative Sociology of International Economic and Political Change, Cambridge: Cambridge University Press, 1997: 2. 28 Mommsen, Wolfgang J., Max Weber and German Politics 1890±1920 trans. Michael S. Steinberg, Chicago: University of Chicago Press, 1984 [1959]: 83. 29 Weber, Max, `On the Situation of Constitutional Democracy in Russia' in Weber, Max, Political Writings, ed. Peter Lassman and Ronald Spiers, Cambridge: Cambridge University Press: 68. 30 Mann, Michael, The Sources of Social Power, Vol. II, Cambridge: Cambridge University Press, 1993: 292. See also Kennedy, Paul, `Strategy versus Finance in Twentieth-century Britain' in Strategy and Diplomacy, 1870±1945, New York: Fontana, 1983: 96. 31 Available from Treasury News at http://www.ustreas.gov/ press/releases/ ps241.htm 32 `Bank on Change', Time, November 8 1999: 46. 33 Testimony of Ralph Nader to the Committee on Banking and Financial Services, US House of Representatives, February 11 1999: 4. See: http:// www.house.gov/banking/2199nad.htm 34 Such income now represents 40 per cent of bank revenues as compared with around 20 per cent two decades ago. 35 John Taylor from the National Community Reinvestment Coalition `NCRC Reiterates Support for Presidential Veto of Banking Bill', U.S. Newswire, November 4 1999.

Select Bibliography While the following selected references do not provide a quintessential list, they do reflect what I consider to be the most important analytical works in the field of `finance and international political economy'. I have also included prominent theoretical works, particularly critiques of popular perspectives, which have informed the perspective offered in this book. I have endeavoured to include the most accessible works in the field and also some lesser-known works. Andrews, David M., `Capital Mobility and State Autonomy: Toward a Structural Theory of International Monetary Relations', International Studies Quarterly, Vol. 38, No. 2, June 1994: 193±218. Aronson, John David, Money and Power: Banks and the World Marketing System, London: Sage, 1977. Beason, Dick and James, Jason, The Political Economy of Japanese Financial Markets: Myth versus Reality, Basingstoke: Macmillan Press, 1999. Block, Fred L., The Origins of International Economic Disorder: A Study of United States International Monetary Policy from World War II to the Present, Berkeley: University of California Press, 1977. Burn, Gary, `The state, the City and the Euromarkets', Review of International Political Economy, Vol. 6, No. 2, Summer 1999: 225±61. Cerny, Philip G. (ed.), Finance and World Politics, Aldershot: Edward Elgar, 1993. Cohen, Benjamin J., Banks and the Balance of Payments: Private Lending in the International Adjustment Process, with F. Basagni, London: Croom Helm, 1981. Cohen, Benjamin J., In Whose Interest? International Banking and American Foreign Policy, New Haven: Yale University Press, 1986. Cohen, Benjamin J., `Phoenix Risen: The Resurrection of Global Finance', World Politics, Vol. 48, No. 2, January 1996: 268±96. Coleman, William D., Financial Services, Globalization, and Domestic Policy Change, London: Macmillan Press, 1996. Crawford, Robert M.A., Regime Theory in the Post-Cold War World, Aldershot: Dartmouth, 1996. de Cecco, Marcello, `International Financial Markets and US Domestic Policy Since 1945', International Affairs, Vol. 52, No. 3, July 1976: 381±99. Deeg, Richard, Finance Capitalism Unveiled: Banks and the German Political Economy, Ann Arbor: The University of Michigan Press, 1999. Epstein, Gerard, `The Triple Debt Crisis', World Policy Journal, Vol. 2, No. 4, Fall 1985: 625±57. Frieden, Jeffry A., Banking On The World: The Politics of American International Finance, New York: Harper and Row Publishers, 1987. Frieden, Jeffry A., `Invested interests: the politics of national economic policies in a world of global finance', International Organization, Vol. 45, No. 4, 1991: 425±51. Garten, Helen, US Financial Regulation and its Implications for the Global Marketplace, Basingstoke: Palgrave, 2001. 268

Select Bibliography 269 Germain, Randall D., The International Organization of Credit: States and Global Finance in the World Economy, Cambridge: Cambridge University Press, 1997. Goodman, John B. and Pauly, Louis W., `The Obsolescene of Capital Controls? Economic Management in an Age of Global Markets', World Politics, Vol. 46, No. 1, October 1993: 50±82. Griffiths, Martin, Realism, Idealism and International Politics: A Reinterpretation, London: Routledge, 1992. Hawley, James P., `Protecting capital from itself: U.S. attempts to regulate the Eurocurrency system', International Organization, Vol. 38, No. 1, 1984: 131±65. Helleiner, Eric, `Money and Influence: Japanese Power in the International Monetary and Financial System', Millenium: Journal of International Studies, Vol. 18, No. 3, 1989: 343±58. Helleiner, Eric, States and the Reemergence of Global Finance: From Bretton Woods to the 1990s, Ithaca: Cornell University Press, 1994. Hobson, John M., The State and International Relations, Cambridge: Cambridge University Press, 2000. Hobson, John M., The Wealth of States: A Comparative Sociology of International Economic and Political Change, Cambridge: Cambridge University Press, 1997. Hudson, Alan C., `Placing trust, trusting place: on the social construction of offshore financial centres', Political Geography, Vol. 17, No. 8, 1998: 915±37. Ingham, Geoffrey, `Capitalism, money and banking: a critique of recent historical sociology', British Journal of Sociology, Vol. 50, No. 1, March 1999: 76±96. Kahler, Miles, `Politics and international debt: explaining the crisis', International Organization, Vol. 39, No. 3, Summer 1985: 357±82. Kapstein, Ethan B., Governing the Global Economy: International Finance and the State, Cambridge, Massachusetts: Harvard University Press, 1994. Kapstein, Ethan B., `Shockproof: The End of the Financial Crisis', Foreign Affairs, Vol. 75, No. 1, January/February 1996: 2±8. Katzenstein, Peter J. (ed.), Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States, Madison: University of Wisconsin Press, 1978. Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy, Princeton: Princeton University Press, 1984. Keohane, Robert O., International Institutions and State Power: Essays in International Relations Theory, Boulder: Westview Press, 1991. Krasner, Stephen D, `American Policy and Global Economic Stability' in Avery, William P. and Rapkin, David P. (eds), America in a Changing World Political Economy, New York: Longman, 1982: 29±48. Krasner, Stephen D., `International political economy: abiding discord', Review of International Political Economy, Vol. 1, No. 1, Spring 1994: 13±19. Leaver, Richard, `International Political Economy and the Changing World Order: Evolution or Involution' in Stubbs, Richard and Underhill, Geoffrey R.D. (eds), Political Economy and the Changing Global Order, London: Macmillan, 1994: 130± 41. Leaver, Richard and Seabrooke, Leonard, `Can the IMF be Reformed?' in Bello, Walden, Bullard, Nicola, and Malhorta, Kamal (ed), Global Finance: New Thinking on Regulating Speculative Capital Markets, London: Zed Press, 2000: 96±113.

270 Select Bibliography Lipson, Charles, `Banker's Dilemma: Private Cooperation in Rescheduling Sovereign Debts' in Oye, Kenneth A. (ed.), Cooperation Under Anarchy, Princeton: Princeton University Press, 1986: 200±25. Llewellyn, David, `The Role of International Banking' in Tsoukalis, Loukas (ed.), The Political Economy of International Money: In search of a new order, London: Royal Institute of International Affairs, 1985: 203±32. Long, David, `The Harvard School of Liberal International Theory: A Case for Closure', Millennium: Journal of International Studies, Vol. 24, No. 3, 1995: 489± 505. Loriaux, Michael, France After Hegemony: International Change and Financial Reform, Ithaca, Cornell University Press, 1991. Mann, Michael, The Sources of Social Power, Vols I & II, Cambridge: Cambridge University Press, 1986, 1993. Moffitt, Michael, The World's Money: International Banking from Bretton Woods to the Brink of Insolvency, London: Michael Joseph Ltd, 1984. Moran, Michael, The Politics of the Financial Services Revolution: the USA, UK and Japan, London: Macmillan, 1991. Odell, John S. US International Monetary Policy: Markets, Power and Ideas as a Source of Change, Princeton: Princeton University Press, 1982. Odell, John S., `From London to Bretton Woods: Sources of Change in Bargaining Strategies and Outcomes', Journal of Public Policy, Vol. 8, No. 3±4, 1989: 287± 315. Pauly, Louis W., `Institutionalizing a stalemate: national financial policies and the international debt crisis', Journal of Public Policy, Vol. 10, No. 1, 1990: 23±43. Pempel, T. J., Regime Shift: Comparative Dynamics of the Japanese Political Economy, Ithaca: Cornell University Press, 1998. Porter, Tony, States, Markets and Regimes in Global Finance, Houndsmill: St. Martin's Press, 1993. Reinicke, Wolfgang H., Banking, Politics and Global Finance: American Commercial Banks and Regulatory Change, 1980±1990, Aldershot: Edgar Elgar, 1995. Schwartz, Anna J., `US Foreign Exchange Market Intervention Since 1962', Scottish Journal of Political Economy, Vol. 43, No. 4, September 1996: 371±402. Sobel, Andrew C., Domestic Choices, International Markets: Dismantling National Barriers and Liberalizing Securities Markets, Ann Arbor: The University of Michigan Press, 1994. Story, Johnathan and Walter, Ingo, Political Economy of Financial Integration in Europe, Manchester: Manchester University Press, 1997. Strange, Susan, `The Future of the American Empire', Journal of International Affairs, Vol. 42, No. 1, Fall 1988: 1±17. Strange, Susan, The Retreat of the State: The Diffusion of Power in the World Economy, Cambridge: Cambridge University Press, 1996. Underhill, Geoffrey R. D., `Markets beyond politics? The state and the internationalisation of financial markets', European Journal of Policy Research, Vol. 19, 1991: 197±225. Underhill, Geoffrey R. D. (ed.), The New World Order in International Finance, London: Macmillan Press, 1997. Verdier, Daniel, `Domestic Responses to Capital Market Internationalization Under the Gold Standard, 1870±1914', International Organization, Vol. 52, No. 1, Winter 1998: 1±34.

Select Bibliography 271 Versluysen, EugeÁne L., The Political Economy of International Finance, Westmead: Gower, 1981. Webb, Michael C. and Krasner, Stephen D., `Hegemonic stability theory: an empirical assessment', Review of International Studies, Vol. 15, No. 2, 1989: 183±98. Webb, Michael C., The Political Economy of Policy Coordination: International Adjustment since 1945, Ithaca: Cornell University Press, 1995. Weber, Max, Political Writings, edited by Peter Lassman and Ronald Spiers, Cambridge: Cambridge University Press, 1994. Weiss, Linda, The Myth of the Powerless State: Governing the Economy in a Global Era, Oxford: Polity Press, 1998. Weiss, Linda and Hobson, John M. States and Economic Development: A Comparative Historical Analysis, Cambridge: Polity Press, 1995. Zysman, John, Governments, Markets, and Growth: Financial Systems and the Politics of Industrial Change, Oxford: Martin Robertson, 1983.

Index Bold type indicates key concepts defined or discussed at length. American Bankers' Association, 107, 135±6 Amyx, Jennifer A., 178, 207 Aronson, Jonathan, 71 Ashley, Richard K., 31 Asian financial crisis, 179±84 causes of, 180±2 comparison to Debt Crisis, 180, 182±4 Asian Monetary Fund, 184 Baker, James, 132 Bank for International Settlements (BIS), Basle Agreements, 55, 82 Basle Concordat and, 91±2 crises and, 120, 163, 187±8 Euromarkets and, 107 financial innovation and, 124, 150, 188 Herstatt crisis and, 89±92 monetary agreements and, 55, 67 overlending and, 95, 193 see also Basle Accord Bank of America, 97, 116 Bank of England (BoE), 14 Basle Accord and, 137, 139 Big Bang and, 130±1 bureaucratization of, 130, 158, 190 coordinator of capitalisms and, 43 ERM crisis and, 162±3 Euromarkets and, 62±3, 67, 75 origins of, 26±7 relationship with US, 67, 90, 122, 137, 140 Bank of Japan (BoJ), 12, 57 cheap money policy and, 127, 147, 179 financial reform and, 106±7, 177±8 overlending and, 122 relationship with US, 75, 133, 176

Bankers Trust, 97, 135, 169 Barclays, 185, 194 Basle Accord, 5 as international regime, 5±6, 135±7, 140, 142, 155, 186, 188±9 commercial banks and, 135±7, 139, 143, 155, 175±6 costs to Japan, 135, 138±9, 148, 174±6, 178, 188 formation of, 136±8 strategy within, 5, 21, 114, 127, 135±8, 170, 189 US government debt and, 138±9 see also Capital adequacy rations Beason, Dick, 191 Bergsten, C. Fred, 126, 194 `Big Bang' (1986) (UK), 93, 130±1, 145, 153, 157, 190 `Big Bang' (1996) (Japan), 179, 191 `big bank' thesis, 140±4, 169 `Big Four' (Nomura, Daiwa, Nikko, and Yamaichi), 94, 132±3 `Big Three' (Deutsche, Dresdner, and Commerzbank), 94 `black-box' view of the state, see neorealism, see neoliberalism Block, Fred, 64 Boyer, Robert, 160 Brazil, 119, 192±3 Bretton Woods, as international regime, 59, 78±81, 103 collapse of, 71±2, 74, 76±81, 83, 85, 163 `exorbitant privilege' and, 66±8, 74, 80, 199, 201 Gold Pool and, 55±6, `n-1' problem, 49, 54, 57±59, 100, 124, 201 origins of, 48, 50±4 272

Index 273 US intermediaries involvement in, 53, 70, 76, 79, 201 US structural power within, 24, 46, 65, 67, 69, 79±81, 103, 201 Britain, 1976 crisis, 101 Asian financial crisis and, 183 Basle Accord and, 114, 136±140 direct financing and, 68, 94, 108, 130±1, 145, 155, 158, 183, 206, 210 entrepreneurial capitalism and, 42 ERM crisis and, 162 Euromarkets and, 62±3, 67±8, 107±9, 145 European center for finance as, 145, 153, 158 financial reform, 26, 75, 93, 109, 130±1, 154, 157, 190, 194 Financial Services Authority (FSAb) (Britain), 14, 190 hegemonic power and, 8, 54, 141, 203±4, 210 informal competitive system and, 11, 13±15, 145, 172, 183, 194, 206 innovation and, 26, 114±15, 130 interactive embeddedness and, 15, 26, 43, 130, 145, 158, 183, 194, 210 international regimes and, 72, 83±4, 107, 136±140 internationalization, 13±14, 145, 153±4, 158, 183, 190, 194, 210 monetary instability, 54±5, 67±8, 72, 83, 101, 132, 162 Pax Britannica and, 8, 43, 125 recession, 145, 157 relations with Germany, 141, 145±6, 158 relations with Japan, 138, 146, 148, 174, 177 relations with US, 67, 72, 80, 136±9, 141, 146, 158, 174, 177, 187, 199 socialization of finance within, 26, 43, 67, 145, 153, 158, 194, 210

state capacity, 17, 43, 54, 130±1, 157, 203±4, 210 structural power in international finance, 26, 43, 54, 67, 105, 145, 199, 203±4 see also Bank of England; Big Bang (1986) (UK); City of London Bull Revolution, 21, 167±74 Bundesaufsichtsamt f uÈr den Wertpapierhandel, 13, 164, 192 Bundesbank, 13 Basle Accord and, capital controls and, 56±7, 128±9 ERM crisis and, 161±2 `Euro-Fed' and, 160 monetary instability, 75±7, 161±2, 182 regulatory change and, 128±9 relationship with US, 75±7, 91, 140 Burma (Myanmar), 230 n. 140 Burn, Gary, 24, 61±2 capital adequacy ratios, downgrading of, 73, 95±6, 119, 123±4, 127, 136, 138, 189 Basle Accord and, 135±40, 155, 167, 174±8, 188±9 capital controls, 5, 20 advocacy of, 50±2, 57, 82±4, 100, 162, 187, objections to, 52±3, 67, 78, 84, 100, 126±7, 167, 187, 201 removal of, 56, 76, 93, 109, 128, 146 carry-trades, 165, 180 Carter administration, 101±3 Cerny, Philip G., 15, 142±3, 149 Certificates of Deposit (CDs), 63, 75, 94, 107, 109, 126 change, understanding and explaining, in international finance, xi±xii, 2±3, 5±6, 9±10, 16±21, 24, 26, 29, 45±52, 57, 59, 61, 64±5, 68, 72, 78, 80, 83±6, 102±4, 112±13, 121,134±5, 141, 150, 152±5, 174,183±4, 187±9, 197±212 in international political economy, xi±xii, 1±5, 7±8, 10, 14±19, 22±4, 26, 35±8, 40, 43±7, 59, 65, 67±8,

274 Index change, understanding ± continued 80, 100, 102±4, 121, 127±8, 135, 142, 150, 154±5, 183±4, 187, 197±212 in international relations, xi±xii, 2±3, 6±8, 17±19, 31, 45±7, 33, 36, 38, 80, 100, 198±212 Chase Manhattan, 97, 108, 193 China, 62, 86 Citibank, 63, 92, 107, 116 Citicorp, 97, 135, 193 Citigroup, 193 City of London, Big Bang and, 93, 130±1, 145, 153, 157, 190 bureaucratization of, 130, 158, 190 Euromarkets and, 62±3, 67, 88, 109 financial center for Europe, 67, 88, 145, 154, 158, 163, 190 financial internationalization, 13, 145, 153, 158, 183, 190, 194, 210 foreign competition in, 53, 67, 84, 158, 191 `old boys club', 93, 130, 190 public involvement with, 153, 158, 190, 194 state power and, 62±3, 190 Clinton administration, 157, 167, 171, 184, 187, 196 Cohen, Benjamin J., 4, 71, 78, 121 Coleman, William D., view of centralized power, 16, 207 view of international regimes, 140, 188 view of state capacity, 15±16, 207 commercial banks, Basle Accord and, 135±7, 139, 143, 155, 175±6 direct financing and, xi, 1, 10, 20±1, 73±4, 89, 93, 98, 112±14, 119±120, 124, 134±5, 141, 143±4, 151±2, 155, 157, 166, 169±70, 186, 193, 200, 206, 211 financial reform to US, 21, 112±14, 116, 118, 135, 143±4, 152, 168±9, 189±90, 196, 200, 211 Japan and, 12, 94, 135±7, 139, 147, 150, 158±9, 175±8, 183

regulatory protection of in US, 11, 121, 123, 134±5, 141±2, 200 US public and, 49, 110, 123, 134, 152±3, 168, 196, 200, 211 Commerzbank, 94, 195 Community Reinvestment Act of 1977, 106, 110, 168, 196, 211 Connally, John, 71, 81±2 constitutive state, 41, 3, 10, 23, 28, 31, 39±41, 44±5, 47, 88, 99±100, 197, 201, 204±5, 212 Continental Illinois, 97, 123 Cooper, Richard N., 55 credit cards, 60±1, 116, 149, 154 credit, consumer, indebtedness and, 117, 170, 198 inhibition of, 159, 195, 207 regulation to support, 154, 169 securitization and, 149, 151, 156, socialization of, 21, 27, 60±1, 68, 106, 110, 116±7, 149, 170±3, 198±9 credit-money, constitutive of capitalism as, 27±9, 53, 118, 203 formal and substantive validity of, 24, xi, 19, 22, 24±9, 40, 74, 170, 173, 202 innovation and, 25±7, 118 structural power and, xi, 19, 24, 26±8, 43, 53, 69±70, 104, 202±3 creditors' advantage of over debtors, 7, 17, 51 cross-shareholding, international comparisons, 172 Daiwa Bank, 94, 132, 176 D'Arista, Jane, 144, 189 de Gaulle, Charles, 66, 77 Debt Crisis, British approach to, 122, 168 causes of, 119±120 comparison to Asian financial crisis, 180±4 comparison to Tequila crisis, 165±7 German and Japanese approach to, 121±2, 182 international regimes and, 120±1

Index 275 US approach to, 97, 112, 114, 119±124, 136, 167±8, 201 debtors' advantage of over creditors, 17, 125, 134 derivates trading, xii, 115, 150, 156, 179, 186 Deutsche Bank, 129, 145, 164, 192,195 diffusion of power, 44, 204 state capacity and, 23, 36, 41, 43±5, 68, 98±9, 196, 204, 207 structural power in international finance and, 43, 64, 68, 163, 207 Weber and, 40±3 direct financing, xi±xii, 1±2 Bretton Woods and, 73, 76 Britain and, 68, 94, 108, 130±1, 145, 155, 158, 183, 206, 210 character of financial systems and, 10±14, 200, 206 commercial banks' role in, xi, 1, 10, 20±1, 73±4, 89, 93, 98, 112±14, 119±120, 124, 134±5, 141, 143±4, 151±2, 155, 157, 166, 169±70, 186, 193, 200, 206, 211 contemporary origins of, 49 credit-money and, 23±4, 29, 203 Debt Crisis and, 114, 119, 124, 135, 151, 180 differentiation from disintermediation, xi±xii, 1±2, 217 n. Euromarkets and, 49, 61, 75, 83±4, 95, 105, 108 fragmented nature in crises, 165, 180, 183, 193 Germany and, 94, 108, 128±131, 145±6, 154±5, 159, 164, 169, 182, 192, 202±3, 206 indebtedness and, 17, 45, 101±2, 113±15, 117, 133±4, 149±50, 152, 156±7, 171, 196, 198±9,202 innovation and, 24, 47, 98, 110±11, 113±18, 124, 128±9, 135, 146, 148±50, 154, 156±7, 167±8, 170±1, 176, 189, 199±200, 203, 211 interactive embeddedness and, 3, 16, 19, 46, 186, 197, 199±200, 210±11

international regimes and, 5, 82±4, 92, 115, 140, 184 investment banks' role in, 73±4, 98, 124, 141, 151, 169±70, 186, 193 Japan and, 94, 108, 111, 113, 124, 128, 131, 146, 153, 182, 202±3 mass privatization of credit, 47, 71, 73 monetary politics and, 20, 72, 76, 82±5, 98, 105, 115, 124, 151, 199 non-bank intermediaries and, 93, 98 petrodollars and, 73, 95 securitization and, 106, 134, 149, 151, 156±7, 170, 193 socialization of in the US, 17±19, 21, 45, 49, 73, 77, 93±4, 106, 110, 113, 117±18, 129, 141, 152±4, 157, 159, 168, 170±2, 192, 196, 198±9, 200, 203, 211 state capacity and, 3, 5, 10, 16, 41, 46±7, 47, 129, 155, 2001, 203, 206, 210 structural power and, 2, 7, 9, 16, 18±19, 20±1, 29, 43, 46±7, 50, 68, 85, 94, 98, 101, 106, 111, 113, 150, 183, 192, 197, 199±204, 210±12 US promotion of, 2, 17, 48, 60, 65, 68, 70±1, 94, 101, 113, 141, 143, 150±1, 167, 171, 178, 202, 210±12 `victory of dividends' and, 43, 193, 210±11 Wall Street and, 3, 18, 70±1, 98, 112±13, 117, 150, 171, 199±204 Washington and, 3, 18, 45, 70±1, 77, 98, 112±13, 135, 144, 150±2, 166±8, 171, 189, 199±204 disintermediation, see direct financing Dresdner Bank, 94, 158, 195 Dymski, Gary, 196 embeddedness, 3, 18, 41, 165, 206±8 finance and American society, 2, 18, 21, 45, 106, 110, 113, 118, 149, 152, 157, 170, 178, 196±7, 199±200, 204, 210±11 finance and British society, 26, 130, 145, 153, 158, 210

276 Index embeddedness ± continued finance and German society, 128±30, 154, 164, 192 finance and Japanese society, 153, 178, 195±6, 207 see also interactive embeddedness; Weberian historical sociology (second wave) ERM crisis, 160±5, 191, 194 Euro-Fed, 159±60, 191, 194 Euromarkets, 20, 49, 61±5 67±8, 73±5, 79, 82±4, 87±8, 95, 97±8, 102, 107±11, 116, 129, 131, 145, 201±2 European Community, 146, 161±2 European Monetary System, 109, 154, 160 Exchange Stabilization Fund (ESF), 58±9, 166±7 Federal Deposit Insurance Corporation (FDIC) (US), 11, 90, 96, 134 Federal Reserve (Fed) (US), 11 Basle Accord and, 136±9 Euromarkets and, 67, 74, 107±11 financial reform and, 96, 107±8, 110, 135, 144, 149, 152, 169, 189±91, 210 international passivity and national activism, 60, 77, 90±1 monetary instability, 75±7, 80±2, 104±5, 107, 162, 165±6, 183 relationship with BoE, 67, 90, 122, 137, 140 relationship with BoJ, 75, 133, 176 relationship with Bundesbank, 75±7, 91, 140, 191±2 relationship with Wall Street, 18, 105, 135, 144, 152, 169, 186±7, 210 `stagflation' and, 72, 101 see also US, financial reform financial innovation, 2 commercial banks, 73, 75, 92, 102, 108 government led, 59, 76±7, 85, 93, 102, 105, 115, 117, 128, 146, 171, 189, 211

indebtedness and, 17, 45, 101±12, 113±15, 118, 133±4, 149±50, 156±7, 164, 171, 199, 202 interactive embeddedness and, 17, 47, 68, 94, 105, 128±9, 168, 200, 206 international passivity and national activism, policies of, and, 2, 47, 58, 88, 98, 102, 116, 168, 200, 206 investment banks, 73, 75, 92, 94, 102, 108, 110 structural power in international finance and, 16, 24, 26±7, 47, 60, 67±8, 98, 111, 150, 157, 168, 176, 200, 203, 206, 211 universal banks, 57, 94 US `pressure-pot' financial system and, 11, 15, 58, 88, 102, 124, 167, 200, 206 financial liberalization, 4, 206 crises and, 179±80, 192±3 government support for, 127±8 international regimes and, 56, 124, 160 US promotion of, 47, 72, 124±5, 128, 155, 157, 159, 164, 167, 174 Yen±Dollar Agreement and, 124±8 see also Big Bang (1986); Big Bang (1996); Finanzplatz Deutschland Financial Services Modernization Act of 1999, 152, 189±90, 193, 196, 210 Financial Services Authority (FSAb) (Britain), 14, 190 Financial Supervisory Agency (FSAj) (Japan), 12, 191 Finanzplatz Deutschland, 113, 145±6, 154, 164, 192 Foreign Direct Investment Program, 60, 63 Frankfurt Stock Exchange (FSE), foreign competition and, 109, 154, 194 internationalization of, 113, 145±6, 160, 164, 194 low public participation with, 131, 145, 192

Index 277 Franklin National Bank, 20, 90±2, 95, 193 Friedberg, Aaron, 9, 174 Galbraith, John K., 60 Geisst, Charles, 75, 173 Germany, Asian financial crisis and, 180, 182±3 Basle Accord and, 136±8, 191 capital controls, 57, 82, 128±9, 163 creditor status, 17, 199, 202 cross-shareholdings and, 146, 169, 172 Debt Crisis and, 119±22, 124, 180, 182 direct financing and, 94, 108, 128±31, 145±6, 154±5, 159, 164, 169, 182, 192, 202±3, 206 dominance of banking in system, 57, 89, 94, 114, 129±30, 141±2, 146, 163±4, 169, 173, 182, 192, 195, 207 ERM crisis and, 154, 160±3 Euro-Fed and, 160±1 Euromarkets and, 82, 88, 107±8, 177 `financial mercantilism', 57, 129 financial reform, 57, 93, 109, 113, 116, 128±30, 146, 153, 156, 163, 192, 195 hegemonic power within Europe, 57, 109, 145, 194 informal cooperative system, 11±15, 146, 206 interactive embeddedness and, 13, 57, 93, 109, 129±30, 145±6, 161, 163±4, 192 international regimes and, 55, 67, 72, 82, 103±4, 107, 136±8, 146, 157, 163, 191 internationalization, 103, 106, 109, 116, 145, 156±8, 159±60, 194±5 monetary politics, 55±7, 67±9, 75, 77±8, 101, 103±5, 124, 126, 131±3, 161±3, 194 recession, 109, 161±3 relations with Britain, 63, 140, 145, 162±3 relations with Japan, 120, 140, 148

relations with US, 57, 63, 78, 80, 88, 103, 105, 127±9, 132±3, 140, 146, 161, 163±4, 195, 199, 202±3 reunification, 154, 159, 161±2 Russian financial crisis and, 182, 184±5 socialization of finance within, 57, 129±30, 145, 153, 159±60, 163±4, 173, 192, 206 state capacity, 17, 91, 163, 206 structural power in international finance, 2, 57, 131, 163, 170, 191, 201 see also Bundesbank; Finanzplatz Deutschland; Frankfurt Stock Exchange Gilpin, Robert, hegemonic decline, 8±9, 124±5, 133 Japan and, 7, 17, 125 view of Weber and, 38, 40 Glass-Steagall Act, 11, 135, 152, 161, 168, 189±90, 210 globalization views of the state, 4±5, 15, 154, 188±9, 206 Gold Pool, see Bretton Woods Gramscian view of IPE, 35, 221±22 n. Grasco, Richard, 151, 171 Griffiths, Martin, xiii, 205 Group of 10, 55, 81 Hegemonic stability theory, 7±8, 10, 69, 143 hegemony, British, 8±9, 125 heuristic value of debate, 4, 6±10, 18, 69±70, 143, 205±6 international regimes and, 4, 31, 46, 84, 89, 120±1, 136, 139, 141±2, 144, 206 Japanese, 7, 125, 141 US, 6±9, 15, 17, 21, 46, 49±50, 65, 68±70, 72, 78±80, 84, 87, 89, 103±5, 120±1, 125, 133±4, 136, 139, 140±4, 152, 170, 174, 205±6 view of power as resources, 8, 17±18, 79, 87, 89, 105, 121, 125, 142±3, 205

278 Index hegemony ± continued view of the state, 17±18, 34, 99, 120±1, 125, 205±6 see also hegemonic stability theory Helleiner, Eric, 87, 89, 124, 162±3 Herstatt Bankhaus, 20, 89±93, 95, 193 historical sociology, see Weberian historical sociology (second wave) Hobson, John M., xiii international/national vortex, 46 view of hegemony debate and, 9 view of the (constitutive) state, 44±6 see also constitutive state; interactive embeddedness; state capacity; Weberian historical sociology (second wave) Iguchi, Toshihide, 176 Ikenberry, G. John, 53 indebtedness, corporate in the US, 17, 113, 117, 149, 156±7, 199 financial innovations and, 17, 45, 101±2, 113±15, 118, 133±4, 149±50, 156±7, 164, 171, 199, 202 personal in the US, 17, 45, 113, 117, 125, 149±50, 152, 157, 170, 196, 198 public in the US, 17, 102, 113±15, 125, 148, 170±1, 199 inflation, 6±7, 53, 59, 64, 66, 72, 74±5, 82, 84, 100±1, 107, 109±10, 112, 131, 133, 156, 161, 170±1, 173, 180 Ingham, Geoffrey K., 27±8, 203 innovation, see financial innovation institutional investors, 61, 113, 117±18, 133, 153, 172±3 interactive embeddedness, 2±3 between Washington and Wall Street, 2, 15±16, 21, 45, 48, 50, 53, 59, 65, 68, 73, 79±80, 83, 85±6, 106±7, 110±11, 125, 148, 168, 189, 197, 199±200, 204, 207, 210±11 state capacity and, 2±3, 5±6, 15, 19, 21±3, 42, 44±5, 47, 83, 98, 105,

128, 153, 156, 176, 197, 200, 204, 207±8, 210 structural power and, 18, 45, 50, 80, 83, 153, 189, 200, 204, 208 Interest Equalization Tax (IET), 59±60, 63, 108 International Banking Facilities (IBF), 111, 116 International Clearing Union (ICU), 51±2, 84 International Lending Supervision Act (ILSA), 122±3, 136, 180 International Monetary Fund (IMF), 54±5, 67, 72, 77, 84±6, 88, 96, 101, 120, 136, 166±7, 180, 183±5, 188, 192±3 International Organization of Securities Commissions (IOSCO), 140, 142, 180 international passivity and national activism, policies of, banks support for, 49, 91, 125, 201 state capacity and, 3, 15, 19, 22, 44±7, 83, 80, 100, 129, 152, 197, 200, 204 structural power and, 59, 67, 81, 111, 150, 197, 200 US use of, 19, 21, 47, 49±50, 58±9, 63, 65, 73, 75, 80, 91, 100, 106, 111, 125, 129, 148, 150, 152, 157, 161, 164, 166±7, 197, 200±1 international political economy (IPE) theory, dominant perspectives within, xii, 2±3, 4, 6, 14±16, 19, 22±4, 29, 31±40, 65, 71, 79±81, 98±100, 103±4, 113, 125, 133±4, 141±2, 167, 176, 186, 200, 204±9, 211±12 main debates within, 4±9, 14±16, 72, 79±81, 125, 142±3, 200, 204±9, 211±12 structural power and, xii, 5, 8, 18, 22±3, 36, 44±7, 65, 71, 79±81, 98, 125, 134, 142±3, 200, 204±9, 211±12 Weber and, xii, 38±43 see also neoliberalism

Index 279 see also neorealism see also new realism international regimes, advocacy of, 6±7, 46±7, 72, 83±4, 88, 91±2, 123, 133, 135±6, 152, 167, 186±8 international finance regimes, 5±6, 55±6, 84±5, 91, 113, 123, 135±40, 146, 152, 155, 160±1, 163, 167, 184, 186 theory of, 5±6, 9, 29±34, 46, 50, 68, 80, 89, 92, 99, 103±4, 120±1, 142, 174, 184, 188±9, 201, 204±5 US lack of support for, 2, 6, 21, 46±7, 50, 72, 80, 84±6, 89, 112±13, 120±4, 135±40, 142, 155, 174, 187±9, 197, 201, 204, 206 investment banks, 10, 12 direct financing and, 73±4, 98, 124, 141, 151, 169±70, 186, 193 financial reform in US and, 158±9, 168±9, 189 IOSCO and, 140 Japan and, 94, 126, 132 US public and, 49, 144 J. P. Morgan, 97, 135, 144, 169, 186±7, 193, 210 Japan, Asian financial crisis and, 97,179±85 Asian Monetary Fund and, 184 Basle Accord and, 114, 135±9, 148, 156, 174±6, 178, 186, 188 creditor position, 17, 125, 134, 139, 153, 199, 201±2 Debt Crisis and, 121±2, 182 direct financing and, 94, 108, 111, 113, 124, 128, 131, 146, 153, 182, 202±3 dominance of banking in system, 12, 57, 88, 114, 119, 122, 126±7, 132±3, 140±1, 146±7, 169, 172±3, 182±3, 195, 203 Euromarkets and, 62±3, 108, 111, 127, 177 financial reform, 85, 88, 94±5, 106±8, 111, 113, 116, 124±8,

138, 154±6, 158±9, 174±9, 190±1, 195, 207 Financial Supervisory Agency (FSAj) (Japan), 12, 191 formal cooperative system, 11±12, 14±15, 122, 127±8, 132±3, 146±7, 153, 169, 175, 206±7 gaiatsu (external pressure), 128,159 innovation and, 85, 88, 116, 126±8, 192 interactive embeddedness and, 57, 94, 109, 124±8, 138, 146±7, 153, 156, 158±9, 167, 176±9, 186, 195±6, 207 international regimes and, 72, 135±9, 183±4, 187±8 internationalization, 103, 125±6, 158, 195 `Japan premium', 123, 177±9, 183, 186, 191 jusen, 147, 176, 191 Liberal Democratic Party and, 158, 175 monetary politics, 68±9, 75, 77±8, 80, 87, 101, 103, 105, 124, 126±7, 131±3, 135±8, 147, 174±7, 179, 183±4, 199 oil crisis and, 87±8 Pax Nipponica and, 7, 125, 140±2, 174 prolonged financial crisis and, 21, 148, 158±9, 174±9, 186, 188, 195, 207 relations with Britain, 62±3, 122, 138, 148, 167, 177 relations with Germany, 128, 148, 167 relations with US, 12, 17, 59, 63, 75, 77±8, 80, 101, 103, 113, 122, 124±8, 131±2, 146, 148, 159, 167, 170, 174, 177±9, 183±4, 186, 191, 195, 199, 202 socialization of finance within, 57, 111, 116, 125±6, 128, 146±7, 153, 158±9, 172±3, 175, 178±9, 192, 195±6, 207 state capacity, 21, 35, 94, 109, 128, 141, 146±7, 153, 156, 167, 174±6, 178±9, 190±1, 207

280 Index Japan ± continued `strong state' as, 21, 35, 141, 174±5, 198±9, 207 structural power in international finance, 2, 72, 86, 88, 94, 112, 124±8, 131, 134, 147±8, 153, 184, 199, 201±2 see also Bank of Japan (BoJ); `Big Bang' (1996); Ministry of Finance (MoF); Tokyo Stock Exchange (TSE) Johnson administration, 60 Kahler, Miles, 120 Kapstein, Ethan B., 87 view of domestic politics and, 65, 176±7, 188, 206 view of international financial regimes and, 138, 186, 188±9, 206 Katada, Saori, 167 Kennedy administration, 58±9 Keohane, Robert O., `disease of the strong', 9, 78±9, 142 `power disinvestment', 34, 79, 103±4 research program, 30, 32, 34, 39, 187 view of domestic politics, 34, 79, 104, 206 view of hegemonic decline, 7, 68±70, 78±9, 81, 89, 103±4, 112 view of international regimes, 29±30, 32, 34, 68, 78±9, 87, 92, 187 view of power as resources/ centralized command, 69, 99, 104 view of state rationality, 30, 34, 78±9, 99 view of Weber, 38±9 Keynes, John Maynard, 50±2 Kindleberger, Charles P., 70, 79 Krasner, Stephen D., view of domestic politics, 80, 175±6 view of hegemonic decline, 7, 17, 80±1, 120±1 view of international regimes, 32±3, 120±1

view of power as resources/ centralized command, 80, 105±6, 120±1 view of state rationality, 32±3, 80, 105±6, 204 view of strong states, 15, 34, 175±6 view of Weber, 38 Krugman, Paul, 192 Leaver, Richard, xiii, 34 London Stock Exchange (LSE), internationalization of, 130±1, 194 liberalization and, 93, 130±1 see also City of London; Big Bang (1986) Long Term Capital Management, 186±7 Long, David, 40 Mann, Michael, diffused power and, 45 `fiscal transnationalism' and, 9 `universal infrastructure' and, 8, 203 view of the state and, 39 view of Weber and, 39 see also Weberian historical sociology (second wave) Martin, Lisa L., 33 Matsui, Kathy, 177 May Day 1975, 89, 93±4, 130 mergers, international comparisons, 169, 193±4 Mexico, 58, 119±20, 122, 165±7 Ministry of Finance (MoF) (Japan), 12, 57, 141 Basle Accord and, 138 `Big Four' and, 132 financial reform and, 94, 109, 126, 128, 146±7, 175, 178±9, 190±1, 195 overlending and, 122, 136±7, 179±80 prolonged financial crisis and, 146±7, 159, 175±6, 178±9, 190±1 relationship with US, 122, 125±7, 141, 167, 176

Index 281 Ministry of International Trade and Industry (MITI), 12, 175 Moffitt, Michael, 60, 92, 97, 108 Moran, Michael, 67, 176 mortgage-backed securitization, 106, 119, 134, 149, 157±8, 192 n-1 problem, see Bretton Woods neoliberalism, `black-box' view of the state and, reductionism and, 2±3, 8, 31±2, 40, 65, 99±100, 205±6, 212 equilibrium analysis and, 30, 35 hegemonic decline and, 49±50, 65, 78, 89, 205 international regimes and, 5±6, 29±30, 32±4, 89, 99, 201 lack of liberalism within, 32, 40 microeconomics and, 24±5, 29±31, 65, 204±5 power as resources/centralized command and, 3, 34±5, 50, 89, 99, 104±5, 121, 141, 205 research program of, 32, 39, 205, 207 sovereignty and, 32, 34, 40, 100, 204 state capacity and, 2±3, 22, 32, 34±5, 100, 174±5, 204±6, 212 state rationality and, 32±4, 37, 65, 78±9, 98±9 state versus market and, 65, 204±5 `strong state' and, 3, 34±5, 50, 89, 141±2, 174±5 systemic theory and, 31±4, 39±40, 65, 100, 204±5 neorealism, `black-box' view of the state and, reductionism and, 2±3, 31±2, 40, 65, 99±100, 205±6, 212 equilibrium analysis and, 30, 35 hegemonic decline and, 49±50, 65, 78, 120±1, 205 international regimes and, 32±4, 89, 120±1 microeconomics and, 24±5, 30±1, 65, 99, 204±5 power as resources/centralized command and, 3, 34±5, 50, 68,

79±80, 89, 105±6, 120±1, 141, 205 sovereignty and, 32, 34, 40, 100, 204 state capacity and, 2±3, 22, 32, 34±5, 44, 100, 174±5, 204±6, 212 state rationality and, 32±4, 37, 65, 80, 98±9, 105±6, 204 state versus market and, 65, 204±5 `strong state' and, 3, 15, 34±5, 50, 141±2, 174±5 systemic theory and, 31±4, 36, 39±40, 65, 100, 204±5 new realism, 2, 19, 36 balance of power and, 36 `black box' view of the state, 2±3, 211±12 hegemonic decline and, 36, 142 international regimes and, 142 state capacity and, 2±3, 22, 36, 204±6, 212 state versus market and, 36±7, 204 structural power and, 35±6 New York Stock Exchange (NYSE), crises and, 132, 148 liberalization of, 93±4, 130 public participation and, 61, 131, 171±2 see also Wall Street Nixon administration, 74±5, 79±81, 85, 112 Non-bank financial intermediaries (NBFIs), 93, 98, 110, 116, 119, 134±5 norms, 3, 31 Odell, John S., 2 Organization for Economic Cooperation and Development (OECD), 56, 88, 138, 143, 173, 186, 196 Organization for Petroleum Exporting Countries (OPEC), see petrodollars overlending, British, 73, 119 financial crises and, 119±20, 122, 179±82 German, 73, 119, 185 Japanese, 12, 73, 97, 119, 122, 136, 147±8, 175±180

282 Index overlending ± continued state responses to, 96±7, 120, 122, 136, 179, 185±8 US, 20, 73, 95±8, 119±20, 136, 180, 193 Parsons, Talcott, 39 Pax Americana, 8, 125 Pax Britannica, 8±9, 43, 125 Pax Nipponica, 8, 125, 174 petrodollars, 20 Euromarkets and, 62, 73, 86±7, 95 international regimes and, 72±3, 86, 88±9, 201 OPEC and, 62, 86 US structural power and, 87±9, 201 Plaza Accord, 128, 131, 138, 174, 179 Pohl, Otto, 161 Porter, Tony, 129 Posen, Adam, 194 power, credit-money and, xi, 19, 24, 26±8, 43, 53, 69±70, 104, 202±3 resources/centralized commandbased view of, 3, 34±5, 50, 68, 79±80, 89, 99, 105±6, 120±1, 141, 205 see also diffusion of power Reagan administration, 111, 116±18, 124±5, 131 Regan, Donald, 112, 126 Reich, Robert, 132 rentier class, `productive' investment and, xi, 19, 41±3, 51, 193, 211 state and, xi, 9, 19, 41±3, 210 `victory of dividends' and, 9, 42, 210±11 Reus-Smit, Christian, 31 Ruggie, John G., 48 Russia, 40, 86, 185±6 Savings and Loans (S&L) crisis, 116, 134±5, 143, 196 Schmiegelow, Henrik & MicheÁle, 139 Schmitz, Ronaldo, 192 Schumpeter, Joseph A., 29±30, 189

Securities and Exchange Commission (SEC) (US), 11, 92, 135, 140, 157 securitization, 1, 10, 217 n. Basle Accord and, 138, 170, 188±9 consumer credit and, 21, 106, 119, 134, 149, 155±6, 170, 192 financial socialization and, 108, 118, 149±50, 157, 170, 193, 199 interactive embeddedness and, 44±5, 148±9 mortgage-backed, 106, 119, 134, 149, 157±8, 192±3 promotion of direct financing and, 106, 124, 134, 149, 151, 156±7, 170, 192±3 proportion of US GDP, 170, 192 US regulation supporting, 118, 149±50, 157, 200 US structural power and, 21, 118, 124, 134, 149±50, 152, 189, 200 share-ownership, international comparisons, 172 Skocpol, Theda, 44, 135, 230 n. Smithsonian Agreement, 81±3 Snidal, Duncan, 69 sovereignty, 32, 34, 37, 40, 100, 204±5 Special Drawing Rights (SDRs), 72, 85 speculation, currency, 51, 56, 58, 75, 92, 109, 182, 187 state capacity, 2±3 Britain and, 17, 43, 54, 130±1, 157, 203±4, 210 diffusion of power and, 23, 36, 41, 43±5, 68, 99, 125, 196, 204, 207 direct financing and, 3, 5, 10, 16, 41, 46±7, 47, 129, 155, 201, 203, 206, 210 financial policy, theory of, and, 15±16, 99±100, 156, 206±7 Germany and, 17, 91, 163, 206 interactive embeddedness and, 2±3, 5±6, 15, 19, 21±3, 42, 44±5, 47, 83, 98, 105, 128, 153, 156, 176, 197, 200, 204, 207±8, 210 international passivity and national activism, policies of, and, 3, 15, 19, 22, 44±7, 83, 80, 100, 129, 152, 197, 200, 204

Index 283 interplay of domestic and international realms, 2±3, 15, 18, 22±3, 37, 39, 45±7, 49, 65, 71, 83, 88, 98, 102, 129, 163, 197, 200, 204±5 Japan and, 21, 35, 94, 109, 128, 141, 146±7, 153, 156, 167, 174±6, 178±9, 190±1, 207 neoliberalism and, 2±3, 22, 32, 34±5, 100, 174±5, 204±6, 212 neorealism and, 2±3, 22, 32, 34±5, 44, 100, 174±5, 204±6, 212 new realism and, 2±3, 22, 36, 204±6, 212 non-realist view of, 43±4, 208 `strong state' and, 3, 15, 22±3, 34±5, 50, 125, 141±2, 153, 174±5, 207 structural power and, 2±3, 5±6, 15, 22±3, 44±7, 83, 98, 125, 197, 200, 204, 207±8, 211 US and, 2, 15±17, 19±21, 36, 45±7, 83, 98, 105, 125, 129, 156, 197, 200, 204, 207, 209±11 Weberian view of, 22±3, 41, 43±5, 83, 100 Strange, Susan, `bargaining' approach and, 36, 227 n. critique of neoliberalism and neorealism, 31, 35, 37, 100, 104, 207 Euromarkets and, 61, 74 `new realism' and, 19, 35±8, 207±8 political importance of credit, 35 structural power and, xii, 35±7, 207, 218 n. Tequila crisis and, 165 view of state-market relations, 36±7, 207±8 view of US structural power in international finance, 36, 66, 74, 134 structural power, 2±3, 5±9, 18, 200, 204±5, 208, 212 credit-money and, xi, 19, 24, 26±8, 43, 53, 69±70, 104, 202±3 diffused power and, 43, 64, 68, 163, 207

interactive embeddedness and, 18, 45, 50, 80, 83, 153, 189, 200, 204, 208 international passivity and national activism, policies of, and, 59, 67, 81, 111, 150, 197, 200 international political economy (IPE) theory and, xii, 5, 8, 18, 22±3, 36, 44±7, 65, 71, 79±81, 98, 125, 134, 142±3, 200, 204±9, 211±12 interplay of domestic and international realms and, 2±3, 15, 18, 22±3, 37, 39, 45±7, 49, 65, 71, 83, 88, 98, 102, 129, 163, 197, 200, 204±5 state capacity and, 2±3, 5±6, 15, 22±3, 44±7, 83, 98, 125, 197, 200, 204, 207±8, 211 Strange, Susan and, xii, 35±7, 207, 218 n. US structural power in international finance, xi, 2, 6±9, 16, 18±21, 24, 26±7, 29, 36, 43, 46±7, 48±50, 54, 57, 60, 64±5, 67±9, 70, 72, 79±81, 83, 85±9, 91, 94, 98, 101, 103, 105±6, 111±13, 117±18, 121, 124±8, 131, 134, 140, 145, 147±50, 152±3, 157, 162, 168, 176, 183±4, 189, 192, 197, 199±204, 210±12 `victory of dividends' and, 21, 43, 155, 197±9, 210±11 Weberian historical sociology and, xii, 22, 38, 44±5, 211±12 Takugin (Hokkaido Takushoku Bank), 178, 183 tax, capital controls and, 51, 59±60, 128±9, 163±4 Euromarkets and, 61, 88 financial crises and, 122, 161, 167, 179, 185 US `tax' on trading partners (`fiscal transnationalism'), 9, 47, 78, 199 Tequila Crisis, comparison to Debt crisis, 165±7

284 Index Tequila Crisis ± continued US involvement in, 165±7, 187, 193 Thailand, 180, 182 Tietmeyer, Hans, 182 Tokyo Stock Exchange (TSE), 112, 131 collapse of, 132±3, 148, 158, 175±6 foreign competition and, 127, 158±9 internationalization of, 85, 127±8, 195 real estate and, 138, 148 Universal banks, 13, 142, 154, 161, 169 US, Asian financial crisis and, 181±3 Bull Revolution, 21, 168±74 corporate indebtedness, 17, 113, 117, 149, 156±7, 199 credit-money, substantive validity of, xi, 23±4, 29, 52, 69±70, 170, 173, 201±2 Debt Crisis and, 97, 112, 114, 119±24, 136, 167±8, 201 direct financing, promotion of, xi±xii, 2, 17, 48, 60, 65, 68, 70±2, 94, 101, 113, 141, 143, 150±1, 167, 171, 178, 202, 210±12 Euromarkets and, 62±5, 67, 74±5, 78, 82, 84±5, 106±11, 117, 129, 131 financial reform, 58±60, 75±7, 93, 96, 102, 106±8, 110, 115±16, 118, 134±5, 141±4, 149±150, 152, 155±7, 168±9, 187, 189±190, 193, 200, 210±1 `fiscal transnationalism' and, 9, 47, 78, 199 formal competitive system, 10±11, 14±16, 58, 88, 102, 121, 124, 167, 200, 206, 209±11 gridlock in financial regulation, 116, 142±3, 149, 168±9 hegemonic power and, 6±9, 15, 17, 21, 46, 49±50, 65, 68±70, 72, 78±80, 84, 87, 89, 103±5, 120±1, 125, 133±4, 136, 139, 140±4, 152, 170, 174, 205±6

interactive embeddedness and, 2±3, 15±16, 18, 21±3, 42, 45, 47±8, 50, 53, 59, 65, 68, 73, 79±80, 83, 85±6, 98, 106±7, 110±11, 113, 125, 148, 153, 156, 168, 176, 189, 197, 199, 200, 204, 207±8, 210±11 international banking and, 48±9, 52±3, 60, 65±6, 72±4, 76, 78, 89, 91±2, 95±7, 106±7, 112, 114, 140±4, 169 see also direct financing International Monetary Fund (IMF) and, 54, 86, 88, 96, 120, 183±4 international passivity and national activism, policies of, 2, 19, 21, 47, 49±50, 58±9, 63, 65, 73, 75, 80, 91, 96, 100, 106, 111, 125, 129, 148, 150, 152, 157, 161, 164, 197, 200±1 international regimes and, 2, 5±6, 21,34, 46±50, 72, 78, 80, 91, 84±6, 89, 112±13, 120±4, 135±40, 142, 155, 174, 187±9, 197, 201, 204, 206 internationalization and, 48, 52±3, 60, 65, 88±9, 98, 102±3, 155, 210 monetary politics, 5±6, 20, 48, 50±7, 59, 66±7, 71±4, 75±85, 87, 98, 100±1, 103±5, 107, 115, 124±8, 131±2, 138, 161±3, 165±7, 174, 179, 183±4, 187, 194, 199, 201 Office of the Comptroller of the Currency and, 11, 96 personal indebtedness and, 17, 45, 113, 117, 125, 149±50, 152, 157, 170, 196, 198 petrodollars and, 72±3, 86±9, 201 `pressure-pot' financial system, 11, 15, 58, 88, 102, 124, 167, 200, 206 public indebtedness, 17, 44, 102, 113±15, 125, 148, 170±1, 199 recession, 98, 132, 144±5, 156±7, 180 relations with Britain, 67, 72, 80, 136±9, 141, 146, 158, 174, 177, 187, 199

Index 285 relations with Germany, 57, 63, 78, 80, 88, 103, 105, 127±9, 132±3, 140, 146, 161, 163±4, 195, 199, 202±3 relations with Japan, 12, 17, 59, 63, 75, 77±8, 80, 101, 103, 113, 122, 124±8, 131±2, 146, 148, 159, 167, 170, 174, 177±9, 183±4, 186, 191, 195, 199, 202 Russian financial crisis and, 186±7 share ownership, demographics of, 171±2 socialization of finance within, 17±19, 21, 45, 49, 73, 77, 93±4, 106, 110, 113, 117±18, 129, 141, 152±4, 157, 159, 168, 170±2, 192, 196, 198±9, 200, 203, 211 state capacity, 2, 15±17, 19±21, 36, 45±7, 83, 98, 105, 125, 129, 156, 197, 200, 204, 207, 209±11 structural power in international finance, xi, 2, 6±9, 16, 18±21, 24, 26±7, 29, 36, 43, 46±7, 48±50, 54, 57, 60, 64±5, 67±9, 70, 72, 79±81, 83, 85±9, 91, 94, 98, 101, 103, 105±6, 111±13, 117±18, 121, 124±8, 131, 134, 140, 145, 147±50, 152±3, 157, 162, 168, 176, 183±4, 189, 192, 197, 199±204, 210±12 Tequila Crisis and, 165±7, 187, 193 unique depth of domestic financial markets, 17, 72, 83±4, 89, 102, 131, 148, 150, 157, 170 US government securities, sale of, 9, 44±7, 55, 58, 77, 87, 101±2, 104, 109, 138±9, 148, 193, 197, 199, 202 `victory of dividends' and, 19, 21, 43, 155, 186, 197±9, 210±11 see also Basle Accord; Bretton Woods; diffusion of power; Federal Reserve (Fed); financial innovation; financial liberalization; interactive embeddedness; international passivity and national activism, policies of; New York Stock

Exchange; securitization; Wall Street; Washington Veneroso, Frank, 196 Verdier, Daniel, 27±8 victory of dividends, xi, 9, 42 rentier interests and, 9, 43, 51 states' dependence upon, 9, 19, 41±2, 51, 210±11 structural power and, 21, 43, 155, 197±9, 210±11 US and, 19, 21, 43, 155, 186, 197±9, 210±11 Weber and, xi, 9, 42±3, 209 Volcker, Paul, 108 Voluntary Foreign Credit Restraint Program (VFCR), 60, 63 Wade, Robert, 196 Wall Street, agreement with/calls for assistance to Washington, 86, 90, 100, 111, 123±7, 129, 169, 176, 183±4, 186±7, 196, 201 conflict with Washington, 58, 60, 75, 84, 106±7, 120, 136, 138, 168 direct financing and, xii, 3, 18, 70±1, 98, 112±13, 117, 150, 171, 199±204 Euromarkets and, 60, 65, 67, 82, 107±11 fear of Japanese banks, 135±7, 140±2 finance industry lobby groups and, 53, 107, 135, 168, 211 October 1987 crash, 115, 132±4, 145, 148 `People's Capitalism', 60±1 post-war recovery and, 48±9, 52±4 relationship with Fed, 18, 105, 135, 144, 152, 169, 186±7, 210 relationship with `Main Street', 154, 171 Yen±Dollar Agreement and, 124±8 see also Basle Accord; Bretton Woods; financial innovation; petrodollars; US, financial reform; US, socialization of finance; US, state capacity; US,

286 Index Wall Street ± continued structural power in international finance Washington, agreement with/calls for assistance from Wall Street, 86, 90, 100, 111, 123±7, 129, 169, 176, 183±4, 186±7, 196, 201 Bank Merger Act of 1960, 58 `benign neglect' and, 75±6, 78, 80 Community Investment Plan, 1963, 61 Community Reinvestment Act, 1977, 106, 110, 168, 196, 211 Competitive Equality Banking Act, 1987, 134±5 conflict with Wall Street, 58, 60, 75, 84, 106±7, 120, 136, 138, 168 decision-making processes, efficiency of, 34, 141±2, 167 Democratic administrations, financial change under, 58±60, 106, 101±3, 106, 110, 157, 167±8, 171, 184, 187, 196, 211 Depository Institutions Deregulation and Monetary Control Act, 1980, 110±11 direct financing and, xii, 3, 18, 45, 70±1, 77, 98, 112±13, 135, 144, 150±2, 166±8, 171, 189,199±204 Douglas Bank Holding Company Act, 1956, 58, 168, 189 Economic Recovery Tax Act of 1981, 116±17 Euromarkets and, 63±5, 67, 74, 77, 107±11 FDIC Improvement Act, 1991, 134 Federal Home Loan Mortgage Corporation, 76±7 finance industry lobby groups and, 53, 107, 135, 168, 211 Financial Institutions Recovery and Enforcement Act, 1989, 134, 143 Financial Institutions Safety and Consumer Choice Act, 1991, 189 Financial Services Competitiveness Act, 1995, 168

Financial Services Modernization Act, 1999, and, 152, 189±90, 193, 196, 210 Garn-St. Germain Depository Institutions Act, 1982, 116 Glass-Steagall Act, 1933, 11, 135, 152, 161, 168, 189±90, 210 Interest Equalization Tax (IET) and, 59±60, 63, 108 International Banking Act, 1980, 110±11 International Banking Facilities (IBF) and, 111, 116 International Lending Supervision Act (ILSA), 1984, 122±3, 136, 167, 180 McFadden Act, 1927, and, 93, 168 post-war recovery and, 48±9, 52±4 Regulation Q and, 62, 77, 110 Republican administration, financial change under, 74±5, 79±81, 85, 111±12, 116±18, 124±5, 131, 168 Riege-Neal Community Development and Financial Modernization Act, 1994, 168 Roosa bonds, 58±9, 66 Savings and Loans crisis and, 134±5 Secondary Mortgage Market Enhancement Act, 1984, 118 US government debt, sale of, 9, 19, 44, 55±6, 97, 101±2, 115, 138±9, 177±8, 197, 201 Voluntary Foreign Credit Restraint Program (VFCR) and, 60, 63 Yen±Dollar Agreement and, 124±8 see also Basle Accord; Bretton Woods; financial innovation; international passivity and national activism, policies of; petrodollars; securitization; US, credit-money, substantive validity of; US, financial reform; US, international regimes and; US, socialization of finance; US, state capacity; US, structural power in international finance Webb, Michael C., 6±7, 17, 64, 79, 143, 205

Index 287 Weber, Max, credit-money and, xi, 22, 24, 26±9 development of capitalism and, xi, 24±5, 27±9, 189, 202, 209 financial markets as a source of state capacity and, xi, 1, 5, 38±9, 41±3, 198, 209±11 formal and substantive validity and, xi, 22, 24, 28±9, 40 historical interpretive method and, 23, 38±9, 209, 212 liberal social reform and, 40±2, 209±11 perception of as a Realist, 23, 39±41, 209, 229 n. role of rentiers and, xi, 42±3, 210 state capacity and, 18, 22, 40±1, 45, 210±11 state±society complex and, 3, 18, 27, 39±41, 43±4, 100, 209 structural power and, xii, 22, 24, 38, 40, 42±3, 212 victory of dividends and, xi, 9, 42±3, 209±10 view of in IPE, xii, 19, 38, 208±9, 212 Weberian historical sociology (second wave), critique of `first wave', 44 interactive embeddedness and, 3, 22±3, 44±5, 208±9

multi-causality and, 208 non-realist view of change and, 43±4, 208 state capacity and, 3, 22±3, 43±5, 208±9, 212 structural power and, xii, 22, 38, 44±5, 211±12 view of the state, 22, 44, 208±9, 212 see also constitutive state; diffusion of power; Hobson, John M.; interactive embeddedness; Mann, Michael; state capacity; structural power Weiss, Linda, 220 n. 53 Wendt, Alexander, 31 White, Harry Dexter, 20, 50, 52±3, 56, 67 Yamaichi Securities, 57, 94, 132, 178, 183, 195 Yasuo Matsushita, 177±8 Yen±Dollar Agreement, 113, 124±8, 174 Zysman, John, view of informal sources of financial power and, 14±15, 130 view of state capacity, 14±15, 130, 207