Studien von Zeitfragen

Victory Over Want

Prologue to “The Multiple Abyss”

By James Cumes

Those of us, in the Western democracies, who grew up in the Great Depression knew a world in which almost all of us were poor and our future uncertain. We dreamed of a prosperity we were told was just around the corner; but the good times remained a dream while the threat of war became ever more real. Most of us left school early to grab what jobs we could; and even the few who went to university knew that they might soon have to abandon their studies to go to war. If we managed, miraculously, to escape both poverty and war, we were still plagued by a variety of fatal, painful and chronic diseases for which we had no remedies and we lived in environments of which we took little care. We sang such songs as "Happy Days are Here Again" to keep our spirits up. The movie theatre was our Camelot of fantasy and escape.

Shortly after Pearl Harbour, while still in my teens, I did indeed go off to war. At that point, nazism, fascism and militarism seemed triumphant. Hitler stood at the gates of Moscow and Leningrad and his General Rommel looked set to walk into Cairo. The Japanese spread themselves effortlessly over east and south-east Asia and the Pacific, as far west as Burma and as far south as New Guinea. Even if we should manage to turn the tide, the prospect was for ever more death and devastation and, unless we were lucky, a new and even deeper economic depression when the shooting stopped.

So, in many ways, it seemed we could only despair; but some more positive features live in my memory. Since we were almost all poor, poverty was often less a badge of shame than a mark of fellowship; and, in our innocence, we had our moral as well as our social and economic disciplines. Always, we had our dreams.

Our fellowship in poverty carried over into the unifying mateship of war; and, as we fought together, so we came to plan together. Before the war, many of us had endlessly debated what political arrangements might serve our economy and society, if not best, then better than the miserable 1930s arrangements. Those possible alternatives covered the whole political spectrum. As well as fascists and others on the right, we had, on the left, a whole host of socialists and communists, Fabians, Douglas Crediters, labour parties, Industrial Workers of the World, Georgists and the rest. In brief, in our world of deprivation and conflict, we had many and varied Sherpas to guide us to the quality peaks of living to which we aspired.

In March 1942, when I swapped university for the army, my parting editorial in our students' newspaper was politically correct in its title of "Pro Patria" and forward-looking in reminding students that "Words are things and a small drop of ink, Falling like dew upon a thought, Produces that which makes thousands, Perhaps millions, think."

That was one of the clearest measures of the character of our times. Our duty was not only to prevail in battle but to think about what we aspired to in the future. Like Ulysses, we called upon ourselves not only to endure but also to seek, to strive and not to yield and, above all, to think and to plan.

Perhaps too simplistically but understandably, many of us conceived our problems to be fundamentally economic. Those problems had landed us in the Great Depression and were a major element in the drift to world war. John Maynard Keynes, who had warned us of The Economic Consequences of the Peace in 1919, published, in 1936, The General Theory of Employment, Interest and Money, which was intended to provide macroeconomic remedies for our economic miseries, especially of the 1930s. Its ideas were gradually adopted, though not without hesitation, qualification, and a good deal of scepticism, by democratic policymakers, academics and "the people" in most of the Western world during the closing stages of the war and afterwards.

Planning for Peace

In retrospect, the outstanding quality of the Second World War was not so much that the "right side won" or that militaristic and genocidal forces were crushed, as that we planned so zealously for what we would do with the peace. How could we both avoid war and achieve peaceful change?

In January 1941, almost a year before Pearl Harbour, President Franklin Roosevelt set the goal of Four Freedoms. We should seek Freedom from Fear and Want, Freedom of Speech and Expression and Freedom of Religion, 'everywhere in the world.' Later, the Dumbarton Oaks proposals were drafted for a United Nations Charter with strong economic provisions. Bretton Woods set up a World Bank and International Monetary Fund. We formed a Food and Agriculture Organisation and a World Health Organisation. We already had an International Labour Organisation. Victory in war was seen not as an end in itself or as the "end of history" but a prelude to winning peace, prosperity and well-being for all in a more secure world.

Even before most of us returned from war, national white papers and international agreements were in place that were intended to help us manage our economic and social affairs more fairly and efficiently. Many doubted that they would work but, applied nationally and internationally, Keynes' macroeconomic ideas did, in the event, serve Western communities well and, within the limits set, often prompted and even enlarged by the Cold War, brought us an era of stable growth and more widespread welfare that contrasted dramatically with the miseries of the 1930s.

A Golden Age

For many people, the quarter-century after 1945 was a golden age, the 1960s one of the most progressive decades humankind has ever known. So far had we gone towards solving our pre-war problems of economic instability and unemployment and so many people were so much better off than ever before, that we believed, with some justification, that the conquest of poverty, worldwide, might now be within our reach. The rich countries pledged themselves to help their poorer fellows advance towards their own levels of relatively comfortable living. Through such action as the 1963 General Assembly resolution on the United Nations Conference on Trade and Development (UNCTAD), this help was to be on a substantial, comprehensive and accelerating basis.

Our dreams went far beyond the economic. In 1969, man walked on the Moon. We could now dream of Mars and the other planets; and, on our own Planet Earth, we could share Martin Luther King's dream of racial equality for all in a world free of poverty, disease and conflict. If we had always dreamt of such things, the sixties made them seem attainable as never before.

We even had Woodstock and, a little later, Charles Reich wrote about a new visionary consciousness: "The extraordinary thing about this new consciousness is that it has emerged out of the wasteland of the Corporate State, like flowers pushing up through the concrete pavement. Whatever it touches it beautifies and renews: a freeway entrance is festooned with happy hitch-hikers, the sidewalk is decorated with street people, the humourless steps of an official building are given warmth by a group of musicians. And every barrier falls before it. We have been dulled and blinded to the injustice and ugliness of slums, but it sees them as just that - injustice and ugliness - as if they had been there to see all along. We have all been persuaded that giant organisations are necessary, but it sees that they are absurd, as if the absurdity had always been obvious and apparent. We have all been induced to give up our dreams of adventure and romance in favour of the escalator of success, but it says that the escalator is a sham and the dream is real. And these things, buried, hidden and disowned in so many of us, are shouted out loud, believed in, affirmed by a growing multitude of young people who seem too healthy, intelligent and alive to be wholly insane, who appear, in their collective strength, capable of making it happen. For one almost convinced that it was necessary to accept ugliness and evil, that it was necessary to be a miser of dreams, it is an invitation to cry or laugh. For one who thought the world was irretrievably encased in metal and plastic and sterile stone, it seems a veritable greening of America."

Of course, there were still problems. The Cold War cursed and divided the world. Despite long-running peace talks, the war in Vietnam persisted. But, if these were grave problems, another and, in some ways, even greater threat lurked unacknowledged in the background.

Before the 'sixties were quite done, that threat became real and the sweet times turned sour. Why?

The Breakdown of Economic Stability

In July 1969, six months into the first Nixon Administration and just twelve days before man took his first steps on the Moon, the Federal Reserve Board raised interest rates. In the midst of the high drama of the times, that seemed an inconsequential, almost trivial act. Not surprisingly, to the extent that it was not ignored, it was received calmly and, initially at least, with understanding. The United States had spent enormous sums on the Cold War and Vietnam, on the Space Race, on aid to developing countries and on Lyndon Johnson's Great Society. The economic resources of even the mighty United States were stretched and, though modestly, prices were rising. So the Fed acted "to slow the economy down." Its action was, in the conventional wisdom of the time and indeed even now, "correct." But what was the result?

One contemporary account said that -

"...towards the end of 1969, that is, less than six months after the Fed had acted, policies instituted by the Nixon Administration began to push unemployment up. The intention of these policies was to stop inflation by reducing demand. Demand was to be reduced by reducing personal income, which was assumed to be a function of increasing unemployment. But President Nixon had already arranged in his message to Congress that 'if unemployment were to rise' the programme of unemployment insurance 'automatically would act to sustain personal income.' He had therefore undermined in advance his capacity to attack inflation through increasing unemployment and reducing personal incomes.[1]

"But he was more shackled in his capacity to attack inflation by these means than even this contradiction in his policies demonstrates. For his policies, if they did not reduce incomes as much as the increase in unemployment would have done in an earlier period, they did reduce production. The number of unemployed shot up by more than one million in less than a year. The rate of increase in the gross national product dropped sharply. The President's Council of Economic Advisers estimated that the United States economy, in the second quarter of 1970, was operating at about 4 per cent below its potential capacity and that the real rate of growth of GNP in the third quarter was down to 1.4 per cent - or to 2.5 per cent, if the effect of the General Motors strike were excluded. Growth in the fourth quarter was probably nil. The difference between these estimates and the real rate of growth of 5 per cent or more before the advent of recessive policies was substantial; and was borne out by data showing movements in industrial production. From a peak in July 1969, the index of industrial production dropped steadily to a point 7 per cent lower in October 1970. The decline was sharper as unemployment grew (and as the General Motors strike caused further production losses). The index which stood at 173.1 in October 1969, had fallen to 166.1 in September 1970, and 162.3 in October 1970."

So the Nixon and Fed policies had preserved fairly steady consumer demand with a much reduced consumer supply. Prices rose still more and they did it more quickly, introducing us to a new phenomenon, to which we applied a new term: stagflation.

In September 1970, I arrived in New York for the annual Session of the United Nations General Assembly. These Sessions are like war: long periods of extreme boredom punctuated by brief moments of intense fright - or, in the case of General Assemblies, brisk diplomatic activity. So, in the long periods of boredom, I had ample time to look around New York, talk to a variety of people and watch my quota of television. The reaction of "ordinary" people to the recessive policies was exemplified by a woman telling us on television one evening how miserable she was that she'd lost her job for reasons that, she complained, made no sense: "A month ago I had a job, lots of friends and I was working hard. Now I'm no worse off financially; but I've lost my friends at work and I'm doing nothing. How does that help the economy, the society, the government - anyone? A month ago, I was paid for doing something useful. Now unemployment insurance pays me much the same for doing absolutely nothing. The whole thing's absurd."

Despite its absurdity, the pattern of adopting recessive policies to fight inflation was set firmly in place in the United States and elsewhere, not only then but long afterwards. Indeed, even now, more than thirty years later, it remains part of the conventional gospel shared by the professional economist equally with the common man. Over time, the wisdom of that woman on television in 1970 was overwhelmed by the ceaseless repetition of the absurd. The motivation for this ceaseless repetition may not of course have been wholly intellectual and objective . That there probably were motivations associated with a desire to reverse existing economic and social trends towards a more just and egalitarian society, nationally and globally, is something that we shall have to consider.

Looking at this phenomenon as early as 1971, I saw "...a curious similarity between the error into which we have recently fallen and the error into which economists and policy-makers fell in the pre-Keynesian period of the 1930s. Then the theories and policies intensified the very disasters which they were intended to remedy or avert. The same thing is happening now... Fundamentally, we try to solve our problems of economic disequilibrium by measures which - in practice - intensify them. As in the 1930s, so now we could scarcely do worse if we tried. We act as we do because we think we are still solving economic problems in the context of the 1930s. We are not; but we think so. And the error goes on being repeated however long it would seem to be obvious that the solutions are just as outdated as our conception of the economic environment in which they are being tackled. To put this a little more specifically, we seek to maintain domestic economic stability by applying or reversing the means which brought us such splendid success at the advent of the Keynesian era. When we are confronted with inflation, we immediately react with policies reversing the fiscal and monetary stimulation which is thought to have caused the inflation. Modern economic policies have created and maintained full employment through active and generally invigorating fiscal and monetary measures. Therefore, the pundits argue that, if these measures go too far and create unacceptable inflation, the solution is to take them off. It is all so simple. Turn on the tap to move the economy up; turn it off to move the economy down. Almost every economist worth his salt sings or dances to this canticle. Not only do they believe it but they act upon it. And they nod sagely when anyone else - even their political enemies - act upon it. That it doesn't work is, for them, almost an obiter dictum. It should work. All the economists agree that it should work. If it seems not to work, then, say the economists, it is because the politicians or the bankers or both have not had the courage or the competence to do the job properly; or the trade unions don't know what is good for them and the country; or the employers don't; or there are 'special factors' which have ruined a good policy in the hands of sincere people. But the plain fact of the matter is that it does not work."[2]

Economic policies have political and social impacts. Indeed, economic, social and political policies are inevitably and inextricably bound up with each other. Economic policies have direct and substantial effects on domestic stability and growth; and they also impact on international trade and payments. Both will, in turn, help determine the economic and eventually the political and strategic vigour of individual countries. They will largely determine just how much authority and power a country can wield. The hike in interest rates by the Fed on 8 July 1969 can, in this sense, be seen as a political act - even an act of foreign-policy. It was part of the "grappling" of the large Powers - and indeed of the smaller ones - "...with the age-old dilemmas of rise and fall, with the shifting pace of productive growth, with technological innovation, with changes in the international scene, with the spiralling cost of weapons, with alterations in the power balances. Those are not developments which can be controlled by any one state, or individual. To paraphrase Bismarck's famous remark, all of these Powers are travelling on 'the stream of time,' which they can 'neither create nor direct,' but upon which they can 'steer with more or less skill and experience.' How they emerge from that voyage depends, to a large degree, upon the wisdom of the governments in Washington, Moscow, Tokyo, Peking and the various European capitals. [We can analyse] what the prospects are likely to be for each of those polities and, in consequence, for the Great Power system as a whole. But that still leaves an awful lot depending upon the 'skill and experience' with which they manage to sail on 'the stream of time'."[3]

Mainland China Joins the United Nations

In September 1971, I was again a member of the Australian Delegation to the Regular General Assembly Session. Just before it opened, Henry Kissinger paid a sensational visit to Peking; and the world knew that President Nixon would soon follow. Those visits would usher in a new era, transforming international relations in Asia and the Pacific as well as in the wider world community. But the change had some complexities. While some of these were obvious and acknowledged, others were concealed and their significance would emerge only with time.

Future President George Bush the Elder was then United States Ambassador to the United Nations. His challenging task at the 1971 Assembly was to preside over a large group of anti-communist governments cooperating to keep Taiwan in and Peking out of the United Nations. A remarkable goal, in the light of the Kissinger mission and Nixon's impending visit. Bush performed his task with quiet dignity, though with little flair or insight, and we - America's allies - did our best to help him. On the way to the Assembly, I had called at some capitals to discuss the tactics by means of which we could remain loyal to Taiwan and continue to deny United Nations membership to the undoubted masters of the Chinese mainland and the vast majority of the Chinese people; but it was all to no avail. The Americans and their allies were defeated and China took a giant leap into formal international society. At last, 22 years after winning power at home, the communist government won its rightful place in the General Assembly and its rightful seat as a permanent member of the Security Council.

At the time, this undoubtedly counted as a great victory for Peking; but, working away quietly in the background, unrecognised by anyone, another process had already begun that would fundamentally change China's place in the world, its power and prestige, much more than United Nations membership ever could.

Inflation: The Two Phases

The United States has many achievements to its credit in the twentieth century, its rout of German nazism and Japanese militarism in the Second World War and its triumph in the Cold War not the least of them. It has also had its setbacks, its defeat in Vietnam among the most painful. But history might see its greatest error of political judgement - its greatest failure to 'steer with ...skill and experience...on the stream of time' - to reside in the action of the Fed in raising interest rates in July 1969. That was a crucial turning point and the persistence in policies that the act symbolised changed the whole character of the world financial, economic and trading system over the next thirty years. Beyond that, it changed the political and strategic balance too.

There were two phases.

In the first, extending from 1969 until the early 1980s, the misconceived policies, especially on interest rates, produced stagflation , that is, intensified domestic inflation with unemployment. (The basic error was - and is - that raising interest rates does not reduce inflationary pressures for consumer goods although it is likely to reduce asset-price inflation. Raising interest rates adds to production costs and reduces supply, thus intensifying consumer-price inflation from two directions at once.)

A second phase then evolved from the first, in which enlarged investment in developing countries, especially in east and south-east Asia generated supplementary supplies and the Tiger economies were born. They joined such surplus countries as Germany and Japan, to meet supply shortages in the United States and other countries in Western Europe, Canada, Australia and elsewhere which had adopted policies similar to the United States. When the supply shortages were met and the resultant lower inflation 'allowed' interest rates to fall, investment, productivity and production were revived, at least in limited measure, at home - or the decline was arrested. However, any such blessings were partial, temporary and discouraged by the Damocles sword of renewed hikes in interest-rate always hanging over the economy.

In the second phase, the domestic manifestation of inflation was thus converted into imbalances in international trade and payments. Having migrated overseas, investment and production tended to stay there. Real domestic investment continued to lag at home. Unemployment rose or settled at higher levels and became chronic. The United States and such countries as Australia with similiar policies, effectively gutted or "offshored" their own industry. The extent to which industry was or potentially will be "offshored" is sometimes exaggerated; but certainly a wide range of both basic manufacturing and more sophisticated industry was and, indeed, still is being "offshored." Much of the high-tech information hardware industry has been "offshored" and software and services continue to emigrate at an accelerating rate. Employment at home tended to be concentrated in the less skilled, lower paid distributive industries and to move away from the more highly skilled, more highly paid production industries, especially manufacturing.

There were some policy interventions to remedy some of the adverse trends.

In the 1980s, the instabilities of the previous decade prompted a simplistic, supply-side approach that called for cuts especially in personal income tax and public spending, for small government and for free markets. Reagonomics dovetailed well with Thatcherism which, inter alia, became increasingly obsessed with privatisation of public enterprise and public investment. The philosophy of allowing the free market free rein went along with abdication by governments of a wide range of economic and social responsibilities. Central banks still lacking it were handed independent power to manage monetary policy and especially to "fight inflation" by raising interest rates at the slightest provocation and holding them at the higher level as long as their "responsibility for monetary stability" might, however implausibly, require. As economic policy came to mean more and more a deceptively simple matter of whether interest rates should be raised or not, economic power passed more and more out of the hands of the government and into the hands of an independent authority - the central bank - not accountable to the democratic process.

This abdication of power by government had international as well as domestic repercussions and was especially linked to the gutting of domestic industry - the emigration of domestic industry at an accelerating rate - that we have referred to above.

The unhappy context of inordinate market freedom linked with mechanistic and misconceived monetary regulation, allowed innovative and structured finance to flourish, which could, inter alia, embrace the servicing of huge and accelerating overseas investment, mergers, takeovers and the like. Distributive import trades took the place of domestic production to serve consumer needs. Non-banking financial institutions multiplied. Trade in derivatives escalated. Privatisation of pensions created huge funds often seeking quick rather than secure investment returns in highly competitive environments. A casino-like domestic and international financial and trading system emerged with a robustness matched only by the wildfire spread of undisguised casinos all around the world. The IMF offered aid packages to post-Soviet and other countries that mandated a precipitate transition to copycat, free-market, free-wheeling, casino-like arrangements. Instead of being froth on the surface of the real economy, speculation became and was widely regarded as the real economy itself.

The Asian Tigers: China

The conversion of domestic inflation into trade imbalances created the Asian Tigers or, put another way, the shift of inflation, entailing the transfer of industry overseas, had necessarily to mean the emergence of the Asian Tigers or something of the kind. The two - like love and marriage - went together like a horse and carriage.

As time passed, more developing countries were drawn into the emigration-of-industry process. During the 1980s, the most conspicuous newly-industrialising countries were Taiwan, South Korea, Hong Kong and Singapore. Gradually, other countries joined them: Thailand, Malaysia, Indonesia, the Philippines and, later, India, with the giant mainland China advancing slowly at first but steadily from the early 1980s onwards. The expansion of supply sources hastened the trend towards equilibrium between supply and demand and threatened - and in some cases resulted in - over-capacity. China came to vie with and surpass Japan as the country with which the United States had its largest deficit.

That brings us back to the suggestion made earlier that the admission of the People's Republic of China to the United Nations in 1971, dramatic as it was at the time, was less significant than the Fed's raising of interest rates in July 1969. That has proved true in the thirty years since. The policy of slowing the economy through interest-rate hikes opened up the United States and other developed economies to newly-industrialising countries in a way that allowed, for example, China, to evolve as an economic, political and military power, both to an extent and at a pace that would not otherwise have been possible. Hong Kong and Singapore, and even Taiwan and South Korea, showed more dramatic progress for their relatively small populations earlier and more quickly; but, with its large territory and huge population, China was presented with opportunities for development and power - political and strategic as well as economic - of a quite different order of magnitude and consequence.

The political and strategic consequences are still unfolding and will make themselves more manifest as time goes on. We hope we will have peaceful economic growth and peaceful economic change among all nations, great and small. We hope that, unlike the past, we will not have wars inflicted on us in future - neither hot wars nor cold; but we must always bear in mind Mackinder's claim that "the great wars of history...are the outcome, direct or indirect, of the unequal growth of nations." Shifts in economic power in the next thirty years may or may not be as large as those since 1970; but much will depend on the wisdom with which, in the years ahead, the single Superpower, the bunch of Great Powers and even the medium and small Powers manage their investment, productivity and production and, along with those determinants, build or diminish their domestic economic base, relatively and absolutely. Much will depend on whether they manage their external economic affairs to achieve harmonious trading and financial relations or whether there is no more than an uneasy coexistence carrying with it, sooner or later, the threat of armed conflict.

The Military-Industrial Complex

Especially in the present context of rapid, unequal and "free-market" development - and the substantial migration of home-based industry abroad - one major source of concern must be the way in which the military-industrial complex has developed, especially though not only in the United States, and ever more destructive weapons and delivery systems have been propagated. On the one hand, this has constituted a kind of military Keynesianism, providing investment opportunities and employment, and on the other, has created vested interests in the production and sale of a wide range of military hardware and services. These interests continue to have what appears to be an ever more powerful influence on the United States and some other governments, partly because the home-based defence industries are major export earners. While the United States is easily the world's biggest supplier, other countries, especially in Europe but also elsewhere, constantly seek to find new and expand older export markets for their armaments and military services. The Pakistan experience of the sale of nuclear technology highlights the real and extreme danger of marketing weapons of mass destruction - marketing which may be undertaken by individuals or groups of presumed high "respectability."

Whether or not this traffic in arms stimulates warlike policies, it undoubtedly creates a world in which conflict becomes actually or potentially more destructive of life and property than ever before. Even without nuclear weapons, a world or major regional war would entail enormous devastation and loss of life. At the same time, several countries have already joined the Big Five nuclear powers - the United States, Russia, Britain, France and China - and others are on the threshold of nuclear-weapons capability, together with long-range delivery systems. The likelihood of more proliferation must be regarded as high. We have reached a stage at which, though we must continue to promote non-proliferation, we must seek more robustly to control the behaviour of those to whom proliferation has already taken place. We must also seek, much more robustly, to pre-empt the capacity of terrorist groups or megalomaniac individuals to acquire and use nuclear and other weapons of mass destruction.

The growth of the military-industrial complex has not been without some positive features. It has initiated or invigorated space-related activities and research and development in such areas as information technology. It has imparted a dynamism to economies during and after the Cold War. United States defence expenditure, of about $400 billion annually, equals that of the next twenty countries combined. Other, ancillary costs are more difficult to calculate but "contracted" defence expenditures, for example, are probably of the order of another $100 billion. While United States defence spending dwarfs other countries' outlays, virtually every country of any consequence now spends more on defence - or its potential for offence - than ever before in peacetime history.

A Many-sided Abyss

Especially in the context of economic and other disparities, the growing sophistication, production and propagation of weapons of mass destruction add to the mutually-reinforcing elements propelling us towards a many-sided abyss. Other elements might also cause the ground to crumble under our feet. For example, though we can debate its cause and extent, there can be little doubt that economic policies and free-wheeling political philosophies have made it much harder to deal with environmental degradation. Governments have relinquished much of their responsibility for public investment and their obsession with small government, low taxes and balanced budgets has caused them largely to disregard such issues as global warming - whatever its extent and its cause - climate change, enlargement of the ozone hole, destruction of much of the world's forests, desertification, husbanding of water resources and a host of related issues. Despite some rhetoric, governments have shown little readiness to do anything like enough quickly enough.

Neglect of the environment has been matched by neglect of public health in a world in which travel and communication have become conspicuously so much easier and more affordable for so many more people. A variety of plagues can now spread much more easily and control is consequently so much more complex. Progress during much of the 20th century in elimination and control of diseases has, to a significant extent, been reversed. Tuberculosis has re-emerged as a newly accelerating plague and such scourges as malaria and AIDS continue to devastate much of the developing world.

Neither environmental nor health problems can be resolved without fundamental re-casting of economic policies. Growing inequalities in the quality of life have engendered or exacerbated resentments, hatreds and potential or actual conflict among classes, races and religious groups. The motivations for conflict, terrorism and war have intensified both within individual countries - developed and developing - and among countries.

While globalised communications, travel and commerce have brought people closer together, mainstream economic and social policies have driven them further apart. The gap between rich and poor has widened and the imperatives for the disadvantaged to seek a better life in the richer countries have intensified. Thousands continue to seek political asylum and many more seek to clamber on to the economic life-raft which the richer countries are seen to provide, in order to win the basic food, clothing and shelter they need to survive or prosper.

As a consequence, a combination of factors are causing us to slide remorselessly towards a many-sided economic and financial, military and nuclear, environmental, social and religious abyss of which our national and world leaders seem almost unaware or, if they are aware, with which they have so far been unable to cope or even effectively address. Unlike the period before the Second World War, no current economic, social or political philosophy offers remedies. On the contrary, the dominant philosophy of a freedom approaching licence and dependence on violence to respond to national and international conflict and terrorism offer only to speed the journey along the road to catastrophe.

Domestic and World Poverty

A basic need - probably the basic need - is to solve the problem of economic management. We need to find policies that will employ the human and material resources we have to give us sustained, balanced and harmonious growth worldwide. That must mean a reversal of the policies of the last thirty years and, in broad terms, a resumption by governments of the responsibilities that, especially since the 1980s, they have so comprehensively abdicated.

Our policies should aim to solve the problems both of domestic poverty and the chronic and intensifying poverty in much of the rest of the world. Only then will we be able to tackle environmental and health issues effectively worldwide and provide a life-raft, preferably at home, on to which the disadvantaged can clamber.

All of these things must go together. Fortunately they can go together. We have the human and material resources, we have the technologial and the project management skills. What we need is agreement on a process and the political will to apply it.

The Solution can be Simple

At first sight, the political, strategic, nuclear, economic, environmental, health and socio-religious problems identified above are so formidable that we might be excused for despairing of their solution. However, we should recall the relative ease with which what seemed to us then the monumental economic problems of the 'thirties were resolved - and many others diminished - in the quarter century after the war ended.

What we need now is something similar in broad concept and relatively simple - as simple as the Keynesian solution after World War Two. We need a basic solution to our macroeconomic problems and a process to enable its cooperative application worldwide. In applying that process, we shall draw in and resolve the variety of problems now threatening our survival and we shall step away - not for ever; we will still need constant vigilance - from the multiple abyss with which we are now confronted.

Investment, Productivity and Production

Our basic need is to acknowledge the fundamental importance of real investment, productivity and production. We need to re-appraise our current economic concepts and approaches, to apply more enlightened and well-conceived creditary policies and to employ available human and material resources more fully and cooperatively. Our objective must be to agree on policies and processes that will eliminate or moderate poverty in the poorer countries while, at the same time, eliminating poverty and removing at least the grosser inequalities that we have in the richer countries. The one can provide both a means and a motivation for achieving the other.

The more imaginative use of human resources will yield a richer and more satisfying life for everyone. Those resources, linked wisely to coordinated public and private investment, can enable our science and technology, our means of communication and education, and our concept of human rights and equality for all peoples, to lead us to the peaceful and progressive political, strategic and economic outcomes we seek - and, indeed, that we need if our civilisation and our species are to survive. A widespread cooperative effort could mean, literally, the difference between catastrophic conflict and the peaceful survival of human and other life on Planet Earth.

Towards True Globalisation

That will be a true globalisation - of the people, by the people, for the people everywhere. This is not an unattainable ideal. It is something that can be achieved and achieved quickly. Not only is it achievable; it is imperative. If we do not wisely join together in such an enterprise - if our present penchant for war, violence, terrorism and greed persists - the majesty of the human achievement might lead not to the almost god-like grandeur to which we have often aspired, but to the obliteration of our species and the extinction of most, if not all other species along with us.

Solving our economic problems will not directly resolve those social, cultural and religious differences which are a main source of conflict and terrorism. However, many and perhaps most hatreds originate in or are intensified by competition and conflicts over resources, by inequalities in current economic conditions and future prospects and by the envy, resentments and humiliations that perceived unequal opportunity produces. If we can resolve our economic problems, through people of all regions, races and religions being encouraged and organised to work equally together, we should at least win time to control those social, cultural and religious demons within us that threaten to lead us to conflict and catastrophe.

Pulling the Strands Together

Since 1969, the United States - the world's number one economy and now the single superpower - has been embarked on policies that threaten it with self-destruction and that have brought major transformations to the world economy. At the same time, the character of the United States economy and society has changed, with trends towards more welfare and equality being replaced by trends, accentuated especially since 2001, towards ever greater privileges for wealthier and higher-income groups.

These domestic trends have had their international counterpart in diminishing concern for developing-country welfare, diminishing aid, and accelerating support for policies of "globalisation" that benefit speculative finance capitalism and enhance rather than reduce global poverty and inequalities.

Always the citadel of free enterprise, the United States has also undergone a strange metamorphosis. On the one hand, addiction to free enterprise has probed fundamentalist extremes in its permissiveness for finance capitalism to exploit whatever new financial devices in whatever ways it chooses and for private enterprise to expand even into such politically and strategically sensitive areas as private armies and private defence enterprises.

Contrarily, the United States has persisted with and intensified its preoccupation with some of the most costly and far-reaching exercises ever in state enterprise . The military-industrial complex now draws budget expenditure of at least $400 billion a year and, with costs of war in such places as Afghanistan and Iraq, plus payments to contractors, well in excess probably of $500 billion a year. Defence and related industries have become one of the largest publicly funded and publicly protected industries ever, anywhere in the world.

While defence expenditure involves the largest public outlays, farm support of about $150 billion and law-and-order outlays, including costs of homeland security and the war on drugs, of perhaps up to $200 billion, are also huge. Farm support goes mainly to large and wealthy landowners and corporations rather than to small, family farmers. With a prison population of about two million, law-and-order outlays, on the one hand reduce the numbers of unemployed at a cost far exceeding the cost of welfare and, on the other hand, provide private enterprise with highly profitable opportunities to construct, manage and supply prisons and their inmates.

In financial terms, the potentially most costly public enterprise of all covers the government guarantees of Fannie May and Freddie Mac mortgage securities. These guarantees, of mortgages now calculated at about $4 trillion, allow banks to offer virtually risk-free, poorly vetted loans to support a housing industry whose propensity to boom - as it is at the moment - and collapse - as it threatens to do soon - is accentuated by what has become direct facilitation by the government of the housing-mortgage business. When the housing bubble bursts, the burden on public funds will be, potentially, gigantic and the housing-industry collapse is likely to precipitate deep disruption of the whole United States economy, with repercussions world-wide.

There has thus been a metamorphosis in the role of the United States Government. From participating relatively little in business and confining its spending largely to traditional national security, law, order and welfare, it has become a direct investor, supporter or guarantor of much of the real investment in the economy. This support is largely for the benefit of particular groups and special areas of activity.

Especially with the emigration of manufacturing and the decline of welfare spending, lower-income earnings have stagnated or declined and poverty has increased, even of those in full-time employment. At the same time, public expenditure has been stabilised or cut on those things for which no powerful lobbies exist or against which powerful lobby groups prevail. That has meant that expenditure to improve or protect the environment has lagged. So has expenditure on such things as public education, public health - some 40 to 50 million remain without health insurance - and basic infrastructure. On the last, objective analysts calculate that hundreds of billions of dollars need to be spent to restore basic infrastructure to acceptable standards. There is much in this that is chillingly reminiscent of the collapse of the Soviet Union.

The metamorphosis of the domestic economy and society has had its counterpart in a metamorphosis in United States foreign and defence policy.

In the twenty-five years immediately after the Second World War, the United States was a leader in cooperative international action and international aid. The rapid reconstruction of war-torn Europe was accomplished by the then unique concepts and processes of the Marshall Plan. The United States paid as much as one-third of postwar international agencies' budgets and was easily the largest contributor of both bilateral and multilateral aid. However, after 1969, these policies were wound down, contributions to international agencies were cut and the United States became, in percentage of per capita terms, the least generous contributor to foreign aid of all the developed countries.

At the same time, the character of the United States Government has been transformed in political and strategic terms. We cannot be sure how far this can be traced to the heavy expenditure and the consequent heavy dependence of much private enterprise on defence spending. Much of it may derive from an understandable but unhealthy obsession with oil and with the oil industry, domestic and foreign. Whatever the causes, the United States has become more militaristic and more ready than it was traditionally to embark on foreign and seemingly imperialist wars.

This was not so apparent in the Clinton years (1993-2001) during which the foreign-policy emphasis was on resolution of conflict through diplomatic negotiation; but, supported by the concept of "shock and awe" and what the Administration believes to be the unique capacity of the United States to deliver it, military action or its threat has become a dominating feature of the American character during the regime of Bush the Younger.

During this latter period, the United States economy has become progressively more unbalanced. That broad trend is not new. It began as far back as 1969 and, with the peaking of the policy of fighting inflation through hiking interest rates under Fed Chairman Volcker, was intensified from the early 1980s onwards. During the Clinton years, the recovery after the early 1990s recession and its evolution into the runaway high-tech boom of the later 1990s, concealed the growing and fundamental vulnerability of the United States economy.

The collapse of the high-tech bubble at the turn of the century was followed by a comparatively weak and shortlived recession, moderated by the swift action of Fed Chairman Greenspan to cut interest rates in 13 quick steps to what was, in the end, a real, negative, Feds-funds rate of 1%. This was accompanied by dramatic fiscal action by the Bush Administration with huge cuts in taxes, especially for the rich.

Far from removing fundamental imbalances, these stimulatory measures were mainly distinguished for creating further bubbles, especially in housing and consumer spending, and in keeping stock markets at levels above those justified by their underlying profits situation.

The trade balance, which had been in deficit almost constantly since the impact of inflation shifted dramatically offshore in the early 1980s, was reduced in some years of the 1990s but moved up again, especially after the turn of the century, to stand now at more than half a trillion dollars a year. From being the world's greatest creditor in the early postwar years, the United States is now, by a huge margin, the world's greatest debtor. There seems to be no means by which the trade deficit can be eliminated and the debt "repaid" except through massive disruptions in world trade, investment and capital flows, although it might be modified by capital spending on a cooperative, global scale (see below).

So, at this point, in May 2004, the American economy is confronted with the largest federal-budget and external-trade deficits in its - or anyone else's - history. The dollar has slipped against the Euro and most other currencies and, though it made some recovery between February and May 2004, the fundamentals remain such that further decline, perhaps amounting to collapse, is the prospect for the relatively short and certainly the medium and longer term. If there is a precipitate collapse - sparked, for example, by a severe fall in bond prices or a crisis in Fannie May and Freddie Mac - the shock waves will be felt everywhere.

Because of these trends, the United States role and status as the world's single superpower - or, as some would have it, the world's hyperpower - has become more and more at risk. The fate of the Soviet Union in overreaching itself through its political, strategic and economic policies, threatens more and more to become a fate that the United States could be destined to share.

If that prospect becomes a reality, who will replace the United States as the world's superpower?

Let us be clear that, if we no longer have an America, we would be wise, if we can, to invent one. In other words, what we need is an America rather like the one we had up to the end of the 1960s. Despite its size and economic strength, Europe is not, at the moment, in a position to fill the role in the crucial foreign-policy or strategic areas; and there appears little prospect that, even if it were so disposed, China could quickly step into America's shoes.

History suggests that it is in the interstices between the domination of one power and its successor that catastrophic conflict is likely to occur: the erosion of British domination before and after the First World War and now, the erosion of the fundamentals of American power, are illustrative.

If the prospect now is for such a catastrophic interstice, how long will it last?

Through its policies after 1969, the United States inadvertently handed the baton to China to succeed it as the single world superpower. China may - eventually - achieve this status anyway but United States policies provided China with a unique opportunity to develop more quickly and dramatically. Beijing grasped the opportunity with a capability that was not foreseen by many in advance. It is still more than possible that China's policies may falter and that, through financial and investment excess or ineptness, its present prospects for growth and power may decline. It may be too that the United States will draw back from its present course of self-destruction and resume its position as the world's secure superpower. (Much could turn on the outcome of the Presidential elections in November 2004.) However, the present prospects, at this point of time in May 2004, are that, if present policies continue, the United States will probably experience a major collapse in economic, political and strategic status and that China will continue to grow with the prospect that she will become, eventually, the world's superpower.

However, that cannot happen overnight and, at best, we must look towards perhaps a couple of decades in which there is jostling among a group of near-equal powers for a position of supremacy. China's enormous population gives it an impressive GDP but its relatively low per capita income - China is said to be aiming at $3000 a head by 2020 - could cause such social and political strains that they would precipitate a Soviet-type collapse if the Chinese Government were to aim, prematurely, at a superpower, "new America" type of role. The consequently quite lengthy interstice will be a period of acute risk of what might be called traditional armed conflict among the contending powers and of persistent manoeuvring for strategic advantage by one country or group of countries.

I should add that the idea of a Soviet-like collapse for the United States may seem fanciful and remote; but the elements are clearly there for such a collapse. Even so, a chance remains that, through last-minute, far-reaching and fundamental changes in policies, the United States could retain its superpower status or, after a severe decline, could retrieve it. It is also possible that a collapse of the United States economy, to which the Chinese economy owes so much, could precipitate a severe downturn in the Chinese economy too and rule out or postpone any prospect of Chinese "hegemony" and a Chinese "succession." Apart from the United States and China, the most likely candidate for world leadership is a politically and strategically invigorated European Union. The Union, now of 25 countries of both eastern and western Europe, is one of the most positive achievements of the post-World-War-Two period. If some substantial political and strategic unity can be achieved, it might then be able to take over the baton of the democratic West from a United States that has completed its run, and be an effective new "America" to lead us into a future of peace and peaceful change.

Evidently, there is much in this that can only be speculation at the moment but the prospect of a Soviet-style collapse of the United States is real, together with the prospect that, if there is such a collapse, an acutely dangerous interstice is likely to follow.

In this period of strategic, accompanied in all probability by political and economic instability, an additional danger that has become particularly acute in the last twenty years is religious conflict or conflict deriving from other causes that has been assigned or has acquired a religious tag.

This so-called religious conflict can be traced to several factors, chief of which seem to be uneven economic growth resulting in acute and chronic poverty in some populations, contrasting with unprecedented income and wealth, especially among privileged sections of other populations. This has aroused envy and feelings of humiliation among some groups, intensified by the political and strategic disregard, condescension and contempt sometimes and even habitually shown by the United States and other more powerful countries, regions and races.

These two factors in particular have bred resentments and hatreds that, in their turn, have been inflamed by the rise and spread of fundamentalism in several world religions. The narcissistic imperative that drives all men and especially its manifestation in narcissistic transference - to the tribe, to the race, to the country, to the cult - makes fundamental belief and the division of humanity into several sharply distinct and mutually hostile religions acutely dangerous, especially in the context of economic inequality and perceived humiliation. Terrorism and the response to it have gravely intensified the danger that relatively random events of violence could deteriorate into a march towards some kind of Armageddon. The so far relatively primitive forms of terrorism could escalate into nuclear and other mass destruction and provoke a response that could lose sight of longer perspectives in the emergency of the moment.

All of this is aggravated by the existence of weapons more destructive of life and property than ever before and the spread of these weapons in greater quantity more widely than ever before, among individuals and groups, including an ever widening variety of "terrorists", freedom -fighters, dissidents, war-lords, private armies and national forces.

Consequently, we live in a period in which our scientific and technical progress enables us to lead more comfortable, longer and healthier lives than ever before; but the failure of our social "sciences" to employ our scientific and technical knowledge so as to maximise social benefit and minimise potential for conflict, has exposed us to the risk, not only of national or regional self-destruction but of obliteration of our own and other species.

In this field of social sciences, there is a peculiar paucity of economic and social theories as contrasted with other periods of crisis, for example, in the nineteen-thirties. Whether on the right or left, few movements even purport to deal with the fundamental issues adumbrated above. The only movements with effective power belong to a centre that is starved of ideas and has nowhere to go except in directions that have led to the present complex of crises. "There is a relentless convergence of conformity that discourages diversity of viewpoint. The education students are getting is not preparing them for the diversity that exists in the world."[4] In other words, the only movements are those that, because of their inability to confront the crucial issues, can offer only the inevitability of catastrophe.

Is there a way out of such a devastating prognosis?

The first step must be to return to effective consultation and, as a first step, to initiate ways of realising that consultation. Such organisations as the United Nations or regional bodies or, for example, the Group of Seven have fallen so far short of what is required that they do not even have the most crucial questions on their agenda. They are preoccupied with a series of emergency situations which they can only do their best to moderate or sideline, without attempting to deal with underlying causes. Until recently, their meetings served only to provoke demonstrations by a wide range of largely unfocussed dissidents. More recently, even the demonstrators seem to have seen no point in demonstrating against their futility.

The international gatherings reflect the fact that national governments have failed even more miserably than they did in the 1930s. In the last year, there has tended to be a movement among governments, almost wholly in the developing world, that offers more hope. The Brazilian initiative to draw other countries into common action has been commendable and might include such countries as India in productive debate. The result of the Indian elections (May 2004) suggests that thinking is moving away from the extreme right or the mainstream centre to a position that seeks to combine the advantages of a high growth, basically market economy with the goals of a caring society, that is, perhaps to a return to the motivations of the 1945-69 period, with nuances or more basic changes to take account of technological and scientific, as well as social and economic changes since then.

Beyond consultation, there is a need, beyond that of any earlier period, to formulate new proposals for managing our societies and economies , nationally as well as globally. Economic policies need a fundamental re-appraisal and must be at the root of any changes that will enable us to move towards a new individual, national and global vision.

What sort of vision should we have to guide us?

The essence of what we need and the process to enable us to get it, has already been described in "A Democratic Initiative for Victory Over Want," [5] as follows:

Our cooperative effort, in Victory Over Want (VOW), to rebuild the world economy and to ensure its future strength, will empower and enrich men, women and children everywhere, rich and poor, developing and developed, of all races and all religions on all the continents. It will counter terrorism and violence, and promote political and strategic stability.

The wars in Afghanistan and Iraq will not bring an end to terrorism or deliver us the peaceful change we need. Nothing can justify the monstrous acts of September the Eleventh, Bali and Madrid; but we must be positive in our response. We need to show vision in acknowledging the extent of human poverty and deprivation. We must acknowledge our failure to respect human aspirations and ensure that people are not humiliated or, in President Franklin D. Roosevelt's words, "ill-housed, ill-clad, ill-nourished."

We are right now in the paradoxically "fortunate" position that we can be both hardheaded and humanitarian. We can help ourselves while we help others. For once, we can "globalize" in our own self-interest while we lift up the lives of billions of our fellow human beings.

In the last twenty years, public investment has gone out of fashion, but we must be clear that it is not the enemy of private investment and enterprise. On the contrary, and especially when times are tough, public investment is, for the private sector, a close, stalwart and indispensable friend.

Our need to re-launch the world economy back to robust prosperity and a simultaneous long-term, global need to lift the quality of life and meet the aspirations of billions of our fellow human beings are the imperatives that Victory Over Want is designed to meet.

VOW envisages a process whereby people of all races, religions and secular beliefs will work together for the common good – to accelerate, as President Clinton suggested, our reaching the goal of freedom from want "by a generation" – and perhaps by even more.The process involves, first, a gathering of moral support from all around the world. Then Commissions will be convened on a wide range of issues. People sitting around the tables at these Commissions will be from India and Ireland, China and Peru, Nigeria and Nicaragua. They will be Moslems and Methodists, Brahmins and Buddhists, Catholics and Jews.

Some will be poor, others rich. The disadvantaged will sit alongside the "elites."Their common quality will be their determination to promote the common "global" good, to reconcile differences, to abolish want and, through it all, to achieve peaceful, continuing change for the betterment of all.

The Commissions will report to a World Conference which will decide on ways to implement agreed measures.

It is crucial that, within this process, voices of dissent be heard and the content of dissent thoroughly debated. They must not be shut out as they have been from intergovernmental gatherings from Seattle to Genoa, Montreal to Melbourne; or as they have been from the World Economic Forum, where agenda and guests are acceptable to the world's 1000 foremost corporations and their smaller governing group; and from the World Trade Organization.

That exclusion of other voices, other ideas must cease.

Governments and their mainstream advisers have failed. They have failed even to listen. Participants in the VOW process must therefore help us make a fresh start, with fresh ideas and fresh policies. Governments of goodwill and equivalent individuals in the economic, social and political mainstream are welcome but they must not be allowed to dominate the process.

We must have a real globalization of ideas, not a globalization of formulae devised to serve the self-interest of particular countries or particular economic, social or other groups.The process will draw on the expertise of those who know both the immensity of the task and the means by which it can be successfully accomplished.

VOW opens horizons for peaceful change we have scarcely glimpsed before and, in the new millennium, can lead us forward, not only with hopes high but, above all, with newfound assurance that we know the road we must travel by. It is a road we can and must all travel together - hands clasped, as in the VOW logo - living together, working together, prospering together.

This is not an impossible dream. It is a realistic vision. All we need is to accept the challenge and feel again the fire in our bellies that we knew at great moments in the past. In 1969, Man walked on the Moon. Now is the time to make another "giant leap for mankind" – this time right here on Earth.

With that as introduction, let us now offer a more detailed analysis and more precise proposals on the ways in which we might proceed if we are to avoid tumbling into the "multiple abyss."

Copyright and with friendly permission by James Cumes

17 May 2004

[1]The Indigent Rich, Pergamon Press, 1971, pp.41-2

[2]Ibid., pp.1-2

[3]The Rise and Fall of the Great Powers, Paul Kennedy, Random House, 1987, p.540

[4]Professor Joan Roughgarden of Stanford University, as quoted in the Financial Times,   London, 15/16 May 2004.




Finance after WWI - The Bank of England and the Federal Reserve System
by F. William Engdahl

Richard Löwenthal: Jenseits des Kapitalismus - Globalsteuerung oder Globalisierung

Four Decades of Decay: The Third Stage of Imperialism

Vier Jahrzehnte der Irreführung:
Die Dritte Ära des Imperialismus

A Call to Conscience
by Roger Morris
The Diplomat who quit over Nixon's Invasion of Cambodia asks Americans on the front lines of Foreign Service to resign from the
"Worst Regime by far in the History of the Republic."

Kündigen Sie Bush
Ein offener Brief an Amerikas Diplomaten Von Roger Morris

Diplomats and Military Commanders for Change
Video Webcast, June 16, 2004

Ein Jahrhundertsieg wird verspielt
Von David Hartstein