Monday, June 24, 2019

Modern History: Ports, Finance, Power, and Free Trade

I've written about modern history before, but I see no harm in trying again. Summarizing any time period is bound to exclude important events and people, and assigning exact percentages of influence is impossible. (For example, Elon Musk is better known than Martin Eberhard, but the latter founded Tesla Inc., and Eberhard surely benefitted from GM's EV1 research in the 1990s.) With these two caveats in mind, let's continue. 
"Europeans... are the conflicted inheritors of a long military tradition." -- Justin Va├»sse
In 1919, WWI's devastation forced Germany (aka the Weimar Republic) to accept the Treaty of Versailles' onerous terms, which did not contemplate re-establishing Germany as an equal member among world nations. In 1920, the League of Nations, the precursor to the modern United Nations, was convened, but its difficulty enforcing terms contrary to Britain and France's wishes meant true diplomacy was limited from the start. Indeed, in 1922, after Germany claimed it couldn't make its scheduled reparations payment, France and Belgium invaded the Ruhr in 1923 and occupied Germany until 1925 to ensure deliveries of coal, iron, steel, and timber. 

Inflation, high unemployment, and Germany's lack of a stable currency made it hard to administer the German economy in mutually beneficial ways. In 1924, the Dawes Plan, for which Charles G. Dawes and Austen Chamberlain received the Nobel Peace Prize, injected American capital into Germany, shifting much of the burden of German reparations onto American bondholders, creating a more probable repayment scenario and convincing the French and Belgium occupiers to leave the following year. 

The United States's credibility in international relations derived in part from its large post-WWI gold reserves, some of which were housed at Fort Knox (built in 1918). Although the U.S. dollar had ceased to be backed by gold reserves in 1919, Britain in 1925 returned to a gold bullion standard, likely causing potential investments to leave European neighbors and the United States and enter Britain--around the same time American bondholders had taken risks in stabilizing Europe. Britain's action assisted it in repaying its own debt to the United States as well as signaling an answer to declining wages and inflation across Europe, but had the unintentional effect of France devaluing its own currency to undermine Britain's desired status as superior trade exporter. In choosing the gold standard, Winston Churchill wanted Britain to be both a financial and trading center during a time when America was reeling from the Teapot Dome scandal and President Calvin Coolidge was preoccupied with Latin American affairs: 

I believe that the establishment of this great area of common arrangement [aka the gold standard] will facilitate the revival of international trade and of inter-Imperial trade. Such a revival and such a foundation is important to all countries and to no country is it more important than to this island, whose population is larger than its agriculture or its industry can sustain which is the centre of a wide Empire, and which, in spite of all its burdens, has still retained, if not the primacy, at any rate the central position, in the financial systems of the world. (Churchill, 1925, to Britain's House of Commons)

Although the initial effects of a strong pound/sterling attracted investment, Britain was unable to stimulate demand, leading to sustained unemployment. Meanwhile, in America, taxes were slashed, consumer credit extended, and wartime manufacturing capacity transitioned into peacetime production. Such success led to increased borrowing generally and speculation in America's stock market. 

By 1929, greater complexity in currency obligations, international trade, and wage stability prompted the creation of the Young Plan (promoted by America's J.P. Morgan, Jr. and finalized on August 31, 1929) to supplant the Dawes Plan in 1930, but it was too late. In Germany, the National Socialists (aka Nazis) sought a "Liberty Law" (aka Law against the Enslavement of the German People) to disavow all reparations, which was overwhelmingly voted down on October 16, 1929. Even so, on October 24, 1929, America's stock market crashed, perhaps anticipating global instability and large losses in its German-linked bonds. The German government's rejection of the "Liberty Law" increased Adolf Hitler's and the National Socialists' visibility when they took the proposal directly to the German people on December 22, 1929. On January 30, 1933, Adolf Hitler was appointed Chancellor of Germany. In 1938, Hitler invaded Austria, setting in motion WWII from 1939 to 1945. 

Britain would abandon the gold standard in September 1931, about two years after America's October 1929 stock market crash. By 1933, almost two-thirds of world trade had vanished. That same year, President Franklin Delano Roosevelt banned private ownership of gold bullion, gold certificates, and gold coins, intending to remove impediments to the devaluation of the U.S. dollar in 1934. 

(Bonus: Germany did not pay off the interest owed on its reparations debt until 2010. As of June 2019, Germany has the strongest economy in Europe, and one of its banks has loaned billions of dollars to the current president of the United States, a man sometimes compared to a former German Chancellor. With "Brexit," Britain continues to vacillate between becoming a full member of a new Europe, where it will compete with non-English-speaking France, Norway, and Germany for influence, or maintaining preferential American relations.) 

In July 1944, forty-four Allied countries attended the Bretton Woods Conference in New Hampshire, where they, anticipating Germany's defeat, looked ahead to a new international paradigm led by the United States. In 1945, Congress ratified the Bretton Woods agreement, establishing a new gold exchange standard promoting currency convertibility, the International Monetary Fund (IMF), and the World Bank. The USSR (aka the Soviet Union), one of the primary reasons for Germany's defeat in WWII, did not ratify the Bretton Woods agreement and did not join the IMF or the World Bank. With respect to the gold standard, America, anticipating greater spending and involvement in the Vietnam War, once again forbade private ownership of gold in 1961, then de-linked the dollar with gold in 1971, four years before its defeat in Vietnam. 

(Bonus: from Allison J. Truitt's Dreaming of Money in Ho Chi Minh City (2013): "The United States' massive military expenditures in Southeast Asia led to the collapse of its ability to maintain the dollar's fixed value relative to gold. When the US government put an end to the dollar's convertibility in 1971, it ushered in a new era of more flexible and more volatile exchange rates.")

After 1945, naval power plus nuclear and satellite-related technology plus natural resources (e.g., oil) determined which countries would set the rules of the world. America could set many of these rules because its two neighboring oceans had afforded it the protection to enter WWII late, minimizing its human and materiel losses. Having the advantage of only needing to rebuild a single state (Hawaii) rather than numerous cities, America was willing to assist other players through a mutually beneficial system in which it distributed power--and favor--through ports, loans, and trade agreements. 

Countering America's power were the Soviet Union--equally determined to spread its economic system--as well as a China comfortable in being isolationist in the short term. The task of rebuilding infrastructure required not just the possession and transport of raw materials but implicit assurances of reliability. Hence, shipbuilding, ship repairing, refueling stations, and port efficiency became prized skills, and strategically-located countries like Singapore, Hong Kong, and Taiwan (aka Chinese Taipei) became valuable allies. 

To diminish the West's military strategy of choosing a small country along a strategic shipping (e.g., Singapore, Eritrea, Falkland Islands) or geographical (e.g., Poland) point, then shepherding that country into an alliance at the expense of its relations with its neighbors, the East attempted to use the same strategy with Cuba and other countries, primarily Vietnam and Mongolia. The East's mimicking of the West in this regard failed, in large part because its comparatively underdeveloped banking, legal, and insurance sectors could not generate similar investment returns, leading to slower income growth (though less inequality) and personal dissatisfaction in Eastern countries. By the 1980s, the resource-rich Soviet Union was borrowing money from Western banks because its ruble was not freely convertible to other currencies, foreshadowing its 1991 dissolution. 

While both the Soviet Union and China pursued a strategy of self-sufficiency, America demurred, using its naval power and satellite countries (Singapore, Taiwan, South Korea, Saudi Arabia, Israel, South Africa, United Kingdom) to increase its share of worldwide foreign trade. By 1962, America's Trade Expansion Act allowed President Kennedy to reduce tariffs by up to 80%, increasing foreign trade and therefore the influence and strength of the U.S. dollar. 

The Soviet Union's failure to create multinational banks--resulting from the assumption its vast natural resources and military strength were enough to maintain empire--meant its economy and ability to project power depended wholly on oil prices. The Soviet Union's lack of economic diversification also exacerbated competition, most pitched during WWII, between the East and West for control of oil supplies. 
Such competition had the effect of requiring large military expenditures to deter others from seeking similar control, rendering empire and power contingent on military and industrial cooperation. As oil, naval efficiency, and multinational banks became more important to an increasingly globalized and interdependent economy, military spending began driving economic growth. To protect investments and jobs, large financial outlays were channeled through an increasingly smaller elite, often associated with banks, insurers, and military on national levels; educators, natural resource producers, and unions on state levels; and real estate development and police on local levels. All aforementioned players would have access to financial terms and conditions unavailable to most people outside their spheres, allowing debt to inflate their influence at the expense of perhaps more innovative competitors. Most troubling, the projection of external power backed by foreign currency into a developing nation disfavored minorities and dissidents within such nations, sometimes with violently tragic consequences. 

As the West's international influence grew through debt and trade agreements, so did domestic vested interests, making substantive change increasingly difficult. For example, though the 2007-2009 financial crisis was caused by excessive debt and lax financial regulation, by 2019, overall debt had increased beyond its 2007 threshold. Such debt was deemed necessary to project influence or gain access to lucrative markets, though wise politicians found a balance between foreign trade and domestic infrastructure spending. As competition increased between major powers--designated by access to the most advanced nuclear, AI, cyber-warfare, surveillance, and satellite technology--risks continued to multiply in the interlinked worldwide economy. A rising EU, China, and Russia meant post-WWII alliances such as U.S.-led NATO no longer yielded the same positive economic or humanitarian results. [From UNHCR (2019): "the number of people who are forcibly displaced globally is indeed at an all-time high since the end of World War Two."] 

With technological advances outpacing cultural understanding (e.g., seamless and accurate language translations), negotiation and cooperation within the same geographical spheres became unwieldy and ROI uncertain, causing politicians to use tariffs and other measures to favor their own technological platforms, currency, and media content. In addition, the desire for consistent debt repayments made monopolies more acceptable and free trade's premise of fair competition less benign. 

Part of the problem was that overlapping and trans-continental trade agreements were based, at their root, on economist David Ricardo's ideas of tangible trade between just two nations: Portuguese wine for English cloth. In short, the global trading system assumed a paradigm of clear laws, finite trading partners, mutually beneficial cooperation, and tangible products. In reality, countries favoring fair play had to contend with greater unpredictability in consumer demand, tax revenues, informal economic actors, and domestic resource needs, making them more dependent on debt. As such, "free trade," especially within the context of intellectual property rights, favored developed over developing nations, and corporations over individuals, with developing nations often pledging fealty to one particular developed country over another to gain access to capital. 

Despite perennially low (and sometimes even negative) interest rates, the economic stability promised through open markets and respect for domestic producers had not come to fruition, reducing esteem for moderate Western politicians and existing practices. Smaller or less developed countries began to better utilize trade associations such as ASEAN or to develop new ones like the African Continental Free Trade Agreement (AfCFTA), realizing their local consumer populations were sufficient to improve living conditions without excessive interference by developed countries. The more developing countries began to wean themselves from post-WWII economic rules, the more the future of capital and labor became unpredictable, causing a rise in extremism. As governments, mostly in the West, realized they had sanctioned a technologically-driven economy without any firsthand technological expertise, they enacted flaccid countermeasures which further damaged their credibility. In 2019, tech corporations, often run by executives not subject to removal due to supermajority voting shares, began exploring plans to issue their own currencies

[W]e believe that the right to coin money and issue money is a function of government... We believe it is a part of sovereignty and can no more with safety be delegated to private individuals than can the power to make penal statutes or levy laws for taxation... I [say] that the issue of money is a function of the government and the banks should go out of the governing business. 

-- William Jennings Bryan, American, anti-imperialist politician, in 1896 

By summer of 2019, the first stanza of W.B Yeats' 1919 poem, "The Second Coming," written after WWI, seemed tailor-made for the present: 

"Turning and turning in the widening gyre 
The falcon cannot hear the falconer; 
Things fall apart; the centre cannot hold; 
Mere anarchy is loosed upon the world, 
The blood-dimmed tide is loosed, and everywhere 
The ceremony of innocence is drowned; 
The best lack all conviction, while the worst 
Are full of passionate intensity."

So it goes

© Matthew Mehdi Rafat (2019) 

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