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<nettime> history lesson
Keith Hart on Sun, 21 Jan 2007 04:49:44 +0100 (CET)

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<nettime> history lesson

How do you teach history to a people who escaped from history, some of 
whose intellectuals thought winning the Cold War was the end of history? 
Hardt and Negri may have been wrong about trans-national Empire, but 
they were right to see social democracy and neo-liberalism as political 
responses to the depressions of the 1930s and 1970s. Our task is to 
understand how the third depression, which is taking root now, has its 
origins in the circumstances of the last one. My story is not greatly 
informed by reading books, more by extrapolating from fragments of news. 
Let's just say I made it up.

Cracks were already beginning to show in the West's post-war boom by the 
beginning of the 1970s. The Vietnam War introduced financial instability 
to world markets, as well as showing that American pretensions to global 
hegemony had clay feet. When Nixon took the dollar off the gold standard 
in 1971, leading to an eight-fold increase in the dollar price of gold, 
the main winner was the US (which held more gold than anyone else); the 
losers were countries (mostly poor) who held dollar deposits. The fixed 
parity exchange rates system collapsed soon afterwards and money markets 
as we now know them were invented in 1975, inaugurating the financial 
flood that has since taken over world economy. But the second 
twentieth-century depression was triggered off by the events of 1973. 
This was when a new system for American control of the Middle East and 
its oil was put in place. The Iraq war and whatever it is leading to 
next are a response to the cascading failure of that system.

Israel's comprehensive defeat of the Arabs in the Yom Kippur war 
established that it could be an effective military proxy for the US in 
the Middle East. In the same year the OPEC countries, led by the Saudis 
and dominated by a group of small countries in the Persian Gulf region 
with a lot of sand and next to no people, formed a cartel to raise the 
price of oil. Oil production was organized by American and one or two 
European companies ("the seven sisters"). One might ask how an economic 
disaster of this magnitude could be pulled off by a few Arab sheiks 
sheltering under the military protection of the United States. The 
acquiescence of the oil companies and the US government implies that 
their interests were also served by what transpired. In this way the 
Saudis became America's financial proxy in the Middle East.

The consequence of the oil price rise was an immediate reduction in 
aggregate demand within the industrial economies, as consumers were 
forced to pay substantially more for energy. The oil producers received 
a windfall surplus that most of them could not spend, since their 
populations were too small and there is a limit to how many fancy 
weapons they could buy (the idea of building super-cities came later). 
They made huge transfers to their patron, the US government, in the form 
of purchasing Treasury bonds ($20 billions by the Saudis alone in the 
first year of OPEC). This meant that American citizens were indirectly 
financing additional government expenditures by paying more for gas, a 
tax hike by the back door. There was still a lot of money left over. 
This was deposited by the oil producers in the banking system, much of 
it in the new off-shore Eurodollar market which offered higher interest 
rates. In order to pay the interest the banks had to lend on the money. 
There were few takers in the West, since the sharp reduction in demand 
discouraged investment there. The communist bloc was not considered to 
be suitable for investment at the time and had little to sell that the 
rest of the world wanted. So the bankers turned to the Third World.

But first a digression on the communist bloc. Richard Nixon, before he 
was evicted from office, made a sort of peace with Brezhnev's Soviet 
Union, as well as with China. This opened up the possibility of trade 
between East and West. Nixon's solution to the other side's lack of 
purchasing power was the so-called "vodka-cola" strategy. There was no 
way that Americans could drink enough vodka to pay for all the Coke that 
the Russians would be buying. But the communists had plenty of docile 
cheap labour at a reasonable level of skill. Their rulers could buy 
western goods with the proceeds from selling that labour to western 
corporations. So the Bretton Woods institutions made credit available to 
the Poles and Hungarians to go in for joint sponsoring deals with these 
companies, setting up factories to make clothes and similar items for 
sale in the West. The hard currency earned by repressing their own 
labour force was spent by the political elites in special shops for 
whisky and Marlboro cigarettes that served to mark off their status from 
the masses, who ate bread and potatoes, if they were lucky.

This system didn't take off until the 1980s, but there was still a snag. 
World trade was rigged to prevent countries with cheap labour, like 
Taiwan or Poland, undermining the sales of their high-cost western 
competitors. North America and Western Europe erected tariff barriers 
against such competition which were potentially prohibitive of the trade 
envisaged by the vodka-cola strategy. A solution was found. When West 
Germany signed the Treaty of Rome to join the European Common Market, it 
was in the name of Germany as a whole; so that East Germany was in 
theory a member of the western trading circle. Manufactures from the 
communist bloc were shipped into the West through East Germany acting as 
a sort of port-of-trade. When the Berlin Wall fell, several Eastern 
European countries had accumulated billions of dollars in debts to 
finance this scheme. The resulting popular governments then embarked on 
a privatization programme that ruined their economies; and the attention 
of the western powers shifted to doing what they could to protect their 
trade and investment there.

If the oil price rise was bad for the industrial countries, it was a 
full-scale disaster for non-oil producing Third World countries. These 
had been encouraged by the World Bank and other international agencies 
to concentrate on exporting a few primary products. The resulting 
oversupply kept prices down, while rapid urbanization in their countries 
raised demand for the manufacturing exports of the industrial countries. 
As a result the terms of trade between the two blocs were worsening from 
the perspective of the poor agricultural economies. The oil shock 
depressed demand in the rich countries for Third World exports; yet when 
the latter were faced with increased energy bills, all they could do was 
try to sell more of their traditional exports, thereby driving down 
world prices even further.

Into this desperate situation came the western banks looking for ways of 
lending on the oil surplus. They found takers, of course, usually 
corrupt leaders of bankrupt governments who were prepared to sign any 
piece of paper to get their hands on some money. The premise of the 
loans was that they would be invested in productive projects out of 
whose yields the interest and capital repayments would be made. But more 
often than not, the money went into private Swiss bank accounts or the 
projects failed, as most "development" projects did at the time. By the 
end of the 1970s there was a huge banking crisis, since Third World 
debtors were in no position to pay off the loans. This was exacerbated 
by the second oil price hike in 1979. The OPEC gains of 1973 had been 
eroded in the meantime; so the producers tried to claw some of them 
back. This time, the dollar was undermined and the Federal Reserve, now 
headed by Paul Volcker, responded by raising interest rates to almost 
20%. The subsequent regime of high interest rates coincided with the 
shift from post-war Keynesian demand management to the "monetarist" 
(sound money = deflationary) policies identified with Reagan and Thatcher.

The 1980s and afterwards saw a massive transfer of money from the Third 
World to the West in the form of interest repayments that often amounted 
to as much as a third of nation public revenues in any given year. This 
drain of income from the poor countries was greater than any extracted 
under previous colonial and neo-colonial arrangements; and it came when 
their reserves had been wiped out by the dollar devaluation of 1971. The 
International Monetary Fund and World Bank then imposed draconian 
measures known as "structural adjustment", designed to reduce each 
government's financial obligations and open up their economies to the 
free flow of capital. The threat to the western banking system was 
averted by a combination of rescheduling agreements (which only 
increased Third World liabilities) and covert support to the most 
vulnerable banks. The governments of poor countries were caught without 
any alternative to playing along. In any case they had long ago 
abandoned any sense of responsibility towards their own people in 
exchange for dependency on their foreign creditors.

This catastrophe is the specific context for the further impoverishment 
of Africa and similar regions of the world. The idea of "development" 
was quietly dropped. The international agencies now had just one goal, 
the survival of governments whose task is to supervise passively the 
flow of money into the coffers of western banks and corporations. Aid 
levels have been much reduced since the 1960s; indeed non-governmental 
organisations of a bewildering number and variety have stepped in to 
perform functions that neither Third World states nor their 
international sponsors are prepared to undertake any more. But the 
obscene transfer of wealth from the poor to the rich, honouring debts 
contracted under highly dubious circumstances, reveals how far world 
society has degenerated from the high ideals generated by the defeat of 
fascism and the anti-colonial revolution in mid-century.

It might have been plausible at the millennium to represent all this as 
a multi-lateral empire of Roosevelt's original design, but events since 
9-11 have revealed the American Empire for what it is in the hands of 
Bush and his neo-Nazi backers. The story speeds up and gets more 
complicated as we enter the present. All I would suggest here is that 
one interpretation of the first and second Gulf wars, as well as of the 
third being currently launched against Iran, is that America's oil habit 
has become increasingly threatened by the weakness of its two regional 
proxies, Israel and Saudi Arabia. Both societies are imploding under the 
political, military and economic contradictions they are built on. Bush 
I used Iraq as an excuse to strengthen the US's military presence in the 
Gulf, threatening the fig leaf of Saudi Arabia's independence; but Bush 
II came to power committed to making Iraq a base for direct military 
operations in the Middle East, knowing that the Saudis and Israelis 
would not be able to hold out on their own for long. In the process, 
they strengthened Iran and that is the next part of the story.

I have left out the camouflage provided by Armageddon in the Middle East 
for the economic upheavals unleashed by the current devaluation of the 
dollar in the face of a cumulative transfer of economic power from West 
to East. It may be that the American public needs educating about its 
own passive role in generating this nightmare. The rest of us had better 
figure out where to take cover -- perhaps in cyberspace, on a mailing 
list like this one or, failing that, in a library?

Keith Hart

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