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American power and the dollar: The constraints of technical authority and declaratory policy in the 1990s

2006; Taylor & Francis; Volume: 11; Issue: 1 Linguagem: Inglês

10.1080/13563460500494834

1469-9923

Andrew Baker,

Global Financial Crisis and Policies

Click to increase image sizeClick to decrease image size Acknowledgments Earlier versions of this paper were presented at departmental seminars at the Department of Politics, Nottingham University, in November 2003, the Department of Politics and International Studies, Warwick University, in October 2004 and the School of Politics and International Studies, Queen's University of Belfast, in November 2004. I am grateful to participants at these seminars for their interesting observations and suggestions. I am also indebted to the anonymous reviewers for NPE for their instructive and helpful comments. Remaining shortcomings are my responsibility alone. Notes 1. Peter Gowan, The Global Gamble: Washington's Faustian Bid for Global Dominance (Verso, 1999). 2. Susan Strange, States and Markets (Pinter, 1994). 3. Peter Gowan, ‘Explaining the American Boom: The Roles of “Globalisation” and United States Global Power’, New Political Economy, Vol. 6, No. 3 (2001), pp. 359–74. Gowan is one of the few scholars in recent times to consider the degree of autonomy the USA enjoys in its dollar policy and the implications of this more generally for US strategy and power. 4. Jonathon Kirshner, Currency and Coercion: The Political Economy of International Monetary Power (Princeton University Press, 1995). 5. Gowan, The Global Gamble; Susan Strange, Casino Capitalism (Blackwell, 1986); Eric Helleiner, States and the Re-emergence of Global Finance: From Bretton Woods to the 1990s (Cornell University Press, 1994). 6. US macroeconomic policy played a role in this with Reagan's fiscal policy of tax cuts and military expenditures stimulating the domestic economy, but also contributing to a burgeoning budget deficit, while interest rate hikes at the Federal Reserve attracted inflows of foreign capital and contributed to the rise in the dollar. This was termed a phase of ‘benign neglect’ and the subsequent exchange rate cooperation to reduce the value of the dollar enabled the USA to resist protectionist pressures without having to adjust domestic macroeconomic policy. 7. Randall Henning & Ian Destler, ‘From Neglect to Activism: American Politics and the 1985 Plaza Accord’, Journal of Public Policy, Vol. 8, Nos 3/4 (1988), pp. 317–33. Henning and Destler provided the definitive analysis of the Plaza Agreement. They argued that dollar appreciation prior to 1985 resulted in political pressures for a lower dollar from trade-exposed sectors within the USA. These political pressures formed an alliance with influential voices in the US Congress, which constituted the most important single factor pushing the US Treasury towards a strategy of dollar depreciation. The use of the G5 by the USA to achieve this depreciation was done primarily for the domestic reason of demonstrating to Congress the willingness of the USA's main trading partners to assist in a dollar re-alignment, thus appeasing protectionist sentiment on Capitol Hill. Such was the significance of these congressional political pressures that they overrode factors such as ideas, given the Reagan administration's ideological commitment to free markets and floating exchange rates, as the administration switched to a more activist exchange rate stance. Most commentators have subsequently interpreted the Plaza agreement as a demonstration of US autonomy and power in exchange rate politics, as the USA was able to follow the exchange rate policy best suited to its own domestic political circumstances. 8. Gowan, The Global Gamble, pp. 92–3; Gowan, ‘Explaining the American Boom’, p. 365. 9. Gowan, The Global Gamble, pp. 95–100. 10. Gowan, ‘Explaining the American Boom’, p. 367. 11. Gowan, The Global Gamble, p 93. 12. Gowan, ‘Explaining the American Boom’. This interpretation is contested. Robert Brenner argues that dollar appreciation resulted from US benevolence, which resulted in long-term damage to the US economy. See Robert Brenner, The Boom and the Bubble: The US in the World Economy (Verso, 2002). Also see Alex Callinicos, ‘Feature Review: The Boom and the Bubble: The US in the World Economy Robert Brenner’, New Political Economy, Vol. 8, No. 3 (2003), pp. 419–26. 13. The IMF argued that exchange rate adjustments were only very minor and could not account for the crisis. See IMF World Economy Outlook Supplement, Interim Assessment (IMF, 1997). It should be noted, however, that the Fund has a reputation for having an intellectual bias against explanations that emphasise design flaws in the international monetary and financial system itself, such as those that draw attention to speculative financial behaviour and currency turbulence. 14. For a similar if less conspiratorial analysis of aggressive US policy towards Asia, see Richard Higgott, ‘The Asian Economic Crisis: A Study in the Politics of Resentment’, New Political Economy, Vol. 3, No. 3 (1998), pp. 333–56. 15. See, for example, Benjamin Cohen, ‘The Meaning of Monetary Power’, paper presented to the Annual Convention of the International Studies Association, Montreal, Canada, 17 March 2004. 16. Gowan, The Global Gamble. For an account of how states that traditionally run long-term structural current account deficits, such as the USA and the UK, have a strategic interest in capital account liberalisation, see Mark Blyth, ‘The Political Power of Financial Ideas: Transparency, Risk and Distribution in Global Finance’, in Jonathon Kirshner (ed.), Monetary Orders: Ambiguous Economics, Ubiquitous Politics (Cornell University Press, 2003), pp. 239–59. 17. For an account of this, see Strange, States and Markets. 18. Cohen, ‘The Meaning of Monetary Power’. 19. Ibid. 20. This power of veto was evident in the US rejection of proposals for an Asian Monetary Fund (AMF). Combined, these powers ensure that international monetary relations remain very much asymmetrical. 21. Ian Hurd, ‘Legitimacy and Authority in International Politics’, International Organization, Vol. 53, No. 2 (1999), pp. 379–408; Claire Cutler, Virginia Haufler & Tony Porter (eds), Private Authority and International Affairs (State University of New York Press, 1999); Bruce Hall & Thomas Biersteker (eds), The Emergence of Private Authority in Global Governance (Cambridge University Press, 2002); Peter Aykens, ‘Conflicting Authorities: States, Currency Markets and the ERM crisis of 1992–93’, Review of International Studies, Vol. 28, No. 2 (2002), pp. 359–80. 22. Hurd, ‘Legitimacy and Authority in International Politics’. Cohen makes the distinction between ‘power from’ and ‘power to’ or ‘influence’. Authority is comparable to what here refers to as influence, although elements of influence also relate to what is referred to as structural power, such as US power of veto and the capacity to set agendas. In other words structural power involves more than power from and authority is a distinct form of influence. Cohen, ‘The Meaning of Monetary Power’. 23. Aykens, ‘Conflicting Authorities’, p. 361. 24. Joseph Raz, ‘Introduction’, in Joseph Raz (ed.), Authority (Blackwell, 1990), p. 2. 25. Keith Plibeam, ‘Economic Fundamentals and Exchange Rate Movements’, International Review of Applied Economics, Vol. 15, No. 1 (2001), p. 56. 26. Aykens, ‘Conflicting Authorities’. Steven Lukes, ‘Perspectives on Authority’, in Roland Pennock & John Champan (eds), Authority Revisited (New York University Press, 1987), p. 65. 27. Given the greater salaries on offer, we might expect to find a growing concentration of expertise and therefore authority in the private sector. The growing public profile of market analysts at leading private sector financial institutions has certainly seen them lay a claim for technical authority. An example of private technical authority is the role played by credit rating agencies. For an account see Timothy J. Sinclair, The New Masters of Capital: American Bond Rating Agencies and the Politics of Creditworthiness (Cornell University Press, 2005). 28. Jeffrey Frieden, ‘Invested Interests: The Politics of National Economic Policies in a World of Global Finance’, International Organization, Vol. 45, No. 4 (1991), pp. 125–48. Frieden argued, that as trade liberalisation proceeded, the number of social groupings affected by exchange rates increased with the consequence of politicising this issue. However, as we shall see, the fact that more societal groupings have more of an interest in exchange rate issues does not necessarily translate into exchange rate issues becoming more susceptible to political influence. 29. Henning & Destler, ‘From Neglect to Activism’; Michael Webb, ‘International Economic Structures, Government Interests and International Coordination of Macroeceonomic Adjustment Policies’, International Organization, Vol. 45, No. 3 (1991), pp. 309–42; Robert Putnam & Randall Henning, ‘The Bonn Summit of 1978: A Case Study in Coordination’, in Robert Cooper, Barry Eichengreen, Gerald Holtham, Robert Putnam & Randall Henning (eds), Can Nations Agree? Issues in International Economic Cooperation (The Brookings Institution, 1989), pp. 12–140. 30. Tony Porter, ‘Technical Collaboration and Political Conflict in the Emerging Regime for International Financial Regulation’, Review of International Political Economy, Vol. 10, No. 3 (2003), pp. 520–51. 31. Ed Balls, ‘Open Macroeconomics in an Open Economy’, Scottish Journal of Political Economy, Vol. 45, No. 2 (1998), pp. 113–32. These kind of arguments have the effect of making monetary policy appear to be a more technical matter and make it more difficult for those outside the central banking community to contest. 32. This is not same thing as saying that exchange rates and monetary policy are not political, or that central bank independence is not a political act, but merely that there has been an attempt to insulate monetary policy from political interests and demands. This has been accompanied by conscious efforts to present exchange rates as matters that are rightfully the concern of technocrats, which in itself is an explicit political act with political consequences. For an argument that central bank independence is socially and politically constructed and that the intellectual case for it is inconsistent, see Matthew Watson, ‘The Institutional Paradoxes of Monetary Orthodoxy: Reflections on the Political Economy of Central Bank Independence’, Review of International Political Economy, Vol. 9, No. 1 (2002), pp. 183–96. Also see Jonathon Kirshner, ‘Money is Politics’, Review of International Political Economy, Vol. 10, No. 4 (2003), pp. 645–60. 33. Watson, ‘The Institutional Paradoxes of Monetary Orthodoxy’. 34. The European Central Bank (ECB) had emerged as a new supranational independent central bank (possibly the most independent) while the Bank of England and Bank of Japan have gained operational independence. 35. Nigel Wicks, ‘G7 Coordination: An Empty Box?’, speech to the Bank of England's Advanced Development Course, 1 September 1994. 36. That is not to say that data and evidence will not reflect societal and political bias inherent in the norms of a particular technical profession. Theory, as Robert Cox remarked, is always for someone and for some purpose. ‘Social Forces, States and World Orders: Beyond International Relations Theory’, Millennium: Journal of International Studies, Vol. 10, No. 2 (1981), p. 128. 37. James March & Johan Olsen, ‘The Institutional Dynamics of International Political Orders’, International Organization, Vol. 52, No. 4 (1998), pp. 943–69. 38. Bergsten and Henning have argued that macroeconomic policy has been immobilised by the mandates and decision-making procedures of national central banks and by fiscal policy frameworks. Fred Bergsten & Randall Henning, Global Economic Leadership and the Group of Seven (Institute for International Economics, 1996); Andrew Baker, ‘The G7 as a “Global Ginger Group”: Plurialteralism and Four-Dimensional Diplomacy’, Global Governance, Vol. 6, No. 2 (2000), pp. 165–89; Andrew Baker, ‘The Three Dimensional Governance of Macroeconomic Policy in Advanced Capitalist States’, in Andrew Baker, David Hudson & Richard Woodward (eds), Governing Financial Globalization: IPE and Multi-Level Governance (Routledge, 2005), pp. 102–29. 39. Wicks, ‘G7 Coordination’, p. 2. 40. Nigel Wicks, ‘Governments, the International Financial Institutions and International Cooperation’, in Nicholas Bayne & Stephen Woolcock (eds), The New Economic Diplomacy: Decision Making and Negotiations in International Economic Relations (Ashgate, 2003), pp. 243–58. 41. Interview with David Dodge, Governor of the Bank of Canada, Conducted by Candia Tamar Paltiel, G8 Research Group, Ottawa, 18 November 2001, http://www.g7.utoronto.ca/oralhistory/. 42. See Robert Russell, ‘Transgovernmental Interaction in the International Monetary System 1960–1972’, International Organization, Vol. 27, No. 4 (1973), pp. 431–64. While conceding that surveillance involved technical exchanges, Russell argued that in the 1960s deliberations on payments financing were best explained by a model of intergovernmentalism in which politically motivated agencies attempted to rationalise and explain policies they were already intent on pursuing and gaining intelligence on the policies of their counterparts. My point here is not to deny that such factors continue to motivate states and inform their behaviour, rather that there is much less scope for the kind of politically motivated policy coordination that took place in the 1970s and 1980s, because of the consensus on exchange rates in the 1990s and perceptions of international capital mobility. For an argument relating to rising international capital mobility in the 1970s and 1980s and an increase in negotiated domestic macroeconomic adjustments see Webb, ‘International Economic Structures’. 43. Halifax Communiqué, G7 summit 1995, Background Document prepared by the G7 Finance ministries and Central Banks, ‘Promoting Financial Stability in a Globalised Economy’. 44. Ibid. 45. Ibid. 46. On the flexible and sticky price models and the portfolio balance model, see Pilbeam, ‘Economic Fundamentals and Exchange Rate Movements’. 47. Wicks, ‘Governments, the International Financial Institutions and International Cooperation’, 48. Lawrence Summers, ‘US Policy Towards the International Monetary System on the Eve of the Lyon Summit’, remarks to New York Emerging Markets Traders Association, New York, 24 June 1996. 49. Confidential interview with senior US Treasury official, Washington DC, February 1998. 50. Confidential interview with senior US Treasury official, Washington DC, February 1998. 51. There are caveats to this. For example, Larry Summers was accepting as early as 1996 that controls on short-tern capital inflows into banking systems could be appropriate in certain circumstances. For a discussion, see Andrew Baker, The Group of Seven: Finance Ministries, Central Banks and Global Financial Governance (Routledge, 2005). 52. The literature on the material realities of globalisation is extensive and the debates are well known to scholars of political economy including the work of Paul Hirst and Grahame Thompson, Geoffrey Garrett and Linda Weiss to name but a few. Specifically on exchange market intervention, see Katherine Dominguez & Jacob Frankel, Does Foreign Exchange Market Intervention Work? (Institute for International Economics, 1993). On central bank independence, see the excellent review essay by Matthew Watson, ‘The Institutional Paradoxes of Monetary Orthodoxy’. On capital controls, see Matthew Watson, ‘Rethinking Capital Mobility, Re-regulating Financial Markets’, New Political Economy, Vol. 4, No. 1 (1999), pp. 55–75; David Felix, ‘The Economic Case Against Free Capital Mobility’, in Leslie Armijo (ed.), Debating the Global Financial Architecture (State University of New York Press, 2002), pp. 172–215; and Benjamin Cohen, ‘Capital Controls: The Neglected Option’, in Geoffrey Underhill & Xiaoke Zhang (eds), International Financial Governance Under Stress: National Imperatives versus Global Structures (Cambridge University Press, 2003), pp. 60–76. 53. Colin Hay & Ben Rosamond, ‘Globalization, European Integration and the Discursive Construction of Economic Imperatives’, Journal of European Public Policy, Vol. 9, No. 2 (2002), pp. 147–67. The altogether more controversial question of whether or not material constraints are invoked as an instrumental device deployed in the promotion of a set of extant preferences cannot be debated in any depth here as result of constraints of space. However, my research indicates that officials genuinely believe that there is little they can do other than correct market imperfections where exchange rates are concerned despite numerous academic contributions that point in the opposite direction, but that simultaneously this is accompanied by a normative view that they should not take a more interventionist stance in any event. 54. Summers, ‘US International Monetary Policy on the Eve of the Lyon Summit’. 55. Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and Functions (2005). 56. This is not to say the Federal Reserve ignores the dollar, but merely that it is only one factor factored into their calculations. 57. It is worth pointing out that public statements and foreign exchange market interventions are frequently used in concert with one another and represent a combined strategic signal, or a common statement of intent, that authorities wish to see an exchange rate re-alignment and are prepared to exert collective will to bring that about. Because the two are used in tandem they should be viewed as two sides of the same coin, rather than separate policy instruments. Consistent large-scale intervention has become increasingly rare. 58. Robert Rubin & Jacob Weisburg, In an Uncertain World: Tough Choices From Washington to Wall Street (Thomson Texere, 2003), p. 182. 59. Gordon Clark, Nigel Thrift & Adam Tickell, ‘Performing Finance: the Industry, the Media and Its Image’, Review of International Political Economy, Vol. 10, No. 2 (2004), pp. 289–310. 60. Nigel Thrift & Andrew Leyshon, ‘The Phantom State? The De-traditionalisation of Money, The International Financial Syatem and International Financial Centres’, Political Geography, Vol. 13, No. 4 (1994), pp. 299–327; George Soros, The Alchemy of Finance (Wiley, 1987). 61. For a discussion of extraterritorialty as the defining feature of contemporary globalisation, see Jan Aart Scholte, Globalization: A Critical Introduction (MacMillan, 2001). For discussion of the idea of finance being characterised by spaces of flows, see Benjamin Cohen, The Geography of Money (Cornell University Press, 1998). Also see Richard Woodward, ‘Money and the Spatial Challenge: Multi-Level Governance and the Territorial Trap’, in Baker et al., Governing Financial Globalization, pp. 49–61, and David Hudson, ‘Locating and Understanding the Market Place in Financial Governance: IPE, Interdisciplinarity and Multi-Level Governance’, in Baker et al., Governing Financial Globalization, pp. 62–84. 62. Summers, ‘US Policy Towards the International Monetary System’. 63. Gowan, The Global Gamble. 64. Federal Reserve Board of Governors, Record of Policy Actions of the Federal Open Market Committee (1994). Bergsten & Henning, Global Economic Leadership. 65. In this case the intervention and the G7 statement was undermined by the actions of the US Commerce Department. This is dealt with in more detail in the section of this chapter on domestic politics. 66. Financial Times, 4 May 1999. 67. Federal Reserve Board of Governors, Record of Policy Actions. See also Bergsten & Henning, Global Economic Leadership, p. 33. This was done primarily to placate Congress, rather than as a signal to the markets. I am grateful to Ben Thirkell-White for this point. 68. Baker, ‘The Three Dimensional Governance of Macroeconomic Policy’. 69. Bergsten & Henning, Global Economic Leadership. 70. Ibid. 71. Statement of G7 Finance Ministers and Central Bank Governors, Washington DC, 25 April 1995. 72. Position of Robin Marshall, Chief Economist at Chase Manhattan London, Financial Times, 27 April 1995. 73. Michael Barone, ‘Wealth Accumulation and American Politics: How Stock Ownership is Changing the Political Game’, The International Economy, Sept–Oct (1998), pp. 46–50. 74. A further factor in dollar appreciation was the flow of funds back into dollars following the Mexican peso crisis, although it is striking to see that the appreciation of the dollar coincides with and gathers steam following the G7 statement. I would suggest, therefore, that the Mexican peso crisis was not the principal cause of dollar appreciation and did not have an instant impact in terms of moving the dollar. 75. Statement of G7 Finance Ministers and Central Bank Governors, Berlin, 8 February 1995, http://www.g7.utoronto.ca/. 76. Pilbeam, ‘Economic Fundamentals and Exchange Rate Movements’, p. 61. 77. Although they repeatedly emphasised they did not want to see the dollar climb much higher or the yen fall much lower, on the whole the Treasury was also happy to continue to accept the anti-inflationary benefits of a higher dollar and healthy stock market performance that was partly derived from low interest rates. 78. See, for example, articles in The Financial Times, 3 October 2003. 79. This interventionism was an effective breach of the G7 consensus that had characterised most of the previous decade, but was accepted by the Bush administration because these interventions enabled the USA to continue financing trade and current account deficits. Unfortunately, the policies of China caused exchange rate tensions with other G7 countries because the full force of their efforts to ensure their currency remained competitive relative to the dollar fell on an appreciating euro and on sterling. 80. Cohen, ‘The Meaning of Monetary Power’. 81. What we are witnessing is an effective long-term debt default as foreign investors provide the financing to fund both the twin deficits and low levels of domestic saving, but see the return on their investment being squeezed by a falling dollar. 82. Cohen, ‘The Meaning of Monetary Power’, p. 16. 83. One of the most pressing issues currently facing US economic policy-making is how high US interest rates will have to rise to combat personal indebtedness and low saving levels.