How We Got Here, How to Get Out Kannan Srinivasan

 How We Got Here, How to Get Out Kannan Srinivasan 

Modernization taught us science & taught us the point of democracy. Renouncing all its benefits, governments all over the world from India to the United States embrace every measure that speeds up global warming. This is certain to kill us all.  

What explains this collective compulsion?

I suggest that some part of the explanation might lie in specific policy. Namely the  long-term bipartisan US decision to sustain measures originally taken by the Reagan Administration in the early Eighties to induce capital flight from everywhere, which had, I shall argue, the effect of perpetuating an expensive dollar sustained not by trade earnings but inflows of capital so substantial as to dramatically enrich Wall Street & its billionaire allies all over the world, making imports into the US cheap while making everything produced domestically so expensive as to render American workers jobless & kill their unions, which had the effect of denying the movement to expand the effective franchise its core organisational strength  thereby enabling the roll-back of democracy. Since I feel this & related issues are insufficiently addressed, I set out my claim more boldly at certain points than evidence may warrant, hoping that, should anyone be concerned enough to refute me, it provoke general discussion.

My claim is that it is this flood of cash from overseas that might now kill American democracy. Yet democracy is what we now need everywhere, now more than ever to save this planet. For the billionaires in charge in Washington DC, Riyadh & Delhi are clearly too stupid to think for all humanity. For their compulsive greed, as in seeking to find safety from the damage they themselves do by such reckless accumulation compels them to accumulate all the more, directing the persistently irrational public policies that constantly accelerate global warming. But we do have agency & can indeed prevent Wall Street pushing all humanity off the lifeboat. We must stop feeding this Beast with laundered cash.

 The relevant history is that the United States of America had undertaken at Bretton Woods to unconditionally exchange its currency for gold, making the dollar the dominant means of international settlement. So when President Nixon announced America would no longer honour this commitment it was not clear what might happen next. Yet the dollar flourished (all this so brilliantly set out by Michael Hudson (see especially Super-Imperialism, Holt, Rinehart & Winston, Inc, third edition, 2021). Strengthened as it was by the rich secondary market of dollars held overseas that developed in London, itself fed by Britain’s global network of money-laundering tax havens, the US dollar kept its position as the payment of choice for most trade.

This was to make it possible for the US to produce fewer & fewer internationally tradable goods or services, as it settled all debt instead by simply printing more of its own currency, which Giscard d’Estaing when French Finance Minister had protested as un privilège exorbitant. So did American finance help to shut down American industry & earn its returns from such seigniorage (see Maria N. Ivanova, Hegemony and Seigniorage: The Planned Spontaneity of the U.S. Current Account Deficit, International Journal of Political Economy, Spring 2010, Vol. 39, No. 1 (Spring 2010), pp. 93-130) returns all the more stable in a world without a workforce periodically making wage demands. Accordingly, when the United States itself set out in the early Eighties to emulate the UK & welcome anonymous flight capital from around the world by making non-resident investment & deposits tax-free while not concerning itself with the actual beneficial owners of that money, it was soon awash in cash, so increasing the dollar’s value as to make it very cheap for Americans to buy anything anywhere in the world. But no matter how hard an American worked, she could not afford to buy what she made, but only imported goods, far cheaper because the swelling dollar value had, over four decades of incoming policy-directed capital flight, made US manufacture & services so price-uncompetitive, devastating a large sector of the manufacturing economy. 

Since the effect of exchange rates on manufacturing output & employment have long been accepted (William H Branson, James P Love, July 1986, Dollar Appreciation and Manufacturing Employment and Output, National Bureau of Economic Research Working Paper No 1972), economists knew what lay in store, and amplified their warnings towards the end of the century (See for instance Linda S. Goldberg and Keith Crockett The Dollar and U.S. Manufacturing in Economics & Finance, November 1998 Volume 4 Number 12 published by the Federal Reserve Bank of New York) as the effect on wages became increasingly evident, then employment, & then eventually, the very trades-unions themselves (Useful papers on the connection between such inflows, the rising dollar & falling investment in US industry include those by, among others, Robert A. Blecker & Rafael Schwalb Blecker (Blecker, Robert A. (2007) 'The Economic Consequences of Dollar Appreciation for US Manufacturing Investment: A Time-Series Analysis', International Review of Applied Economics, 21:4, 491 – 517); Schwalb,  Rafael, in Capital Inflows &the Decline in US Manufacturing, 2024 https://rafaelschwalb.github.io/JM/SchwalbJMP.pdf), though neither sees these as outcome of policy).

 

 

Why labour is critical for democracy

Liberal democracy’s strategy has depended on replicating the success of the Civil Rights movement with the effective enfranchisement of one disadvantaged group after another, as each minority community joined majority in access to choice & welfare it may have seemed this momentum was unstoppable: “The women’s movement is usually seen as having grown from the movement for civil rights for blacks..(Powers, Elizabeth, A Farewell to Feminism, Commentary, January 1997)”. Yet as it has sought to proselytise it has discovered that among those to whom it reaches out that what constitutes such common interest is not always evident. The general common interest of the disadvantaged may often be vulnerable to the clash of mutually exclusive beliefs. As when religious groups do not recognise sexual diversity, prompting impoverished immigrants to ally with other conservative confessions rather than the rest of the working poor, retarding any agenda of the extension of freedom to all. We cannot choose to drive on either side of the road; thanks to rules we behave rationally to the advantage of all; Ernst Gellner pointed out famously that it was no accident that a cinema theatre needed an usher. This is why a trades-union constitutes one of the most important collectives in any society, for in a union, members of every ethical persuasion & ethnicity submit to a communal discipline at an identifiable common workplace, seeing in their comrade who speaks to them not the abstract good citizenship remote enough to be ignored, but the inescapable common cause that also becomes the private concern. By having led to the collapse of the trades-unions, that seemingly free money that swept in from all over the world might actually have served to usher in a lasting tyranny.

 

The first steps that made all this possible were taken by the Truman Administration, which, persuaded by the Labour Government’s claim that its status as a key ally against the Soviet Union & others overrode other commitments, decided in 1947 to reverse the policy of Franklin Roosevelt’s government that Britain repay India & Egypt, the second and third largest creditors of WW2 the  borrowing it had forced on them during the War. This allowed Britain to effectively default (https://thewire.in/banking/how-india paid-to-create-the-london-of-today) on payments due for exports to the United States & expenditure on Allied war effort in Italy North Africa the Middle East Burma Malaya & Japan including supplies to all all Allied troops & payment for the Indian Army. Working out, through its Ambassador to the Court of St James & the Departments of Treasury & State, a secret deal with Chancellor of the Exchequer Hugh Dalton & high officials of the Bank of England including the future Lord Cobbold later Bank of England Governor, to allow the UK to renege on its formal wartime commitment to the convertibility of the pound sterling upon which those creditor countries had predicated their agreements with the UK (https://thewire.in/history/independent-india-secret-uk-us-deal-britain-wartime-debt), the Truman Administration’s policy ensured that the UK only very gradually drew down its worldwide colonial commitments over the next three decades, at a cost as Keynes had predicted, of effectively zero. Since central banks in former British colonies all around the world were stuck for the next thirty years with a stock of sterling they could only trade with each other, India & Egypt, the second & third largest creditors of  the War, which had wished to switch to US dollars to import food, as well as heavy plant & machinery, technology, steel, rolling stock to revive their economies, were forced to stay on in sterling by the UK-US consensus. So they now had no choice but to buy obsolete British technology & goods including second-hand Royal Navy vessels such as HMS Achilles which became INS Delhi, or the Ambassador car. The Empire, with a parting kick enforced post-Independence backwardness. This long holiday from convertibility & repayment allowed the City of London’s merchant bankers to innovate when opportunity should present itself.

 As it did with progressive decolonisation, as Britain repurposed former colonial properties, ports, coaling stations, naval bases, from Dubai to Gibraltar to Malta to Singapore to the Cayman Islands, as well as its own Crown Dependencies of Jersey, Guernsey & Man, each a stage of a worldwide chain of tax havens that provided another wash cycle to secret cash. Yet this business really took off as Sanjay Reddy of the New School points out with the invention of the Eurodollar market in London providing the most attractive returns anywhere, which had arisen from the US requirement of cash to finance its wars overseas, especially in Vietnam, when, as America kept printing more money President Nixon had eventually to announce that it would no longer honour its pledge to back its dollars with gold, the very basis of the Bretton Woods agreements of 1944 & the post-War financial order enforced by its institutions. So did London once more become what it had been till the First World War: the centre of global finance.

 

Today UK private banks collect cash in Singapore, Dubai & other havens,  send it on to the Dependencies of Jersey, Guernsey & Man, tiny islands offshore the UK-- for which it has invented the legal fiction they were not part of the United Kingdom but possessions of the Sovereign, as Duke of Normandy & in the case of Man, in succession to the King of Norway as Lord of Mann (sic). Yet these tiny islands offshore account for the largest part of net capital inflows: US$129.911 billion out of US$197.49 billion, as all deposits in British banks in these Dependencies are “upstreamed” to the United Kingdom to be actually treated as a part of its balance of payments,

 “1.13 The Crown Dependencies make a significant contribution to the liquidity of the UK market. Together, they provided net financing to UK banks of $332.5 billion in the second quarter of calendar year 2009, largely accounted for by the ’up-streaming’ to the UK head office of deposits collected by UK banks in the Crown Dependencies,"

 --making absurd the claim they are independent & beyond the reach of UK financial regulation. So this is what really finances the UK current account deficit of   £21.177 billion, in other words paying for its imports[1].

How difficult it is to get off the back of the tiger!

Those who have regarded every successive government as a sort of concierge now threaten to run away if taxed at all today.

Guernsey	44,966
Jersey	66,968
Isle of Man	17,977

In US $ dollar billions, from External business of monetary financial institutions operating in the United Kingdom, C3.2 Bank of England March 28th 2025

 

And the City is not the final destination for all this cash in flight; since it acts merely as the Clapham Junction for money on its way to Wall Street (it should not detain us here, so I offer a brief note on how the UK system works as an appendix below). So the United States recorded such capital inflows of $194.8 billion in the fourth quarter of 2023, accounting for the US’ net international investment position of -$19.77 trillion[2] --- cash flowing directly to the US from the UK as well as via the connected tax havens such as the Caymans.

Cayman Islands	-25.674
United States	-176,433

q 3 2024 net inflows from various jurisdictions into the UK:  extracted from external business of monetary financial institutions operating in the UK table c 3.2 https://www.bankofengland.co.uk/boeapps/database/index.asp?Travel=NIxSTxTCx&levels=2&XNotes=Y&I=5MP&I=BWSX5N1&I=6SW&I=BWT&I=5N2&I=5N3&I=BWUX5N4&I=5N5&I=CRVXCRY&I=CRWXCRZ&Nodes=X2776X2778X2797X2799X2779X2780X2781X2782X2783&SectionRequired=C&HideNums=-1&ExtraInfo=false&B2779XBMX2776X2778.x=13&B2779XBMX2776X2778.y=17

 

America began openly soliciting international flight capital when the  Reagan Administration made investment in US securities and deposits in US banks by non-resident foreign nationals free of tax in steps undertaken in 1982 & then 1984 (the “portfolio-interest exemption”[3]), continuing to do so ever since as a  distinct regime has been invented for such non-residents,  US banks applying a standard that made legal their business even when it might be illegal in America. Anonymous personalities from tax havens (of which the UK bloc (US$4.765 trillion) accounts for over half,  made up of the Caymans US$ 2.237 trillion & UK itself, US$2.528 trillion also invest in special ‘bearer securities’, which as the US Treasury explains,“ are .. payable to “bearer” on their face at maturity or at call for redemption... ownership .. not recorded.”

As the US became the primary destination for laundered money, spectacular crimes were thereby enabled all over the world-- as Senator Carl Levin documented at length in numerous reports of the Senate Sub-Committee on Investigations that he so long headed, assisted by great staffers such as the late Elise Bean. Public-spirited individuals such as Raymond Baker, founder of Global Financial Integrity, & Lucy Komisar free-lance journalist, alerted Americans to the consequence of such folly. None of this had any effect on policy, nor even the concerns of Levin’s own Party which had implemented the agenda of GATT & NAFTA, celebrating “labour market flexibility", as the new realism of the DNC sacrificed American labour to suit plutocrats & their new found allies in flight capitalists all over the world, united against labour everywhere. Nor were the surging US dollar nor the Wall Street boom affected by this continuous decline of industry & loss of jobs. Perhaps liberal America was unconcerned, believing it could simply compete with Republicans for the goodwill of the very rich; robbing it of all credibility among  those who had been its essential constituency, the American working-class. This might explain why nine years later it is so unable to defend its own core institutions: for its law courts, great universities, libraries, the media, hospitals, public transport, indeed anything that must be financed & needs skill & technology to run & provide a public service is now ripe for private appropriation, to be repurposed, & denied to many. It is private means that ensure the powerful prevail, unrestrained by any notion of a common good embodied in a benevolent authority. None of us need reminder that among the pundits of the Right is the late Robert Nozick who argued

 “the state may not use its coercive apparatus for the purpose of getting some citizens to aid others, or in order to prohibit activities to people for their own good or protection (Anarchy, State & Utopia, 1974, page ix)”;

 he would have property rights extend to traffic in human beings thus: the ancestors of every slave must at some point have consented to it,  so that is indeed a fair contract which binds all their progeny for perpetuity as the property of others (ibid, pp 280-7), servitude extending to implied consent to rape & torture.

 Since it is bi-partisan policy that has brought us here, destroying American employment as much as the livelihood of people all over the world in a race to the bottom, with unionised labour toiling at dirty unregulated industries hastening a warming planet to an even more rapid end. Democrats might consider not appeasing plutocrats but for the sake of democracy reinventing their party.

As an howl of rage from all America brought us Trump, Mamdani’s victory is New York’s signal that mainstream Democrats are not trusted. Although very different events in every way, both do tell us that Main Street has a right to be aggrieved; so we should fix Wall Street.

Institute capital controls so the rich cannot run away with their cash; there is a long history of them having worked when a government is committed to them, the best example being when William Pitt resisted David Ricardo’s eloquence on the floor of the House & in pamphlets & undertook the Suspension during the Napoleonic Wars, & similar measures undertaken by Britain during the First World War. And, to show how disastrous it may be to not do so at certain times, recall that when Churchill ignored Keynes’ advice & effectively introduced convertibility to the dollar by adopting the Gold Standard, he helped launch the Great Depression.Then tax them & so finance the Green New Deal. END

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

[1] -- the accumulated debt represented by its net international investment position of - £824.993 billion

[2] Foreign holdings of US securities by country as of end June 2022 --Foreign Portfolio Holdings of US Securities Department of Treasury Federal Reserve Bank of New York Board of Governors of the Federal Reserve System April 2023.

 

[3](https://www.irs.gov/individuals/international-taxpayers/nonresident-aliens-exclusions-from-income) &  https://www.irs.gov/individuals/international-taxpayers/taxation-of-nonresident-aliens. As long ago as 2012 at least 3 trillion dollars was deposited in US accounts by mysterious foreigners: estimate by the Center for Freedom and Prosperity, a libertarian lobbying group connected to Mossack Fonseca the Panamanian law firm about whose international clients evaded taxes in numerous countrieshttp://freedomandprosperity.org/2012/publications/interest-reporting-regulation-threatens-economy/).