The Financial Tsunami: The Financial Foundations of the American Century
Global Research, January 16, 2008
Part II
The financial foundations of the American Century
The ongoing and deepening global financial crisis, nominally triggered in July 2007 by an event involving a small German
bank holding securitized assets backed by USA sub-prime real estate mortgages, can best be understood as an essential
part of an historical process dating back to the end of the Second World War—the rise and decline of the American
Century.
The American Century, proudly proclaimed by Time-Life founder and establishment insider, Henry Luce in a famous 1941 Life magazine editorial, was built on the preeminent role of New York banks and Wall Street investment banks which had by
then clearly replaced the City of London as the center of gravity of global finance. Luce’s American Century was to be
built in a far more calculated manner than the British Empire it replaced.1
A then top-secret Council on Foreign Relations postwar planning group, The War & Peace Studies Group, led by Johns Hopkins President and geo-political geographer, Isaiah Bowman, laid out a series of
studies designed to lay the foundations of their postwar world, already beginning 1939, well before German tanks had
rolled into Poland. The American Empire was to be an empire indeed. But it would not make the fatal mistake of the
British or other European empires before, namely to be an empire of open colonial conquest with costly troops in
permanent military occupation.
Instead, the American Century would be packaged and sold to the world, above all the emerging countries of Africa, Latin
America and Asia, as the guardian of liberty, democracy. It would clothe itself as the foremost advocate of end to
colonial rule, a stance which uniquely benefited the only major power without large colonies—namely, the United States
The new American Century world was to be led by the champion of free trade everywhere, which also uniquely benefited the
strongest economy in the early postwar years, the United States. It was a brilliant, if fatally flawed concept. As State
Department planning head, George F. Kennan wrote in a confidential internal memo in 1948, “We have about 50% of the
world’s wealth but only 6.3% of its population…Our real task in the coming period is to devise a pattern of
relationships which will permit us to maintain this position of disparity without positive detriment to our national
security.” 2
The core of the War & Peace Studies, which were designed for and implemented by the US State Department after 1944, was to be the creation of
a United Nations organization to replace the British-dominated League of Nations. A central part of that new UN
organization, which would serve as the preserver of the US-friendly postwar status quo, was creation of what were
originally referred to as the Bretton Woods institutions—the International Monetary Fund and the International Bank for
Reconstruction and Development or World Bank.3 The GATT multinational trade agreements were later added.
The US negotiators in Bretton Woods New Hampshire, led by US Treasury deputy Secretary Harry Dexter White, imposed a
design on the IMF and World Bank which insured the two would remain essentially instruments of an “informal” US empire,
an empire, initially based on credit, and later, after about 1973, on debt.
New York and the New York Federal Reserve Bank were the heart of the new empire in 1945. The United States held the
overwhelming majority of world central bank monetary gold reserves. The postwar Bretton Woods Gold Exchange Standard
uniquely benefited the role of the US dollar, then and even now world reserve currency.
All IMF member country currencies were to be fixed in value to the US dollar. In turn, the US dollar, but only the US
dollar was fixed to a preset weight of gold at $35 per ounce of gold. At this fixed rate, foreign governments and
central banks could exchange dollars for gold.
Bretton Woods established a system of payments based on the dollar, in which all currencies were defined in relation to
the dollar. It was ingenious and uniquely favorable to the emerging financial power of New York, whose bankers actively
shaped the final agreements.
In those days, in stark contrast to the present, the dollar was “as good as gold." The US currency was effectively the
world currency, the standard to which every other currency was pegged. As the world's key currency, most international
transactions were denominated in dollars.
Maintaining the role of the US dollar as world reserve currency has been the foremost pillar of the American Century
since 1945, related to but more strategic even than US military superiority. How that dollar primacy has been maintained
to now encompassed the history of countless postwar wars, financial warfare, debt crises, and threats of nuclear war to
the present.
Important to place the emergence of the asset securitization revolution in global finance which is now impacting the
world financial system in wave after wave of new shocks and dislocations, and to appreciate Alan Greenspan’s substantial
contribution to preserving the dominance of the dollar as world reserve well beyond the point the US economy ceased
being the world’s most productive industrial manufacturer, a brief review of the distinct phases in postwar dollar
hegemony is useful.
The Golden Years of America’s Century
The first phase, which we might call the postwar “golden years,” saw the US emerge from the ashes of World War II as the
unchallenged global economic Colossus. The US was the dominant world power; no one even came close. Over half of all international money transactions were financed in terms
of dollar. The US produced more than half the world output. The US also owned about two thirds of the official gold
reserves in the world in 1940.
When various European countries had reserve surpluses, they converted the surpluses into dollar reserves rather than
gold because they could earn interest on dollar assets such as US Treasury bonds and dollars could always be converted
into gold at $35 per ounce whenever it became necessary. The US dollar was at the center of this system.
American industry, led by General Motors, Ford and Chrysler Motors, the Big Three, were the world class leaders—no one
was even close back then. US Steel (before it became USX), machine tool manufacture, aluminum, aircraft and related
industries all set the benchmark for global excellence well into the 1950’s.
Above all, the American oil giants—Mobil, Standard Oil of New Jersey, Texaco, Gulf Oil—those key companies dominated the
unique energy source which was to become essential to unprecedented postwar growth rates in Europe, Japan and the rest
of the postwar world—petroleum.4
In this early postwar period demand for dollars in the world to finance reconstruction was so great that the primary
economic problem faced in the 1950’s in Europe, Japan, South Korea and elsewhere was dollar shortages to finance imports
of needed US capital equipment, its oil, its consumer products.
The US monetary gold stocks reached a record $24.6 billion in 1949, a huge sum that was comparable today to $211
billion, as gold from abroad poured into the US to pay the deficits in trade run up by foreign nations. New York, backed
by gold reserves, was the unchallenged world banker.
This process began to deteriorate after a steep postwar recession in 1957-58. That recession should have been the alarm
bell to US economic policy planners and industry that the unique period of profiting from the relative economic
dislocation of a war-torn world was at its outer limits. Beginning 1957 the US economy was in need of a substantial
regeneration, were it to remain globally competitive. That was not to happen.
By the time of the November 1967 British Sterling crisis, where the British Government was forced to violate IMF rules
and devalue Sterling by 14% to maintain their economy amid severe recession, the focus turned on the fact that President
Lyndon Johnson’s Great Society and disastrous Vietnam War costs were causing the US government to run record budget
deficits. The dollar was vulnerable to a run on US gold for the first time since the 1930’s.
To hide the extent of those deficits, the Johnson Administration introduced creative accounting. For the first time the
Budget director added the funds paid by working Americans into the Federal Social Security Trust Fund, a surplus that
was to have been set aside to pay future retirement and related benefits for most Americans, to the Consolidated General
Budget—a start to budget fakery which by the early years of the next century were to become huge.
Johnson also began manipulation of key government economic statistics used to compute everything from unemployment to
inflation to GDP. The statistical manipulations, for reasons of obvious if fateful political opportunism, were endorsed
silently by every succeeding Administration, the most egregious of them being the present Bush-Cheney Administration. 5
The 1971 dollar coup
Despite all the manipulations, by 1971 US monetary gold reserves had reached a precarious low as foreign trade surplus
nations, led by France, had demanded payment in hard gold from the US Federal Reserve for their dollar surpluses.
Reality could not so easily be manipulated as government statistics. Europe had emerged, along with Japan, as powerful
trade surplus, modern, fast-growing economies.
The United States was becoming a vast rustbelt of decaying, obsolescent manufacture. The spin-doctors of Wall Street and
select think-tanks such as the Ford and Rockefeller foundations came up with a linguistic euphemism calling it the “post
industrial society,” but linguistics did not change the reality. By the late 1960’s America’s once-booming industrial
centers from Detroit to Pittsburgh to Chicago had become sprawling slums of decay, crime and rising unemployment.
Were the United States to lose its last gold reserves, the role of the dollar as unique world reserve currency—the
pillar, along with US military superiority, of its postwar American Century imperium—would end abruptly.
To avert such a calamity, in August 1971 President Nixon huddled with his closest advisers, among them a US Treasury
official named Paul Volcker, then Under-Secretary of the Treasury for International Monetary Affairs, and a long-time
associate of David Rockefeller and the Rockefeller family.
Their task was to come up with a solution. Volcker’s “solution” to the massive demand to redeem US dollars for gold was
to be as simple as it was to prove destructive to world economic health.
Nixon announced to a startled world on August 15, 1971 that from that day, the United States would not longer honor its
international treaty obligations under the Bretton Woods Agreement. Nixon had suspended convertibility of the dollar
into gold. The New York Fed’s Gold Discount Window was locked shut. World currencies went into a free float against an
uncertain dollar, a so-called fiat currency. The dollar now was not backed by gold or even silver but only the “full
faith and credit” of the US government, a commodity whose marketable value was beginning to be questioned.
Debt becomes the vehicle
Soon, with the implicit threat of withdrawing its nuclear shield as its prime persuasion, successive US Administrations
realized that rather than depending on its role as the world’s creditor as it had until 1971, the American Century could theoretically thrive as the world’s greatest debtor, so long as American finance and the dollar dominated world finance.
As long as major US postwar satrapies 6 such as Japan, South Korea or Germany, were forced to depend on the US security umbrella, it was relatively simple to
pressure their Treasuries into using their US dollar trade surpluses to buy US government debt. In the process, the US
bond or debt markets became far and away the world’s largest. Wall Street primary bond dealers were replacing Pittsburg
steel and Detroit car manufacture as the “business of America.”
To paraphrase the famous quip of former GM president Charles Wilson from the 1950’s, the new mantra was, “What’s good
for Wall Street is good for America.” It wasn’t. The name financial “industry” even became commonplace, as if to
designate money as the legitimate successor to production of real physical wealth in the economy.
Debt—dollar debt—was to be the vehicle for a new role of New York banks, led by David Rockefeller’s Chase Manhattan and
Walter Wriston’s Citibank. Their idea was to extend hundreds of billions of dollars in newly acquired OPEC and other
petrodollars, which they “persuaded” Saudi and other OPEC governments to bank their new oil surpluses in London or New
York banks. Then those dollar deposits from OPEC, called by Henry Kissinger and others at the time, “petrodollars” went
in the form of recycled loans to oil importing and dollar-starved Third World economies. 7
The Carter dollar confidence crisis
This second phase, the post-gold era, fuelled by the manipulated 1973 oil shock and US pressure on Saudi Arabia and OPEC
to price oil exclusively in dollars, Kissinger’s “petro-dollar recycling,”8 rolled along without major trouble until early 1979 when the dollar faced a major foreign sell-off during the end of
the Jimmy Carter Presidency. The American Century faced one of its greatest challenges at that juncture. German,
Japanese even Saudi Arabian central banks began dumping US Treasury holdings in what was called a loss of “confidence”
in Carter’s world leadership role.
In August 1979, to restore world “confidence” in the dollar, President Jimmy Carter, himself a hand-picked protégé of
David Rockefeller’s Trilateral Commission, was forced by the big New York banks, led by David Rockefeller’s Chase
Manhattan, to accept Paul Volcker, a protégé of Rockefeller’s from Chase Manhattan Bank, as new Chairman of the Federal
Reserve with an open mandate to do what was necessary to save the dollar as reserve currency.
On taking office, Volcker bluntly announced, "the standard of living for the average American has to decline." He was
Rockefeller’s hand-picked choice to save the New York financial markets and the dollar at the expense of the nation’s
welfare.
The Volcker ‘shock therapy’
Volcker’s shock therapy, begun in October 1979, lasted until August 1982. Interest rates shot through the roof to double
digits. The US and world economies were plunged into a monster recession, the worst since World War II. Within a year,
the prime rate had shot up to the unheard-of level of 21.5%, compared to an average of 7.6% for the fourteen previous
years, a more than threefold rise in weeks. Official US unemployment peaked at 11%, while unofficially when those who
simply had given up seeking work were counted, it was far higher.
Source: AngryBearBlogspot.com
The Shock Therapy of Volcker doubled US official unemployment
The Latin American debt crisis, an ominous foretaste of today’s USA sub-prime crisis, erupted as a direct result of the
Volcker shock. In August 1982 Mexico announced it could no longer pay in dollars the interest rate service on its
staggering debt. It, as most of the Third World from Argentina to Brazil, from Nigeria to Congo, from Poland to
Yugoslavia, had fallen for the New York banks’ debt trap. The trap was in borrowing what amounted to recycled OPEC
petrodollars invested in the major New York and London banks, the Eurodollar banks, which lent the dollars to desperate
Third World borrowers initially at “floating rates” tied to London LIBOR rates.
When Libor rose some 300% within months as a result of the Volcker shock therapy, those debtor countries were unable to
continue. The IMF was brought in and the greatest looting binge in world history, misnamed the Third World Debt Crisis,
was on. Volcker’s shock policy, predictably, triggered the crisis.
After seven years of relentlessly high interest rates by the Volcker Fed, sold to the gullible public as “squeezing
inflation out of the US economy,” by 1986 the internal state of the US economy was horrendous. Much of America came to
resemble a Third World country, with its growing slums, double-digit unemployment and growing crime and drug addiction
problems. A Federal Reserve study showed that 55% of all American families were net debtors. Federal budget deficits
were running at then-unheard-of levels of more than $200 billion annually.
In reality, Volcker, a personal protégé of David Rockefeller from Rockefeller’s Chase Manhattan Bank, had been sent to
Washington to do one thing—save the dollar from a free fall collapse that threatened the role of the US dollar as global
reserve currency.
That dollar reserve currency role was the hidden key to American financial power.
By letting US interest rates go through the roof, foreign investors flooded in to reap the gains by buying US bonds.
Bonds were and are the heart of the financial system. Volcker’s shock therapy for the economy meant soaring profits for
the New York financial community.
Volcker succeeded only too well in his mission.
The dollar rose to all-time highs against the currencies of Germany, Japan, Canada and other countries from 1979 through
the end of 1985. The over-valued US dollar made US manufactured exports prohibitively expensive on world markets and led
to a dramatic decline in US industrial exports.
Already high interest rates from the Volcker Fed since October 1979 had led to a major decline in domestic construction,
the ultimate ruin of the US automobile industry and with it, steel, as American manufacturers moved to outsource
production offshore where the cost advantages were greater. Referring to Paul Volcker and his free-market backers inside
the Reagan White House, Republican Robert O. Andersen, then chairman of Atlantic Richfield Oil Co. complained, “they’ve
done more to dismantle American industry than any other group in history. And yet they go around saying everything is
great. It’s like the Wizard of Oz.” 9
By early 1987 the nation’s traditional mortgage banks, the Savings & Loan banks, were in a liquidity crisis that was to ultimately cost US Taxpayers hundreds of billions in government
bailouts. The Congress’ GAO watchdog agency declared that the Federal Savings & Loan Insurance Corporation, the guarantor against S bank panic, was insolvent. Yet under pressure from the S, huge bank losses were allowed to build as insolvent institutions were allowed to remain open and grow, allowing ever
increasing losses to accumulate. The ultimate cost of the 1980’s S debacle came to more than $160 billion. Some calculated real costs to the economy ran as high as $900 billion. Between
1986 and 1991, the number of new homes constructed dropped from 1.8 to 1 million, the lowest rate since World War II.
America’s Second Revolution: the eyes on the Prize
Federal Reserve monetary policy has been typically misrepresented as a series of ad hoc pragmatic responses to recurring
crises in post-war banking and finance. The reality is that it has faithfully followed a coherent hidden thread of
policy that was first laid out in 1973 by the spokesman then for America’s most powerful establishment family.
The policy was outlined in a little-noted book titled, ominously enough, “The Second American Revolution.” It was
written by John D. Rockefeller III, scion of the powerful Standard Oil and Chase Manhattan Bank empire, and, along with
his three brothers—David, Nelson and Laurance—architect of the world arrangement after 1945 known as the American
Century.
In his book, Rockefeller declared the establishment’s determination to roll back concessions grudgingly granted by the
wealthy and powerful during the Great Depression. Rockefeller issued the call in 1973, long before Jimmy Carter or
Margaret Thatcher came to office to implement it. He called for a “deliberate, consistent, long-term policy to
decentralize and privatize many government functions…to diffuse power throughout the society.” 10 The latter was a witting deception as his intent was not to diffuse power, but just the opposite—to concentrate that
economic and banking power into the hands of a tight-knit elite.
Privatization of essential and socially useful government functions that had been established often with great social
agitation and political pressure during the difficult crises of the 1930’s, was the Rockefeller agenda. In brief, it was
the removal of Depression era government regulations on all aspects of economic and social life in America.
Above all, deregulation of Wall Street and financial markets was the goal, along with a radical reduction in the
equalizing of wealth, as seen by Rockefeller and friends, inherent in such programs as Social Security. The George W.
Bush “tax cuts for the wealthy” were just a continuation of a three decade agenda of the powerful establishment circles.
Hard as it may be to believe, all major US policy from the 1970’s through the misnamed sub-prime crisis today, had a
connecting continuous thread. Key Fed and Treasury and other US policymakers always held their “eyes on the Prize.”
The “Prize” was untold financial gains to be won through a rollback of major concessions to the working blue collar and
middle income Americans, concessions granted during the Great Depression by powerful establishment circles led by the
Rockefeller and Morgan banking groups, to forestall a more radical revolt.
Social Security was one target for rollback. Financial deregulation and above all repeal of the 1933 Glass-Steagall Act,
was another. Here a well-connected Wall Street banker named Alan Greenspan was to play the decisive role on behalf of
the financial deregulation agenda in his tenure as Federal Reserve Chairman lasting from 1987 through 2006.
Securitization of sub-prime or junk mortgages was to have been his crowning legacy. As it looks at this writing, it
certainly will be, though perhaps not as he and others in Wall Street intended. It will more likely be a crown of
disgrace.
(Part III will deal with the Greenspan creation of the securitization revolution and its subsequent demise)
NOTES
1 Luce, Henry, The American Century, reprinted in The Ambiguous Legacy, M. J. Hogan, ed. Cambridge, UK: Cambridge University Press, 1999.
2 Kennan, George F., 1948, “PPS/23: Review of Current Trends in U.S. Foreign Policy”, Foreign Relations of the United States, Volume I.
3 New York Council on Foreign Relations, undated, The War & Peace Studies, http://www.cfr.org.
4 Engdahl, F. William, A Century of War: Anglo-American Oil Politics and the New World Order, London, Pluto Press, 2004, pp. 88-9.
5 For an excellent historical account of the impact of those systematic government statistical manipulations, see John
Williams’ http://www.shadowstats.com/. John has been tracking the manipulations for well over two decades, the only systematic attempt I know of.
6 The term “satrapy” to describe US relations with Japan, Germany and other postwar allies is used by Zbigniew
Brzezinski in his book, The Grand Chessboard: American Primacy and its Geostrategic Imperatives, New York, Basic Books, 1997.
7 The best treatment of this new role of endless debt creation backed by US military power as the foundation for the US
domination, see the excellent personal account in the remarkable work by Michael Hudson, Super Imperialism: The Economic Strategy of American Empire, London, Pluto Press, 2nd Ed.2003, www.michael-hudson.com. p.289 ff.
8 See Engdahl, op.cit., pp.130-141 for an unusual account of the role of then-Secretary of State Kissinger in the events
leading to the 400% OPEC oil price rise in 1974.
9 Anderson, Robert O., cited in Greider, William, Secrets of the Temple: How the Federal Reserve runs the country, Simon & Schuster, New York, 1987, p. 648.
10 Rockefeller, John D. III, The Second American Revolution, Harper & Row, New York, 1973.
*************
F. William Engdahl is a leading analyst of the New World Order, author of the best-selling book on oil and geopolitics, A Century of War: Anglo-American Politics and the New World Order,’ His writings have been translated into more than a dozen languages.
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