Casino capitalism

with an introduction by Matthew Watson

Susan Strange

• Editorial: Manchester University Press
• Año: 2015
• ISBN:
  9781784996598
• Edición: 1
• Categoría: Volkswirtschaftslehre
• Categoría: Wirtschaftstheorie

Originally released by Basil Blackwell in 1986, and then re-released by Manchester University Press in 1998, Casino capitalism is a cutting-edge discussion of international financial markets, the way they behave and the power they wield. It examines money's power for good as well as its terrible disruptive, destructive power for evil. Money is seen as being far too important to leave to bankers and economists to do with as they think best. The raison d'être of Casino Capitalism is to expose the development of a financial system that has increasingly escaped the calming influences of democratic control. This new edition includes a powerful new introduction provided by Matthew Watson that puts the book it in its proper historical context, as well as identifying its relevance for the modern world. It will have a wide reaching audience, appealing both to academics and students of economics and globalization as well as the general reader with interests in capitalism and economic history.

Chapter 1

Casino capitalism

The Western financial system is rapidly coming to resemble nothing as much as a vast casino. Every day games are played in this casino that involve sums of money so large that they cannot be imagined. At night the games go on at the other side of the world. In the towering office blocks that dominate all the great cities of the world, rooms are full of chain-smoking young men all playing these games. Their eyes are fixed on computer screens flickering with changing prices. They play by intercontinental telephone or by tapping electronic machines. They are just like the gamblers in casinos watching the clicking spin of a silver ball on a roulette wheel and putting their chips on red or black, odd numbers or even ones.

As in a casino, the world of high finance today offers the players a choice of games. Instead of roulette, blackjack, or poker, there is dealing to be done – the foreign exchange market and all its variations; or in bonds, government securities or shares. In all these markets you may place bets on the future by dealing forward and by buying or selling options and all sorts of other recondite financial inventions. Some of the players – banks especially – play with very large stakes. These are also many quite small operators. There are tipsters, too, selling advice, and peddlers of systems to the gullible. And the croupiers in this global financial casino are the big bankers and brokers. They play, as it were, ‘for the house’. It is they, in the long run, who make the best living.

These bankers and dealers seem to be a very different kind of men working in a very different kind of world from the world of finance and the typical bankers that older people remember. Bankers used to be thought of as staid and sober men, grave-faced and dressed in conservative black pinstripe suits, jealous of their reputation for caution and for the careful guardianship of their customers’ money. Something rather radical and serious has happened to the international financial system to make it so much like a gambling hall. What that change has been, and how it has come about, are not clear.

What is certain is that it has affected everyone. For the great difference between an ordinary casino which you can go into or stay away from, and the global casino of high finance, is that in the latter all of us are involuntarily engaged in the day’s play. A currency change can halve the value of a farmer’s crop before he harvests it, or drive an exporter out of business. A rise in interest rates can fatally inflate the cost of holding stocks for the shop-keeper. A takeover dictated by financial considerations can rob the factory worker of his job. From school-leavers to pensioners, what goes on in the casino in the office blocks of the big financial centres is apt to have sudden, unpredictable and unavoidable consequences for individual lives. The financial casino has everyone playing the game of Snakes and Ladders. Whether the fall of the dice lands you on the bottom of a ladder, whisking you up to fortune, or on the head of a snake, precipitating you to misfortune, is a matter of luck.

This cannot help but have grave consequences. For when sheer luck begins to take over and to determine more and more of what happens to people, and skill, effort, initiative, determination and hard work count for less and less, then inevitably faith and confidence in the social and political system quickly fades. Respect for ethical values – on which in the end a free democratic society relies – suffers a dangerous decline. It is when bad luck can strike a person not only from directions where luck has always ruled: health, love, natural catastrophes or genetic chance, but from new and unexpected directions as well, that a psychological change takes place. Luck, now, as well as idleness or inadequacy, can lose you a job. Luck can wipe out a lifetime’s savings, can double or halve the cost of a holiday abroad, can bankrupt a business because of some unpredictable change in interest rates or commodity prices or some other factor that used to be regarded as more or less stable and reliable. There seems less and less point in trying to make the right decision, when it is so difficult to know how the wheel of chance will turn and where it will come to rest. Betting on red and on black has equally uncertain results. That is why I think the increase in uncertainty has made inveterate, and largely involuntary, gamblers of us all.

Moreover, the vulnerability to bad luck in a system which is already somewhat inequitable is itself far from equal. Some can find ways to cushion or protect themselves, while others cannot. And inequities that were originally due to a variety of factors become suddenly much more acutely felt and more bitterly resented. Frustration and anger become sharper and are apt to be more violently expressed when the realm of luck becomes too large and when the arbitrariness of the system seems to operate so very unequally.

If this is true for individuals, it is also true for large enterprises and for the governments of countries. Political leaders, and their opponents, like to pretend that they are still in control of their national economies, that their policies have the power to relieve unemployment, revive economic growth, restore prosperity and encourage investment in the future. But recent years have shown again and again how the politicians’ plans have been upset by changes that they could not have foreseen in the world outside the state. The dollar has weakened – or become too strong. Interest rates have made the burden of servicing a foreign debt too heavy to sustain. The banks have suddenly decided to lend the country no more money. Oil prices have suddenly risen – or fallen. Other commodity prices, on which export earnings may depend, fall, because the major economies of major consuming countries are going through a recession. The uncertainty that rules in the financial world spills over not only into individual lives but into the fortunes of governments and of countries – and sooner or later into the relations between states. That spillover happened 50 odd years ago, after the Great Crash of 1929, and whether this time the uncertainty leads to a dramatic crisis or – as seems far more likely – to a stubbornly continuing malaise in the world market economy, this must be of general concern not just to economists.

The mess in perspective

If we stand back from the headlines and concerns of the immediate present we might observe two things. One is that the changes leading to the present mess have happened very fast, in the short space of about 15 years. The other is that in that space of time, change has affected coincidentally some of the key prices which order the functioning of the world economy. They have all become increasingly unstable in the same period – the price of currencies in the foreign exchange market which connects all the national economic systems with each other; the rising price of goods in general in terms of money, otherwise known as the inflation rate; the price of credit, otherwise called the rate of interest, which is a major factor in the production of all goods and services; and the price of oil, which is the other major input on which all mechanical production and the transport of goods depend. Uncertainty in each has fed the uncertainty and the volatility of the others. And the common factor linking them all to each other has been the international financial system. That is the rootstock, from whose disorders stem the various problems which afflict the international political economy, just as blight, disease or mildew attack the different branches of a plant.

Everyone is familiar with these problems, thanks to newspapers, television and a spate of books and pamphlets. Best known and understood is the debt problem of the developing countries: the fact that too many were lent too much on terms which laid them open to the risk that if the loans ever stopped, they would be in trouble with the creditors. That is related to the second problem, which is the slow growth of the whole world economy in the late 1970s and the recession of the 1980s. The instability of the banking system is the third problem. But it is not limited to the debtor countries; the extent of corporate debt to the banks is equally great and, if slow growth continues, could be equally menacing, in the absence of a credible lender of last resort. Fourth might be added the uncertainty over oil prices, of consequence to producers and to consumers and, thus, a decisive factor in many countries’ balance of payments not least of the major producers in the Middle East, an area doubly afflicted by economic and political instability, both domestic in some cases and international. All these problems are recognizably mainly economic in character. But as big as any is the fifth problem: the precariousness of the international political situation – notably the unstable Soviet–American balance and the uneasy American–European alliance. Even these have some roots in the financial disorder and uncertainty. Both are affected by – as they in turn affect – the strength or weakness of the dollar on those flickering computer screens in the foreign exchange rooms of banks around the world.

If, as I shall argue, all these problems are interconnected, and in all of them there is the common factor of financial uncertainty and therefore vulnerability to the play at the tables of the great financial casino, then it must follow that some attention to the common denominator would certainly make the solution of any one of them much easier. It might not be a sufficient condition, but almost certainly it is a necessary one. Any help that restoring financial certainty and stability would give to each one of the problems would also make the solutions of the others a less formidable task.

Before we consider solutions, though, we must ask when and how the rot in the old system set in. When did this rapid change with its many political and economic repercussions really begin? How did it start? It is only by looking back and reviewing how the multiple mess developed that we shall ever be able to work out a solution to it.

How did it start?

The year of 1973 stands out as a benchmark, a turning point when the snowball of change from the leisurely 1960s to the hectic yo-yo years of the 1970s and 1980s began to gather momentum. It stands out as a year when several big changes coincided – an effective devaluation of the dollar and the accompanying decision to leave the determination of exchange rates to the markets. This is known as the move to floating rates – not a very apt description because some sink while others rise. It was also the year of the first major rise in oil prices, to be followed by much increased dependence on the banking system to find the finance for the current consumption bills and the economic development of the poorer countries (and some developed ones). Each of these changes was to add in a different way to the uncertainty of the system.

It may help to recall a little of the history of international monetary relations to see how this came about. It will also explain why the choice of 1973, or any other precise date, is bound to be somewhat arbitrary. All that can be said is that it seemed to mark a sort of change of gear, as the system moved from a more stable period into a much more unstable one.

Cracks and weak spots in the system had been detected a full 15 years before, when it became clear that the monetary rules and arrangements agreed by the United States and other countries at Bretton Woods during the war were not working out quite as planned. Instead of an evenhanded system in which the same rules applied to all, a highly asymmetric one had developed in which continuing deficits on the US balance of payments were matched by increasing dollar holdings by America’s trading partners. These dollar reserves allayed other countries’ anxieties that they might run out of money to import – as Britain had in 1945. Trade revived, but the accumulated dollars, though they also helped to finance investment, especially in Europe, were sooner or later going to exceed even the very large gold reserves of the United States. For it was an essential part of the system that the dollars were held as IOUs by the Europeans and others, partly because the United States offered to exchange them for gold at a fixed pre-war price. The inherent dangers of this ‘dollar overhang’ were pointed out as early as 1958 by Professor Robert Triffin (Triffin 1958) in America and by Professor Jacques Rueff in France (Rueff 1971). This analysis was taken up by the French and other European governments who (somewhat ambivalently) wished to enjoy both growing prosperity and the right to complain about the injustice of a system which allowed the Americans (and to some extent the British) to enjoy the special privileges that came from other countries holding their currency as a reserve of IOUs. This was what General de Gaulle called ‘the exorbitant privilege’, meaning that the Americans could pay their bills – for defence spending among other things – with IOUs instead of exports of goods and services.

As the 1960s progressed, the cracks widened and the system began to creak under the combined pressure of growing international financial and capital markets, moving more and more money across the exchanges, and of political disagreement among governments about what was wrong with the system. The cracks were patched with such palliative measures as the Gold Pool, and the General Arrangements to Borrow augmenting the resources of the International Monetary Fund set up at Bretton Woods to lend its member countries foreign currency in an emergency. To prevent their payments deficits from being made worse by foreign borrowers coming to New York for loans, the Americans taxed such loans – but in doing so forced their own banks abroad, fostering the nascent London market for the Eurodollar credits. The disagreements continued but some compromises were reached – as for example the agreement at Stockholm in 1968 to allow the IMF to issue Special Drawing Rights (SDRs) which would supplement, but not supplant the dollar as an asset which governments could hold in their reserves.

The strains in the system, even late in the 1960s, seemed to afflict mainly the strong European currencies, like the German mark (revalued in 1969), and the weak European currencies like sterling (devalued in 1967) and the French franc (devalued in 1969). Eventually, however, they also affected the US economy. Holding the dollar’s exchange rate, while spending heavily on the Vietnam War, had led President Johnson to resort to a deflationary tight money policy at home and to high interest rates which helped somewhat to mitigate the worsening trade balance.

But while Johnson saw the foreign exchange markets as enemies putting the dollar under speculative pressure, Nixon, Kissinger and Connally were well advised and saw that the markets could also be used as allies, helping the United States to engineer a devaluation of the dollar which other countries could neither resist nor match. The unilateral abrogation by Nixon of the Bretton Woods system in August 1971 closed the gold window (i.e. he refused to exchange any more dollar IOUs for US gold reserves) and allowed the dollar to come down off its fixed exchange rate with other countries.

That was the first step towards the decision in 1973 to abandon fixed exchange rates for good. In the interval there had been the Smithsonian Agreement of December 1971, a negotiated realignment of dollar rates with the Japanese yen and the German mark. But continued inflation, and a commodity boom, partly set off by uncertainty about the future of the dollar, first took the pound sterling out of the fixed rate arrangements and then tore apart the Europeans’ ‘snake in the tunnel’, their first attempt to hold their currency rates steady with each other. Turbulence in the currency markets finally led the United States to take the plunge and let the markets, not governments, decide how many pounds, yen or marks should be exchanged for a dollar.

The effects of floating rates

The record, however abbreviated, of the events leading up to this point is chiefly important because of the yawning discrepancy between the promise and the performance of floating exchange rates. The great majority of economists, led by the Americans, had promised that the change would bring the alarming and disturbing currency crises of the previous five years to an end: ‘The strain,’ they assured us, ‘can be taken on the rate instead of the reserves – so governments will not need to worry. The markets will only reflect step by step the proper relation of costs and prices (and inflation rates) in each country with those of its trading partners. There need be no more violent shifts in exchange rates.’

That was the theory and the promise. But practice proved very different. Instead of reducing the volatility of the markets, floating rates – or to put it another way, the abstinence of governments from intervening in the markets – seemed to increase the volatility.

After only five years’ trial, it was already clear that both the surpluses and the deficits on the major countries’ balance of payments were getting larger, not smaller. The invisib...