Mad money

with an introduction by Benjamin J. Cohen

Susan Strange

• Publisher: Manchester University Press
• Year: 2015
• Print ISBN: 9781784991357, 9781784991357
• eBook ISBN: 9781784996628
• Edition: 1
• Topic: Politique et relations internationales
• Subtopic: Relations internationales

Mad money is a classic of International Relations and international political economy literature. It also has profound modern relevance. First published by Manchester University Press in 1998, the book called for an end to the volatility of international financial markets. Markets had grown, technology had advanced, and regulation had all but disappeared, resulting in financial crises in Asia and in the western world. The book identified that finance now called the tune internationally: governments had been stripped of control, morals had loosened, and income gaps were widening sharply. Susan Strange predicted that this would lead to a long, inevitable financial crisis if it continued unchecked. She was proved right within a decade of the book coming out.This reissue includes a new introduction by Benjamin Cohen of the University of California that contextualises the book, and conveys the value of the work for a modern audience.

Chapter 1

The casino image gone mad

Why mad? Because to my mind it was, and is, ‘wildly foolish’ – the dictionary synonym for ‘mad’ – to let the financial markets run so far ahead, so far beyond the control of state and international authorities. We recognise insanity, or madness in a man or woman, by erratic, unpredictable, irrational behaviour that is potentially damaging to the sufferers themselves or to others. But that is exactly how financial markets have behaved in recent years. They have been erratically manic at one moment, unreasonably depressive at others. The crises that have hit them have been unpredicted and, to most observers, surprising. Their behaviour has very seriously damaged others. Their condition calls urgently for treatment of some kind.

The first step before treatment is diagnosis, assessing the nature and, if possible, the origins of the madness and understanding the stages of its development. That is exactly the purpose of this introductory book. There is a long bibliography at the end for those who want to know more, and to hear different diagnostic opinions. I do not pretend to have the complete answer to what treatment is needed – although I do have a few ideas about where it might start.

The insanity of it all was vividly brought home to me at the end of 1997. The newspapers carried pictures of Wall Street brokers, champagne bottles and glasses in hand, their faces wreathed in crazy grins, celebrating the large end-of-year bonuses they had just been given. Nor were they the only ones in the financial markets being handsomely rewarded: some of the bonuses to investment bankers and fund managers were unimaginably, obscenely large. And meanwhile, in Asia, there was nothing to celebrate. Millions faced job losses and unemployment. Family businesses painstakingly built up over the years were bankrupted. The future looked dark indeed for the once-proud ‘tiger economies’ of east Asia. It was a coincidence that the book to which this is some sort of sequel, Casino Capitalism, had ended with just such a graphic image of the financial operators drinking champagne, while outside the tower-block offices other people were having a hard time of it (Strange 1986). The only difference was that the imaginary picture was set for the millennium in 2000, while the newspaper pictures were three years earlier. The pace of globalisation and of changes in the financial system that lay behind what people thought of as globalisation had got faster.

Globalisation

There are now two serious threats that jeopardise civilisation and the life chances of our children and grandchildren – both ‘threats without enemies’. The worst threat – if we take a long-term view of life on this planet – is the environmental one. The depletion of the ozone layer and the build-up of carbon dioxide in the atmosphere, deforestation and the damage to the ecological balance between animals, plants, soil and water have all been studied and understood for the past two decades. The progressively destructive consequences of these processes have been repeatedly debated not only by experts but by governments. But declarations and resolutions have not led on – neither at meetings of the United Nations (UN) in Rio in 1992 nor in Kyoto in 1997 – to serious corrective action – as distinct from vacuous general declarations of intent. There is a small glimmer of hope that, given time, a new and powerful coalition will rise up to challenge the vested interests – the oil companies, the chemical companies, the car manufacturers, the paper and packaging industries and all the others opposed to change. This challenge could come from organised world opinion aided and supported by the self-interest of a few environmental-protection businesses and, probably much more important, by the self-interest of the powerful insurance industry.¹

But though the ecological threats to humanity are certainly the most serious, they are a comparatively long-term threat. Whereas if confidence in the financial system were to collapse, causing credit to shrink and world economic growth to slow to zero, that is a much more immediate threat. Writing at the end of 1997, it is clear from the public reaction that there is enormous uncertainty even among the experts about how far the contagion that started in Thailand in the summer will spread, and whether the United States and Europe as well as Japan will also suffer. It seems to me that there are more worried people, more public concern this year than last, and certainly more than there was even twelve years ago when Casino Capitalism was first published. That concern – which I share – is the reason for returning to the subject of an earlier book.

My concern, now as it was then, is not technical – with the efficiency of the system – but social and political, with the consequences for ordinary people who have never been asked if they wanted to gamble their jobs, their savings, their income in this casino form of capitalism. The fact that some made windfall gains does not assuage the pain and bewilderment of those afflicted with undeserved losses. Today, at the end of the century, the casino nature of the financial system has been widely acknowledged. And what we have today is much more of the same – more volatility, more uncertainty and more anxiety. While many of those engaged in financial markets may regard what is happening as perfectly normal, necessary and therefore acceptable, there are a lot more who think it is all quite crazy. It does not make sense, they think, to gamble in this way with the future of the world market economy. More of the same developments that I described in the 1970s and 1980s have meant worse for those who lost jobs – because it was financially necessary – and for those who lost savings and whose investments failed. Money has indeed gone mad.²

That is why there is more need than ever to explore the nature of the problem – its political aspects as well as its technical and functional ones. More need than ever to look for the weak points in the financial system and to ask whether there are possible remedial changes that might be made. And if the prospects for reform, for cooling the casino, for making money sane again are slim, then we should also perhaps look at the alternative scenarios of what could happen to it in the years ahead. Being prepared, even for the worst, is better than being taken totally by surprise. The last chapter, therefore, will briefly review these scenarios.

Meanwhile, the link with the environmental issues is that our chances of acting in time on those are going to be dramatically less if the world economy should fall – as some observers fear it might – into a long-drawn-out depression. For history strongly suggests that at such times governments everywhere tend to focus exclusively on the immediate and the domestic issues. Frustration feeds nationalism and xenophobia at home. Abroad, international collective action is put firmly in second place and little progress is possible. The 1930s are not so long ago that the doldrums of the League of Nations, the impasse in reparations and disarmament talks and the inaction on world economic issues are beyond recall. This is one good reason for not just waiting to see what will happen and hoping for the best. If there is anything that can be done, we ought at least to start thinking about how it could he done and by whom. Not having the expert’s grasp of the technical details of how financial markets work is no excuse for indifference to the social consequences of casino capitalism.

One thing that has certainly changed since the mid-1980s is the greater awareness of global interdependence. Even as late as 1986, there were still people who thought in terms of the First World and the Third World. The Second World was the Soviet-dominated world of state-planned command economies. Each had different problems. No longer. Now, as 1997 amply showed us, we are all in the same boat. One financial system dominates from Moscow to Manila, from Tokyo to Texas. A large part of the task of this book will be to see how this has come about and what else has changed over the last ten to fifteen years. But first, for some readers, it may be worth recalling the themes of Casino Capitalism and the stages by which the relatively stable and predictable world of the 1950s and 1960s had already changed, quite radically, by the 1980s.

Themes of Casino Capitalism

The dominant theme of the book to which this is some sort of sequel was – in a word – volatility. That word seemed to sum up how the international monetary and financial system had changed in the twelve years between 1972/3 and 1984/5, when the book was written. The book was not supposed to be a history of that period, but more some reflections on what to make of the history.³ It seemed to me that, compared with the relatively stable 1960s, the big change had been to far greater instability, and in the pace of change in the basic prices of a world economy: the price of currencies (exchange rates), the price of goods (i.e. inflation), the price of credit (interest rates) and the price of oil as the main traded commodity necessary to industrialised economies. I commented:

Uncertainty in each has fed the uncertainty and the volatility of the others. And the common factor linking them 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. (Strange 1986: 4)

The common problem, therefore, was how to restore – if at all possible – some stability and certainty to the system. The common consequence was to have made involuntary gamblers of us all:

For the great difference between in ordinary casino which you can go into or stay away from, and the global casino of high finance, is that in the latter we are all 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 costs 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. (Strange 1986: 2)

How had the casino economy come about? That for a political economist, was the first question. What were the series of steps, the decisions and non-decisions, that had led us down this primrose path? Who had taken those decisions and why? The answers lay in political as well as economic history, in domestic and in international politics and markets. Of that there was little doubt, but it was necessary to go back and list those steps in order to find some satisfactory explanation for the shift from the relatively stable 1960s to the turbulent, yo-yoing conditions of the 1970s and early 1980s. Because what has happened since then goes back to the very same roots, it may be worth summarising what I thought them to have been.

I listed five distant non-decisions, each with far-reaching implications, drawn from the postwar period up to the end of the 1960s, and then five political choices taken in the decade 1972–82. Although selection of ‘facts’ in history is a notoriously subjective business, as E. H. Carr (1961) rightly insisted and as the postmodernists have rediscovered for themselves, 1 would still stand by the two lists. They can be briefly summarised.

In the list of distant non-decisions, first came the refusal of Europeans to respond to US pleas for more equitable burden sharing in the North Atlantic Treaty Organization (NATO), back in the early 1950s. Opting to be free riders, on the security provided by US nuclear weapons and the tripwires of US ground and air forces, the Europeans – and Japanese, come to that – gave the United States from that time on the perfect justification for finding other ways than taxes to have its defence policies paid for. Thereafter it was no use General Montgomery complaining that the US got into the Vietnam War without consulting the European allies, or Jacques Rueff and General de Gaulle complaining that the US was abusing the exorbitant privileges given it by other people’s use of the dollar as an international currency. European preference for welfare spending over defence spending shared the blame with American preferences for spending now and paying later – or never.

The second non-decision was the refusal as early as 1957 to respond to the developing countries’ claims for redistributive UN aid. Related to it, third, was the choice of ad hoc, case-by-case processes of dealing with international debt.

Also going back to the mid-1950s was the first of many failures to agree strong, comprehensive rules against the use of cheap credit and subsidised export credit insurance to promote competitive exports by the industrialised countries. A recent study by Gunther Walzenbach shows how mutually destructive, politically and economically, has been this ongoing failure (Walzenbach 1998).

Fifth and last, I added the decision by Harold Wilson in the first postwar Labour government in Britain to reopen the City of London as an international financial marketplace. All subsequent history of the management (and mismanagement) of international finance showed the importance to the United States of having London as partner to New York in developing a lively and innovative system for the transnational creation of and trade in credit. In the old sense, it was true even before the Suez debacle that the ‘special relationship’ of Britain to the United States no longer existed save in the minds of British politicians. But in matters of financial...

Table of contents

• Cover
• Half Title
• Title Page
• Copyright Page
• Table of Contents
• Introduction to the new edition of Mad money
• Acknowledgements
• Abbreviations
• 1 The casino image gone mad
• 2 Innovations
• 3 Political underpinnings: the US–Japan axis
• 4 Political underpinnings: disunited Europe
• 5 Wall Street and other casinos
• 6 The debtors
• 7 Finance and crime
• 8 Managing mad money – national systems
• 9 Our international guardians
• 10 So what?
• Bibliography
• Index