Illustration by Kate Charlesworth

The 1970s

The end of Bretton Woods On 15 August 1971 President Nixon took the US dollar off the Gold Exchange Standard. An international agreement had pegged the US dollar to gold (at $35 per ounce) since 1944, when the Bretton Woods conference in the US had established the post-war economic world order. All the major currencies now followed suit, leaving the US dollar as the one internationally recognized reserve currency. The immediate cause was the mounting trade and other deficits of the US, principally as a result of the war in Vietnam. The effect was to allow the US Government – and private corporations, banks and speculators – to manipulate the world’s financial system to their own advantage.

Shock and war The Yom Kippur War of October 1973 pitched Arab states against Israel once again, following their disastrous defeat in the ‘One Day’ war of 1967. This time Arab (and some other) states deployed their control of the world’s oil supply through the Organization of Oil Exporting Countries (OPEC). Not merely was the US the main sponsor of Israeli military supremacy: inflation and the devaluation of the US dollar since 1971 had slashed the value of oil exports. Embargoes and caps on oil production, co-ordinated by OPEC, quadrupled the price of oil in months. The ‘oil shock’ transferred billions of US dollars to the ruling élites of the OPEC states, who duly recycled them into their personal bank accounts abroad. Thus, in financial centres like New York, London and Zurich, the Lords of the Universe (and the Gnomes of Zurich) were born – and, along with them, the cancerous reproduction of footloose, candyfloss wealth.

Petrodollars The banks now holding these so-called ‘petrodollars’ duly went in search of maximum returns. The rich world was stunned by the oil shock and had little to offer. So off went the petrodollars to the élites of former colonies, various gangster regimes and organizations around the ‘Third World’. These were happy to pocket hard cash at any price. A goodly part of it was stashed, all over again, in private bank accounts back in New York, London and Zurich. When it came to repayment, however, the gangsters used their client political regimes – military dictatorships and ‘kleptocracies’ of one sort or another – to offload their debts on to subject populations, in the form of public or ‘national’ debt.

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The 1980s

The ‘Third World’ debt crisis Inflation and interest rates rose. Governments started borrowing simply to service their existing debts. Calamity finally engulfed Mexico in 1982. President López Portillo suspended foreign debt payments, devalued the peso and nationalized the banks. Fears that Mexico would be just the first to do this caused panic among the private international banks that now faced ruin. So, primarily at the behest of the US Government, two public institutions, the International Monetary Fund (IMF) and World Bank – also set up at Bretton Woods – bailed out governments, thereby saving the private banks. But the debts kept growing. Africa in particular was being bankrupted. Eventually, a Brady Plan (named after a US official) was devised for Mexico and applied worldwide. It transferred to the IMF and World Bank the economic policy-making of indebted countries. Known as ‘structural adjustment’, and then ‘poverty reduction’, these policies imposed the free-market mantras first rehearsed by the brutal Pinochet dictatorship in Chile after the military coup in 1973. Privatization, deregulation, cuts in public expenditure, charges for public services, regressive taxation, the promotion of commodity exports, a free hand for footloose capital and corporations, all became preconditions for new loans. The net transfer of wealth from poor to rich intensified.

Black Monday On Monday 19 October 1987, little more than a year after the Big Bang deregulation of the City of London, stock markets around the world crashed. It began in Hong Kong, spread west through international time zones to Europe and eventually hit the US, where the Dow Jones Industrial Average index dropped more than 500 points, or almost 23 per cent, in minutes. Nothing quite like it had been seen since the Wall Street Crash of 1929. Computerized trading programmes linking 24-hour ‘globalized’ financial markets were blamed. The ‘herd instinct’ was said to have overwhelmed reason. For the first time, financial derivatives and ‘short selling’ (profiteering from falling prices) fuelled the crash. Black Monday was the first of many Black weekdays to come – not least because, to this day, no-one claims to know exactly why it happened.

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The 1990s

Japan deflates By far the most serious blow to free-market orthodoxy struck Japan in the early 1990s – and the ‘Japanese disease’ has been spreading around the world, uncured, ever since. Japan had been the model of sustained prosperity, becoming the world’s second-largest economy on the back of sophisticated corporate exports to world markets. However, it now began to experience a severe ‘over-investment’ or ‘over-production’ crisis, with persistent deflation (falling prices) rather than the inflation (rising prices) that had plagued the world hitherto. There had been no major bank failures in postwar Japan – banks had been heavily regulated, primarily to support the wider economy. But the system became lax. Japanese savings shifted to property, where a huge price bubble finally burst. Japan was then plagued by ‘non-performing’ loans, reaching a climax in 1997 with the bankruptcy of the mighty Yamaichi Securities. By March 2000 the cost to the Japanese taxpayer of dealing with bad loans in 110 deposit-taking institutions had reached some $7 trillion.

Asia crashes In July 1997 there was a run on the Thai baht. Thailand had a large trade deficit, concealed only by ‘hot’ foreign money, which suddenly fled in panic. Contagion soon struck Malaysia, Indonesia and South Korea. These ‘Little Tigers’ had been poster-children for the ‘export-oriented growth’ theory that justified corporate globalization. Now the IMF stepped in with $40 billion to stabilize the currencies of South Korea, Thailand and Indonesia – and to protect foreign creditors (the banks). In a matter of weeks, a million people in Thailand and 21 million people in Indonesia were pushed below the poverty line. An unintended consequence was the demise of the Suharto dictatorship in Indonesia, when widespread rioting followed sharp price rises in May 1998. The term ‘Little Tigers’ promptly disappeared from the lexicon of economic orthodoxy.

Russia crumbles A ‘ruble crisis’ hit post-communist Russia on 17 August 1998. It was triggered by the Asian crisis and a sharp fall in commodity prices, such as oil and gas. The Russian economy, now largely in the hands of private oligarchs, relied on such commodities for 80 per cent of its exports. Oil was also the single largest source of government tax revenue, some $5 billion of which were being spent on the first brutal war in Chechnya. The effect of Russian bankruptcy spread quickly to the states of the former Soviet Union. The IMF provided a $22.6 billion package designed, inevitably, to protect private creditors.

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2000s

Dot Com bubbles At the turn of the millennium there was a stampede of internet companies towards stock market floatation, principally on the technology-heavy NASDAQ in New York. Very few of these companies had made any money at all, but such were the limitless expectations of the internet’s profitable potential that speculation became feverish. The NASDAQ peaked at 5,048 on 10 March 2000, more than double its value just a year before. Then the US economy stalled – interest rates rose six times in as many months. The NASDAQ fell below 2,000 in 2001, even as the 9/11 attacks devastated Wall Street. By 2003 it had fallen below 1,000 – and most of the Dot Com companies had vanished.

Argentina agonizes Another poster-child of the IMF, President Carlos Menem of Argentina, had privatized public services and industries during the 1990s. Purportedly as a token of confidence and stability, the value of the peso was pegged to the US dollar. But in early 2001 people began turning pesos into dollars and sending them abroad, causing a run on the banks. The Government froze all bank accounts. The entire economy collapsed, and Argentina defaulted on its foreign debt. Neighbourhood organizations mounted street protests and ‘pickets’, and occupied abandoned workplaces. Accompanied by the popular outcry ‘Que se vayan todos’ (‘Out with them all’) Presidents were replaced five times in as many months.

After this the rest, as they say, is news – but no-one need be unduly surprised.

This article is from the March 2010 issue of New Internationalist.

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