Anti-Democratic Nature of US Capitalism is Being Exposed

Bretton Woods was the system of global financial management set up at
the end of the second World War to ensure the interests of capital did
not smother wider social concerns in post-war democracies. It was hated
by the US neoliberals - the very people who created the banking crisis
writes Noam Chomsky

Published on Friday, October 10, 2008 by The Irish Times
by Noam Chomsky

THE SIMULTANEOUS unfolding of the US presidential campaign and
unraveling of the financial markets presents one of those occasions
where the political and economic systems starkly reveal their nature.

Passion about the campaign may not be universally shared but almost
everybody can feel the anxiety from the foreclosure of a million homes,
and concerns about jobs, savings and healthcare at risk.

The initial Bush proposals to deal with the crisis so reeked of
totalitarianism that they were quickly modified. Under intense lobbyist
pressure, they were reshaped as "a clear win for the largest
institutions in the system . . . a way of dumping assets without having
to fail or close", as described by James Rickards, who negotiated the
federal bailout for the hedge fund Long Term Capital Management in
1998, reminding us that we are treading familiar turf. The immediate
origins of the current meltdown lie in the collapse of the housing
bubble supervised by Federal Reserve chairman Alan Greenspan, which
sustained the struggling economy through the Bush years by debt-based
consumer spending along with borrowing from abroad. But the roots are
deeper. In part they lie in the triumph of financial liberalisation in
the past 30 years - that is, freeing the markets as much as possible
from government regulation.

These steps predictably increased the frequency and depth of severe
reversals, which now threaten to bring about the worst crisis since the
Great Depression.

Also predictably, the narrow sectors that reaped enormous profits from
liberalisation are calling for massive state intervention to rescue
collapsing financial institutions.

Such interventionism is a regular feature of state capitalism, though
the scale today is unusual. A study by international economists
Winfried Ruigrok and Rob van Tulder 15 years ago found that at least 20
companies in the Fortune 100 would not have survived if they had not
been saved by their respective governments, and that many of the rest
gained substantially by demanding that governments "socialise their
losses," as in today's taxpayer-financed bailout. Such government
intervention "has been the rule rather than the exception over the past
two centuries", they conclude.

In a functioning democratic society, a political campaign would address
such fundamental issues, looking into root causes and cures, and
proposing the means by which people suffering the consequences can take
effective control.

The financial market "underprices risk" and is "systematically
inefficient", as economists John Eatwell and Lance Taylor wrote a
decade ago, warning of the extreme dangers of financial liberalisation
and reviewing the substantial costs already incurred - and proposing
solutions, which have been ignored. One factor is failure to calculate
the costs to those who do not participate in transactions. These
"externalities" can be huge. Ignoring systemic risk leads to more
risk-taking than would take place in an efficient economy, even by the
narrowest measures.

The task of financial institutions is to take risks and, if
well-managed, to ensure that potential losses to themselves will be
covered. The emphasis is on "to themselves". Under state capitalist
rules, it is not their business to consider the cost to others - the
"externalities" of decent survival - if their practices lead to
financial crisis, as they regularly do.

Financial liberalisation has effects well beyond the economy. It has
long been understood that it is a powerful weapon against democracy.
Free capital movement creates what some have called a "virtual
parliament" of investors and lenders, who closely monitor government
programmes and "vote" against them if they are considered irrational:
for the benefit of people, rather than concentrated private power.

Investors and lenders can "vote" by capital flight, attacks on
currencies and other devices offered by financial liberalisation. That
is one reason why the Bretton Woods system established by the United
States and Britain after the second World War instituted capital
controls and regulated currencies.*

The Great Depression and the war had aroused powerful radical
democratic currents, ranging from the anti-fascist resistance to
working class organisation. These pressures made it necessary to permit
social democratic policies. The Bretton Woods system was designed in
part to create a space for government action responding to public will
- for some measure of democracy.

John Maynard Keynes, the British negotiator, considered the most
important achievement of Bretton Woods to be the establishment of the
right of governments to restrict capital movement.

In dramatic contrast, in the neoliberal phase after the breakdown of
the Bretton Woods system in the 1970s, the US treasury now regards free
capital mobility as a "fundamental right", unlike such alleged "rights"
as those guaranteed by the Universal Declaration of Human Rights:
health, education, decent employment, security and other rights that
the Reagan and Bush administrations have dismissed as "letters to Santa
Claus", "preposterous", mere "myths".

In earlier years, the public had not been much of a problem. The
reasons are reviewed by Barry Eichengreen in his standard scholarly
history of the international monetary system. He explains that in the
19th century, governments had not yet been "politicised by universal
male suffrage and the rise of trade unionism and parliamentary labour
parties". Therefore, the severe costs imposed by the virtual parliament
could be transferred to the general population.

But with the radicalisation of the general public during the Great
Depression and the anti-fascist war, that luxury was no longer
available to private power and wealth. Hence in the Bretton Woods
system, "limits on capital mobility substituted for limits on democracy
as a source of insulation from market pressures".

The obvious corollary is that after the dismantling of the postwar
system, democracy is restricted. It has therefore become necessary to
control and marginalise the public in some fashion, processes
particularly evident in the more business-run societies like the United
States. The management of electoral extravaganzas by the public
relations industry is one illustration.

"Politics is the shadow cast on society by big business," concluded
America's leading 20th century social philosopher John Dewey, and will
remain so as long as power resides in "business for private profit
through private control of banking, land, industry, reinforced by
command of the press, press agents and other means of publicity and
propaganda".

The United States effectively has a one-party system, the business
party, with two factions, Republicans and Democrats. There are
differences between them. In his study Unequal Democracy: The Political
Economy of the New Gilded Age, Larry Bartels shows that during the past
six decades "real incomes of middle-class families have grown twice as
fast under Democrats as they have under Republicans, while the real
incomes of working-poor families have grown six times as fast under
Democrats as they have under Republicans".

Differences can be detected in the current election as well. Voters
should consider them, but without illusions about the political
parties, and with the recognition that consistently over the centuries,
progressive legislation and social welfare have been won by popular
struggles, not gifts from above.

Those struggles follow a cycle of success and setback. They must be
waged every day, not just once every four years, always with the goal
of creating a genuinely responsive democratic society, from the voting
booth to the workplace.

* The Bretton Woods system of global financial management was created
by 730 delegates from all 44 Allied second World War nations who
attended a UN-hosted Monetary and Financial Conference at the Mount
Washington Hotel in Bretton Woods in New Hampshire in 1944.

Bretton Woods, which collapsed in 1971, was the system of rules,
institutions, and procedures that regulated the international monetary
system, under which were set up the International Bank for
Reconstruction and Development (IBRD) (now one of five institutions in
the World Bank Group) and the International Monetary Fund (IMF), which
came into effect in 1945.

The chief feature of Bretton Woods was an obligation for each country
to adopt a monetary policy that maintained the exchange rate of its
currency within a fixed value.

The system collapsed when the US suspended convertibility from dollars
to gold. This created the unique situation whereby the US dollar became
the "reserve currency" for the other countries within Bretton Woods.