On the Fiscal-Military State

The fiscal-military state was not simply a state that spent more on war. It was a new institutional form in which taxation, public debt, public banking, naval procurement, bureaucracy, and war-making capacity were joined together. I discuss it in a longer post on substack. I argue that the British case shows how this system became a foundation of capitalist development. Also, ancient Athens shows that public finance and naval power could be constitutive of state formation much earlier, but it lacked the permanent funded debt, central banking, and capitalist financial system that made Britain distinctive.

Chokepoints and the resilience of American power

Quinn Slobodian has a good review in the New York Review of Books of Edward Fishman’s Chokepoints: American Power in the Age of Economic Warfare. Fishman’s book, as discussed by Slobodian, suggests that the old geography of imperial power, associated with control over maritime chokepoints, has been displaced, or at least supplemented, by a new kind of geopolitical chokepoint embedded in the infrastructure of globalization itself.

The old strategic passages, Suez, Hormuz, Malacca, have not ceased to matter, of course. But the new chokepoints are less visible. They are located in dollar payment systems, correspondent banking networks, shipping lists, insurance, transaction data, export controls, semiconductor supply chains, and the legal mechanisms that allow American sanctions to reach firms and governments well beyond U.S. territory. The empire is not only in the fleet, but also in the spreadsheet, the compliance office, the server, and the bank account.

Slobodian’s central point, a moral or ethical one, is that Fishman is too complacent about the American use of these instruments. Sanctions and export controls are presented too easily as clever instruments of policy, when in fact they are instruments of economic warfare. They often miss ruling elites and impose enormous costs on ordinary people. They restrict access to medicines, raise the cost of living, reduce growth, and produce humanitarian consequences that rarely enter the calculations of the sanctioning power. No surprise there. Fishman is an insider of the US bureaucracy.

More importantly, he notes that there is also a paradox. Sanctions and economic warfare reveal American power and erode it at the same time. In the short run, they demonstrate the extraordinary coercive capacity of the United States. Washington can freeze assets, cut access to dollar payments, block technology transfers, threaten third-party firms, and punish countries that do business with the wrong partners. In the longer run, however, the repeated use of these instruments encourages both adversaries and allies to search for alternatives. Russia, China, Iran, and even European firms and governments learn that dependence on US-controlled networks is a vulnerability (The Chinese already knew that; see Jake Sullivan’s piece in the last issue of Foreign Affairs).

That is certainly right. But it is also incomplete. Slobodian’s critique captures the self-undermining logic of financial and technological chokepoints, but it underplays the military dimension that makes those chokepoints effective in the first place. The dollar system, the control over payment systems, the ability to impose secondary sanctions, and the capacity to define who can and cannot participate in global markets are not simply instruments of market power or legal jurisdiction. They are embedded in a broader imperial architecture.

That architecture includes US military reach, naval dominance, intelligence capabilities, alliance systems, bases surrounding potential rivals, and the capacity to enforce rules globally. The chokepoint is not only financial or technological. It is also geopolitical and military. The old geography of power has not disappeared. It has been internalized into the institutional and technological infrastructure of globalization. This is important because otherwise one ends up with an overly pessimistic view of American hegemony.

It is true that the strength of the system creates vulnerabilities. The more the United States weaponizes interdependence, the more other countries have incentives to escape from it. China’s efforts to build technological autonomy, Russia’s attempts to find payment alternatives, and the search for non-dollar channels of trade all reflect this dynamic. However, as Tim Barker notes in a recent piece in Phenomenal World, American declinism has often been less a description of terminal weakness than a political language for imperial renewal.

Further, hegemony also reproduces American power. The dollar is not simply a convenient currency that survives because markets trust it. Nor is its dominance ultimately explained by gold, credibility, or some spontaneous market convention. The willingness of agents across the world to accept dollars, to denominate contracts in dollars, to hold reserves in dollars, and to organize their calculations around the dollar rests on power. More precisely, it rests on the capacity of the United States to enforce the rules of the global system.

Monetary hegemony (the role of key currency) depends on military technology, which in turn depends on access to key commodities (mostly energy) and technological dominance (mostly in sectors related to the military), but then access to commodities and military power depend on the ability to spend without significant limits, which is based on monetary hegemony, in a circular and self-reinforcing way.

In a simplified way, since the transition to capitalism, there have been essentially three monetary standards. A silver standard, dominated by the Spanish silver peso (which anchored global trade), and was mostly managed by Italian (Genoese) and then Dutch bankers (Bank of Amsterdam), a gold standard, dominated by British pound (that anchored the Industrial Revolution, 1st and 2nd), and was managed by the Bank of England, and a fiat standard, dominated by the dollar, and managed by the Federal Reserve and the multilateral organizations (IMF, World Bank, BIS, etc.).

The rise of the pound was associated to the demonetization of silver, and the end of Bretton Woods to the demonetization of gold. The end of Breton Woods, in this sense, did not represent the beginning of the end of dollar hegemony. Quite the opposite. The collapse of the dollar-gold link created the first genuinely global fiat standard and enlarged the policy space of the United States. Freed from the gold constraint, the United States could use its currency, its public debt, and its central bank in ways unavailable to other countries. The dollar standard allowed the United States to spend, borrow, and sustain its military and technological capacities on a scale that others could not replicate.

This is the fiscal-military side of dollar hegemony. The hegemonic currency allows the state to spend without the same external constraint faced by peripheral countries. That spending supports the military-industrial complex, government procurement, research & development, and the hidden developmental state. In turn, military power sustains the international order in which the dollar remains central. Monetary power and military power are not separate. They are mutually reinforcing.

This is why the rise of China must be analyzed carefully. China has changed the geography of global production. It is no longer simply a low-wage assembler of cheap consumer goods. It is now a central actor in high-tech manufacturing, electric vehicles, batteries, solar panels, telecommunications, and other strategic sectors. The old complacent view that the United States would innovate and design while China assembled is gone. That was one of the illusions of the pro-globalization cheerleaders.

There is an argument, the energy-hegemony argument,, we may call it, made recently by Danny Bessner in David Sirota’s podcast, and in a more systematic way by Helen Thompson in her book Disorder,* that suggest that China is to become dominant because of its control of clean energy sources. Bessner said that “the country that is the leader in new energy technologies is the country that is going to dominate global economics,” and he frames the present as a possible hinge point in which countries begin shifting toward a different energy base. Britain with coal, the United States with oil, and perhaps China with batteries, solar panels, electric vehicles, and the supply chains required for electrification.

There is something to this. Energy transitions are never merely technical, and they reorganize production, finance, and geopolitics. But one should be cautious about moving too quickly from China’s lead in renewables to the end of American hegemony. Energy leadership matters, but monetary and military power have their own inertia. The dollar system, the Treasury market, US military reach, and the legal-financial architecture of sanctions do not disappear because China sells more electric vehicles.

In other words, China’s productive rise has not displaced the financial and military architecture centered on the United States. The geography of production has changed much more than the geography of money. China remains deeply constrained by the dollar system, while the United States does not need to hold renminbi reserves. The United States has military bases around China’s neighborhood and China does not have anything comparable around the United States. China has become a great manufacturing power, but it has not become the issuer of the world’s hegemonic currency.

This asymmetry is central for understanding the current world order as I suggested in my Jacobin piece. In that sense, the discussion of chokepoints should not lead to the conclusion that American hegemony is disappearing. It should lead to a better understanding of how that hegemony operates. The United States no longer relies only on the direct control of territorial routes, although naval power remains essential. It also controls the institutional and technological circuits through which trade, finance, and production are organized. The sea is supplemented by the payment system, the microchip, the export license, and the sanctions list. In a sense, the notion that finance was central to hegemony not just trade, was true (with technological differences) about the pound centered world of the 19th century.**

The overuse of these instruments may indeed generate resistance. But resistance is not the same thing as successful displacement. Alternatives to the dollar system are costly, partial, and difficult to build. Technological autonomy takes time. Financial autonomy requires deep markets, political power, and geopolitical protection. The capacity to escape American chokepoints is unevenly distributed, and most countries remain trapped in the networks they would like to avoid.

The danger, then, is not that American hegemony is about to vanish. The danger is that it becomes more openly coercive as its legitimacy declines. The veneer of politeness associated to the liberal rhetoric of a rules-based order gives way to the crass use of direct interventions, sanctions, export controls, industrial policy for the center, and austerity for the periphery. The old ideology of globalization promised interdependence and efficiency, gives way to more openly nationalist discourses. The reality of coercive interdependence is the same.

* On the energy-hegemony nexus Thompson says: “Geopolitically, an energy change will necessarily result in upheaval. If Britain were the power that climbed to dominance during the age of coal and the United States the power that ascended during the age of oil and coal, the spectre haunting Washington is that without a decisive American strategic turn to renewables and electrification, the new energy age that depends on metals and minerals will belong to China.” Her statement is more nuanced than Bessner, and less categorical about the rise of China, but certainly linked to the energy transition.

** See my article on the use of central banks as weapons of hegemony, and why Ha-Joon Chang's kicking away the ladder was also monetary and financial in nature.

From Truncated Developmental State to Failed State in Latin America

I gave a talk last year in Argentina that forced me to think about the notion of the developmental state and its limits for Latin America. I discussed it in Mexico too, and I added a bit more about the notion of failed states, also discussed in my first presentation. This week I presented at Boston University, for the first time for a mostly English speaking audience. This is a brief summary of some of my ideas, based on those presentations.

National state formation in Latin America, during the last quarter of the 19th century, in what has been termed in the more conventional literature the 1st globalization, was related to the incorporation of the region in the networks of trade, finance, in particular in relation to the United Kingdom and the United States, and the European migratory flows.  On the other hand, the disintegration of the national states in the neoliberal period, starting with the collapse of the so-called Golden Age of Capitalism, is the result of the same necessity to promote the integration of the region in the global economy. Strong or weak state, but with the same objective, to promote the subordinate integration of the region into the global economy. It must be emphasized that it is NOT a Latin American phenomenon, and that the Failed State in the region corresponds to what James Galbraith has called the Predator State in the case of the US, which implies the use of the state to promote the private gains of corporations and the wealthy.

Neoliberalism is NOT a right-wing phenomenon, since the existence of progressive neoliberals, as denominated by Nancy Fraser, referring to left of center, or more appropriately centrists like Clinton and Obama. Right-wing and left-wing populism are to a great degree a reaction to Neoliberalism.

The concept of the developmental state is often used, but seldom analyzed more carefully. The narrative is often associated with the Asian experience in the post-war period, from Japan to China, including in particular South Korea. Conceptually the work of Chalmers Johnson, and his followers (e.g. Amsden, Chang, Evans, and Wade, to cite the most prominent) is central, building on a tradition that harks back to Friedrich List. But the logic of the developmental state is actually related to the American experience, and to the legacy of Alexander Hamilton, who was the inspiration for List, as noted by Cohen and DeLong, discussed here before. In my view, that should be extended to the British case in the 18th century, which was the ultimate inspiration for Hamilton in his 'Report on Manufactures.'

It seems reasonable that what John Brewer called the British Fiscal-Military State  (old post on that here) is the original developmental state. In my view, the central characteristic of the developmental state is its ability to borrow more or less without limit and also without the possibility of default. It is true that the British currency was effectively tied to gold from the early 1700s, but convertibility was suspended in periods of crisis like the Napoleonic Wars. At the core of the developmental state is the ability to spend, without external restrictions. It must have the hegemonic currency, or it must not have a significant shortfall of it.

Charles Tilly famous dictum according to which “war made the state, and the state made war” is correct. It must be complemented by the work by Jan Glete, which extends to the work by Roberts and Parker on the Military Revolution, and the role of a permanent navy and naval warfare in the formation of the state. Nicholas Rodger refers to the Fiscal-Naval State. War matters, but control of the sea matters even more. What is missing in Tilly, and his followers, is the peripheral state, and the relation of the latter with the developmental state. In this case, if we take the Asian case as paradigmatic, we could say that the state lost the war, and the loss made the developmental state.

The developmental state in the periphery appears in the post-war period, with the establishment of American hegemony. The reasons for the collapse of the 1st globalization are complex, but at a deeper level Charles Kindleberger suggested that the roots of the inter-war crisis, including the Great Depression, and the wars too, were associated to the decline of British hegemony and the slow emergence of the American one. But it is not the collapse of the British hegemony, neither the rise to dominance by the United States, that allowed for the appearance of a developmental state in the periphery, and arguably in Latin America too.

The crisis per se opens space for new policies, without a doubt. But it is ultimately the Russian Revolution, and the Cold War, which provides an alternative to capitalism, that opens up space for both alternative policies in the periphery, but additionally for support by the new dominant hegemon in promoting development and lifting the external constraint, that I suggested was at the core of the possibility for a developmental state. In the Asian case, the very existence of the developmental state was to some extent tied to the special relation with the US within the geopolitical situation that included, not only the Soviet Union, but also communist China, North Korea, Vietnam, and the domino theory, according to which Asian economies would fall and become communist if a neighboring country also did. And that is without considering India, Indonesia and the non-aligned movement.

This generated the conditions for an American procurement policy for Asian firms. Daniel Immerwahr argues that Toyota, the firm famous for ‘just-in-time’ or flexible production methods that superseded Fordist mass production, was virtually broke at the beginning of the Korean War. The firm was saved by Pentagon purchases, which guaranteed demand, and the same time that it enforced standards, and transferred technology. In Latin America there was nothing similar to this. Volta Redonda, the first steel mill in Brazil, which depended on US technology transfer and resulted from the US military base in Natal during World War II, would pale in comparison. It was assumed, not completely incorrectly, that our elites would align themselves with the West, and that a communist revolution could not take roots in the region. When it occurred the long and harsh embargo on Cuba was imposed, and a similar one now on Venezuela. Sticks rather than carrots were used in the backyard.

In the case of Latin America, the legacy of the Monroe Doctrine, implied that the benevolent policy referred to as “development by invitation” by Immanuel Wallerstein, following the ideas of Arthur Lewis and revived more recently by Carlos Medeiros and Franklin Serrano, was never really a possibility.

The limited impact of the developmental state in the region, when compared with the Asian experience, should not be seen as a complete failure. The economies of the region grew relatively fast, and even an incomplete or developmental welfare state was created, as noted by Sonia Draibe and Manuel Riesco. Nor should the debt crisis of the 1980s, which closes the cycle, be seen as the result of state-led industrialization. In fact, it is the debt crisis that leads the region more decisively into neoliberalism, even if neoliberalism had started before with the Southern Cone at the forefront.

What has not been discussed in more detail is the role of the United States opening of China, and the role of development by invitation in Asia for the Latin American periphery. In the case of Latin America the end of the developmental period, and the opening up of China, has gone hand in hand with a reprimarization of production and exports in South America, and with a maquilization – which implies higher dependence on imported components – in Mexico and Central America. The new integration implies a peripheral integration with the Southern periphery. But the decision to open up Asia did not come from Latin America. It was an American decision, based on geopolitical calculations, isolate the Soviet Union, back then, and also to discipline the labor force in the center.

It is in this context that the failed state starts to take a hold in the region. But the failed state, defined broadly as one that is incapable to intervene coherently in the economy, or unable to maintain the monopoly of violence, is by no means a mistake. It is functional and necessary for the integration into the global economy. In contrast to the relatively strong state of the late 19th century needed to integrate our economies into the global markets, now, in the 2nd globalization, a weak state, incapable of defending the rights of the working class, is necessary. In the same sense that American elites abandoned their working class, and have weakened and promoted the destruction of the welfare state institutions, the same has taken place in Latin America, but in more dramatic fashion, since in the region the welfare state was already incomplete or truncated, to use Fernando Fajnzylber’s expression about our industrialization.

The protests in the region, and in the center, have opened the possibility for alternatives to neoliberalism, but it would be a mistake to presume that the latter is dead. In general, when left of center governments manage to get elected they must contend with managing the failed state left by neoliberalism.

Handbook of the History of Money and Currency

The Handbook (subscription required) has been edited by Stefano Battilossi, Youssef Cassis and Kazuhiko Yago. It has many interesting chapters. Barry Eichengreen writes on what determines that a currency is used as an international currency (or even as the predominant currency). While he follows conventional views in suggesting that role of money as a means of exchange and the importance of the country in international transactions, he does also explore the role of power (military power) behind the key currency. My take on that topic in this paper with David Fields here.

There is also a very readable paper on the history of central banks by Stefano Ugolini here. It follows the evolutionary approach of Roberds and Velde, and in my view also suffers from conventional views on monetary theory that emphasize the exchange role of currencies, rather than the unit of account function. As a result, it downplays the role of fiscal agent of the state, that in my view was key in the early experiences with public banks. I would emphasize the importance of the development of public debt for the subsequent evolution of public banks, and the relevance of early central banks in the management of the Fiscal-Military State. On this see this and this.

There are interesting papers on paper money experiences, by François Velde (here) or on deflation, by  Richard Burdekin (here), to cite a couple.  There is, also, our entry (with Esteban Pérez) on the history of Central Banking in Latin America (here).

Classical Political Economics and the History of Central Banks

As promised not long ago, here a short paper on the history of central banks presented at ASSA meeting in Philadelphia. The paper is short, given the submission policy. It discusses the growing literature on the origins of central banks, and essentially disagrees with Charles Goodhart, who is the authority on the topic.

The conventional argument is that central banks only become effectively central banks in the late 19th century when a concern with financial stability was developed and the function of Lender of Last Resort (LOLR) was more formally established. The notion is that up to that point central banks were essentially concerned with profit making, as private institutions, and that only when a concern with financial stability as a public good was developed is that they can be seen truly as public institutions (even if they remained private).

Implicit in this view is also the notion that central banks would have a tendency to overissue paper money, in times of booms, which would help their profitability, and that constraining that ability, but at the same time allowing them to act as LOLR was central for financial stability. The first part of the argument, the notion that inflation is caused by the overissue of paper money, derives from the Bullionist controversies and the Bank Charter Act of 1844.

The point of the paper is that early public banks (essentially Italian and Dutch banks that preceded the the Swedish and English central banks) were central banks because they did have a public concern considerably before than their LOLR function was developed. They were fiscal agents of the state concerned with providing a stable unit of account and a secondary market for public debt allowing the expansion of the State.

The paper tries, in that sense, to connect the discussion of the origins of central banks with the extensive literature on the Fiscal-Military State and its relevance for the process of capitalist development.

DisORIENT: Money, Technological Development and the Rise of the West

A very short paper on a very broad subject, co-written with David Fields, which was presented at the last ASSA Meetings in San Francisco. It is forthcoming in the Review of Radical Political Economics (RRPE). The title is derived from Gunder Frank's ReORIENT, that David and I always thought was thought provoking, but surprisingly Monetarist in its assumptions about money. The paper also adds a discussion of Pomeranz famous views on the Great Divergence, particularly the views regarding technological change, which are marginalist at its core, as well as those of Gunder Frank and some of his critics, like Arrighi.

From the abstract:

This paper analyzes the revisionist literature on the Rise of the West. Revisionist authors suggest that the so-called Great Divergence is relatively recent, and that good luck – in the form of silver from the Americas, and abundance of coal, rather than European exceptionalism – was central for the higher rates of growth of GDP in the West. This paper argues that while the revisionist literature provides relevant critiques of conventional accounts of the Rise of the West, it remains rooted in marginalist or neoclassical views of both the role of money and technological progress, and that abandoning these theoretical foundations would strengthen some of its arguments.

As far as I can tell, there aren't many papers in economic history that properly acknowledge the contributions of the revisionist literature, but also of the Military Revolution (Parker), the Consumer Revolution (McKendrick), and the Fiscal-Military State (Brewer). In fact, these historical schools are more compatible with non-marginalist views of the functioning of the economy that emphasize the role of demand and endogenous money in the explanation of the Rise of the West.

The Fiscal-Military State and Western Hegemony

An often neglected, at least in economics, argument for the rise of the West (leaving the debate of when the Big Divergence took place, if around 1800 or before, for another post), is its fiscal advantage when compared to the Oriental Empires (Mughal, Ottoman, Safavid and Qing). Patrick O'Brien, the prominent author of the idea of Western fiscal exceptionalism, suggests that the smaller and more urbanized polities of the West found it easier to tax their populations than the Eastern empires with more extensive territories, larger populations and less urbanized economies, even if the latter were in many respects more advanced than the former. The figure below shows that to some extent the Dutch dominance, and then the English ascension, go hand in hand with and increase of tax revenue as a share of GDP.

The figure shows only the Ottoman empire, at the bottom of the graph, as a comparison to the Western economies, but it gives a sense of the stark differences after the mid-17th century. In a sense, O'Brien's argument can be seen as a variation of Charles Tilly's famous argument that "War made the State, and the State made war." Inter-State wars gave a military edge to Europe, which was solidified in the higher revenues which led to larger and more organized navies in particular. In this respect, the work by Jan Glete on the effects of a permanent navy on State formation deserves also careful reading.

However, the reasons for the militaristic nature of the Western economies is not well developed in the Fiscal-Military State literature. Kenneth Chase's book on the history of firearms provides an interesting answer.

He argues that early firearms were not very effective when used against cavalry because of their overall lack of mobility, poor rates of fire, and limited accuracy. As a result, their effectiveness was restricted to infantry and siege warfare, and were not used in regions threatened by nomads (which include all the Oriental Empires), in which cavalry warfare was dominant. That is why the Chinese invented guns, but failed to keep up with Western developments. The same could be said about sailing techniques, and the combination of guns and sails, to use the terms of Cipolla's classic book.

Long-term versus short-term debt

In a previous post I have referred to the Fiscal-Military State, and Brewer's classic book on it. It is worth remembering, for those afraid about debt these days, that public debt in the UK during the Napoleonic Wars peaked at more than 250% of GDP.

One of the important ways in which the British were able to out-finance the other major European powers, fundamentally France, during the 18th century was the ability to borrow long at at low rates. The graph below shows the proportion of unfunded to funded debt (from Brewer's book). The UK rapidly moved from almost 100% of unfunded debt to less than 10%.

Funded debt, was debt for which specific taxes were set aside to service it, and it tended to be long-term, while unfunded debt was usually short-term debt. Debt service consumed a great amount of the budget, but that was simply the result of the incredibly large amount of debt, since interest rates remained relatively low. I guess the lesson is that long term debt in your own currency is okay.

The role of the State in US Development

As part of Peter Ho's talk yesterday, two graduate students presented some of their research. One of the topics, was the role of the State, the Fiscal-Military State in particular, in the early process of industrialization and development in the US, which was, as noted by Peter, very much in line with his arguments for managed trade. Here is a link to a paper I wrote on the rise of what Schumpeter termed the Tax State. On the Fiscal-Military State read this. The classic book by John Brewer, The Sinews of Power, was essential in the development of some of these ideas, in the sense that it shows the fundamental role of the State for industrialization and the creation of a global empire. The argument put forward, in the talk yesterday, was that the US development can only be understood from a Fiscal-Military Developmental State perspective.