The Financial Tsunami
Part II: The Financial Foundations of the American Century
F. William Engdahl
Jan 18, 2008
The financial foundations of the
The ongoing and deepening global
financial crisis, nominally triggered in late June 2007 by the
sudden collapse of two Bear Sterns hedge funds with excessive
exposure to sub-prime mortgages, can best be understood as an
essential part of an historical process dating back to the end
of the Second World War - the rise and decline of the American
The American Century, proudly
proclaimed by Time-Life founder and establishment insider,
Henry Luce in a famous 1941 Life magazine editorial, was
built on the preeminent role of New York banks and Wall Street
investment banks which had by then clearly replaced the City
of London as the center of gravity of global finance. Luce's
American Century was to be built in a far more calculated manner
than the British Empire it replaced. 
A then top-secret Council on
Foreign Relations postwar planning group, The War & Peace
Studies Group, led by Johns Hopkins President and geo-political
geographer, Isaiah Bowman, laid out a series of studies designed
to lay the foundations of their postwar world, already beginning
1939, well before German tanks had rolled into Poland. The American
Empire was to be an empire indeed. But it would not make the
fatal mistake of the British or other European empires before,
namely to be an empire of open colonial conquest with costly
troops in permanent military occupation.
Instead, the American Century
would be packaged and sold to the world, above all the emerging
countries of Africa, Latin America and Asia, as the guardian
of liberty, democracy. It would clothe itself as the foremost
advocate of end to colonial rule, a stance which uniquely benefited
the only major power without large colonies - namely, the United
The new American Century world
was to be led by the champion of free trade everywhere, which
also uniquely benefited the strongest economy in the early postwar
years, the United States. It was a brilliant, if fatally flawed
concept. As State Department planning head, George F. Kennan
wrote in a confidential internal memo in 1948, "We have
about 50% of the world's wealth but only 6.3% of its population...Our
real task in the coming period is to devise a pattern of relationships
which will permit us to maintain this position of disparity without
positive detriment to our national security." 
The core of the War & Peace
Studies, which were designed for and implemented by the US State
Department after 1944, was to be the creation of a United Nations
organization to replace the British-dominated League of Nations.
A central part of that new UN organization, which would serve
as the preserver of the US-friendly postwar status quo, was creation
of what were originally referred to as the Bretton Woods institutions
- the International Monetary Fund and the International Bank
for Reconstruction and Development or World Bank. 
The GATT multinational trade agreements were later added. The
US negotiators in Bretton Woods New Hampshire, led by US Treasury
deputy Secretary Harry Dexter White, imposed a design on the
IMF and World Bank which insured the two would remain essentially
instruments of an "informal" US empire, an empire,
initially based on credit, and later, after about 1973, on debt.
New York and the New York Federal
Reserve Bank were the heart of the new empire in 1945. The United
States held the overwhelming majority of world central bank monetary
gold reserves. The postwar Bretton Woods Gold Exchange Standard
uniquely benefited the role of the US dollar, then and even now
world reserve currency.
All IMF member country currencies
were to be fixed in value to the US dollar. In turn, the US dollar,
but only the US dollar was fixed to a preset weight of gold at
$35 per ounce of gold. At this fixed rate, foreign governments
and central banks could exchange dollars for gold.
Bretton Woods established a
system of payments based on the dollar, in which all currencies
were defined in relation to the dollar. It was ingenious and
uniquely favorable to the emerging financial power of New York,
whose bankers actively shaped the final agreements.
In those days, in stark contrast
to the present, the dollar was "as good as gold." The
US currency was effectively the world currency, the standard
to which every other currency was pegged. As the world's key
currency, most international transactions were denominated in
Maintaining the role of the
US dollar as world reserve currency has been the foremost pillar
of the American Century since 1945, related to but more strategic
even than US military superiority. How that dollar primacy has
been maintained to now encompassed the history of countless postwar
wars, financial warfare, debt crises, and threats of nuclear
war to the present.
Important to place the emergence
of the asset securitization revolution in global finance which
is now impacting the world financial system in wave after wave
of new shocks and dislocations, and to appreciate Alan Greenspan's
substantial contribution to preserving the dominance of the dollar
as world reserve well beyond the point the US economy ceased
being the world's most productive industrial manufacturer, a
brief review of the distinct phases in postwar dollar hegemony
The Golden Years of America's Century
The first phase, which we might
call the postwar "golden years," saw the US emerge
from the ashes of World War II as the unchallenged global economic
Colossus. The US was the dominant world power; no one
even came close. Over half of all international money transactions
were financed in terms of dollar. The US produced more than half
the world output. The US also owned about two thirds of the official
gold reserves in the world in 1940.
When various European countries
had reserve surpluses, they converted the surpluses into dollar
reserves rather than gold because they could earn interest on
dollar assets such as US Treasury bonds and dollars could always
be converted into gold at $35 per ounce whenever it became necessary.
The US dollar was at the center of this system.
American industry, led by General
Motors, Ford and Chrysler Motors, the Big Three, were the world
class leaders - no one was even close back then. US Steel (before
it became USX), machine tool manufacture, aluminum, aircraft
and related industries all set the benchmark for global excellence
well into the 1950's.
Above all, the American oil
giants - Mobil, Standard Oil of New Jersey, Texaco, Gulf Oil
- those key companies dominated the unique energy source which
was to become essential to unprecedented postwar growth rates
in Europe, Japan and the rest of the postwar world - petroleum.
In this early postwar period
demand for dollars in the world to finance reconstruction was
so great that the primary economic problem faced in the 1950's
in Europe, Japan, South Korea and elsewhere was dollar shortages
to finance imports of needed US capital equipment, its oil, its
The US monetary gold stocks
reached a record $24.6 billion in 1949, a huge sum that was comparable
today to $211 billion, as gold from abroad poured into the US
to pay the deficits in trade run up by foreign nations. New York,
backed by gold reserves, was the unchallenged world banker.
This process began to deteriorate
after a steep postwar recession in 1957-58. That recession should
have been the alarm bell to US economic policy planners and industry
that the unique period of profiting from the relative economic
dislocation of a war-torn world was at its outer limits. Beginning
1957 the US economy was in need of a substantial regeneration,
were it to remain globally competitive. That was not to happen.
By the time of the November
1967 British Sterling crisis, where the British Government was
forced to violate IMF rules and devalue Sterling by 14% to maintain
their economy amid severe recession, the focus turned on the
fact that President Lyndon Johnson's Great Society and disastrous
Vietnam War costs were causing the US government to run record
budget deficits. The dollar was vulnerable to a run on US gold
for the first time since the 1930's.
To hide the extent of those
deficits, the Johnson Administration introduced creative accounting.
For the first time the Budget director added the funds paid by
working Americans into the Federal Social Security Trust Fund,
a surplus that was to have been set aside to pay future retirement
and related benefits for most Americans, to the Consolidated
General Budget - a start to budget fakery which by the early
years of the next century were to become huge.
Johnson also began manipulation
of key government economic statistics used to compute everything
from unemployment to inflation to GDP. The statistical manipulations,
for reasons of obvious if fateful political opportunism, were
endorsed silently by every succeeding Administration, the most
egregious of them being the present Bush-Cheney Administration.
The 1971 dollar coup
Despite all the manipulations,
by 1971 US monetary gold reserves had reached a precarious low
as foreign trade surplus nations, led by France, had demanded
payment in hard gold from the US Federal Reserve for their dollar
surpluses. Reality could not so easily be manipulated as government
statistics. Europe had emerged, along with Japan, as powerful
trade surplus, modern, fast-growing economies.
The United States was becoming
a vast rustbelt of decaying, obsolescent manufacture. The spin-doctors
of Wall Street and select think-tanks such as the Ford and Rockefeller
foundations came up with a linguistic euphemism calling it the
"post industrial society," but linguistics did not
change the reality. By the late 1960's America's once-booming
industrial centers from Detroit to Pittsburgh to Chicago had
become sprawling slums of decay, crime and rising unemployment.
Were the United States to lose
its last gold reserves, the role of the dollar as unique world
reserve currency - the pillar, along with US military superiority,
of its postwar American Century imperium - would end abruptly.
To avert such a calamity, in
August 1971 President Nixon huddled with his closest advisers,
among them a US Treasury official named Paul Volcker, then Under-Secretary
of the Treasury for International Monetary Affairs, and a long-time
associate of David Rockefeller and the Rockefeller family.
Their task was to come up with
a solution. Volcker's "solution" to the massive demand
to redeem US dollars for gold was to be as simple as it was to
prove destructive to world economic health.
Nixon announced to a startled
world on August 15, 1971 that from that day, the United States
would not longer honor its international treaty obligations under
the Bretton Woods Agreement. Nixon had suspended convertibility
of the dollar into gold. The New York Fed's Gold Discount Window
was locked shut. World currencies went into a free float against
an uncertain dollar, a so-called fiat currency. The dollar now
was not backed by gold or even silver but only the "full
faith and credit" of the US government, a commodity whose
marketable value was beginning to be questioned.
Debt becomes the vehicle
Soon, with the implicit threat
of withdrawing its nuclear shield as its prime persuasion, successive
US Administrations realized that rather than depending on its
role as the world's creditor as it had until 1971, the American
Century could theoretically thrive as the world's greatest
debtor, so long as American finance and the dollar dominated
As long as major US postwar
satrapies  such as Japan, South Korea or
Germany, were forced to depend on the US security umbrella, it
was relatively simple to pressure their Treasuries into using
their US dollar trade surpluses to buy US government debt. In
the process, the US bond or debt markets became far and away
the world's largest. Wall Street primary bond dealers were replacing
Pittsburg steel and Detroit car manufacture as the "business
To paraphrase the famous quip
of former GM president Charles Wilson from the 1950's, the new
mantra was, "What's good for Wall Street is good for America."
It wasn't. The name financial "industry" even became
commonplace, as if to designate money as the legitimate successor
to production of real physical wealth in the economy.
Debt - dollar debt - was to
be the vehicle for a new role of New York banks, led by David
Rockefeller's Chase Manhattan and Walter Wriston's Citibank.
Their idea was to extend hundreds of billions of dollars in newly
acquired OPEC and other petrodollars, which they "persuaded"
Saudi and other OPEC governments to bank their new oil surpluses
in London or New York banks. Then those dollar deposits from
OPEC, called by Henry Kissinger and others at the time, "petrodollars"
went in the form of recycled loans to oil importing and dollar-starved
Third World economies. 
The Carter dollar confidence crisis
This second phase, the post-gold
era, fuelled by the manipulated 1973 oil shock and US pressure
on Saudi Arabia and OPEC to price oil exclusively in dollars,
Kissinger's "petro-dollar recycling," 
rolled along without major trouble until early 1979 when the
dollar faced a major foreign sell-off during the end of the Jimmy
Carter Presidency. The American Century faced one of its greatest
challenges at that juncture. German, Japanese even Saudi Arabian
central banks began dumping US Treasury holdings in what was
called a loss of "confidence" in Carter's world leadership
In August 1979, to restore
world "confidence" in the dollar, President Jimmy Carter,
himself a hand-picked protégé of David Rockefeller's
Trilateral Commission, was forced by the big New York banks,
led by David Rockefeller's Chase Manhattan, to accept Paul Volcker,
a protégé of Rockefeller's from Chase Manhattan
Bank, as new Chairman of the Federal Reserve with an open mandate
to do what was necessary to save the dollar as reserve currency.
On taking office, Volcker bluntly
announced, "the standard of living for the average American
has to decline." He was Rockefeller's hand-picked choice
to save the New York financial markets and the dollar at the
expense of the nation's welfare.
The Volcker 'shock therapy'
Volcker's shock therapy, begun
in October 1979, lasted until August 1982. Interest rates shot
through the roof to double digits. The US and world economies
were plunged into a monster recession, the worst since World
War II. Within a year, the prime rate had shot up to the unheard-of
level of 21.5%, compared to an average of 7.6% for the fourteen
previous years, a more than threefold rise in weeks. Official
US unemployment peaked at 11%, while unofficially when those
who simply had given up seeking work were counted, it was far
The Shock Therapy of Volcker
doubled US official unemployment:
The Latin American debt crisis,
an ominous foretaste of today's USA sub-prime crisis, erupted
as a direct result of the Volcker shock. In August 1982 Mexico
announced it could no longer pay in dollars the interest rate
service on its staggering debt. It, as most of the Third World
from Argentina to Brazil, from Nigeria to Congo, from Poland
to Yugoslavia, had fallen for the New York banks' debt trap.
The trap was in borrowing what amounted to recycled OPEC petrodollars
invested in the major New York and London banks, the Eurodollar
banks, which lent the dollars to desperate Third World borrowers
initially at "floating rates" tied to London LIBOR
When Libor rose some 300% within
months as a result of the Volcker shock therapy, those debtor
countries were unable to continue. The IMF was brought in and
the greatest looting binge in world history, misnamed the Third
World Debt Crisis, was on. Volcker's shock policy, predictably,
triggered the crisis.
After seven years of relentlessly
high interest rates by the Volcker Fed, sold to the gullible
public as "squeezing inflation out of the US economy,"
by 1986 the internal state of the US economy was horrendous.
Much of America came to resemble a Third World country, with
its growing slums, double-digit unemployment and growing crime
and drug addiction problems. A Federal Reserve study showed that
55% of all American families were net debtors. Federal budget
deficits were running at then-unheard-of levels of more than
$200 billion annually.
In reality, Volcker, a personal
protégé of David Rockefeller from Rockefeller's
Chase Manhattan Bank, had been sent to Washington to do one thing
- save the dollar from a free fall collapse that threatened the
role of the US dollar as global reserve currency.
That dollar reserve currency
role was the hidden key to American financial power.
By letting US interest rates
go through the roof, foreign investors flooded in to reap the
gains by buying US bonds. Bonds were and are the heart of the
financial system. Volcker's shock therapy for the economy meant
soaring profits for the New York financial community.
Volcker succeeded only too
well in his mission.
The dollar rose to all-time
highs against the currencies of Germany, Japan, Canada and other
countries from 1979 through the end of 1985. The over-valued
US dollar made US manufactured exports prohibitively expensive
on world markets and led to a dramatic decline in US industrial
Already high interest rates
from the Volcker Fed since October 1979 had led to a major decline
in domestic construction, the ultimate ruin of the US automobile
industry and with it, steel, as American manufacturers moved
to outsource production offshore where the cost advantages were
greater. Referring to Paul Volcker and his free-market backers
inside the Reagan White House, Republican Robert O. Andersen,
then chairman of Atlantic Richfield Oil Co. complained, "they've
done more to dismantle American industry than any other group
in history. And yet they go around saying everything is great.
It's like the Wizard of Oz." 
By early 1987 the nation's
traditional mortgage banks, the Savings & Loan banks, were
in a liquidity crisis that was to ultimately cost US Taxpayers
hundreds of billions in government bailouts. The Congress' GAO
watchdog agency declared that the Federal Savings & Loan
Insurance Corporation, the guarantor against S&L bank panic,
was insolvent. Yet under pressure from the S&Ls, huge bank
losses were allowed to build as insolvent institutions were allowed
to remain open and grow, allowing ever increasing losses to accumulate.
The ultimate cost of the 1980's S&L debacle came to more
than $160 billion. Some calculated real costs to the economy
ran as high as $900 billion. Between 1986 and 1991, the number
of new homes constructed dropped from 1.8 to 1 million, the lowest
rate since World War II.
America's Second Revolution: the eyes
on the Prize
Federal Reserve monetary policy
has been typically misrepresented as a series of ad hoc pragmatic
responses to recurring crises in post-war banking and finance.
The reality is that it has faithfully followed a coherent hidden
thread of policy that was first laid out in 1973 by the spokesman
then for America's most powerful establishment family.
The policy was outlined in
a little-noted book titled, ominously enough, "The Second
American Revolution." It was written by John D. Rockefeller
III, scion of the powerful Standard Oil and Chase Manhattan Bank
empire, and, along with his three brothers - David, Nelson and
Laurance - architect of the world arrangement after 1945 known
as the American Century.
In his book, Rockefeller declared
the establishment's determination to roll back concessions grudgingly
granted by the wealthy and powerful during the Great Depression.
Rockefeller issued the call in 1973, long before Jimmy Carter
or Margaret Thatcher came to office to implement it. He called
for a "deliberate, consistent, long-term policy to decentralize
and privatize many government functions...to diffuse power throughout
the society."  The latter was a witting
deception as his intent was not to diffuse power, but just the
opposite - to concentrate that economic and banking power into
the hands of a tight-knit elite.
Privatization of essential
and socially useful government functions that had been established
often with great social agitation and political pressure during
the difficult crises of the 1930's, was the Rockefeller agenda.
In brief, it was the removal of Depression era government regulations
on all aspects of economic and social life in America.
Above all, deregulation of
Wall Street and financial markets was the goal, along with a
radical reduction in the equalizing of wealth, as seen by Rockefeller
and friends, inherent in such programs as Social Security. The
George W. Bush "tax cuts for the wealthy" were just
a continuation of a three decade agenda of the powerful establishment
Hard as it may be to believe,
all major US policy from the 1970's through the misnamed sub-prime
crisis today, had a connecting continuous thread. Key Fed and
Treasury and other US policymakers always held their "eyes
on the Prize."
The "Prize" was untold
financial gains to be won through a rollback of major concessions
to the working blue collar and middle income Americans, concessions
granted during the Great Depression by powerful establishment
circles led by the Rockefeller and Morgan banking groups, to
forestall a more radical revolt.
Social Security was one target
for rollback. Financial deregulation and above all repeal of
the 1933 Glass-Steagall Act, was another. Here a well-connected
Wall Street banker named Alan Greenspan was to play the decisive
role on behalf of the financial deregulation agenda in his tenure
as Federal Reserve Chairman lasting from 1987 through 2006. Securitization
of sub-prime or junk mortgages was to have been his crowning
legacy. As it looks at this writing, it certainly will be, though
perhaps not as he and others in Wall Street intended. It will
more likely be a crown of disgrace.
(Part III will deal with the
Greenspan creation of the securitization revolution and its subsequent
Part 1: Deutsche
Bank's painful lesson
1 - Luce, Henry,
The American Century, reprinted in The Ambiguous Legacy,
M. J. Hogan, ed. Cambridge, UK: Cambridge University Press, 1999.
2 - Kennan,
George F., 1948, "PPS/23: Review of Current Trends in
U.S. Foreign Policy", Foreign Relations of the United
States, Volume I.
3 - New York
Council on Foreign Relations, undated, The War & Peace Studies,
4 - Engdahl,
F. William, A
Century of War: Anglo-American Oil Politics and the New World
Order, London, Pluto Press, 2004, pp. 88-9.
5 - For an
excellent historical account of the impact of those systematic
government statistical manipulations, see John Williams' http://www.shadowstats.com/.
John has been tracking the manipulations for well over two decades,
the only systematic attempt I know of.
6 - The term "satrapy"
to describe US relations with Japan, Germany and other postwar
allies is used by Zbigniew Brzezinski in his book, The Grand
Chessboard: American Primacy and its Geostrategic Imperatives,
New York, Basic Books, 1997.
7 - The best
treatment of this new role of endless debt creation backed by
US military power as the foundation for the US domination, see
the excellent personal account in the remarkable work by Michael
Hudson, Super Imperialism: The Economic Strategy of
American Empire, London, Pluto Press, 2nd Ed.2003, www.michael-hudson.com.
8 - See Engdahl,
op.cit., pp.130-141 for an unusual account of the role of then-Secretary
of State Kissinger in the events leading to the 400% OPEC oil
price rise in 1974.
9 - Anderson,
Robert O., cited in Greider, William, Secrets of the Temple:
How the Federal Reserve runs the country, Simon & Schuster,
New York, 1987, p. 648.
10 - Rockefeller,
John D. III, The Second American Revolution, Harper &
Row, New York, 1973.
Jan 15, 2008
F. William Engdahl
F. William Engdahl
is the author of Seeds
The Hidden Agenda of Genetic Manipulation. Publication Launch:
23 November 2007.
He also authored
Century of War:
Anglo-American Oil Politics,' Pluto Press Ltd.
He may be contacted
at his website, www.engdahl.oilgeopolitics.net.