Jan

14

Bill Haynes' comment that "we and China have our arms wrapped around each other, and probably will continue to for the foreseeable future" has a direct parallel with the relationship between U.S. and Britain in the beginning and middle of the 19th century. Then, as now, the U.S. had a chronic trade deficit. The difference between the cost of U.S. purchases of British parasols, railway engines and steel and the value of our cotton exports was financed by British and Dutch banks' acceptance of U.S. paper. The paper was denominated in $ but its valuation was based on the gold standard. The traditional explanation of the periodic slumps in U.S. was that American borrowing was curtailed when the London and Amsterdam markets had questions about the ultimate acceptance of U.S. paper. I think, in fact, the causal arrow went in the opposite direction. Whenever American enthusiasm for parasols, railway engines and steel waned, optimism about the growth prospects for Britain's biggest customer also diminished. There had always been a "gold" market - i.e. one where paper was discounted against bullion; but the fluctuation in the spread between paper and "money" - i.e. sterling coin - depended far more on faith in the U.S. ability to continue to grow as a customer than it did on the credit-worthiness of the U.S. Treasury. There is no other explanation for the willingness of British and Dutch banks to continue to finance exports to the North during the Civil War after the U.S. had lost its primary "money" export and begun printing greenbacks.

I would love to know whether Mr. Haynes thinks that the parallel with 150 years ago will extend to the "solution" of the "trade deficit" problem. When, in the 1870s and 1880s, watches from Connecticut, agricultural machinery from Illinois and Rockefeller's kerosene turned the U.S. into a capital exporter for the first time in its history, the British faced a political crisis. The city banks lost their lucrative market for the discounting of American paper. Their response was to shift almost overnight from being believers in free trade to supporters of Imperial Preference. Attention shifted from trading partners in the Americas to colonial accumulation in Africa and Asia and a literal explosion in the issuance of Imperial paper, primarily from India.


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