F. William ENGDAHL^

You’ve shown how the United States has run rings around Britain and every other empire-building nation in history. We’ve pulled off the greatest rip-off ever achieved.

Herman Kahn, on Hudson Institute in 1971, when informed how US payments deficits could be used to exploit other countries¹

1971: BEGINNING OF THE ENDGAME

The early 1970s were a watershed in policy for the American establishment. Dramatic measures were needed to ensure the continued domination of the United States as global economic and financial superpower. It was not at all obvious how they would do it. Soon enough however, the powers that dominated Wall Street developed a strategy.

With Lyndon Johnson’s war in South-East Asia escalating, along with its costs, international banks and central banks accelerated their selling of dollars and buying of gold. By 1968 the Federal US budget deficit, fed by exploding costs of the war, reached an unprecedented height of $30 billion. Gold reserves continued to fall precariously close to the legal floor of 25% allowed by law under the Bretton Woods treaty. Political disarray within Johnson’s Administration increased the financial flight as Defense Secretary Robert McNamara, widely viewed as the architect of a “no-win war” strategy, handed in his resignation.

The Vietnam War strategy had been deliberately designed by Defense Secretary Robert McNamara, National Security Adviser McGeorge Bundy, along with Pentagon planners and key advisers around Lyndon Johnson, to be a “no-win war” from the onset, in order to ensure a prolonged build-up of the military sector of the US economy.

The American voter, Washington reasoned, would accept large costs for a new war against an alleged ‘encroachment of Godless communism’ in Vietnam, despite the gaping US budget deficits, as long as this produced local jobs in defense plants.

Under the US-dictated Bretton Woods rules, by inflating the dollar through huge spending deficits at home, Washington could, in effect, force Europe and other trading partners to ‘swallow’ US war costs in the form of cheapened dollars. So long as the United States refused to devalue the dollar against gold to reflect the deterioration of US economic performance since 1944, Europe had to pay the cost by accepting dollars at the same ratio as it had some 20 years before despite a huge inflation over that period.

To finance the enormous deficits of his Great Society program as well as the Vietnam build-up during the 1960s, Johnson, fearful of losing votes if he raised taxes, simply printed dollars by selling more US Treasury bonds to finance the deficits. In the early 1960s, the US federal budget deficit averaged approximately $3 billion annually. It hit an alarming $9 billion in 1967 as the war costs soared, and by 1968 it reached a staggering $25 billion.

The European central banks began to accumulate large dollar accounts during this period, which they used as official reserves, the so-called Eurodollar accumu-lation abroad. Ironically, Washington in 1961 had requested that US allies in Europe and Japan, the Group of Ten countries, should ease the drain on US gold reserves by retaining their growing dollar reserves instead of redeeming the dollars for American gold, as mandated under the terms of Bretton Woods.

The European central banks in turn earned interest on these dollars by investing in US government treasury bonds. The net effect was that the European central banks thereby in effect ‘financed’ the huge US budget deficits of the 1960s Vietnam War they so opposed.²