time of the second oil crisis, it achieved a balance between imports and exports. Or, to put it another way, enough profits on sales had built up in the country’s coffers so that it could buy whatever it wanted.
On the other hand, because the dollar has been the key currency used by the free world throughout the postwar period and is accepted both at home and abroad, America alone can import whatever it wants without having to export first. With some exaggeration one might even say that as long as the United States prints dollars, it has the right to buy anything in the world. Even without the money readily at hand it can buy on credit. That is one of the advantages of controlling the key currency.
This situation will continue as long as America maintains its grip on world leadership. But when, as now, American competitiveness is declining, controlling the key currency becomes a disadvantage. What was beneficial in the short run becomes a handicap over the long run. The flip side to the short-term advantage of being able to buy anything you want without making any export effort is that two big bills eventually come due—a long-term deterioration of international competitiveness and an ingrained habit of import consumption.
Thus, lurking in the background of the debate about containing Japan are these systemic factors of short-term advantages and long-term disadvantages. This raises the question of whether it might be a good idea to change the system, but in point of fact there is no currency at present that is capable of replacing the dollar as the key currency. And even if there were, the United States would not accept such a course of action. Suppose, for example, that the yen grew even stronger and Japan invested huge sums of money in the IMF, thus eclipsing the U.S. contribution and winning a stronger say for itself. America would be upset. Even if the United States has declined in real strength, it is not likely to give up its prerogatives of world leadership. That is not the way superpowers behave.
If some worldwide upheaval or major cataclysm occurred, the situation would be different. The dollar replaced the pound as the key currency when world leadership shifted from Britain to the United States after two world wars. For leadership to be transferred during peacetime as the result of deliberations is inconceivable.
The Fragility of Economic Power. In July 1944, at the height of World War II, the foundations for today’s International Monetary Fund system were laid at an international conference held in the town of Bretton Woods, New Hampshire. This conference to define the workings of the world economy in the postwar period was attended by representatives of the Allied countries, including John Maynard Keynes of Great Britain and Harry D. White of the United States. The conference would not only establish a monetary system, it would also determine whether the pound or the dollar would have primacy in the postwar world. By this time the Allied countries could read the signs of German and Japanese defeat and had begun to take steps accordingly.
Keynes’s concept was that the IMF should act as a clearinghouse, coordinating and maintaining a balance so that no particular country would become too weak or too strong. This, of course, was a desperate attempt to preserve British authority and save the pound. White’s plan was to place America at the center and subordinate all the other countries around it like satellites. It tied the dollar to the gold standard and created a fixed exchange rate for all other currencies. Despite Keynes’s strong opposition to White’s plan, there was no contest between the ascending dollar and the setting sun of the British pound. Keynes’s arguments fell on deaf ears. The key currency shifted from the pound to the dollar, and world leadership shifted from Great Britain to the United States.
The present IMF system thus came about in part through American steamrolling, and America is unlikely to give up control of the IMF unless it is forced to do so. The IMF was created at a time when America accounted for 52 percent of the world’s Gross National Product (GNP) and two-thirds of the world’s gold supply. That America with a mere 3 percent of the world’s population had so much wealth is amazing. That period was indeed an unprecedented golden age for the United States, which was able to do whatever it pleased.
Despite Keynes’s desperate efforts at Bretton Woods, the outcome was inevitable. Britain no longer had the political, economic, or military clout to prevent the dollar from replacing the pound as the key currency. Though it has declined since those heady days, the United States remains a great power. Replacing America today with second-place Japan or Germany would leave much to be desired. But even if these countries were absolute equals with the United States, the transfer of leadership as the result of discussion is inconceivable. History teaches that there has to be some dramatic upheaval for world leadership to shift.
We therefore cannot expect any change in the IMF system until America becomes much weaker and the number-two powers much stronger—and much stronger not only in terms of their economic capabilities. In order to attain superpower status a country also needs physical, that is, military, strength. Economic power is too fragile to respond in emergency situations. In the 1980s Japan went on a shopping spree, buying up America and investing elsewhere overseas. If the laws changed or a war broke out in any of those foreign countries, however, Japan’s foreign investments would be frozen or confiscated and that would be the end of that.
At present Japan does not even have the power to protect Japanese corporations that have set up businesses overseas. Take the case of the Iran Japan Petrochemical Company, a joint venture between Iran and members of the Mitsui group. Its plans to build a petrochemical company in southern Iran were interrupted first by the Khomeini revolution and then by the Iran-Iraq war, resulting in the loss of millions of dollars. If Japan had had military capabilities, the results might have been different. Japanese oil tankers sailing into the Persian Gulf would not have had to seek American protection during the Iran-Iraq war. At the very least, there would have been no outcry in the United States about Japan’s getting a free ride militarily. More recently during the Gulf War, I repeatedly heard Americans ask why the lives of American young people should be sacrificed to give Japan access to the oil it needs so that it can go on making money. Despite having contributed $13 billion to the war effort, Japan had little say, diplomatically speaking, in the postwar settlement. Most Japanese sense that Japanese diplomacy carries little weight. Does any country look to the prime minister of Japan for leadership? Though it may pride itself on being an economic superpower, Japan is still frustrated by its relative powerlessness on the world scene.
To turn the argument around, it could be said that Japan, which has so little political or military strength, has come to have too much economic power. Having written this, I should hasten to say that I am not a Japanese nationalist or a hawk who wants to see Japan rearm. As a realist I am merely pointing out the obvious. Shintaro Ishihara’s statement that Japan might call on Russia to defend it if America tried to contain Japan is nonsense. In such an event, Russian demands are unlikely to stop at microchips. To put it bluntly, as far as most Japanese are concerned, Russia is not the country that they are most likely to trust. The realistic view is that it would be far better for Japan to listen to America’s complaints than to join hands with the country that stole Japan’s Northern Territories at the end of World War II.
Excessive Exports versus Excessive Imports. In order for the dollar to function as the key currency, America must reconsider its special right to cheap imports and exercise restraint. If it is going to be the world’s leader, it must act like a leader and show more self-control. This means becoming more internationally competitive and achieving a trade balance through an export effort or through a further devaluation of the dollar. Competitiveness can be achieved by letting the dollar fall even further, but there is an inherent contradiction in a constantly declining dollar. A key currency that falls unchecked makes no sense as a key currency. Thus, as long as the dollar is the key currency, it must not be allowed to fall indefinitely.
After the Plaza Accord, the dollar plummeted and by 1988 it had reached an exchange rate of 120 yen. At the time some predicted that the dollar might drop even further to the 100-yen or 80-yen level. (At the time this book went to press, the exchange rate was fluctuating between 125 and 104 yen to the dollar.) Although logically speaking it is not strange
