Treasure Islands - Nicholas Shaxson [36]
Keynes understood the problem. “Advisable domestic policies might often be easier to compass, if the phenomenon known as ‘the flight of capital’ could be ruled out,” he said. His words were prescient, for capital flight in his day was nothing when compared to the world-bending amounts that flood out of poor countries into the secrecy jurisdictions today.
He also knew there was a problem: Even in a world of tight capital controls, there would be leakage. Multinational companies needed permission to move investment capital overseas but had much more freedom in moving money for current purposes—that is, for financing trade and other day-to-day business. Of course, they could easily disguise a capital payment as a current one. To this, however, Keynes and Harry Dexter White had an answer. “What is often forgotten,” the Canadian scholar Eric Helleiner notes, “is that Keynes and White addressed this with a further proposal. They argued that controls on capital would be more effective if the countries receiving that flight assisted in their enforcement.”18 In the earliest drafts of the Bretton Woods agreements, both Keynes and White had required that the governments of countries receiving the flight capital would share information with the victims of that flight. In short, they wanted transparency in international finance. Without the lure of secrecy, capital would have far fewer incentives to flee.
Enter Wall Street bankers and their lobbyists. U.S. banks had profited hugely from handling European flight capital in the 1930s, and, fearing that transparency would hurt New York’s allure, they gutted the proposals. While early drafts of the IMF’s Articles of Association had “required” cooperation on capital flight, the final version that emerged from the Bretton Woods conference saw that word replaced with “permitted.” And through that one-word gateway drove a great, silent procession of coaches and horses across the Atlantic, laden with treasure from a shattered Europe. And the capital flight that ensued was as bad as Keynes and White had feared: A U.S. government analysis in June 1947, admitting that it only saw a part of the picture, found that Europeans held $4.3 billion in private assets, an enormous amount in those days, and far bigger than America’s jumbo postwar loan to Britain that year.
American bankers were thrilled. And a new economic crisis exploded in Europe. America filled the hole with aid: the giant Marshall Plan of 1948. It is widely believed that the plan worked by offsetting European countries’ yawning deficits. But its real importance, Helleiner argues, was simply to compensate for the U.S. failure to institute controls on inflows of hot money from Europe. Even in 1953, the authoritative New York Times correspondent Michael Hoffman noted, American postwar aid was smaller than the money flowing in the other direction.19
Henry Cabot Lodge, a Republican senator, was one of those who raised his voice to object to the stink. “There is a small, bloated, selfish class of people whose assets have been spread all over the place,” he said. “People of moderate means in this country are being taxed to support a foreign aid program which the well-to-do people abroad are not helping to support.”20 The comparison with Hillary Clinton’s words about Pakistan can hardly be missed. These words would be painfully familiar today to citizens of Argentina, Mexico, Indonesia, Pakistan, Russia, Nigeria, and so many other nations that have watched powerlessly while local elites mount raids on their countries’ wealth and collude with Western financiers and businessmen