Financial Statecraft

Financial Statecraft: The Role of Financial Markets in American Foreign Policy

Benn Steil
Robert E. Litan
Copyright Date: 2006
Published by: Yale University Press
Pages: 224
https://www.jstor.org/stable/j.ctt1npz66
  • Cite this Item
  • Book Info
    Financial Statecraft
    Book Description:

    As trade flows expanded and trade agreements proliferated after World War II, governments-most notably the United States-came increasingly to use their power over imports and exports to influence the behavior of other countries. But trade is not the only way in which nations interact economically. Over the past two decades, another form of economic exchange has risen to a level of vastly greater significance and political concern: the purchase and sale of financial assets across borders. Nearly $2 trillion worth of currency now moves cross-border every day, roughly 90 percent of which is accounted for by financial flows unrelated to trade in goods and services-a stunning inversion of the figures in 1970. The time is ripe to ask fundamental questions about what Benn Steil and Robert Litan have coined as "financial statecraft," or those aspects of economic statecraft directed at influencing international capital flows. How precisely has the American government practiced financial statecraft? How effective have these efforts been? And how can they be made more effective? The authors provide penetrating and incisive answers in this timely and stimulating book.

    eISBN: 978-0-300-12826-0
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. ACKNOWLEDGMENTS
    (pp. ix-x)
  4. 1 WHAT IS FINANCIAL STATECRAFT?
    (pp. 1-8)

    As long as the world remains divided into sovereign nations, there will always be a need for statecraft—the means by which governments pursue foreign policy. Harold Lasswell (1958), one of the scholarly giants in this field, suggested that statecraft was pursued through four primary instruments: information (words and propaganda), diplomacy (negotiations and deals), force (weapons and violence), and economics (goods and money).¹ The scholarly literature on foreign policy is full of major treatises, articles, and other texts on the first three of these instruments. There remains, however, a single classic text on “economic statecraft.” Though in his book by...

  5. PART I OF BANKS AND BOMBS
    • 2 BANKING AND FOREIGN POLICY
      (pp. 11-30)

      Winning a war is the most monumental challenge any national leader can face. For Abraham Lincoln, one of the most vexing challenges posed by the American Civil War was figuring out how to pay for it.¹ His Treasury secretary, Salmon Chase, initially followed the strategy used by European monarchs in the seventeenth and eighteenth centuries, issuing $150 million in bonds to domestic banks. But since these bonds were then sold to British banks, this strategy put the Union at the mercy of a foreign power sympathetic to the Confederacy.

      Lincoln therefore changed course, following a plan developed by Chase, and...

    • 3 FINANCE AND THE “WAR ON TERROR”
      (pp. 31-47)

      Only days after the terrorist attacks of September 11, 2001, President George W. Bush announced a far-reaching “war on terror.” He not only signed legislation to strengthen law enforcement tools against actual and would-be terrorists, but also embraced the Clinton administration’s campaign to dry up the financial flows to terrorists. The latter step was a striking about-face. Only months before, two top economic officials, then-Treasury Secretary Paul O’Neill and chief economic adviser Lawrence Lindsey, had questioned the wisdom of the Clinton administration’s anti–money laundering effort.¹

      That governments can fight the post-9/11 war on terror by stopping the flow of...

    • 4 CAPITAL MARKETS SANCTIONS
      (pp. 48-78)

      Of Markets and Metaphors

      Approach a medieval European city, and the importance of religious authority is immediately apparent in the cathedral dominating the skyline. In a seventeenth-century city, it is the secular authority that is elevated, literally and metaphorically, through the towering presence of the political palace. In a modern city, it is the power of the commercial sector, and particularly its financial institutions, that is reflected in the gleaming skyscrapers.¹

      Buildings are metaphors for emergent centers of power. Politics provides such metaphors as well. In international affairs, the granting or withholding of trade “privileges” has taken on great symbolic...

  6. PART II OF CURRENCIES AND CRISES
    • 5 THE SECURITY DIMENSIONS OF CURRENCY CRISES
      (pp. 81-97)

      The Rise of Geoeconomics

      In 1972, President Nixon, upon hearing that the Fed chairman was concerned about speculation against the Italian lira, responded, “Well, I don’t give a **** about the lira.” Today, if an American president is warned about possible speculation against the Thai baht, he is far more likely to give one.

      The LDC debt crisis of the 1980s, as we discussed in chapter 2, galvanized economic policymakers in the United States, who were determined to ensure that the American banking system would not be destabilized by risky lending abroad. Despite the problems we identified with the capital...

    • 6 THE ECONOMICS OF FINANCIAL CRISES
      (pp. 98-133)

      It’s the Currency, Stupid

      Over the past two decades, financial crises have hit countries across Latin America and Asia, as well as countries just beyond the borders of western Europe—in particular, Russia and Turkey. Roubini and Setser conclude that “all crises are unique.”¹ Indeed, no two crisis countries appear to make precisely the same errors or to face the same market reactions when appearing to follow the same policies. There is, however, one commonality that virtually defines the onset of crisis. Holders of the crisis country’s currency begin selling it rapidly and in large amounts, almost invariably for dollars....

    • 7 GLOBAL CAPITAL FLOWS AND U.S. FOREIGN POLICY
      (pp. 134-158)

      Just after the Clinton administration approved a $20 billion line of credit to Mexico in 1995, then-Treasury Undersecretary Lawrence Summers is said to have quipped that his human capital was now denominated in pesos.¹ Humor often captures the gravity of a situation in a way that gravity itself cannot.

      Far more than $20 billion rested on the fate of the peso. Barely a year before, the North American Free Trade Agreement had come into effect, heralding what was supposed to be a new era of economic and political progress in a country that had known little of either. Now, further...

    • 8 THE FUTURE OF FINANCIAL STATECRAFT
      (pp. 159-166)

      Notwithstanding two decades of debate over whether political speed bumps should be raised in the international marketplace for capital, the trend to date has been clear. Policymakers in the developed and, increasingly, the developing world have reached the conclusion that the economic benefits of allowing capital to flow cross-border from suppliers to users outweigh the costs of maintaining or erecting barriers to stop it. This is clearly illustrated in the trade figures displayed in chapter 1, which show that, since the mid-1980s, trade in securities has grown dramatically relative to traditional trade in goods and services. Yet whereas there is...

  7. NOTES
    (pp. 167-182)
  8. REFERENCES
    (pp. 183-196)
  9. INDEX
    (pp. 197-208)