Whose Wealth of Whose Nation?nThe Case Against Unfettered Tradenby William R. Hawkinsn’Then the Gods of the Market tumbled, and their smooth-tongued wizards withdrew,nAnd the hearts of the meanest were humbled and began to beheve it was truenThat All is not Gold that Glitters, and Two and Two make Four—nAnd the Gods of the Copybook Headings limped up to explain it once more.”nRudyard Kipling wrote the above lines in 1919, the yearnafter World War I ended. The war had delivered a fatalnblow to international laissez-faire. It had shattered the dreamnof classical liberals that interdependence would put an endnto national conflict. The claim of J.B. Say, that as anconsequence of his celebrated Law of Markets “[a]ll nationsnare friends in the nature of things,” sounded rather empty tonthe veterans of the trenches. It well deserved a place innKipling’s critique of Utopian liberalism.nThe war had revealed England’s weakened economy.nThe U-boats had nearly starved the interdependent island,nwhile England’s industrial capacity and financial reservesnproved inadequate to sustain its position as a dominantnpower. Both Germany and the US had surpassed “freentrade” England in industry at the turn of the century byncreating large internal or otherwise politically protectednmarkets. In the years before the war England had foundnitself in somewhat the same situation as the US today.nBritish industries were blocked from exporting to most of thenworld by foreign mercantilist policies, yet its own empire wasnopen to rivals. The US exported more steel to the overseasnBritish Empire than did British firms, while British exportsnto the vast US market were restricted by tariffs.nWilliam R. Hawkins is research director for The SouthnFoundation and lives in Knoxville, Tennessee.nJcj/if-nWorld War I also made the US the world’s largest creditornnation, a status it held until 1983. The center of worldnfinance shifted to New York from London and the dollarnreplaced the pound as the world’s key currency. The dollarnstill holds a central position, but the long-term prospect isnnot good. Continued large trade deficits will put downwardnpressure on the dollar, as will the shift in the net Americannflow of overseas investment income from positive to negative.nA currency that is likely to drop in value makes a poornbasis for a world economy. If policies do not change, thenstrong Japanese yen will replace the dollar by the end of thencentury. Already as a result of Japan’s economic prowess,neight of the world’s ten largest banks are Japanese. As ofn1986, Japanese banks held 31.6 percent of all bank assetsnworidwide (the US held 18.6 percent). And every yearnthat the trade imbalance continues, the financial situationnworsens.nFree traders have dismissed the merchandise trade deficitnby claiming that there can be no overall imbalance becausendollars paid out for imports are recycled to the Americanneconomy as capital investment. This is true in a narrownaccounting sense, but those who cannot look beyond theirnsimple ledger sheets miss the bigger picture of the internationalnrealignment of wealth and productive capacity. Americansnare consuming goods on credit, then selling ofl^ theirnassets to pay the bills. Such profligate behavior leads to annnJANUARY 1990/19n