The West Marches East, Part 2: Georgia Starts a War, Russia Draws a Line
By: Andrew Gavin Marshall
Originally posted at The Hampton Institute
19 June 2014
In Part 1 of this series – ‘The West Marches East’ – I examined the circumstance that while Russia has received the majority of the blame for the more than six-month-crisis in Ukraine, these events did not take place in a vacuum, and, in fact, the Western powers and institutions – notably the United States, NATO and the European Union – have broke promises made at the end of the Cold War to expand NATO – a Western military alliance that was created in opposition to the Soviet Union – to Russia’s borders. Simultaneously, the European Union has expanded eastwards, bringing Eastern and Central European countries within its orbit and in adherence to its economic orthodoxy. Further, many NATO powers had worked together to promote ‘colour revolutions’ across much of Eastern Europe over the previous decade or so, helping to overthrow pro-Russian leaders and replace them with pro-Western leaders.
After nearly a quarter-century of Western expansion – militarily, politically, economically – to Russia’s borders, Russia has had enough. But Ukraine was not the first instance in which Russia has been provoked by the West into a response that the West subsequently declared as an act of imperial “aggression.” In 2008, the small Caucasus nation and former Soviet republic of Georgia started a war with Russia, leading to Russia’s invasion of the tiny country, effectively ending nearly two decades of NATO and Western expansion. This report examines the 2008 war in Georgia and the roles played by Russia and the NATO powers.
Setting the Stage
As documented in part 1, Georgia was – in 2003 – subjected to a NATO sponsored ‘Colour Revolution’ which removed the previous leader and replaced him with a pro-Western (and Western-educated) politician, Mikeil Saakashvili. In December of 2003, Georgian defense officials met with the U.S. Secretary of Defense Donald Rumsfeld to discuss enhancing military cooperation between the two countries. The US had sent roughly 60 military trainers to Georgia in 2002, but the Georgians had been lobbying for a US military base in their country.
Instead, the Pentagon decided to ” privatize its military presence in Georgia” through a security contractor, Cubic, which signed a three-year $15 million contract with the Pentagon to support the Georgian ministry of defense. The team from Cubic would engage in training and equipping the Georgian military, as well as protection for the oil pipeline that was to take oil from Baku, Azerbaijan, to Turkey through Georgia. Western diplomats suggested that the country could become a “forward operations area” for the US military, “similar to support structures in the Gulf.” In return for the program, Georgia agreed to send 500 soldiers to Iraq.
As the BBC reported in 2006, Georgia was discarding its ties with Moscow and instead, leading “westwards – towards NATO, and perhaps eventually the European Union.” US military instructors were in the country “to drive that change,” training Georgian soldiers to manage checkpoints in US-occupied Iraq. Georgia was largely uneasy with Russia due to the fact that Moscow provided – since the early 1990s – moral and material support to the country’s two breakaway regions of South Ossetia and Abkhazia. A Georgian corporal deployed in Iraq was quoted in the New York Times in 2007 saying, “As soldiers here [in Iraq], we help the American soldiers… Then America as a country will help our country.” This reflected the implicit thinking within Georgia up until the 2008 war.
In early April of 2008, U.S. President George W. Bush said he “strongly supported” Ukraine and Georgia’s bids to join NATO, despite the enormous objections from Russia, which would then see NATO powers located directly on its borders. Bush made the comments following a NATO meeting, where France, Germany, Italy, Hungary, Belgium, the Netherlands and Luxembourg all opposed the U.S. position of fast-tracking Georgian and Ukrainian membership into NATO, seeing it as ” an unnecessary offense to Russia.” Shortly after Bush made his announcement, a former Russian armed forces chief of staff said that Russia would ” take military and other steps along its borders if ex-Soviet Ukraine and Georgia join NATO,” claiming that “such a move would pose a direct threat to its security and endanger the fragile balance of forces in Europe.”
Within Georgia and its separatist regions, which were home to Russian soldiers, tensions were increasingly flaring over the summer months of 2008. With both sides undertaking provocative measures, there was a growing awareness that war could break out. In July of 2008, following her visit to the Czech Republic where she signed an agreement to base part of a new U.S. missile defense system in the country, U.S. Secretary of State Condoleezza Rice traveled to Georgia to meet with the country’s leadership. At that time, U.S. military forces in the region had begun joint exercises with soldiers from Georgia, Armenia, Ukraine and Azerbaijan. The exercises were taking place less than 100km from Russia’s border, with roughly 1,000 U.S. soldiers and an equal number of Georgian troops. As Rice arrived in Georgia, the Russian foreign ministry issued a statement accusing Georgia “of pushing the region towards war through actions openly supported by the United States.”
Then-Russian President Dmitri Medvedev later explained that as tensions escalated into July of 2008, he was in contact with his Georgian counterparts. However, following Secretary Rice’s July 2008 visit to Georgia, he claimed, “my Georgian colleague simply dropped all communication with us. He simply stopped talking to us, he stopped writing letters and making phone calls. It was apparent that he had new plans now. And those plans were implemented later.”
Indeed, as the New York Times noted, when Rice went to Georgia, she had two different goals, one private, and one public. Privately, she reportedly told the Georgians “not to get into a military conflict with Russia that Georgia could not win.” However, in public, standing alongside the Georgian president, Rice spoke defiantly against Russia and in support of Georgia and its “territorial integrity” in the regions of South Ossetia and Abkhazia. Standing next to the president, Rice declared that Russia “needs to be a part of resolving the problem… and not contributing to it.” The NYT claimed that these public statements of support for Georgia – and antagonism toward Russia – not to mention the fact that the US was engaging in large-scale military exercises with Georgians, expanding military installations all across Eastern Europe and providing Georgia with military advisers, had the combined effect of sending the small country “mixed messages ” about U.S. support for a war with Russia.
No doubt contributing to these ‘mixed messages’ was when – at the very same news conference with President Saakashvili – Rice was asked a question about a potential conflict with Iran, to which she replied that, “We will defend our interests and defend our allies… We take very, very strongly our obligations to defend our allies and no one should be confused of that.” Apparently, Georgia was a little confused.
When the Soviet Union collapsed and Georgia declared independence, the two regions of South Ossetia and Abkhazia gained de facto independence in the early 1990s following conflict between the breakaway regions and the central state. Following this brief period of fighting, tensions were largely reduced, though Russian ‘peacekeepers’ were on the ground monitoring the fragile balance. That balance was upset when Saakashvili became president in 2004, making one of his pledges “national unification.” By 2008, when tensions were reaching a breaking point, there were over 2,000 American civilians in Georgia, according to the Pentagon, with over 130 U.S. military trainers and 30 Defense Department civilians.
Another facet to the increased tensions was the fact that Georgia was an important conduit for a major pipeline, bringing oil from Baku in Azerbaijan through Georgia and to the Turkish port of Ceyhan on the Mediterranean. When the pipeline was completed in 2006, it was the second-longest pipeline in the world, and its construction and use was specifically designed to “bypass Russia, denying Moscow leverage over a key resource and a potential source of pressure.” As Jonathan Steele wrote in the Guardian, the resulting war was about more than pipeline politics, however, as it represented “an attempt, sponsored largely by the United States but eagerly subscribed to by several of its new ex-Soviet allies, to reduce every aspect of Russian influence throughout the region, whether it be economic, political, diplomatic or military.”
The Wall Street Journal reported that the Baku-Tbilisi-Ceyhan pipeline was built by a consortium of major Western energy corporations, and was “the first pipeline on former Soviet territory that bypasse[d] Russia,” which “was strongly backed by the US as a way of loosening Moscow’s grip on the Caspian’s oil wealth.”
When War Broke Out
On August 7, 2008, war broke out. Georgia claimed that it was responding to an attack on the country by separatists in South Ossetia and Russian aggressors. However, independent military observers from the Organization for Security and Cooperation in Europe (OSCE) who were deployed in the region refuted the Georgian government’s claim, and instead reported that, “Georgia’s inexperienced military attacked the isolated separatist [South Ossetian] capital of Tskhinvali on Aug. 7 with indiscriminate artillery and rocket fire, exposing civilians, Russian peacekeepers and unarmed monitors to harm.” While Georgian President Saakashvili presented the Georgian military actions as “defensive,” in response to separatist and Russian shelling of Georgian villages, the OSCE monitors were unable to confirm that such villages had been attacked, with no shelling heard in the villages prior to the Georgian bombardment of Tskhinvali. Two senior Western military officials who were stationed in Georgia, working with the Georgian military, told theNew York Times that, “whatever Russia’s behaviour or intentions for the enclave, once Georgia’s artillery or rockets struck Russian positions, conflict with Russia was all but inevitable.”
A year after the war, an EU-commissioned report which took nine months to compile concluded that despite much of the blame at the time of – and since – the war being directed at ‘Russian aggression,’ the conflict began “with a massive Georgian artillery attack.” The “damning indictment” of Georgia, however, blamed both Georgia and Russia for committing war crimes during the conflict, and noted that the conflict resulted from months and years of growing conflict. However, the report flatly stated: ” There was no ongoing armed attack by Russia before the start of the Georgian operation… Georgian claims of a large-scale presence of Russian armed forces in South Ossetia prior to the Georgian offensive could not be substantiated… It could also not be verified that Russia was on the verge of such a major attack.” However, Vladimir Putin stated in 2012 that Russia had drawn up plans to counter a Georgian attack as far back as 2006 and 2007, when he was president. Still, while the Russians were clearly aware – and preparing – for a war, it was ultimately Georgia that fired the first shots.
Months before the war broke out, according to documents and interviews obtained by the Financial Times, senior U.S. military officials and U.S. military contractors were inside Georgia training special forces commandos. The two contractors, MPRI and American Systems, both of which are based in Virginia, were responsible for training the Georgian special forces as part of a program run by the Pentagon. The Pentagon had previously hired MPRI to train the Croatian military in 1995, just prior to the Croatian military’s invasion of the ethnically-Serbian region of Krajina, “which led to the displacement of 200,000 refugees and was one of the worst incidents of ethnic cleansing in the Balkan wars.” MPRI, of course – in both cases – denied “any wrongdoing.” The first phase of the training in Georgia took place between January and April of 2008, and the second phase was due to begin on August 11, with the trainers arriving in Georgia on August 3, four days before the war broke out.
Just prior to the outbreak of war, as U.S. diplomatic cables showed, the U.S. Embassy in Georgia knew and reported about the fact that Georgian forces were concentrating their forces near South Ossetia, “either as part of a show of force or readiness, or both.” The U.S. ambassador reportedly told Georgian officials “to remain calm, not overreact, and to de-escalate the situation.” As the diplomatic cables from Georgia revealed, unlike in neighboring countries, U.S. diplomats in Georgia “relied heavily on the Saakashvili government’s accounts of its own behavior” and embraced the “Georgian versions of important and disputed events.” Whereas in other regional countries, U.S. diplomats would report to Washington on their “private misgivings” about their host countries’ claims, in Georgia, the Saakashvili government’s “versions of events were passed to Washington largely unchallenged.”
The five-day war between Russia and Georgia lasted from August 7 – 12, leading to a decisive Russian victory and a humiliating defeat for the US-puppet regime in Georgia. Months of ‘mixed messages’ and indecision and divisions within the Bush administration directly led to the conflict, inflaming internal confrontations within the Bush administration itself. A New York Times article tells this brief story based upon interviews with diplomats and senior officials in the US, EU, Russia and Georgia. Five months before Georgia started the war – in March of 2008 – President Saakashvili had gone to Washington to lobby for NATO membership at Congress, the State Department and the Pentagon. Bush promised the Georgian president ” to push hard for Georgia’s acceptance into NATO.”
In early April, President Bush flew to the Russian resort city of Sochi where he met with President Putin. Putin delivered Bush a message: “the push to offer Ukraine and Georgia NATO membership was crossing Russia’s ‘red lines’.” The United States, however, clearly underestimated Russia and Putin’s determination to adhere to those ‘red lines’. Meanwhile, Vice President Dick Cheney saw Georgia as a “model” for the administration’s “democracy promotion campaign,” and continued to push for selling Georgia more arms and military equipment “so that it could defend itself against possible Russian aggression.” Opposing Cheney were Secretary of State Rice, National Security Adviser Stephen J. Hadley and Undersecretary of State for Political Affairs William J. Burns, who were arguing that ” such a sale would provoke Russia, which would see it as arrogant meddling in its turf.”
While the official line of the Bush administration after the war broke out was to blame Russia, quietly and internally, top U.S. officials noted that Georgia was largely to blame, and that U.S. officials had contributed to that process by sending confused messages. Indeed, as some administration officials reported, the Georgian military had created a “concept of operations” plan for a military operation in South Ossetia which “called for its army units to sweep across the region and rapidly establish such firm control that a Russian response could be pre-empted.” As early as January of 2008, Georgia’s Ministry of Defense laid out plans in a “strategic defense review” which “set out goals for the Georgian armed forces and refers specifically to the threat of conflict in the separatist regions.” U.S. officials had reportedly warned the Georgians that, ” the plan had little chance of success.”
Indeed, as the war was under way, debates were raging within the Bush administration regarding the possible US response. In particular, tensions started to erupt between Bush and Cheney, as Cheney’s office felt that when Bush had previously met Putin in April, his silent response to Putin’s warning “inadvertently gave Russia the all-clear to attack.” There was discussion within the administration (from Cheney’s side of the debate) of launching air strikes to halt the Russian invasion. After four days of talks with the National Security Council (NSC), George Bush “cut off the discussion,” siding with his somewhat more rational advisers, as there was “a clear sense around the table that any military steps could lead to a confrontation with Moscow.”
Putin had also spoken with Georgian president Saakashvili in February of 2008, where he warned the Georgian president: “You think you can trust the Americans, and they will rush to assist you?” Putin then reportedly claimed that, ” Nobody can be trusted! Except me.” Interestingly, in this respect, Putin happened to be correct.
European governments were not big fans of Saakashvili, either, seeing him as “an American-backed hothead who spelled trouble.” During the five-day war, French President Nicolas Sarkozy shuttled between Russia and Georgia attempting to negotiate a ceasefire. Sarkozy reportedly told the Georgians: “Where is Bush? Where are the Americans?… They are not coming to save you. No Europeans are coming, either. You are alone. If you don’t sign [the ceasefire], the Russian tanks will be here soon.”
The day after the war began, the Russians called an emergency session at the United Nations to find a resolution to the conflict. The Russian’s proposed a short, three-paragraph draft resolution calling on all parties to “renounce the use of force.” This phrase ran into opposition from the United States, France and Britain, who claimed the phrase was “unbalanced” because it “would have undermined Georgia’s ability to defend itself.” The US, British and French opposition to “renounce the use of force” led to a collapse of diplomatic attempts at the UN to end the fighting, according to the New York Times. When the French President eventually negotiated a ceasefire on August 12, at least one senior U.S. official (presumably Cheney) was reportedly ” appalled” by the ceasefire text.
Erosi Kitsmarishvili, a former Georgian diplomat and ambassador to Moscow (and confidante of President Saakashvili) caused controversy within Georgia when he testified at a parliamentary hearing in Georgia in November of 2008 that Georgian officials were responsible for starting the war. He said that he was told by Georgian officials in April of 2008 that they had “planned to start a war in Abkhazia,” saying that they “had received a green light from the United States government to do so.” However, he added, the officials later decided to start the war in South Ossetia instead, believing that ” United States officials had given their approval.” He discussed the July 2008 meeting between Georgian officials and Secretary of State Rice, saying, “Some people who attended the meeting between Condoleezza Rice and Saakashvili were saying that Condoleezza Rice gave them the green light for military action,” though U.S. and Georgian officials “categorically denied this information.”
When the war broke out, the United States military airlifted Georgian troops from Iraq back to Georgia to participate in the fighting against Russia. In the Pentagon, a 28-year-old junior staffer, Mark Simakovsky, “almost overnight… became a key policy adviser” to Secretary of Defense Robert Gates and other top administration officials. Serving as the Pentagon’s country director for Georgia, he “used his expert knowledge and contacts throughout the government and in Georgia to quickly gather information about developments on the ground.” He was pivotal in shaping the Pentagon’s response to the crisis, including the coordination of airlifting 2,000 Georgian soldiers from Iraq back to Georgia.
Within a week of the Georgian war ending on August 12, Secretary of State Condoleezza Rice declared that the United States “would not push for Georgia to be allowed into NATO” during an upcoming emergency meeting of the NATO countries in Brussels, in what the New York Times reported as, “a tacit admission that America and its European allies lack the stomach for a military fight with Russia.”
However, NATO foreign ministers were expected to reaffirm that they would eventually like to see both Georgia and Ukraine join NATO, but not to fast-track the process through the Membership Action Plan (MAP), for which Georgia and the US had previously been lobbying. In November of 2008, Rice affirmed that the US was no longer attempting to fast-track Georgian and Ukrainian membership into NATO, largely due to opposition from France and Germany . In 2011, Russian President Dmitri Medvedev stated that if Russia hadn’t invaded Georgia in 2008, NATO would have expanded already to include Georgia as a member.
In late August, Russian commanders were reportedly “growing alarmed at the number of NATO warships sailing into the Black Sea.” The U.S. said it was delivering “humanitarian aid on military transport planes and ships,” though the Russians suspected that the Pentagon was shipping in weapons and military equipment “under the guise” of humanitarian assistance.
Weeks following Georgia’s defeat, officials at the White House, Pentagon and State Department were “examining what would be required to rebuild Georgia’s military.” The U.S. Chairman of the Joint Chiefs of Staff, Admiral Mike Mullen, stated during a news conference that Georgia was ” a very important country to us” and that the U.S. would continue to pursue a “military-to-military relationship.” Both Democrats and Republicans proclaimed their unyielding support for Georgia, as both the John McCain and Barack Obama presidential campaigns had “cultivated close ties” to President Saakashvili. John McCain’s wife and Senator Joe Biden (who would become Obama’s Vice President) had gone to visit Georgia in August of 2008, just following the end of the war.
In early September, President Bush promised $1 billion in ” humanitarian and economic assistance” to help rebuild the country following the war, making Georgia one of the largest recipients of U.S. foreign aid, after Israel, Egypt and Iraq. Comparatively, in the previous 17 years, the United States had provided a total of $1.8 billion in aid to the country. The European Union also pledged to contribute funds to Georgia, as did the International Monetary Fund (IMF), declaring its intention to provide the country with a $750 million loan.
In September of 2008, Vice President Dick Cheney flew to Georgia “to deliver a forceful American pledge to rebuild Georgia and its economy, to preserve its sovereignty and its territory and to bring it into the NATO alliance in defiance of Russia.” Cheney, who arrived in Georgia a day after the U.S. announced a $1 billion rescue package to help the country, then flew to Ukraine to deliver a similar message. Russia, meanwhile, was entrenching its control over the breakaway regions of South Ossetia and Abkhazia, recognizing their independence from Georgia and keeping military units stationed within them.
Cheney’s visit, which began in Azerbaijan, then to Georgia and Ukraine, was orchestrated to confirm that the U.S. had “a deep and abiding interest” in the region, and notably in terms of ensuring that these and neighboring countries remained “free from a new era of Russian domination.” Cheney was the highest-ranking U.S. official to visit Azerbaijan since it gained independence in 1991. Underscoring the importance of the BP-led pipeline transporting oil from Azerbaijan through Georgia to Turkey, Cheney’s first meetings in Azerbaijan were not with political officials, but with representatives from BP and Chevron.
In the last weeks of the Bush administration, Condoleezza Rice and the Georgian Minister of Foreign Affairs signed the U.S.-Georgian Charter on Strategic Partnership. This was followed up by the Obama administration, holding the first meeting of the Strategic Partnership Commission meeting in Washington on June 22, 2009, marking the launch of four bilateral working groups on “democracy, defense and security, economic, trade and energy issues, and people-to-people cultural exchanges.” The Strategic Partnership reflected U.S. commitment “to deepening Georgia’s integration into Euro-Atlantic institutions and enhancing security cooperation,” including eventual membership into NATO.
The Obama administration sent Vice President Joe Biden to Georgia in July of 2009, with Saakashvili lobbying for the U.S. to sell the country weapons, which Russia strongly opposed, considering the rearmament of Georgia to be ” more serious than whether Georgia enters NATO.”
In 2010, Georgia began a “serious push” to lobby the U.S. for “defensive weapons,” notably air defense and anti-tank systems. To help achieve this objective, Georgia spent roughly $1.5 million at four top Washington, D.C. lobbying firms over the course of the year. Meanwhile, Russia had been “intimidating” many of Georgia’s past arms suppliers, including Israel and other Eastern European nations, not to resume arms sales to the country.
In 2010, the United States also resumed its military training exercises in Georgia, which have continued in recent years, much to Russia’s displeasure. However, Saakashvili lost the 2012 elections and was replaced with a billionaire Bidzina Ivanishvili, who had made his fortune in Russia, leading to slightly improved relations with Putin. In 2013, Russia accused the U.S. of ” putting peace at risk” by holding joint military exercises in Georgia.
Bidzina Ivanishvili was the Georgian Prime Minister from 2012 to 2013, during which time Saakashvili was still president. As the Economist reported in October of 2013, weeks before the Georgian presidential elections to replace him, Saakashvili, who came to power through the U.S.-sponsored ‘Rose Revolution’ in 2003, had, in the following decade, “fought and lost a war with Russia, cracked down on the opposition, dominated the media, interfered with justice and monopolized power .” No wonder Cheney saw him as an ideal representation of America’s “democracy promotion” project.
The billionaire oligarch prime minister, Ivanishvili, Georgia’s richest man, had put his weight behind a presidential candidate, Giorgi Margvelashvili, who subsequently won the October 2013 elections. Under reforms implemented by Saakashvili, the role of president would become “largely ceremonial, with the bulk of power resting with the prime minister.” Ivanishvili proclaimed his intention to turn Georgia into a ” perfect European democracy.”
In May of 2014, months into the Ukrainian conflict, NATO announced its intentions to find ways of bringing Georgia ” even closer” to the military alliance. Just days earlier, both France and Germany “assured Georgia that a deal bringing it closer to the European Union would be sealed soon.”
Georgian officials were holding “extensive discussions” with US and German and other NATO members seeking ways to accelerate the country’s membership into NATO. Whereas previously, the US and NATO powers had decided to put Georgia’s NATO membership on the backburner, the conflict in Ukraine had changed the situation. Georgia’s Defense Minister stated: “Clearly, what’s happening in Ukraine impacts the thinking in Europe… Now it’s very different.” The Defense Minister went to Washington in May 2014 to visit with Vice President Biden and U.S. Secretary of Defense Chuck Hagel.
And so, in the more than ten years since Georgia’s U.S. and NATO-supported colour revolution, the West – particularly the United States – have increased Georgia’s military capabilities, armed and trained its forces, all the while aggravating Russia as NATO and Western military, political and economic influence spread ever-closer to its borders. This ultimately resulted in a war. Though, since then – and with the recent conflict in Ukraine – it is clear that rearming Georgia and further aggravating Russia is back on the agenda.
The hypocrisy and imperious expansionism of the West in Georgia is but a minor reflection of a similar process which has been taking place across much of Eastern Europe, and most especially in Ukraine. Thus, despite the never-ending proclamations of “Russian aggression,” it is once again the Western powers, NATO, the EU, the IMF and especially the United States that are the most to blame for the current conflict in Ukraine.
The 2008 war in Georgia had seemingly put an end – or a halt – on NATO’s eastward expansion. Russia had – after 18 years of NATO expansion – finally drawn a line in the sand over how much it was willing to put up with. It was clear, then, that a similar process with Ukraine, a much larger and more strategically significant country than Georgia, was sure to incur a military response from Russia. If anything, the only surprise is that Russia’s military response has been so minimal, comparatively speaking; at least, for the time being. But as this process continues in response to Ukraine’s crisis, and as NATO and the U.S. military, the EU and the IMF accelerate their advance eastward, future conflict is seemingly all but inevitable.
No doubt, when that conflict comes, we will once again hear the amnesic proclamations of “Russian aggression” and Western benevolence.
Andrew Gavin Marshall is a researcher and writer based in Montreal, Canada. He is Project Manager of The People’s Book Project, chair of the Geopolitics Division of The Hampton Institute, research director for Occupy.com’s Global Power Project and the World of Resistance (WoR) Report, and hosts a weekly podcast show with BoilingFrogsPost.
Globalization’s Game of Thrones, Part 2: Managing the Wealth of the World’s Dynasties
By: Andrew Gavin Marshall
27 May 2014
In part 1 of this series (“Globalization’s Game of Thrones”) I examined the concept of corporate and financial dynasties holding significant power in the modern world. In this, part 2 of the series, I examine the realities of the ‘wealth management’ industry in being responsible for handling the wealth and investments of the world’s richest families, and the role of a unique institution dedicated to protecting and propagating dynastic wealth: the family office.
A Family Affair
In 2010, Forbes – a major financial publication which publishes an annual list of the world’s richest people – noted that the richest of the richest 400 Americans were members of prominent corporate and financial dynasties, with six of the top ten wealthiest Americans being heirs to prominent fortunes, as opposed to being ‘self-made’ billionaires. What’s more, since the financial crisis began in 2007 and 2008, the fortunes of these dynasties – and the other super-rich who made the Forbes list – had only increased in value.
Corporate America can frequently be seen as the emblem of the ‘self-made’ rich, a representation of a supposedly democratic, capitalist society, where firms are run by “professional managers” who received the right education and developed the appropriate talents to make successful companies. The reality, however, is that roughly a third of the Fortune 500 companies (that is, many of the world’s largest multinational corporations) are in fact “family businesses,” frequently run by family members, and often outperforming the “professionally managed” firms “by a surprisingly large margin,” noted the New York Times.
In other words, in the United States – the beacon of the ‘self-made’ millionaire – a huge percentage of the most successful companies are owned by family dynasties, and most of the richest individuals are heirs to these family dynasties. The picture that begins to emerge better reflects that of an aristocracy, rather than a democracy.
As the New York Times noted in 2010, “the increasing use of so-called dynasty trusts” was undermining the notion that America was a meritocracy (where people ‘rise through the ranks’ of society based upon merit instead of money, access or family lineage). Dynastic trusts allow super-rich families “to provide their heirs with money and property largely free from taxes and immune to the claims of creditors,” not only providing for children, but “for generations in perpetuity – truly creating an American aristocracy.” In laws that predate the formation of the United States as an independent nation, such family trusts were only able to limit the term of the existing trust to roughly 90 years, after which the property and wealth which was consolidated into the trust would be owned directly by the family members. However, in changes that were implemented through Congress in the mid-1980s and in state legislatures across the U.S. in the 1990s, the rules were amended – with the pressure of the banking lobby – to allow family trusts to exist “forever,” a quiet coup for the existing and emerging aristocratic American class.
Thus, the modern dynasty trust was officially sanctioned as a legal entity – a type of private family company – that would be responsible for handling the collective wealth – in money, property, land, art, equities (stocks), bonds (debt), etc. – of the entire family, for generation after generation. The focus is on long-term planning to maintain, protect and increase the wealth of the dynasty, and to hold it ‘in trust’ against the inevitable in-fighting that accompanies dynastic succession and generational differences. This would prevent – in theory – one generation or patriarch from mishandling and squandering the entire family fortune.
The legal structure of a family trust differs greatly from public corporations, in that their focus is not on maximizing short-term quarterly profits for shareholders, but in maintaining multi-generational wealth and prestige. Family trusts are increasingly used to manage the wealth of the world’s super-rich dynasties, alongside private banking institutions and other wealth management and consulting firms. There is an entire industry dedicated to the management of money, wealth and investments for the super-rich, and it is focused largely – and increasingly – on family dynasties.
Of Rockefellers and Rothschilds
One of the world’s most famous family trusts – the “family office” – is that of Rockefeller & Co., now known as Rockefeller Financial. It was founded in 1882 by the oil baron industrialist John D. Rockefeller as the ‘family office’ to manage the Rockefeller family’s investments and wealth. Roughly a century after it was founded, in the 1980s, Rockefeller & Co. began selling its ‘expertise’ to other rich families, and by the year 2008, the trust had roughly $28 billion under management for multiple clients.
When the CEO of Rockefeller & Co., James S. McDonald, shot himself in an alley behind a car dealership in 2009, the family looked for and found a successor in the former Undersecretary of State for Economic, Energy, and Agricultural Affairs for the Bush administration, Rueben Jeffery III, a former partner at Goldman Sachs. Jeffery was responsible for handling the family’s wealth throughout the global financial crisis, and by 2012, the assets under management by Rockefeller Financial had grown to $35 billion.
As of late 2012, Rockefeller & Co. had approximately 298 separate clients, providing them with “financial, trust, and tax advice.” The typical clients for Rockefeller & Co. are families with more than $30 million in investments, and the group charges new clients a minimum annual fee of $100,000. However, the family office has increasingly been attracting clients beyond other family dynasties, including major multinational corporations awash with cash in a world where nation states are flooded in debt. David Harris, the chief investment officer of Rockefeller Financial, explained in a 2012 interview with Barron’s (a magazine for the super-rich), that as the world’s nations were stuck in a debt crisis, triple-A rated multinational conglomerates represented “the new sovereigns” with “unprecedented” amounts of cash to be invested.
And while prominent family trusts have become increasingly attractive for other rich families and institutions to handle their wealth, they have also become attractive investments in and of themselves. One of Europe’s largest banks, the French conglomerate Société Générale (SocGen) purchased a 37% stake in Rockefeller & Co. in June of 2008. However, with the European debt crisis, the bank had to cut a great deal of its assets, and so in 2012 Rueben Jeffery III managed the sale of the 37% stake in the Rockefeller enterprise from SocGen to RIT Capital Partners, the investment arm of the London Rothschild family, one of the world’s most famous financial dynasties.
Barron’s magazine noted that the official union of these two major financial dynasties “should provide some valuable marketing opportunities” in such an uncertain economic and financial landscape, where “new wealth” from around the world would seek “to tap the joint expertise of these experienced families that have managed to keep their heads down and their assets intact over several generations and right through the upheavals of history.”
Early in 2012, the Rothschild family, with various banks and investment entities spread out across multiple European nations and family branches, was making a concerted effort to begin the process of “merging its French and British assets into a single entity,” aiming to secure “long-term control” over the family’s “international banking empire,” reported the Financial Times. The main goal of the merger was “to cement once and for all the family’s grip on the business,” giving the family a 57 percent share in the voting rights, thus protecting the merged entity from hostile takeovers. Thus, as the Rothschild banking dynasty was seeking to consolidate its own family interests across Europe, they were simultaneously looking to expand into the U.S. through the Rockefellers.
Thus, when Lord Jacob Rothschild – who managed the British Rothschild’s family trust, RIT Capital Partners – announced that RIT would be purchasing a 37% stake in Rockefeller Financial Services in May of 2012 for an “undisclosed sum,” it was announced as a “strategic partnership” that would allow the Rothschilds to gain “a much sought-after foothold in the US,” representing a “transatlantic union” that officially unites the two family patriarchs of David Rockefeller and Jacob Rothschild, “whose personal relationship spans five decades.”
At the time of the announcement, David Rockefeller, who was then 96-years-old, commented that, “Lord Rothschild and I have known each other for five decades. The connection between the two families is very strong.” Rockefeller & Co.’s CEO, Rueben Jeffery III, declared that, “there is a shared vision, at the conceptual and strategic level, that marrying the two names with particular products, services, geographic market opportunities, can and will have resonance. These are things we will want to act on as this partnership and overall relationship evolves.” In a world where families hold immense wealth and power, the official institutional union of two of the world’s most famous and recognizable dynastic names makes for an attractive investment for newer dynasties seeking propagation and preservation.
The Family Office
As the Financial Times noted in 2013, the “family office” for the world’s wealthy dynasties, which had “long been cloaked in a shroud of secrecy as rich families have sought to keep their personal fortunes private” has become more popular with “the explosion of wealth in the past few decades and dissatisfaction with the poor performance of portfolios handled by global private banks.” Still, many so-called “single family offices” continue to operate in secrecy, managing the wealth of a single dynasty, but the emergence of “multi-family offices” (MFOs) has become an increasing trend in the world of wealth management, handling the wealth and investments of multiple families.
The world’s largest private banks have specific “family office arms” which are dedicated to managing dynastic wealth, and these banks continue to dominate the overall market. Bloomberg Markets published a list of the top 50 MFOs in 2013, with HSBC Private Wealth Solutions topping the list, advising assets totaling $137.3 billion, with other banks appearing on the top ten list such as BNY Mellon Wealth Management, Pictet and UBS Global Family Office. Despite the fact that the family office arms of the world’s top private banks dominate the list, many of the oldest family offices made the list, such as Bessemer Trust and Rockefeller & Co. A top official at HSBC Private Bank was quoted by the Financial Times as saying: “Very wealthy families are becoming more and more globalized. It’s not just the fact that they are acquiring assets – like real estate – in several jurisdictions, but family members are scattered around the globe and need to be able to transact in those countries.” In effect, we are witnessing the era of the globalization of family dynasties.
Such a view is shared by Carol Pepper, a former financial adviser and portfolio manager at Rockefeller & Co. who established her own consulting firm – Pepper International – in 2001, specializing in advising families with more than $100 million in net worth. In a 2013 interview with Barron’s, Pepper explained that with the globalization of higher education – where the super-rich from around the world send their children to the same prominent academic institutions – as well as with the emergence of associations designed to bring wealthy families together, “the 19th century [is] coming back,” referring to the era of Robber Baron industrialists and co-operation between the major industrial and financial fortunes of the era. Pepper explained that in the present global environment, she was witnessing “a lot more exchange of ideas among wealthy families from different countries than there ever was before,” with such families increasingly investing in and with each other, noting that “inter-family transactions” had increased by 60% in the previous two years.
The globalization of family dynasties and the ‘return’ to the 19th century is an institutional phenomenon, facilitated by elite universities, business and family associations, international organizations, conferences and other organizations. Thus, regardless of geographic location, the world’s wealthiest families tend to send their children to one of a list of relatively few elite universities, such as Wharton, Harvard or the London School of Economics. At these and similar schools, noted Carol Pepper, the future heirs of family fortunes attain “both the know-how and the contacts for forging overseas collaborations between family businesses.”
So-called ‘non-profit’ associations like the International Family Office Association, the Family Business Network, and ESAFON, among others, are institutional representations of “intentional efforts by rich clans to rub shoulders with one another.” Instead of a rich family in one region hiring an outside firm to introduce them to a new market, they simply are able to reach out directly to the wealthy families within that market, and, as Pepper explained, their interests will be increasingly aligned and “hopefully you’ll all make money together.”
Instead of relying on banks as intermediaries between markets, rich families with more than $47 million to invest are pooling their wealth into the multi-family offices (MFOs). The Financial Times explained that such wealthy families were “crying out for something financial institutions have singularly failed to provide: a one-stop shop to manage both their business and personal interests.” Further, as banks have been coming under increased scrutiny since the financial crisis, “there is still a clandestine nature to the family-office world that will continue to attract clients.” Explaining this, the Financial Times appropriately quoted advice by the character Don Corleone from The Godfather, when he told his son: “Never tell anybody outside the family what you’re thinking.”
As the Wall Street Journal noted, family offices “are private firms that manage just about everything for the wealthiest families: tax planning, investment management, estate planning, philanthropy, art and wine collections – even the family vacation compound.” As such, regardless of where many family fortunes are made, the family office has come to represent the central institution of modern dynasties. And the growth of multi-family offices has been astounding, with the number increasing by 33% between 2008 and 2013, with more than 4,000 in the United States alone, the country with the highest number of wealthy families and individuals, including 5,000 households that have more than $100 million in assets. The Wall Street Journal noted: “You don’t have to be a Rockefeller to join a family office.” However, it does help to have hundreds of millions of dollars.
In 2012, the list of the largest multi-family offices were largely associated with major banks, including HSBC, BNY Mellon, UBS, Wells Fargo and Bank of America, but Rockefeller Financial maintained a prominent position as the 11th largest multi-family office (according to assets under advisement and number of families being served). And beyond the specific arm of the ‘multi-family office’ to the list of the top wealth management groups as a whole, private bank branches of some of the world’s most recognizable bank names dominated the list: Bank of America Global Wealth & Investment Management, Morgan Stanley Smith Barney, JPMorgan, Wells Fargo & Company, UBS Wealth Management, Fidelity, and Goldman Sachs, among others. However, after the top 19 wealth management companies in the world – all of which were arms of major global banking and financial services conglomerates – came number twenty on the list: Rockefeller Financial.
Indeed, things have never been better for the super-rich. A 2012 poll of 1,000 wealthy Americans by the Merrill Lynch Affluent Insights Survey revealed that 58% of respondents felt more financially secure in 2012 than they did the previous year. In 2013, U.S. Trust, the private banking arm of Bank of America, released a survey of 711 individuals with more than $3 million in investable assets, of whom 88% reported that they were more financially secure today than they were before the financial crisis in 2007. Further, the main goal for the super-rich in 2013 was reported to be “asset appreciation” as opposed to “extreme caution”, as the survey reported for 2012.
In 2013, Bloomberg Markets Magazine reported that the number of wealthy people in the world with more than $1 million in investable assets had increased by 9.2% over 2012, reaching a new record of 12 million individuals, and the assets by the rich increased by roughly 10%, reaching a combined total of roughly $46.2 trillion. With this growth in extreme wealth, the wealth management business is itself becoming a major growth industry, with independent firms competing against the big banks in a race to manage the spoils of the world’s super-rich.
And the world’s big banks want to get more of this investable wealth. For example, Goldman Sachs has boosted its private wealth management services. The number of partners at the bank working in asset management in 2010 represented 4.5% of the bank’s total partners, a number which grew to 12% by 2012. Tucker York, the head of private wealth management in the U.S. for Goldman Sachs, noted: “This is a relationship business, and long-term relationships matter… The focus for us is to have the right quality and caliber of people come into the business and stay in the business for a long, long time.”
The managing director and chief investment officer of Goldman Sachs’ private wealth management arm, Mossavar-Rahmani, told Barron’s in 2012: “This is the time to be a long-term investor… There are very few market participants in today’s environment who can truly be long-term investors. Who can really afford to be a long-term investor? The ultra-high-end client is the only one we could think of, because they generally have more money than their spending needs.” In addition, he noted, “their assets are multigenerational,” and, what’s more, “they are not accountable to anyone.”
In a world of immense inequality, with the super-rich controlling more wealth than the rest of humanity combined, the wealth management industry – and within it, the ‘family office’ – have become growth industries and increasingly important institutions. The whole process of globalization has facilitated not only the internationalization of financial markets, multinational corporations and the economies they dominate, but it has in turn facilitated the globalization of family dynasties themselves, whose wealth is largely based on control over corporate and financial assets and institutions.
In globalization’s ‘Game of Thrones’, the world’s super-rich families compete and cooperate for control not simply over nations, but entire regions and the world as a whole. As dynasties seek perpetuation, most people on this planet are concerned with survival. Whoever wins this ‘Game of Thrones,’ the people lose.
The research for this series has been undertaken as part of The People’s Book Project. For this – and similar – research to continue, please consider making a donation today:
Andrew Gavin Marshall is a researcher and writer based in Montreal, Canada. He is Project Manager of The People’s Book Project, chair of the Geopolitics Division of The Hampton Institute, research director for Occupy.com’s Global Power Project and the World of Resistance (WoR) Report, and hosts a weekly podcast show with BoilingFrogsPost.
Austerity Revisited: How Global Financiers Rigged the Bank Bailouts of the 1980s
By: Andrew Gavin Marshall
Originally posted at Occupy.com
20 May 2014
In the first part of this Global Power Project series, I examined the origins and early evolution of the International Monetary Conference, an annual meeting (to be held June 1-3 in Munich) of several hundred of the world’s most influential bankers who gather in secrecy with the finance ministers, regulators and central bankers of the world’s most powerful nations. The second part looked at the role of the IMC in the lead-up to the 1980s debt crisis. Now, in Part 3, we examine the role the IMC played throughout that debt crisis which began in August of 1982.
At the 1982 International Monetary Conference, bankers noted that they had been cutting back extensively on loans to developing countries, with some leading bankers warning that the lending cut-backs could result in “aggravating the problems of countries already in economic difficulties and threatening to throw them into default” – which is exactly what happened a couple of months after that’s year’s conference.
A. W. Clausen, former CEO of Bank of America, spoke at the IMC in 1982 as then-president of the World Bank, and told the assembled bankers it was “an honour to be the first President of the World Bank to address the International Monetary Conference,” noting that, “themes of partnership and interdependence have repeatedly been at the center of our IMC meetings.” It was the subject Clausen wanted to address, “the tightening interdependence between the developed and the developing nations,” announcing “a new era of partnership between the World Bank and international commercial banks for helping the economies of the developing countries.”
Clausen told the bankers that “in order to develop a closer partnership with you, we intend to expand the International Finance Corporation [the investment arm of the World Bank] to explore the possibility of a multilateral insurance scheme for private investment, and to develop new mechanisms for attracting commercial bank co-financing.”
He also noted that the “fundamental objective of the World Bank” was “to help raise the standard of living of people, especially poor people, in the developing countries,” and argued that “people in developing countries will benefit from a closer partnership between the World Bank and international commercial banks.” Clausen was speaking roughly three months before Mexico announced its debt repayment problems, sparking the debt crisis, though he acknowledged that the developing world was experiencing a “balance-of-payments disequilibrium and debt-servicing difficulties.”
In addition, Clausen noted that the affiliate organization of the World Bank, the International Finance Corporation, had a special purpose which was “to encourage productive private enterprises in developing nations” whose loans do not have to be guaranteed by governments, and which can take equity (or shareholdings) in corporations. Clausen noted that together with the IMF and the General Agreement of Tariffs and Trade (GATT), the World Bank “has helped to build an interdependent global economy,” adding: “International commercial banking depends on the relatively integrated, dynamic, and peaceful world economy that these official institutions have nurtured.”
Thus, he suggested, “we should now develop the complementarity between the World Bank and international commercial banks into a closer relationship of collaboration,” and recommended “greater collaboration between [the] IFC and commercial banks,” which “has great potential for stimulating commercial investment in the developing countries.” All of the initiatives Clausen proposed revolved around the basic objective of increasing “the collaboration of the international banking community” with the World Bank, in order “to assist poor nations to better manage their economies through the establishment of economic policies that are conducive to economic growth and development” and thus “bringing them fully into the global economy.”
The Debt Crisis
In the first full year of the international debt crisis that tore Latin America and other developing countries into financial ruin – with entire populations pushed overnight into poverty through austerity measures that were demanded by the IMF and the global banks, in return for additional loans and debt rescheduling – the more than 200 global bankers at the International Monetary Conference met in Belgium where they were “treated like royalty,” met at the airport by “special hostesses” and were then chauffeured in Mercedes limousines to the Hyatt Regency Hotel.
The bankers attended a cocktail party at the Palais d’Egmont and hosted the King of Belgium for an afternoon lunch. It was in this “fairy-tale atmosphere,” as the New York Times described it, that the world’s top bankers met with government officials and central bankers and enjoyed “the luxury of thinking about the grand problems of world finance, unfettered by the real world’s concerns.”
The bankers at the 1983 conference agreed that the major debtor countries, in particular Brazil and Mexico, would need time to reshape their economies, with estimates ranging from three to seven or eight years of austerity, and various “structural reforms” designed to enforce neoliberal economic policies upon those entire populations. James Wolfensohn, a former partner at Salomon Brothers who started his own consultancy (and later went on to become President of the World Bank), delivered a popular speech at the IMC recommending that there could be no one solution to the debt crisis, but that each country would have to be handled on a case-by-case basis.
The banker William S. Ogden, a former vice chairman of Chase Manhattan, presented another popular speech at the IMC in which he explained that what was needed to resolve the debt crisis was “sustained world economic growth, avoidance of protectionism, increased government aid to the third world and more disciplined economic policies among the developing countries.” In other words, harsh austerity measures.
That very same year, Ogden was in the midst of creating a unique organization of international banks and bankers to represent their collective interests as a global community in the face of the debt crisis. That organization came to be known as the Institute of International Finance, itself the subject of a previous set of exposés in the Global Power Project.
At the 1984 meeting of the International Monetary Conference (IMC), a special meeting occurred among some of the top banks that held a large percentage of Mexico’s debt. They participated in a “closed meeting” with major central bankers and finance officials, including representatives of the IMF, who recommended that the banks lower their interest rates on loans to Mexico in order to reduce pressure on the country. Walter B. Wriston, chairman of Citicorp, who had previously opposed any concessions to the impoverished nations in crisis, at this point appeared willing to adhere to some reductions in interest rates for Mexico.
The closed meeting was also attended by Willard C. Butcher, Jr., the chairman of Chase Manhattan; John F. McGillicuddy, chairman of Manufacturers Hanover Trust Company; Lewis T. Preston, chairman of J.P. Morgan & Company; Walter V. Shipley, chairman of Chemical Bank; Wilfried Guth, managing director of Deutsche Bank; Guido R. Hanselmann, executive board member of Union Bank of Switzerland (UBS), and Sir Jeremy Morse, chairman of Lloyds Bank of London.
The following day, the international banks announced that they would agree to negotiate a long-term debt solution for Mexico. Included in the decision as well was the IMF managing director, Jacques de Larosiere; the chairman of the Federal Reserve, Paul Volcker; and a special representative of the banks, Citibank Vice Chairman William R. Rhodes, who announced the decision to negotiate on behalf of the banks and who was personally responsible for chairing multiple “bank advisory committees” that negotiated debt rescheduling with various countries in Latin America.
Three years later, in 1987, Mexico was still caught in a painful crisis and the world’s bankers were still meeting for the IMC in luxurious surroundings, partaking in opulent social events to discuss the issue of world debt problems. The more than 200 bankers at the meeting expressed their frustration with the problems of the global monetary system, the instability of the floating exchange rate system, and currency crises. William Butcher, that year’s chairman of the IMC, warned that the global monetary system would not “correct itself” and instead the search for a new and more stable system “must be intensified.”
The most popular speech at the IMC that year was delivered by Japan’s vice minister of finance for international affairs, Toyoo Gyohten, who proposed the establishment of “some international mechanism” which would be responsible for managing international monetary crises, and would be required “to have at least several hundred billion dollars in order to influence the financial markets.”
At the next year’s meeting of the IMC, then-Chairman of the Federal Reserve, Alan Greenspan, spoke to the assembled bankers, explaining that further declines in the U.S. Dollar would not help American exports. His comments led to a rise in the Dollar, “greeted positively in the financial markets,” and stock and bond prices rose on Wall Street. The heads of the central banks of other major industrial nations, such as West Germany and Britain, were also present at the conference where collectively the central bankers “reiterated the need to keep inflation down as a way to continue worldwide economic growth” – a position met with great approval by the bankers present at the meeting.
At the 1989 meeting of the IMC, many of Mexico’s largest international lenders attended a special meeting after which they announced a $5.5 billion “aid” package (aka bailout) for Mexico in cooperation between Japanese banks, the IMF and the World Bank. But the so-called “aid packages” handed out by Western banks and international organizations to the crisis-hit developing nations were, in fact, bailouts for the major banks: the funds were given to the countries explicitly to pay the interest that they owed to the banks, while at the same time forcing those governments to implement strict austerity measures and other economic reforms.
William R. Rhodes, Citibank’s main official responsible for debt rescheduling agreements, was present at the meeting, which was also attended by Angel Gurria, the chief debt negotiator for Mexico. Rhodes stated that the meeting at the IMC “set the stage for rapid progress.” In the final part of the Global Power Project series on the International Monetary Conference, I examine the continued relevance of the IMC from 1989 to the present – including the bankers who composed its leadership, as well as a review of leaked documents pertaining to the 2013 meeting of the IMC in Shanghai.
Andrew Gavin Marshall is a 27-year-old researcher and writer based in Montreal, Canada. He is project manager of The People’s Book Project, chair of the geopolitics division of The Hampton Institute, research director for Occupy.com’s Global Power Project and the World of Resistance (WoR) Report, and hosts a weekly podcast show with BoilingFrogsPost.
How the International Monetary Conference Helped Fuel the 1980s Debt Crisis
By: Andrew Gavin Marshall
Originally posted at Occupy.com
14 May 2014
Last week, in Part 1 of the Global Power Project’s investigations into the machinery behind the International Monetary Conference, I examined the history and evolution of the IMC from its founding by the American Bankers Association in 1954 to the global financial and monetary disruptions of the late 1970s.
The IMC, happening June 1-3 in Munich, brings together hundreds of top bankers with leading finance officials and central bankers from the world’s industrial powers to discuss major economic, financial and monetary issues of the day – and to form a consensus on policies for managing the world economic order. In part 2 of the series, I look at the role of the IMC in the lead-up to the 1980s debt crisis.
What Fueled the Debt Crisis?
The 1980s debt crisis erupted when Mexico announced in 1982 that it could no longer service its debts to Western, and primarily American, banks. This resulted in a crisis that quickly spread across Latin America, Africa and parts of Asia. The oil price rises of the 1970s had led to a surge in revenues for oil-producing nations, which had invested their surplus oil wealth in Western banks that then lent the money to poor, developing nations requiring oil in order to finance their industrialization.
Then, following the 1979 oil shocks, the Federal Reserve in the United States decided to dramatically increase interest rates. The result: interest payments on “third world” debts skyrocketed, ultimately forcing Mexico and other nations to seek bailouts in order to pay their interest to the world’s major banks.
At the 1980 International Monetary Conference meeting, two years before the debt crisis erupted, some of the world’s top bankers – particularly Wilfried Guth, the managing director of Deutsche Bank – warned that a “safety net” may be needed to bail out the major banks that lent money to the developing world. Chase Manhattan Chairman David Rockefeller, who also attended the meeting, agreed that such a “safety net” for the banks was “well worth considering.”
Other leading bankers warned that since the world’s major banks were big lenders to each other, there was “a danger that if one large institution were to fail, a chain reaction could be started that would topple other banks around the world.” (“A ‘Safety Net’ for Banks is Proposed,” New York Times, June 3, 1980).
An Exclusive Event
The June 1980 meeting of the IMC took place in New Orleans, to which The New York Times reported that “only the most elite of the world’s financiers are invited.” American participants at that year’s meeting included Treasury Secretary G. William Miller and Federal Reserve Board Chairman Paul A. Volcker, as well as the chairmen of America’s three largest banks: David Rockefeller (Chase Manhattan), A.W. Clausen (Bank of America) and Walter Wriston (Citibank). The New York Times noted that the IMC “has been a forum where the heavyweights of world finance often take off their gloves.” (“Bankers Meet in Discord,” New York Times, 2 June 1980).
The bankers who attended the conference to discuss issues of debt and poverty were greeted at the New Orleans airport by police officers who provided them with security and doubled as “porters and chauffeurs,” driving the bankers in unmarked police cars to their hotels. The IMC, which is presided over by a 15-member board that decides who gets invited to the yearly meetings, admits banks based upon their size and the scope of their international operations.
At this gathering, eight of the 15 board members were Americans, including Walter B. Wriston, chairman of Citibank; Willis W. Alexander, executive vice president of the American Bankers Association, and leading figures representing First National Bank of Chicago, Wells Fargo, Mellon Bank and Chemical Bank, among others (“The Talk of New Orleans: Agonies of World Banking,” New York Times, 8 June 1980).
Though official sessions of the meeting were closed to the press, in briefings afterward the bankers warned that some developing nations were having increasing difficulty paying interest on their debts to the big banks – and that although the situation had not yet reached crisis proportions, they were wary of what was to come. David Rockefeller declared an urgency “for official organizations, such as the International Monetary Fund, to increase their lending to oil-consuming countries,” and suggested that “private banks and the international institutions should work more closely together.”
Likewise, Wilfried Guth of Deutsche Bank presented a 35-page paper in which he stated that the global financial system was “fairly under control for 1980,” but warned that “critical developments are feared for 1981 and later” when many developing nations “will find it extremely difficult to raise the money they need to pay for oil and other essential imports, including food.” Powerful bankers and monetary officials at the conference widely supported Guth’s paper and presentation, with David Rockefeller warning that international loans given by commercial banks had already surpassed $1 trillion.
The global bankers noted that the underlying issue was “the huge transfer of wealth from the oil-consuming nations to the oil-producing nations,” and warned that “economic stability can be achieved only if the oil-consuming countries accept declines in their living standards” and “an indefinite recession” (“Oil Payment Worries Grow,” New York Times, 7 June 1980).
Meanwhile, the most popular person at the conference that year was a specially-invited guest named Milton Friedman, the University of Chicago economist known for his promotion of neoliberal economic orthodoxy. As the New York Times noted, “It seemed that just about everyone wanted to sit at Mr. Friedman’s lunch and dinner tables.” Friedman had been invited to the IMC to preside over a debate on nothing less than “how monetary policy should be designed and implemented.”
The 1980 IMC meeting seemed to bear formal fruition when Ronald Reagan assumed the presidency in January of 1981, as his new economic policies won “praise from at least one important foreign group – bankers.” The New York Times noted that the several hundred of the world’s top financiers from the IMC meeting “expressed understanding and support of even the most controversial of American monetary policies – the record interest rates that have strengthened the dollar and battered most foreign currencies as a result.”
It was the very same interest rate hikes that led to highly-indebted poor countries finding themselves unable to pay the increased interest on their loans – which pushed them into bankruptcy and the need for bailouts. But for global bankers, there was nothing but praise. Sir Jeremy Morse, chairman of Lloyds Bank of London one of those in attendance at the IMC, stated that, “In general, most people feel that high interest rates are appropriate to the inflationary position of the Western world, and are appropriate to the United States position.”
The only issue of bankers’ “irritation” with the Reagan administration, it seemed, was the fact that incoming Treasury Secretary Donald T. Regan – the Chairman and CEO of Merrill Lynch from 1971 to 1980 – had cancelled his trip to the IMC at the last minute. As many at the conference noted, it was “tradition” to have “a formal address by a senior American economic official.” The President of Wachovia, John G. Medlin Jr., commented, “I think he should have come … I don’t think he understood the importance of this group.”
In the absence of Regan, the responsibility of explaining official American economic policies fell to Federal Reserve Chairman Paul Volcker, himself a former official at Chase Manhattan where he had worked for David Rockefeller. Volcker stood up to the challenge and “was a great success among the bankers [at the IMC], many of whom expressed support for him.”
In the next installment of this series investigating the International Monetary Conference, I examine the role of the IMC throughout the 1980s debt crisis and its position as an important, influential forum that helped to articulate and definitively shape consensus around neoliberal Western economic policy.
Andrew Gavin Marshall is a 26-year-old researcher and writer based in Montreal, Canada. He is project manager of The People’s Book Project, chair of the geopolitics division of The Hampton Institute, research director for Occupy.com’s Global Power Project and the World of Resistance (WoR) Report, and hosts a