What was the role of the United States in the global economy by 1920?

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Kenneth W. Dam, Deputy Secretary of the Treasury
Remarks Delivered to the Center for Strategic & International Studies
Washington, DC
September 11, 2002

Released by U.S. Department of the Treasury, Office of Public Affairs

The United States plays many important roles in the global economy. One of those roles is to promote stability in the global financial system, as the title of this session suggests. But that, in my view, is too narrow a role, too instrumental a role, to capture the essence of U.S. leadership in the global economy.

President Bush and Secretary O�Neill have a much broader vision of U.S. leadership in the global economy. Their vision is U.S. leadership to leverage the potential of individuals and private enterprise to create growth around the world. A stable financial system is a necessary condition for that growth, but not a sufficient one.

There are two main ways that we advance this vision. First, we make sure the right economic policies are in place in the United States. Second, we promote the right economic policies around the world.

First and foremost, we are focused on getting our economic policies right here at home. Ensuring that the American economy grows at its full potential is, obviously, crucial to Americans. But it is important to the world economy as well. Perhaps the single most important thing that the United States can do to promote growth around the globe is to grow at home.

The important thing to remember in that respect is that we already have the right monetary, fiscal, and trade policies in place to assure domestic growth. Let me be specific.

1. Monetary policy -- set, of course, mainly and independently by the Federal Reserve -- has produced historically low interest rates while keeping a tight lid on inflation. Last week, even the 10 year rate fell below 4%. Low rates have fueled both housing and automobile sales, sustaining the recovery.

I should also note that most economists believe there is a lag of perhaps 12 months from a cut in the federal funds rate before the full effect is felt in the economy. If that holds true in the current context, we have yet to see the full impact of the Fed�s cuts after the September 11 attacks.

2. Fiscal policy -- set by the President and Congress -- in June of last year produced a historic tax cut exactly when we needed it. And we followed up with a stimulus package, including the provisions allowing for increased expensing of capital expenditures enacted this Spring. As a result, we are running a deficit exactly when nearly all economists agree we should -- when the economy is not growing at its potential.

3. Trade policy is also finally moving in the right direction. Congress did the right thing in renewing the President�s Trade Promotion Authority. Overnight, there has been a distinct improvement in negotiations around the world. People are excited and hopeful that we can make great progress:

--with renewal of the Andean Trade Preferences Act now in operation;

--with bilateral free trade agreement negotiations with Chile and Singapore nearing completion;

--with a multilateral Free Trade Agreement of the Americas now in prospect; and, of course,

--with the groundwork laid for a multilateral WTO agreement in the Doha Round.

I should say that Trade Promotion Authority does more than increase the likelihood of agreements -- it also decreases the likelihood of disagreements. It�s called the bicycle theory. As we all learned as children, it�s easier to keep your balance when the bicycle is moving forward than when it�s standing still. Now that Trade Promotion Authority has got us moving again, we expect to see fewer trade disputes around the world and we can expect those disputes already on record to be settled more promptly and more amicably.

At Treasury, we are particularly focused on trade in financial services. Trade in financial services is part of our overall development strategy, not just an opportunity for our own, highly-developed industry.

Developing economies have learned the limits of export-led strategies during the recent recession. As these economies consequently focus on building domestic demand-led growth, they see the necessity for a strong financial services sector.

Strong financial services direct capital to high-valued uses, not high-valued friendships.

Strong financial services help manage volatility.

Trade in financial services promotes the transfer, particularly through direct investment, of internationally-recognized best practices including:

--the most advanced risk-management techniques,

--the latest financial products, and

--the due diligence practices that are so critical to ensuring the most efficient allocation of resources.

Countries that avail themselves of the assistance of the global leaders in financial services position themselves on a path of accelerated growth.

By the way, you don�t have to take my word for it. A 2001 World Bank study found that countries with fully open financial service sectors grew, on average, one percentage point faster than other countries.

To be sure, there are some short-term risks to more rapid growth in the U.S. economy including, for example, volatility in the equity markets. Another example is the threat of future terrorist attacks. We are acting forcefully to mitigate those risks.

Some of the recent volatility in equity markets appears attributable to the spate of accounting scandals and associated bankruptcies. The Administration�s Corporate Fraud Task Force is acting swiftly to punish corporate wrongdoers. The Administration also worked closely with Congress to produce the Sarbanes-Oxley Act of 2002. That legislation improves the quality and transparency of financial reporting, independent audits, and accounting services for public companies. These actions will, I believe, help restore investor confidence in markets that reward intelligent risks taken on honest information.

As for the threat of terrorist attacks, it is likely to be with us for a long time. We can, however, take an important step now to mitigate the damage that an attack might do to our economy. Congress can finally pass the terrorism risk insurance bill.

Property and casualty insurance markets responded well to the September 11 attacks. But it isn�t clear that they will be there for the next attack.

We can�t wait to find out. Congress must act now.

We will manage these short term risks. The U.S. economy is remarkably resilient. The potential of American workers and American business is remarkably high. Our economic fundamentals are more than sound -- they remain the envy of the world. We have the right monetary, fiscal, and trade policies in place to leverage those strong fundamentals. I am confident that the economy will respond to these policies, create more high-skill jobs, and return to growth at its full potential.

The right economic policies abroad.

I would like to turn now to our efforts to promote the right economic policies abroad. I will discuss just two of the ways in which we promote the right economic policies -- (1) through our policy with respect to emerging markets and official lending and (2) through our policy with respect to development.

Emerging Markets Strategy and Official Lending

Our policy toward emerging markets and official lending is simple.

During the last four years, capital flows to emerging markets declined sharply. This trend must be reversed. We need better mechanisms to prevent financial crises and to resolve them when they occur. Better crisis prevention and resolution will help create the conditions for sustained growth of private investment in emerging markets and, ultimately, raise living standards of people who live in those countries.

We are focused on achieving this goal in several ways. I will describe four.

1. Crisis prevention. This means not only early detection of policies or of external shocks that could cause crises, but also the resolve to take actions to reverse such policies or counter such shocks. The Bush Administration has encouraged the IMF to strengthen its capacity to detect potential troubles on the horizon, and to be willing to warn countries that are heading down a dangerous path to take appropriate action. Effective communication with markets is also key. And the IMF can be more effective and credible in undertaking these tasks if it focuses on issues that are central to its expertise -- notably helping to strengthen monetary, fiscal, exchange rate, financial sector, and debt management policies. In the last decade, the IMF became too involved in matters outside of these core areas.

2. Limits on official finance. We support countries that follow the right economic policies. For example, Brazil and Uruguay have effectively and consistently implemented sound economic policies, embracing free markets, liberalizing trade, and maintaining low inflation. Well-designed support from the IMF is enabling the continuation of strong policies in these countries. In the case of Argentina, the United States stands ready to support further assistance to Argentina through the IMF once the Argentine authorities develop a sustainable economic program.

At the same time, we remain focused on the goal of limiting large-scale assistance. The IMF should be the key source of emergency balance of payments support, without recourse to bilateral assistance as in the past. For example, and by way of comparison, Brazil�s recent $34 billion package of IMF and Multilateral Development Bank loans, while large, compares to approximately the $51 billion made available to Mexico in 1995 and the $58 billion available to Korea in 1997, both cases in which large bilateral support was used. Our goal is to continue to reduce reliance on official sector resources over time.

3. Sovereign debt restructuring reform. We have encouraged the development of a more orderly and predictable process in the event a restructuring is necessary. We are working closely with the IMF, emerging market countries, and their creditors to implement a market-oriented approach to the sovereign debt restructuring process. This "contractual" approach would put new clauses into sovereign debt contracts. We also support, on a parallel track, further work by the IMF on its proposed statutory approach to sovereign debt restructuring. We consider the Fund approach and the contractual approach to be complementary and work should continue on both approaches simultaneously.

Contagion. Since early in this Administration, Secretary O�Neill has emphasized that contagion is not inevitable. Different countries with different economic fundamentals need not fall victim to the same swings in international financial markets. Our public comments on this point were meant to advance the changes in the markets by emphasizing that policy decisions would not be based on unjustified claims of contagion. And in fact we have witnessed contagion come down dramatically. During the crisis in Argentina, for example, markets have done a good job of differentiating between the sovereign debt of Argentina and the sovereign debt of other nations.

Approach to Development

Our approach to development is another means by which we work to promote the right economic policies around the world.

First, we recognize that official foreign assistance is an important, but limited resource. As President Bush has said, "Most funds for development do not come from aid, they come from foreign investment, domestic savings, and, especially, from trade."

Foreign assistance can make the most difference, therefore, when it leverages government efforts to channel these larger flows to development goals.

For that reason, we are focused on directing foreign assistance, especially in the Millennium Challenge Account and Multilateral Development Banks, to governments that invest in their people, promote economic freedom, and rule transparently and justly. At the same time, we will continue USAID programs for humanitarian and security purposes.

We are also focused on results. After all, we are in this business to make a difference. Donors and borrowers need to better measure their results, so they can better assess failures and successes, and better apply lessons learned from the past to future efforts.

You have to be careful when measuring results, however. Sometimes, what you measure is what you get. If, for example, you measure enrollment, you may get rooms with a lot of children and too few teachers. The goal should be education, not the warehousing of children. Our challenge is to build an international consensus around measurements that matter and that create incentives to increase results that matter.

Here, too, we are making some progress. For example, the donors to IDA (the International Development Association) have agreed to two sets of measures.

The first set is needed to get the new measurable results system started. They include timely and high quality diagnostic analyses, such as:

--public expenditure reviews,

--financial accountability assessments,

--and investment climate assessments.

We believe that these assessments will help identify the strengths and weaknesses in a country�s ability to make the most effective use of IDA resources.

And we are willing to put our money where our mouth is. If the IDA makes progress in this area, the United States will supplement its 3-year $2.5 billion contribution to IDA by an additional $100 million.

The second set of measurements is in the areas of education, health, and private sector development.

In the education area we will measure the increase in aggregate primary school completion rates across IDA countries as well as the increase in the number of countries that have raised their completion rates.

In the health area, we will measure the increase in measles immunization coverage across IDA countries as well as the increase in the number of countries with 80 percent coverage.

As for private sector development, we will measure reductions in both the number of days and the official costs required to start businesses in IDA countries.

Again, we will back these ideas with dollars. If satisfactory results are achieved in the above areas, the United States will provide an additional $200 million to IDA -- above and beyond the $100 million I mentioned before.

These are but two ways -- through our approach to emerging markets and official lending and through our approach to development that we are working to promote the right economic policies abroad.

Before inviting your questions, I would like to turn to another, important topic: protecting our economy and the world�s economies from terrorism.

On September 11, after the first plane hit, we were discussing whether the New York Stock Exchange should close. Then the second plane hit. Then we felt a thump as the third plane hit the Pentagon. Shortly thereafter, we evacuated the Treasury. There were still planes in the air, and our bureau, the Secret Service, believed that the White House was a target.

As the attacks occurred, we knew two things: (1) the terrorists struck deliberately at our financial system and our economy, as well as our people; and (2) it took money to plan, prepare, and execute the attacks. Since September 11, we have worked hard in the United States and abroad, with the help of other governments, to disrupt terrorist financing.

Since September 11, $112 million around the world has been frozen. Over 160 countries have blocking orders in force. More importantly, we have cut the flow of terrorist money. For example, we have designated a network of money transfer agents known as Al-Barakaat, which was channeling as much as $15 to $20 million to al Qaida a year.

Further, countries around the world are improving their financial regulations to disrupt terrorist financing. Since September 11, over 80 countries and jurisdictions in every region of the world have passed or drafted new laws to combat the financing of terrorism.

To cite just one of many examples, according to the Foreign Broadcast Information Service, Thailand recently announced plans "to reduce the minimum value of transactions subject to scrutiny" by its anti-money laundering office.

As these safeguards increase and as we remain vigilant in ensuring that terrorists do not use our financial system to move and store money, terrorists must resort to other means -- such as physically carrying currency in bulk -- that are expensive, time consuming, uncertain, and expose them to greater risk of capture. For example, Customs, U.S. Secret Service, and FBI agents recently apprehended and subsequently indicted Jordanian-born Omar Shishani in Detroit for smuggling $12 million in forged cashier�s checks into the United States.

We have had other successes that I am not at liberty to disclose. These successes are perhaps as frustrating as they are encouraging. They are important, real successes. But we cannot tout them. One of our challenges is to find ways of communicating our successes while protecting our sources and respecting the wishes of the sovereign governments that work with us. We can say that we know that al Qaida and other terrorist organizations are suffering financially as a result of our actions. We know that potential donors are being more cautious about giving money to organizations where they fear that the money might wind up in the hands of terrorists.

In short, a great deal remains to be done. Although we have had a considerable impact on al Qaida�s finances, we also know that al Qaida�s financial needs are greatly reduced. They no longer bear the expenses of supporting the Taliban government or of running training camps, for example. We have no reason to believe that al Qaida does not have the financing it needs to conduct at least a substantial number of additional attacks.

This is particularly true in the area of safeguarding charities from abuse by terrorists and preventing terrorists from abusing hawala networks. (Hawalas, by the way, are a centuries old way of moving money based on trust that generates little paper trail.)

Thank you for this opportunity to review some aspects of the role of the United States in the world economy. I look forward to answering your questions.

What role did the US play in the global economy by 1920?

What role has the United States played in the global economy?

What helped the US economy do well in the 1920s?

What did the US do in 1920?