ABSTRACT
Reflecting on the interest hikes he presided over in the late 1970s and early 1980s, Paul Volcker said that the inflows of foreign capital into the United States were ‘far greater than [he] had thought possible’ (quoted in Murphy, 1996: 148). Not only did these inflows — ‘at one point at a greater rate than all the personal savings in the US’ by his own estimation — exceed Volcker's expectations: they also fundamentally reshaped the geography of manufacturing on both sides of the Pacific. By raising real US interest rates from an average of —2 percent in 1979 to an average of 7.5 percent in 1982, the US Federal Reserve engineered an unprecedented reversal in the flows of capital — transforming the United States from the largest creditor nation to the largest debtor country in less than a decade. If this recentralized financial power in New York and Washington, the high dollar also undermined the competitiveness of American industry and facilitated the emergence of the Asian rimlands as the most dynamic industrial region in the world economy in the 1980s and early 1990s.
