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We bring to the attention of our readers this outstanding, detailed and incisive analysis by Professor Mason Gaffney of the University of California, Riverside

Abstract

Military defense is generally treated in economics texts as a “public good” because the benefits are presumed to be shared by all citizens. However, defense spending by the United States cannot legitimately be classified as public good, since the primary purpose of those expenditures has been to project power in support of private business interests. Throughout the course of the 20th century, U.S. military spending has been largely devoted to protecting the overseas assets of multinational corporations that are based in the U.S. or allied nations.

Companies extracting oil, mineral ores, timber, and other raw materials are the primary beneficiaries. The U.S. military provides its services by supporting compliant political leaders in developing countries and by punishing or deposing regimes that threaten the interests of U.S.-based corporations. The companies involved in this process generally have invested only a small amount of their own capital. Instead, the value of their overseas assets largely derives from the appreciation of oil and other raw materials in situ. Companies bought resource-rich lands cheaply, as early as the 1930s or 1940s, and then waited for decades to develop them. In order to make a profit on this long-range strategy, they formed cartels to limit global supply and relied on the U.S. military to help them maintain secure title over a period of decades. Those operations have required suppressing democratic impulses in dozens of nations. The global “sprawl” of extractive companies has been the catalyst of U.S. foreign policy for the past century. The U.S. Department of Defense provides a giant subsidy to companies operating overseas, and the cost is borne by the taxpayers of the U.S., not the corporate beneficiaries.

Defining military spending as a “public good” has been a mistake with global ramifications, leading to patriotic support for imperialist behavior.

Introduction

Corporations are heavily involved in the military programs of the United States. 1 (endnote) On the one hand, they build weapons systems for the Pentagon under contract, often with large cost overruns. On the other hand, all American corporations with overseas investments benefit from U.S. military spending. The net effect is that business ties with the military have increased the power of corporations, distorted the political system in the United States in favor of elite interests, encouraged waste of productive potential, and led to the U.S. functioning as the world’s police force. That last effect is part of an expansionist foreign policy that has embroiled the U.S. in military action almost every year of the 20th and 21st centuries (Grimmett 2010:7-30).

On the procurement side, consider only the latest fiasco. The F-35 jet program, built by Lockheed-Martin, is currently scheduled, after seven years of delay, to cost $406.5 billion for procurement and over $1 trillion in lifetime operating and maintenance costs (Capaccio 2017). The project has been the object of ongoing criticism from the U.S. Congress. The F-35 is less combat-ready than its predecessors, but despite its litany of technical problems, the Pentagon has deemed it “too big to fail” (Hughes 2017). This is an exaggerated case of corporate welfare—a situation in which a corporation is able continually to draw upon public revenues for inferior product, all because that corporation has amassed so much political power. Bender, Rosen, and Gould (2014) show how Lockheed Martin is able to influence the political system by the use of strategically located subcontractors dispersed around the U.S. and the world:

One reason why the project has become such a boondoggle is that many states and countries are significantly invested in the plane, relying on its production for income and jobs. Every U.S. state but Alaska, Hawaii, Nebraska, and Wyoming has economic ties to the F-35, with 18 states counting on the project for $100 million or more in economic activity, according to primary contractor Lockheed Martin. All told, the project is supposedly responsible for 32,500 jobs in the U.S. Globally, another nine countries have major ties to the F-35.

This is how corporations function in the world of defense contracts. They create “white elephants” that the government is forced to buy to avoid angering the constituency of key members of Congress.

On the other side of the ledger are the more than $5 trillion in assets held by U.S. corporations in foreign countries (US CIA 2016). The U.S. military devotes a large portion of its resources to protecting those foreign investments, although it defines those assets as “the interests of the United States.” Few people who use that language stop to think that those interests are mostly private, not public. Why should someone who invests in a company with oil-fields in Angola, Kazakhstan, or Sudan receive the protection of U.S. military forces without any charge? Why should American taxpayers pay this cost? Why should young Americans be sent to fight to protect those investments? Why should the U.S. provoke other countries into becoming “endless enemies” to protect private investments (Kwitny 1984)? There is no reason the price of oil could not reflect the true cost of obtaining it. Alternatively, some international body might collect the oil rents so there would be less value worth fighting over. In fact, American taxpayers spent about $50 billion a year in the 1990s to project American power into the Persian Gulf. If that cost had been factored into the price of oil, the true net cost of oil from that region would have reached $100 per barrel by the mid-1990s (Lovins and Lovins 1995).

The question that I seek to answer in this article is how corporations have managed to cloak themselves with patriotism when their assets are at risk in other countries and yet refuse to share the benefits of their activities with the governments that pay for these protection services. This does not mean that the U.S. military spends no money on legitimate security interests. But in a world where corporate interests have become so closely tied to American foreign policy, it is difficult to know precisely where to draw the line.

The Fig Leaf: Defense as a Public Good

The use of military spending in the U.S. to defend private interests has received surprisingly little attention over the years. Economists who question many other aspects of the federal budget seem reticent to turn their skeptical gaze upon the military budget. For many analysts, that spending is sacrosanct. They hesitate to pry open the lid and look inside.

The single biggest factor in the general reluctance to ask who benefits from military spending (and implicitly to ask who should pay for it) is the philosophical premise that defense is a public good. Although the term “public good” is used in casual speech to mean any service that government provides (roads, health, education, and so on), economists have a more specific meaning. A public good is one that is indivisible in production and undiminished by use. It is a service with universal benefits from which it is hard to exclude potential beneficiaries. One standard example is education, but it is only a quasi-public good. It has some properties of a private good, since it permits exclusion and mostly offers direct benefits. Thus, a better example seems to be national defense, which is often presented as a pure public good. If your country is invaded by a foreign power, every citizen benefits from the effort to ward off the attack, which means the benefits are universal and non-excludable. But no foreign army has attacked the U.S. directly since 1941, and even then, the mainland remained secure throughout World War II. Thus, the argument that military spending is a public good does not have the degree of plausibility with which it is usually presented. The argument is even less plausible in countries where the main function of the military is to repress domestic dissent and protect the power of an elite. That describes a high percentage of countries today.

Thinking of defense as a public good runs counter to the historical origin and nature of national governments, including the United States. National governments originated to establish, maintain, legitimize, expand, allocate and police the tenure of land—both inside and beyond their borders. Thus landowners benefit from defense in proportion to the value of their holdings. The public goods argument becomes even more tenuous when military power is used on foreign soil to protect the economic interests of Americans abroad, which largely consist of large and influential corporations. They benefit disproportionately from military outlays.

One aim of military spending by the United States today is to extend sovereignty outside its borders. Since the prior goal of securing the heartland itself has been achieved, a high share of the discretionary or marginal military dollar should be imputed to marginal expansion or territoriality. It goes by names like policing the world, naval patrol, counter-insurgency, technical advice, surveillance, C.I.A., overseas bases, military aid, bringing democracy to the world, or humanitarian intervention.

During the Cold War, it was possible to rationalize military action at the periphery as a strategy to secure the U.S. heartland. President Eisenhower initially justified support for the government of South Vietnam in the 1950s to sustain the raw material base of Japan in Southeast Asia, given the need to maintain an alliance with Japan (Magdoff 1969: 53). Similar arguments were used to justify support for allies in Western Europe against Russian efforts after World War II to lure European countries into their sphere of influence (Ellis 1950). Walt Rostow in 1956 claimed that the economy of the U.S. and its allies was directly at stake if the U.S. did not take action to maintain the allegiance of developing countries (Magdoff 1969: 54). Another argument was that the U.S. military itself required certain raw materials, so access to them had to be protected.

There is a scintilla of truth in those security arguments. Yet a nation that dominates most of the world must be engaged in more than simple “defense.” We threaten others more than they threaten us from any objective, third-party view. In the middle of the Cold War, Edward Mason (1964: 20) wrote,

“The American economy is relatively invulnerable to a curtailment of foreign sources of raw material supply” (Mason 1964: 20).

It may be more vulnerable now, but U.S. gross imports of crude oil—about $80 billion in 2016—are small next to a defense budget of around $600 billion. The argument of needing to protect petroleum supply lines in order to fuel the armed forces is dangerously circular. A nation that acquires surplus resources around the world using gunboat diplomacy is aggressing. A nation whose philosophers preach that its way of life requires continuous expansion is dangerous in a finite world.

Truth is to be found in trade-offs. Official U.S. policy would have us believe that continental or homeland security is the primary end and that protection of offshore resources acquired by American firms is a means. That would mean trading off or sacrificing the interests of U.S. businesses for the security of the American public. Yet, the evidence presented below leads me to believe that U.S. policy makers often act as though expansion of investments were the ultimate aim. They use and trade off U.S. homeland security as a means to achieve that goal, and occasionally wager U.S. survival at the brink.

Who Benefits?

The main rationale for a standing army in the U.S. and bases overseas is the protection of Americans. Yet, the main beneficiaries of U.S. military power overseas are not ordinary  citizens. Extraterritoriality is not generally extended to U.S. citizens abroad in their capacity as persons. The U.S. tourist may repine in jail on the same basis as native miscreants, or worse. No one has suggested invading Thailand or Mexico to rescue U.S. drug offenders.

U.S. soldiers receive no special benefits either. William the Conqueror confiscated England from the losing team and parceled it among his warriors. The United States adopted the same method by granting land scrip for 160 acres to each veteran from the American Revolution to the Civil War, although much of the value was gained by private speculators throughout the 19th century. But in the 20th century, the draft was cheaper. Some of the soldiers for private military contractors in the last two decades may have received some of the spoils of war, but enlisted soldiers have received only a normal level of income while they give up career-building potential during their time away. Landowners in countries that lose to the U.S. are vulnerable to inroads by war-nourished property interests of the winning team, so there may result a postwar transfer of property, but it is not taken by soldiers. That would be looting. But Halliburton, KBR, Brown and Root, and its other subsidiaries made billions of dollars from military contracts in the Balkans and Iraq, many of them without competitive bidding, before, during, and after wars there. Following the American occupation of Iraq, several American oil-drilling companies, including Halliburton, signed contract for services worth billions of dollars (Kramer 2011).

The ability of Halliburton to gain from the losses of others in foreign wars is nothing new. If we want to understand who benefits from military spending, we need to look beyond them most recent wars and the familiar names of companies that have benefited from them. If we look back over a longer period and widen our search, we will discover various categories of people and companies that are able to gain from military expenditure far in excess of their meager contribution to the public fisc. The obvious beneficiaries of the extension of U.S. sovereignty are resource owners in America outre-mer, overseas America, with preference to U.S. nationals and native allies. Prominent classes of such beneficiaries are 1) caciques (defined below), 2) European and Japanese-based firms, and 3) multinational corporations.

Beneficiary 1: Caciques

 “Caciques” are native landowner-administrators (in less developed countries the two offices merge) who cooperate with U.S. forces and firms, and in return enjoy the tenure of land free of taxes that might otherwise be needed for their defense and other public functions. (The term “cacique” is of Arawak Indian or Haitian origin, and was used in former Spanish colonies.)

“Cacique” is a generic name, often applied to people playing this role, but the role is universal in the annals of mercantilism: ‘Zamindar” is the East Indian term. The metropolitan power does not rule directly at the lower echelons. It works with willing locals, permitting it to control some policies over a large area or population with a skeleton crew of metropolitans, and without being obnoxiously obtrusive. Another term with a similar meaning is “satrap,” a Persian term for a local ruling landowner, which was adopted by Alexander the Great and later Roman writers to designate the regional governors put in place by a central authority.

Conspicuous caciques have included Mr. Nguyen Van Thieu (image on the right) and the ruling group in South Vietnam; Mohammed Resa Pahlevi, the Shah of Iran; Francois (Papa Doc) Duvalier of Haiti; Col. Papadopoulos in Athens; Yahya Khan of Pakistan; Anastasio Somoza of Nicaragua; Manuel Noriega of Panama; Alejandro Lanusse of Argentina; Chiang Kai-shek of China; Mobutu Sese Seko of the Democratic Republic of the Congo; Francisco Franco of Spain; Alfredo Stroessner of Paraguay; King Hassan of Morocco; Lon Nol of Cambodia; Vang Pao of Laos; King Faisal of Saudi Arabia; Kittikachorn and Charausathien of Bangkok; Ramon Cruz of Honduras; Joaquin Balaguer in Santo Domingo; and so on around the world.

Cacique turnover is very high, but under and around them are the less visible, more permanent landowning-military oligarchs such as Las Catorce, the 14 families who own El Salvador; Las Diez y nueve of the Dominican Republic; Pakistan’s 22 families; Iran’s 1,000 families; and so on. These form the cacique matrix, which survives palace revolutions. Often they antedate American presence at least as a class and have some history of rule. Many were cultivated by European colonial governments. In the Western Hemisphere, the U.S. cultivated many of them under the Monroe Doctrine of 1823.

The U.S. government keeps them in power and enables them to extract wealth from their own people. Some also receive foreign aid from the U.S. One recent example is Colombia.  It was one of the largest recipients of U.S. military aid outside of the Middle East from 2000 to 2014, and it now trains military units from other Latin American countries. It has become a “net security exporter,” serving as a proxy for the United States on security issues, so the U.S. can use force to achieve foreign policy objectives in the region while maintaining “plausible deniability” (Tickner 2014). For example, when the U.S. wanted to assassinate Venezuelan President Hugo Chavez in 2002, a military unit from Colombia was sent in to do the job (Golinger and Whitney 2016).

With tacit support from the U.S. government, caciques treat the public lands and enterprises of their countries as their private domain, to be leased or sold to U.S. companies, with private gains on both sides. Thus, the cacique no more represents the interests of his country than overseas U.S. companies represent the interests of the average American.

The cacique also is relieved of pressure to win support from his country’s submerged classes. He need not educate them to build industry or increase the tax base or handle modern weapons. He can cooperate with the United States to discourage industry at home that might pull up wage levels. In the 1980s and 1990s, caciques in Mexico, Central America, the Philippines, and many other countries provided foreign corporations with free trade zones in which their labor force could be regimented and controlled, thereby providing a cheap source of labor for the companies.

The cacique is expected to open the door to major U.S. corporations. The cacique assigns the foreign firm valuable concessions and resources, especially minerals, routes, and communications. The gains made by foreign firms abroad are as isolated from the host economy as from the home economy; investment in export-oriented production or plantation agriculture does little to develop the local economy. As George Awudi (2002), representative of Friends of the Earth, Ghana, has pointed out:

The role of the mining industry in the economic development of Ghana is a suspect. Despite the over U$2 billion FDI attracted in mineral exploration and mine development during the last decade, representing over 56% of total FDI flows to the country (with the attendant increase in mineral export), the sector is yet to make any impact on the country’s overall economy. The sectors contribution to the country’s GDP is a meagre average of 1.5% since 1993. There is lack of linkage between the mineral sector and the rest of the internal economy. The massive investment has not been translated into significant increase in employment.

Thus, multinational corporations may technically be on the soil of a foreign country, but economically they operate in enclaves that are sealed off from the host country’s economy. They extract resources and leave behind polluted streams and clearcut forests, but they do little to help the local economy develop.

The less legal and more one-sided a grant to a multinational company is, the more the company depends on keeping the cacique in power. Some caciques, such as Mobutu in the Congo, the Shah in Iran, and Somoza in Nicaragua, were sustained almost entirely with foreign support. That arrangement benefited U.S. firms in the short run because it discouraged the cacique from reneging on deals. But it was seldom successful in the long run. Once the cacique died or was deposed, the situation often changed with a new regime. Thus, force alone is not a durable basis of sustaining a relationship that depends on exploitation of another nation’s resources.

The cacique must accommodate U.S. military bases. In Latin America he is often graduated from U.S. Army and Air Force Southern Command schools in Panama or from the Western Hemisphere Institute for Security Cooperation (WHINSEC), formerly known as the U.S. Army School of the Americas (SOA). Cacique governance is not likely, therefore, to be very popular at home, and U.S. aid is used for internal security.

The location of the Southern Command and the Panama Canal makes that country’s complete subservience to the U.S. essential in the minds of American military leaders. As a result of the strategic importance of the canal, Panama has been a client state since it broke away from Colombia in 1903 with assistance from the U.S. That is why Manuel Noriega, dictator of Panama, was deposed in 1989 when he demonstrated some level of independence from U.S. policy. The previous dictator, Omar Torrijos, was likely assassinated for his refusal to toe the line with the U.S. (Perkins 2004: Ch. 10). The pattern of supporting compliant caciques and removing ones who are not has deep roots. U.S. Defense Secretary Robert McNamara testified in 1968 that the primary objective in Latin America was to aid “indigenous military and paramilitary forces capable of providing, in conjunction with police and other security forces, the needed domestic security” (Magdoff 1969: 121). Thus, the purpose of military aid is not to combat foreign enemies but to prop up the regimes of caciques when they do as they are told and to end them when they begin acting on their own initiative.

The cost in U.S. force to secure cacique tenure varies with circumstances. It may run as high as the Vietnam War. Before the United States came, the Viet Minh had driven away the landlords. President Diem, financed by the U.S., had a primary objective of restoring this lost tenure, calling it “land reform,” but it was just the opposite. Unjust land tenure arrangements were the main source of Viet Cong support in the rural south (Scheer 1965: 48-50). According to Prosterman (1967), the landlords rode back to the countryside on the jeeps of U.S. soldiers to collect rent from peasants. Yet, even as the U.S. openly aided landlords, the government of South Vietnam ceased collecting direct taxes from rich farmers, claiming it was too difficult. In order to retain power, a cacique regime sides with the landlords and allows them to exploit peasants and laborers. To the downtrodden, exploitation by local landlords is then tied to the presence of the U.S. military and the American corporations it protects. Even if foreign corporations do not directly exploit people in the host country, their military protectors openly support the people who do take advantage of the poor. This is how the American government and American corporations have gained so much hatred around the world.

Beneficiary 2: European and Japanese-based firms

Citizens and corporations of older European metropolitan nations retain large holdings behind the “protective” shield of the U.S. military. Even Spaniards retain sugar plantations and refineries in the Philippines. European title-holders to land and water throughout Africa rely in part on the U.S. military to back up their claims. French landowners were able to retain their rubber plantations and rice fields in Vietnam, as long as the U.S. military was there to protect them. National oil companies, such as Shell and British Petroleum. U.S. diplomats recognized decades ago the American interest in sustaining older colonial bases as a gesture of goodwill toward allies, even as American corporations gained the most favorable treatment. Such as gesture was particularly important in countries where U.S. holdings displaced European ones.

In some ways, European nations without a strong military presence in the world function like caciques themselves. That was particularly true during the Cold War, when nations were under pressure to choose sides, but that relationship still persists in muted form. Caciquism is a matter of degree. Given the complexity of partnerships and other forms of interlocking interests, many of the firms in Europe that benefit from U. S. military support are subsidiaries of U.S. corporations already or are partially owned by them. Others are closely allied in cartels which the Marshall Plan did little to weaken and much to support (Engler 1961: 254).

The situation is perhaps even clearer in East Asia, where the U.S. became involved in two land wars to demonstrate a commitment to allies. The U.S. prevented Japan from arming itself again after World War II, and in return the U.S. protected Japanese business interests in the region, even if U.S. firms receive advantages. The entry of China into the power equation of East Asia has made relationships more complex, but the U.S. continues to support Japan and South Korea.

Beneficiary 3: Multinational Corporations

The primary beneficiaries of U.S. military policy are multinational corporations, particularly ones that are based are based in the U.S. Any U.S. national owning land offshore is a potential multinational, but most U.S.-owned offshore lands are in a few hands, as we will see. As corporate shares are owned internationally, the distinction between American-owned and other corporations becomes increasingly one only of degree. Giant corporations also own assets everywhere. There is an international comity of property which transcends national loyalty, and when one’s treasure is scattered around the world, so may one’s heart be, and one’s residence, and one’s social peer and reference groups. The United States is useful as a police force, and so far has been willing to be used as such, being generally partial to subsidiaries of corporations with U.S. charters. I will give primary attention to these U.S.-based interests.

One should not equate them with the United States or even with “U.S. business.” They are individual firms, vertically integrated, each holding its own individual resource base.  They are an international society, internationally owned, owning international assets, transcending nations. They cooperate in cartels, but they do not supply other firms except at a price and with efforts to expand supply into control. They do not supply the nation as such, and sell to the government only at market price, and frequently above it. They often control world markets and sell dearer inside the United States than outside.  They do not guarantee us supply in wartime, but depend on U.S. forces for that even in peacetime. They have achieved virtual tax exemption for their offshore holdings.

The Nature of the Benefits

Cheap Labor

The umbrella of U.S. military protection enables companies that acquire resources abroad to tap a low-wage workforce that will not be demanding. That is a great advantage to U.S. firms that own mineral reserves, plantations, timber, communications systems, transport facilities, factories, and distribution networks. These firms are the world’s new absentee landlords. They own everywhere and they sell everywhere.

As a result of the overseas operations of American companies, the U.S. is an indirect importer of cheap labor, by outsourcing cheap-labor operations. Setting up a factory in China or Sri Lanka in order to hire cheap labor is the economic equivalent of investing in capital at home and importing workers from other countries to work at low wages. Tariff Code Item 807 has facilitated this, by limiting reimport duties to value added abroad. But the $2 billion output under Item 807 is only 1% or 2% of our offshore output. And labor-intensive offshore operations are not, by definition, property-using. They involve minimal commitment of capital, and minimal resource control. They feature quick recovery of small capital. They do not therefore require much U.S. force. In addition, they do not loom large in the exports of developing nations.”. About 84% of the exports of LDCs are extractive (Magdoff 1969: 97).

American corporations also rely on cheap foreign labor on U.S. soil. An estimated 11 million unauthorized aliens reside in the United States, of whom half are from Mexico (Passel and Cohn 2017). About 9 million of them are of working age. The corresponding estimate of the total number of people employed overseas in companies operated by foreign affiliates of American multinational corporations is around 16 million (S. P. Scott 2016: Table A2). Thus, foreign investment has a much greater impact on the loss of American jobs than immigration.

The effect of cheap labor on an industry depends on a factor seldom mentioned in popular discussion of either outsourcing or immigration—the capital intensity of an industry’s operations. Garment production is a labor-intensive occupation, for example. That means corporations producing garments are not only looking for countries such as Guatemala or Indonesia that have low labor costs. They also want assurances that the local government will quell labor unrest and prevent unions from organizing. To back up that assurance, host governments will be amenable to military support from the U.S. in case of armed insurrection.

By contrast, U.S. mining and petroleum workers are generally indifferent to the price of labor, because labor looms small among their costs (Gaffney 1967: 409-413). Mines or oilfields with high costs of extraction require a lot of capital relative to labor. In locations with relatively new fields or ones with deposits nearer the surface, lifting costs, including capital, are far lower. In general, extractive industries are capital intensive, not labor intensive. For example, Creole Petroleum, Exxon’s Venezuela arm, in 1960 paid $3.19 in dividends for each $1 of wages and salaries (O’Connor 1962: 8; Rollins 1970: 186). The prime concerns of U.S. extractors are tenure, taxes, and lax environmental rules. In that situation, the U.S. may eventually be called to use force to persuade host governments to grant free access to minerals at low tax rates and with few environmental rules.

Enormous asset growth

The net value of assets owned by America outre-mer has come from four main sources: net capital flows into overseas investments; plow-backs or re-investment of profits; appropriation; and appreciation. The gross value of what is controlled also rises as U.S. firms borrow abroad. For a very small initial investment, American companies abroad have pyramided their assets, largely due to appreciation in the value of resources. The method by which corporate assets grew so rapidly may come as a surprise. It was not so much from wise investment or excellent management. The major source of growth was the appreciation of asset values, mostly minerals and land, along with reinvestment of profits. This required no effort except a small initial investment that then grew on its own.

To observe the process of asset growth with few distractions, we go back in time to the decades in which mineral deposits and other assets were acquired. In the years since 1990, when the U.S. became a debtor nation, the statistics on the net international position of the U.S are dominated by sovereign debt, which now overwhelms private assets. From the 1930s to the formation of OPEC, however, we can compare the roles of each source of growth to see clearly that appreciation was the key factor.

First, net reported capital flows were quite small, so the explanation for asset growth does not arise primarily from ordinary returns on investment. Foreign direct investment by Americans was well under $1 billion yearly until 1956, when it jumped to a new level of about $1.5 billion (Krause and Dam 1964: 5, 64, 69; Nisbet 1970). The book value of U.S. private investment abroad was only $37 billion in 1962 (Krause and Dam 1964: 64). That number was far below the market value of foreign holdings, as we shall see below. In any case, most of that came from reinvestment (Kindleberger 1969: 7). Return flows were disproportionately large, around $3 billion, and income larger yet, because over half of reported income was plowed back, and reported income was understated by inflating depletion and depreciation. Even the return flows were too high for the cumulated capital outflows, unless at implausibly high rates of return.

Since so much money was flowing back to the U.S. from minimal foreign investments, the high return flows betrayed the presence of a larger base than could result from cumulated capital flows, suggesting a large role for plowbacks, appropriation, and appreciation.

Since World War II, U.S. policy in the Middle East has been premised on protecting the huge U.S. investment in oil. But what is this huge investment, and whence? Engler (1961: 222) records Bahrein Petroleum Co., Ltd. as having had an original capital of $100,000. In 15 years, spanning World War II, it accumulated profits and surplus of $91 million. Caltex, a Bahamian-chartered child of Texaco and Socal, set up to market Bahrein oil, in ten years accumulated $25 million from an original $1 million investment. These rates of return may be extreme cases, but they do suggest the relative importance of plowbacks, appropriation, and appreciation. Indeed they may omit the last two.

The story of Aramco’s dramatic increase in value exemplifies how asset growth in mineral deposits grew at an extraordinary rate over period of 40 years. The forebear of Aramco was organized in 1933 with a capital of $100,000. In 1947 its assets were reported at $150 million (Mikesell and Chenery 1949: 55-56, n. 31). Actually, in 1947 Esso and Socony Mobil paid $101 million for 40% of Aramco, indicating a total value around $250 million. The Middle East was not at that time very secure, and the willingness of U.S. taxpayers to police the world not yet established. In 1957, F.A. Davis testified that Aramco had netted $280 million after all taxes and royalties (Engler 1961: 224).  Capitalizing at 6%, that flow of net income was worth nearly $5 billion, not counting its projected growth. Thus the value of Aramco went from $100,000 to at least $5 billion in just over 20 years.

Looking at returns on all oil investments the Middle East from 1947 to 1962, the story is the same, although not as dramatic as Aramco. Capital exported for exploration amounted to less then $3 billion. The net annual return by 1964 was $1 billion and rising rapidly (Tanzer 1969: 45-47, 131). It would seem that appropriation and appreciation loomed large. Or, as the American Enterprise Association (1957: 2 n. 2, 21) put it:

None of the private foreign investment figures allow for increases in the value of direct investment attributable to changes in profitability; … book values … may represent half or less of market values.

Petroleum might seem to be a special case because of its singular importance in fueling economic growth in the middle of the 20th century. However, other indices of offshore asset accumulation are also extremely large next to cumulated capital investments. We shall look at four such indices: 1) return flow on income, 2) output, 3) earnings, and 4) market power. All of these indices point in one direction: the high rate of economic growth of the United States in the middle of the 20th century was due as much or more to the increased value of corporate assets abroad (particularly mineral assets) as to industrial development at home. Since much of that value added came at the expense of the host countries where the raw materials were located, it is not surprising that the U.S. military was instrumental in blocking nationalist movements that would have claimed that value for the nations where the oil and other resources were located.

We must keep in mind that the period in question was the final stage of formal colonial rule in much of the world and the beginning of formal independence, when methods were devised to perpetuate the economic aspects of colonialism.

The first index of the huge volume of overseas assets is the return flow of income. We have already observed this in relation to Aramco and other oil production, where the value of the asset grew far more rapidly than reported income. Since reported income is taxable, it should come as no surprise that there are various means of disguising it: by expensing exploration and development investments, omitting unrealized capital gains, accelerating depreciation during a period of growth, and taking percentage depletion not limited by cost. By grossly understating income, corporations were able to hide the extent to which a net flow of economic value was transferred from developing countries to the United States. Since less value derived from original capital investments than from appreciation of assets, the corporations involved had reason to hide the source of their profits to avoid antagonizing the countries in which they operated.

A second index is output. By the middle of the 1960s, the value added each year by U.S. corporations in other countries was at least $100 billion, making it the third fourth largest economy in the world (Model 1967: 640-41). But $100 billion of output from $37 billion in capital assets would mean a capital-output ratio of 0.37, which is too low to believe. For domestic U.S. production in the period after WWII, the capital-output ratio was around 1.9 (La Tourette 1969: 44). That would imply around $190 billion in American-owned assets abroad were needed to generate $100 billion in output. As an indicator of the relative importance of international production by U.S. companies compared to production in the U.S. for export, we might note that $100 billion in output from American subsidiaries abroad was three times larger than exports from the United States in 1965 (US Census Bureau 2017). Thus, overseas production weighed heavily in the American economy.

Inferring the scale of assets from the capital-output ratio for the economy as a whole underestimates the true extent of foreign asset holdings by U.S. companies in the period after World War II. Industries devoted to raw material extraction used about twice as much capital per unit of output than manufacturing industries (Kuznets 1961: 209).

Mineral holdings are capital and resource-intensive. That is especially true of large offshore holdings by American mining corporations. Large firms, that is, one’s with the highest value assets, use more property to produce a unit of output than smaller ones. This reveals the relatively low productivity of the largest companies, which can afford to be inefficient because of their political connections and their market size. Therefore, we can be confident on theoretical grounds that the assets of large multinational corporations far exceed what their annual output would suggest. In a truly competitive environment, the inefficient use of capital by large corporations would be penalized by the loss of market share, but under present conditions, they are under no pressure to become more efficient.

The mineral deposits of U.S. companies abroad are generally measured in terms of the years of life of the in situ reserves: how many years they can be extracted at present rates. Here are some examples of these massive holdings in the 1960s:

• U. S. Steel had 100 years of iron ore (Martin 1967:126).


• Three U.S. firms (Alcan, Kaiser and Reynolds) held most of the reserves of Jamaican bauxite from the 1940s to 1971, and those same holdings provided several decades of continued bauxite mining to later companies (Davis 2012).


• Lumber firms often hold more than half a century’s timber reserve behind a mill (based on this author’s personal experience).


• World oil reserves were more than 35 times annual output in the 1960s (Gaffney1967: 389). The international majors held 45 years of reserves; smaller companies held 24 years of reserves (Tanzer 1969:45-47).

Again, we see that large extractive companies are top-heavy with both capital and raw materials. Those mineral deposits or stands of timber were, in many cases, the single largest asset held by American corporations in other countries, which means that military support to protect their property rights was primarily oriented toward land-based assets, not capital.

A third index of overseas asset holdings is earnings. These are a closer index to asset values than is gross output, since earnings come primarily from assets, rather than labor.  In 1965, reported earnings from corporate foreign investment were $8 billion, compared to $36 billion domestic (Magdoff 1969: 183). As noted earlier, various accounting techniques allowed earnings to be underreported, and that was especially true for minerals. Moreover, a large share of offshore income comes as unrealized capital gains which are not even counted as part of gross product or as taxable income. The value of minerals generally appreciates between acquisition and use, but that appreciation does not appear in data on output or earnings.

A fourth index is market power. U.S. firms dominated world markets for much of the 20th century far more than their small capital investments could possibly explain. In the years before the U.S. corporations set up assembly plants along the U.S.-Mexico border or Indonesia or Sri Lanka, U.S. holdings abroad were concentrated in mining and banking, communications and manufacturing—not in local services. Just as a corporation can dominate a small town, so U.S.-owned factories had influence beyond their own value in native economies.

The importance of appropriation and appreciation relative to actual capital outlays was charmingly expressed by Abraham Chayes, State Department legal adviser, in testimony he gave in 1964: “The fact is the Europeans are anxious to put up a greater share of the money than we think they are entitled to” (cited in Phillips 1969: 197). Those are words to ponder. Mr. Chayes was indirectly acknowledging that a major source of American economic power in the world was the ability to “get in on the ground floor” by claiming assets that would appreciate in value.

Since claiming those assets is as much a matter of power as of foresight, he was implicitly acknowledging the background role of the military in propping up the patterns of ownership established by American corporations.

Concentration of ownership

Another characteristic of the beneficiaries of American military power overseas is that they are relatively few in number. In other words, ownership of U.S. foreign holdings in the post-war period was highly concentrated (AEA 1957: 2).

Absentee ownership is a certain sign of large investors. Businesses with small amounts of capital stay close to their owners, who use capital and to complement their own labor.

Businesses with limited assets invest in marginal locations in projects with rapidly depreciating capital that frequently turns over and is renewed, where the ratio of management input to capital is high.

Companies that have large concentrations of capital move into offshore interests for the opposite set of reasons. They have surplus capital and a management bottleneck. They favor assets requiring minimal management per dollar of capital. Resource industries with high reserve/output ratios are an excellent way to accumulate large amounts of capital in projects with slow capital turnover. They can minimize the management effort required to renew capital as it depreciates. Larger firms also enjoy economies of scale in influencing government, including the State Department, the C.I.A., and the Pentagon.

Accordingly, many empirical studies have shown that absentee investment is large investment. For example the U.S. Census (1901: 310, Table 22, 314, Table 24) showed that:

• In-county landlords averaged 85 acres;


• out-of-county but in-state landlords, 126 acres;


• out-of-state but U.S. landlords, 159 acres.


• The acreage of foreign landlords was the most concentrated: 28 percent of acreage belonged to those holding over 2500 acres, compared to 10 percent for U.S.-based landlords.

The same pattern of absentee owners having disproportionate amount of property still holds in many different parts of the economy, but it is rarely measured. The largest holders of any significant asset are those wealthy enough to diversify their assets over a wide geographic range. The fewer assets a business has, the closer it sticks to home, and vice versa. In 1950, 10 firms held 40 percent of U.S. assets abroad (Mikesell 1957: 23). In 1957, 45 firms held 57% of U.S. direct foreign investment (Magdoff 1969: 192-93; Phillips 1969: 188). Global concentration of asset ownership by absentees fit the pattern of the U.S. Census of 1900. In the oil industry, the domestic companies were small independents. At the other end of the scale were the seven sisters, the international majors who dominated the world. Twenty-four U.S. oil firms had about 93 percent of U.S.-owned holdings abroad (Magdoff 1969: 193). Other minerals were comparable. Two U.S. firms produced 90 percent of Chile’s copper; three mined 83 percent of Peru’s copper; two controlled 100 percent of Zambia’s copper; one Belgian firm controlled 100 percent of Congo’s copper; and the top three nickel producers have 95 percent of the world market (Mikesell 1971a: 10; BW 1971a).

How Were Benefits Received?

Thus far, we have asked only about the nature of the benefits gained historically by American corporations with overseas subsidiaries. The primary benefit was the chance to acquire massive holdings of raw materials with little capital and then to make billions of dollars through their appreciation in value. That simple formula was the basis of the extreme concentration of wealth on a global basis of the fortunes built up by American multinational corporations during the Cold War period. That is why most of corporate investments in Latin America were in natural resources (Fitzgerald 2015: 407). In more recent decades, the formula has expanded to include American manufacturing companies that move to countries with low wage rates. But asset growth continues to be the primary source of long-term profits for extractive companies, in contrast to manufacturers. Thus, we will continue to focus on the benefits derived from acquiring ownership of land, minerals, and timber in other countries.

In this section, we turn from asking what the benefits were to asking about the process by which they were gained. This will take us much more deeply into the history of U.S. foreign policy and the use of military force to gain concessions from host countries.

Securing tenure: making the world “safe” for investment

U.S. nationals have benefited from military spending in their capacity as owners of property in foreign lands, especially lands of turbulent political conditions where U.S. forces constituted an important part of the police force. Protection of existing property is the most obvious part of this benefit. A number of military interventions in other countries in the 1950s and 1960s had this character:

• The CIA’s coup against Prime Minister Mohammed Mossadegh in Iran in 1953 protected British interests by overturning the nationalization of the Anglo Iranian Oil Company. However, it was also the “first step toward the reversal of the British and American positions in the Middle East, which involved the U.S. replacing the British as the hegemonic power in Iran and the entire region (Heiss 1997: 4).


• In 1954, the CIA overthrew Guatemalan President Jacobo Arbenz Guzman. The United Fruit Company (UFCo, now Chiquita Banana) instigated this action because Arbenz had confiscated uncultivated lands from the company and offered compensation based on UFCo’s self-assessed value. The assessed value was only about 4 percent of market value, but that was the basis on which UFCo had been paying taxes. When the CIA deposed Arbenz, Guatemala returned to its normal condition of exploitation (Handy 1994: 171-173). Normal for Guatemala was a situation in which UFCo controlled 42 percent of the land, much of it idle, owned the port and all of the railways, and paid no taxes on income or imports (Cook 1981:221).


• On July 15, 1958, the U.S. sent troops to Lebanon, and British sent troops to Jordan, but the true reasons were not made public. In 1949, to gain an essential right-of-way for the Trans-Arabian pipeline (TAPLINE) through Syria, the CIA helped overthrow the government and supported one unpopular regime after another (Little 1990: 55-56). TAPLINE was then able to transport oil from Iraq and Saudi Arabia through Jordan and Syria, with Lebanon as the terminus on the Mediterranean Sea. By 1958, the pro-Western government of Syria was gone, and Lebanon was under pressure to join the pan-Arab movement. A left-wing coup in Iraq on July 14, 1958 triggered fears in Washington and London about the potential nationalization of oil fields in that country. Thus, sending troops into Lebanon was a show of force to all Middle East leaders at minimal cost. As the U.S. Secretary of State, John Foster Dulles, said in a memo to oil company executives: “Nationalization of this kind of asset [oil in Iraq], impressed with international interest, goes far beyond the compensation of shareholders alone and should call for international intervention” (quoted in Fleming 1961: 924). Sending U.S. troops into Lebanon was a message that the U.S might send an expeditionary force unless “Iraq respects Western oil interests” (Engler 1961: 264; Tanzer 311);


• In 1965, President Lyndon Johnson sent U.S. troops into the Dominican Republic (D.R.) who stayed for over a year to quell a popular uprising that sought to restore Juan Bosch to the presidency, for which he had been elected. Under President Rafael Trujillo, U.S. mining interests were directly negotiated with the president and his trusted American adviser, William Pawley, who himself held a controlling interest in nickel mines and other businesses in D.R. (Ornes 1958: 165; Pawley and Tryon [1976] 1990: Ch. 20). After Trujillo’s assassination in 1961 and several years of a military junta, Juan Bosch was elected president in February 1963, but a U.S.-organized coup deposed him in September 1963 (Murphy 1986). The U.S. then backed Joaquin Balaguer, who served as president from 1966 to 1978, and 1986 to 1996. Whereas Bosch sought to nationalize foreign companies, Balaguer welcomed foreign investors and American aid (News24 2000). The true winner of the turmoil in D.R. during the 1960s was Gulf & Western, an American company that dominated the local economy from 1967 to 1984 (Hollie 1984).


• The Vietnam War was also about the protection of resource claims, but not primarily the offshore leases that President Thieu granted to twenty firms. Many of the important battles of World War II were fought for control of oil, but not directly at the site of the oilfields. In July1941, President Roosevelt placed an embargo on oil shipments to Japan, and England and the Netherlands also stopped shipments from their colonies in Asia. That action provoked the Japanese to attack Pearl Harbor in December 1941. One might argue that the entire war in the Pacific was over control of oil from Indonesia, although little fighting took place there. In 1945, when the war was over and the Dutch reclaimed Indonesia as their colony, the only issue raised by Secretary of State Cordell Hull was that U.S. oil companies retain their tenures there (Gardner 1964: 189). Thus, when the U.S. drew the line in 1963 and decided to fight to retain control over Vietnam, the real prize at stake was Indonesia. The Japanese took over Indonesia in 1942, and the U.S. did not want a Communist regime to replicate that experience in the 1960s. That also explains why the U.S. aided the coup in Indonesia in 1965 in which 500,000 supposed communist sympathizers were slaughtered. The oil had to be in the hands of a reliable regime.

There are 800 U.S. air, naval and army bases around the world today that cost the U.S. around $70 to $120 billion per year, not including bases in recent war zones (Iraq, Afghanistan).² Their very existence implies a threat to anyone who challenges U.S.-held mineral or land tenures. In 1975, the U.S. already had 375 major bases and 3,000 minor installations around the world (Vine 2015: 6, 9, 40). Since World War II, they have always targeted areas where U.S.-based corporations claim rights to land and minerals. National defense was officially equated with protection of mineral rights in other countries. The International Development Advisory Board (IDAB) (1951: 18,46), an official advisory council to President Harry Truman, concluded a report on how to improve the economies of developing nations with exports, with several recommendations, including one about procuring strategic minerals:

[A new U.S. agency should seek to] safeguard and increase the production and flow of all necessary imports to this country, particularly of critical and strategic materials the production of which can be spurred by sound development work…. Of the 15 basic minerals, the United States is relatively self-sufficient in only six….The reserves of the some of the most critical and strategic materials which we have been stock-piling against the risk of war are likely to prove sorely inadequate were war to break out. … Since three-quarters of the imported materials included in the stock-pile program come from the underdeveloped areas, it is to those countries that we must look for the bulk of any possible increase in these supplies. The loss of any of these materials … would be the equivalent of a grave military setback.

The economic and military imperialism implicit above became even clearer when the IDAB (1951: 53) considered the special case of Japan, a country the U.S. strongly supported as a strategic ally in East Asia:

The case of Japan presents a particularly drastic threat. Japan has already been cut off from her prewar sources of materials in North China and Manchuria. Were Southeast Asia to fall, the economic base on which Japan’s future depends would have to be fundamentally recast.

The losses they are recounting are the former colonies of Japan, from which it was able to extract resources without payment and with impunity. One might easily infer that this was the sort of relationship a presidential advisory panel was recommending for the U.S.

Creating New Tenure in New Resources

 The benefits described thus far all have a static character. In each case, military intervention merely protected an existing corporate asset. But American companies operating