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The Rise of Offshore Business

Here we enter into getting a flash of history from one perspective, to understand some of the domains in which business deals take place.  There are various market places, in which various types of business transactions occur.

One of the most relevant ones to contextualise a globalised trading system is that of Offshore business.  An offshore company is a legal entity established in a tax haven or offshore financial center, being protected by specific legislation which guarantees a status of partial or full tax exemption.

offshore business

To understand the trade between countries and the establishment of protocols, we must dip into the history of the Second World War.  Lord Robert Skidelsky is regarded by many as the authorative biographer of John Maynard Keynes – a great and brilliant thinker involved in economics.  Skidelsky argues that, for the United Kingdom, the Second World War had been two wars: one fought by Winston Churchill against the physical onslaught of Nazi Germany, and the other fought by John Maynard Keynes against the financial strategy of the United States of America to diminish the standing of the UK.

 

“Churchill fought to preserve Britain and its empire against Nazi Germany; Keynes fought to preserve Brtain as a Great Power against the United States.  The war against Germany was won; but in its effort to win it, Britain spent its resources so heavily that it was destined to lose both its empire and its Great Power status.” [Robert Skidelsky, John Maynard Keynes: Fighting for Britain, 1937-1946, Mcmillan, 2002, pxv]

Treasure Islands

There is no doubt that the two countries were locked in titanic struggle for financial dominance, and it was long after the war that the two powers would work out an arrangement in terms of trade: This was the construction of an international system that Keynes helped design involving close working relationships and tight control over flows of capital between them; this was eventually to give way to the modern fragmented laissez-faire offshore system [page 64, Treasure Islands – Tax Havens and the Men Who Stole The World, Nicholas Shaxson, Vintage Books, ISBN: 9780099541721]

The Great Depression that had started in 1929 was the culmination of a long period of deregulation and economic freedom and a great bull market built on an orgy of debt and economic inequality.  In the late throes of the boom the richest 24,000 Americans, for example, received 630 times as much income on average as the poorest six million families, and the top 1 per cent of people received nearly a quarter of all the income – a proportion slightly greater than the inequalities at the onset of the global crisis in 2007.

In those days there was not a coherent interconnected offshore system, just a few foreign jurisdictions that wealthy elites used to hide their wealth and income from their tax authorities.

Rich Europeans primarily used Switzerland, while wealthy UK citizens used the Channel Islands and the Isle of Man.  In the US, Henry Morgenthau, the then US Treasury secretary wrote to the president about taking action where American tax evaders had set up foreign personal holding corporations in places where ‘taxes are low and corporation laws lax’ such as the Bahamas, Panama and Newfoundland.

The letter went on “…the stockholders have resorted to all manner of devices to prevent the acquisition of information regarding their companies. The companies are frequently organized through foreign lawyers, with dummy incorporators and dummy directors, so that the names of the real parties in interest do not appear.  The ordinary salaried man and the small merchant does nto resort to these or similar devices.  Legalized avoidance or evasion by the so-called leaders of the business community… throws an additional burden upon other members of the community who are less able to bear it, and who are already cheerfully bearing their fair share“(page 68 Treasure Islands – Tax Havens and the Men Who Stole The World, Nicholas Shaxson, Vintage Books, ISBN: 9780099541721)

shares

Investment in factories, training, research, wages and so on – the things that make society richer – are one thing.  Financial investments and capital are quite another.  It is often assumed that when one company buys another, some kind of capital investment is taking place.  Most of the time, these purchases may have nothing to do with new real investment at all.  When a company or government sells bonds or shares, investors hand over money in exchnage for pieces of paper that give the holder title to a future stream of income.

When bonds or shares are first issued, savings are mobilized, funds are raised, and they flow into productive investment.  This is generally healthy.  Next, however, a secondary market appears, where these shares and bonds are traded.  These trades do not directly contribute to productive investment; they merely shuffle ownership.  Well over 95 per cent of purchases in global markets today consist of this kind of secondary activity, rather than in real investment. (page 69 Treasure Islands – Tax Havens and the Men Who Stole The World, Nicholas Shaxson, Vintage Books, ISBN: 9780099541721)

And Keynes explained what happens when you start to separate real business operations from their owners – the holders of these pieces of paper – and especially when this happens across borders:

‘When the same principle is applied internationally,’ Keynes, continued, ‘it is, in times of stress, intolerable – I am irresponsible towards what I own, and those who operate what I own are irresponsible towards me.’  There may be some theoretical calculation showing that shuffling pieces of paper around the world according to market supply and demand is efficient, but experience is accumulating that remoteness between ownership and operation is an evil in the relations among men, likely or certain in the long run to set up strains and enmities which will bring to nought the financial calculation’.

 

Question 1: Considering the position of John Maynard Keynes on the effect distance has on the real business, try and write down reasons for why he might have thought degrees of separation are best avoided.

Question 2: Create a list of 5 situations where there are tangible degrees of separation between the ‘real business owners’ and ‘business operations’; for example the distance between the owner of a share and the product it is tied to. I may theoretically own a share in gold mining operations in South Africa, however I live in the United Kingdom never having visited the place where the gold is extracted from the ground.

 

This is part of a series of articles and exercises exploring food speculation and its relation to famine:

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