7

7. THE MONETARY SYSTEM AND THE CONTRADICTIONS OF CAPITALISM

The beginning of the 1950s may be regarded as a new stage in the history of the postwar monetary and financial system of capitalism. By that time the quite prolonged period of its build-up had ended, international financial organisations had begun to function and the financial might of the United States had reached its zenith. At the end of the 1940s the American stock of monetary gold reached its maximum level, about $ 25,000 million, or 8 times greater than that of the six European countries which later formed the Common Market and Britain combined.

World currency circulation needed liquid assets and presented a mounting demand for American dollars, which replaced the gold that the capitalist countries were short of owing to its concentration in the United States. The uneven distribution of gold between the capitalist countries was greater than ever before in the history of world circulation. Here are the relevant figures. World monetary gold (exclusive of socialist countries) in 1949 totalled $ 35,055 million, of which $ 24,563 million, or 70 per cent, were in the United States; $9,041 million, or about 25.8 per cent, was held in other capitalist countries, and $ 1,451 million, or about 4.2 per cent, was at the disposal of international institutions.1 There is nothing surprising in the fact that under these conditions more than $ 8,200 million of liquid dollar holdings remained firmly in the foreign exchange reserves of other countries and at the disposal of international institutions.2 Nevertheless world currency circulation ran up against huge difficulties, which US financial circles tried to exploit. It is during this period that the vaunted formula "the dollar is as good as gold" gained wide acknowledgement.

Awareness of its financial and economic might impelled US imperialism to military and political adventures, the first of which was the war in Korea started in the summer of 1950.

During the Korean War (1950-1953) the monetary and financial system of capitalism, based on the Bretton Woods Agreements, was for the first time extensively utilised in the interests of US capital as a weapon of its aggressive policy.

The war in Korea, despite the expectations of the Pentagon strategists, was by no means a triumphant march to the sound of drums and pipes. It demanded great exertions, big budget expenses and much foreign exchange to cover military spending abroad. Suffice it to say, for example, that the expenditure of foreign currency through the channels of the US military establishment in Japan during the Korean War increased fourfold. According to figures provided by the Bank of Japan, in three years (1951-1953) receipts of foreign exchange through the channels of the US military establishment (military purchases, spending by US servicemen and so on) contributed about $2,000 million to Japan's balance of payments. US military spending in Japan continued to remain at a high level, exceeding on the average $ 500 million annually up to the 1960s. At the beginning of the 1950s the American military expenditure in Western Europe and other countries likewise increased. This was linked with the formation of the aggressive NATO bloc (April 1949) under the aegis of American imperialism and the intensive setting up of US military bases in capitalist countries. That is why the so-called military expenditures abroad by the United States, i.e., the sums spent minus the income from the sale of war surplus stocks, etc., amounted on the average to $2,100 million annually in 1950-1956, to $2,800 million in 1956-1960, and reached $3,100 million in 19583 . As a result of the existing international monetary system all these expenditures were covered not by gold but by liquid liabilities of the United Stales or, to put it in more general terms, by dollars.

In postwar years, seeking to tie other capitalist countries as strongly as possible to the chariot of American imperialism, the US ruling circles rendered so-called military aid to those of them which were of special interest from the viewpoint of Pentagon strategy.

Thus, in the period between 1946 and 1949 military aid amounted to $206 million annually on average, while in the 1950s it exceeded an average of $2,400 million.4

In addition to investments of American capital abroad the expenditure for government ``aid'' and credits of a nonmilitary nature were added during this period. In 1951- 1957 they averaged annually almost as much as military aid–$2,358 million. After the end of the Second World War and up to 1957 the expenditure of the US Government on military and other aid exceeded $5,100 million annually in round figures.5

One may ask why the US ruling circles were so generous? It undoubtedly stemmed from the assumption that, with the help of broad trade and credit expansion and direct investments abroad, US capital would succeed in attaining a position in which the favourable balance of visible and invisible trade, together with the profits on capital abroad, would make the balance of payments favourable and then any danger of an excessive increase in liquid liabilities to foreign states would be eliminated.

Proceeding from these calculations, private American capital in all forms was widely invested abroad. Direct investments, loans and deposits of American capital in West European banks were rising. This was also facilitated by the fact that the rate of return on capital abroad, as a rule, was substantially higher than in the USA. It is for this reason that American deposits in West European banks, which came to be known as Eurodollars, gradually began to circulate between European banks and trading and industrial companies in the form of short-term loans which brought in a higher income both to the initial depositors and to those who borrowed Eurodollars. The rise of Eurodollars no doubt most conclusively corroborates the Marxist proposition about capital's search for superprofits regardless of national boundaries.

This is the only proper explanation for the origin and economic essence of Eurodollars, but, instead of this, Prof. M. Wasserman, an American economist, resorts to a long discourse, and hints that Eurodollars appeared because some banks of the East European socialist countries found it more convenient to keep their operational foreign exchange reserves in West European banks in dollars. But apparently sensing that his arguments carry no weight, he eventually admits that the deficit of the US balance of payments after 1950 and particularly beginning from 1958 onwards brought about a situation in which US "trading partners" were "gradually well supplied with dollars". This, in his opinion, "contributed to the development of overseas dollar markets".6 But this is exactly the penetration of American dollars in world circulation that is examined in this book. The only difference is that Wasserman repeats the official explanation of American monetary and financial policy in this period. In his opinion, the appearance of dollars in Europe was, as it were, some kind of a service to trading partners. Hence the use of the term ``supplied'' when ``implanted'' would have been more correct.

In this connection it is interesting to cite the view of the nature of Eurodollars which appeared in the press. Thus, Richard Mooney wrote in the Paris edition of The New York Times: "Eurodollars are a relatively new medium of international credit, in existence only a half-dozen years. Roughly defined, they are dollars deposited in foreign banks, mostly in Europe, and loaned from bank to bank and eventually to business customers.... They exist because they make extra money for lenders and borrowers. The lender, or original depositor of the dollars, earns higher interest than by depositing in the United States. For the borrower, the higher interest rates are still not so high, as he might have to pay for local funds.''7

The search for higher profit than could be obtained in the United States is connected with Eurodollars, as in general with American investments abroad. It is not surprising that, notwithstanding the continuous increase of investments of American capital abroad, the net repatriation of profits and interest on capital during the 1950s, according to the data of the Economic Report by President Kennedy to Congress, amounted annually to about $ 2,200 million. Instead of repatriating the profits on capital the financial tycoons preferred to reinvest them abroad.

Yet, after the Second World War, particularly in the 1950s, big changes took place in the position of the United States as a creditor country. This may be seen in Table 8.

Table 8 International Investment and Gold Position of the United States in 1949 and 1960 (millions of dollars, end of year)8

1949 1960
Assets..................... 55,200 89 , 201
of which: gold and short-term liquid assets...... 28,600 26,800
of which: Gold.................... 24,600 2,800
IMF subscription.............. 1,300 26,600
Short-term private liquid assets........ 17, 8( 0 4,1( 0 4,9,0 62,40(1
Long-term assets................ of which:
Direct investment.............. 10,700 4,900
other private investment........... 11,000 16,900
US Government claims ........... 9,800 32,700
Liabilities................. 12,600 17.000
liquid ................... of which: 44,700 2(i,200
Foreign official organisations........ 2,900 1,300
IMF .................... 400 4,600
Other international organisations........ 10,3,K) 2.6JO
Private...................' 1,400 9,610
Foreign and international holdings of US Government bonds and notes ............ 600 7,100
Long-term................... of which: 2.300 18,400
Direct investment in USA.......... 2,900 4,200
Other private investment.......... 38,300 6,900
Excess of assets over liabilities....... 11,500 44,500

Source: Economic Report of the President Transmitted Congress, January 1962, Washington, 1962, p. 151.

Table 8 discloses the essential aspects in the changes of the international financial position of the United States which occurred from the end of 1949 to 1960.

What stands out above all is the steep increase of direct investments of American capital abroad, from $ 10,700 million to $ 32,700 million, or three times. This results from the financial and economic expansion based on the privileged position of the dollar in the postwar monetary system of capitalism. The need for working capital compelled West European businessmen to allow the direct participation of US capital in their industrial companies, to give Americans a big part of the shares, and so on.

For the very same reason other long-term private investments of American capital abroad also increased from $4,900 million to $12,600 million. These were mostly special-purpose loans, investments in securities known as portfolio investments.

Foreign long-term investments in the United States grew at an incomparably smaller rate both in absolute and relative terms, and it is not they that called the tune. The main thing that characterises the weakening of US positions in the monetary and financial system of capitalism was that in the period we are examining the short-term liquid liabilities of US official and private institutions held by central and private foreign banks increased from $9,800 million to $26,200 million or 160 per cent. A considerable part of these liabilities were bank bills of exchange and bank notes, i.e., precisely the liabilities which could be presented, and actually were later presented, to be exchanged for American gold.

The US Administration sought solace in the fact that on the whole the country's assets exceeded its liabilities by $40,000 million. But this excess proved of no avail in rectifying the situation. With a higher rate of return abroad a more or less sizeable repatriation of American capital was out of the question. Moreover, the repatriation of long-term investments, especially direct investments in industry, is not an easy matter because they are in the form of fixed capital, industrial equipment, real estate, and so on. But utilising short-term liabilities, foreign financial circles mounted attacks–and not without success–on fort Knox, where the gold stock of the United States is kept. This led to a multifaceted process of changing the financial position of the United States in the capitalist world. The nature and movement of this process are shown in Table 9.

Table 9 Movement of World Gold Stock and Dollars Abroad (million dollars, end of year)

Year World gold stock Gold stock of the USA Gold stock of other countries Dollar holdings abroad
1949 35,055 24,563 9,041 8,226
1950 35,498 22,820 11,184 10,197
1951 35,664 22,873 11,261 10,173
1952 35,968 23,252 11,024 11,719
1953 36,396 22,091 12,603 12,739
1954 37,056 21,793 13,523 14,019
1955 37,716 21,753 14,155 15,230
1956 38,246 22,058 14,496 16,433
1957 38,960 22,857 14,923 16,600
1958 39,851 20,582 17,937 17,637
1959 40,332 19,746 18,677 20,055

Source: R. Triffin, Gold and Dollar Crisis. The Future of Convertibility, New Haven, 1960, p. 5.

Table 9 shows that during the 1950s the world gold stock steadily increased. Between 1950 and 1958 it rose by $4,796 million. In the first half of 1959 it grew by $481 million. Yet the movement of the gold reserves of the United States and of other capitalist countries was proceeding in opposite directions: the gold stock in the United States, notwithstanding fluctuations, decreased during this period by $3,981 million and in June 1959 by^even $4,813 million, while the reserves of other capitalist countries rose by $8,896 million at the end of 1958 and by $9,636 million in June 1959.

A comparison of these figures shows the gold stock of other capitalist countries increased not on account of American gold but chiefly due to the annual increase of production and its influx into monetary state reserves. American dollars which were kept in the official reserves of capitalist countries were also to a certain extent used for buying gold. For this reason, with the continuous increase of dollars abroad, chiefly in the official reserves and in banks, the gold stock in the United States also fluctuated. In 1956 and 1957 it even considerably increased as compared with the preceding two years. This brief rise gave way to a steep decrease at the end of 1958 and the beginning of 1959 which became continuous.

This turn was so threatening that the Eisenhower Administration tried to stop the outflow of American gold by administrative measures. But, naturally, this could not be successful, since the changes were a result of deep economic causes operating not only in the United States. Economists in the USA and other countries naturally sought to discover the reasons for the monetary crisis and to find a way out of the entangled situation. These were the motives that prompted Professor Robert Triffin to write the book Gold and Dollar Crisis. He was one of the first to understand "the absurdities associated with the use of national currencies as international reserves".9 Triffin reproached his "bright colleagues" for not fighting "with an opposite, and equally absurd, theory of a permanent arid untractable dollars glut.''10 He was referring to the dollar shortage, a notion which had dominated economic and^political thinking in the United States and abroad forjnore than 10 years before he wrote his book. He suggested^as a way out the internationalisation of money circulation, in fact, the creation of a world currency. As for Professor Triffin's reproaches against his "bright colleagues" and hints at the one-sidedness of economic and political thinking in the United States and other countries, they were correct in the main. This particularly applies to the US ruling circles.

It would be wrong to examine the monetary crisis only from the viewpoint of the financial and economic policy of the USA, however great its importance in this respect. Other factors too played quite a significant part in the development of the monetary crisis in postwar years into the trend that we are witnessing now. These factors were: expansion of world trade and other forms of economic relations on the basis of the increased industrial output of capitalist countries and a change in the alignment of forces in the capitalist world in general. These factors affected the world monetary system indirectly. They were mediated by foreign trade, the international movement of capital, internal money circulation and, lastly, the political situation in the capitalist world at the beginning of the 1960s. For example, quite a significant role was played by the militarist aspirations of some capitalist countries. Mention should first of all be made of the fact that in the 1950s, especially after the war in Korea, the militarist course of the US ruling circles had a clearly adverse effect on American exports, the most stable mainstay of the balance of payments. Thus, in 1953 world exports totalled $74,300 million, with US exports amounting to $15,782 million, or 21.2 per cent; in 1960 world exports were $113,600 million, the United States accounting for $20,584 million, or 18.1 per cent. In other words, the'growth of US exports lagged behind the world average. In the period we are examining world exports increased by 53 per cent and US exports by 30.4 per cent. During the same period exports from West European countries, notwithstanding the obvious lag of Britain, grew by 81 per cent. Even exports from Britain rose higher than the American figure–by 45 per cent.

If we compare US exports with those of the Common Market countries, the relative weakening of US positions stands out even more clearly. In 1953 the EEC countries accounted for 19 per cent of world exports, while in 1960 they surpassed US exports both in absolute and relative terms, reaching $29,733 million or more than 26 per cent of the total.

The export position of the USA was considerably weakened by the war in Korea and the aggressive aspirations of American imperialism in general. The same reasons cut the favourable foreign trade balance, which provided the basis for the balance of payments. The upshot of it has been a permanent balance-of-payments deficit.

Thus, while the favourable US balance of trade reached $6,892 million annually between 1946 and 1949, in 1950- 1954, (the period which included the war in Korea), it averaged $2,029 million, i.e., was cut by about 67 per cent. In 1955-1957 it rose to $4,476 million and then steadily declined up to the end of the 1950s. In 1959 exports exceeded imports by only $ 985 million. In view of this during the seven years prior to 1957 the US balance-of-payments deficit amounted to $1,500 million annually. In the next three years it averaged $3,700 million and in 1960 rose to $3,900 million.

It is no exaggeration to say that at the beginning of the 1960s the results of the US financial and economic policy offered no grounds for optimism. There was every reason for pessimistic forecasts, and the American press began to feature them.

The change in US exports and the deterioration of the balance of payments in the 1950s also altered the position of the United States in the world monetary system. The most general indicator in this respect are a country's reserves of gold and foreign exchange reflecting its payment position vis-a-vis the rest of the world and its financial and economic situation. Under capitalism a nation cannot have stable reserves of gold and convertible currency unless it is able to make ends meet in its external economic payments. This applies all the more to countries which joined the IMF and, as pointed out earlier, undertook to regulate the rate of their currency, not allowing any substantial deviation from the agreed parity in relation to the dollar. Without gold and exchange reserves such regulation is impossible without loans, including borrowing from the IMF. If the situation in the capitalist world is examined from this viewpoint, one cannot fail to notice the striking changes which occurred during the 1950s, namely, the weakening of the position of the United States and strengthening of the positions of some West European countries.

In 1951 the United States had a stock of monetary gold amounting to $ 22,873 million, or 64.3 per cent of the world total ($35,575 million).

In 1960 the world gold stock rose to $40,525 million while in the United States it decreased to $17,804 million, or 43.9 per cent of the total.

These figures show that in the 1950s the United States lost more than $5,000 million of its gold reserves. The weakening of its position in the currency circulation of the capitalist countries was all the more dangerous for the United States because the economy of other countries was growing at a faster pace. Some of them, especially the Common Market countries, on the contrary, during this time substantially increased their stock of gold and convertible currency, the selfsame dollars. Subsequently the Common Market gave considerable trouble to the US financial circles.

Before presenting the respective comparative data, one essential reservation should be made. When comparing monetary reserves, gold and foreign exchange in capitalist countries, it should be borne in mind that the United States as the "key currency" country formerly had only gold. It did not need foreign exchange because its own national currency could be used, if need be, for international settlements. This often enabled US financial agencies not to resort to gold in making such settlements, while other countries could not manage without gold. These countries, apart from Britain, enjoyed no such advantage. They could make external payments in their own currency if the partner wanted it; this, however, was not the rule but the exception. Therefore, the gold and exchange reserves of capitalist countries prior to the crisis always included convertible currency, dollars and pounds, and were actually equal to gold. Some of them, Japan, for example, had almost no gold and kept only foreign exchange in reserve.

As the position of the United States in the world monetary system weakened, its former advantage as the "key currency" country began to turn into the opposite: the United States had to spend a lot of gold to maintain the rate of the dollar. But the US ruling circles considered this to be a temporary phenomenon. Mistaking the wish for reality, they continued to use dollars extensively as an instrument of economic and political expansion.

Table 10, which shows the gold and foreign exchange reserves of the principal capitalist countries, gives a clear picture of the growing quantitative changes in the monetary sphere which were about to turn into a new quality.

Table 10 Change in the Gold and Exchange Reserves of the Financially Leading Capitalist Countries
(million dollars)

1951 1955 1960
Country Gold Foreign exchange Per cent of gold

World Reserves* ..... 35,575 20,950 63.0 37,620 24,970 60.1 40,525 33,700
United States ..... 22,873 100 21,753 100 17,804 100
Britain ......... 2,200 135 94.2 2,050 70 97.0 2,800 431 86.6
France ......... 597 19 96.9 942 970 49.2 1,641 429 80.0
Federal Republic of Germany 28 427 6.1 920 2,015 31.3 2,971 3,766 44.1
Italy ....... 333 441 43.0 352 815 30.1 2,203 876 71.5
Belgium ...... 635 419 60.2 928 219 81.0 1,170 252 82.3
Netherlands ...... 316 865 358 70.7 1,451 291 83.3
EEC .......... 1,909 1,306 59.3 4,007 4,377 47.7 9,396 5,614 62.3
Switzerland ....... 1,451 193 88.4 1,597 250 86.5 2,185 139 96.0
Canada ........ 842 984 46.2 1,134 776 59.3 885 951 48.2
Australia ....... 112 1,022 10 0 144 691 17.2 147 696 17.4
Republic of South Africa Sweden ......... 190 152 197 332 49.0 31.4 212 276 154 194 57.9 58.9 178 170 66 318 73.0 34.9
India .......... 247 1,698 12.7 247 1,619 13.2 247 423 37.0
Japan .......... 10 23 746 3.0 247 1,577 13.5
* Including reserves of international organisations

Source: United Nations Statistical Yearbook, 1961, N. Y., pp. 521-22.

During the 1950s the gold and exchange reserves increased quite swiftly on the whole. During the entire decade there was not a single year without a noticeable growth both in gold and other liquid assets. It is characteristic that the world gold stock in 1960 rose by $ 4,950 million as compared with 1951. If we add to this more than $5.000 million (the decrease in the gold reserves of the United States during this period) the conclusion may be drawn that other capitalist countries received at their disposal additional gold amounting to about $ 10,000 million. Newly-mined gold and that from the shrinking US reserves increased the gold stock in West European countries.

At the beginning of the 1950s the gold and exchange reserves of these countries were insignificant. The gold stock of the United States was several times greater than its reserves of gold and foreign exchange combined. In 1960 the difference was only $ 2,800 million. Moreover, it continued to decline; the American gold stock kept flowing out of the country, while the gold and exchange reserves of the Common Market countries were going up.

Britain, whose currency was devalued in 1949, noticeably increased its gold and exchange holdings. As a creditor country, it tried to stabilise its currency and rally together, on this basis, the sterling area countries, hoping to extend commerce in this zone with the help of trade preferences. The special position of the pound in this area offered Britain the privilege of utilising her currency in many cases for regulating the balance of payments, credits and so on. Moreover, in the 1950s London again became a big financial centre. A considerable part of the international gold, foreign exchange and credit operations were transacted via London. But the international brokerage functions of the British banks even in the 1950s were not reinforced by adequate economic growth and the expansion of commodity exports, which potentially threatened with financial and economic difficulties.

Switzerland held a special place. This country, which formally did not join the IMF, has played, and is playing, an important role in the financial affairs of the capitalist world.

The setting up and consolidation of the European Economic Community, or the Common Market, was an important event in international relations during this period. When this organisation was established, neither its organisers nor the US ruling circles could foresee the influence it would be able to exert on international currency circulation and credit relations. The emergence of the Common Market as a regional organisation ran counter to the global tendencies of American financial policy and, moreover, it created prerequisites for current reciprocal crediting of the Common Market countries in trade and other transactions, which reduced the need for circulation media. More favourable opportunities were created for settlements without cash. All this could not but reduce the need for liquid assets, including American dollars and Eurodollars, in relation to the growing circulation of goods. In their reciprocal financial and economic relations Common Market countries could manage without the London and New York financial centres. They resorted to their assistance in their relations with non-European countries.

France, not without success, whipped together her franc area, consisting of the formerly dependent African countries. This led directly to a decrease in the need for American dollars, which, as shown earlier, became firmly entrenched in Western Europe. Here is the crux of what is called the "dollar crisis" problem, around which discussions flared up among bourgeois economists and political leaders. In these discussions which assumed an international character the initiative was grasped by official representatives of the US ruling circles grouped around the White House. Considerable initiative was also displayed by President John F. Kennedy. The American approach was supported by international organisations.

The point of departure was the Keynes doctrine that it was possible and necessary to control the movement of capital in order to steer economic growth in the direction required, to accelerate or slow it down with the help of such instruments as the discount rate. Special significance was, and is, attached to the latter from the viewpoint of stimulating or curbing inflation tendencies. This, as will be subsequently shown, was a case of the unfulfilled good wishes to escape from the sphere of operation of capitalism's objective laws governing world currency circulation which began to exert an adverse influence.

• 1 Robert Triffin, Gold and Dollar Crisis. The Future of Convertibility, New Haven, 1960, p. 5.
• 2Robert Triffin, Gold and Dollar Grists. The Future of Convertibility, p. 5.
• 3Economic Report of the President Transmitted to the Congress, January 1962, Washington, 1962, p. 149.
• 4Shigetsugu Okumura, "The 'Dollar Crisis' and the United States Economy", Osaka City University Economic Review, Osaka, No. 4, 1968, p. 13.
• 5Ibid.
• 6M. Wasserman and others. International Finance, New York, 3, p. 46.
• 7The New York Times, Paris, June 23, 1964.
• 8(Again, I cannot guarantee to have always correctly copied the tables - note by NR.)
• 9Robert Triffin, op. cit., p. 10.
• 10Ibid., p. 3.