12. The gold problem and the further undermining of the monetary system
Devaluation can produce different results: in some cases it leads to a more or less prolonged financial equilibrium (the effect expected from the measure); in other cases it becomes merely a temporary interruption of the inflation process and a new stage in the development of the monetary crisis.
The devaluation of the pound in 1967 did not bring about a change for the better in Britain's financial situation. The crisis of the monetary system had become so deep that an individual country or group of countries could not break out of it through devaluation.
For Britain devaluation became a factor which somewhat eased the pressure of the internal debt and stimulated exports. But at the same time the centrifugal forces in sterling area countries were intensified, creating prerequisites for the further weakening of Britain's external economic position.
As for foreign trade, British exports rose from $13,869 million in 1967 to $ 14,812 million in 1968, or by 6.8 per cent. At the same time imports rose from $17,186 million to $ 18,520 million, or approximately by 7.7 per cent. In 1968 foreign trade improved as compared with 1967 in the sense that exports did not decline, as was the case in 1967 prior to devaluation. While in 1967 exports dropped from $14,132 million to $13,869 million, or by 1.8 per cent, the 6.8 per cent increase in 1968 may be regarded as a positive feature. But all this cannot be credited solely to devaluation. In any case, in a number of other countries the growth in exports was more substantial. Even in Hie United States, despite the slower growth of exports as a result of the war in Vietnam, they increased by 7.9 per cent. As for Japan, it registered a 24-per cent rise in exports in 1968. This shows that even without devaluation other countries continued to outstrip Britain in export growth rates.
Why was Britain unable to fully exploit all the advantages which could be expected from devaluation? Because at the moment of devaluation her liquid liabilities to other countries were very big. Let us assume that devaluation reduced the liabilities by about 14.3 per cent. They nevertheless remained too burdensome. From this angle moderate devaluation was clearly inadequate.
On the other hand, receipts from bigger exports became a source for redeeming a certain part of the liquid liabilities and consequently could not be utilised for developing the export-oriented industries so as to utilise the favourable export situation.
That is why, as soon as British foreign trade encountered the need to increase imports of raw material for accelerating industrial production, including output for export, difficulties in maintaining the current export-import balance began to make themselves felt. Instances of a dangerous reduction in the rate of the devalued pound began to recur.
But the financial difficulties of Britain in the post-devaluation period were no longer the main channel of the continued monetary crisis. Manifestations of the crisis appeared in the sphere where gold and the American dollar are interconnected. The tendencies to exchange dollars for gold or to buy gold for dollars mounted. This led to a steep rise in the price of gold. Only one means remained to restrain the price of gold–to satisfy the bigger demand by dumping new lots of gold on to the markets and exchanging the dollars directly presented to US financial agencies for American gold.
The task of maintaining the price of gold became the more difficult because after France's withdrawal from the Gold Pool in the summer of 1967 the efficiency of this organisation clearly diminished. Gold Pool members reluctantly sacrificed part of their reserves on maintaining the American dollar. In the meantime the gold stock of the United States shrank noticeably. At the end of 1967 it amounted to $ 12,065 million as compared with $ 13,235 million at the end of 1966, a decrease of about $1,200 million in one year.
In December 1967 the demand for gold remained at a high level. In the London market sales on some days reached up to 100 tons, many times the usual figure.
The rush for gold showed that this time mistrust of the dollar grew over into a panicky fear of devaluation, i.e., an official raising of the price of gold in dollars, as demanded by J. Rueff and other advocates of restoring the former role of gold in the world monetary system. Only this can explain the search for gold which was already under way at the end of 1967 and at the first stage was consummated in the huge "gold rush" in March 1968.
It arose from the desire of capitalists to have in their operational reserves of currency a guaranteed stock of gold and not the desire of hoarders of precious metals to acquire gold in order to satisfy their craving for it. Gold by no means disappeared from world circulation, as could be judged from the cessation of the growth of official world gold stocks at the disposal of financial agencies of capitalist states. We must not forget that the private capitalist sector is itself in need of gold. It is held by capitalists. That is why world gold smuggling is thriving. Therefore all the more unconvincing is the theory that gold is supposedly losing its role as world money and is being demonetised. As for the increase in its price by 15-20 per cent, this was said to result from the operations of hoarders and speculators.
It is important to note that such views originated in the Anglo-Saxon countries which have always worshipped the golden calf more than other countries. Matters went to such extremes that the London Economist with a serious air began to contrast Rueff's views about the need to enhance the role of gold and raise its price with Lenin's well-known statement that after the victory of the proletariat or of the socialist revolution on a worldwide scale gold could be used for building public lavatories. "Did Lenin know better than Rueff?''1 was the title given by The Economist to the article. In it, apparently for the obvious purpose of frightening Rueff's supporters, the journal pointed out that the USSR was mining gold valued at between $150 and $400 million annually and it had a gold stock estimated at between $2,000 million and $7,000 million. As for the data about gold in the USSR, their extremely doubtful precision should be left on the conscience of the editors of The Economist. But as regards the views of Lenin about gold simple decency demanded that the journal should have not limited itself to the ironic remark about public lavatories made of gold, but should have pointed out right there and then that Lenin advised, until the victory over capitalism on a worldwide scale, to save gold, sell it at the highest price and buy goods with it at the lowest price. From this it follows that Lenin did not mean that gold would be demonetised under capitalism and would cease to discharge its function as world money and as a medium of world circulation. It is easy to understand why Lenin spoke so scornfully about gold during the complete victory over capitalism. As for Lenin's approach to gold from the purely economic viewpoint, he did not regard it with contempt.
At the beginning of the 1920s Lenin expected to use the gold fund as a means of production. He considered this theoretically and practically correct, and it was only because of the extreme necessity of easing the food difficulties of the working class that he arrived at the conclusion: "Contrary to our old Programme the gold reserve must be used for consumer goods.''2
In this context we consider unjustified the allegation that, in view of the crisis, the role of gold is being fundamentally altered: a supposed "degeneration of the private monetary reserve into a hoarded treasure", as it were, is taking place; that this is a "new phenomenon" determined by the deepening of state-monopoly tendencies in the currency and monetary relations of capitalism.3
Nor must we consider that "the demonetised gold, excluded from the capitalist money mechanism which, at least within national economies, is fully served by unconvertible paper money, can now already receive, and is actually receiving, the market price in this paper money, just as is done by the rest of the entire commodity world".4
The following example is cited as proof: in Paris a gold bar in the gold market and a car cost (or could cost) 5,560 paper francs. Can this serve as proof of the demonetisation of gold? In our opinion, it cannot.
First, that internal circulation can be fully served by paper money of mandatory circulation was established by Marx. He also demonstrated the predominant function of gold as world money of full value.
Second, the sale of gold for paper money, like the sale of a car or any other commodity, by no means attests to the demonetisation of gold. To sell gold for gold would be an absurdity. In the past too gold was sold or exchanged for paper or credit money. It was the meaning and purpose of the gold monetary standard to exchange paper money for the precious metal. But when coins were exchanged for paper money (in essence the same thing as ``bought'' for paper money) of a definite nominal value, as, for example, Russian paper money in the last century, this exchange was made with a definite difference for full-value specie or without itit was unimportant. But when gold bullion of definite weight is sold (exchanged) for a definite sum of paper money there can be no difference. Simply a bigger or smaller amount of paper money has to be given for the bullion as compared with its parity (gold content). It is this that is known as the rate of exchange of a currency. The parity of the US dollar was 0.888671 g of gold.
It is a different matter that in the free market one could not buy such a quantity of gold for one dollar. This simply shows that it is not gold that is determined by paper money but vice versa, paper credit money (the mandatory circulation of paper money in international settlements is ruled out because there is no, and there cannot be, any supranational authority) circulates with a definite disagio as compared with its gold parity.
The monetary crisis at the end of the 1960s was caused by the reluctance of US financial circles to recognise the depreciation of the dollar. They continued to impose on world circulation elements of mandatory paper money circulation which are alien to it. But it is impossible to divorce world circulation of credit money from the gold basis and even less so to demonetise gold under capitalism. All this has been proved by the present monetary crisis.
The existence of gold markets clearly demonstrates that the so-called "degeneration of the private monetary reserve into a hoarded treasure" is far-fetched. These gold markets for all the former attempts to control them and even more so now, with the existence of what is customarily called the free market price of gold, are, as it were, money exchanges or offices. Strictly speaking, what takes place in the gold markets is not the purchase of gold for paper money but the exchange of paper money for gold or vice versa. It is these markets that show whether paper money corresponds to its parity or gold content, and if not, what the real exchange rate is. To picture the situation differently means to turn the problem upside down. An automobile purchased for paper money is, above all, an article of consumption. Gold received in exchange for dollars is an immutable embodiment of exchange value, which is not intrinsic in dollars. Owing to this all the measures taken by the US ruling circles to ease the crisis remain futile. In the first quarter of 1968 it became clear that all talk about gold as a "barbaric relic" which must be eliminated were groundless under the conditions of capitalism. The elimination of gold is tantamount to the elimination of exchange value, which runs counter to the capitalist commodity economy. Life is refuting any far-fetched ideas about the ``demonetisation'' of gold. The gold rush on the eve of 1968 dampened the New Year mood of many financiers, bankers and politicians in capitalist countries, including US President Johnson.
The desire to exchange US dollars for gold was so great that Lyndon Johnson instead of merrymaking within his family circle had to tackle currency and balance-of-payments problems. This gave rise to the well-known programme for combating the monetary crisis advanced by Johnson at a press conference held at his Texan ranch which
ushered the United States in 1968, a stormy year for its finances.
This programme dealt mainly with the balance of payments, the elimination of deficit and the prevention of the outflow of the gold reserves. The balance of payments also became a key issue because the elimination of deficit was demanded not only by France, but also by other US partners from the Group of Ten. Elimination of the balance-of-payments deficit was rightly regarded as essential to stopping the financial and economic expansion of US capital. It is not surprising that some financial circles in the United States and abroad, in one form or another, expressed their dissatisfaction with the measures proposed by Johnson. These were the circles which invest American capital abroad and the users of American capital in other countries.
The first measure suggested by Johnson was aimed at a more rigid restriction of loans to foreign states by taxation, relying at the same time on the voluntary co-operation of banking corporations.
Nor was the second measure, a more rigid reduction of government spending abroad, new in any way. But this measure remained merely a pious wish in view of the war in Vietnam and the aggressive policy of the Pentagon in other regions of the world.
Johnson called for restricting American investments abroad. But for private capital the decisive factor was not patriotic motives but the actual rate of return on the capital invested abroad and at home. When the rate of return is at stake, finance capital is fully cosmopolitan. Therefore, while Johnson urged American investors to refrain from the excessive export of capital, foreign capitalists withdrew their deposits from US banks in order to place them in more profitable spheres in other countries. That is why, Johnson's programme called, at least until an equilibrium in the balance of payments was achieved, for attracting foreign capital into the United States in the form of bank deposits and medium-term loans. For these purposes emissaries of US financial agencies, Nicholas Katzenbach and Walt Rostow, were sent to Western Europe and Asia.
Before long the US Treasury made the sale abroad of the so-called medium-term Rusa bonds (so named after the Assistant of the Treasury who advanced this idea) one of the main points of the Administration's financial programme.
The effort to stabilise the country's finances was complicated by the unbearable military spending and the huge budget deficit which demanded a 10-per cent surcharge on the Federal individual and corporate income tax (a corresponding bill had been introduced in 1967 but was kept back in Congressional committees). Lastly, the increased internal public debt, which, by the decision of the Congress, the Administration intended to raise to § 358,000 million, also pressed on the government's finances and hindered their normalisation. Little wonder that inflation in the country spread further.
Johnson's press conference designed to pacify world opinion missed its mark. Mistrust of the dollar continued to mount and the money exchanges in all countries were in a feverish state. Gold rose in price and disarray prevailed in international financial circles. It was in this situation that the gold rush reached an unparalleled scale in March 1968. In its scale and intensity it could be more aptly described as a panic.
A conference of the Gold Pool, consisting of governors of the central banks of the United States, Britain, the Federal Republic of Germany, Italy, Switzerland, Belgium and the Netherlands, was hastily summoned in Basle on March 12. It adopted one more decision: to preserve the former constant price of gold in dollars–$35 per troy ounce–or to preserve the gold parity of the dollar and the former rates of the currencies of IMF countries to the dollar. To pacify public opinion, a corresponding statement was issued, but it had no effect. The panic, far from waning, was intensified and it became impossible to satisfy the demand for gold. That is why, at the request of President Johnson, banks in West European financial centres stopped foreign exchange operations or were temporarily closed.
The governors of the central banks met again on March 15, this time in Washington. It was here that the decision on introducing a system of dual gold prices was adopted. The participants decided to preserve the former price of gold at $ 35 per ounce for operations between states performed by central banks, and to allow the free fluctuation of the market price of gold under the influence of supply and demand. By this forced decision the governors of the central banks, on behalf of their governments, admitted that they were powerless to further regulate the price of gold by economic methods, as was formerly the case.
The decision to preserve the old price of gold in interstate operations applied to the sphere of administrative regulation and, therefore, the further existence of the Gold Pool on the former principles became meaningless.
According to the foreign press, the Washington decision of the central banks, introduced a system of dual prices, or a dual gold market–official and free. This decision was presented in an epically calm tone.
The conference of the governors of the central banks in Washington sanctioned dualist principles in the capitalist monetary system and created definite contradictions between the private capitalist sector of the economy and the official sector of interstate monetary relations.
The March decisions made by the governors of the central banks of the leading financial countries in fact showed that the International Monetary Fund, which allowed a group of highly developed capitalist countries to decide on the questions facing it, was undergoing a serious crisis. These decisions endangered the entire system of regulating exchange rates around one hub–the dollar and its unchanged relation to gold. In view of the separation of the official and the private gold market by these decisions, the gold reserves became frozen and the connection between them and private capitalist circulation of gold was severed. This all the more bolstered up the decision not to buy newly-mined gold for centralised state reserves at the market price.
After the March decision concerning the dual system of gold prices, the United States began even more insistently to place its medium-term loans in other countries, to accumulate reserves in foreign exchange, to withdraw free dollars from world circulation, and thus reduce the possibility of presenting dollars to be exchanged for gold through interstate channels and, therefore, at the unchanged ratio between the dollar and gold.
In their turn, governments of countries supporting the dual price system began to some extent to keep a certain amount of American currency in their reserves, thereby creating a sham stability for the US gold reserves after the Washington decisions made in March 1968.
The ``solidarity'' of the central banks of the leading capitalist countries achieved in March 1968 in supporting the system of dual prices that they had adopted resembled the solidarity of seamen on an old schooner caught in a heavy storm. To avoid sinking, the seamen in such cases work hard to lash the sails, but at each creaking of the boat, everyone is ready to grab a lifebelt and jump overboard, abandoning the others to their fate.
In the first quarter of 1968 the monetary crisis which had assumed the form of an unprecedented gold rush was resolved in the market circulation of gold at freely fluctuating prices, which proved to be 15-20 per cent higher than the official price. The central banks of the major imperialist countries, at least in words, refrained from controlling these prices. But the fact that they did not buy gold to replenish their reserves speaks of the opposite. This measure was designed to prevent an additional demand for gold and thereby give the prices of the free market a chance to become stabilised.
Simultaneously an offensive on all fronts was launched on the economic position of France so that her policy should not hinder the contemplated introduction of the SDR system by the IMF which, it was assumed, could offer a'way out of the difficult situation for countries with a balance-of-payments deficit and, particularly, for Britain and the United States.
Since March 1968 was a turning point in the international monetary policy of capitalism, it is of interest to trace the changes in the world stock of gold and its reserves in the principal capitalist countries in the subsequent period. These figures reveal new tendencies in the distribution of the world gold and foreign exchange reserves of capitalist countries.
The ten countries whose gold reserves exceed $1,000 million are given in the table. It is these countries that are in the epicentre of the present monetary crisis. These are, first, the United States, Britain and partly Canada; second, the other members of the Common Market.
International Liquidity6 1966-1971 (end of period, million of US dollars)
1966 1967 1968 1969 1970 1971 June
World gold holdings7
........... 43,185 41,605 40,910 41,010 41,285 41 265
of which IMF8 .......... 2,279 2,100 1 969 1 882 4 102 4 783 72,635 74,270 77,330 78,195 92 510 104 835 40,910 39,505 38,940 39,125 37,185' 36,480 25,395 29,010 31,900 32 345 44 485 55 550 60,520 61,280 63,245 62,640 74,325 84,485 38,345 36,610 35,510 35,675 33,895 33 200 16,330 19,425 21,845 20 860 31 080 40 585 12,115 12,990 14,085 15,550 18,185 20 355 2,565 2,895 3,430 3,455 3,290 3,280
Foreign Exchange ........... 9,065 9,585 10,065 11.485 13.405 14.970 Selected countries 13,235 12,065 10,892 11,859 11,070 11,081 1,321 2,345- 3,528 2,781 630 280 1,940 1,291 1,474 1,471 1,349 (13,422)5 1,159 1,404 948 1,054 1,212 (1,212) 5,238 5,234 3,877 3,547 3,532 3,825 507 874 323 286 1,257 (3,203)
1966 1967 1968 1969 1970 1971 June
gold .......... 4 292 4 228 4 539 4,079 3,980 4,426
Foreign exchange ....... 2,480 2' 873 3 894 2,748 8,455 12,292
gold .............. 2 414 2 400 2 923 2 956 2,887 3,131
Foreign exchange ........... 1 621 2 221 1,524 1,194 2,059 3,030
gold ....... 1 525 1 480 1 524 1 520 1 470 1 676
Foreign exchange ........... 458 782 362 712 780 706
gold ....... 2 448 2 619 2 463 2 529 3,234 3,797
Foreign exchange ...... 305 556 269 370 764 406
gold ............ 2 841 3 089 2,624 2,642 2,732 3,158
Foreign exchange ........... 704 607 1,669 1,783 2,401 3,734
gold ............... 329 338 356 413 532 738
Foreign exchange . . 1 469 1 453 2 261 2,614 3 188 13 783
Source: Monthly Bulletin of Statistics, March 1972, pp. 212-218.
[...] (missing text from OCR – note by NR)
Switzerland is not a member of the IMF but plays an important part in the monetary and financial affairs of the capitalist world. Substantial reserves of monetary gold are concentrated in that country which, moreover, is the traditional haven for the capital of deposed kings, dictators and others thrown out of the saddle by socio-economic upheavals. Swiss bankers also engage in substantial pawning operations with gold which are kept secret. The Republic of South Africa is the main gold-producing country in the capitalist world (70-75 per cent of the total). It is the main supplier of gold for the capitalist countries, and for a number of years for the Gold Pool. Prior to the aggravation of the monetary crisis South African gold entered international circulation chiefly via London; moreover, the Bank of England played, not without benefit to itself, the role of a transfer junction.
What tendencies in the movement of the gold and exchange reserves of capitalist countries were displayed at the end of 1960s? To begin with, the world stock of monetary gold noticeably decreased, including that in the national reserves of capitalist countries. The latter dropped from $ 40,900 million at the end of 1966 to $38,900 million at the end of 1968, or by $2,000 million. This gold no doubt migrated from the system of state monetary and financial agencies of capitalist countries to the private sector. The newly-mined gold in 1967 and 1968 (about $ 2,800-3,000 million) also went into the same sector. We must not assume, however, that this gold turned into inert capital. In the safes of capitalists and their associations it claims the role of security, giving rise to credit and credit media of exchange. It is not precluded that the total sum of the increased world liquid resources, which at the end of 1968 amounted to $ 76,300 million as compared with $71,800 million at the end of 1966, was partly based on hidden gold resources. Incidentally, at the end of 1969 the world monetary reserves of gold again exceeded $39,000 million.
The shocks which Britain felt and continued to feel as a result of the monetary crisis upset the system of replenishing the reserves of monetary gold in capitalist countries. The gold-producing countries, in the first place, the Republic of South Africa, refused to sell or exchange the newly-mined gold at the lower price for pounds and dollars.
The central banks in the leading capitalist countries, in turn, acted in a united front against South Africa, refusing to satisfy its demand for an increase in the price of gold because this would imply the devaluation of the dollar and a revision of the entire system of exchange parities between the IMF countries.
In boycotting the purchase of South African gold, the central banks of the principal capitalist countries expected that South Africa would be forced to dump big lots of gold on to the free market in order to cover the deficit in its balance of payments, and thereby bring down the price of gold. This was done for the same purpose of preserving the existing system of interstate settlements on the basis of the unchanged parity of the dollar.
But these exertions obviously did not produce the expected results. Contrary to expectations, they did not succeed in forcing South Africa to capitulate on the question of the gold price even several months after the March 1968 gold rush. At the end of 1968 on account of newly-mined gold South Africa brought up its gold stock to $ 1,243 million as compared with $ 637 million at the end of 1966, and $742 million in March 1968 during the gold panic.9 In other words, its gold stock more than doubled. In three months of 1969 alone its reserves rose further and reached $1,367 million at the end of March 1969. Additional proof that the boycott of South African gold was ineffective was the increase of convertible currency to $ 244 million at the end of March 1969 as against $98 million, at the end of 1966 and $120 million in March 1967.
Lastly, mention should be made of the changes in the distribution of the gold reserves in other capitalist countries.
The United States had difficulty in keeping its gold stock at a level somewhat exceeding $ 10,000 million and had to resort to the forcible replenishment of its reserves from Canada, the IMF and other sources.
The gold stock of France decreased from $ 5,200 million in 1967 to $3,800 million at the end of 1968. This drop was a result of special reasons which stemmed from the further deepening of the monetary crisis and the drawing into its orbit of West European countries which formerly had not felt the crisis to the same extent as the USA and Britain, whose currencies played a vital part in the monetary system of capitalism.
- 1The Economist, December 2, 1967, p. 976.
- 2V. I. Lenin, Collected Works, Vol. 33, p. 113. V. I. Lenin, Collected Works, Vol. 32, p. 224.
- 3S. M. Borisov, Zoloto v ekonomike sovremennogo kapitaltsma (Gold in the Economy of Contemporary Capitalism), Moscow, 1968, p. 33.
- 4Ibid., pp. 36, 37.
- 5(Not correctly copied - note by NR.)
- 6Gold + Reserve position in IMF-)-Foreign exchange + Special Drawing Rights (1970-71).
- 7Excluding Persian Gulf States, China, Eastern Europe, the USSR and Cuba.
- 8IMF, EPU/EF and BIS.
- 9Monthly Bulletin of Statistics, May 1969, p. 218.