14. INITIAL ATTEMPTS TO SOLVE THE MONETARY PROBLEMS OF CAPITALISM
The entire history of the present monetary crisis of capitalism shows that the world monetary system has outlived its usefulness and began to function poorly towards the end of the 1960s. Naturally, international financial circles tried to conceal this by talk about minor shortcomings, mishaps which, supposedly, could be eliminated by partial improvement measures without touching the mainstays of the system.
The Wall Street Journal, the mouthpiece of US Big Business, for example, wrote on the day when the devaluation of the franc came into effect that if the existing system allowed a somewhat freer change of currency rates, France could probably have achieved a transition to a realistic rate gradually. The newspaper of American bankers and stock exchange brokers referred to the rigid IMF rule stipulating that currencies which have a convertible status or are convertible into gold and currencies of other countries cannot deviate from their parity upwards or downwards by more than 1 per cent and in EEC countries, according to their agreement, by not more than 0.75 per cent. Otherwise a change in parity must be followed by devaluation during a prolonged decline in the rate or revaluation in the case of an increase.
However, while advocating freer and more flexible fluctuations of the rate of exchange, the newspaper was compelled to remark that flexibility of exchange rates was also no cure-all for the monetary system. It voiced the thought that disorder in monetary markets would exist so long as large countries obstinately applied an internal inflation policy.
So, to judge from the statements of The Wall Street Journal, US banking circles admitted the imperfection of the system and the adverse effect of an internal inflation policy (especially that of the United States) and the need for some changes. But why did they begin their arguments with the system of regulating exchange rates, for what purpose was it introduced?
During any changes of exchange rates upwards or downwards in international payments on credit transactions the payer will be the winner and the receiver the loser or vice versa. In the past, when there was a free gold standard, as soon as the fluctuation of the rate went too far, payments in gold were employed in order not to bear losses on a big difference in exchange rates. This happened as soon as the difference in rates went beyond the cost of transporting gold (including freight and insurance, expenses for packing the gold and guarding it en route). A kind of automatically operating system existed for settlements in gold. Let us assume that between the two places of residence of trading partners the cost of transporting gold, including all the enumerated expenses, was 0.75 per cent of its value. As long as the difference in exchange rates did not exceed this figure, partners paid (directly or through foreign exchange banks) in the respective currencies. Wide use was made in international payments of drafts (hence the exchange rate was often called the bill rate), cheques, payment orders, bank notes paid into the bank in one national currency credited to the account of the receiver in another national currency. In all these transactions, naturally, account was taken of the difference in the exchange rates.
But as soon as the difference in the rates went beyond the cost of transporting gold, which came to be known as the gold point, the person for whom the difference in the rate was disadvantageous resorted to payment in gold. He sent bank notes to the central Bank or gave respective instructions to the bank serving him to exchange bank notes for gold at parity (and under the gold standard such an exchange was made without hindrance) and settled with his foreign partner in gold.
Such a mechanism of going over to international payments in gold operated automatically, and even before the deficit of a country's balance of payments was revealed in full measure and led to its redemption in gold.
The situation became different when gold was no longer available for private settlements, as happened after the Second World War. Here, wittingly or unwittingly, payments had to be made in foreign exchange, most often in some convertible currency–dollars or pounds. The exchange rates of all national currencies were tied to the dollar, whose relation to gold remained unchanged. Payments in gold in settlement of an unfavourable balance of payments were made through central banks. In such a case, without a rigid regulation of rates a real orgy could occur in the fluctuation of exchange rates. It was to avoid such a situation that a control system was introduced in the form of the IMF Rules. Moreover, the limit of the permissible fluctuations was close to the former "gold points''.
It has been demonstrated in practice that such a system is linked with "sharp jolts" in monetary circulation. International circles have not yet devised, and will not be able to devise, a shock absorber of these ``jolts'', although they have been trying to adopt for this purpose the so-called SDKs of the International Monetary Fund.
Another thing was also ascertained. Under such a system, which enabled dollars to oust gold from private international payments, inflation in the United States developed into international inflation, which enabled American capital to dominate world currency circulation and the international movement of capital. This abnormal situation caused the natural regulator of spontaneous capitalist circulation, artificially severed from price formation in the huge quantity of commodities circulating between countries, to stop functioning. This resulted in huge balance-of-payments deficits and the loss by the United States of a considerable part of its gold reserves, the forced introduction of a system of dual gold prices and the devaluation of two major currencies in the capitalist world with a subsequent chain of devaluations in other countries.
The deepening of the monetary crisis, however, was not averted. It continued, just as the pressure of internal inflation in the United States on international circulation continued. But although it had a chronic balance-of-payments deficit, the United States did not feel any financial necessity to eliminate it and to curtail its financial, economic and military expansion. The US Federal Reserve System utilised the dollar as an instrument of inflation affecting the entire world. This brought about a general rise of prices and unsound economic development fraught with big upheavals and difficulties which face some countries today and may face others tomorrow.
Aware of these effects, international financial circles, under the aegis of the United States, for a number of years now have been trying unsuccessfully to normalise the monetary system. To put it more concretely, the matter is tackled chiefly by financial agencies of the Group of Ten.
This group, which decides all the main questions of the monetary system outside the IMF, rejected the plan for restoring the role of gold in the international monetary system by raising its price and, to avoid still bigger crisis upheavals, facilitated the introduction of Special Drawing Rights of the IMF, which we shall discuss later in greater detail.
At one time the role of a shock absorber during sharp jolts in mutual monetary settlements between IMF countries was played by so-called ``Swap'' loans or the exchange of national currencies with the obligation to change them back after a specified period. But the monetary crisis in Britain revealed the inability of this form of international loan to prevent the spread of the crisis and the devaluation of the British pound with all the consequences following therefrom.
Towards the end of the 1960s too many dollars had accumulated in bank accounts and their owners lost confidence in their ability to convert them into real values. They felt that inflation, originating in the United States, was slowly but surely depreciating these accounts and therefore every time they were used as credit the interest rate rose. An interest of 7-8 per cent and even more on reliable first-class bills in the most important banks, up to the central banks, became the rule rather than the exception (an example is the Bank of England). We can imagine what the cost of credit in ordinary commercial banks was like. At the beginning of our century such a rate of interest would have been regarded as usurious. Against the background of inflationary economic activity, however, it looks like a normal phenomenon.
The inflationary overheating of the economy in the principal capitalist countries inevitably intensified the competitive struggle in the world market. This rivalry, in view of the devaluation in countries of the sterling and franc areas, entered into a phase of bitter struggle with the help of monetary dumping. The traditional methods of protecting home markets through tariff barriers, the establishment of import quotas, and the like were revived. To circumvent these obstacles, private capital intensified its efforts to entrench itself in the industries of other countries through direct investment or mixed enterprises. This tendency, in turn, only increased the deficit of the balance of payments which undermined the currency of the respective countries.
But while a balance-of-payments deficit was becoming for some countries the cause of certain monetary and financial complications, including the devaluation of the national currency, the United States tried to divert this threat by covering its balance-of-payments deficit with its national currency. Jasques Rueff wrote that "the accumulation of dollar credits had increased dollar balances abroad from $ 15,000 million in 1958 to around $ 35,000 million at the end of 1968".1 The liquid liabilities of the United States, accumulated on dollar accounts in other countries, continued to mount because of the country's balance-of-payments deficit. Under different circumstances the United States would have had to pay for these liabilities with its gold (and it partly did so, losing from the end of 1961 to the end of 1968 more than $ 6,000 million of its gold stock). But after it had succeeded, with the help of the central banks of the Gold Pool countries, in blocking the monetary stock of gold in March 1968, the foreign dollar liabilities of the United States turned into a millstone suspended on a rotten rope and hanging over the world monetary system. Under what circumstances this rope would snap and how destructive the blow of the millstone would be no one was able to predict exactly, but all were aware of the danger.
The US ruling circles did not close their eyes to this menace either. They realised that it was no longer possible to repay the dollar liabilities accumulated abroad on banking accounts and in the official reserves of other countries in the usual manner. This could be done only through the devaluation of the dollar. But if this happened, did it make any difference what sum of liabilities would be liquidated in this way? That is why the ruling circles of the USA were willing to drag out the show-down endlessly, while at the same time, behind cover of talk about reducing the balance-of-payments deficit and controlling inflation, continuing the former policy of inflation and dollar expansion.
It was against this background of general monetary instability that the panicky shifting of capital from one country to another became possible, just like the continuous search for gold and hard liquid assets. A case in point is the panicky flight of capital from France to the FRG and Switzerland in November 1968 and May 1969.
These big shifts of capital were a logical consequence of the policy of the financial and economic restrictions employed by the United States and the FRG against France. But they once again thoroughly shook the entire monetary system and spread even greater fear of its inability to continue functioning in the existing way. This especially affected the position of the British pound up to a point where there was talk in international financial circles about another devaluation.
Mention must be made, however, of the fact that, fearing the devaluation of the franc, the owners of free capital in 1969 converted it not into pounds or dollars but into marks and deposited them in West German banks, although the interest rates in the FRG at that time were lower than in Britain and the United States. This was explained to a certain extent, by the speculative expectation of a revaluation of the mark. A big part, however, was also played by the fact that the deposits in West German banks in marks were regarded by the owners of foreign capital as a quiet haven which could protect their capital from the destructive force of a monetary crisis.
It goes without saying that the FRG was thus becoming a financial centre not only of the Common Market but of the whole of Western Europe. The West German mark began to play the important part of a stable currency competing with the American dollar, if not on a world scale, at least on the scale of Western Europe.
In 1968, for example, of all the loans issued in the West European financial markets 31 per cent were loans in West German marks. In the first half of 1969 their share amounted to 45 per cent and reached $ 953 million. The preference given to marks offered ground for the assumption that sooner or later American dollars would have to make room in the West European capital market. But for this the West German mark had to preserve its stability. The parity in relation to the American dollar, 4 : 1 (DM4=$ 1) which existed up to October 1969 was most convenient for replacing the dollar, if need be, in definite spheres of international payments. The question was not, as in the sterling or franc areas, that of creating a West German mark area but of extending the participation of West German finance capital and its instrument, the mark, in the world circulation of capital in general.
In this connection food for thought is afforded by statements which appeared in The New York Times three days after the devaluation of the franc that the time had come for introducing official changes in the exchange rates. In countries with a favourable balance, like the FRG, this change should be towards raising parity. In countries suffering from a balance-of-payments deficit, towards reducing parity. This had to be done without the threat of restricting trade, the level of employment and reducing capital investments. These considerations voiced by a leading US newspaper in 1969, as it were, anticipated the measures taken by President Nixon in August 1971.
It is easy to notice that these arguments contained advice to the FRG to revalue its currency, just as to other countries with an unfavourable balance to change parity downwards in good time and ``properly''. On October 24,1969 the revaluation of the West German mark became an accomplished fact. What was to be done with the dollar itself? If the dollar were measured with the yardstick recommended by The New York Times it had already lost its former relation to gold and, consequently, it would be necessary to change this ratio by reducing the gold content of the dollar or devaluing it. But Washington preferred not to talk about it so as not to disturb public opinion.
This, however, was a constant subject of discussion in Western Europe. Apparently, though, certain American banking circles were inclined to heed suggestions about changing the ratio between the dollar and gold, since an article by such an eminent votary of gold as Jacques Rueff was published in The Wall Street Journal. It seems to us of interest once again to refer to the views voiced by its author a few days prior to the devaluation of the franc.
He resolutely rejected the idea that it was possible to avoid a monetary crisis in any other way except by raising the role of gold in international payments and expounded a number of correct ideas. He thought it necessary to create a situation in which the owners of unpaid money accounts should gain confidence that they would be able to exchange their accounts for real assets with a stable average purchasing power. This attribute can be possessed by gold which, in contrast to paper money, has real production value.
But Rueff lapsed into a one-sided exaggeration of the possibilities of organised capitalism and he proposed that an international gold convention be concluded under which member states could buy and sell gold directly or through the medium of the dollar. But such a convention already existed, namely, the Bretton Woods Agreement. And the price of gold was fixed at $ 35 per ounce. But this system had obviously outlived its usefulness. And the crux of the matter was not only that the price of gold was undervalued but that it was artificially regulated. Even if the price of gold were raised but were to remain regulated in a similarly artificial way to one extent or another, the crisis in the monetary system would continue.
As long as capitalism exists, any artificial regulation of the price of gold in international circulation inevitably turns into a violation of the law of value and leads to phenomena of a muffled monetary crisis which nonetheless makes itself constantly felt.
Speaking about the need to conclude an international gold convention, Rueff held that this would correspond to the procedure of co-operation established between banks of issue. But the experience of the Gold Pool and other conventions, on the basis of which organisations like the IMF exist, proves that international forms of regulating currency circulation through control over the price of gold lead to the one-sided prevalence of interests and to a deepening of crisis phenomena.
Capitalism is undergoing a general crisis and, on this basis, a crisis in the sphere of international circulation, too, is inevitable. But the crisis phenomena engendered by American imperialism through its monetary and financial policy of economic and military aggression are by no means unavoidable.
For many years after the Second World War the monetary system of capitalism, it seemed, was inseparable from the American dollar. It was regarded not only "as good as gold", but actually stood above gold, controlling the price of the monetary metal. And since the purchasing power of the dollar declined, this to the same extent led to the depreciation of gold. This circumstance by itself sooner or later had to aggravate the contradiction between gold and the dollar as a medium of international circulation. At the same time it was steadily supplemented by the wide use of the dollar by US finance capital for its economic expansion and the penetration of the industries of other countries and also its use by Washington to cover the US balance-of-payments deficit resulting from the Pentagon's military ventures. Thus, the American dollar was widely introduced into the channels of international currency circulation and dollars were accumulated in the monetary reserves of other countries.
Since the monetary system of contemporary capitalism seemed inconceivable without the dominant role of the dollar, some people in the West, especially in the United States, came to think that capitalism could get along without the "barbaric metal", gold. The realities refuted this view and at the same time took vengeance on the dollar for belittling, over many years, the role of gold as a measure of value and as world money. It may be said without fear of exaggeration that the 1960s were years of the gradual decline in the role of the dollar and the mounting of the crisis which is now racking the entire world capitalist system.
At the end of the 1960s the world monetary crisis substantially undermined the capitalist monetary system. At the same time it should be noted that this marked the beginning of a functional disorder of the organisational foundations of the entire system headed by the International Monetary Fund. There are sufficient grounds for such a conclusion.
The corner stone of the postwar monetary system was undoubtedly the little-changing ratio of national currencies to the American dollar or gold content parities when the US dollar with a gold content of 1/35th of a troy ounce was invariably taken as a unit. The parities of national currencies, expressed in relation to the dollar, were agreed upon with the IMF.
On the whole the central banks of capitalist countries loyally observed the rules of the IMF and did not allow deviations of the current exchange rate of national currencies by more than 1 per cent from parity upwards or downwards, although for this purpose the central banks often had to exert considerable effort and at the time spend a considerable part of their gold and exchange reserves, as was the case with the Bank of England in 1967 and the Bank of France in 1968-1969. In both cases the devaluation first of the pound and then of the franc was not avoided. Such a change in parities, dictated by the circumstances, corresponded to the charter of the IMF.
Experience has shown that the devaluation of the national currency of a big capitalist country during a monetary crisis does not lead to a mechanical restoration of the equilibrium of monetary and financial relations on the basis of the new parity or the relation to the dollar as a stable unit. Devaluation of the national currency of a big capitalist country creates for a certain period the preconditions for monetary dumping, the stimulation of the export of goods to foreign markets to the detriment of the home market on account of the difference in prices in the home market resulting from devaluation and in world prices expressed in stable currencies not subject to the devaluation. Thus, favourable opportunities are created to step up exports from countries with a devalued currency (to the detriment of the home market). At the same time countries with stable currencies and even more so having currencies with a high rate, are deprived of such conditions. For them, on the contrary, additional stimuli for the import of goods are created. All this ultimately deranges the previously existing structure of trade and payments balances of capitalist countries and often causes painful disturbances in their mutual settlements.
Let us recall that both the decrease in the parity of the franc (devaluation) by 12.5 per cent, like the increase in the parity of the West German mark (revaluation) by 8.5 per cent, occurred after a shifting of free capital to the FRG. This circumstance alone led to considerable disproportionality in the movement of international capital.
It is, however, exceedingly difficult to prevent such extremely adverse shifting of capital from one country to another, as demonstrated by the futile attempts to do so by raising the discount rates and by restrictive administrative measures.
- 1The Wall Street Journal, June 5, 1969.