10. DIFFERENCES OVER CHANGING THE CAPITALIST MONETARY SYSTEM
After the big $ 1,000-million loan which Britain received in 1964 the pound sterling remained at risk. It noticeably lost its role as the second world currency, after the American dollar. International financial circles were pondering over the question of how the further weakening of the pound would affect the position of the dollar. The fall of sterling could seriously complicate the monetary system, which was already unstable.
First, countries whose central banks participated in the Gold Pool were faced with a considerable outflow of their gold stock for supporting the fixed price of gold in dollars, in effect, for supporting the dollar.
Second, the glutting of the world monetary system with dollars made the task of maintaining the stability of the US currency more difficult because the American ruling circles were obviously not inclined to abide by the agreed rules in their international payments. They only spoke about the need for eliminating the US balance-of-payments deficit, but actually tolerated it because of the extensive investments of capital and big military spending abroad. As before, they covered the deficit with dollar liabilities, with their national currency, which had become an international medium of circulation.
While other countries having a balance-of-payments deficit were forced either to spend gold on covering it or to reduce their imports of goods and services and to restrict the export of capital, and, consequently, to restrain business activity, the United States could afford to neglect all these measures. The dollars were turning the deficit into a means which stimulated, rather than restrained, business activity. A balance-of-payments deficit turned into a weapon of US aggressive foreign policy and an instrument for the expansion of American capital in other countries.
True enough, after the adoption of the Interest Equalisation Tax Act the impression was created that an obstacle had been set to the expansion of American capital. The facts, however, showed that even after its enforcement, the outflow of capital in different forms was kept up, the balance-ofpayments deficit remained and US liquid liabilities abroad continued to rise.
On the other hand, direct long-term investments of capital abroad also grew swiftly. The deficit in the balance of payments and the rise in investments, as it were, represented two sides of the coin, which could not but draw the close attention of economists in capitalist countries.
The ruling circles of the other capitalist countries, especially those whose central banks co-operated with the Federal Reserve System in supporting a stable price for gold, could not remain indifferent observers. They understood that they were facilitating US expansion in the monetary and financial sphere to their own detriment. They waited for the outcome of the elections, but after Johnson was elected they insistently raised the question of measures to end the US balance-of-payments deficit.
At that time such a possibility seemed feasible. This delusion was intensified by the fact that in February 1964 Johnson succeeded in pushing through the House and the Senate a bill reducing the personal and corporate income tax. Utilising this, Johnson's supporters and he himself during the election campaign emphasised that this measure would provide additional possibilities for economic growth because the tax reduction would save the taxpayers $ 25 million daily. This was to stimulate a demand for goods. In turn, the additional demand for goods was to provide an added stimulus to production. If we also point out that, in accordance with the 1962 Trade Expansion Act, the US Government was engaged in intensive talks (the Kennedy Round), seeking to increase its exports, the picture of the general trade and economic expansion becomes clear.
The situation in the international monetary system was becoming a pressing question, and it was discussed by statesmen of the capitalist countries and in the press, and debates flared up everywhere.
Two main opposing viewpoints could be singled out in these discussions. Both of them became publicly known, in one way or another, since the beginning of the 1960s because of the troubles in the monetary system, but their widescope discussion started in 1965.
One of these concepts is associated with the name of Professor Triffin, the American economist. His view in brief is that all the shortcomings of the world monetary system stem from the abnormal situation created when the principal role of the international medium of circulation is played by a national currency. Up to a definite time this shortcoming was tolerable, but in the long run the monetary system ran up against the dollar crisis. To prevent further complications, as some bourgeois economists assume, it is necessary to create a genuinely international currency. In their opinion, the conditions for the creation of such a currency are available. Specifically, this could be facilitated by the existing international monetary and financial organisations. The operation of the international currency was conceived on the same principles as those governing the functioning of bank notes, i.e., credit money in general.
As for gold, once under international control, it would lose its function as the main means of international settlements. It would preserve value like every commodity, but would lose the money fetishism which was inherent in it for centuries!
It is easy to see that the plan for creating an artificial international currency proceeds from an agreement among the capitalist countries, or at least the most important of them, and presupposes the restriction of the sovereign rights of states in the sphere of money circulation. Moreover, this plan stems from the assumption that such an un derst anding would be of a permanent, and not of a temporary, nature.
It was assumed that capitalism would develop in the direction of "organised capitalism". This Utopian tinge was also emphasised by the point that the foreign press named such an international currency "paper gold''.
Prior to the exacerbation of the monetary crisis in the second half of the 1960s financial circles attached no serious significance to such plans.
Another concept is associated with the name of Jacques Rueff. Its author is not inclined to idealise capitalist realities.
He understands that the capitalist countries base their relations on real values and that gold has played, and will play, the cardinal role in these calculations.
Rueff explains the shortcomings of the present monetary system by saying that for a number of reasons, mainly owing to the improperly conceived measures of governments and international organisations, the role of gold as an automatic regulator of international circulation has been restricted. The price of gold has been artificially reduced as compared with the price of other commodities. Therefore, in his opinion, to bring back stability to the capitalist system, it is necessary to return to the gold standard, taking gold as the basis of international settlements and more or less doubling its price as compared with the one fixed in 1934 ($ 35 per troy ounce of gold). Then it will be possible for the United States to redeem its liquid liabilities with the gold stock it has. (The question was put in these terms at the beginning of the 1960s when the US gold reserves amounted approximately to $ 17,000 million or about 40 per cent of the world stock).
It is easy to see that such an objectively realistic approach to the problem at that time seemed far-fetched to international financial circles: the crisis had not yet undermined the world monetary system to such an extent that international, especially American, financial circles should seriously ponder over questions of radically changing it. On the contrary, it still seemed to them possible, as before, to arrange world currency circulation on the basis of the dollar within the framework of the Bretton Woods system.
Academic disputes about the merits and demerits of the two concepts turned in February 1965 into a keen political discussion in which literally the entire world press took part. It was triggered off by a speech made by President de Gaulle.
President de Gaulle criticised the monetary system because the dominance of the dollar in it gave unjustified advantages to the transatlantic partner of the West European countries. These advantages in the economic sphere were being exploited for introducing American hegemony in the international policy of the capitalist world. President de Gaulle called for a return to the gold standard, expressing the official opinion which reflected the policy of the French state.
Small wonder that the entire world press reacted to General de Gaulle's statement. The tone was at once set by the American and British press, which rejected the proposal for a return to the gold standard. It was followed by the press of other countries, particularly newspapers and journals connected with banking and business circles afraid of a radical change in the existing monetary system.
Commenting on the statement of President de Gaulle, The Economic Times, an influential Indian newspaper, for example, wrote: "Although official circles refrain from commenting on President de Gaulle's proposal for a return to a gold standard for international exchange and for a new world monetary system founded on something more than the dollar and the pound sterling, there is little doubt that the Union government would take a dim view of such a proposal, should it be pressed before the International Monetary Fund.''1
In general the negative attitude to changes in the monetary system on the basis of the gold standard conformed to the official views of Washington and London. Business and government circles of these two world financial centres hastened to voice objections to de Gaulle's proposal and offered assurances that the monetary system required no radical change and that it was not anticipated.
It is in this vein of pacifying world opinion that President Johnson's message to Congress was coached. The connection between this message, made public on February 10, and de Gaulle's statement in France a week earlier is perfectly obvious. The dispute of the two presidents across the Atlantic became a new landmark in the development of the crisis. To muffle the crisis by all possible measures without emerging beyond the bounds of the existing system–such was the opinion of US finance capital. This was also the purpose of Johnson's programme which incorporated ten points; in submitting it to Congress the President claimed that it was fully adequate for eliminating the monetary and financial difficulties. Normalisation of the balance of payments was regarded as the chief means. "On the basis of searching study of the major causes of our continued imbalance of payments," the President wrote in his message to Congress, "I therefore propose the following program2 :
``First, to maintain and strengthen our checkrein on foreign use of U.S. capital markets. I ask Congress to extend the interest equalization tax for 2 years beyond December 31, 1965; to broaden its coverage to nonbank credit of 1 to 3 year maturity.
``Second, to stem and reverse the swelling tide of U.S. bank loans abroad, I have used the authority available to me under the Gore amendment to the act to apply the interest equalization tax to bank loans, of 1 year or more.
``Third, to stop any excessive flow of funds to Canada under its special exemption from the equalization tax, I have sought and received firm assurance that the policies of the Canadian government are and will be directed toward limiting such outflows to the maintenance of a stable level, of Canada's foreign exchange reserves.
``Fourth, to limit further the outflow of bank loans, I am asking the Chairman of the Board of Governors of the Federal Reserve System in co-operation with the Secretary of Treasury to enroll the Banking Community in a major effort to limit their lending abroad.
``Fifth, to ensure the effective co-operation of the banking community, I am requesting legislation lo make voluntary co-operation by American bankers in support of our balanceof-payments efforts, under the government's auspices, exempt from the antitrust laws wherever such co-operation is essential to the national interest.
``Sixth, to reduce the outflow of business capital, I am directing the Secretary of Commerce and the Secretary of the Treasury to enlist the leaders of American business in a national campaign to limit their direct investment abroad, their deposits in foreign banks, and their holding of foreign financial assets until their efforts–and those of all Americans–have restored balance in the country's international accounts.
``Seventh, to minimize the foreign exchange costs of our defense and aid programs, I am directing the Secretary of Defense, the Administrator of AID (Agency for International Development) and other officials immediately to step up their efforts to cut overseas dollar cost to the bone.
Eighth, to narrow our tourist gap, I encourage our friends from abroad as well as our own citizens, to 'see the U.S.A.', and I request legislation further to limit the duty-free exemption of American tourists returning to the United States.
``Ninth, to earn more trade dollars, I am calling for a redoubling of our efforts to promote exports.
``Finally, to draw more investment from abroad. I am requesting new tax legislation to increase the incentives for foreigners to invest in U.S. corporate securities.''
It is indicative that, when putting forward the programme of efforts for regulating the balance of payments and defending the dollar, the President did not miss the chance to offer comforting assurances. According to his message, there was no reason for fears about the future of the dollar. Those who hoped to weaken the dollar, hoped in vain. "The world willingly uses our dollars as a safe and convenient medium of international exchange," President Johnson wrote. He added right there and then: "But we cannot–and do not– assume that the world's willingness to hold dollars is unlimited.''3
In an attempt to demonstrate the strong side of the US financial position, President Johnson, like other officials, emphasised that the United States as a creditor country had public and private liabilities of foreigners totalling $ 88,000 million or $37,000 million more than foreigners had in the United States. This wholesale lumping together of long-term investments with short-term liabilities and the undifferentiated comparison of both was done chiefly for propaganda purposes: indeed, to make private capital act in conformity with national, and not personal, interests is not an easy task, to say the least. If in his programme the President all the time laid emphasis on the desirability of co-operation from bankers and industrialists with the government, he did so for the very reason that such co-operation was absent.
The President's programme paid much attention to all kinds of restrictions on the outflow of capital abroad. The question was even raised of limiting direct investments, though this followed from an understanding with business community leaders. Thus, the expediency of introducing American capital into foreign industry where the profit on capital was higher was challenged. And all this was done because of the dollar crisis which shook the mainstays of the world dominance of US finance capital.
Private capital was faced with the necessity, contrary to its nature, to renounce a higher profit abroad. It is difficult to conceive of better proof of capitalism's general crisis. The export of capital for the first time after the advent of imperialism ran up against not external but internal difficulties and contradictions of the capitalist system. The social system of production and distribution came into conflict with the private nature of appropriating profit–the result of an entire society's labour. Continuation of the old policy of absolutely unrestricted foreign investment threatened to completely undermine confidence in the dollar abroad and to stimulate a flight from the dollar towards gold. This intensified the tendency of exchanging dollars for American gold. Here is the source of President Johnson's intention to pool the efforts of the government with voluntary measures of the US financial and industrial tycoons in order to curb the outflow of capital from the country.
It cannot be said that the American bankers and industrialists were so naive as not to realise the danger of upsetting the capitalist monetary and financial system. They were well aware that this would disorganise the credit relations which bind the capitalist system into a single whole.
A touching scene of the unity between the financial magnates with their government was enacted at the meeting in the White House on February 18, 1965, a week after the President sent his message to Congress. The meeting was devoted to the questions raised in the President's programme. The official bulletin of the Department of State featured Johnson's speech at this conference under the heading "Government-Business Partnership on Balance-of-Payments Problems". This speech made by the President to the real rulers of the United States is characteristic in many respects.
``I asked you here to-day," the President said, "because you are America's leader in the world of international business and banking.''4 This was the truth: the men assembled in the White House personified US finance capital.
In his speech Johnson stated that in 1964 the outflow of private American capital ran to more than $ 2,000 million over 1963 and to more than $ 2,500 million over 1960. The President thus noted the none-too-gratifying results of the measures the Government had employed since 1960 to curb the outflow of capital so as to regulate the balance of payments. He admitted that the measures being taken could result in private capital missing a chance to receive an additional profit but he expressed confidence that the country, industry and stockholders would have better opportunities for obtaining profit. "So I am asking you today to join hands with your Government in a voluntary partnership," Johnson said. "I am asking you to show the World that an aroused and a responsible business community in America can close ranks and make a voluntary program work.''5
In conclusion Johnson drew attention to the need not only to curb the outflow of capital abroad but also to speed up the return of profits from abroad, which was one of the tasks most difficult to achieve since profit on capital in other countries was higher than in the USA. In such cases there is always the desire to reinvest profit in expanding production, to leave it on deposit in local banks, and so on.
While the "business community in America" represented in the White House was demonstrating to the world its ``solidarity" and readiness to eliminate the difficulties facing it, the no less business-minded community united in the Federal Reserve System of US banks was preparing a bill which laid bare the country's worsened monetary and financial position.
This was a bill abolishing the gold security on deposits in the Federal Reserve System. It was swiftly railroaded through all the legislative links and acquired the force of law on March 3, 1965. The bill abolished the Act of 1945 under which the Federal Reserve System had to have gold security amounting to 25 per cent not only for its notes in circulation, but also for deposits of member banks.
The need for such security aroused no doubt because deposits are a source of the constantly functioning circulation media, bank money. With the help of their deposit accounts banks, often without the knowledge and consent of the Government, could create an inflational upswing of business activity that might lead to a derangement of circulation and credit. It was to avoid such a contingency that gold security of deposits, alongside security of Federal Reserve notes in circulation, was stipulated in the 1945 Act. Why was it necessary to abolish the gold backing of deposits early in 1965 when the clouds of crisis thickened over the American dollar and the world monetary system? The chief reason was that, owing to the outflow of US gold reserves in the previous few years, the gold stock drew close to the level where it might actually be less than that demanded by law for backing bank deposits with the Federal Reserve system and its notes in circulation combined.
Thus, on September 21, 1949, when the United States had a gold stock of about $ 23,400 million, the deposits of the Federal Reserve system and its notes in circulation amounted to $40,700 million, i.e., were secured by gold to the extent of 57.5 per cent. On December 31, 1964 the gold reserves dropped to $ 15,000 million, while the deposits and notes in circulation rose to $ 54,800 million, i.e., the gold security was 27.5 per cent. If the gold reserves were reduced by some $ 1,500 million, the law would actually be violated and the gold backing would drop below 25 per cent.
The US ruling circles acted quite simply: if the law does not conform to the emerging circumstances, all the worse for the law. They simply annulled the law on gold security of the deposits and thereby opened a loophole to inflation. But these seemingly internal events in money circulation were by no means isolated from a world monetary system that was intimately linked with the US dollar.
The point is that one and the same gold stock served as security for both deposits and notes of the Federal Reserve System circulating within the country, and its liquid liabilities, notes and bills, circulating outside. If matters reached a point when the internal circulation of bank notes lost its gold security, all the more so was this the case as regards external circulation. The free surplus of gold for external operations connected with covering the balance-of-payments deficit and maintaining the stability of the dollar was steadily shrinking.
Table 15 shows that after the security of deposits and notes in circulation required by law, of the entire American gold stock of $ 15,075 million at the end of 1964 only $ 1,376 million could be used for external operations linked with US liquid liabilities. But the liquid dollar liabilities abroad exceed this free surplus many times over.
Table 15 Consolidated Reserve Position of the Federal Reserve Banks 6 (million dollars)
AS of 21 September 1949 As of 31 December 1963 As of 31 December 1964
F. R. Bank deposits .... 17,523 23 248 18,392 19,454
Liabilities requiring reserves Required reserves: 40,771 4,381 51,270 4 598 54,796 A SfiA 5 812 8 990
Total required reserves . . 10,193 12,818 13,699
Free gold certificate holdings 13,247 2,419 1,376
Gold certificate reserves . . 23,440 15,237 15,075
Ratio of gold certificate reserves to deposit and net liabilities (per cent) . 57.5 29.7 27.5
Source: Federal Reserve Bulletin, February 1965, p. 230.
In other countries which at the end of 1963 had $ 25,000 million in the form of reserves of foreign circulation media, chiefly dollars and pounds, half consisted of dollars. Moreover, about $ 15,000 million foreign liquid assets were in private hands, half of them in dollars7 . As compared with all this the free gold (above the gold backing of deposits and notes in internal circulation) was insignificant.
These figures are from a statement by US Under-Secretary of the Treasury on Monetary Affairs F. Deming made at the University of Ohio in Columbus on April 29, 1965. It may be assumed that he did not try to be very exact in estimating the liquid liabilities of the United States abroad because this could dampen the mood of his audience. He spoke about American circulation media abroad which could be presented and actually were presented for payment or exchange for American gold.
Thus, by abolishing the gold backing of bank deposits in the Federal Reserve System early in March 1965, US legislators wanted to release more than $ 4,800 million in gold, which is shown in Table 15 as reserves against deposits, and to bring up the amount of free gold to $ 6,000 million. In this way, they sought to demonstrate the readiness of the United States to continue to utilise its gold for maintaining the convertibility of the dollar in world circulation, but all they actually showed was that the gold basis of the dollar had shrunk.
Mr. Deming assured his listeners that "the reserve currency status of the dollar is greatly buttressed by the fact that the United States is the only country which stands ready to deliver gold at the fixed price of $ 35 an ounce to foreign monetary authorities upon request".8 From this it followed that the ruling circles of the United States still hoped to preserve the monetary system unchanged, but this required a great exertion of effort, up to changing internal legislation related to money circulation.
In view of the increased difficulties in preserving the mainstays of the world monetary system, the problem of liquid assets in world circulation arose. Official US circles tried to utilise it for proving the need to preserve dollars in world circulation as the main component in world liquid resources. Transition to the gold standard, in their opinion, might produce world deflation. When the question was broached of raising the price of gold in dollars, they emphasised that the USSR as a country having a substantial gold-producing industry would be the winner. Wittingly or unwittingly, this led to the necessity of preserving the dollar as a means for the penetration of American capital into other countries. "The dollar in this capacity," Under-Secretary of the Treasury Joseph W. Barr stated on September 21, 1968, "is held by private banks, business and individuals throughout the world as a medium of exchange for their international transactions.''9 He saw in the fact that the dollar as a national currency has international circulation only a blessing for the rest of the capitalist world. Referring to the authority of another financier Robert Roose, Barr saw the positive role of the dollar in that national resources could easily be invested in a liquid form on similar terms of return. Offering a definition of liquidity, Barr stated: "For the world as a whole, you would probably define liquidity as the amounts of acceptable international resources (gold, convertible currencies and automatic credit at the IMF) available for trade, finance and reserves.''10 This shows that the American official viewpoint on liquidity was confined to purely quantitative bounds of international circulation media. Consequently, there could be only a question of quantitative characteristics: whether there was a large or small quantity of a particular circulation medium, gold or dollars.
Such a formulation of the question makes it clear that in the capitalist monetary system dollars as liquid resources in international circulation ensure trade and other payments. But these liquid assets themselves are a liability of the United States issued by the Federal Reserve System. As such, they are in effect a liability of this system payable to the holder. Under the economic law of the circulation of bank notes, they must return to the bank that issued them when a definite cycle of circulation is completed (e.g., redemption of a discounted bill) or if the bank notes are in surplus in circulation and are presented to be exchanged for gold. The whole point, however, is that this law of circulation of bank notes was violated. The United States, as shown above, in the first quarter of 1965 was already unable to exchange the dollars in world circulation for gold. It was this that increased the strain in the international capitalist monetary system.
It goes without saying that the United States could ease this tension were it not for the balance-of-payments deficit and were the favourable balance of trade preserved. This would mean that other countries would cover their deficit in trade with the United States with the US dollars they hold. On the other hand, this would mean that the United States would pay for its liquid liabilities with its exports.
The same problem could be solved by restraining the export of capital, by stepping up the influx of profits on US capital invested earlier in other countries. But although under the item of profits on capital there were considerable net receipts in the US balance of payments, they could not eliminate its deficit. It is not surprising that a new massive outflow of gold began in 1965 and the law on the gold cover of deposits of the Federal Reserve System had to be abolished in order to satisfy the demand for American gold in exchange for dollars.
On the whole, the monetary system of capitalism entered the second half of the 1960s in no better shape than in the first half.
The main reason was rooted in the weakening of the international financial positions of the United States and Britain, the two countries whose currencies form the foundation of the capitalist monetary system. Thus, the gold stock of the United States dropped from $ 17,800 million at the end of 1960 to $ 16,000 million in 1962 and to $ 14,000 million at the end of 1965. On the other hand, US liquid liabilities to other countries at the end of 1965 exceeded $ 29,000 million as compared with $ 24,000 million at the end of 1962. Thus, the gold reserves decreased by $ 2,000 million between 1962 and 1965, while liquid liabilities grew by $ 5,000 million.
In the first half of the 1960s the gold stock of Britain reduced slightly: at the end of 1960 it amounted to $ 2,800 million; in 1962 to $ 2,600 million and at the end of 1965 to $ 2,300 million; on the other hand, her external liquid liabilities in foreign currency at the end of 1965 exceeded $ 5,900 million as against $ 2,900 million at the end of 1962. To this we have to add Britain's external liabilities in sterling which, in terms of dollars, reached $ 12,700 million at the end of 1965 as compared with $ 10,700 million at the end of 1962. Most of the sterling liabilities were in North America ($ 7,100 million) and countries of the sterling area ($ 5,300 million).11
The swift growth of the external liquid liabilities of countries whose money represented the key currencies in the monetary system of the capitalist world, threatened to develop the crisis further, the more so because the balance of payments of both the United States and Britain was unfavourable. In the mid-1960s the weakest link in the entire system was Britain, whose financial and commercial positions in the sterling area were weakened by competition from other advanced capitalist countries.
Hence it is not by accident that Britain, which resorted to an international loan of $ 1,000 million dollars in 1964 had again to request an even bigger loan ($ 1,400 million) in 1965. As the weakest link in the world monetary system, Britain became the epicentre of the crisis in the next two years.
- 1The Economic Times, February 6, 1965.
- 2The Department of State Bulletin, March i, 1965, p. 283.
- 3The Department of State Bulletin, March 1, 1965, p. 283.
- 4Ibid. 162
- 5Ibid., p. 336.
- 6I did not accurately copy these data - note by NR
- 7The Department of State Bulletin, June 14, 1965, p. 957.
- 8Ibid., p. 956.
- 9Vital Speeches of the Day, No. 1, 1968, p. 18.
- 10Ibid., p. 20.
- 11International Financial Statistics, No. 6, 1969, p. 322. Ibid., pp. 316-317.