11. THE ESSENCE OF THE MONETARY CRISIS AND ITS MANIFESTATIONS. DEVALUATION OF THE POUND
While in internal circulation, as pointed out earlier, gold can be replaced by paper money of mandatory circulation and by credit money, in world circulation paper money of mandatory circulation is out of the question. In world circulation gold can be replaced only by credit or bank money. The latter assume different forms–from bank notes or bills of central state banks and commercial drafts to the so-called current accounts in international banks. This clarifies Marx's statement that one of the principal costs of circulation is money itself (meaning gold) because it itself has value. Circulation of credit money presupposes that the unfavourable balance which arises in a particular period will be paid in gold by the country which has a balance-of-payments deficit. Marx, speaking of gold as world money, emphasised that "its function as a means of payment in the settling of international balances is its chief one".1
From this it follows that capitalist countries, as before, must have a reserve of real world money–gold. After the Second World War many capitalist countries were without the necessary reserves of gold. About three-quarters of the world stock of monetary gold was concentrated in the United States, and a large quantity of it was in private hands. This enhanced the role of credit or bank money. Thus, American dollars, as a form of bank money, began to play a big part in world circulation. But their role was not independent of gold. The relationship between dollars and gold lay in the fact that the United States always expressed readiness to exchange its dollars for gold at the fixed price, and actually did so. The need for world media of circulation after the war frequently compelled other countries to use dollars in mutual settlements and this ensured them a place in the channels of world circulation and the reserves of other countries.
After the Second World War the British pound, like the American dollar, regained its role as a world currency. This was facilitated by the fact that London was the financial centre of the British Commonwealth. The Commonwealth countries used the British pound as a convenient substitute for gold in their mutual settlements. Concentrating their foreign exchange holdings in London banks, these countries created a basis for sterling acting as an international currency, although the gold reserves of Britain were actually much smaller than those of the United States.
Thus, the monetary system of capitalism consisted of three main components–gold, US dollars and British pounds.
Moreover, in the first two decades after the war countries like France, the Federal Republic of Germany, Italy, Belgium and Holland which restored their economy and money circulation, accumulated considerable reserves of gold as well as dollars and pounds. It is natural that the currencies of France, the FRG and some other countries often began to play the role of international circulation media.
In accordance with the rules of the IMF, the currencies of these countries acquired the status of convertible currencies. On the basis of the same rules, these states were obliged to exchange their currency at the official rate during international settlements either for gold directly, or for the convertible currency of the USA and Britain. In this case too we have a connection of national convertible currencies with gold. It was reinforced by the fact that the exchange rates of the convertible national currencies of the above countries, according to the IMF rules, must not fluctuate from gold parity (the gold content) and also in relation to the dollar by more than 1 per cent either way, and for Common Market countries by 0.75 per cent.
This gave rise to the multinational nature of the international currency circulation on the basis of national currencies, which sooner or later had to come into contradiction with the world hegemony of the USA and Britain.
It was this contradiction that made itself felt in the 1960s, when it became clear that in world circulation the US dollar and the British pound had become severed from the gold basis and as credit money were not adequately secured either by liquid international liabilities of other countries or gold. This became obvious when the United States and the Gold Pool which supported it faced big difficulties in maintaining the price of gold at $ 35 per ounce.
The multinational nature of international money circulation on the basis of various currencies, whether wanted or not by international financial circles, tended to weaken the international monetary hegemony of Britain and the United States, and to restore the direct functioning of gold as world money, which was expressed in the exceedingly big redistribution of gold between capitalist countries.
Today it is beyond doubt that the gold standard is possible only in the form of a restoration of the role of gold in intergovernmental circulation. Attempts to return to a gold standard in national money circulation of capitalist countries apparently can no longer rest on a solid foundation. But in internal circulation of capitalist countries too the interests of private capital dictate a certain liberalisation of the market circulation of gold, as evidenced by the existence of a number of world gold markets.
One of the most important of them is located in London. In keeping with tradition, it was via London that newly mined gold of different countries entered the reserves of Britain herself and also of other capitalist states. That is why many financial operations linked with regulating the rates of currencies not only of Britain herself and the United States but also of other countries were effected in London, the more so, since the Bank of England acted as the chief agent of the Gold Pool.
But the situation in the mid-1960s was such that the Bank of England had to concentrate efforts on defending its own currency–the pound. The large sums accumulated in the reserves of other capitalist countries in the form of liquid liabilities of Britain in sterling and foreign exchange were becoming superfluous as the convertibility of other currencies was consolidated. The need for pounds among the countries of the sterling area also declined to the extent to which Britain yielded her place in their foreign trade to other capitalist states. The growing strength of the West European Common Market, to which British capital sought admission, was particularly unfavourable for Britain.
The external economic position of Britain and consequently also of her currency was complicated by the fact that her balance of payments remained adverse despite all the exertions of the government to eliminate it. This further increased the pressure of the external liquid liabilities of Britain on her finances.
To protect the pound, Britain had to utilise her gold and foreign exchange reserves and the big international loans received in 1964 and 1965. She was the first among the principal capitalist countries to raise the Bank Rate which fluctuated at 6-7 per cent, in other words, was 2-3 per cent higher than in other West European countries and the United States.
But an increase of the Bank Rate as a measure of attracting loan capital (foreign and its own) has meaning and produces a positive result only during an upswing of economic activity in the country, and this was not the case in Britain. Without it a high interest on loan capital misses the mark. It may produce undesirable consequences, restraining internal credit and money circulation, and adversely affecting business activity. Such was actually the situation of Britain's economy when it entered the second half of the 1960s.
International financial circles were extremely worried by the emerging situation, which was reflected in the activity of international financial organisations, conferences, meetings and other forums. The danger of the oncoming crisis of the monetary system kept the international circles on edge and impelled them to look for ways to prevent the catastrophe. It was in this situation that the idea of a reform of the international monetary system originated. It cannot be claimed that it was universally welcomed.
The substance of the reform idea amounted to a decision to create a special fund within the IMF framework for furnishing emergency loans to members of the organisation when difficulties arise owing to a balance-of-payments deficit and currency rate fluctuations. For these loans to act swiftly and automatically, the system of Special Drawing Rights (SDR) was introduced. Hence the name of the reform–the creation of SDRs.
Having such rights in accordance with its quota in the Fund, the needy country is able to receive through the IMF the sum needed for covering the deficit in the balance of payments. Accordingly, the sum of the SDRs of the given country will be reduced, while the SDRs of the country to which these drawing rights were transferred during settlements on the balance of payments, will be increased.
It is easy to see that the volume of credit is expanded in the given case. Such a situation is unjustified and even dangerous because it compels countries which already have a balance-of-payments deficit to aggravate the situation by putting off the final redemption of the credits with real values for an indefinite period. Either exported goods or gold can serve as these real values. But such conditions may not materialise.
In a word, there were a number of weighty considerations against introducing SDRs at a time when not all the efforts to preserve the monetary system in its previous form had been exhausted.
Serious differences on a reform of the monetary system arose at the 21st IMF annual session (Washington, September 1966) and the 22nd session (Rio de Janeiro, September 1967). They were attended by representatives of IMF member states who reflected the official views of their governments.
At both sessions the US delegate, Secretary of the Treasury G. Fowler, spoke up in favour of creating the SDR system in the IMF or of additional means of international payments.
Opposing the view of the US delegate, the French representative, the then Minister of the Economy and Finances Michel Debre, also favoured a reform of the monetary system, but on the basis of returning to a gold standard not subordinated to the dollar. The arguments of both were highly indicative of the monetary and financial policy of the USA and France.
While Washington's policy, despite the expressed desire for a reform of the monetary system (which previously it had in effect rejected), proceeded from the desire to preserve the mainstays of the system based on the domination of the dollar, France's policy aimed at advancing gold to the fore, in particular, at raising its price considerably. The latter measure was to increase the value of the stock of world monetary gold in terms of currencies and thereby ensure the selfsame international ``liquidity'', whose scarcity, according to American official spokesmen, already faced capitalist countries. The further continuation of the policy of introducing dollars into world circulation by using dollars for covering the deficit of the US balance of payments was regarded in French financial circles as the cause of the "world tendency toward inflation". From this followed France's request that US ruling circles stop covering the balance-ofpayments deficit in a way that promotes its financial and economic expansion at the expense of other countries.
US representatives at international forums and in the press kept harping on the same note: the increase in the price of gold would supposedly give unjustified advantages to the countries which had already accumulated a substantial stock of gold, or to gold-producing countries. Moreover, they missed no opportunity of reproaching France for accumulating gold.
These rather strange arguments failed to consider the fact that the countries which succeeded in accumulating gold reserves (France, FRG, Italy, Belgium, Netherlands, Switzerland and others) had done so, as the United States did previously, because of a favourable balance of payments. Consequently, these reserves embodied national labour which was undervalued owing to the low price of gold in dollars.
An increase in the price of gold could only remove this injustice. If it were a question of ``benefit'' the United States itself would gain to the same extent from the higher price of gold. But the whole point was that such a measure would be in effect a devaluation of the dollar. It would undermine the role of the dollar in the international monetary system and deprive US finance capital of a powerful instrument of foreign expansion and easy covering of the country's balance-of-payments deficit.
As for the price of gold in the context of a reform of the monetary system, a convincing argument was presented in articles by J. Rueff published in Le Monde and in The Wall Street Journal on June 5-7, 1969. "The gold price," he wrote, "was fixed at the present level in 1934 by President Roosevelt. Since then, all prices in the United States have more than doubled.''2
While international financial circles engaged in debates over a reform of the financial system, the objective economic laws were impelling the capitalist monetary system towards a radical change.
In 1966 the balance of payments of the USA and Britain, as in preceding years, was unfavourable, whereas France's balance of payments was favourable. In view of this, the American and, especially, the British press frequently carried articles voicing anxiety over the financial policy of Paris. It is no departure from the truth to say that as early as 1966 the American and British press expressed opinions directed against France's policy of freeing the country from dollar monetary dependence. At the same time the possibility of playing on French-West German contradictions in the Common Market were probed. Indicative in this respect was the article the British Economist printed in August 1966 under the title "French Reserves: Whose Burden?". The article unambiguously revealed the British and US opposition to the policy of France and her demands for restoring the gold standard. The British journal stated that "when General de Gaulle stepped up his gold offensive eighteen months ago, some international financial officials in America and Europe (meaning, of course, primarily Britain.–A.S.) played down the likely damage by suggesting that France itself might be reaching the end of its surplus, and therefore its capacity for financial trouble-making".3
But, the journal noted further, these circles "were wrong". This is followed by proof: in 1965 France had a favourable balance of payments of about $ 1,000 million.
While the world reserves of monetary gold increased by $ 250 million, France increased her reserves by $ 1,000 million. Moreover, The Economist noted anxiously, in the first seven months of 1966 French gold reserves had risen by almost another $ 500 million to reach $ 5,160 million.
The journal then compared the gold reserves of France with the reserves of gold and foreign exchange in the FRG. The conclusion was that the French gold stock was already $ 800 million greater than in the FRG, while France was behind in its foreign exchange reserves. A comparative table of the gold and foreign exchange reserves of France and the FRG is given as of June 30, 1966–the French gold stock was $ 5,026 million and the FRG's $ 4,310 million. The foreign exchange reserves of France amounted to $ 795 million, and of the FRG to $ 1,884 million.4
The London Times also came out against the French monetary and financial policy. It complained that France was utilising her favourable balance of payments and her "surplus dollars have been steadily converted into gold".5
Arguments about the supposed inadequacy of the monetary reserves in capitalist countries were put forward. While in ten years (1958-1968) international trade had doubled and invisible exports had risen by 40 per cent, the monetary reserves of capitalist countries amounted only to five months of world imports. By the way, this point does not prove anything, since no one has studied to what extent clearing and other settlements increased.
Besides attacks on the monetary and financial policy of France in the US and British press, attempts were made to impede French exports, infringe France's balance of payments and bring about an outflow of capital. This was facilitated by the fact that during the first half of the 1960s, France was a country of cheap credit. If we compare the discount rates of the central banks of different countries over a number of years, we find that Britain and the United States, more than other countries, resorted to measures of governmental credit regulations to influence private capital in the interests of their financial policy.
Table 16 6
Discount Rate of Central Banks (end of year, in per cent per annum) 1958 1960 1963 1965
United States 2.50 3.00 3.50 4.50
Britain .... 4.00 5.00 4.00 6.00
France .... 4.50 3.50 4.00 3.50
FRG ..... 3.00 4.00 3.50 4.00
Italy ..... 3.50 3.50 3.50 3.50
Switzerland . . 2.50 2.00 2.00 2.50
Canada .... 3.74 3.50 4.00 4.75
Japan . . . 7.30 6.94 5 84 5 48
Source. International Financial Statistics, No 2, 1966, p. 21.
Table 16 shows that at the end of 1965 Britain had the highest Bank Rate. She outstripped in this respect Japan, despite the high cost of Japanese credit. In Japan this was explained by the increased demand for loan capital owing to the swift industrial growth rate and the high business profits. In Britain the high Bank Rate was explained by a financial policy designed to attract foreign money capital and encourage the repatriation of British capital, and also profits on formerly invested capital abroad.
For creditor countries like the USA and Britain the item of profit on capital abroad is of great importance in the balance of payments. Suffice it to say that between 1963 and 1965 annual profits on capital abroad in the balance of payments of the United States amounted on average to $ 5,050 million and of Britain, to $ 1,157 million. But this revenue could not compensate for the external expenditures on other items. As a result, under the current balance, exclusive of the movement of capital (IMF Statistics includes profit on capital in the current balance), the United States had during this period an average annual payments deficit of $ 2,875 million and Britain a deficit of $ 506 million. Here was the root cause of US and British financial troubles.
It is characteristic that foreign investment income of the USA (profit on capital invested abroad, exclusive of undistributed profit) in the 1966 balance amounted to $ 6,200 million, or only $ 300 million more than in 1965. Yet private American assets abroad rose by $ 5,000 million. Consequently, the growth of investment receipts from the outside in the balance of payments did not correspond to the increase of American assets abroad, specifically new investments of private American capital. In 1966 the latter amounted to $ 3,900 million.7
While new private capital investments abroad totalled $ 3,900 million in 1966 and private American assets rose by $ 5,000 million, or by more than $ 1,000 million, where could this sum come from if not from the profit on capital left abroad despite the government's appeals to repatriate more profits.
According to the Economic Report of the President submitted to Congress in January 1967, profit on American capital in the manufacturing industry of West European countries amounted to 12-14 per cent between 1962 and 1965. But they were far from being fully repatriated. This once again demonstrates that profit on long-term and, even more so, on direct investments of private American as well as British capital abroad no longer acted as the mainstay of the balance of payments when the monetary crisis of the 1960s developed. Motivated by their private interests, investors abroad refrained from repatriating a considerable part of the profit, especially in expectation of a further aggravation of the monetary crisis and the devaluation of the dollar and the pound.
The United States and Britain, although creditor countries, continued to export capital, notwithstanding the obvious symptoms of a monetary derangement and the huge sums of their liquid liabilities accumulated abroad. The dollar and the pound, as it were, remained vehicles for the movement of long-term private capital abroad. Discharging this function, dollars and pounds remained in international circulation and in the reserves of other countries as liquid liabilities subject to payment in gold or commodity exports.
The external liquid liabilities of the United States, which amounted to $ 29,800 million in 1966, reached $ 33,100 million in 1967. Respectively the liabilities of Britain in pounds and foreign exchange rose respectively from $ 21,700 million to $ 22,800 million.8
But a circumstance pointing to the extremely precarious position of the pound was revealed in the movement of the external liquidity of Britain in 1967. Britain's liquid external liabilities in pounds unexpectedly decreased from $13,300 million to $ 12,300 million or by $ 1,000 million. At the same time its liabilities, or to put it more simply, debts, in foreign currencies rose from $ 8,400 million to $ 10,500 million, or by $ 2,000 million.9 Thus what would seem to be a positive development, a decrease in pound liabilities, was explained by the fact that Britain supported the pound with the help of foreign loans. For a private debtor a reduction of his old debt with the help of new borrowing offers no way out of the situation; nor was it for Britain. Her difficulties piled up in 1967.
The cardinal issue facing international financial circles in 1967 in its full magnitude could be briefly defined as the problem of the price of gold. The capitalist world was swiftly losing faith in the stability of the dollar and the pound and pinning its hopes on gold. The exchange of US and British currency for gold, the unceasing demand for monetary gold gave rise to the tendency towards a rise in the price of gold in international markets, primarily, in London. To stem these tendencies the machinery of the Gold Pool had to operate at full capacity. But this merely increased the outflow of gold from the reserves of the USA and other Pool members. It is not surprising that the word ``gold'' began to figure more and more often in the capitalist press.
Early in January the drive against an increase in the price of gold was opened by the influential London Times with an article entitled "Powerful Voice Against Gold Price Rise". The newspaper ascribed this powerful voice to Milton Gilbert, economic advisor to the Bank for International Settlements, and undertook to examine the problem of gold because the French economist Rueff, the well known proponent of raising the price of gold, was scheduled to speak in London on the following day, and in the same month the Group of Ten was to hold its next meeting together with IMF top officials on the problem of gold. Thus, the newspaper hastened to condition the mind of its readers accordingly.
It is difficult to say to what extent it succeeded, but it did cite some essential facts. Referring to the annual gold review of the First National City Bank of New York, it reported that in 1966 "all of the newly mined gold went into private hand". According to estimates, it amounted to about 1,500 tons.10 Yet the official world gold stock even declined somewhat. According to The Times, in 1965 of the 2,000 tons of newly mined gold only 250 tons found their way into official monetary reserves.
But those who bought gold paid for it not in gold but in currency, chiefly in dollars and pounds. It is easy to understand the newspaper's alarm: all this pointed to a desire to get rid of American and British currency, to convert it into gold, which threatened to deepen the monetary crisis.
The central banks of the leading capitalist countries, for their part, succeeded in considerably increasing the share of gold in their monetary reserves.
The newspaper pointed out that as of September 1966 the share of gold in total monetary reserves of countries was as follows (percentage): Switzerland over 90; France, the Republic of South Africa and the Netherlands 80-90; Belgium and Spain 70-80; the FRG, Italy, Venezuela, Britain and Portugal 60-70; Australia and Canada 40-60; India, Mexico, Sweden and Denmark 20-40; Japan, Austria and Norway 10-20 per cent.
Thus the striving to accumulate gold was displayed not only by private persons but also by central banks, which tried to have more gold, rather than convertible currencies, in their reserves. More than half of the 20 countries listed had over 60 per cent of their reserves in gold.
In view of this, the British and US press assigned a special place to French financial policy. In January 1967 The Economist reported France's intention to liberalise her gold market and withdraw from the Gold Pool. Indeed, at the end of January France did liberalise her gold market and her monetary and financial relations with other countries up to the free import and export of gold, foreign exchange and securities. In the summer the Bank of France withdrew from the Gold Pool, not wishing11 to spend French gold on supporting the US dollar.
France's liberalisation of her monetary and financial operations with other countries early in 1967 was premature. The monetary system based on the dollar and the pound was not yet sufficiently undermined. Washington's financial policy was still supported by international financial circles.
The essence of liberalising the financial relations of France with other countries, under the law of December 28, 1966, which came into force on January 31, 1967, was the unlimited convertibility of the franc, abolition of all foreign-exchange restrictions, including those on free money transfers, imports and exports of gold, money and securities; liberalisation of the issue of foreign securities and investments (except direct, on which some restrictions were preserved), and so on. France thereby demonstrated her readiness to support a change in the monetary system on the basis of the gold standard.
On February 8, 1967 Georges Pompidou, who at that time was the Prime Minister, speaking at a luncheon in the Association of Economic and Financial Correspondents, stated, not without grounds, that the "international monetary system was functioning poorly because it gave advantages to countries with a reserve currency: these countries can afford inflation without paying for it". He reaffirmed what had been said by General de Gaulle two years earlier, stressing that France regarded gold as the only solid basis for an international monetary system because it did not yield to manipulations. He admitted that for this reason France had converted a considerable part of her exchange reserves into gold.
We showed earlier that other countries too did not lag behind France in this respect. As a result, the exchange rate of the pound began to decline and the price of gold to rise. To maintain the rate of the pound, it was necessary to use a considerable part of the gold and foreign exchange reserves of Britain and of the Gold Pool. The demand for gold mounted; at the end of 1967 only in five days 80 tons of gold were sold on the London market. On some days 20 tons were sold, which was several times greater than normal operations in London. The efforts to restrain its price made it necessary for Gold Pool members to sell part of their gold reserves on the market. All this spread uncertainty in international financial circles.
Apprehensions arose that the chain of monetary relations, strained to the extreme, would break at its weakest link, namely the British pound. These apprehensions were intensified by the continued deterioration of Britain's balance of trade.
Table 17 Britain's External Liabilities and Claims in Sterling (million pounds)
1963 1964 1965 1966 September 1967
Liabilities Total 4,859 5,409 6,016 6,397 6,204
Overseas sterling countries . . 2,942 3,048 3,061 3,074 2,991
International organisations 627 991 1,481 1,656 1,439
Claims Total 667 1,110 1,151 1,236 1,292
Overseas sterling countries . . . 350 457 466 483 493
Net Liabilities . . 3,892 4,299 4,865 5,161 4,912
Overseas sterling countries . . 2,592 2,591 2,595 2,591 2,498
International organisations 627 991 1,481 1,656 1,439
It can be seem from Table 17 that the sum of liabilities of both Britain and sterling area countries decreased in 1967. This was linked with the commencing outflow of foreign sterling deposits from British banks, the forced redemption of some liabilities in view of the increased centrifugal forces in the sterling area, and so on. The decrease in Britain's sterling liabilities concealed not a strengthening but a weakening of the country's financial position in general and in the sterling area in particular. The latter was especially dangerous for the pound.
Investments of private British capital abroad continued during tho first half of 1967; in the first quarter £ 84 million were invested and in the second quarter £ 78 million. But at the same time foreign, chiefly American, capital was invested in Britain and, moreover, a long-term credit was received from the US Export-Import Bank for the purchase by Britain of the latest American aircraft for £ 19 million in the first quarter and £ 23 million in the second quarter, and as a result the balance of capital movements proved to be ``favourable'' on the whole.
During the first half of 1967 Britain's balance of payments deteriorated.
Britain's Balance of Payments (million pounds)
1954 1965 1966 1967 first quarter second quarter
Exports (f.o.b.) 5,014 4,471 5,053 4,784 5,221 5,110 1,426 1,344 1,428 1,339
Visible trade balance 543 209 - Ill -82" 89
Payments by Britain to the United States, for aircraft and missiles ..... __ 2 –12 –41 __ 23 –30
Visible balance Government invisible payments
Other invisible receipts and payments -545 -432 +575 –281 -446 4-617 –152 –460 -1-553 –105 –118 4-205 –119 –117 -151
Current balance –402 –110 –59 -18 -85
Source: Hunk of England Quarterly Bulletin. No. 4, 1967, December, p. 410.
Table 18 shows that in the first half of 1967 the balance of current account in visible and invisible trade was unfavourable. The unfavourable balance in the first half reached £ 103 million. This was almost twice as high as the unfavourable balance of current account on visible and invisible trade in 1966.
Nor is it difficult to see the main cause of the unfavourable balance on visible and invisible trade. It consisted of the excessively burdensome so-called "governmental invisible payments, chiefly the military expenditure abroad, connected with Britain's participation in NATO and her support of aggressive US policy. It is also characteristic that in the second quarter of 1967, when Britain was faced with extremely serious monetary and financial difficulties threatening a devaluation of the pound, the government spent £30 million ($ 84 'million) on the purchase of US aircraft and missiles.
Britain thus entered the third quarter of 1967 with a clearly worsened condition of external accounts. At the end of June her gold and foreign exchange reserves amounted to fi 1,012 million (about $2,834 million) as compared with £ 1,118 million (about $3,130 million) in January. Gold amounted to £ 610 million in her monetary reserves ($1,708 million).13 Under the normal course of foreign payments, when sterling countries kept their sterling balances in London and made through them a considerable part of their mutual settlements, no special complications arose. But the whole point is that the further accumulation of Britain's sterling liabilities became impossible. The desire to convert these liabilities into something more tangible raised the demand for gold in exchange for pounds. The desire to convert sterling into other currencies, gold and reliable securities exerted pressure on the rate of the pound. It dropped to the lowest limit permissible by the IMF Rules– $2,78 per pound (at the parity rate of $2.80). To avoid a drop in the rate, Britain's financial agencies were compelled to buy sterling and to spend either gold or convertible foreign currency on maintaining its rate. A considerable part of Britain's foreign loans were thus utilised for bolstering up the shaky pound. But this did not eliminate the danger.
Unable to convert pounds directly into gold, capitalists playing at the stock exchanges first converted pounds into dollars and other currencies and then rushed to buy gold in all accessible markets–from Frankfurt-on-Main to Pretoria, from Paris to London. Thus, the first result of the pound crisis was a steep rise in the price of gold in the world markets as compared with the official price fixed by the IMF. This created a big threat to the American dollar, because the official price of gold was fixed in dollars and was guaranteed by the US Government. Thus, the difficulties facing the pound seriously affected the US dollar, raised the problem of the price of gold and cast doubt on the stability of the entire capitalist monetary system. The crisis of the pound was one of the striking forms in which the crisis of the monetary system of capitalism and its general crisis were displayed.
That is why international financial circles eagerly sought a way out. Frequent meetings and conferences of financiers and bankers were convened. Most of these forums were marked by the exploration of a reform of the monetary system and, on the whole, produced no results. They merely attested to the inability of international financial circles to stern the spread of the crisis, which reduced British finances to a lamentable state at the end of 1967. But the raising of the question at these assemblies is of interest from the viewpoint of the problems brought on by the crisis. That is why we shall examine some of these meetings.
A meeting of financial experts to discuss aspects of the world monetary system was held on January 16, 1967 in Bologna, Italy. It was attended by exponents of two fundamentally opposed views: Professors Triffin and Bernstein, on the one hand, and Jacques Rueff, on the other. The former advocated the concept of liquidity and the latter upheld his views on the need to go over to a gold standard and raise the price of gold. Naturally, this conference could not arrive at a common platform. It is known from press reports that Lord Robbins, the representative of the British business world, "called for the creation of an Atlantic monetary system controlled by the Atlantic community".14 This, however, contained hardly anything new, since the postwar monetary system of capitalism was in effect controlled by the USA and Britain.
A meeting of American bankers was held in Pebble beach, California, at the end of January and it was addressed by the then US Secretary of the Treasury Fowler. As could be judged from press reports, the bankers concentrated attention on practical matters. They particularly discussed the possibility of transition by the USA to limited convertibility of the dollar into gold. Thus, US bankers had already thought of refusing to exchange dollars for gold. Apparently, at that time they did not consider it advantageous to themselves, since not all the possibilities of the dollar as a means of financial and economic expansion of American monopoly capital had been exhausted.
The Foreign Ministers of Britain, the United States, France, the Federal Republic of Germany and Italy met at Chequers, the country residence of the British Prime Minister, on January 23 to discuss chiefly a reduction of central banks' discount rates. The need for this arose because an increase in discount rates as an instrument of credit policy began to restrain and derange national and international credit.
During 1967 Finance Ministers and bank governors of the Group of Ten countries met on a number of occasions. All these meetings invariably had to face the question of a reform of the monetary system, and the question was constantly shifted from one meeting to another (March 6 and June 19 in Paris, July 17 and August 26 in London, and others).
Lastly, the very same questions of a monetary reform were on the agenda of the 22nd annual session of the IMF, held in Rio de Janeiro between September 24 and 29, 1967.
The session decided to set up, within the framework of the IMF, a special fund and the SDR system as a kind of prototype of an international currency.
We recall all these collective actions of capitalist countries, and especially the busy round of meetings by the Group of Ten which undertook to act as a fire-fighting brigade, to demonstrate that all these measures were incapable of preventing the imminent collapse of the British pound, the second world currency after the dollar.
The final act of the drama which ended in the devaluation of the pound was enacted between September and the first half of November. In fact, everything boiled down to one more attempt, with the help of international loans, to prevent the shaky pound from collapsing. In October agreement was reached with the Swiss Bank corporation, Swiss Credit Bank and the Union Bank of Switzerland on furnishing a loan of 450 million Swiss francs ($ 104 million) at an annual interest rate of 5.5 per cent to Britain. It is noteworthy that the Swiss bankers explained this step by the supposed desire to compensate, at least in part, the outflow of capital caused by the military events in the Middle East.
In November British financial agencies conducted negotiations with Swiss banks about a much bigger international loan–ranging from $1,000 to $3,000 million. The press even reported a supposed understanding on this point but the devaluation of the pound on November 18, 1967 spiked these reports.
The question arises of whether the Wilson Labour Government acted too hastily? Did it not miss the opportunity to receive one more international loan and thereby emerge from the difficult financial situation without resorting to devaluation? In our opinion, the devaluation of the pound became inevitable and the British Government, by taking its decision, acted in full conformity with the IMF rules, which do not allow a prolonged and considerable fluctuation of exchange rates from parity.
The rate of the pound as a convertible currency at parity of $2.80 per pound could not fluctuate more than $2.78- $2.82. In October-November the rate of the pound stood for a long time at the lowest boundary–$2.78. According to a statement by the Conservative Opposition, during the parliamentary debate after devaluation, the Government had spent up to $ 1,000 million from its reserves on maintaining the rate of the pound but had been unable to achieve any positive result.
Let us assume that on receiving a further big international loan the British Government had resumed its attempts to maintain the rate of the pound. It would be hardly possible to expect that the big sum of the loan would have stabilised the pound. The crux of the matter is that the mechanism for regulating a rate when it declines requires the creation of a shortage in the money market of the given currency and other liquid liabilities, bills of exchange and short-term treasury bills in the given national currency. Then those who need it for immediate payments will pay more for the given currency and its rate will naturally rise. But as regards the pound, this method failed for a number of reasons.
First, Britain had an unfavourable balance of payments and, consequently, she herself had to cover the deficit, and could not expect receipts of foreign exchange from other countries.
Second, her liquid liabilities to other countries were big, and therefore the former were able to demand the exchange of sterling liabilities for gold and foreign currency in amounts larger than Britain's reserves.
Third, by buying pounds and other British liabilities for foreign exchange received in the form of a loan (e.g., dollars), Britain's financial agencies increased the supply of dollars in the world market, which would inevitably reduce their rate. Lastly, the owners of dollars, on receiving them in exchange for pounds, could well claim to exchange them for gold. Thus, the cycle closed on gold, the demand for which actually rose sharply and the price of which was climbing. The devaluation of the pound was a logical consequence of the development of the monetary crisis and one of its manifestations.
But what is devaluation? It is the law-sanctioned reduction of the gold content of a national monetary unit, its depreciation, as it were. This means that all the balances in the given currency, no matter who owns them, are simultaneously depreciated. And since a huge part of the media of circulation is represented by liabilities of the central state bank, such a depreciation is simultaneously an admission of the fact that the bank is unable to redeem these liabilities at their former value. Devaluation is partial bankruptcy, enabling financial agencies to untie their hands at the expense of others. Hence it is not surprising that Engels once wrote: "Wealthy England secured relief by bankruptcies in its obligations toward the continent and America.''15 In 1967 devaluation was designed, if not in full then in part, to untio Britain's hands in relation to all holders of her liabilities within and outside the country.
Therefore, the degree of devaluation was of considerable significance. It infringed the interests of creditors, domestic and foreign, and also of all persons who had a fixed income in pounds, in favour of debtors and the biggest of them, the state itself. That is why the question of the degree of devaluation of the pound was the subject of discussion in international financial circles and was coordinated with the IMF.
It will be recalled that on November 18, 1967 the pound was devaluated by 14.3 per cent and its parity to the dollar became 1 : 2.40 ($2.40 per pound). This is a comparatively modest devaluation. It is smaller than the devaluation of the pound on September 18, 1949. At that time the parity of the pound to the dollar was reduced from 4.03 to 2.80 or by 30.5 per cent.
It, is not surprising that, the day after the devaluation of the pound, devaluations began in sterling area countries and in countries which had very close financial and economic ties with Britain. The currencies of more than 20 countries wore devalued to varying degrees. This was explained by the fact that the countries which had not only sterling balances in Britain but also liabilities in their own currency, sought to avoid one-sided harm.
It is also necessary to bear in mind the export advantages associated with devaluation. And in this respect countries which devalued their currencies did not want to lag behind Britain.
Stimulation of British exports was one of the practical tasks in devaluating the pound. It was the more urgent because the growth of British exports, keeping pace with the country's comparatively slow industrial development, lagged behind other advanced capitalist countries. Between 1959 and 1966 British exports increased by 47 per cent, while those of the United States rose by 72.5 per cent, France 94 per cent, FRG more than 100 per cent, Italy almost 180 per cent and Japan by over 100 per cent.
But the further development of the world monetary crisis showed that, in contrast to the devaluation of national currencies which are not convertible, the devaluation of currencies which have such a status in accordance with IMF rules does not exert a big stimulating effect on exports. The reason for this is that convertible currencies like the pound sterling are preserved in international circulation channels, even after devaluation, in quantities sufficient for interested countries to pay for imports after devaluation. Hence British exporters were deprived of the possibility of receiving the difference in the rate during tho exchange of the currency obtained for their goods.
- 1Karl Marx, Capital, Vol. I, p. 143.
- 2The Wall Street Journal, June 9, 1969.
- 3The Economist, August 13, 1966, p. 668.
- 4The Economist, August 13, 1966, p. 668.
- 5The Times, September 1, 1966.
- 6(I cannot guarantee to have correctly copied these data - note by NR.)
- 7Federal Reserve Bulletin, April 1967, p. 505.
- 8International Financial Statistics, No. 6, 1969, pp. 316, 322.
- 10The Department of State Bulletin, February 27, 1967. (Not sure I place this footnote correctly - NR)
- 11The Times, January 3, 1967.
- 12(I could not accurately copy these data - note by NR.)
- 13Bank of England Quarterly Bulletin, No. 4, 1967, December, p. 424.
- 14The Times, January 16, 1967
- 15Karl Marx, Capital, Vol. Ill, Moscow, p. 493.