13. SPREAD OF THE MONETARY CRISIS TO EEC COUNTRIES. THE CURRENCY WAR AND DEVALUATION OF THE FRENCH FRANC
The world monetary crisis affected the economies of all capitalist countries, but to a differing extent. Prior to 1968 the crisis hit first of all the USA and Britain, whose currencies played a special part in international circulation. After the devaluation of the British pound in 1967 and particularly after the gold rush and the forced introduction of a system of dual gold prices in March 1968, new phenomena appeared in the development of the crisis.
US ruling circles opened a new round of the battle for preserving the existing monetary system and began to act according to the principle that attack is the best form of defence. France, the main proponent of the idea of recreating the mechanism of ,the world monetary system on the gold basis, was chosen as the chief target. Since the March gold rush had compelled the US ruling circles to retreat from their former position on the question of gold prices and to allow free price formation on the gold markets, they decided to take revenge. To discredit the idea of recreating the monetary system on the gold basis, US financial circles considered it necessary first of all to undermine the monetary and financial position of France. That is why Washington's anti-French policy, pursued even earlier, developed into open hostilities in 1968, and became a real currency war.
It goes without saying that the hostile actions towards France employed by the US ruling circles with the help of their West German counterparts were not openly advertised. More than that, they were pursued as much as possible by methods regarded fully legitimate in international financial relations. These included restriction of French exports, reduction of tourist travel by US citizens to France and other sources of foreign exchange receipts in France's balance of payments. At the same time measures were taken to increase the outflow of capital from France, above all American, and of profits on long-term investments. This was also facilitated by the political situation in France resulting from the MayJune strikes in 1968. Although the deliberate removal of capital would have been effected under any political circumstances, the events of 1968 were widely exploited for stimulating the outflow of capital, not only foreign but also French capital. Various means were artfully employed, including the deliberate spread of rumours about the forthcoming revaluation of the West German mark.
The question of revaluing the West German mark was not new. There had been talk of it even earlier, since the exchange rate of the West German mark in previous years had been invariably higher than its parity or its relation to the American dollar: 4 marks = $ 1. Thus at the end of 1962 it was 3.998 marks; in 1963,3.975; in 1964, 3.977; in 1965, 4.006; in 1966,3.977 and in 1967,3.999 marks. Thus, the rate of the mark quite frequently drew close to the limit allowed by the IMF rules for a rise in the exchange rate (among EEC countries 0.75 per cent) above parity or 3.97 marks to the dollar.
As for the French franc, at a parity of 4.93706 francs to the dollar, its rate in 1962 was 4.900; in 1963 4.902; in 1964 4.900; in 1965 4.902 ; in 1966 4.952 and in 1967 4.908. From this it follows that the rate of the franc at least up to 1966 was high and firm, which was explained by the general stable economic situation and the country's favourable balance of payments.
Aware of this, the ruling circles of the USA and the FRG launched no head-on attacks on the franc, but waited for a convenient moment. It came in 1968. By that time France's balance of payments had become unfavourable but the deficit was of a by no means chronic nature. Without a big outflow of capital in 1968 and 1969 the monetary and financial position of France could not have led to the devaluation of the franc on August 11, 1969.
This is demonstrated by the fact that from the end of 1966 to March 1968, when the gold rush shook the monetary system of capitalism, the gold stock of France remained stable, exceeding $5,200 million. France did not resort to IMF loans, as was repeatedly done by Britain when she found herself in the vortex of the monetary crisis. France also had in her reserves considerable sums of convertible currency sufficient for maintaining international payments. It might rather have been expected that after the January statement of President Johnson on the US balance of payments the monetary crisis would still more affect the economic situation in the USA.
Indeed, early in 1968 there was greater nervousness than before among US ruling circles. The war in Vietnam and the Pentagon's aggressive plans dictated military spending in the following fiscal year of up to $ 79,800 million, and the usual revenue could not cover the tremendous military expenditure. The budget deficit reached the astronomical figure of about $30,000 million and so President Johnson demanded of Congress a 10-per cent surcharge on the Federal personal and corporate income tax.
The shrinkage of the gold reserves continued. They dropped below $ 12,000 million, and a further decline could invalidate the law on the 25-per cent gold cover for Federal Reserve notes in circulation. In view of this and also trying to release gold for international operations, W. Martin, President of the Board of Governors of the Federal Reserve System, raised the question of annulling the law on the gold security of bank notes in circulation. This was a method paving the way for further inflation and a symptom of the grave financial situation and the fear of the further weakening of the dollar in the world monetary system. Washington abolished the gold cover of bank notes within the country on the pretext of releasing the gold reserves for backing dollars in international circulation.
Dismay in ruling circles close to the White House was also displayed in the replacement of high officials. Robert McNamara resigned from the post of Defence Secretary, Charles Zwick was appointed Director of the Budget instead of Charles Shultze, and Arthur Okun headed the Council of Economic Advisers instead of Gardner Ackley. US financial and economic circles openly discussed questions of inflation and possible deflation; Martin himself regarded inflation as a real necessity. There is no doubt that disarray in US ruling circles over further financial and economic policy only accelerated the stormy onset of the crisis in March 1968 which raised the problem of gold on its full scale.
The difficult position of US financial circles early in 1968, however, did not prevent them from applying a policy designed to weaken France's financial position. Matters reached a point of the direct boycott of French goods, not to mention other financial means of pressure.
The organised reduction of the imports of French goods to the United States on the pretext that the public did not buy them, withdrawal of American deposits from French banks, reduction of commercial and other credits, and intensive export of profits on American capital invested in France worsened the country's balance of payments.
Last but not least, the most ^effective method was employed–rumours were spread about the revaluation of the West German mark and devaluation of the franc. The scheme was simple: to catch the speculative elements among the French bourgeoisie on a double hook of greed. If the franc were to be devaluated or its gold parity reduced, this would mean a decrease in the purchasing power of the franc, especially in international payments. If the West German mark were revalued this would mean a rise in its purchasing power as compared with the existing parity.
From this it followed that by converting their free capital in francs into marks and depositing them in German banks one could wait for the revaluation of the mark and then gain a double benefit equal to the difference in the exchange rate of the devalued franc and revalued mark.
The temptation of a double gain was so great that francs were exchanged for marks and capital transferred to the Federal Republic of Germany, disregarding the swiftly dropping rate of the franc set by the West German banks at their own discretion. An organised outflow of Eurodollars from France was also organised as well as the massive demand for payments on French liabilities, and so on.
France's financial agencies apparently underestimated the oncoming danger to the country's balance of payments and its financial position. Otherwise it is difficult to explain why up to July 1968 the discount rate of the Bank of France was 3.5 per cent, while in Britain it was 8 per cent and in the United States it was raised from 5 to 5.5 per cent in April 1968. Only on July 3 was the discount rate of the Bank of France raised to 5 per cent. Although the discount rate of the central bank of the FRG at that time was low, only 3 per cent, this did not prevent the outflow of capital from France to the FRG under the influence of rumours about the revaluation of the mark and the political situation in France. The pressure on the franc reached its peak in November 1968, when the question of devaluing the franc was seriously raised for the first time. The government took a number of restrictive measures as regards the export of capital, and the discount rate of the bank of France was raised to 6 per cent as of November 12, 1968. But at the same time it was learned that no revaluation of the mark was contemplated, although this was demanded by Paris and London.
The latter is explained by the fact that the speculative fever had spread across the English Channel and the pound was faced with the same threat as the franc. For British currency the speculative fever over the revaluation of the mark was all the more dangerous because the pound had no such gold backing as the franc. In this connection it is of interest to present comparative data on the gold and foreign exchange reserves of the four principal countries which had a bearing on undermining the franc in 1968.
Table 201 International Liquidity of the United States, Britain, France and the FRG Before and After 1968 (millions of dollars)
1966 1967 1968 1969 March December March December March
total liquidity or gold 14,881 13,235 13,854 13,184 14,830 12,065 13,927 10,703 15,710 10,892 15,758 10,836
position in IMF . . . 326 357 420 478 1,290 1,321
foreign exchange . . 1,321 314 2,345 2,746 3,528 3,601
total liquidity gold 3,100 1,940 3,259 1,677 2,695 1,291 2,722 1,493 2,422 2,470
position in IMF . . . – – –-
foreign exchange . . 1,159 1,582 1,404 1,229 – –
total liquidity gold 6,733 5,238 6,720 5,240 6,994 5,234 6,906 5,235 4,201 3,877 3,987 3,827
position in IMF . . . 988 1,015 886 883 1 1
foreign exchange . . 507 4G5 874 788 323 159
total liquidity crold 8,028 4,292 8,019 4,294 8,152 4,228 8,539 3,972 9,937 4,539 8,209 4,541
position in IMF ... 1,257 1,260 1,052 1,134 1,515 1,354
foreign exchange . . 2,479 2,465 2,872 3,433 3,883 2,314
Source: Monthly Bulletin of Statistics, May 1969, pp. 212, 218.
Table 20 shows that prior to March 1968, when under the influence of the gold rush and the monetary panic the system of dual gold prices was introduced, France's gold and exchange reserves remained stable. But in the following months the situation changed drastically and by the end of 1968 the gold reserves of France had dropped from $ 5,235 million to $3,877 million, or by $1,358 million. Moreover, France exhausted its automatically granted credits in the IMF. French foreign exchange reserves decreased between March 1968 and March 1969 to $159 million, or almost by 80 per cent.
The gold stock of the United States underwent no essential changes during this period judging by the table. But the data given in it are largely a result of artificially reducing the balance-of-payments deficit with the help of loans, foreign deposits in American banks and so on. The FRG gave substantial loans to US financial agencies. From 1968 onwards both government and private American loans were placed abroad intensively. As early as July 2, 1968 the London Times noted that new issues of American loans in Western Europe had reached $1,278 million and amounted to 75 per cent of all the new loans. The newspaper quite anxiously noted that the crisis was continuing and incidentally was expressed in steep ups and downs of discount rates and big migration of capital from country to country. In August 1968 the International Herald Tribune pointed out that from January to June only one American company engaged in placing foreign loans, the Morgan Guarantee Trust, marketed loans for $1,480 million as compared with $260 million during the whole of 1967.2
At the end of 1968, when it was nevertheless established that the balance of payments would end in a deficit, big short-term loans were made to create a semblance of a favourable situation. To support President Johnson's call to draw up the balance of payments without a deficit, American corporations hastily repatriated from abroad about $1,000 million. Apparently, a considerable part of the repatriated capital came from France against which the monetary and financial policy of US ruling circles was directed.
Viewing the measures to improve the US balance of payments in 1968 as a deliberate embellishment of reality, the London Times wrote on February 17, 1969: "The true deficit last year was over $3,000 in." The newspaper mentions as an adverse fact the steep decline of the favourable trade balance by $3,400 million (the favourable trade balance dropped from $ 3,500 million in 1967 to under $ 100 million in 1968). This decrease was not compensated by the somewhat increased favourable balance of invisible trade. Specifically, the investment income rose by $ 600 million. It is this item that is utilised by American corporations in order, if necessary, at the most unexpected moment to severely weaken the balance of payments of the country from which profit on capital is exported and to somewhat remedy their own balance.
The situation was different as regards France. Her capital in other countries was small. She had no such broad opportunities for manoeuvring and had to rely only on her gold and foreign exchange reserves. With their help she defended the franc twice, in November 1968 and May 1969.
The speculative movement of capital assumed such proportions that it is estimated that in two days (May 8 and 9, 1969) the Federal Republic of Germany received $ 4,000 million or 20,000 million francs. To avoid a further outflow of private capital and the melting away of the gold stock, France devalued her currency by 12.5 per cent on August 11, 1969, i.e., to a somewhat smaller extent than the British pound was devalued in 1967 (14.3 per cent).
The devaluation of the franc conclusively demonstrated that the crisis had spread to Common Market countries. It engendered new trade and economic difficulties among them, weakening the trade integration of the European Economic Community.
At the special session of the Agriculture and Finance Ministers of EEC countries convened in Brussels after the devaluation of the franc, serious differences flared up over the agricultural exports of France, which as a result of devaluation began to rise. French exporters received a stimulus to sell their agricultural commodities in other Common Market countries, while the exporters of farm produce of these countries to France lost during the exchange of the French currency received for their national currency the entire difference between the old and the new parity of the franc. This example of trade inequality engendered by devaluation is so typical that we shall discuss it in somewhat greater detail.
Usually, exporters in a country with a devalued currency sell their goods at the world market prices or those existing in the importing country. Since French agricultural commodities are sold within the bounds of the EEC at common prices expressed in American dollars at parity, by exchanging the sums received for the exported goods in devalued francs, the French exporters naturally receive more francs than exporters of agricultural produce from the FRG and other Common Market countries. This could impel French firms to step up the export of farm produce to the West German market to the detriment of similar local produce.
Now let us examine the question from the other side. A certain part of West German produce is exported to France. Let us assume that at the old exchange rate of the franc the price was sufficiently equalised and such export was profitable. As soon as the franc had been devalued, the equilibrium was upset. West German exporters for their goods sold in France receive the same sum in francs as before, but in exchanging the francs for marks receive fewer marks. For them it becomes disadvantageous to export their goods to Frence and their output has to be sold in the home market or exported not to France but to other Common Market countries.
The devaluation of the franc thus introduced big shifts in trade among EEC countries. It separated the market of every country in the Common Market and at the same time stimulated French exports. It was for this reason that the very first session of the Agriculture and Finance Ministers of EEC countries in Brussels was marked by heated debates over the changes introduced by the devaluation of the franc in mutual trade, above all in agricultural commodities, and also in other goods.
To paralyse this effect on mutual exports, various plans were put forward at the conference for limiting France's export advantages. Among the restrictive measures was a suggested tax on French agricultural exports to other EEC countries. Whatever concrete forms this tax assumed, its essence was the same: to remove the advantages which French exporters of agricultural commodities could gain from the devaluation of the franc. This tax was also to be somehow used for compensating the losses of firms in EEC countries which traded in farm produce.
It should be borne in mind that all these measures could be carried out only at the expense of the direct producers of agricultural commodities, the farmers of France and other countries.
It goes without saying that the devaluation of the franc, apart from shifting the entire commodity mass of the country with the devalued currency towards exports, inevitably led to higher prices in the home market. Given the unchanged nominal wages of workers and other employees and also of all persons with fixed incomes, this inevitably depressed their standard of living. It is from this source under any devaluation and also the inflational drop in the purchasing power of the population that the export reserves are created, with the help of which exports are expanded and a country's balance of payments is improved. But these theoretical expectations are not always realised. Britain is a case in point.
Table 20 shows that 18 months after the devaluation of the pound Britain's monetary and financial position had not improved appreciably. Through devaluation the Government succeeded in somewhat easing the pressure exerted by the public debt on the country's finances but it did not radically improve the external balance. Britain's foreign exchange reserves stood at an exceedingly low level.
It is not surprising that the least change in the economic situation, and especially an event as important as the devaluation of the franc, unfavourably affected the pound and the entire system of Britain's external payments. The pound, whose rate was already low, was placed on the brink of a new devaluation by France's action.
Without examining Britain's financial position after devaluation in detail, it should be emphasised that the pound still lacked stability owing to the weakened financial and economic position of Britain in the sterling area, her slow industrial development compared with other economically developed countries and the high production costs of her manufactured goods.
Britain could not realise in full measure the export advantages following from the devaluation of the pound because her short-term liquid sterling liabilities and her external debts in foreign exchange were too high. The military spending of Britain to meet the wishes of her transatlantic friends was too burdensome. It was becoming clear that the devaluation of the pound in November 1967 was insufficient and the possibility of its recurrence was not ruled out.
The monetary crisis continued to spread through Western Europe, not missing EEC countries either.
The question arises, did it bypass the Federal Republic of Germany? It did not. The facts show that prior to the devaluation of the franc the FRG succeeded in gaining certain benefits from the crisis of the capitalist monetary system. This was reflected by an increase in its gold and foreign exchange reserves.
But the initial results of the devaluation of the franc showed that the monetary crisis encompassed in its orbit all EEC countries, not excluding the FRG. The problem of agricultural exports concerned above all the FRG, its home market of farm produce.
The favourable financial position of the FRG, set against the financial difficulties of France and particularly Britain, made its convertible currency a fully acceptable medium of circulation and accumulation of reserves by other countries alongside the dollar and the pound widely used for these purposes.
All conditions were thus created for maintaining a stable high exchange rate for the West German mark. But in this way the export position of the FRG, alongside the less stable and devalued currencies, became vulnerable. Foreign goods, especially of countries with a devalued currency, gained additional advantages in the West German market in competition with local goods.
A further problem arose–the expedient use of surplus money capital. In a situation in which the "industrial miracle" in the FRG had subsided the internal market was subjected to inflational pressure from outside and foreign investments became inevitable. They were dictated not only by the attribute of every capital to be a self-growing value, to bring a profit, but also by the fear of the ruling circles of placing the economy of the FRG in a disadvantageous position, surrounded by an inflational stream of goods from other countries.
But the foreign investment of West German capital in the industries of other countries was inevitably linked with the sharpening of the competitive struggle with foreign financial monopolies, especially American.
The monetary crisis placed American investors in quite a tight spot. But there position was sufficiently strong and they manoeuvred in every possible way to cushion the jolts and blows of the crisis, to preserve the postwar monetary system of capitalism and the special position of the American dollar in it.
As a means of reducing the country's balance-of-payments deficit Washington, as shown earlier, itself widely resorted to obtaining foreign loans. It was not against utilising West German money capital on a wider scale. In effect, every such loan helped the American monopolies themselves to invest capital in profitable spheres of production abroad.
Such a role of West German capital would fully have suited the transatlantic friends of the FRG. They expected to ease the blows of the monetary crisis with the help of West Germany. But these hopes were unjustified. West German finance capital itself wanted to exploit the emerging situation for consolidating its position in the international capital market in general and within the bounds of the EEC in particular.
In this context mention should be made of the revaluation of the West German mark in October 1969. This step conformed to the demands of the IMF charter and could formally be regarded as a loyal act designed to strengthen this organisation and the capitalist monetary system. In itself the rise in the parity of the mark as a result of its revaluation by 8.5 per cent did not essentially change currency circulation between the FRG and its trading partners because at that time the actual rate of the West German mark was considerably above parity (DM4=$1). Thus, the new parity set as a result of revaluation (DM3.66=$ 1) did not affect current payments.
The revaluation of the West German mark pursued other aims. To begin with, the new Federal Government emphasised by this action that it did not intend to preserve the shaky monetary and financial position which had arisen during the election campaign and alarmed the people. The main thing was that revaluation demonstrated the strength of the mark, which was of great significance from the viewpoint of consolidating the position of West German finance capital in the economy of Western Europe.
In contrast to the devaluation of currencies designed to stimulate exports, revaluation has no such effect on exports; rather the reverse, it can restrain them and stimulate imports. But since the size of the revaluation of the mark was insignificant, its impact on the foreign trade of the Federal Republic could not be substantial either. The main effect of revaluation was felt in the international movement of capital. It created the necessary prerequisites for the further penetration of West German capital into other EEC countries. To a certain extent, the West German mark began to assume in the European capital market the role of the Eurodollars whose outflow from Europe for a number of reasons increased in 1969.
At the same time the stability of the West German mark, emphasised by its revaluation, facilitated an increase of deposits of free capital in West German banks, which enabled the latter to extend their operations within and outside the country.
The change in the parities of the currencies of two leading EEC countries–France and the FRG–in the second half of 1969 in opposite directions by no means eliminated the acute monetary, financial and trade contradictions in Western Europe. Quite the reverse, it intensified them. This applied above all to the EEC countries and Britain.