16. TWO DEVALUATIONS OF THE DOLLAR AND EXPLORATION OF WAYS FOR REFORMING THE MONETARY SYSTEM
The August 1971 measures of the United States caused consternation among its partners. To eliminate differences, intensive negotiations were started. In the course of the talks the United States demanded a revaluation of the currencies of a number of countries, sought the creation of favourable conditions for American exports, insisted on increasing the share of other countries in NATO military spending, and so on.
The Council of the Six EEC countries which met in Brussels on August 20 was marked by sharp differences. This was reflected even in newspaper headlines: "A Torn Europe; Failure in Brussels" (UAurora); "French and Germans Clash Sharply" (Le Figaro); "Clash of Giscard d'Estaing and Schiller" (Paris-Jour).
On August 22, 1971 the news agencies of the world, transmitted the text of a telegram sent by Pierre-Paul Schweitzer, managing director of the IMF, to all member states of the organisation: "Unless prompt action is taken, the prospect before us is one of disorder and discrimination in currency and trade relationships which will seriously disrupt trade and undermine the system which has served the world well and has been the basis for effective collaboration for a quarter of a century.''1
He was referring to the postwar monetary system of capitalism founded on the US dollar as an international currency. As director of the IMF, Schweitzer called for the earliest convocation of the financiers of the Group of Ten, which usually preceded major IMF measures.
Finance Ministers and managers of the central banks of the Group of Ten met on September 15-16 and discussed a wide range of issues raised by the August measures of the US Administration.
To judge from the official communique, the financiers of the ten countries merely examined factors pertaining to the proper rearrangement of exchange rates, ``fair'' trade agreements and questions of sharing the burden and the necessity of reforming the international monetary system. The latter was an open admission that the mechanism of the postwar monetary system could no longer function normally without radical changes.
After the floating rate of the Japanese yen was introduced on August 28, all the principal capitalist countries refused in fact to support the market rate of the dollar. Its rate in relation to other currencies continued to drop, while the price of gold began to rise not only in dollars, but also in other currencies. The capitalist world once again was made aware of the importance of gold as the cornerstone of the monetary system of the commodity capitalist economy regulated by the objective law of value.
Abolition of the conversion of the dollar into gold placed it in the position of a "king without a golden crown": it was no longer recognised as the pivot of the monetary system.
As the year 1972 was drawing near, the ruling circles of the capitalist countries felt impelled at all costs to create, at least temporarily, a semblance of some stability of monetary relations, since the completion of international settlements of old trade contracts and the conclusion of new ones was associated with the advent of the new year. Hence the proposal for summit meetings.
Of particular significance was the meeting of two presidents–Richard Nixon and Georges Pompidou–in the Azores on December 12-14, 1971. Pompidou in fact represented the interests not only of France but also of the other EEC countries. As a result of the talks Nixon agreed to lift the import surcharge, making this conditional on the consent in principle of other countries to revalue their currencies and also on a certain devaluation of the American dollar by raising the price of gold in dollars. President Pompidou stated on this score that a return to firm parities of currencies determined by the relation to gold was in line with the principle advocated by France.
On December 17-18 Finance Ministers and managing directors of central banks of the Group of Ten assembled in Washington. The meeting, presided over by US Secretary of the Treasury John Gonnally, adopted decisions corresponding to the Nixon-Pompidou understanding reached in principle in the Azores.
The agreements on monetary questions reached in Washington (they were named Smithsonian, after the institute where the financiers met) initiated a restructuring of the international monetary system.
The United States undertook to raise the official price of gold from $ 35 to $ 38 per troy ounce of pure gold, and thereby devalued the dollar by 8.57 per cent. At the same time the question of restoring the actual convertibility of the dollar into gold, abolished in August, remained unsolved because the available US gold stock remained at the level of about $ 10,000 million, while the sum of dollars in the reserves of banks of other countries, estimated earlier at $ 50,000 million, increased still more towards the end of 1971.
Other countries, in turn, officially agreed to revalue their currencies raising them as follows in relation to the dollar: the Japanese yen by 16.88 per cent, the West German mark by 13.57 per cent, the Belgian franc and the Dutch gulden by 11.57 per cent. The gold content of these currencies was raised by 7.6, 4.61 and 2.76 per cent respectively.
The gold content of other national currencies either changed insignificantly or remained unaltered (the French franc and the British pound), but with respect to the dollar they also were raised to the same degree to which the dollar was devalued, i.e., by 8.57 per cent. Simultaneously, a decision was adopted on allowing the upward or downward fluctuation of currencies from parity by 2.25 per cent (in the case of opposite trends of rates this could create a difference of up to 4.5 per cent). The legislative procedure of approving the devaluation of the dollar by the US Congress was completed only in April 1972.
Having achieved the revaluation of a number of currencies of its partners, the United States agreed to lift the 10-per cent import surcharge. The US ruling circles acted on the principle that the revaluation of currencies in relation to the dollar would bring into action the monetary mechanism of stimulating American exports, especially to countries with a revalued currency. But owing to the cluttering of the channels of world circulation with US dollars and widespread world trade settlements in US dollars, the stimulating influence of the new correlation of settlement rates was diminished.
More than 40 countries, including members of the EEC, under US pressure, agreed with the proposal to extend the fluctuation rates from 1 to 2.25 per cent. This complicated mutual settlements among Common Market countries: it was becoming exceedingly difficult to apply the common policy of agricultural prices within the framework of the EEC, and so on.
Let us assume, for example, that the rate of the currency of one EEC country, the FRG, rises by 2.25 per cent as compared with the dollar, while the rate of the currency of another country, Italy, decreases by 2.25 per cent. In that case the divergence between their currency rates may reach 4.5 per cent. What complicated the situation was that in 1972 the question was settled of admitting Britain, Eire, Denmark and Norway to the Common Market ( Norway's application was subsequently withdrawn).
Enlargement of the Common Market during a period of monetary troubles could exert a particularly adverse effect on reciprocal trade and settlements between the EEC countries. That is why the question of more effective currency solidarity of the EEC countries, including future members, after the Smithsonian agreements acquired even greater urgency. These countries agreed to cut by half the permissible fluctuation of the rates of their currencies as compared with the level accepted by the Group of Ten at the Washington meeting in December 1971. In March 1972 Britain acceded to this decision. But this solidarity of the principal West European countries proved to be short-lived.
As prior to the devaluation of US currency, the reason for the extreme instability of currency rates was the oversaturation of the exchange reserves of capitalist countries with dollars. In the very first months of 1972 it became clear that the Smithsonian agreements did not lead to an equilibrium in currency relations and that a radical reform of the monetary system was imperative. At the end of June 1972 the British Government, suffering from financial strain and pressed by US capital, decided to let the rate of the pound float. This struck a blow at the currency solidarity of the Common Market countries. The floating sterling demolished the plans for regulating the currency rates of the EEC countries. On the eve of the 27th session of the IMF the EEC was deprived of the possibility of acting in a more organised way on questions of reforming the monetary system. This impelled EEC countries to hold additional talks on currency problems so as to create at least a semblance of solidarity before the IMF session.
On September 11-12, two weeks before the opening of the IMF session, ministers from ten countries (members and prospective members of the EEC, including Norway) agreed to set up a so-called European Fund of Monetary Co-operation. The centrifugal forces which were destroying the Bretton Woods system thus continued to operate, US financial circles made use of the IMF session which opened in Washington on September 25, 1972 to capture the initiative in the contemplated reform of the monetary system. On September 26, George Shultz, the new US Secretary of the Treasury, outlined the general principles of the reform. He voiced the opinion that the reform would require a transitional period. It became clear that the USA had no intention of accelerating the adoption of a reform. American ruling circles, undoubtedly, acted on the principle that time was on their side. France's representative, Giscard d'Estaing, who reflected the opinion of the EEC countries, made a proposal for three-stage reform. The first stage, the conclusion of agreements on exchange rates and the problems of developing countries, was to be discussed at the IMF session in Nairobi in 1973. The second stage was to be consummated by the restoration of the convertibility of currencies and the third was to establish an initial monetary standard.
An examination of the essence of the US proposals on the monetary reform makes it possible to single out the following two problems.
First, Shultz tried to set international financial circles against gold as the foundation of the monetary system and spoke in favour of an artificial medium of international settlements. "I do believe," he said, "orderly procedures are available to facilitate a diminishing role of gold in international monetary affairs in the future".2 "We contemplate," Shultz said, "that the SDR would increase in importance and become the formal numeraire of the system.''3 From this it seemed to follow that gold as an objective measure of value, standard of prices (in the form of the gold content of money units) and a universal equivalent could be replaced by an arbitrary ``numeraire''. How an SDR unit, equal to the dollar or its gold content prior to devaluation, would break its link with gold was not explained, however. ``Contemplation'' of the future role of SDRs, of course, could not offer a suitable basis for a discussion on this question at a broad international forum.
Second, the US Secretary of the Treasury spoke at length about the regulation of the balance of payments. The gist of his proposals was that in future an increase or decrease of foreign currency reserves of the respective countries should be regarded as the ``indicator'' of the favourable or unfavourable nature of the balance of payments. Measures were necessary for reaching an equilibrium in balance of payments, for eliminating a surplus or deficit. In other words, both countries with a favourable and unfavourable balance of payments had to take measures for removing the deficit or surplus.
The former had to revalue their currencies and take other measures necessary to eliminate the favourable balance. The latter could devalue their currencies and resort to direct restrictive measures for regulating their balance.
Thus, the representative of the United States, a country with an unfavourable balance of payments, prepared the ground for the subsequent measures of the USA, specifically, for the second devaluation of the dollar. Other proposals of the US representative, particularly, wider fluctuation of currency rates and liberalisation of the movement of capital, in fact, reflected former US policy.
The procedure for regulating balances of payments proposed by Shultz has aroused doubts. Its legalisation, within the framework of the IMF, would doom member countries to the constant changes of the exchange rates of their currencies during settlements and extreme instability of monetary and credit relations.
A special agency at the level of finance ministers, known as the Committee of Twenty, was set up within the framework of the IMF at that session to work out the reform of the monetary system. In the interval between meetings of the Finance Ministers various aspects of the reform were to be settled by a working group at the level of their deputies headed by Jeremy Morse (Britain). All questions of the reform of the monetary system were handed over to the Committee of Twenty. Having outlined in detail the basic principles for the reform of the monetary system at the IMF session in September 1972, US financial circles steered in advance the work of the Committee of Twenty into the channel of their monetary and financial policy. The second devaluation of the dollar by 10 per cent, effected on February 12, 1973, was an important step of this policy.
In his statement about the second devaluation of the dollar US Treasury Secretary Shultz in fact repeated the main principles for reshaping the monetary system that he outlined at the 1972 September session of the IMF.
Specifically, he laid emphasis on the necessity for procedures which could reduce the role of gold and enhance that of SDKs, thus overshadowing the question of restoring the dollar's convertibility. At the same time Shultz emphasised that the US Administration assumed no commitment to intervene in the foreign money market to restore the "currency equilibrium", leaving this to other countries. On behalf of the US Government, the Treasury Secretary also insisted on the need for liberalising the movement of capital between countries and mentioned the contemplated annulment of the so-called Interest Equalisation Tax on American capital flowing out abroad. Thus, he expounded a programme for the further expansion of American capital, and not a drive to eliminate the monetary disequilibrium which intensifies inflation.
After this preamble to the second devaluation of the dollar it became clear that the vast Eurodollar market would remain an uncurbed factor promoting speculative shifts of capital and instability in international monetary relations.
Indeed, during the 12 months in the interval between the September 1972 IMF session in Washington and the session held in Nairobi in September 1973, instability of currency and credit relations in the capitalist world was intensified. All attempts to eliminate or, at least, to slow down the inflation process in capitalist countries were of no avail.
The inflationary rise of prices, especially of consumer goods, worsens the material condition of the masses, particularly the workers, and arouses their resistance.
The class struggle assumes the form of open protests, mass action and strikes, which is compelling the ruling circles of the principal capitalist countries to step up the work of preparing the monetary reform,
The fundamental issues of the reform of capitalism's monetary system, however, remain outstanding and will, apparently, for a long time be the subject of discussion by statesmen at different levels.
The main fallacy of the unsuccessful search for ways of reforming the monetary system is undoubtedly rooted in the incorrect premise that under present-day commodity capitalist relations it is possible to disregard the objective regularities based on the law of value. Hence the attempts to eliminate the functions of gold as a measure of value, the standard of prices and universal equivalent in international monetary relations. By putting up against them the Utopian ideas of an international medium of circulation– a voluntarist ``numeraire''–the would-be ``reformers'' of the system are, on the contrary, aggravating the situation which is already exceedingly tense.
The exertions of bourgeois economists and statesmen who, disregarding the inflationary derangement of monetary relations, are trying to eliminate the operation of the law of value through reform cannot lead to success.
The monetary reform plan which the USA is seeking to force upon other countries obviously cannot eliminate the intrinsic flaws in the currency and credit relations of the capitalist world. Hence, the acute disagreements between the major capitalist countries. Under such circumstances, the Committee of Twenty has not been able to formulate acceptable proposals for a monetary reform. This came to light during the IMF session, held in Nairobi (Kenya) in September 1973.
Since then the Committee of Twenty and international financiers have arranged several meetings which, however, failed to get the monetary reform moving. As a result, uncertainty in the monetary sphere of the capitalist world has been increasing.
The year 1974 witnessed further chaos in the currency and credit relations of capitalist countries. Two cases in point are the decision of the French Government to let the French franc float and tbe new rise in the price of gold.
The announcement introducing the floating of franc particularly aggravated currency relations among EEC countries. The monetary solidarity of the Common Market countries was thrown into jeopardy, and the establishment of a monetary union of the Nine was deferred indefinitely. The prospects of agreement on a monetary reform within the framework of the IMF grew dimmer.
The capitalist monetary crisis continues apace, and new upheavals in the field of currency, trade and credit relations may be expected.