9

9. DEFENCE OF THE DOLLAR

The policy of "defending the dollar", which was the hub of President Kennedy's home and foreign policy, was also pursued by Lyndon Johnson. At the Presidential elections in the autumn of 1964 Johnson advocated the continuation of Kennedy's measures. Moreover, it was necessary to approve the bills drawn up under Kennedy, the Interest Equalisation Tax bill, which meant a tax on capital invested abroad, and the bill on reducing the federal personal and corporate income tax. Both bills had a bearing on the defence of the dollar and the capitalist monetary system and were designed to improve the balance of payments and to liven up the economy within the country since its growth rate was lagging behind those of other countries.

The question was not whether the Interest Equalisation Tax would stop the outflow of capital or not but whether the measure was at all necessary since the country received from its foreign investments a net difference of $2,700 million.1 The groups of American capitalists which had already invested or intended to invest free capital abroad were hostile towards any restriction of investment. This striving for ``freedom'' in utilising capital was spurred on by the fact that the rate of return and the level of interest on capital abroad were higher than in the United States with its low industrial growth rates in those years.

But these private group interests stood in opposition to the general class interests of US finance capital, to the desire to preserve the dominant position of the dollar in the world monetary system and the advantages following therefrom.

Table 12 Selected Economic Data: United States and Western Europe2

United States EEC Great Britain
Population–mid-year 1960 (millions)
GNP at current prices in 1961 ('000 million dollars) ......... 181 505 169 179 52 65
National income per capita, 1961 (dollars) ............. 2,310 771 1,080
Gold and foreign exchange reserves, end 1961 ('000 million dollars)
Growth of production, 1950-1960 (per cent) . . .......... 38 16.0 70 3.3 (36)
Annual growth rate in GNP, 1951-1960 (per cent) ............ 2.6 5.3 2.7
Annual growth rate in industrial production, 1951-1960 (per cent) . . 3.0 7.4 3.2

Source: The Impact of the Common Market on the American Economy, p. 23.

The breakdown of this system threatened to bring about the complete outflow of the American gold reserves, an increase in the dollar price of gold, i.e., the actual devaluation of the US currency and chaos in credit relations of the capitalist world. The latter was all the more dangerous because the United States was the chief creditor country. In addition to these arguments in favour of restricting the outflow of capital in the undesirable forms of portfolio investments the following point was raised: faced with a tax on foreign portfolio investments, American investors would try to find a use for their capital within the country, including industry, which could provide an additional stimulus to economic growth. From this point supporters of the Interest Equalisation Tax–among whom were the most prominent advisers of President Kennedy and influential circles of the Democratic Party–built a bridge to other measures. In their opinion, the Trade Expansion Act and the law reducing income tax were to open new spheres for the application of the capital flowing out abroad in the form of loans, and so on. A reduction of the federal personal and corporate income tax (according to estimates, by $11,000 million in the course of the fiscal year) was to extend the consumer demand and enable corporations to increase output in the country.

Thus, behind the apparently separate tax questions lay a whole economic programme. It was a programme for a massive economic offensive by US finance capital against foreign competitors, in defence of its shaken position in the world economy. The expansion of exports and the Interest Equalisation Tax were to serve as the weapons in this offensive.

While the expansion of American exports could directly strike at the interests of foreign competitors, the operation of the Interest Equalisation Tax could no less sensitively affect those who were accustomed to utilise the relatively cheaper American credits abroad.

The point is that every tax on capital, as a rule, is shifted by its owner on to the users of capital. Accordingly, when introducing an equalisation tax on incomes from portfolio investments, the US Government expected that American creditors would immediately raise the interest rate on loan capital for foreign borrowers. Thus, the interest rate on American credits would rise to the level of rates in other countries and would be ``equalised'' with them. Hence the name ``Equalisation'' Tax.

Such an influence on American creditors with the help of the tax would bring pressure to bear on international credit, narrowing its base and causing a world-wide rise of the interest rate on capital.

Foreseeing that, while the Equalisation Tax was going through the legislative machine, American capital might flee to other countries, the authors of the bill provided for its retroactive operation. That is why, although the law was passed and came into force on September 2, 1964, after more than a year of discussion and struggle between different capitalist groups, its operation to some extent had made itself felt even prior to the adoption of the Act, immediately after the bill was made public.

The Equalisation Tax Act provided for tax on profit yielded by capital invested abroad depending on the period for which it was invested, up to 15 per cent and on the whole raised the cost of credit by 1 per cent per annum on the average. This caused a general tendency to raise the credit rate in the world capital market. So it was not surprising that Washington was showered by reproaches and protests from the foreign recipients of American credits. There were even formal government protests, for example, by Japan. The reason for the protest was that the Act made an exception for Canada. The Japanese Government laid claim to a similar privilege. Actually, the Japanese Government was dissatisfied not only because Japan had to pay more for the American capital received to cover the deficit in the US balance of payments, but also because the tax brought about a general rise in interest rates.

In the so-called Ten Points of his Presidential programme, made public in January 1964, Lyndon Johnson directly associated the sixth point on the Interest Equalisation Tax with the defence of the gold content of the dollar and the balancing of international payments. "We must continue," he stated, "through such measures as the Interest Equalisation Tax, as well as the co-operation of other nations, our recent progress toward balancing our international accounts. This Administration must and will preserve the present gold value of the dollar.''3

The determination of the United States to preserve the foundations of the capitalist monetary system and its backbone, the dollar equated to gold at an unchanging ratio, was once again reaffirmed.

In this context it is necessary to quote one more point of the Presidential programme, namely, the fifth, concerning the tasks of US foreign trade. "We must expand world trade. Having recognised in the Trade Expansion Act of 1962 that we must buy as well as sell, we now expect our trading partners to recognise that we must sell as well as buy. We are willing to give competitive access to our market, asking only that they do the same for us.''4

It is difficult to give an adequate definition to this point of the programme because it is impossible to precisely determine the fundamental difference between the demand for liberalising international trade and the open declaration of a competitive struggle.

As for the Interest Equalisation Tax on foreign portfolio investments, ways of evading it were found before long (specifically, through Canada, investments in which were exempted from the operation of this law). It should be noted that Canada is not only the main sphere of investment for American capital. It has at the same time, as it were, become a kind of transfer junction for it. It is safe to assume that a considerable part of the US investments officially listed in Canada have in one way or another been reinvested, particularly in the British Commonwealth. Canada has become a loophole utilised by US investors for circumventing the Interest Equalisation Tax. As a matter of fact, this is not a new trick.

US capital flowed to other couiitries via Canada not directly but indirectly. Instead of being repatriated to the United States, the big profits on capital in Canada were reinvested not only in Canada but also in other countries.

A picture of the distribution of US private investments abroad was presented in October 1962 by Secretary of State Dean Rusk at a meeting of businessmen in Hot Springs. Canada held first place. According to~|Rusk, of the 3 34,700 million of direct private investments abroad the biggest part was in industrially developed countries. Of them $]11,800, million were in Canada and $7,700 million in Europe, of which $3,500 million in Britain and $3,000 million in Common Market countries. A large sum, about $8,200 million, was invested in Latin America, $2,500 million in Asia and approximately $1,000 million in Africa.5

As pointed out earlier, the Interest Equalisation Tax did not apply to direct investments. But even after it was introduced on portfolio investments, not only direct investments but also all other increased, as was reflected in the balance of payments.

Table 136

US Balance of Payments (million dollars)
1903 1964 1965

Balance of goods, services, remittances and pensions
US Govt. grants and capital flow, net . ... 5,030 –3,581 7,611 –3,560 5,963 –3,375
Grants, loans and net change in foreign currency holdings, and short-term claims –4,551 –4,263 –4,277
Scheduled repayments on US Govt. loans . . . . 644 580 681
Non-scheduled repayments and selloffs ....... 326 123 221
US private capital flow, net Direct investments .... Foreign securities ..... –4,456 –1,976 –1 , 104 –6,523 –2,416 –677 –3,690 –3,371 –758
Other long-term claims: Reported by banks . . .
Short-term claims: Reported by banks . . . –754 -781 –941 –1,523 –231 325

(Source: Federal Reserve Bulletin, November 1966, p. 1726.)

Table 13 shows that, notwithstanding the tax designed to curb the outflow of American capital, no noticeable changes for the better occurred. On the contrary, the net investments of private capital abroad in 1964 rose steeply. Direct investments which were not restricted also continued to rise. In 1964 there was, on the whole, a definite growth in longterm] and short-term investments (deposits and others) through banks. Apparently, the private interests of finance capital prompted investors to disregard the state interests which the federal legislative and executive bodies sought to protect. Anxiety on this score was quite often voiced in the press and in official statements. Similar anxiety was also displayed in other capitalist countries. It was aroused not so much by the failure of Washington's measures to protect the dollar as by the very fact of legislatively restricting foreign investments of US capital. This measure taken by a country rightly regarded as the world creditor was unusual from the viewpoint of capitalist practices. It affected the interests of other countries, restricting the possibilities of credit, and raising the interest on loan capital. This, however, was the practical and not the main aspect of the matter.

The fundamental aspect was that the regulation of the interest rate by taxing profits on investments abroad was introduced into world practice by the creditor country itself. This in effect was an attempt to somehow compel private capital to forego its selfish interests in favour of the general state interests, which in a capitalist country are the general class interests of the bourgeoisie.

It was an attempt to somehow mitigate the basic contradiction of the capitalist mode of production–between the social nature of production and the private capitalist form of appropriating the results of production. In the given case some groups of US finance capital preferred foreign portfolio investments as the best form of appropriating interest, a part of the profit, while this, through currency circulation, adversely affected the US economy and the entire world monetary system favouring the United States.

It is not surprising that the state as represented by President Johnson and his Administration tried somehow to combine in new forms private capitalist and state interests. The relevant measures once again demonstrated that the state machine in the USA, as in other capitalist countries, protects the general interests of the capitalist monopolies. In all questions of principle the voice of the monopolies is decisive.

The Johnson Administration in particular sought to somehow reconcile the group interests of monopoly capital in the United States itself and to coordinate them with the interests of other capitalist countries within the framework of the monetary system functioning under the aegis of the IMF. But Washington's efforts did not produce the expected results both because of differences within the US ruling circles and also because the International Monetary Fund itself had begun to totter. The latter was specifically linked with the weakening of Britain, one of the pillars of the IMF. Britain was a principal organiser of the IMF because during the war it tried to ensure the normal functioning of the international credit system, of which the United States was the centre (when the war ended Britain, after a period of vacillation between inflation and deflation, nevertheless decided to normalise its currency). It was this question that was settled by the devaluation of the pound in 1949, after which Britain utilised the IMF for imparting firm convertibility to her currency, and in this respect competed to some extent with the United States.

The pound, just as before the war, gradually assumed a prominent place in international payments, alongside the US dollar, and became a reserve currency for other countries. Britain's quota in the IMF, as noted earlier, was the largest after the United States. She succeeded also in increasing her gold and exchange reserves, which, incidentally, was facilitated by the fact that British capital held strong positions in gold-producing countries, especially in Africa. The reinforcement of British positions in the monetary system was also facilitated by her ties with the dominions and countries of the sterling area, which kept resident accounts in London. "The major distinctions which characterised the sterling area are: a) a system of monetary control extended to currency circulation between the area and the rest of the world modelled after the British pattern and based on an unchanging rate of currencies to sterling and in effect single for the entire area; b) participation of the area's countries in the 'dollar pool', that is, the obligatory handing over to the central reserves in London, at the stable fixed rate, the entire or part of the receipts in dollars and other scarce foreign currencies and also of gold; c) the keeping of the biggest part of the foreign exchange reserves of the area members in the form of sterling balances in British banks.''7

This definition of the essence of the sterling area and the role of Britain in it shows that in the capitalist monetary system this area represented, as it were, a state within a state. The form of this coexistence was the "dollar pool", which enabled London to concentrate the gold and foreign exchange reserves of the sterling area and, on this basis, to impart to the pound the necessary stability of an international currency on a par with the dollar. For British finance capital it was important that this system should operate smoothly and that Britain should play a leading role in the foreign trade of the sterling area countries, while they strictly adhered to monetary discipline: they concentrated their foreign exchange reserves in the form of sterling balances in London banks. Lenin drew attention to the specific features of Britain's financial position. It is not by chance that he quoted the following excerpt from an article by Alfred Lansburgh: "The continual holding of a large portfolio of British bills of exchange means, in practice, that the country in question puts considerable resources at London's disposal, which for its part London can, and does, use to further finance the foreign trade of other countries and in this way strengthen its own sterling currency and its own clearing function.

Thus, owing to the gold value of the pound sterling, Great Britain is always able to put at the service of her credit system, besides her own large capital assets, also several thousand million marks of foreign money.''8

Such was the traditional role of Britain and she tried to play it after the Second World War too.

In the 1950s, thanks to the system of trade preferences, the role of Britain in the commerce of the sterling area countries was quite substantial. This helped her maintain at a high level the role of London as one of the biggest financial centres of the capitalist world. In 1958 Britain had a gold stock of $ 2,807 million, bigger than any other West European country. At that time it was equal approximately to the gold reserves of France, Italy and the Netherlands combined.

The British pound, as the second international currency after the dollar, resting on the financial relations which arose in the sterling area, played an important part in international payments. The ruling element of Britain to a certain extent adhered to the same financial policy as the US ruling circles. It widely introduced its currency into other countries unperturbed by the mounting sum of Britain's liquid liabilities abroad. Britain was the second creditor country after the United States, but the long-term investments of British capital, although they contributed considerable sums in the form of profit on capital to the balance of payments, could not compensate for the adverse trade balance. Britain's foreign trade clearly lagged behind other countries owing to a slow economic growth rate, while the latter was, to a considerable extent, explained by the technological lag of industry. The investment policy of British monopoly capital greatly leaned towards foreign investment to the detriment of home investment. The result of all this was that the second biggest creditor country constantly had a strained balance of payments, which in 1964 endangered the position of the pound.

Britain's gold and foreign exchange reserves were substantially reduced, while the presentation of its liabilities for payment in gold or hard currency was mounting.

Finding herself in a difficult financial position, Britain resorted to what seemed to be a normal way out–a loan from the International Monetary Fund amounting to $1,000 million. But this failed to normalise the country's finances and strengthen the pound.

It should be borne in mind that IMF loans differ from ordinary ones in that the recipient country, in accordance with its quota and the existing rules, pays into the fund a sum in its own currency equivalent to the loan. This sum, upon the expiration of a definite period (not more than four years) has to be exchanged or, as it were, redeemed, for hard currency or gold. In this case the currency of the borrowing country, as it were, replaces a promissory note or bill. In essence, there is no difference in principle between a bill of exchange and bank notes. Bank notes, in Marx's definition, are a liability of the bank issued to the holder. The parallel between a bill of exchange and the national currency deposited in the IMF to cover the loan received in foreign exchange can also be supplemented by the point that, just like the discounting of a bill, the IMF may sell the national currency if there is a demand for it from other Fund members. Consequently, it may happen that other IMF members will fully or in part buy the deposited national currency for their needs. This does not mean, however, that the borrowing country will be freed from repaying the loan. It will pay for its currency by exports and international services when, in case of a favourable trade and payments balances, it will receive, in final settlement, its own currency held by other countries.

But all this, as a Russian saying has it, looked easy on paper, but there were many hurdles in real life. And it was these obstacles that proved too much for Britain's foreign payments. The main one was the deficit of the balance of payments, while Britain's liquid liabilities in pound sterling were at the disposal of other countries in excessive amounts. That is why the £ 1,000 million deposited with the IMF was the additional issue which filled the cup to overflowing. These financial operations, far from improving Britain's financial position and reinforcing the pound, on the contrary, worsened it. This was conclusively demonstrated by the fact that the following year Britain had to resort to another international loan for an even bigger sum, $ 1,500 million.

Britain's big loans upset the financial position of the IMF which found itself burdened with too many pounds for which there was no demand. More than that, foreigners began to withdraw their sterling balances from British banks in order to transfer them to other countries and exchange for gold. This led to the outflow of Britain's gold and exchange reserves. The situation in the entire monetary system became more tense than before the onset of the sterling difficulties. But the position of the dollar still seemed to be stable. This is partly explained by the fact that speculators, unable to exchange sterling for gold and in anticipation of its devaluation, exchanged pounds for dollars. Greater dangers for the American dollar and the entire capitalist monetary system were already discernible behind all these feverish activities in the world money markets.

The specificity of the situation was that both the leading world creditors, the United States and Britain, had landed in a tight spot. Moreover, the reason was one and the same– the excessive piling up of long-term credits, the gap between long-term foreign investments and short-term liquid liabilities of these countries which exceeded their national gold and foreign exchange reserves and other assets. The private capital of these countries continued to extract high profits on foreign investments and frequently acted contrary to the national interests. All this was a manifestation of capitalism's general crisis. But one of the main attributes of capitalism in the period of imperialism, the export of -capital, remained.

If we compare the revenue of the leading capitalist countries from external economic ties in relation to their national product, the United States and Britain stood out for the high incomes (100 per cent) on the invested capital. Particularly big was the share of these incomes in the United States. Let us recall that in the case of a creditor country income on investments exceeds its payments of profits and interest on capital. From this viewpoint, the United States and Britain likewise stood out among the main capitalist countries.

Table 14 External Receipts and Payments of Some Countries as Compared with Their National Product (per cent of GNP)9

Countries
Trade Transport Tourist travel Profit on capital Other services Payments receipts
United States .... 3.8 14.2 15.7 14.9 12.1 11.6 28.6 20.1 9.2
Britain . ... 2.8 14.4 15.4 12.9 11.3 13.9 28.6 21.4 8.5
Canada . ... 3.3 2.7 1.2 1.2 0.6 1.5 1.7 3.9 0.8
FRG 3.8 2.8 1.5 1.4 0.7 1.8 1.7 1.7 1.6
France . . . . . 1.9 0.7 1.4 0.6 1.2 2.1 1.1 0.5 0.1
Italy ........ 3.4 0.8 1.5 1.3 0.8 0.3 1.4 0.9 0.1
Benelux 9.1 3.1 0.5 0.3 0.5 0.3 1.4 0.4 0.2
Sweden 2.2 1.7 1.9 0.7 0.4 0.5 1.2 0.1 0.4
Japan ........ 2.0 1.6 0.8 0.5 1.4 1.9 3.2 0.8 0.3
0.8 1.0 0.6 1.4 1.2 1.1 2.1 1.5 0.8

Source: Economic White Paper for 1964, Tokyo, 1964, p. 44. (In Japanese.)

Table 14 shows that of all the countries only in the United States and Britain did '"come on capital abroad substantially exceed payments under this item in percentage of their gross product.

This characteristic feature of a creditor country was less strikingly pronounced in countries like Belgium, the Netherlands and Luxemburg, and also in France where the ratio of receipts from foreign investments to the national product exceeded payments under this item by a fraction of a percent. It is even more pronounced in Sweden where receipts on capital in percentages were four times higher than payments, although they amounted to 0.4 per cent of the gross national product. But since the magnitudes by countries depend on the absolute value of the gross national product, the actual sums of external income and expenditure on capital differ considerably.

Mention should also be made of one more circumstance usually emphasised by US ruling circles at all kinds of international trade and tariff negotiations–this is the low ratio of foreign trade, particularly exports, to the GNP. This was the reason given for the need to increase exports by President Kennedy in his speech at the conference on exports held in the White House on September 17-18, 1963. He explained the need and possibility of extending exports as a major item of the balance of payments by the fact that the United States exported 4 per cent of its national product, while, according to him, the respective percentage in other countries was in the Federal Republic of Germany 16, Italy 10, Japan 9, and Sweden and the Netherlands 19 and 35 per cent respectively.10 The President did not try to analyse the reasons for the high ratio of exports in West European countries. This follows from their greater trade interdependence expressed in similarly big imports. But notwithstanding the low ratio of exports to the gross national product, the United States had regularly a favourable balance of trade. Thus, in 1961 the excess of exports over imports by only 1 per cent of the GNP amounted to $ 5,500 million.

The crux of the matter is not a shortage of receipts from the export of goods and capital, but the spending on military ventures abroad. Secretary of State Rusk pointed out at the meeting in Hot Springs that the military expenditure abroad amounted annually to about $ 3,000 million and in general military appropriations in the budget amounted to 10 per cent of the GNP.11 Under these circumstances the export of US capital could not but lead to a balance-of-payments deficit. Johnson appealed to the patriotic sense of American businessmen, urging them voluntarily to limit investments abroad, above all, portfolio investments.

The Treasury Department, on instructions from the President, also tried to influence various corporations so as to make them spend less money abroad in the form of portfolio investments and to draw more from overseas, repatriating a much bigger share of the profits than usually. But this did not produce a notable result either. Not only direct investments continued to rise.

In 1964 short-term investment by American banks abroad almost doubled. US banks exploited the flight from the pound for currency speculation. The demand for Eurodollars increased in Western Europe and this to a certain extent restrained the presentation of American liquid liabilities in exchange for gold.

There were also other reasons which restrained the outflow of American gold in 1964. Foreign states obviously adopted a wait-and-see attitude as regards the legislative measures designed to normalise the financial settlements of the United States with other countries: the Interest Equalisation Tax, the reduction of the Federal personal and corporate income tax which Johnson succeeded in pushing through Congress before the Presidential elections. They also waited for the outcome of the elections, since the future foreign economic policy of the United States depended on them.

Lastly, mention should be made of the purely financial measures for protecting the dollar adopted in that period. Washington, for example, reached an agreement with the International Monetary Fund to the effect that the latter would place at the disposal of the United States, in exchange for dollars, part of its assets in convertible national currencies. If a demand were made for American gold in repayment of US liabilities, the American Treasury could place into circulation the respective national currency instead of gold. For this reason from 1961 onwards the United States, which formerly had no foreign currencies in the liquid form, began to accumulate a reserve of foreign exchange. In the first quarter of 1964 it was brought up to $ 440 million.

In addition, US financial agencies, together with a leading group of West European banks participating in the Bank for International Settlements in Basel, began energetically to regulate the price of gold in the London market by influencing the demand through the massive sale of gold which satisfied for a time the speculative demand.

A part in these operations was taken by the Federal Reserve Bank of New York (it usually represented abroad the entire Federal Reserve System), the central banks of Britain, France, the Federal Republic of Germany, Italy, Belgium, the Netherlands and Switzerland, in other words, countries possessing the biggest stock of gold. They formed the so-called Gold Pool for regulating the price of gold and set up a gold fund for this purpose. Half of this fund was provided by the United States, and the remaining half in fixed proportions by the central banks of the other countries. They, in turn, resorted to "gold intervention" in the market, whenever necessary, through the Bank of England, i.e., they would unexpectedly create an excess of the gold supply over the demand, and lowered its price. But naturally this operation led to a loss of part of the gold reserves of every country that was a member of the Gold Pool. It is not surprising that the United States regarded these collective actions with satisfaction.12 But naturally this ``help'' to the United States in maintaining the price of gold in dollars or defending the dollar hardly aroused enthusiasm among the ruling circles of the countries, whose central banks undertook to bolster up the shaky dollar with their gold reserves. Sooner or later these props had to collapse.

• 1Economic Report of the President Transmitted to the Congress, January 1962, Washington, 1962, p. 149.
• 2This table is incorrectly copied - note by NR)
• 3The Department of State Bulletin. Foreign Policy Briefs, No, 14, January 20, 1964, The President 10 Points Program.
• 4Ibid.
• 5The Department of State Bulletin, November 5, 1962, p. 686.
• 6(Inaccurately copied data - note by NR)
• 7S. M. Borisov, Sterlingovaya zona v valyutnoi sisteme kapitalizma (The Sterling Area in Capitalism's Monetary System), Moscow, 1957, p. 41.
• 8V. I. Lenin, Collected Works, Vol. 39, p. 79.
• 9(I could not correctly copy the data of this table either - note by NR.)
• 10The Department of State Bulletin, October 14, 1963, p. 596.
• 11The Department of State Bulletin, November 5, 1962, p. 684.
• 12See Federal Reserve Bulletin, March 1964, p. 305.