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From International Socialism, No. 60, July 1973, pp. 8–10.
Transcribed by Marven James Scott, with thanks to Paul Blackledge.
Marked up by Einde O’Callaghan for ETOL.
Capitalism is international and so is its trade. Trading and international movements of capital require a medium of exchange which is of stable value (so that creditors lend to debtors and governments hold reserves in a form not liable to sudden losses of value). The form of payment least likely to lose its value is still gold. But it is in limited supply and awkward and costly to transport.
In practice, gold has been supplemented and even at times partly replaced by the use of the money of a particular country, its currency. But the currency has to be, as nearly as possible, ‘as good as gold’ – that is, has a price fixed in terms of gold which does not vary, can actually be exchanged for gold at the bank that issues it (it is ‘convertible’) and is in plentiful supply in the world.
For a currency to be used as a substitute for gold, it has to be issued by an economically powerful state which can always meet its debts and can match the volume of its currency in circulation abroad with gold. Its currency must also be distributed in the world either because the country has exported it as investment, overseas, military spending or aid, or because it has paid for massive imports of goods and services from the rest of the world.
Since the beginning of industrial capitalism, two currencies have been used in this way – British sterling before 1914 and US dollars after 1945 – but in very different circumstances.
Before 1914, for a country on the Gold Standard, the volume of money issued at home was tied to the quantity of gold in its reserves in the central bank (in Britain, the Bank of England). If the country imported more than it exported – producing a balance of payments deficit – foreign sellers would take payment in gold so that the reserves would fall. This would force a cut in the supply of money at home.
Supposedly, this would force the economy to contract – there would be a deflation. As a result, the demand for imports would be cut and the price of exports lowered, so producing – in theory – a restoration in the balance of payments (the reverse cycle followed an excess of exports over imports).
In practice it was more complicated. For example, deflation implied a cut in the price of labour, wages, and unemployment. The capitalists were always eager to see wages as the crucial price. But cutting wages also cut the market for what was produced, and could turn deflation into slump, to the cost of the capitalists. Unemployment was tolerable but massive bankruptcies were not.
The Gold Standard before 1914 rested not simply upon gold. The British currency, sterling, was used as an absolutely reliable substitute. Economically Britain was the dominant world power, the largest importer of foodstuffs and raw materials and the largest investor of capital abroad. Sterling met the requirements of a substitute for gold.
The First World War brought the system – and Britain’s paramount position – to an end. It had depended on British economic power and free trade. Both free trade and sterling convertibility collapsed in 1931 when foreign holders of sterling demanded to cash it for gold when the British reserves could no longer cover all British debts.
The 1944 Bretton Woods conference tried to lay down the basis of the post war monetary system – with the US and Britain taking the lead. The two powers did not attempt a return to the old order precisely because of the deflationary policies imposed by the gold standard, and the political implications of heavy post-war unemployment. It was Britain rather than the US that argued for high employment as one of the aims of Bretton Woods.
The new system required that every currency be fixed in price in terms of gold, but did not demand that the domestic money supply be regulated by the size of the gold reserves of the country concerned. The price of dollars was fixed, and it was assumed that the dollar would play the key role as reserve currency – the dollar, once fixed, became the measure of value of all other currencies.
At the same time, the International Monetary Fund (IMF) was created to receive from member countries ‘quotas’ – partly in gold, partly in the currency of the country concerned – the proceeds of which were used as temporary loans to countries with balance of payments deficits.
No blue print on its own could restore the fortunes of capitalism in 1945. Two major problems had to be overcome before any real change was possible – the restoration of each economy simultaneously, and the provision of an adequate supply of dollars. If only a few economies revived, they would set up a round of competition that would finally drag them back to the condition of the others. An international compulsion was required which would lever up the system as a whole.
Arms expenditure provided the solution to both questions, and so the basis for the stability and unprecedented expansion in world trade and the world economy since 1945. Defence spending by the state offered business guaranteed profits and so induced levels of investment capable of supporting full employment and sustained expansion through the 1950s.
State spending on such a large scale would normally generate rapid inflation [1], and in any one country where this happened, its export prices would sooner or later reflect this. But in practice, the very rapid expansion in productivity stimulated by defence-induced investment damped down inflationary pressure.
Furthermore, once the standards of rivalry in arms expenditure were established (by the US), almost all countries were compelled to conform. Each, therefore, through its own arms spending tended to make uniform the level of inflation. Arms provided the international compulsion which drove all towards expansion.
For the second problem, US overseas military expenditure and aid (most importantly, the Marshall Aid programme from 1947) provided a stream of dollars. Flooding the world with dollars primed the pump of the world economy and permitted the US to accumulate gold in exchange.
For those countries actually forbidden to spend money on arms – Japan and Germany – conditions were enormously advantageous. They exploited the rapid growth of world markets and rising productivity without having to maintain a proportionate share of the defence spending which made it possible – indeed, they were able to devote an even greater share of their resources to investment. In due course, both economies grew to the position of being able, in turn, to challenge US economic hegemony. Even in the fifties, the rising influence of Europe was expressed in the 1958 return to convertibility and creation of the European Economic Community.
The dollar famine of the early fifties gave way to a dollar glut in the early sixties. The absolute increase in US overseas military expenditure and export of capital was not matched by an equal expansion in exports or revenue from abroad – the balance of payments slid into the red. America was able to escape the implications of this for much longer than any other country because the dollar was the main world currency and no other power was economically in a position to challenge it.
Any threat of a devaluation of the dollar in terms of gold, any hint that dollar payments would no longer be accepted by other major powers because their value was in question, would have threatened ruin to the reserves of all and so a crisis in the system. The debts of the UK were the burden of its rivals. [2]
The others were financing the US deficit by agreeing to accept dollars in settlement of debts rather than demanding gold in conditions where the true value of the dollar was being undermined. In 1960, Washington announced that the gold held in the US could no longer cover all dollar holdings abroad. Some countries – led by France – began to sell their dollars and replace them with gold.
The changing balance of power between Japan and Europe on the one hand and the US on the other provides one dimension of the assault on the dollar. Another is the level of inflation and the increasing determination of organized labour to resist further increases in exploitation. All serve to pressurize profit margins, and so induce even more extreme efforts for each rival to subordinate all the others.
The balance of payments consists of three elements. First is the difference between the value of the imports and exports of merchandise (the balance of trade). To this is added the difference between the value of services bought or sold (banking, transport and so on, called ‘invisible’) to make the ‘current’ balance of payments. Britain, for example, for many years has had a trade deficit but a balance of payments surplus because ‘invisible’ earnings more than outweighed ‘visible’ losses.
The third item is capital investment overseas. Capital held overseas can produce a flow of earnings in the form of profits, dividends and interest which figure as ‘invisibles’ on the ‘current account’. But the initial flow of capital out of the investing country is registered as a ‘loss’ in the accounts, and an inflow of foreign capital is counted as ‘income’. When the difference between the outflow and inflow of capital is combined with the current balance of payments, the result is the ‘overall’ balance of payments.
However, not all capital flows are for investment purposes. Some ‘capital’ moves for purely speculative reasons – to gain from local high rates of interest (the rate of interest is the price paid for capital). Where currency exchange rates are expected to change, there will also be capital movements – out of currencies expected to devalue and into currencies expected to revalue.
This is the so-called ‘hot money’. Its volume is now so large that it can wreck the current balance of payments figures and force devaluation or revaluation. The US export of dollars – reloaned by European banks to insurance companies, multinational firms and other business requiring short term dollar finance – has created the enormous pool of Eurodollars (which could be as large as 70 thousand million dollars).
Small changes in expectations set off large and growing movements of money as businessmen scramble to get out of any threatened currency. Governments are forced to try and build reserves even higher to protect themselves. To introduce restrictive regulations would be very difficult in practice – for example the internal accounts of multinational companies span several countries and can easily conceal the transfer of vast sums – and would directly contradict the declared aim of the capitalist powers to expand the freedom of movement of goods and capital.
Monetary crises have been increasing in number and severity over the past decade. Now, the complete Bretton Woods structure is gravely fractured.
British capitalism has had more than its share of monetary strain for two reasons. First, British industry is less competitive than its rivals. British capitalists have tended to invest more abroad than at home, so weakening the balance of payments in the short term and export capacity and technology in the long term.
This tendency in recent years, is partly a response to the fact that the British working class has waged a more sustained struggle against exploitation than in many other advanced capitalist countries.
Second, in monetary terms, sterling has been a reserve currency. As a result, slight balance of payments difficulties lead to much larger movements out of sterling than for many other important currencies. The US has stiffened sterling’s ability to resist speculative movements since sterling was the first line of defence for the dollar.
The other major trading powers have also helped since a British devaluation could give it a competitive advantage over the rest (by cheapening British exports), could start a com-petive devaluation between countries and seriously disturb the whole of world trade.
If sterling came under fire first, it was really the dollar that was mainly concerned. A series of arrangements have been set up to try and prevent a dollar devaluation – agreements among the richest powers (the ‘Group of Ten’) to buy each others currencies when they weakened on the exchanges, to ‘swap’ lump sums of each others currencies, to refrain from buying gold at its vastly inflated and rising price.
At the same time, the US government has tried to right its balance of payments – by domestic restrictions, taxation to discourage capital exports, cuts in foreign military and pressure on Germany and Japan (and others) to support a much greater share of military expenditure. Without success.
In 1971, the US announced the withdrawal of its commitment to pay gold for dollars (which in effect was a devaluation). A further major crisis in the middle of 1971 forced the realignment of currencies with the devalued dollar (the ‘Smithsonian settlement’). 1972 saw these alignments then disintegrate as one currency after another ‘floated’ – that is, their fixed price in terms of gold was scrapped.
There is now no one ‘international reserve currency’, but several of different relative strengths. This reflects that fact that the world is now dominated not by one single power but by several. Undoubtedly, the US remains the most powerful, but its position is increasingly threatened by Japan and Europe.
The competition renders the system increasingly unstable, increasingly outside the control of one centre. The creation of the Common Market was an attempt to create an area of market stability on a size comparable to that of the US but partly excluding US competition.
The standard response to increasing rivalry is the attempt to keep out foreign imports and capital, ‘protectionism’. The US government has for the past five years been moving towards forms of protection, supposedly as a bargaining counter in negotiations for expanded trade with Europe and Japan. Europe has also made moves in the same direction form time to time.
One advantage for the US in a straight economic competition with the Common Market is the monetary disunity of the Ten: each currency is subject solely to its own government. The most powerful elements in the Market favour a ‘common float’ where all European currencies are fixed with each other but float together in relationship to the rest of the world (the ‘snake’).
The weak – the British – would accept this if the gold reserves of all the other nine were to be used to back sterling. But of course, the rest are not willing to bale out sterling. A fixed rate without the required reserves would tend to impoverish the poorest elements of the Ten.
Many other proposals have been made – a return to a full gold standard, raising the price of gold, or creating a new world currency (IMF’s special drawing rights or SDRs). The essential problem remains unaffected by these proposals – the unstable balance of economic power in the world, the jockeying for advantage, and the assault – to different degrees – of each capitalist state upon its working class.
The real problems do not lie in the sphere of money circulation but in production. Monetary questions are a prime example of the mystification intrinsic to capitalism. The struggle for power of the leading capitalist countries is transformed into a debate about technical adjustments in relationships.
At each stage the adjustments follow changes in the world economy and transmit those changes in certain forward imperatives – in this case, the drive of each capitalist class to secure its own survival in the struggle with its rivals at the expense of its working people.
1. Insofar as inflation reflects the need to shift income from labour to profits, arms expenditure is less inflationary in that it does not reinforce any tendency for the rate of profit to fall. By absorbing large quantities of ‘values’ (capital and labour power) in ‘waste’ production, the overall organic composition of capital in the rest of the economy is kept down. Public works schemes do not have this effect and so are of limited value in reviving a depressed economy.
2. See the comment of a prominent US economist in 1962: ‘All but $0.6 billion (US) of the $6.9 billion gap between Western Europe and Canada’s deficits and their gold and dollar accumulations can be traced, directly or indirectly, to our own (i.e. US) exports of private capital, military expenditure and foreign aid’ – Robert Triffen, The World Money Maze, London 1966, p. 98.
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