The following article, while it first appeared in 1980, provides a good analysis of the beginning stages of US economic decline, one of the manifestations of that decline being the fall in importance of the US dollar. More broadly it explains the connection between currencies and the strength of the actual productive economy – the place where surplus-value is created by workers, but which is largely ignored by bourgeois economics these days. It’s also a mark of the changes in capitalism – or, to be more precise, its increasing degeneration – that in recent years bankers have occupied a more prominent position and been frequently hitting the headlines.
by Tony Norfield
It isn’t often that bankers hit the headlines. While capitalist politicians expect to see their names in lights as frequently as they feel their status demands, the money men pursue their dealings quietly – almost secretively. So when Paul Volcker, chairman of the United States Federal Reserve Board, was splashed across the front page of every ‘quality’ newspaper the world over on October 7, 1979, it should have been apparent that the financial position of the West’s major economic superpower was, at the very least, worthy of discussion.
Should have been apparent to the workers movement, that is. But unfortunately the ruthless measures Volcker took to halt the slide of the world’s leading currency, the dollar, went almost unnoticed in the columns of the left-wing press. While the Financial Times observed that he had “administered the most effective shock to the US economy since the original OPEC price increase of 1973” (Financial Times, October 9, 1979), Volcker’s rearguard action to stave off America’s decline caused little comment in the Morning Star or Socialist Worker.
But in decline the USA certainly is. A month before Volcker announced stringent curbs on the growth of America’s money supply, Business Week, prestigious New York journal of economic analysis and stock market tips, celebrated its 59th anniversary with a major survey of past, present and future trends for world capitalism. It wasn’t much of a celebration. Business Week proclaimed: “The postwar period of US leadership and central bank coordination is now over. The international monetary system is sliding once again into economic competition and financial anarchy” (Business Week, Sept 3, 1979).
Business Week is right. Competition between the USA, West Germany and Japan is getting tougher every day. Though Frankfurt bankers approved of Volcker “putting America’s house in order”, his decision to tighten up on bank reserves and let US interest rates soar upwards soon unleashed retaliation from the German Bundesbank. On October 31 1979 it raised interest rates by a full percentage point and byNovember 12 the trans-Atlantic ‘interest rate war’ drove Business Week to warn that the USA and West Germany were “on a collision course” over monetary and exchange rates policies.
Competition doesn’t end there: it hits trade too. As the dollar sags further, European and Japanese exports into the USA work out dearer in dollar terms while US exports cost less. The world balance of trade thus moves in favour of the USA, pressing other nations to stiffen protectionist measures. At the same time American efforts to stabilise the dollar through deflation make it harder to sell into the States. They exacerbate inter-imperialist rivalries.
And anarchy really does rule in Wall Street and the City.* As the dollar’s international exchange rate plummets, holders rush to buy German marks and Swiss francs – or gold, silver and copper. In doing so they push the price of the dollar down still more. A consequence: US companies anxious to invest abroad find they no longer have the assets to do so.
The dollar – good as gold
Why was Volcker forced to take steps unprecedented in the entire history of US banking? What lies behind the chaos on the world’s money market? The international working class has every interest in cutting through the mumbo-jumbo of the banking world and understanding the global monetary crisis for what it is – an expression of the tumbling profitability of the capitalist system.
There was a time when dollars could buy anything. The condition on which the USA bailed Britain out during the Second World War was the destruction of the sterling bloc and the opening up of the British Empire, Latin America and the Middle East to US capitalists. Britain’s financial crisis of 1931 had proved that the pound could no longer continue as the world’s leading currency; but by 1944 the USA was ready to take up the position that Britain had vacated. It did so at a confeence of all the Allies at Bretton Woods, New Hampshire in July of the same year.
One of the most important decisions of the conference was to set up the Internatioanl Monetary Fund (IMF). The IMF laid down two rules. The dollar was to be convertible into gold at the fixed rate of 35 dollars an ounce. And the values of other currencies were to be fixed in terms of dollars alone, so that exchange rates could be changed only as a last resort. This had two consequences.
First, the dollar became the main currency for countries to hold their reserves of foreign exchange in. By the end of the war the USA held more than two-thirds of the world’s gold. It had enugh reserves at Fort Knox to cover every green bill that foreign firms or governments held. The dollar’s convertibility was unquestioned. It gained acceptance as the world’s strongest currency because each piece of paper printed by the US mint was backed by solid gold guarantees.
Second, the dollar became the universal means of conducting world trade and settling debts after the war. While the European and Japanese economies lay in ruins, the USA was responsible for more than half the world’s total industrial output. Demand for its commodities was enormous, and so was the demand for the dollars to buy them with. When, in 1947, the USA began Marshall Aid, a massive programme of loans to Western Europe to assist its struggle against ‘communism’ and accelerate post-war reconstruction, the money it sent came in dollars – claims on products of the massive US economy. The only way to do business across national frontiers was to do business in dollars.
The dollar’s unique position did not simply reflect the USA’s domination of the world economy. It helped strengthen it. To pay for imports, foreign governments had to build up their foreign exchange reserves – which meant their dollar reserves. This allowed the USA to maintain economic expansion at the expense of other countries, for it could buy both their exports and their factories merely by handing over the dollar bills they needed so desperately in exchange. More, it bought them cheap: the dollar’s high exchange rate made it worth a lot of money. And cheap imports helped check domestic inflation, while cheap foreign assets made foreign investment an easy way to make a fast buck.
The giant stumbles
It was not surprising that the USA ran heavy balance of payments deficits throughout the post-war period. But that was no problem; in fact it showed once again how the dollar helped the USA out while other countries suffered. Balance of payments deficits forced other countries to deflate and cut back imports (particularly Britain, which was famous for its ‘stop-go’ policies). That was the only way to maintain the exchange rate, for a currency only counted for something if a country could pay its way. But the exchange rate of America’s currency was fixed, so the USA could spend as much as it liked. The trouble was, it was all too much of a good thing. Behind the mighty dollar the US economy was fundamentally weak. A crash was bound to come.
Despite the fact that it ran a positive balance of trade throughout the post-war boom, the USA did not enjoy the very rapid growth rates of West Germany and Japan. While the German and Japanese ruling classes profited from the defeats they im;posed on workers before, during and immediately after the war – and took advantage of the destruction of capital that the war brought to re-establish accumulation at a higher level – the US economy expanded relatively slowly. Between 1960 and 1971, for instance, investment in the USA was only 17 percent of Gross national Product, compared with West German and Japanese figures of 25 and more than 30 percent respectively. Again, between 1950 and 1970 the USA’s share of world manufactured exports fell from 27 to 18 percent while West Germany’s rose from 7 to 20 percent and Japan’s shot up from 3 to 12 percent.
Why couldn’t America maintain substantial investment and basic competitiveness? The reason was simple. More than any other major capitalist nation, except Britain, the USA suffered from a tendency inherent in capital accumulation: the tendency of the rate of profit to fall.
It works like this. Each capitalist tries to build up more surplus-value by riaisng his firm’s productivity – by introducing more automation. But that leaves him with bigger bills for machinery and raw materials, and fewer workers to exploit for him to pay these bills. So his profitability decreases.** Yet the process doesn’t just stop there. To improve what he perceives as his ‘margins’, the capitalist raises his prices. When he finds his suppliers doing the same, he is forced to look for loans.
So along with slow growth anda declining share of world trade, the tendency of the rate of profit to fall brought the USA inflation and a massive expansion of credit. As if that wasn’t enough, it gave a double boost to America’s balance of payments deficit. First, more productive countries like West Germant and Japan accrued substantial dollar holdings from the proceeds of their competitively-priced exports to the USA. Second, US enterprises, disappointed with the low profitability of their undertakings at home, stepped up capital exports to more lucrative investment sites abroad – so adding to the stock of dollars outside the USA.
Matters finally came to a head in 1971, the year in which the USA declared its first trade deficit of the century. By this time inflation was on the rise. Total indebtedness had leapt from 500 billion US dollars in 1950 to 2,000 billion dollars. And the value of US liabilities overseas far exceeded what was in Fort Knox. The ‘Eurodollar market’ – dollars held by European firms and governments for the purpose of long-term investment – alone had grown from a mere two billion US dollars in 1960 to 60 billion dollars.
On May 3 1971 bankers all over Western Europe panicked. Everybody wanted to ‘get out’ of dollars and into something else – be it German marks, Japanese yen, Swiss francs, whatever. In West Germany a billion dollars changed hands in two days. By late July, US reserves were at their lowest level since before the war as governments demanded conversion of their surplus dollars into gold at the official price. Speculation against the dollar raged in Frankfurt, Tokyo, Zurich, Paris and London. Devaluation was certain.
President Nixon had to act. On August 15 he ordered a wage freeze, tariffs on imports – and the dollar’s release from convertibility with gold. It was the end of an era. The dollar proceeded to float down on the money markets of the world, making US exports more competitive, the purchase of imports and foreign assets more costly – and making dollar holders abroad very angry. The international monetary crisis began in earnest.
Cut loose from its golden anchor, the world’s money system broke up amid stormy seas. One by one, European governments followed Nixon’s example and devalued their currencies to ease their balance of payments deficits (Britain pioneered the development of this new weapon of international competition by its June 1972 decision to let the pound float). At the same time, they used their new-found freedom from the discipline of gold and the dollar to expand the money supply and issue massive quantities of credit. The result was simple: rampant inflation. Money wasn’t worth anything any more.
Carter’s last stand
By 1978 the USA was ready for a new dollar crisis. From three billion dollars in 1971, its trade deficit had reached a crushing 34 billion. In the first ten months of the year the dollar fell by 18 percent against the German mark and by 26 percent against the Swiss franc and the Japanese yen. On November 1 president Carter was forced to take drastic action to prevent a complete collapse of confidence in the dollar. He raised interest rates, placed restrictions on bank lending and – with the co-operation of foreign central banks – set up a 30 billion dollar fund to support it.
Carter’s conversion to monetarism solved nothing.*** By the summer of last year he was forced to adopt still more stringent measures to curb roaring inflation and the burgeoning growth of America’s money supply. Interest rates were sent through the roof and credit controls were tightened sharply. To ‘defend the dollar’ the US economy had to be squeezed remorselessly. At the same time the US ruling class opened an all-out campaign of nationalist hysteria against the oil supplying nations of the Middle East. The reason: OPEC’s higher prices meant that more dollars left the USA, so worsening America’s liabilities abroad and putting its currency under renewed prressure.
When the member countries of the IMF met in Belgrade in the first days of October 1979 the USA came on its knees. It proposed that central banks open a dollar ‘substitution account’ – that they help America write off its overseas liabilities by replacing some of their dollar reserves with IMF ‘Special Drawing Rights’, an artificial money based on a weighted mix of 16 major currencies. But though everybody was concerned about the havoc the international monetary system was in, nobody wanted to foot the bill to end it. As the Economist laconically observed, member countries “did not even agree to set a date for agreement” (Oct 6, 1979).
The size of the dollar holdings of foreign private capitalists give an indication of the USA’s problems. The Eurocurrency market, three-quarters of which is denominated in dollars, has grown at an annual rate of 23 percent over the last five years: it now lies at about 1,000 billion US dollars (Fortune, Sept 24, 1979). ‘Confidence’ in the dollar is now critical: “with hundreds of billions of dollars in ‘stateless’ money moving about the offshore Euromarkets outside the control of central banks, there is no limit to how far the dollar could plunge if private investors and speculators lose confidence in the US currency” (Business Week, March 12, 1979).
‘Take the money and run’ – but where?
Capitalist governments, banks and corporations will forsake the dollar. But how can they protect the value of their wealth? The mad scramble to get rid of dollars – politely termed ‘diversification’ in banking circles – can only exacerbate the monetary crisis and sharpen the struggle of imperialist powers to redivide the world market.
The bourgeoisie has two options – gold and other foreign currencies. Gold is certainly in demand: from its official price of 35 dollars an ounce (1971), it has risen to 150 dollars (1974-5), 250 dollars (Feb 1979) and now to more than 510 dollars. The IMF and the US Treasury have sold tons of gold from their reserves to keep the price down, but to no avail. In August 1979 a single West German bank bought up nearly all the US Treasury offered – yet the price kept on rising. Nothing can be done. Capitalists want to get rid of their worthless bits of paper and buy money with real value. And so the dollar plummets further.
Can other currencies provide the stability the dollar lacks? In recent years, the strength of West Germany’s economy has made its currency the main refuge from the dollar crisis. Since 1974 the German mark has become the second most important reserve currency after the dollar. Capitalists have confidence in its value; worldwide mark holdings more than doubled last year.
But while the mark remains the pivot of the European monetary system (EMS), it cannot replace the dollar on a global scale. As West Germany’s finance minister put it at the Belgrade IMF talks: “Germany is a medium-sized country that does not want to take over a leading position in world monetary affairs. The US alone must handle this” (Financial Times, Oct 4, 1979). West Germany can use the EMS to try to consolidate its position in Western Europe, but it doesn’t have the power to dominate the world economy in the way the USA did after World War 2.
The same is true for another potential reserve currency, the Japanese yen. Official holdings of yen have risen rapidly, yet they still form only three percent of world currency total reserves – less than a third of the mark’s share. But, like West Germany, Japan is using its currency to impress its economic superiority upon its neighbours. Commenting on moves by the Japanese government to ‘internationalise’ the yen, one financial journal has remarked: “The idea of an economically powerful country, to which surrounding countries are tied by monetary affiliation, must have appealed. . . to all Japanese who believe that Japan has a special position in Asia. Yen hegemony in Asia would serve to secure and support Japan’s increased presence” (Euromoney, July 1979).
Today’s currency impasse is only an expression of the growing tendency for world capital accumulation to break down. The decline of the dollar and the crisis of US capitalism make rivalries between different powers more and more vicious. The world economy is breaking up into competitive regional blocs. There can be no return to financial stability now that each national capital has to save itself regardless of the consequences. Instead governments will copy Cater’s treatment of Iranian money held in US banks and confiscate their enemies’ deposits. Or they will speculate wildly. Moving vast sums in and out of different currencies and different vaults.
Volcker took the steps he did to save the dollar as a desperate attempt to counter the effects of the collapse of American profitability. He may control the US Federal Reserve Board, but he cannot control capital’s descent into disaster. The working class has every interest in closely monitoring developments in the world f banking. As imperialist rivalries turn from economic sanctions to military skirmishes the capitalist class will look to workers to carry out its war plans.
This article first appeared in the British Marxist review the next step in January 1980. These days Tony Norfield blogs at Economics of Imperialism.
* This is one thing that has certainly changed in recent years, most especially since the global financial crisis (GFC) of 2007-8
** The City is the financial district in the centre of London.
*** For a more in-depth explanation of the law of the tendency of the rate of profit to fall, see How capitalism works – and doesn’t work
**** For more on monetarism see here