The Crisis of Keynesian Economics by Geoffrey Pilling (1986)

5 The Collapse of International Keynesianism

In Washington Lord Halifax
Once whispered to Lord Keynes,
'It’s true they have all the money-bags
But we have all the brains.'
(Gardner 1969: xvii)

In the last chapter we have suggested that the longevity of the postwar boom in Britain cannot be attributed to the operation of Keynesian policies but was produced by objective forces at work in the economy. Further, when traditional Keynesian policies to combat rising unemployment were attempted in the mid-1970s, they ran into the direct opposition of the International Monetary Fund. Bowing to this pressure, the then Labour government broke all the conventional Keynesian rules and began a deflation of the economy which has been followed by the Thatcher governments from 1979 onwards.

In one respect, however, it can still be argued that the 30 years or so which followed 1945 did constitute the Age of Keynes, if not on the level of the national economy then certainly on the plane of international economic relations. For these were the years in which the leading capitalist powers, led by the United States, attempted to establish a regulated international financial and economic order which would avoid the ravages of the 1930s and their attendant social and political implications. And although this order did not correspond to the exact pattern for which Keynes worked at the end of his life, it was none the less consonant with his general view: namely that appropriate state action, or in this case action by a number of states operating together, would be able to iron out the most violent amplitudes of the capitalist economic cycle. This new order was enshrined in the articles of the International Monetary Fund, brought into being as a result of the Bretton Woods conference which convened in 1944, with Keynes acting as chief British spokesman.

It was in a sense fitting that Keynes should assume this position, for one of the central issues which occupied him throughout his life was the struggle to fashion an international economic and financial framework in which British capital would be able to follow policies of its own choice. From his early concern with problems of Indian currency and finance, through his involvement in the controversies surrounding both the Versailles peace conference and the return to the Gold Standard in the 1920s, to his attempts at the end of his life to bring into being an international monetary order which would secure the survival of a chronically weak British capital, this was perhaps Keynes’ central preoccupation. In this task he was of course grappling with two closely related issues: first, the fact that from the beginning of the present century the capitalist system as a whole was in historical decline and second, Britain’s place as the leading industrial and financial power within this declining system had been taken over by American capital, whose unrivalled domination was so clearly visible at the Bretton Woods negotiations. An economic nationalist at heart, Keynes was at the same time forced to take cognisance of these fundamental and irreversible shifts in economic and political power which were characteristic of the present century.

The Gold Standard

This was no doubt a painful process given that Keynes had grown up in a world still dominated by British capitalism, even though that dominance was coming under increasing pressure from the time of his birth onwards. It was a world in which capital, both industrial and financial, had been accumulated in Britain for over two centuries and more, in which imperial markets still provided a sheltered outlet for anything British industry cared to chum out. Any malfunctioning of the economy, it was assumed, was due to internal rather than external factors. Long before he reached the end of his life Keynes realised that these conditions had disappeared, never to return. This was already evident to him in the 1920s; it was starkly obvious to many more as the Second World War came to an end. In a struggle to create a post-war financial system which would enable an enfeebled Britain to adjust without too much pain to its greatly reduced role in world politics and economics, he hoped to persuade the Americans to reflate the economy by means of an international clearing union. The Americans rightly believed that Keynes’ version of the new economic order would keep demand for commodities too high (in the initial post-war period this was largely demand for American commodities), would inhibit the free flow of capital (again predominantly American capital), and would prevent the use of monetary controls as an instrument of short-term economic policy. So Keynes’ plans ran up against the crude realities of American power, against which the intellect, even one nurtured at Eton, was no match.

From the 1920s onwards, Keynes, dissenting from the predominant opinion in the City of London, was an opponent of the restoration of the Gold Standard. He rightly sensed that there could in fact be no ‘return to normalcy’ as the more short-sighted elements in the British ruling class fondly hoped or imagined; furthermore, an attempt to re-establish the conditions of Edwardian England would be inimical to the interests of large industrial capital, heavily involved as it was in world trade. Any thought in 1944 that the conditions existing prior to 1914 could be brought back into being was even more ludicrous and lacking in historical sense.

In the minds of its advocates at least, the theory of the pre-1914 monetary order to which they looked back with such nostalgia was straightforward enough. The Gold Standard is generally reckoned to have come into being as a result of the Paris Conference of 1867. Under this system, gold was the only form of international money and at the same time the base of domestic money and credit creation. International trade imbalances would be automatically corrected. A country enjoying a trade surplus would experience an inflow of gold which would make necessary an expansion of the domestic money and credit supply. This would lead to rising prices and consequentially a relative loss of international competitiveness. In precisely the opposite manner, a country in deficit would suffer an outflow of specie, with a corresponding retraction of its money and credit supply, a fall in economic activity and a resultant pressure on its domestic price level. These forces, it was claimed, would bring an improvement in its competitive position.

This was the textbook version of the Gold Standard. Many observers believed that at last an ideal monetary system had been discovered: it was simple, smooth in operation, independent of the foolish actions of statesmen. As George Bernard Shaw put it: ‘You have to choose [as a voter] between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of members of the Government. And, with due respect for these gentlemen, I advise you, as long as the Capitalist system lasts, to vote for gold’ (Quoted in Anikin 1983: 134-5).

But in fact the operation of the Gold Standard hardly accorded with this idealised picture. The theory was derived from the quantity theory of money as proposed by Hume and Ricardo as well as from the latter’s theory of international trade – the theory of comparative advantage. One of the arbitrary assumptions on which the Ricardian theory was based was the tacit view that all nations were homogeneous; that is, at the same stage of development. The theory was also static, a fact indicated amongst other things by Ricardo’s view that it was perfectly possible for countries to invert their specialisms. Both Smith and Ricardo wrote in the period prior to the introduction of mass production and the possibilities of taking advantage of the economies of scale. However realistic this particular assumption might have been for a part of the nineteenth century it was increasingly undermined by the penetration of mechanised forms of production into more and more areas of the economy. So also was shattered the notion that the international economy developed in a balanced, all-round manner. In fact the law of capitalist development moved in exactly the opposite direction – to an ever greater unevenness on a world scale, as those Marxists (Lenin, Bukharin, Hilferding, etc.) who studied those new economic phenomena emerging at the beginning of the present century saw. And this unevenness was closely related to the disproportionate development of industry, concentrated largely in Europe and North America on the one hand, and agriculture on the other.

The theory underpinning the supposed operation of the Gold Standard was also based on the proposition that all economic operations are responsive to movements in prices and/or interest rates. This was far from being the case. In its classical period (the last three decades of the nineteenth century) Britain was a considerable exporter of long-term capital. British capital was used extensively to develop the productive forces abroad and as a result income flowed back into London. These movements had a certain logic and relative independence of their own which cannot be explained in terms of the supposed operation of the Gold Standard, and are certainly not reducible to the latter.

Also questionable is the idea, fundamental to the conventional view of the Gold Standard’s operation, that the inflow of precious metals into a country brings with it an increase in the money supply, and, following the principles of the quantity theory of money, that this increased supply is the source of a corresponding inflation of prices. As we have suggested earlier, Marx was strongly critical of this thesis: if the economic conditions of a country (in particular the value of total commodity circulation) does not require an increase in the supply of money, then nothing will bring about an increase in that supply. The gold imported into a country with a favourable balance of payments may simply lie in private hoards (that is, cease to act as money) or lie in the vaults of the Central Bank.

Additionally, even if the increased supply of gold does bring an increase in the supply of money (by no means an impossible outcome) this will not necessarily produce an increase in prices. The exact result will depend, argued Marx, on the particular phase of the economic cycle which the country concerned is experiencing. Prices usually rise in the upward phase of the cycle and fall in the downturn. So the impact of a change in the supply of money will depend on the concrete circumstances in which such a change takes place.

Most critically, in the actual development of capitalism, the establishment of conditions of relative equilibrium was achieved not in the smooth manner proposed by the apologists of the Gold Standard but through convulsions, more or less acute. The outflow of gold from a country was an indication of an acute crisis, and, although often the means for its intensification, not its initial cause. Under these conditions, the banks curtailed their loans; it was difficult to get money for payments due, and sections of capital (the weaker, usually more competitive sectors) were threatened with bankruptcy. Credit was undermined and everybody wanted gold, or credit money exchangeable for it. The result of such financial crises was the curtailing of production, rising unemployment, a fall in national income and a drop in wages.

The fact that the Gold Standard endured for the relatively long period that it did is explicable not in terms of any technical mechanism or intrinsic virtues it may have possessed, but solely by reference to the concrete conditions obtaining in the world economy at the end of the last century and beginning of this. Because of the great specific weight which British capital carried in the international economy she was able to impose on the rest of the world the rules which alone made the operation of the Gold Standard feasible. In other words, the foundation of the Gold Standard was the position of London as the unrivalled centre in world trade and finance.

That the Gold Standard of the nineteenth century had been sustained by definite conditions which disappeared in 1914 is confirmed by the fact that the restored Standard of the inter-war period was a pale reflection of its former self. The historical fate of the Gold Standard after the First World War is well known and can be told briefly. Britain, like all the major countries, practically abolished the Gold Standard during the First World War: sterling was no longer exchangeable for gold; now the state sought to bring all gold under its control. As a result sterling fell in relation both to the value of gold as well as all stable currencies. The City of London, dependent for its world position on a strong currency, refused to accept this and every effort was bent towards-bringing back the conditions which obtained in 1914, against Keynes’ advice. Under the supervision of Winston Churchill, restoration of the Gold Standard involved a savage deflation in order to force prices down, jack up the exchange rate and bring about an improvement in the external payments position. The cost, as Keynes had indeed warned, was a price level which made many British exports uncompetitive in world markets.

The weakness of the restored Standard can be seen in the fact that it could not re-establish the circulation of gold coin (specie). Gold was almost entirely removed from domestic circulation and concentrated in the hands of the state where it became world money, a universal means of payment in the international economy. This system, brought into being with such problems and sacrifices, could not endure for more than a few years. In the case of both Britain and France (where the Gold Standard lasted longest, being abandoned only in the mid-1930s) a so-called gold bullion standard operated: the Central Bank would only exchange bank notes for gold of a fixed weight. Small businesses, not to say individuals, had effectively lost the right to hold their assets in gold form.

An additional factor indicating the weakened nature of the new arrangements was the fact that whereas in the nineteenth century the pound sterling was in effect the only reserve currency, the inter-war period saw an increasing challenge by the US dollar to the former hegemony of sterling. In retrospect it is clear that the inter-war years were an interregnum in which sterling had been deposed but the dollar had yet finally to take its place.

In the case of Britain the partially restored Gold Standard lasted barely six years, collapsing in September 1931 under the pressure of the world financial crisis. In the case of the United States the abolition of dollar convertibility was one of the first measures taken under Roosevelt’s New Deal at the start of 1933. France, the country par excellence of gold, was finally obliged to depart from the precious metal in the face of a massive flight of capital at the time of Blum’s Popular Front government. The old system of fixed parities was destroyed. Currencies were allowed to ‘float’, just as they were to be allowed to float from the 1970s onwards. In the competition for markets, countries were prepared to let their currency drop, thereby cheapening their exports and raising the price of their imports. This was but another form of protectionism. It was against this beggar thy neighbour policy that many economists, notably the Keynesians, subsequently complained so bitterly. This was somewhat ironic in view of Keynes’ own conversion to the camp of protectionism in the 1930s.

The Establishment of Bretton Woods and its Collapse

In the summer of 1944 the delegates of over 40 countries assembled in Bretton Woods in the United States for an international conference which was centrally concerned with a question which previously had hardly been considered: the setting-up of an international financial system aimed at regulating world monetary and credit relations. Dominating these deliberations was the memory of the inter-war period with its collapse of the Gold Standard, the competitive devaluation of currencies, the growth of a series of restrictions on international payments and trade, and the severe political and social problems which this economic crisis engendered. The underlying assumption of the conference was that these events had been triggered off by weaknesses in the monetary sphere. The fear of a renewal of similar upheavals in the period following the end of the war and the threat which such upheavals might entail for the future of capitalism itself were upmost in the mind of most delegates. The situation in France, Italy, Greece and elsewhere was already fraught with potential danger, and only the restoration of some economic stability in Western Europe seemed likely to avert grave social dangers for capital, even if such stability involved a temporary retreat on the part of the ruling class.

One of the basic aims of Bretton Woods was the introduction of a series of strict rules of behaviour which would, it was hoped, prevent unilateral devaluation of a currency without prior agreement of the Fund and at the same time abolish the restrictions on world trade which had been such a damaging feature of the years between the wars. Second, it was proposed to institute a system whereby countries with financial problems would have access to certain international credits so that they would avoid the need for rapid and savage deflation.

But this did not mean that there was ready agreement on the shape which the new economic order should take. Far from it. As has been widely noted, one of the most significant features of Bretton Woods was the sharp clash between what were then the two leading world economic powers, Britain and the United States. This clash took the form of acute differences between Keynes and Harry Dexter White. Keynes, recently elevated to the peerage, was by this time considered to be the leading figure in economics, the principal advocate of the state regulation of capitalist economy, and the outstanding authority in the fields of financial and economic policy. White, on the other hand, was not an academic but a practical economist, Assistant Secretary to the United States Treasury then responsible for international financial problems, and a follower of President Roosevelt and New Dealism.

Superficially, White and Keynes shared the same objective: to overcome the past weaknesses of the world monetary system and thus help create the conditions for a renewed growth of capitalism. But this seeming agreement obscured a fundamental difference in outlook between the two leading figures at Bretton Woods. For while White wished to see the dominant position of American capitalism confirmed in the post-war arrangements, Keynes, with equal determination, wished to salvage something in the world economy for the once all-powerful place for British capital. The struggle was however quite unequal. Britain had been irrevocably weakened by the slump and by the war itself which had amongst other things obliged her to realise a large slice of her overseas assets. Never again would sterling be able to look the dollar straight in the eye. Keynes’ proposals were listened to with apparent respect but Whites’s plan was the one adopted. Here was living refutation of Keynes’ notion that ideas were more powerful than vested interests. That he experienced the refutation first hand only added to the irony.

What were these plans – both incidentally published in 1943 – advocated by the Americans on the one hand and the British on the other? The White plan called for a Stabilisation Fund and a Bank for Reconstruction. The Fund was to be available for short-term lending to countries in temporary balance of payments difficulties, in return for which the contributors to the Fund would relinquish a considerable amount of their sovereignty – they would lose their power to vary their exchange rates; all forms of exchange control would have to be got rid of; and each member would have to submit to Fund supervision over domestic economic policy. Morgenthau’s objective, expressed in a letter to President Truman, was ‘to move the financial center of the world from London and Wall Street to the United States Treasury’ (Gardner 1980: 76). The real significant shift was to be away from London. The British understandably objected that the White plan was merely an attempt to restore arrangements similar to those prevailing under the Gold Standard with the significant difference that it would now be the Americans rather than the British who would exercise the right to interfere in the domestic policies of any other country. This they would do through their domination over the Fund’s assets and their disbursement. As Keynes expressed it:

Any accommodation we accept from the United States must be on our terms, not theirs. Recent discussion in the United States and evidence given before Congress made it quite clear that there are quarters in the United States intending to use the grant of post-war credits to us as an opportunity for imposing (entirely, of course, for our good) the American conception of the international economic system. (van Dormael 1978: 155)

What Keynes feared specifically about the American ‘conception of the international economic system’ was that it would involve the destruction of imperial preference, giving the Americans access to previously privileged British markets and areas for capital investment, a move which, through the abolition of exchange control, would prevent the sterling area balances held in London being used to buy American goods. In general his fears were well grounded.

In opposition to White, Keynes proposed the formation of a Clearing Union with $26 billion overdraft facilities (five times the sum envisaged by White) and these facilities were to be divided according to the shares of pre-war trade. The Americans wanted any facilities available to a country in trouble to be based not on their share of world trade prior to the war alone (this was Keynes’ proposal and would have given Britain a position comparable to that of the United States) but also on their gold holdings and national income – a move designed greatly to enlarge the share of America. Under Keynes’ envisaged plan balance of payments surpluses and deficits were to be expressed in Bancor, a new international unit of account. Again, White demurred: there was to be no new world currency; the dollar was to be imposed on the international economy as the principal reserve currency, supported by American gold and the general strength of her economy.

What Keynes aimed at was the ability of a country (he meant Britain) to pursue domestic expansionary policies without the fear of the international consequences. (As Lord Kahn put it, ‘if Keynes can be said to have devoted his life to anything, it is to liberating internal policy from the dominance of external factors’, quoted in Milos Keynes (ed.).) White summarised the differences between the Americans and the British in the following way:

Those [British] views happen to be different from those that were held by the United States and those that were held by a good many other countries present at Bretton Woods. ... The controversy stems from the issue as to what is the major role which the Fund and the Bank, and particularly the Fund, shall play. It has been our belief from the very beginning that the Fund constitutes a very powerful instrument for the co-ordination of monetary policies for the prevention of economic warfare and for an attempt to foster sound monetary policies throughout the world. The British view, in my judgement, was based more on the concept that the Fund should play a role somewhat similar to that indicated in the International Clearing Union, that the greater emphasis should be upon the provision of short-term credit, that it should provide the necessary funds whereby a country, when it felt the need for foreign exchange, would be able to acquire it. ... They believed that there should be as little discussion as possible on the role of the Fund to determine whether or not policies pursued by any member governments were or were not in accord with certain principles. (van Dormael 1978: 299-300)

The debate between White and Keynes was unequal. Britain no longer ‘conducted the international orchestra’ (Keynes’ phrase) as she had done in the previous century, nor could she ever hope to do so again. Despite Keynes’ intellectual force the delegates at Bretton Woods accepted a plan based on the American proposals.

The main aim of the new system was to keep the advantages of the Gold Standard while getting rid of its supposed defects. The advantages of the old system were held to lie in the fact that it preserved stable ratios between the currencies, allowed their mutual convertibility, and ensured the free movement of commodities and capital. Great emphasis was placed on the discipline associated with the nineteenth-century Gold Standard: a country living above its means would lose gold and would take restrictive measures – it would deflate its economy and thereby re-establish external equilibrium. The flaws attaching to the Gold Standard were reckoned to be its inflexibility, the fact that it imposed deflation on debtor countries too soon and too often. And because those gathered at Bretton Woods were above all fearful of the political and social consequences which a post-war deflation would bring, this was considered to be the major defect of the pre-1914 system.

In short, Bretton Woods involved a policy of (controlled) inflation as a means of avoiding social upheaval. In this respect it was based upon ‘international Keynesianism, but an international Keynesianism firmly in the control of America, rather than Britain. Here was an expression not of the vitality of capitalism but of its profound weakness, the fact that it felt unable, as the Second World War drew to a close, to confront the working class throughout Europe in the manner which it had felt able to do after the First World War.

The basic features of Bretton Woods were as follows:

1. All currencies were pegged to the dollar, and their exchange rate could only be altered by international agreement, in effect by agreement with the Americans. The dollar replaced sterling as the dominant currency, a point soon underscored when, in 1949, sterling was devalued from its initial parity of $4.03 to $2.80

2. The dollar was to be linked to gold by the American guarantee to purchase dollars throughout the world at a fixed rate of $35/1 oz fine gold. Thus was the dollar said to be ‘as good as gold’; indeed some went further, declaring that as dollar holdings, unlike gold, attracted a rate of interest, the American currency was in fact superior to gold. But this was a forlorn hope: the position of the dollar depended on the strength of American capitalism in world economy and far from being absolute this was strictly relative.

3. Under Bretton Woods a central pool of reserves was established, to be administered by the Fund, which would make loans available on a temporary basis to countries in balance of payments difficulties. Each country contributed according to an agreed scale, with the lion’s share being put in by the Americans. In short the IMF was from the outset firmly under American control.

4. As one condition for their participation, the Americans insisted on trade liberalisation. Tariff barriers were to be run down, a move designed to facilitate the dominance of American capital in the markets of the world. As we have noted, Keynes rightly saw this as a frontal attack on what was left of the British empire and the privileges which it had afforded British capital.

But the opposition to the Gold Standard which was expressed at Bretton Woods apart, the place of the metal, far from being dispensed with had to be accorded a role in the new scheme of things, despite the fact that, as Keynes had said as early as 1924, the intention was to remove gold’s formerly autocratic power and reduce it to the status of constitutional monarch. Gold was made the measure of the international value of monetary units: each country pledged to fix and preserve the gold content of its currency. Gold was also declared to be the major international reserve asset, the ultimate instrument for settling balance of payments deficits. In short, on the international plane certainly, capitalism proved unable to free itself of the barbarous relic.

But just as the Gold Standard of the nineteenth century had in reality operated on the basis of the strength of British capital, so the system emerging from Bretton Woods was only as stable as American capital. The dollar was the means by which all major currencies were linked to gold. Indeed, currencies were tied not immediately to gold, but to gold via the dollar. In other words, the central axis on which Bretton Woods turned was the gold content of the dollar, or the official dollar price of gold, for it was this which in effect measured the size of any country’s balance of payments deficit. This dollar price of gold remained fixed at $35/1 oz fine gold until 1971, and this was the ‘constant’ on which the stability of the world monetary system depended.

The prime concern of each country was the dollar parity of its currency, for on this depended the profitability of its exporting and importing activities as well as the results of other foreign economic activities. Because of its vast stockpile of gold, the Americans could freely exchange dollars for gold, at least for foreign governments and banks. This exchangeability of the dollar was the thread which tied the whole currency system to gold.

In the immediate years after 1945 gold continued to flow into the United States as it had done in the pre-war years. The financial collapse following the 1929 Wall Street crash had brought a flood of gold from Europe into the US reserves. In the years 1934-49 (the outbreak of the Korean War) the American gold reserve approximately trebled, rising from some $8 billion to over $24 billion (based on gold priced at $35/fine ounce). Not only did widespread fear of political and social unrest in Europe induce gold-holders to transfer their holdings to New York, as well as to return their capital to America, but this trend was encouraged by a consistently favourable US balance of payments position and increased gold-mining in America itself. To put these trends in some perspective: on the eve of the First World War the Americans held a little over a quarter of total world gold reserves, not much more than France and considerably less than the combined Anglo-French holding. This figure had risen to over half on the eve of the Second World War (and was to continue to increase during the war itself). Thus the widespread complaint of financiers in the 1920s that there was a severe gold shortage in fact missed the point. What was crucial was not so much the absolute amount of gold available for financial purposes but its unequal distribution: by the end of the 1920s some two-thirds of all available gold was concentrated in the hands of the Americans and the French.

The fact that gold continued to move into America in the early postwar period reflected the impoverished state of Europe and the fact that gold was the only available way of paying for American goods. By the end of 1949 the American gold-holding reached a record level of some 22,000 tons, equivalent to 70 per cent of the reserves of the entire capitalist world. (Britain’s share at this time was roughly 6 per cent, with the countries which were later to constitute the European Economic Community holding even less between them.) From this point onwards the movement of gold to the United States ceased and soon began to move in the opposite direction – to such an extent that by the end of 1960 America’s reserves of gold were down to under 16,000 tons (representing now only 44 per cent of total world holdings) and in 1972, when the Bretton Woods system had in effect collapsed, the US held under 9000 tons (21 per cent of total holdings). Along with this steady decline in the American gold-holding went the erosion of that other prop of the Bretton Woods system:

the fact that in the years immediately following 1945 America was the principal and often sole supplier of many vital commodities, especially raw materials.

Until the severing of the fixed gold/dollar link in 1971, the privileged position accorded the dollar at Bretton Woods provided the basis for the rapid expansion of capital exports from the United States in the post-war years. These exports fell under three broad heads:

1. First the Americans had to make considerable loans to a war-devastated Europe facing economic collapse and social tensions which threatened the very future of capitalism. First in the form of lend lease and then under the Marshall Plan (the so-called European Recovery Program) loans were granted to assist in the economic, social and political stabilisation of Western Europe.

2. The Americans were obliged to undertake responsibility for a large slice of European military expenditure. Such expenditure was not of course made because it was imagined that it might have a stabilising effect on capitalism (in the long term the contrary proved to be the case) but because imperialism was driven to prepare for the reassimilation of those territories over which it had lost control in 1917, losses which increased as a result of the westward march of the Soviet army at the end of the war. Military expenditure by America was also required for an intensifying struggle against the colonial and semi-colonial peoples; here the war in Vietnam (following the Korean War), which ended in ignominious defeat in 1975, was one of several decisive events undermining the position of American capital in world economy. Here the resistance of the masses in the colonial countries, whose struggle had been greatly stimulated by the war itself, was a potent factor throughout the post-war period in exacerbating the crisis and instability of world capital. In this respect, the nature of military expenditure furnishes yet another example of the sheer impossibility of drawing a rigid demarcation line between economics and politics after the manner of much orthodox social science.

3. Dollars also flooded into Europe as a result of the increasing penetration of American capital into Europe, often into its key and most advanced areas of industry and finance. This was the result of no abstract policy decision on the part of the American ruling class. As Marxists have always stressed, the export of capital is one of the decisive features of capitalism in the epoch of imperialism, one of the principal counteracting forces to the tendency of the rate of profit to fall. The American monopolies saw in Europe not merely an outlet for their goods but also a profitable field for the investment of surplus capital, where, in part because of the ravages of war, the possibilities for profit were much greater than they were at home.

Needless to say, many superficial commentators saw in these developments only the strength of US capital. But they were in fact indications of the growing contradictions of capital on a world scale, pointers to the fact that the Americans would be unable to sustain for long a policy of ‘international Keynesianism’. The fact is that throughout the post-war years labour productivity in the American economy was growing at only some quarter the rate as that in Japan and roughly half the rate as that in Western Europe. That much of this productivity increase was the result of American capital invested in these areas was but one expression of the contradictory nature of the post-war boom.

One manifestation of these developing contradictions was the emergence of the so-called ‘liquidity crisis’ which began increasingly to exercise the concern of politicians and financiers from the mid-1960s onwards. In the world of finance it is a well-known fact that it you owe somebody $10 and cannot pay you are at the mercy of your creditor; if on the other hand you owe him $10 billion he is in your hands. For capitalism this became the nub of the problem. By the end of 1967 the United States owed the rest of the world some $36 billion, of which about half was to other governments and Central Banks. By the start of the 1980s this figure had shot up to over $200 billion. Now these debts (those of America to the rest of the world) have a specific character. For they are at one and the same time debts but also monetary reserves, international means of payment accumulated by countries outside America. In the first 20 years after the war the reserve aspect of the dollar was to the forefront and the fact that these reserves were also debts which America owed tended to be lost sight of. But once the dollar holdings of non-American governments and institutions reached a critical level it was their quality as debts which became decisive. It was this transformation of reserves into debts which was the single most important feature of the growing monetary crisis and which more than anything served to undermine the Bretton Woods arrangements and along with them ‘international Keynesianism’.

The US gold reserve was similar to that which any bank has to hold in order to meet the cash demands of its clients. In normal times, a bank can manage with fairly small reserves. It is only when, for whatever reason, confidence in the bank has been undermined and depositors begin to get worried about their money that the danger of a classic run on the bank is possible. Such a possibility was hardly present in the early phase of the post-war period. In 1950, for instance, the US gold reserve was some seven times greater than the dollar assets of foreign powers. By 1967 the danger signs were already looming when this figure had dropped to 78 per cent. By 1971 the figure had plunged to around one-fifth. Here a critical moment had arrived, at which point the US closed its doors. Possibility had been transformed into reality, as dialectics puts it.

One of the factors explaining the drain of gold from Fort Knox was the policy of a number of governments, notably the French, who set out on a conscious policy of transforming their reserves from dollars into gold. From the end of the 1950s onwards, enjoying a certain revival in her industries and experiencing an improvement in her balance of payments, which previously had been characterised by chronic deficits, France embarked on a course of action which in the decade following the late 1950s saw the central gold reserve rise over tenfold. This policy was given credence by the school of metalism (advocates of metal money) led by Jacques Rueff. Anti-Keynesian in its general stance (here Keynes’ role at Versailles no doubt had a role to play), it favoured the preservation of free-market mechanisms of which the Gold Standard was supposed to be the epitome. That France should take the lead in the accumulation of gold was not wholly accidental, nor merely the attachment to what Keynesianism would regard as an obsolete economic doctrine. It reflected the historical peculiarities of French capital, the classic country of the rentier: money capitalists living on the proceeds of loan capital. The rentier is above all interested in stability, expecting as he does the repayment of his loan, together with an appropriate amount of interest. Gold is the most stable money form. Hence the decided anti-Keynesian slant of much economics in France, one of the countries where The General Theory made little impact at the time of its publication. By making the dollar a reserve currency, American capital had gained for itself a considerable advantage, for it was able to run a balance of payments deficit over many years, settle this deficit in paper form and oblige other countries to hold the paper as reserves. By handing over goods and accumulating paper money, the tendency towards inflation was stimulated. The Americans, said the French, must be made to settle their debts in gold; this would force them to bring their economy into order. De Gaulle followed Rueff’s advice and from the mid-1960s the French systematically changed their dollar holdings for gold at the agreed rate of exchange $35 per ounce of gold. Only working balances were retained in dollar form. And despite appeals by the Americans to the rest of the world not to follow suit (appeals followed by threats and arm-twisting) they were unable to staunch the flow and the dollar’s link with gold was finally broken with President Nixon’s historic announcement on 15 August 1971.

America and World Economy

One of the striking features of the history of the world monetary system throughout the twentieth century is that capitalism has on the one hand been driven to try to free its system from the grip of Keynes’ ‘barbarous relic’, gold, but has found this in practice to be quite impossible, certainly in the sphere of international economic relations. Here again is an expression of Keynes’ failure to grasp the real nature of capitalist economy and specifically the role of money within it. That capitalism has proved unable to break free of the power of the precious metal is no accident, for it is in the sphere of world economic and financial relations that gold comes fully into its own as both the final means of payment and as the universally recognised social materialisation of wealth. Thus says Marx:

Just as every country needs a reserve fund for its internal circulation, so, too, it requires one for external circulation. The functions of hoards, therefore, arise in part out of the function of money, as the medium of payment and home circulation and home payments, and in part out of its function as money of the world. For this latter function, the genuine money-commodity, actual gold and silver, is necessary. On that account, Sir James Steuart, in order to distinguish them from their purely local substitutes, calls gold and silver ‘money of the world’. (1: 144)

It is in this sphere, as Marx notes a little earlier (ibid.: 142) that the real mode of existence of money ‘adequately corresponds to its ideal concept’.

It has often been pointed out that the monetary system of capitalism in its hey-day was based on the strength of sterling. This was perfectly correct in that it was the position of British capital in world manufacturing and trade and the City of London in international financial matters which preserved a degree of stability in world economy prior to 1914. But gold still retained a pivotal place in the entire financial system and only within definite limits could sterling substitute for gold in the settlement of international payments. And those limits were fixed by no means by the ingenuity of politicians and financiers but by the strength of British capital. In short, the collapse of the Gold Standard in the last century was indicative of the decline of British capital in world economy and the inability of any other power at that period to take Britain’s place. Only after the transfer of economic and financial power across the Atlantic during the 1930s and 1940s (a process which involved a series of convulsive economic, social and military shocks to capital) could America take on the British mantle.

We have several times drawn attention to the fact that orthodox thinking sees economic categories not as social relations but as things. This certainly extends to money which is regarded merely as a symbol, a name. But money, growing out of the needs of commodity production, is a higher, more intense, expression of the relations of this form of production. And just as, historically, money developed not within primitive communities but on their edge – in their relations with other communities – so the essence of money is made manifest in relations between states (as international money the precious metals once again fulfil their original function of means of exchange: a function which like commodity exchange itself, originated at points of contact between different primitive communities and not in the interior of the communities’ (Marx 1971: 149)).

As far as the domestic economy is concerned, it is perfectly possible for other forms of money, including paper, to replace gold. (The debasement of gold coins, their wearing-out through use in part renders them token money.) This Marx recognised. But in the sphere of world economy it is quite a different matter. Here it is not possible that the domestic money of any one country can permanently act as world money; nor, given the inter-state rivalries which characterise capitalism, is it possible to establish an artificial world credit money which will satisfy the needs of all states, the powerful and not so powerful. Keynes’ proposal for such a currency, Bancor, never had a chance of acceptance. It is for these reasons that Marx’s dictum, ‘Gold and silver are not by nature money, but money consists by its nature of gold and silver’ (I: 89), really comes into its own once money as world money is considered. Nature did not create money, just as it did not create the banker. But once money develops it is the natural qualities of gold – its durability, its easy divisibility, the possibility of transforming it from bullion to coin and vice versa, the fact that it is rarely found in the earth’s crust and is therefore valuable, etc. – which render it more suitable than any other commodity for the role of the money commodity.

In the period after 1945 this appeared to be far from the case. This was an indication not that gold had been knocked off its pedestal but that appearances, as always, were deceptive. Marx used to remark with a certain irony that bourgeois economics were proud to have discovered that money was one commodity amongst many. This discovery was lost sight of as first gold was replaced in domestic circulation by paper and then, in the world sphere, the dollar dislodged, or promised to dislodge, gold from its premier position. The printing press, or the banker’s pen, appeared to be able to create money and credit at will. Indeed, apart from one or two eccentrics such as Rueff and his fellow thinkers in France, it was fashionable to heap abuse on the gold currency system. But later developments established that those who derided gold, who along with Keynes considered it an outmoded relic, laughed a little prematurely. In the abuse of the Gold Standard was expressed not the wisdom of the economists but the fact that they were mocking something which intuitively they knew was no longer attainable. By subscribing to the notion that ‘the dollar was as good as gold’ the economists were in fact obscuring a fundamental contradiction of the post-war financial system which for the most part went unnoticed: the use of the currency of one country, America, as the credit money for the whole capitalist world.

Of course the denigration of gold, especially in periods of prosperity, is nothing new in the history of economics. Its roots lie in the one-sided rejection by classical economics of mercantilism and its doctrine that only the precious metals constituted real wealth. From the eighteenth century onwards economics moved to an extreme antithetical position: money was merely a conventional measure of price – a view which obscured its various other functions, notably as a means of holding wealth, that is as hoard.

Leaving aside for the moment the question of gold, there is no doubt that the stability of the world economy in the years after 1945 clearly rested on the power of American capital. The collapse of the Bretton Woods arrangements and the subsequent crisis testify to the fact that while American capitalism was undoubtedly powerful, the contradictions of world capitalism proved to be somewhat stronger. In other words, the strength of US capitalism was relative and never absolute. In the twentieth century Britain was replaced by America as the dominant economic and financial power just as the dollar replaced sterling as the principal form of world credit money. But precisely because America assumed her position in the period of the overall crisis of capitalism she proved unable to emulate Britain’s position in the nineteenth century. To put the matter concretely, whereas Britain had sustained the development of capitalism in the last century by means of a surplus, America did so after 1945 from exactly the reverse position: on the basis of a growing balance of payments deficit.

This was an indication of the fact that America, for all her power, never carried the same weight in world economic and financial relations as had Britain in the nineteenth century. Whereas Britain had been able to dominate a world in which some countries were just embarking on the road to capitalist development (Germany, America herself, etc.) or who remained colonial or semi-colonial appendages (India, Argentina, etc.) this was far from being the case with the United States. As the economies of Western Europe expanded in the late 1940s through to the 1960s America found herself increasingly challenged from already mature capitalist countries, each with their own specific imperialist interests in world economy and politics. Despite the demagogic claims from some quarters, America was quite incapable of reducing the countries of Europe, Britain included, to colonial status. From the historical angle this was quite out of the question.

Looking more specifically at the matter, one important factor sustaining the Gold Standard of the last century lay in the fact that Britain’s surplus on foreign account was largely self-sustaining. Because Britain was by far and away the dominant manufacturing power in a world consisting largely of commodity producers, her foreign loans – which expanded considerably after 1870 – were used by their recipients to purchase British goods. Second, Britain had direct political control over a vast colonial empire. India was of course the classic case. This allowed Britain not only to levy taxes from the empire but also meant that surpluses which were earned could be used to offset deficits Britain might incur as a result of the increasing export of capital – such an important feature of her economy in the latter part of the nineteenth century. As de Cecco (1974) has shown, Britain was able to square her accounts with the rest of the world in the period prior to 1914 principally because of her empire whose trade surpluses based on the export of primary products helped sustain a large outflow of British capital.

America was not afforded this luxury. Denied the possibility of direct taxation on an empire, at the same tune she found that her export of capital tended not to build up trade surpluses but on the contrary laid the basis for increasingly successful challenges to her hegemony in world economy: West Germany and Japan were the most important instances of this phenomenon.

This has led some commentators to explain the current crisis of world economy in terms of the ‘hegemony theory of stability’ which argues that generally states are more likely to realise their common interests in a hegemonic structure dominated by a single state (see Odell (1982) for an example of this position). The American economist and economic historian, Kindleberger, holds a similar position, according to him,

The world economic system was unstable unless some country stabilised it, as Britain had done so in the nineteenth century up to 1913. In 1929, the British couldn’t and the United States wouldn’t. When every country turned to protect its national private interest, the world public interest went down the drain. (Kindleberger 1976: 32; see also Calleo in Skidelsky (ed.) 1977)

Kindleberger’s argument is that British foreign investment after 1870 was counter-cyclical: it expanded when profit opportunities at home were poor and was reduced when the domestic economy was expanding rapidly. But an expansion at home stimulated the importation of more goods which naturally involved greater stimulus for foreign exporters. Kindleberger contrasts this situation with the position of America in the present century: here foreign and domestic investment have been positively correlated and as such have had a destabilising effect on world economy.

The problem with such theories is that they are in danger of remaining highly abstract. Britain was able to exercise the stabilising influence she did on world economy (this influence was in any case relative and never absolute) because of definite concrete conditions which lasted for a relatively short period in the last century. America was unable to carry this role into the present century exactly because those world conditions had altered fundamentally. The most dramatic change was that whereas in the period of British dominance capitalism was still expanding on a world scale, and rapidly so, in the present century the dominant tendency is towards stagnation such that any expansion in one sphere of world economy or by one country can only be at the expense of another sphere or country. The imperialist stage of capitalism is bound of necessity to find its acutest expression in the contradictions of the dominant capitalist power, America, and above all in her relations with world economy. Unless we start from these world economic conditions then any theory, including those based on hegemony, will remain devoid of real content. That is why Kindleberger, for example, can speak of ‘the world public interest’ about a system – world capitalism – which is in fact marked by ever sharper internecine conflicts between the various capitalist powers.

The fact is that the rapid expansion of world trade in the post-war years (which increased at a greater pace than did world production) was based on the dominant position of American capital in general and of the dollar in particular throughout the world economy. America was the main supplier of loan capital to the rest of the world – in the immediate post-war years virtually the sole source of such capital. But America played this role as an already mature capitalist country which, because of its ‘over-ripeness’, was impelled to export capital on an increasing scale, and this because of the lack of profitable opportunities for capital investments at home. The rest of the world, especially Europe, had little choice but to accept such capital exports in the form of the accumulation of ever greater dollar reserves. As we have seen, Bretton Woods involved a domestic money (or rather a token for money, the dollar) acting as the chief instrument of international payment. The dollar became world credit money. But the viability of this system rested on one vital base: the productivity of labour in the American economy, for it was this which in the last resort determined the stability of the dollar. As long as this productivity was developing at a sufficient rate, these world arrangements could be sustained. But in fact there were insuperable barriers to achieving the increases in the productivity of American labour. Not least was the fact that the capital invested abroad by American banks and firms was often in the most advanced sectors of the economy (petrochemicals, later electronics and computers, etc.) which did much to build up the position of America’s rivals in world economy. Because of the wholesale destruction of the productive forces for which the war had been responsible, in many cases these countries (West Germany, Japan) had the advantage of starting with the most sophisticated technology as well as being able to employ a working class whose basic class organisations had been destroyed by the ravages of Fascism. Like Britain in the last century, they now enjoyed the advantages of being first.

But because of the privileged position given to America under Bretton Woods she was able to expand credit throughout the world on a scale far greater than was justified by the development of the productive forces in the United States (the index of which is the growing productivity of labour). Of key significance here was the mushrooming of the Eurodollar market. First established towards the end of the 1950s and comprising the dollar deposits in the European banks and American banks in Europe, this market amounted to around $2000 million in 1960 and had soared to around $60,000 million by the time Bretton Woods collapsed in the early 1970s. This was a measure of the debt built up by American capital, a debt which it had forced the Europeans to hold as reserves. Marx’s comments on the role of the credit system have a strikingly contemporary ring:

If the credit system appears as the principal lever of overproduction and excessive speculation in commerce, this is simply because the reproduction process, which is elastic by nature, is now forced to its most extreme limit; and this is because a great part of the social capital is applied by those who are not its owners, and who therefore proceed quite unlike owners who, when they function themselves, anxiously weigh the limits of their private capital. This only goes to show how the valorisation of capital founded on the antithetical character of capitalist production permits actual free development only up to a certain point, which is constantly broken through by the credit system. The credit system hence accelerates the material development of the productive forces and the creation of the world market. . . . At the same time, credit accelerates the violent outbreaks of this contradiction, crises, and with these the elements of the dissolution of the old mode of production. (III: 431-2)

Given the fact that dollars piled up at a rate outside of the United States which was fundamentally out of line with the development of the American economy, the depreciation of the dollar was inevitable. In fact the dollar has been depreciating for much of the post-war years but this was a fact for a long period obscured by the artificial fixing of the dollar’s price in terms of gold. Because the productivity of labour was increasing less rapidly in America than elsewhere, the American balance of trade, which in most years had shown a surplus, was turned into a deficit. It was these developments which finally led to the refusal of the Europeans and the rest of the capitalist world generally any longer to accept the dollar in the manner in which they had done throughout the 1950s and 1960s. The increasingly artificial dollar price of gold had to be abandoned in 1971. And with that abandonment the experiment in international Keynesianism effectively came to an end. All the old vices which it was thought had been eliminated by Bretton Woods returned as floating currencies replaced the system of pegged rates. The openly inflationary character of the dollar found its expression in explosive price increases, notably that of oil.

The Impact of 1971

In every sense of the word, 15 August 1971, when the dollar was finally revealed openly to be an inflationary form of credit money, marked a decisive point in the development of post-war capitalism. All the basic tendencies of the previous two decades or so were turned into their opposite: controlled inflation was now transformed into near uncontrolled inflation. Keynesianism was one of the principal casualties of this transformation.

The statistics of the period indicate the nature of this transformation If the two decades 1960-69 and 1970-79 are compared, we find the following: whereas in the first period GDP grew at an annual average rate of 5.2 per cent, in the second period it was growing at only 3.3 per cent. If GDP per capita in the big capitalist countries is considered, this shows an even sharper slowdown: from a 4.1 per cent per annum rate of increase to 2.5 per cent in the second decade. Similarly with total industrial output. In the 1960s this was increasing at 9.5 per cent per annum; in the following decade the figure slumped to 3.6 per cent. The figures for energy production are even more dramatic: here, again taking the large capitalist economies, the expansion of energy production fell from its 1960 rate of 3.3 per cent to a mere 1.3 per cent in the 1960s. These developments inevitably hit world trade. Whereas in the 1960s imports into the major capitalist countries were growing at an average annual rate of 9 per cent, the figure fell away to 5.5 per cent. The corresponding figures for exports were 8.4 per cent and 6.5 per cent.

Not only this, but it was in the 1970s that the rate of inflation, as ever an expression of a basic disruption in world economy, began to accelerate sharply. Most dramatically affected were world commodity prices and most of all oil, the decisive energy source. The terms of trade (the ratio of export prices to import prices) turned markedly against the big capitalist countries in favour of the colonial and semi-colonial economies. Thus in 1951, in the middle of the Korean War, this ratio stood at 115 and fell steadily for the next 20 years to a figure of around 80 in 1970. It then shot up by almost 40 points to stand at 139 in 1974, with serious consequences for the balance of payments position of the countries of Western Europe and North America. Britain, traditionally reliant on cheap food imports, was especially hit by this shift in the terms of trade, and this trend was part of those forces which impelled in 1973 the bourgeoisie in Britain, albeit with much misgiving, into the Common Market.

As we have noted, although the Bretton Woods monetary system involved the creation of huge international debts based on the dollar as the principal world credit money, most of the major capitalist countries managed to keep their state debts under some degree of control in the post-war period. It was in the 1970s that public debt began to rise rapidly – in the case of Britain from a figure of some 34,630 million in 1972 to some 106,538 million by the end of the decade. The corresponding figures for the US show increases of a similar magnitude. The British government was now obliged to run ever greater budget deficits in order to try and keep the economy afloat and in particular to preserve the rate of profit on capital. In the decade up to 1981 the public sector borrowing requirement (the PSBR, now a key piece of jargon in economic discussions rose from a little over 2000 million in 1971 to over 10,000 million. Taking the years 1972-82 the total PSBR amounted to over 87,000 million. Here was a double-edged crisis. As we have seen, even if state spending is matched by an equivalent volume of taxation such spending still constitutes a drain on surplus value. But now this problem was compounded by the fact that an ever greater proportion of state spending was now met out of loans and this was one of the principal factors serving to drive up interest rates which in the case of Britain rose from a figure of some 7 per cent at the end of 19r70 to around 14 per cent a decade later. Over the same period the money supply in Britain increased by nearly 250 per cent and although the rate of increase was less dramatic in America, even here the figure shot up by around 100 per cent over the same decade. These figures provide the background to the attack which was now launched on state spending, especially in the sphere of health, education and the other social services. This, as we have earlier stressed, arose not on the basis of some aberrant ideological quirk on the part of politicians such as Thatcher or Reagan but expressed the fact that in a period of intensifying world slump such unproductive expenditure could no longer be tolerated by capital. The extent of the problem created by the long period of rising state expenditures is indicated by the American figures which show that interest on the national debt in 1983 amounted to some $90 billion and is projected to rise to some $116 billion in the fiscal year 1985, equivalent to some 13 per cent of federal outlays.

This mushrooming of internal debt is matched by an equally rapid growth of debt on a world scale. Throughout the 1960s America continually exploited its privileged position in the sphere of international monetary arrangements by issuing ever greater quantities of dollars which had less and less gold backing. The great investment drive of the American monopolies, the growth of ‘aid’ programmes with strict political strings attached and rapidly increasing military expenditures were based on the banks’ seeming ability to create money and credit at the stroke of a pen without any backing other than the credibility and political power of the American state. It is the cumulation of these trends which has imposed impossible levels of indebtedness on the colonial and semi-colonial countries, to the point where many of them are in effect bankrupt. The external debt paid by the colonial countries rose from its 1975 level of approximately $180 billion to its 1982 year-end total of over $600 billion. At present debt levels, per capita debt now stands at some $1000. The World Bank has calculated that of every dollar loaned abroad in 1980 some 80 cents were required for debt servicing, and for every one percentage increase in interest rates the colonial countries are obliged to find an additional $13 billion.

It goes without saying that the impact of the ‘debt crisis’ as it is known cannot be confined to the colonial and semi-colonial economies. Stimulated by the prospect of higher earnings resulting from increased commodity prices after 1971, many private banks have become heavily involved in lending to the ‘developing countries’ over the last decade or so, to some extent replacing the official agencies (World Bank, etc.) in this role. The threat on the part of countries such as Bolivia, Ecuador and the Argentine to default on their foreign debts continues to have the most serious consequences for the viability of banks throughout Europe and North America. Several of these banks have been forced to declare many of their loans to such countries to be ‘non-performing’ which, from the point of view of capital, is an unsustainable position.

While it is of course not possible to predict the immediate course of events in all their empirical detail one thing is undeniable: the general trends in world economy are all too clear: towards greater protectionism and currency manipulation as each capitalist country seeks desperately to resolve its own crisis at the expense of its rivals. Even as this book is being completed, amidst ever more strident calls from sections of American industry for protectionist measures against Japanese and European industry, it is transparent that the major forces in world economy are heading for a return to the conditions of the 1930s, conditions which Keynesianism was supposed finally to have disposed of. This fact alone perhaps allows us to put Keynes’ contribution to economic theory and policy into some perspective.