Ted Grant

World currency crisis

Source: Militant, no. 80 (September 17, 1971)
Transcription: Francesco 2010
Proofread: Fred 2010
Markup: Manuel 2010

The creeping sickness of world capitalism as reflected in the steady inflation of prices in all capitalist countries has finally resulted in the suspension of the convertibility of dollars into gold by the American government. This was caused by the staggering balance of payments deficit piled up by America during the first seven months of this year, $22,000 million or £10,000 million.

British capitalism was in a state of crisis with a balance of payments deficit of £600 million! American capitalism, despite the erosion of its position during the last two decades, still remains the world’s most powerful country, economically, militarily, technologically, diplomatically and politically. That is why they have been able to maintain the dollar as the world’s, trading medium in the post-war period, despite staggering deficits during the last decade.

America imposed the gold exchange standard after the war on her allies and defeated enemies. The dollar became the medium of international trade and only the dollar had a direct link to gold, at the rate of $35 to an ounce of gold. Behind the almighty dollar stood the might of the American economy and the overflowing coffers of gold stored at Fort Knox. Up to two thirds of the world’s gold had found its way to these vaults.

Thus American capitalism strode unchallenged on the world scene. All the capitalist powers were dependent on its bounty. Abusing the position of the dollar as world money, American capitalism used fictitious dollars to buy and set up the most modern industries in Western Europe and Britain. Control or a big interest in the automobile, computer, electronic and plastic industries in Europe were bought with the worthless dollars printed by the Americans, without any real backing in production or gold.

Policeman of world undermined

American capitalism used the enormous surplus extracted from the American working class to finance crushing military expenditure to finance its wars and the greatest investment overseas in the whole of capitalist history. The Korean and Vietnamese wars, and the propping up of reactionary regimes in Europe, Asia, Africa and Latin America cost them tens of thousands of millions of dollars. The effort to maintain itself as policeman of the world undermined the power economically of American capitalism. From surpluses in the first years of the post-war period the budget internally and externally of American capitalism turned into big deficits. Only a power as rich and powerful as American capitalism could have maintained the drain on her resources for so long.

Challenge to America

By using the position of the dollar as world currency, as the medium of world trade, the American capitalists were enabled to invest and buy in economically important and strategic industries in Britain and Europe. At the same time, West European and Japanese industry, nurtured by these same dollars, began rapidly to recover lost ground and to challenge the established positions of American capitalism. West Germany and especially Japan, without the burden of military expenditure (even today Japan spends only 1.3 percent of her GNP on arms), rapidly developed and began challenging the domination of American capital, even getting a toe-hold in the gigantic American market itself in certain products. The other big West European powers, France, Italy and Britain, also began to challenge the formerly undisputed commercial hegemony of America.

Wasting the substance produced by the American working class in the delusion of world supremacy and an “anti-communist” crusade has undermined the power of American capitalism.

In the present capitalist world economy, any country with an adverse and persisting balance of payments deficit, rapidly undermines the basis of its commerce on a world scale. This is reflected in the mystical “confidence” or rather the lack of it, by means of which the apologists of capitalism pretend to explain economic and currency crises.

American capitalism is sick. The so-called “British disease” has been affecting the American economy for the last few years. A balance of payments deficit, mounting unemployment, now over 6 million, and riding prices are the symptoms of the disease.

Having rejected Keynesianism which saw in deficit financing a panacea for capitalist crisis, they turned to another economist, Friedman, to solve the problem of inflation. The “money supply” was the nostrum of this quack doctor—“cut the amount of money and prices will fall”. Instead unemployment increased and prices continued to mount. So back to the old idol! But this did not improve matters. The American government and the capitalist class could not understand the real basis of the inflation in the enormous sums wasted on arms and the Vietnam War, which created enormous amounts of fictitious capital. The workers in the swollen arms industry and armed forces had to be fed, clothed and so on, while the capitalists in the arms industry had to get their share of the total profits. The state raised this money for unproductive expenditure by taxes on the working class and the economy as a whole. The taxes were then passed on to the consumers by the capitalists.

This unproductive expenditure has been one of the main causes of the inflation in America.

Similar processes in other countries plus the flood of dollars on the world market were some of the main causes of the world inflation. Externally, America (reduced to reserves of $10,000 million of gold—still one-fourth of the reserves of the capitalist world) suspended the convertibility of the dollar to gold, on which the gold exchange standard is based. American capitalism wishes to devalue its currency by forcing its rivals to raise the exchange rate of their currency in relation to the dollar—more dollars for francs, marks, yens, etc. This is one way of increasing the competitivity of American goods in comparison with those of its rivals, both at home and abroad.

Measures against working class

The burdens of still the strongest capitalism are to be unloaded on to their rivals. At the same time, in a complete reversal of policies, the Tory Nixon, dedicated to the “free working of the market economy”, has taken measures internally to try and restore the health of American capitalism. As The Economist of August 21st remarks “The state, at the highest level, has intervened…disillusionment with the established economic doctrines that no longer seem to serve and from discouragement at persistently rising prices and persistently high unemployment…” plus the staggering trade deficit and the low level of investment in comparison with previous years, has led to similar action as in Britain when faced with a similar crisis. The difference lies in economic and military power. Britain was compelled to accept solutions dictated by world capitalism. America is imposing her difficulties on her rivals.

At home, the prescription is similar: 90 day freeze on prices, rents, wages and salaries. No cuts in dividends and profits. The working class is to bear the brunt of the sacrifices to restore profitability. To encourage the capitalists to invest, a subsidy of an investment tax credit of 7 percent, repealed by Nixon in 1969, is restored under another name and increased to 10 percent. This subsidy is for one year and then reduced to 5 percent.

Who are the speculators?

The personal exemption tax, which was opposed by Nixon, is now restored, and the 1973 exemption is to be allowed in 1972.

Thus American capitalism tries to restore its profitability at the expense of the working class and its rivals. Under such circumstances, the capitalists have no other resources. Their profit being the unpaid labour of the working class, the workers’ share of the national product must be reduced.

American capitalism has struck at its rivals. During the post-war expansionary period, tariffs were reduced and world trade increased, to the benefit of all the world capitalist powers. The effects of the Dillon and Kennedy rounds of tariff reductions have been cancelled out by the American surcharge of 18 percent on goods, especially manufactures. This doubles the American tariff and applies to half the goods imported into America.

America still remains the world’s biggest market, though imports and exports involve only about 4 percent to 6 percent of American production.

Nixon fulminated at “speculators” in dollars and promised action against them. Who are the speculators, who move from one currency to another to make a cheap and easy profit “at the expense of currency stability”? They are the multinational, American and world monopolies, with huge funds at their disposal. They are the very people who hire Nixon, Heath and other capitalist politicians to do their bidding.

Capitalist anarchy

The precarious and crazy basis of a society which is constructed to produce for profit and not for use is indicated by this, completely interdependent economically, and competitive at the same time, with the economy based on money dependent on reserves of the yellow metal, gold. The very act of the Americans in suspending convertibility demonstrates not what even the Financial Times admits is a utopia, the “demonetisation of gold”, but its opposite, the dependence on gold.

In the long run, American capitalism will not be able to prevent a more realistic “price” for the metal which, in capitalist society “incarnates the social nature of human labour” and becomes money. Apart from reasons of prestige and the role of the paper dollar, which has replaced gold as the medium of international trade, there are serious class reasons for the American capitalists’ objection to this step.

Russia has enormous unknown resources of gold and, with South Africa, is the biggest producer. The raising of the paper dollar price would increase her reserves of foreign currency to purchase machinery and other materials she requires on world markets substantially.

However, this world currency crisis is just the beginning of a period of instability on the world market; an epoch of storms and stresses opens up. The Economist of August 21st comments: “The most retrogressive step in international trade since the war”. One-eighth of world exports and imports pass through America’s borders!

“Far from uniting the world, or even his own countrymen, President Nixon’s package has split nation from nation and at home, class from class.”

That is the verdict of the Sunday Times (22nd August 1971).

“The American action has really enraged the Europeans. They argue that they are already in heavy deficit with the US on trade and that the American balance of payments problem is caused by their large-scale direct investment in Europe.”

An unnamed US Treasury official blusters

“Pressure will grow among protectionists to retain the surcharge if Japan and the EEC don’t move to change parities…The Europeans and Japanese only have two choices and I think they know that. They have to choose between willingness to accept dollars without limits—as they have been doing—or see some deterioration of their competitive position vis-à-vis the United States. It is not a pleasant choice, but it is the only realistic choice that exists.”

Europe on rations

Thus, as Trotsky wrote, in another context, America puts Europe on “rations”. The trouble with this policy of American imperialism is that it cannot promote a “stable” economic development. It will promote class battles in the European countries, as the ruling class tries to shift the burden on to the working class. The cut in aid of 10 percent to the “under-developed” countries, coupled with the growing burden of interest payments and further, deterioration in the terms of trade, guarantees new upheavals in the colonial world.

In America too, it marks a new phase in the development of American labour. George Meany, President of the AFL-CIO, hardly a red revolutionary, has denounced the prices and incomes policy. The strikes of the West coast dockers and other sections for higher wages have continued. There has been discussion among trade unionists of a general strike. The politicisation of the American workers, long delayed, has begun. In the next period, it can lead to the demand for independent labour politics and moves by the unions for the formation of a labour party.

The economic measures will not solve the problems of the American economy. It is sick, with a sickness that the capitalist vulgar economists are incapable of diagnosing. The expansion of world trade and the capitalist world economy have reached a new stage. The world market has expanded and enriched the Western capitalist nations. Now this very process of interdependence in its recoil will promote the opposite. Nixon, Sato, Heath, Pompidou, Brandt and Co. are in the grip of economic forces they are incapable of controlling. Temporarily they will patch up the structures of shaking world capitalism.

Socialist federation

But the same factors that have produced this crisis—everywhere inflation and a falling rate of profit will continue. In all the capitalist nations, incomes policy, is being suggested or operated. American and British capitalist politicians complain of the “monopoly position” of trade unions and that “the trade unions are too strong”. In other words, through their unions, the workers can resist attacks on their standard of living and even have the temerity to try and improve them.

On a world scale, the organisation of production through a federation of socialist states would put an end to the nightmare of currency and economic crises. For world capitalism, the shadow of the coming of severe economic crises has been cast by the present currency crisis.