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John Palmer

World Economy

(Autumn 1971)

From Survey, International Socialism (1st series), No.49, Autumn 1971, pp.1-2.
Transcribed & marked up by Einde O’ Callaghan for the Encyclopaedia of Trotskyism On-Line (ETOL).

THE latest and biggest explosion in the world money markets lends dramatic witness to the profound changes taking place in the international capitalist system. It reflects the destabilisation taking place within and between the major world centres of capital and marks the close of a prolonged period of stable and relatively peaceful conditions.

The destabilisation is taking place on three fronts. The first is the upsurge in levels of inflation not seen for 40 years. The second is the evidence of slower economic growth and rising unemployment in the major industrial economies. The third is the breakdown of the international monetary system and the growing friction between emerging capitalist blocs in the United States, Western Europe and Japan.

Capital has to cope with a rate of inflation (more than 10 per cent a year in Britain) appropriate to the last stages of a high boom at the same time as a level of unemployment and excess productive capacity normally associated with a recession. Any attempt to unilaterally expand one national economy tends to make the problem of inflation worse (and so leads to a loss of international competitiveness) while attempts to reduce inflation risk to increase unemployment and excess productive capacity to a disastrous extent. Although all the major capitalist countries suffer from ‘stagflation’ they do so to different degrees and (because of existing differences in industrial structure and competitiveness) with different consequences. In some ways the question is not so much why has this happened now, but rather, why did it not happen before? The 20 years long boom in the major capitalist economies, the unprecedented growth in world trade and the achievement of more or less full employment for most of that period in most countries has no parallel in the history of capitalism. The key to the stability of western capitalism lay in the United States. The long boom there created the conditions for the big increase in world trade which, in its turn, made possible the ‘economic miracle’ in the heavily export-oriented economies of West Germany, Japan and elsewhere. The boom and the full employment brought in its wake was in some ways less remarkable than the absence of serious inflation. How did the system (until the last few years) manage to absorb all the pressures of rising costs associated with full employment without it cutting into profit rates and so threatening the whole boom?

The answer lay in the remarkable post-war technological revolution which originated in the United States. The rapid improvement of productivity through automation and technological change served to ‘offset the rising cost of living by cheapening the cost of dead labour (machinery)’ – something Marx always allowed for in his model of capitalist reproduction.

But that leaves the question of how this came about. Any examination of the causes of full employment and rapid technological change in the post war American economy must grasp the central significance of America’s mass arms economy. Arms spending (on average 50 per cent of the annual investible surplus) has underpinned full employment. By diverting resources from the productive sector – principally from the growth of the production of the means of production – it has prevented the US economy heading for a slump. At the same time the enormous spin-off to the productive sector of the benefits of research and development in the arms sector enabled the system to maintain relative price stability and offset any reduction in the profit rate.

Of course the ‘beneficial’ effects of the militarisation of the American economy (and to a lesser extent its principal NATO allies) were purely fortuitous, but nonetheless real for that. In recent years this beneficial side effect of the global international rivalries of the imperialist nuclear powers has diminished. The arms sector has not been able to underpin full employment. In part this is a result of economies in an attempt to hold down the cost of the missile race, in part it is a consequence of the changing techniques of arms production which require a lower labour content. But the arms sector is now no longer producing the cheap technology which in the past enabled industry to hold costs and contain inflation. Of course there still is a ‘technological spin-off’ from the missile race (and its space-exploration extension) but it is less and less complementary to the level of technique in the productive sector.

Secondly, the effect of rising unemployment (and the run down of these productive sectors over-dependent on conventional arms production) and rising inflation has been to eat into the US capitalist surplus; into the rate of return on capital. The declining profitability of US industry in its turn has led to economies in non-military research and development and to industrial ‘rationalisation’ which have further contributed to the deterioration of the overall economic situation.

At the height of the arms economy boom the United States never paid its full cost alone. From the late 1950s the US ran up a payments deficit with her allies and trade rivals. In the early years the deficit was due purely to the combined cost of military bases and foreign wars (notably Vietnam) and of financing the huge investment needs of the multi-national corporations brought into being by the long economic boom in world trade. (Between 1958 and 1970 US corporate investment in the EEC alone grew from $1 billion to $13 billions.) But in the last decade a new factor has emerged.

The US foreign trade surplus has not been big enough to cover the deficit on the overall payments abroad. And this year the trade surplus itself has disappeared so that the US faces its biggest trade gap since 1893. In the past the US was able to meet the payments deficit by handing her trading allies IOUs in the form of dollars. America’s European and Asian rivals have been accumulating these dollars for the past decade. They now total about $50,000 millions.

The pressure on the US to honour its dollar IOUs was not too great so long as Europe and Japan were short on investment capital and the Americans were prepared to pay out gold to untrusting dollar holders. Over the years of her unchallenged imperialist domination of world trade America had accumulated mammoth reserves of the metal – seemingly enough for all contingencies. But as the demand for gold increased the reserves stored at Fort Knox began to dwindle. In 1969 the US declared that in future gold would only be supplied to bona fide central banks. But in August it became obvious to Nixon that with reserves down to $10,000 millions there was not enough gold left to meet the dollar claims of the Japanese or West Germans.

Nixon has been finally forced to close the ‘gold window’ and act to cut the US payments deficit. At home he aims to reduce import consumption by cutting working class expenditure (through the wage freeze) and by imposing a 10 per cent tax on most foreign imports. Abroad he is trying to force the other major capitalist economies to revalue their currencies upward against the dollar so to give US business a big price advantage over its rivals in world markets. He also aims to cut the dollar free of gold or any other ‘impartial’ measure of its real value. On the face of it the West Europeans (including Britain), and the Japanese have no option but to comply. However they are likely to restrict any revaluation of their currencies while the import surcharge lasts. They are unlikely to agree to allow the dollar unchallengable freedom in the world monetary system. Unless they can force Nixon to retreat on gold and the surcharge there will be growing pressure for retaliatory trade protectionism on this side of the Atlantic. Any fragmentation of the world monetary system would encourage this.

In any case the US payments deficit is unlikely to improve radically while the US has to engage in the missile race. In fact only by radically increasing rearmament can Nixon ‘solve’ the problem of unemployment. Short of this the perspective remains one of declining employment, worsening inflation and increasingly savage monetary (and possibly later trade) conflicts between the main capitalist states. However, because of the deep-rooted conflict within the Common Market bloc (between the West German and French ruling classes) Nixon will succeed in getting most of his own way for the moment.

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