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[This unsigned article is reprinted from Peking Review, #11, March 16,1973, pp. 12-14. Sidebars on the “U.S. International Payments Deficit”, “U.S. Investments in Western Europe”, and “The Ten Crises” of the U.S. dollar, accompanied this article and are included here.]
A NEW dollar crisis has struck hard at the capitalist world. Only two weeks after the dollar was devalued by 10 per cent, another big rush to dump it and buy marks and other European currencies broke out in the West European foreign exchange markets at the end of February and the beginning of March. This storm forced money markets in Western Europe and elsewhere to close from March 2 to 18, completely paralysing the capitalist money markets.
The root cause of the current crisis, as in the past, was the weakness of the dollar while the direct cause was the disturbances created by the 80,000 million Eurodollars which precipitated and aggravated it. The question of Eurodollars has thus caught the attention of people who want to know more about them, how they came about and what their relation to the dollar crisis was as well as what awaits them in the future.
Eurodollars are U.S. currency in the form of deposits and loans handled by commercial banks in Western Europe.
The United States, emerging from World War II with its economic strength greatly augmented, built a capitalist world monetary system with the dollar as the mainstay. Serving as a form of international exchange reserve on a par with gold, the dollar occupied a privileged position.
For many years, dollars were used in paying U.S. overseas military expenses, financing U.S. capital exports and dispensing foreign ”aid.” According to U.S. official sources, between 1960 and 1964 foreign exchange expenditures on armed forces stationed abroad averaged 3,000 million dollars annually and went up to 4,200 million dollars a year between 1965 and 1970. Statistics show that between 1946 and 1970, American investments abroad exceeded 166,000 million dollars. U.S. foreign ”aid,” in addition, totalled around 150,000 million dollars in the 26 postwar years ending in June 1971. With its trade balance going from bad to worse, the United States had foreign trade deficits in 1971 and 1972. Heavy military expenditures, capital exports and foreign trade deficits gave rise to enormous arrears in the balance of payments. From 1950 to 1972, the deficits totalled 85,000 million dollars. These are the main sources of the Eurodollar.
Most of these outflowing dollars found their way into Europe because Western Europe has always been considered as a highly strategic area by the United States. In the last two decades and more, the United States has channelled there 30,000 million dollars in ”aid” and about 30,000 million dollars in private investments, not to mention staggering sums to support its troops stationed in Europe as well as tourists’ expenditures and payments for services. With the rehabilitation of the war-torn economies of the West European countries in the 1950s, there has been a growing demand for funds alongside increasingly concentrated production and ever expanding trade. The exchange controls introduced in the early postwar years were lifted in 1958 by the major West European countries and free transactions in foreign exchange reinstated. This greatly facilitated the dollar influx into Europe. As bank rates in Western Europe were, generally speaking, higher than in the United States, dollar-holders readily transferred their deposits from the United States to Western Europe.
All these factors contributed to a rapid growth in the volume of Eurodollars. Between 1958 and 1967, the amount climbed from several hundred million to 16,000 million, an average annual increase of 1,800 million. Between 1968 and 1971, they reached 54,000 million, with an average annual jump of 9,500 million. Moreover, the United States adopted the two-tier system for gold in March 1968, and on August 15, 1971 announced the suspension of the dollar’s convertibility into gold. As a result of these measures, the Eurodollar, with its outlet blocked, started piling up still more rapidly, reaching the present figure of 80,000 million.
In the postwar capitalist economic system, Eurodollars have been needed in varying amounts by West European countries. But the enormous sums of idle money now available in the form of Eurodollars far exceed the normal requirements of the European economy, and, instead, provide a reservoir of liquid funds for international speculation. As the Western monetary crisis deepens and the position of the dollar continues to deteriorate, the Eurodollar is bound to stir up trouble at every turn and wreak havoc on the money market.
With so many idle Eurodollars on tap, gold speculattion in the West has become unavoidable. Many dollar crises have been precipitated by a gold stampede in West European financial markets. For instance, a gold rush took place in Europe in March 1968 and, within a fortnight, 1,400 million dollars’ worth of the U.S. gold reserve had been siphoned off, mostly because of the part played by Eurodollars. Unable to stem the tide, the United States was compelled to introduce a two-tier system for gold in which it gave up maintaining the free market price of gold at the official rate of 35 dollars an ounce, but allowed the price of gold to fluctuate in accordance with supply and demand. This led to the downfall of the Gold Pool built up through the joint efforts of the United States and other Western countries, and a drastic decline in the dollar’s credibility. Unprecedented in scale, the second postwar dollar crisis developed apace.
U.S. International Payments Deficit
The U.S. international payments deficit is a direct factor leading to the dollar crisis.
The international balance of payments is a country’s income and expenditure in trade, non-trade and capital transactions with other countries in a specified period of time. Items entering the balance of payments are generally grouped under two headings—current account and capital account. The former consists of trade and non-trade items; the latter, investments and transfer of capital. A country has a favourable international balance of payments when its foreign receipts exceed expenditures and an unfavourable balance when the latter exceeds the former.
In the past, the United States always had a favourable balance of payments in trade and a slightly favourable balance in non-trade transactions, which are made up of insurance, freight, interest, tourism and overseas remittances. In the eight years from 1960 to 1967, for example, the annual favourable U.S. balance of payments for trade and non-trade was above 4,000 million dollars while its balance of payments in the capital account showed a huge deficit resulting from foreign military expenditures and heavy capital exports. This deficit usually exceeded the favourable balance for current transactions by 1,000 million to 3,000 million dollars. Therefore, with the exception of some years, postwar United States always had a deficit of 1,000 million to 3,000 million dollars in its international balance of payments.
In 1971, the United States incurred a deficit of over 2,010 million dollars in foreign trade and this deficit rose to 6,300 million dollars in 1979. With huge deficits in its current transactions on top of its annual deficit in capital transactions, 1971 and 1972 saw the United States saddled with 22,000 million dollars and over 13,000 million dollars respectively in the red.
The United States has favourable trade balances with all parts of the world except for Japan, the Federal Republic of Germany and Canada. Of these three countries, Japan had the largest trade surplus with the United States, reaching over 4,000 million dollars in 1972, which for the United States was two-thirds of its foreign trade deficit for that year. Next comes Canada with which the United States had a deficit of 2,000 million dollars in 1972 and then the F.R.G. with which the U.S. deficit stood at more than 900 million dollars that year.
In these circumstances, the United States recently devalued the dollar to improve its competitive capabilities in international trade. In particular, it stressed the need for the revaluation of the Japanese yen so as to reduce Japanese exports to the United States and increase U.S. exports to Japan.
In July and August 1971, the Eurodollar again took the lead in a gold rush which triggered off the seventh postwar dollar crisis. The U.S. Government was forced to announce on August 15 that year the temporary suspension of the convertibility of dollars into gold by foreign central banks, thus severing the ties between the dollar and gold and hastening the disintegration of the capitalist world’s monetary system with the dollar as its prop. In mid-December of that year, devaluation of the dollar by 7.89 per cent was decided on by the U.S. Government, signifying that the dollar had ceased to rule supreme in the capitalist monetary system.
As monetary crises kept recurring, huge sums of Eurodollars flowed from one country to another to be converted into a foreign currency to get the benefits from changes in parities. Such speculation has caused big fluctuations in the exchange rates between the currencies of the countries concerned and has led to further monetary crises.
The dollar crisis at the end of January and the beginning of February this year is an example of this. It began with monetary speculation involving huge sums of Eurodollars. Under strong pressure, the Italian lira went into a two-tier foreign exchange system on January 22. It was rumoured in Western financial markets that Switzerland possibly would adopt the same measure in regard to the franc, or slightly revalue it. Idle funds in the form of Eurodollars thus started flooding Switzerland in a rush for the Swiss franc. The Swiss Government was forced to float the Swiss franc on January 23. Following up the hints that the mark and the yen might be revalued, speculators now concentrated their Eurodollars on buying the two currencies. To maintain the parities of the mark and the yen and avoid revaluation of their currencies, the German Federal Bank and the Bank of Japan were forced to buy up over 6,500 million dollars and 1,100 million dollars respectively. But their efforts were unavailing and such major capitalist countries as Japan, Britain, France, the Federal Republic of Germany, Italy and Belgium closed down their foreign exchange markets one after another.
The new dollar crisis was another example. It was caused by the rumour that the West European Common Market countries were going to float their currencies jointly and that the dollar would be further devalued. The result was that free Eurodollars flooded the West European money markets to buy marks, Swiss francs, Dutch guilders and French francs as well as sterling. To maintain the dollar’s parity with the mark, the German Federal Bank bought up 2,700 million dollars on March 1 alone, while other West European banks were also forced to absorb huge sums of dollars. This rush forced the foreign exchange markets in Western Europe and Japan to close for the second time in three weeks.
To solve the current monetary crisis, the finance ministers of the nine West European Common Macrket countries submitted a series of proposals to the United States. The main points are: (1) The United States go into the international money market to support the dollar in order to maintain the dollar’s parity against other currencies. (2) The United States tighten controls on dollars flowing out of the country. (3) The United States take steps to reduce the amount of Eurodollars, including sales of U.S. government bonds abroad against Eurodollars and increasing the interest rates in order to promote the return of dollars from Europe.
U.S. Investments in Western Europe
As a special feature of its capital exports in the postwar years, the United States has been exporting capital to industrially developed regions on a larger scale and at an accelerated tempo, while continuing to invest in Asia, Africa and Latin America.
Private direct U.S. investments have remained the heaviest in Latin America, Europe and Canada.
In the early postwar years, Latin America ranked first in the volume of U.S. investments, with Canada second and Europe third. In the mid-1950s, taking advantage of Britain’s partial withdrawal from its overseas activities, U.S. capital started infiltrating into Canada in a big way. By the end of 1957, private direct U.S. investments in Canada ran to 8,600 million dollars, in Latin America to 8,100 million dollars, and in Western Europe to only 4,200 million dollars.
In the 1960s, the United States which tried to bypass tariff barriers erected by the West European countries after the founding of the Common Market pushed its way into their domestic markets and increased its investments there. The bulk of U.S. investments gradually shifted. By 1969 American investments in Western Europe had already topped those in other parts of the world. Private direct U.S. investments there climbed to 21,600 million dollars, or 30.5 per cent of the total, while in Canada they reached 21,100 million dollars (or 29.8 per cent), and in Latin America, 13,800 million dollars (or 19.5 per cent).
In 1971, private direct American investments in Western Europe increased further to 27,600 million dollars, or 32 per cent of the total.
However, at the March 9 Paris conference of the finance ministers and the central bank governors of the nine E.E.C. countries and the United States, Japan, Sweden, Canada and Switzerland, the United States virtually rejected these proposals. U.S. Treasury Secretary George Shultz announced on March 9 that the United States had made no hard commitments to intervene in the markets; that the U.S. declared policy of phasing out exchange controls over the next two years remained unchanged; and that the United States was not prepared to subordinate domestic money policies to help resolve the international currency crisis. In other words, the United States does not intend to support the dollar in the international markets, nor is it ready to control the outflow of U.S. capital or willing to raise its interest rates in order to promote the return of Eurodollars from Europe. Instead, Shultz demanded that the West European Common Market (1) make concrete pledges concerning tariff reductions; (2) make concessions in purchases of agricultural products; and (3) refrain from adopting administrative roadblocks in the fields of economic and monetary policy.
The 14-nation finance ministers’ conference failed to reach a consensus of views on how to solve the dollar crisis. The Eurodollar deluge will continue to run wild on the international exchange markets, and as long as the U.S. international balance of payments continues to worsen, reducing the amount of Eurodollars will be difficult. In such circumstances, it will be impossible to prevent the recurrence of a dollar crisis again and again and chaos in the capitalist money markets.
Facts on File
The Ten Crises
Ten U.S. dollar crises have occurred since World War II:
(1) October 1960. The U.S. balance of payments began to show deficits following its war of aggression in Korea. As the position of the dollar declined, the first large-scale postwar dollar crisis broke out in October 1960. To shore up the dollar, the United States and seven West European countries in 1961 formed the Gold Pool for the joint purchase and sale of gold on the market in order to stabilize its price at the official rate of 35 dollars an ounce.
(2) March 1968. Following escalation of the U.S. war of aggression in Viet Nam, financial and monetary problems mounted and the U.S. balance-of-payments position deteriorated. This led to outflow of the dollar in huge amounts. In March 1968, a second and bigger dollar crisis erupted. This compelled the United States to discontinue supplying the London market with gold at the official price. A system of two tiers and two exchange rates was adopted. Thus, in addition to the official price market, in which only foreign central banks were entitled to present dollars to the U.S. Treasury for converting into gold at the official rate, a free market was set up in which the price of gold was allowed to fluctuate in response to the dictates of supply and demand. This in practice meant devaluation of the dollar.
(3) Mid-November 1968. At that time, revaluation of the mark and devaluation of the franc were being bruited about. In the Western markets holders of francs, pounds and dollars started dumping them in a rush for gold and marks.
(4) April 1969. Talk about devaluation of the franc led to dumping the franc, pound and dollar, severely undermining them, in a rush for gold and the mark.
(5) September 1969. A new wave of selling the dollar, pound and franc for the mark swept financial markets in Western Europe and the United States. The Federal Republic of Germany was obliged to close its foreign exchange market and give way to a system of floating exchange rates. In October there was nothing for it but to upvalue the mark by 8.5 per cent, raising the parity rate of 4 to 1 between the mark and the dollar to 3.66 to 1.
(6) May 1971. Serious financial and economic difficulties in the United States, the worsening inflation there, rapid deterioration in the U.S. balance of payments and the weakening position of the dollar stampeded the principal financial markets in Western Europe into a flight from the dollar in favour of gold, the mark and other West European currencies. This time the dollar was the only currency on the run. Its value fell by a wide margin, while the price of gold rose steeply. The major foreign exchange markets of Western Europe were thrown into a turmoil.
(7) Late July 1971. The storm of the dollar crisis struck again, with increased havoc. The price of the dollar plunged, with the price of gold climbing unchecked. The U.S. Government was compelled to announce a ”new economic policy” on August 15, including suspension of convertibility. In mid-December the same year, the United States depreciated the value of the dollar in terms of gold by 7.89 per cent through an increase of the official price of gold from 35 dollars an ounce to 38 dollars. This official announcement of devaluation was the first since 1934.
(8) June 1972. The outbreak of the pound crisis prompted the British Government to float the pound. This led to hectic sales of the dollar and a rush for gold.
(9) Late January-Early February 1973. Another monetary crisis broke out with a flight from the dollar and a rush for the mark and the yen. On February 12, the U.S. Government announced a 10 per cent dollar devaluation. This was the second postwar devaluation of the dollar.
(10) February-March 1973. The dollar devaluation neither increased the dollar’s credibility nor ended the extreme instability in the capitalist money markets. A rush for gold took place in Western Europe. The free market price of gold, which stood at 69 dollars an ounce at the time of the dollar devaluation on February 12, reached a high of 96 dollars in London on February 23.
Another wave of unloading the dollar in a stampede for the mark and other currencies erupted in the West European foreign exchange markets in late February and early March. About 4,000 million dollars were dumped on March 1 alone. Pounded by the storm of the crisis, the foreign exchange markets in Western Europe and Japan were closed on March 2.
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