The capitalist crisis
Nicholas Davenport
The idea that gallant George Brown could solve the Iranian crisis by bravely going to have a chat with the Shah is no sillier than the idea that four Heads of State could break the ice of a capitalist world crisis by going to sunny Guadeloupe for a talk. It was the French President's idea, and one never knows what he is up to, but I was glad to see that before he went our Prime Minister had summoned Ambassador Jay to London for a brief, no doubt on President Carter's dollar problem. For there is no question but that the dollar problem could make 1979 a year of capitalist crisis, if not the year of a financial crash. I note that the International Currency Review has been saying that a crash 'is looking increasingly possible.' I propose this week to examine the areas where this might occur.
The dollar remains the centre of the financial storm and the new men the President has brought in to handle the financial crisis do not inspire great confidence. Of course, it is not entirely the fault of the American Treasury that the dollar is weak, although it has been printing money madly to pay for a colossal budget deficit and a continuing deficit on the balance of payments of around $30 billion. It is partly the fault of the 1973 quadrupling of the price of oil by the OPEC cartel. which gave the Arab oil producers an initial payments surplus of some $40 billion (now perhaps halved). Although the Arab billionaires increased their imports and commitments far more than was ever thought possible, they were left with an enormous dollar surplus which has spilled over into the euro-banking market.
This market has been increasing at the extremely dangerous rate of 27 per cent per annum! It is now around $800 billion. It is dangerous because the euro-market banks (which are subsidiaries of foreign banks) are under no banking control. Unlike national banks they do not have to conform to a reserve asset base, so that they are able to create credit more easily and rapidly than a national bank. If they run into difficulties and their loans to developing and communist nations etc are certainly not all first-class — there is no guarantee that their parents will come to their rescue. It only needs a bad slump in the United States, which the money authorities seem determined to engineer through the folly of increasingly high rates of interest, to bring trouble to the export trade of many developing countries. A lot of dollar debt is therefore falling under suspicion.
The dollar itself, after recent massive support, came under severe pressure again when the OPEC cartel at its pre-Christmas meeting decided to raise the price of oil by 141 per cent over the coming year—with a 5 per cent initial rise in January. This will aggravate the dollar problem, for it will inflate the dollar-denominated euromarket and it will worsen the American trade deficit by about $4 billion. The Saudi Arabians, who are well aware of the dangerous imbalance in the capitalist world, wanted to limit the oil increase to 5 per cent for the year. But the blind and the reckless prevailed at the meeting over the wise Sheikh Yamani.
The dollar crisis is therefore not going to go away. Recall that the American Treasury was confident that the dollar would stabilise after its recent mammoth sale of 1,500,000 ounces of gold. The precious metal had dropped below $200 an ounce but to the surprise of the Americans the gold was snapped up at the auction at an average price of over $214 an ounce. (Some bids were received of $2171). The sale did the dollar no good because it was held at the wrong time — when confidence in American financial expertise had been destroyed. If they had sold gold-denominated dollar bonds six months ago, as some of us advocated, it would have been a different story.
The American financial authorities have really proved themselves to be incapable of managing a world reserve currency. Having arbitrarily destroyed the Bretton Woods system in 1971 by denying the gold convertibility of the dollar, they proceeded to denigrate gold when gold was still a valuable central bank asset. It was surely very foolish, if you are a banker, to depress the market value of an important asset. Their own people proved the American Treasury mandarins to be fools, for, for the first time last year, the sale of gold Krugerrands in the US exceeded the sale of Krugerrands in Germany. As gold has recently been as high as $245 an ounce the speculators were more prescient than the Treasury mandarins.
All this will explain why some of us Europeans are so keen to set up a European Monetary Fund and dress up the European Currency Unit as a'potential world reserve currency. Unfortunately, apart from the West Germans, whose currency is being forced to play a world role, no other country was really ready to set up a European Currency System. The EEC has clearly got to be reformed first, the agricultural policy made less idiotic, and the Resources Transfer system cut down to reasonable size. I would not trust President Giscard d'Estaing to be as firmly reformist as our own Prime Minister but something drastic has to be done if the EEC is to survive.
No doubt these fearsome problems will have been discussed at the summit meeting of the Heads of State in Guadeloupe, but I hope they realised that what they have to prevent is a world financial crash of the dimensions of 1929 which brought about the greatest slump the capitalist world has ever seen.
Another 1929 catastrophe can be prevented if the Guadeloupe summiteers get down to business very quickly. The euromarket has first to be put under some rational control. According to the financial reports I have read the euro-market banks have been increasing the volume of their lending to the riskier developing countries. The Brookings Institute recently questioned whether the communist countries were able to service their debt which is currently reaching $50 billion. Some of the developing countries, whose total debt now exceeds $250 billion, have already fallen into arrears on their service payments. Some of their maturing loans will have to be rolled over; some will eventually have to be written off. The important thing is to avoid a general international credit freeze-up. Such a catastrophe could bring on another world slump.
The next thing is to convince President Carter, if this has not already been done at Guadeloupe, that the US must not go on making money dearer, which can spread its baneful influence round the world, must not become protectionist and put on import controls, and must not retain such price controls as make investment in domestic oil production or oil substitution unprofitable. It is his existing price controls and environmental controls which have made the US so dependent on imported crude oil — the underlying cause of the dollar weakness and world inflation. When will America wake up? When will Europe wake up? If the Guadeloupe summit was intended to give the Heads of State a wakening cold shower and not a comfortable warm swim around the capitalist world's problems it could have been just worth while.
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