In the City
The dollar crisis
Nicholas Davenport
The capitalist system is at risk not so much from the attacks of the Marxist revolutionaries, or from the disruptions caused by trade union militants, as from the malfunctioning of its own internal and international rules and procedures. Its most obvious weakness today is the upset to its system of international payments. I must therefore begin this column with some boring monetary history.
The Bretton Woods ,payment system was never perfect; it was a compromise between the American and British prop osals. Keynes's ideal plan for an international clearing union and a super central world bank bale to create inter national money was rejected by the Americans. Instead we had the Inter national Monetary Fund whose members undertook to stabilise their currencies with parities fixed in relation to the dol lar, which was the only currency based on gold at $35 an ounce. The plan immediately ran into difficulties. Britain led the frequent devaluations against the dollar — having devalued the pound in 1949 by 30i per cent. The main trouble was that while countries which ran into deficit on their balance of payments were expected to deflate by putting up money rates there was nothing to compel the surplus countries to reflate their economies. This is partly the cause of the dollar crisis today.
Then there was the great gold crisis. In the early 'sixties there was a rush after gold because the Americans ran up a colossal payments deficit, not through a trade deficit but through defence spending, foreign aid and huge investments abroad. The American gold stocks, which were as high as $24,500 million in the late 'forties, fell below $16,000 million by 1964. The demand for gold persisted and finally the American government gave up the fixed gold parity of the dollar by repudiating its gold convertibility in August 1971. Ever since then there has been chaos in international payments. There has been nothing to peg on. After a few months of chaotic 'free' floating the so-called Smithsonian Agreement was reached in December 1971, fixing new parities for the world's currencies. But this again did not last. Once more floating was resorted to and it became more violent. The dollar .depreciated from its Smithsonian parity, then recovered, then depreciated and by December last the index of foreign currencies had appreciated 17i per cent over the dollar's Smithsonian parity. By the end of 1977 the dollar was sliding in the
market as crazily as the pound sterling did last autumn.
What astonished European bankers was that the US Treasury was not making use of the currency `swaps' which had been arranged among the central banks for the purpose of ironing out extreme fluctuations in the floats. My impression is that the Americans had become too conceited about their currency. They knew that they had the strongest economy in the world; they knew that most of the world's trade is expressed in dollars. But they should not forget that the world's trading balances have been grossly inflated by the quadrupling of the price of oil, so that the OPEC cartel countries run a payments surplus of around $40,000 million a year. They want a safe place for their deposits.
No one could say that the dollar looked like the safe deposit it used to be when America began to run last year a trade deficit with the world of around $30,000 million. The American oil and gas import bill alone is costing $45,000 million. So the nervous surplus countries began unloading dollars on such a big scale that the retiring chairman of the Federal Reserve Bank, Arthur Burns, decided last week to intervene in the exchange markets. He said that the 'Fed' would at last make use of $20,000 million of currency 'swap lines' with foreign central banks. And he arranged a new 'swap' with the Bundesbank. Immediately the dollar rose 2 per cent against the yen, 4 per cent against the D-mark and 6 per cent against the Swiss franc. Sterling, which had nearly touched $2 last week (as I said it might some time ago), came back to $1.92. To clinch matters Dr Burns raised the Federal Reserve rate from 6 to 6i per cent, which has caused yet another slump in Wall Street and much anger in Washington.
And tempers have not cooled. The European bankers are still• furious over Dr Burns's policy of 'benign neglect' in the dollar exchanges. The Americans are still furious with West Germany and Japan for not fulfilling their obligations agreed upon at the economic summit meeting in London last May. West Germany had undertaken to boost her economic growth rate to 5 per cent and Japan to 6.7 per cent but had never done so. The United States on the other hand had accelerated their growth rate and had incurred a payments deficit of around $30,000 million. The Europeans accused the Americans of blackmailing them into accepting higher rates of inflation and into buying more American goods by letting the dollar slide in the exchange markets. Chancellor Schmidt has officially complained that 'Europe is financing the American balance of payments deficit'. He might remember that America financed Europe with its Marshall Plan when it was down and out after the war. This squabbling is surely unworthy of the great capitalist leaders when it is obvious that the future of the capitalist system is at stake.
If only the western capitalist world had adopted the payments plan which Keynes propounded at Bretton Woods a gen eration ago! We had something like his scheme in Europe when the Marshall Plan was working. We had a European clearing 'bank' and it worked extremely well. Mr Roy Jenkins has suggested a common currency for Europe. We would all hate to give up our local names for measuring things. (To have to motor so
many kilometres into Oxford would infuriate me!) But a clearing union for Europe would be rational and acceptable. It would give notice that we Europeans do not like to be dominated by the dollar. Why should we when so many of our currencies (including even sterling) can now look the dollar in the face.
The dollar will recover — but slowly. It has ceased to function as a store of value. It is curious to note that people who want a store of value have been whoring after gold although gold has ceased to be a part of the international currency system and is now only a commodity market. Yet as a commodity it has not behaved badly, having risen in value from the $35 an ounce which it commanded at the time of Bretton Woods to over $160 an ounce and has even touched $200. The bankers who formed the Bank for International Settlements were not fools when they decided to express their Share Capital in gold.
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