Number 3, October 1992
CRISIS IN CAPITAL AND THEIR
SOLUTION - FREE TRADE AND PROTECTIONISM IN DEVELOPED COUNTRIES
Cover Picture Only in Hard copy: George Grosz:
TABLE OF CONTENTS
The technicalities of economics sometimes causes even
well versed Marxist-Leninists to falter in the face of economic analysis.
But to counter bourgeois analysis we need to follow the convoluted twists
of international capital as it attempts to extricate itself from its' two
central dilemmas. These are : firstly the " tendency of profit to fall
" as Marx showed; and secondly the lack of " unoccupied territories in
the world " as Lenin put it. These culminate in a vicious predatory behaviour
directed at other imperialists and capitalists.
2. Beginnings of Mercantile Capital - "Marx on Free Trade"
3. Free Trade within the era of imperialism.
4. United States Dominance post Second World War.
5. Creation of the European Economic Community
6. Fall of the Rate of profit.
7. Controlling the money supply
8. New Forms of Money
9. The Exchange Rate Mechanism
10. Contradictions within the capitalist class
11. Recent troubles of the EEC capitalists - Maastrict.
12. Theses on Free Trade.
In this article we wish to show the predicament of
the European, Japanese and US imperialists in the current crisis of capital.
This crisis has focused attention on the structural limitations of capitalism.
Of course, bourgeois apologists do not recognise by this the Marxist-Leninist
analysis of the inevitable fall of capital. Nonetheless, the agreement
between bourgeois and revisionists on the one hand, and Marxist-Leninists
on the other hand regarding diagnosis is startling. This diagnosis is that
capitalism as evolved can no longer continue without drastic changes to
its functioning as it is severely sick. That this agreement dissolves when
it comes to the prescription for therapy is no surprise. That the Marxist
- Leninist call for revolution is not heeded by the Financial Times should
not be surprising!
The recent changes being wrought in Capital, were
pointed out by the Communist League (Britain). These were the apparent
rupture of the compact between Finance and Industrial capital
in developed nations. This analysis was first presented in , and is updated
here. However, in this current crisis in the capitalist world, the 19th
Century term " Free Trade " has often been used as a panacea. We also therefore
offer some views on the forthcoming North American Free Trade Association.
2. Beginnings of Mercantile Capital: Marx
on Free Trade
Free Trade nowadays in the post Second World War period,
is really a misnomer; given the degree of intervention on the "Free Markets"
by the capitalist States. Free Trade properly can only refer to the unfettered
trade possible in the days of Adam Smith. At that time it may have had
some progressive connotations. But Marx's attitude to it was equivocal,
"Free Trade: international trade that is carried
on without the imposition of tariffs, import quotas etc. Advocated by Adam
Smith. Free trade took place in association with Laissez Faire , gradually
replacing mercantilism from the 18th century onwards... The policy of free
trade came under pressure after World War I and in the face of adverse
trading conditions was finally abandoned with the introduction of a general
tariff in 1932..."
A Dictionary of British History, J.P.Kenyon.
London, 1981. p.145
In the battle between the mercantile capitalists
and the landlord aristocracy, the cry for Free trade aimed to relieve the
need for labour to work the land and instead drudge for the capitalist.
The protective tariffs against foreign grain were called the Corn Laws
and protected the aristocrat. They did this by raising the cost of bread
for the labourer. In effect, in Marx's words:
"In all the countries where manufacturers are talking about free trade
they have in mind first and foremost free trade in grain and raw materials
in general. The imposition of protective tariffs on foreign grain is a
disgrace, it is a speculation on people's hunger.."
Thus the Repeal of the Corn Laws pushed for by the mercantile
capitalist would lead to lower prices of grain, or practically then - bread.
But as Marx pointed out :
K.Marx, Speech on Free the question of Free Trade, delivered to the
Democratic Association of Brussels .Public Meeting 1848. In " Articles
on Britain. K.Marx and F.Engels, Moscow, 1971. p. 74.
"How astonishing ! The people for whom every effort is being made to
obtain cheap food, are very ungrateful..The English workers realised full
well the significance of the struggle between the landowners and the industrial
capitalist. They know full well that the latter want to lower the price
of bread in order to lower wages and profit on capital would fall as rents
fell..Ricardo the apostle of the English Free traders and the most distinguished
economist of our century is in perfect agreement with the workers on this
Thus the English Free Traders were in Marx's view only
interested in Free Trade for corn, in order that they might be enabled
to drive down the wages of their captive workers. This was in fact one
of the inevitable consequences of a lower price of grain. Since ultimately
the maximisation of profit required the tendency of driving wages towards
the "minimum wage" :
" If instead of growing our own corn, we discover a new market from
which we can supply ourselves with these commodities at a cheaper price,
wages will fall and profits rise. The drop in the price of agricultural
produce reduces the wages not only of workers employed in the cultivation
of the land but also of all those who work in factories or are employed
Marx, Ibid. p.4, 79.
"The more Free Trade is realised, the stricter these laws (of economics)
become. The first of these laws is that competition reduces the price of
all commodities to the minimum cost of their production. Thus minimum wages
are the natural price of labour. And what are minimum wages? They are quite
simply that which is necessary to produce those things which are indispensable
for the sustenance of the worker, to make it possible for him to have more
or less to eat and just manage to propagate his race... This law of labour
- as - a - commodity , the minimum wage will be confirmed as the supposition
of the economists, Free Trade becomes a truth, an actual fact. Thus one
is faced with this alternative: either one denies the whole of political
economy based on the supposition of Free Trade, or one has to agree that
the worker will be hit by all the severity of economic laws under this
Marx places his analysis of Free Trade within the basic
class antagonism that cannot be leavened by Free Trade:
Marx, Ibid, p. 85-6.
"To sum up: What is free trade in the present state of society? It
is the freedom of capital. When you remove the few national fetters that
still trammelled the advance of capital you will have done nothing but
give it entire freedom of action. As long as you allow the relation between
wage labour and capital to continue, the exchange of commodities between
them will be carried on in more favourable conditions to no avail, there
will always be a class which exploits and a class which is exploited.."
Marx makes it very clear that the attitude of the English
working class to Free Trade is a tactical issue. Further, that the
class should decide upon Free Trade; only in so far as it related to the
strategic goal of defeating the capitalist class system.
Marx, Ibid, p.86.
"The English workers have..not been taken in by the (free traders'
) lies and illusions, and if in spite of this they have associated with
the free traders against the landowners it was to destroy the last vestiges
of feudalism and to make sure that they have only a single enemy to face..."
Marx, Ibid, p. 80
He thus ended with a very limited vote for free trade:
"Generally speaking in our time the protective system is conservative,
whereas the system of free trade is destructive. It dissolves the old nationalities
and drives the antagonism between the bourgeoisie and the proletariat to
the extreme. In a word, the system of commercial freedom hastens the social
revolution . It is only in this revolutionary sense, gentlemen, that I
vote in favour of free trade.."
The new phase of capitalism was identified by Hobson
Marx, Ibid, p. 88.
Free Trade within the era
of imperialism. Lenin's Views.
" The facts show that differences between capitalist
countries eg. in the matter of protection or free trade only give rise
to insignificant variations "
V.I.Lenin. "Imperialism, The Highest Stage
""Imperialism " during the Boer War."
Lenin adopted John Hobson's and Rudolf Hilferding's
view of Imperialism as the development of capitalism.
( Introduction by P.Siegelman, to J.A.Hobson, Imperialism. Ann Arbor,
Free Trade provided the developing capitalist of
England their start to become the world's foremost exporters. Consequently
other countries had to protect themselves in order to develop their own
""England became a capitalist country before any other, and in the
middle of the 19th Century, having adopted Free Trade, claimed to be the
" workshop of the world ", the great purveyor of manufactured goods to
the all countries, which in exchange were to keep her supplied with raw
materials. But in the last quarter of the 19 th C, this monopoly was already
being undermined. Other countries, protecting themselves by tariff walls,
had developed into independent capitalist states. On the threshold of the
20th century, we see a new type of monopoly coming into existence.."
The subsequent development of either a Free Trade or
Tariff protected market, had only minimal effects on the tendency within
capital to develop into monopolistic imperialistic capital:
Lenin, Ibid. Chapter IV, p. 62.
""The facts show that differences between capitalist countries eg.
in the matter of protection or free trade only give rise to insignificant
variations in the form of monopolies or in the moment of their appearance;
and that the rise of monopolies as the result of the concentration of production
is a general and fundamental law of the present stage of development of
In his analysis of imperialism,
Lenin defines imperialism by "five essential features ":
Lenin. Ibid, Chapter 1. p.20.
""1. The concentration of production and capital developed to such
a high stage that it created monopolies which play a decisive role in economic
In regards to free trade, or free competition:
2. The merging of bank capital with industrial capital and the creation
on the basis of its " finance capital " of a " financial oligarchy ".
3. The export of capital which has become extremely important as distinguished
from the export of commodities.
4. The formation of international capitalist monopolies which share
the world among themselves.
5.The territorial division of the whole world among the greatest capitalist
powers is completed".
Lenin, Ibid, Chapter VII, p. 89.
""The new capitalism represents a transition to something. It is hopeless
to seek for "firm principals and concrete aim" for the purpose of
"reconciling" monopoly with free competition ... Monopoly is precisely
the opposite of free competition; but we have seen the latter being transformed
into monopoly before our very eyes, creating large scale industry and eliminating
small industry, replacing large scale industry by still larger scale industry
finally leading to such a concentration of production and capital that
monopoly has been and is the result: cartels syndicates and trusts, and
merging with them, the capital of a dozen or so banks manipulating thousands
Of course this view of Lenin's was not meant to be a
static one. Lenin makes quite clear that he foresees even further super
monopolies developing and a general acceleration of these above noted features
under capitalism. Thus he approves Hobson's "appraisal of the significance
of a "United States of Europe". He cites Hobsons' comments:
Lenin, Ibid, p. 46; p.88.
""We have foreshadowed the possibility of even a larger alliance of
Western States, a European federation of great powers which so far from
forwarding the cause of European civilisation, might introduce the gigantic
peril of Western parasitism.."
This presaged the appearance of the European
Economic Community (EEC). As always, the pattern of domination was
ever changing. Lenin recognised the drift towards groupings of imperialists.
Thus he commented on Joseph Patouillet's " L'imperiliasme
americain." Patouillet had written:
Lenin, Ibid, Chapter VIII, p. 103-4.
""Since 1897 Wilhelm II has repeatedly put forward the idea of a policy
of unification in the struggle against trans-American competition - policy
based on European customs agreements, a sort of continental blockade against
the United States."
But in another manner Lenin's
analysis showed a possible departure for future imperialism. Thus although
there was an interpenetration of finance capital with industrial capital,
the two were not necessarily the same. The differences were at times
quite acute :
In the margin against this quote, Lenin wrote: "United States of Europe".
Lenin Collected Works; Vol 39 p.211 and vol 22. p. 273. Cited by M.K.
Bunkina: "USA versus Western Europe. New Trends." Moscow, 1979. p.186.
"Quite often industrial and commercial circles complain of the "terrorism"
of the banks. And it is not surprising that such complaints are being heard,
for the big banks "command" ... As a "matter of fact, this is small capital's
old complaint about being oppressed by big capital but in this case it
was a whole syndicate that fell into a the category of "small capital.."
This difference between industrial and financial capital
was characteristic of capitalism at that time:
Lenin , Ibid, Chapter II, p. 45.
""It is characteristic of capitalism in general that the ownership
of capital is separated from the application of capital to production,
that the rentier who lives entirely on income obtained from money capital
is separated from the entrepreneur and from all who are directly concerned
in the management of capital. Imperialism or the domination of finance
capital is that highest stage of capitalism in which this separation reaches
vast proportions, The supremacy of finance capital over all forms of capital
means the predominance of the rentier and of the financial oligarchy; it
means the crystallisation of a small number of financially powerful states
from among all the rest."
In conclusion, various of the features of imperialism
that Lenin pointed out were inimical to Free Trade. But more importantly,
there was a constantly recurring tendency to re-division of the world as
there were only limited markets. The ever increasing tendency to monopoly
ruled out any notion of Free Trade. The export of capital was extremely
important, and heralded the inter-penetration of finance capital and industrial
capital. This however did not eliminate the conflict between these two
wings of capital. Finally, new alliances between the capitalists made new
Lenin, Ibid, Chapter III, p. 59.
4. United States Dominance
post Second World War.
Stalin wrote this when the hegemony of US capital was
firmly established following the Second World War. The USA was the sole
major participant of the war who had not seen its' home country ravaged
by the war. There was no need to rebuild its industrial base from scratch.
This was quite unlike the UK, France, Germany, Japan; or for that matter
the Soviet Union.
""Britain and France .. are imperialist countries..
Can it be assumed that they will endlessly tolerate the present situation
in which.. Americans are penetrating into the economies of Britain and
France and trying to convert them into adjuncts of the USA economy?
..Would it not be truer to say that capitalist
Britain and France will be compelled in the end to break from the embrace
of the USA and enter into conflict with it in order to secure an independent
position and of course high profits?"
J.V. Stalin, "Economic problems of the Socialism
in the USSR"; Moscow, 1952. p. 38.
In addition the US had given major loans to the British
and French which it now used as a lever to obtain the privileges of entry
into the sterling and franc semi-colonial territories of the British and
French. Britain, for example was now completely beholden to the USA:
"When sales of foreign investments and of gold and dollars are added
in, the net change on capital account between the outbreak of war and the
end of 1945 amounted to no less than Pounds Sterling 4,700 million. The
United Kingdom ended the war with the largest debt in history "
The first shots in the jockeying came even before the
end of the Second World War, at the Bretton Woods
Conference in 1944. The Pound Sterling had already in 1931 been
taken off the gold standard by the British, after an international run
on the pound. This reflected the decline of British Imperial power. But
in 1931, the USA dollar could not take the dominant position. This was
not the case after the war.
A.Cairncross. Years of Recovery,British Economic Policy. 1945-51. London,
1985. p. 7.
The USA now demanded that
the dollar be made the Key currency for convertibility of all currencies.
The dollar was made on par with gold. What this meant was that
whereas for all other countries party to the Agreement, their currencies
were traded according to their reciprocal value with either gold or the
""The operative standard for most countries is the dollar.. and central
banks intervene in the market when necessary by buying and selling dollars
against their own currencies to keep the dollar exchange rate within agreed
limits. The cross rates with other currencies are kept in line by market
arbitrage ( ie trading ). .. it is the market rate on the dollar that is
significant for their international competitive position - irrespective
of the legal gold content of the dollar. The exception in the system is
the dollar itself, which both in law and in fact is fixed in terms of gold
- at $35.00 an ounce. The US is not obliged to intervene in the exchange
market; it has only to be prepared to buy and sell gold at $35 and leave
it to the intervention of the other central banks to maintain fixed rates
to the dollar..."
This meant that the USA had no concerns with trying
to maintain its currency value. All countries had to acquire the dollar;
there was no need for the dollar to be defended at any particular rate
of exchange. This was so at any rate, for the period of the USA hegemony
in world politics until the current period which may be stated to have
begun after the dismantling of the Bretton Woods Agreement, in 1971..By
1949 the US had acquired 72 % of the world's gold. The
Bretton Woods Proposal had been resisted by Lord
Keynes, but to no avail This Agreement eased the post war period
for the USA :
M.Gilbert. The gold dollar system. p. 231. Contained in The Gold Standard
in theory and History. Ed. B.Eichengreen. London, 1985.
""Making the dollar a reserve currency meant that central bankers round
the world had to have dollars. They had to buy dollars in the marketplace
which pushed up the price of the dollar up, threatening the parity of the
currency with the dollar. Thus they could only buy when the dollar was
weak.. This suited the US and the US Federal Reserve which could follow
a very lax monetary policy to make sure that there were always dollars
to go around. It worked wonders for post-war US domestic policy, helping
promote the wartime dream of full employment."
The USA was in an unusual position
of dominance. It had funded the war for the Western capitalist allies,
detonated the Atom bomb thereby showing its military dominance, and had
a home base that was unaffected to a large extent by the war. It proceeded
to further dictate terms :
Mihir Bose. " The Crash " London, 1988. p. 135.
"In order to finance European and other foreign purchases from America,
that is to ensure adequate financial resources to sustain US exports, ("world
trade") the US Government had taken the lead in 1944 at Bretton Woods to
establish the International Monetary Fund (IMF
) and the World Bank. Loans were provided by the U.S. Government
and US credit markets via the World Bank to European governments, which
used them mainly to pay for goods supplied by American exporters. The source
of the original loan funds provided by the IMF came from foreign currency
and gold subscriptions by the participating nations. America's subscription
amounted to almost $3 billion and entitled it to nearly 30 % of the voting
power. The member nations agreed that an 80 % majority vote would be required
for most rulings, thus conceding unique veto power to the US.. Europe was
fully aware that it was ceding to America the option of determining its
own currency values and tariffs. The US was the only nation with sufficient
foreign exchange to finance a program of overseas investments, long term
financing and foreign aid.."
This ceding of power to the USA was self evident
since the USA insisted that their debt be made payable in dollars or gold.
The Bretton Woods Agreement had after all made the dollar " as good as
M.Hudson. Global Fracture, the new international Economic Order. New
York, 1977. p. 11-12.
The USA actively hoarded gold. Until 1958 and the
Korean war the gold stocks of the USA remained exceedingly high, in correspondence
with the USA stipulations on repayment ("The World Economic Crisis, US
imperialism at Bay"; By Y.Fiit, A.Faire and J-P.Vigier; London, 1980; p.76.).
The USA also ensured that the major European powers joined the Gold Pool.
""To ensure that the gold parity of the dollar would be supported by
the central banks, the European ones mainly, who would thus have to sell
central bank's stocks of gold as the occasion demanded. The price of gold
was kept artificially low at a time when the price of goods was rising.
The dollar thus stayed as good as gold and the US was freed from the threat
of having to support the gold parity of the dollar by itself, or of seeing
gold overtake the dollar as an international reserve instrument which remained
a theoretical possibility in the framework of the Bretton Woods Agreement.
The US spared no efforts in its campaign to impose and maintain the Gold
Now that the USA was dominant, it meant that trade was
unilateral in as much as the balance of trade was in the favour of the
USA. But all payments by the USA, for their resident occupying troops in
Europe, and for services were in dollars. Of course this meant that Europe
ultimately built up a dollar surplus. Also as the Gold Pool implied, the
European central bankers found their gold stocks dwindling. They could
not demand gold for dollars from the USA as they might have, because the
USA made it clear that this would be considered a hostile act. Only the
French defied them, leaving the Gold Pool in 1967.
Fitt et al, Ibid. p. 83.
But the constraints of the Cold War and the military
policeman role of the USA meant that by the 1960's the USA was running
a net deficit.
""The decisive reason for the sharp excess of the USA's foreign money
expenditures over inflows from abroad was undoubtedly the tremendous growth
of government expenditures abroad for military - political purposes.. From
1960-69, the size of all these outlays, equal to 82.9 billion dollars was
13.2% higher that from 1950-959 (73.2 billion dollars). And for the entire
period from 1950-1969, the total sum of these payments connected primarily
with the USA's assumed role as the chief support of the world capitalist
system, constituted the vast sum of 156.1. billion dollars. It was 40 %
higher than all the other items of the USA's balance of payments.."
In addition the competitor economies had begun to be
reconstructed enough to pose a challenge again.
S.M.Nikitin, Inflation Under Capitalism Today. Moscow, 1980. p. 110.
""During the Second World War and after it, the structure of the US
balance of payments was characterised by an extremely active correlation
of revenues and payments in foreign trade, which reflected the general
strengthening of the USA.. as well as a growth of the foreign trade expansion
of the American companies.. In the mid-1960's however, the traditional
excess of revenues over payments in the USA's foreign trade began to fall
steadily and in 1968-69 it virtually disappeared. In 1971 for the first
time this century, the USA imported more than it exported: the deficit
of the trade balance stood at 2.3 billion dollars.. The changes in the
foreign trade sphere were the direct result of certain weakening of the
American companies on world markets. One reason in particular was that
the prices of American exports began, in connection with rising production
costs to go up faster than those of the USA's chief competitors. Thus in
1970, compared with 1960, US export prices had risen by 23.9 % while the
corresponding figure for Britain was 17, for Italy 6.3, for Canada 14.3,
for the FRG 27.5, and for France 14, and Japanese exports prices had even
dropped by 3.5 %.. The faster growth of American export prices.. was indeed
connected with the development of inflation in the country.. One more important
reason of the USA's increased foreign trade difficulties was the profound
shifts in the international correlations of the indicators of labour productivity
scientific and technological development.. eg. Labour productivity ( output
per man hour ) rose in the USA by 41.6 % from 1960 to 1970, in Britain
by 41.9 , in Italy by 98.8%, in the FRG by 69 %, in France by 78.4% and
in Japan by 170% Nikitin, Ibid. p. 112.
Illustrated differently, Graph 1 below shows the fall
in trade balance of the US from 1946 to 1985. ( From Willoughby The promise
and pitfalls of protectionist politics. p. 216. In " The Imperilled Economy"
New York, 1987.)
Graph 1: Only in hard copy version
In fact by this time the USA's dominant position
depended in part upon threats to their competitors not to attempt to trade
in their dollars for gold. This would have emptied Fort Knox, and given
international speculators a further reason to distrust the dollar. A warning
was given that this would be interpreted as an unfriendly act. The dollar
surplus in the coffers of Europe effectively led them to subsidise the
USA inflationary policy, by exporting inflation to the Europeans. This
became an explicit business strategy. The Chase Manhattan's "Business in
Brief" in April 1967 outlined this strategy, as quoted by Hudson:
""As dollar liabilities grow, the question arises what would happen
if foreign central banks wished to cash on all their dollars. By now total
liquid liabilities of US banks to foreigners is over two times the amount
of our gold stock and about ten times the amount of free gold beyond that
required to back up the nation's currency. Thus a run on the US gold stock
could not be possibly be satisfied.. Two options are very clear.. First
the US might revalue gold upwards, so that could pay off foreign central
banks in lower volume of higher-priced gold, But this would reward America'
enemies, Soviet Russia and South Africa, the world's major gold producers.
It also would reward France whose policy of cashing in its surplus dollars
for gold on a monthly basis irks US officials...The alternative strategy
was for the US treasury simply to stop selling ( and buying gold ). This
would confront foreign neutral banks with a serious dilemma.."
The USA now relied on the fact that the foreign nations
could not cash in their dollars. If the foreign central banks insisted
on a devaluation of the dollar,their own reserves of Eurodollars would
be worth less. Furthermore USA multi-nationals companies would be more
competitive. But in fact the central banks were forced to accept USA
Treasury bonds. The USA simply continued to print these as required,
unable to back them with either productive or gold reserves.
""With their dollars no longer freely convertible to gold they would
have to decide what to do with the dollars they own, ..On the one hand
if they permitted the dollar to depreciate, prices of US goods would drop
relative to domestically produce goods. Furthermore it would make US goods
more competitive in third markets. This solution would be vigorously opposed
by most US exporters and businessmen abroad. On the other hand if foreign
central banks continued to support the dollar at its present rate, this
would place them more unequivocally than ever on a dollar standard, a politically
embarrassing solution to countries that had participated in the run on
the dollar .."
Cited by Hudson, Ibid. p. 24.
This great injection of money supply in the USA,
fuelled inflation which in turn was transferred to the European economies,
who now were subsidising the USA deficit. As Giscard
d'Estaing put it:
""It is rather remarkable that the war in Vietnam , a localized conflict
of a very special nature involving a great power and a small power could
have such a far reaching effects on world economic equilibrium.. Any other
country that was faced with a balance-of-payment deficit of this magnitude
would have been obliged to take steps to restore balance whereas the US
was not obliged to do so; the method of financing its deficit exempted
it from having to restore equilibrium and it was therefore a system which
caused considerable inequality in the interplay of monetary power..."
At first, it was only the French who refused to accept
the status quo. Every month they insisted on a return of gold for dollar
(Fitt et al, Ibid. p. 83). The French economists had a pithy phrase for
the situation engineered by the USA:
Cited by Hudson, Ibid. p. 31.
""Deficit without tears."
The countries that were most hit by this importation
of inflation were those who had the most favourable current accounts with
the USA. This naturally was therefore the USA's most aggressive competitors.
These were the FRG (West German Republic) and the Japanese. The figures
below illustrate this well. They show that the major revenues held by the
Central Banks were foreign assets.
Cited,S.M.Nikitin, Ibid. p.110.
TABLE 1. Cited by Nikitin. Ibid, p.
116-7. Drawn from Krause L.B and Salant W.S. Brookings Institution Washington
|Increase in components of reserve
money, billions of national currency units:
1) Net Foreign asset central bank;
| 2) Net domestic assets of Central Bank
|3) Reserve of Money, Total
|Increase in components of reserve
money, &money supply (%age)
|1) Net Foreign asset central bank;
|2) Net domestic assets of Central Bank
|3) Reserve of Money, Total
|4) Money supply
|5) Money supply & quasi-money
|Increase in indicators of
|Real GNP (1970 prices)
| GNPdeflator (1970-100)
Ultimately the solution to the problem for the European
Central Banks was to lend out their huge surplus of dollars. This rather
transformed the problem of the Central Banks into a profitable situation:
"Thanks to the growth of this market, the USA managed from 1965 onwards
to get the Europeans and Japanese to accept a massive increase in its indebtedness
(See figures below). It was thus because of the sheer volume of the American
debt, that the European banks came to oppose, or at least to share in the
disadvantages of any devaluation of the dollar, which had by then become
a devaluation of their credit with the USA..."
This Pool of dollars was termed the Eurodollar
market. The Eurocurrency Market. This market became a major
speculative force because of a relative freedom from restrictions on capitalists:
Fitt et al, Ibid. p.85-7.
""The essential feature that accounts for the rising role of the Eurocurrency
Market is its relative lack of regulation. Within the US for example, the
Government can and does control the amount of new loans that a bank can
finance with a nw dollar of deposits; by requiring that banks hold a certain
percentage of deposits in reserve, the Government both places a limit on
the expansion of loan activity and protects the banking system from putting
itself in a position where the it cannot meet the demands of depositors
for their funds. Moreover, government regulators establish restrictions
that limit the degree of risk that can be undertaken by banks..In the absence
of such regulation, competition among banks could push them into risker
and riskier loans and lead them to hold a smaller and smaller percentage
of deposits as reserves. In the Eurocurrency Market such regulation, is
fact virtually absent. Furthermore, without regulation, governments have
much less control over the supply of their currencies. When for example,
banks holding dollars abroad loan out those dollars they create new dollars;
that is, new claims on goods and services in the US."
But the real underlying problems in the USA economy
did not disappear. International speculation hit the dollar violently.
In 1968, the Federal Reserve System, removed all gold cover. This removed
the assurance of a 25 % gold cover for all paper currency issued by the
USA. Now all the Western countries came off the Gold Pool. An odd situation
MacEwan A. Imperial Decline and International Disorder: an Illustration
from the Debt Crisis. p. 209. In The "Imperilled Economy. Book One. " New
York. 1987. p. 209.
""The Gold Pool was replaced by a split gold market ; all dealing in
gold between central banks were to be conducted at the absurdly low fixed
price of $35 an ounce and there was to be no interconnection between such
dealings and the state of the free market for gold... speculation was temporarily
diverted into the free market, the European bankers were persuaded not
to turn their dollars into gold, and the USA was allowed to pursue a policy
leading to a systematic deficit in its balance of payments.."
Despite this move, the growing American debt lead to
an international crisis of confidence. By the end of 1970, official dollar
claims of foreigners was more than twice the US gold reserves, and the
British in August 1971 requested that the US swap a portion of the Bank
of England's dollar holdings for sterling. This coupled with the growing
recession in the Western world; added to the decision of the German Central
Bank in 1971 to float the mark; and the devaluation of the pound sterling,
- all conspired to force further speculation on the dollar. Finally in
August 1971, President Nixon announced officially that it would no longer
exchange dollars for gold; and he placed a 10% surcharge on imports effectively
devaluing the dollar. Now the USA began a policy of boosting its export
trade by successive devaluations; which
also decreased the effective worth of the enormous Eurodollar holdings.
Fitt et al, Ibid, p. 88.
But by now, even the US banks had moved into the
European Eurocurrency markets in a major way themselves. In fact the banks
were now making their major profits abroad, rather than at home; despite
a simultaneous drop in the rate of growth of US direct foreign investments
(See MacEwan Ibid. p. 211). The Eurodollar Market's overall effect on the
world economy was to be spectacularly enhanced by the emergence of the
Petrodollar. These developments are analysed below.
5. Creation of The European Economic Commmunity
Stalin's prediction of forthcoming European struggle
was accurate as the creation of the European Economic Community made clear
in 1957. However the EEC faced major problems, and indeed continues to
do so. The primary problem faced is that the nations making up the EEC
are themselves divided as to their aims and objective possibilities. A
significant problem has been the inclusion in the EEC of pro-US forces
such as the British State led by the Conservative party.
Henry Kissinger 23 April 1973:
"It is not right , proper or wise for the US
to make decisions about keeping troops in Europe on the basis of whether
the Common Market treats soyabeans fairly. But there is no way to prevent
this. The political and economic issues in Atlantic relations are linked
by reality, not by choice.."
Quoted by J.Palmer: "Europe without America?
Crisis in Atlantic relations"; Oxford, 1988; p. 59.
Initially however, it was an explicit strategy of
the USA after the Second World War to dominate the European States specifically
via some loose Federation of the European states. Even after the Korean
War, the Americans were willing to sanction a European Defence Community
including a are-armed Federal Republic of Germany and France ( See Palmer
Ibid, p. 84). This strategy became unravelled as the Europeans developed
self-confidence over the next 30 years.
It did not help the Americans that the English were
not yet fully aware that they had slipped off their imperialist throne.
The British Government initially did not wish to be a subservient partner
of imperialism. As Ernest Bevin Foreign
"His Majesty's government does not accept the view.. that we
have ceased to be a great power, or that we have ceased to play that role
In fact this British myopia also prevented the Europeans
from utilising the British potential. Thus despite Jean
Monnet's wish to have Britain as 'the one great power in Europe
as a nucleus around which a European Community might be formed" ( See Palmer
Ibid.p. 83), Ernest Bevin was kept in the dark about early negotiations
on the European Coal and Steel Community. Bevin rightly commented:
Cited Palmer, Ibid, p. 85.
"I think something has changed between our two countries( ie
France and Britain )."
Jean Monnet, the post war Finance Minister of France
was perhaps one of the foremost in the European postwar leaders to see
the necessity of a coalition of European countries to defeat the USA imperialists.
As early as 1921 Monnet had advised Eduard Benes
Cited Palmer, Ibid, p. 84.
Monnet summed up the British view:
""Britain did not wish to let her domestic life or development of her
resources be influenced by any views other than her own, and certainly
not by continental views.."
Palmer Ibid. p. 85.
""To address the problem of the weakness of Central European
economic by establishing a " federation because of the region formed a
" natural economic unit".
But it took until May 1949, for the first steps to be
taken. This resulted in the Statute of the Council
of Europe, but there was deliberate obscurity surrounding the
wording of the statement. Yet when the European
Iron and Steel Community was established in 1950, they incorporated
some of the desire for:
Cited, James Laxer. "Inventing Europe"; Toronto, 1991.p. 27.
In the Second World War:
""Writing on behalf of the French Committee of National Liberation,
Monnet for the first time advocated the formation of a federation of European
states to be established following the conflict.."
Laxer, Ibid, p. 27.
""The building of a new Europe."
However, its primary purpose was to regain for the members
of the Schumann Proposal for the European Iron
and Steel Community, the competitive market in iron and steel;
with substantial public sector capital. Britain refused to join at that
stage. By 1958, trade in the ECSC in steel had increased by 157 % and steel
output by 65% ( Laxer, p. 38).
Laxer, Ibid, p. 33
However, the US imperialists were not about to watch
this development with complacency. Britain had after Suez, now accepted
that their only role on the world stage would be a as a junior partner
to one of the Big Imperialists. They threw their lot in with the Americans.
The USA used their influence with the British to disrupt attempts at a
defence force independent of the US. But the Europeans counteracted with
the formal creation of the European Economic Community
ie. the Common Market, in 1957 by the Treaty of Rome. The activities
""The launching of both the Common Market and the Common
Agricultural Policy (CAP). Members of the Common Market undertook
to eliminate tariffs between members of countries over a period of ten
The diversionary attempt by the pro-USA British capitalist
section ( represented both by the Conservative party, and the Labour party)
created a rival European Free Trade Association
(EFTA), designed purely as a Free Trade Zone with no political
intentions. The British American policy of unity was shown by the summit
between McMillan and Kennedy at Nassau
in 1962, where agreement over nuclear policy for the Polaris missiles was
Laxer, Ibid, p. 43.
It was primarily for these reasons that the British
bids for EEC membership under Conservative Prime Minister McMillan, and
Labour PM Wilson, was vetoed by France's
De Gaulle in 1963. NATO was of course the frank military expression of
American political influence. Henry Kissinger, the American diplomat and
Secretary of State for President Nixon, conveyed a threat when he stated
that troops in Europe were there to protect the pricing of soyabeans!
Following these initial steps, the pace towards
full economic merging of the forces of Europe proceeded. Even after Britain
was finally allowed entry into the EEC, the thrust towards effective merging
of economic trade and monetary power was not stoppable. Under the hegemony
of the French and Germans, the EEC continued to evolve into a real possibility.
The current battles are the endless
struggles at the GATT talks to twist concessions for entry into each others
markets, and to end the subsidies of the farm capitalist in the Europe
and America and Canada.
Behind all the political forces, there is a central
economic force that drives the inter-imperialist struggles. This is the
tendency for the rate of profit to fall in the capitalist world. It is
an inexorable factor in the drive to increased competition for markets.
That such a factor exists has been contested by some. But even revisionist
economists recognise it as a real factor in the current situation.
6. Fall of the Rate Of Profit.
The reason for the tendency for an overall decline in
rates of profit was advanced by Marx. This relates to the increasingly
low return on investment in heavy industry. This is referred to by Marxist-Leninists
as "CONSTANT CAPITAL".
TABLE ON RELATIVE RATES OF PROFIT
IN THREE COUNTRIES: USA BRITAIN JAPAN
Japan Year Pre-tax
( See E.Mandel, Second Slump. London, 1980. pp 22-25).
SEE ALSO GRAPH 2: Only
in hard copy.
DECLINE IN PORFITS. FROM S.MARRIS "THE DEFECIT
& THE DOLLAR"; Washington 1987; p.190.
""What is constant capital? All capital expended except that
used for the hire of labour power. Buildings , machinery and raw materials
do not themselves create new value; they are the tools by which human labour
creates such new value. Since the capital expended on these items remains
unchanged in value in the course of capitalist production, it is called
Since under competitive capitalism, the industrialist
has to keep up with the competition in terms of technical change; this
tendency in the fall of the rate of profit will obviously particularly
hurt the industrial capitalists. As the industrialists forced by competition
to acquire better machinery etc, the larger machinery plants etc keep monies
tied up in this. But if the capitalists achieves a lower unit price of
production (often referred to as economies of scale ), they will have achieved
some overall profit.
Principles of Marxism-Leninism. Communist League issue of Combat, no.
4. Aug. 1976. London. p. 8.
But competition forces the general price of the
commodities being produced down also, as other capitalists are themselves
forced to reinvest and keep up themselves with the competition. The corollary
will be that the capitalist tries to depress the workers living standards
in order to increase their own profit margin. This means to use Marx's
terminology, to change the variable rate of profit in the capitalists'
""The capital expended on the hire of labour power. Since the
new value created in the course of capitalist production is created entirely
by the workers labour power, it is the capital expended on this item which
creates the new value ( including the surplus value appropriated by the
capitalist ). Thus the capital expended on labour power may be regarded
as changing, as increasing, in value in the course of production. It is
therefore, called variable capital." Communist League, Combat Ibid. p.
Marx showed how the falling rate of profit works in
Part III of the Third volume of capital:
""His argument can be expressed in simple
algebra. The economy wide organic composition of capital can be written
Aggravating this tendency to push down profits of the
capitalist class, has been inflation.
This has been the due to the adopted solution of most capitalist countries
to "push" the economy forward by a Keynsian injection
of money supply. Keynes objective in proposing this was objectively
to spike the guns of revolution, by ameliorating the unemployment rates
of Western countries. But the policy adopted has led to inflation by driving
up the money supply. Of course the capitalists have tried to convince workers
that wage rises are the cause of inflation. This was refuted by Marx. Indeed,
that expansion of the money supply is the root cause of inflation was accepted
by many economists, from the times of David Hume:
k = c/v,
the ratio between aggregate constant capital
(c) and aggregate variable capital (v);
The rate of exploitation is: e = s/v,
the ratio of total surplus value to total variable
The profit rate is : r = s/( c+ v).
Dividing both side of this fraction by v, and
making the appropriate substitutions,
we have: r = e / (k+1).
The rate of profit thus increases as e rises,
and falls with increases in k.
In a nutshell Marx argues that in the modern industry, or "machinofacture"
stage of capitalists development k tends to increase more rapidly than
any rise in e. Despite the operation of several 'counter-acting' tendencies,
the rate of profit must eventually decline.."
From A History of Marxian Economics. Vol II 1929-1990. Mc.Howard and
J.E.King. Princeton, 1992. p. 128.
""At first, no alteration is perceived; by degrees the price
rises, first of one commodity, then of another; till the whole at last
reaches as just proportion with the quantity of specie (ie. money) which
is in the Kingdom."
Keynsian economists hold that laissez-faire capitalism
leads to the stagnation of manufacturing industry and mass unemployment,
and that a positive government policy of 'reflation'
- the injection of money into the circulation by the state - is necessary
to maintain the profitability of industry. Apart from anything else it
enables a workforce to be employed that earns a salary, in order to be
able to buy the goods that capital produces; averting an "underconsumption"
slump. It is admitted that such a policy produces a degree of inflation
- rising price levels and a fall in the value of the currency (pound) -
and monetarist economists regard this as completely unacceptable.
David Hume, cited by Smith D. "The rise and fall of monetarism"; Middlesex,
7. Controlling The Money Supply
Inflation is especially unacceptable to financiers
and financial institutions, which obtain profit by lending or investing
money in return for interest or dividends. The monetarists maintain that,
as far as is politically expedient, the function of the state should be
restricted to " law and order " functions and other state expenditures
(including that on social services) be restricted to the minimum, that
economic enterprises should be private and unsubsidised, so that enterprises
which are not making an adequate rate of profit should be allowed to go
bankrupt irrespective of the social consequences, and that the interest
rates should be kept relatively high.
Both Keynesism and monetarism
are concerned to try to boost the profits of capital. But the former
serves the interests of industrial capital to the detriment of those of
finance, while the latter serves the interests of finance to the detriment
of those of industrial capital. This conflict of capitalist economic policies
is reflected in the field of capitalist polices. The Thatcher and Reagan
Governments epitomised the monetarist finance
wings of capital. The "wets" of the Conservative Party
and the Labour Party in the UK; and the Democratic Party in the USA in
general represented the interest of industrial
In the following we will use the key examples of
the monetarist experiments in the UK under Thatcher, and the Reagan administration
in the USA; to illustrate some of the problems in control of the money
supply. Neither the "wets" or the "drys" were able to avoid the Scylla
of inflation, simultaneously with the Charybdis of unemployment and stagnation.
Capitalism is at the moment
in a catatonic indecision, whatever it does is wrong.
In the UK, one of the prime laboratories to test
monetarism, both the Labour Party and the Conservative party had
come to the conclusion that the old methods of stop-start of the economy
had failed. It is a common mistake to think that only the Thatcher Government
was monetarist. They were the most hard line and refused to be deterred
by the consequences of monetarism. But, in fact the early steps of a reaction
against Keynesian economics had been already been started under the Heath
administration and continued under Labour. Both fiscal policy (ie taxes
and government spending) and monetary policy (ie. control of the money
supply) were tightened. Thus the Bank Of England had begun to set secret
internal money supply targets. On 11 Sep 1976:
""It set a notice to Banks and building societies, declaring that :'the
banking system is close to being fully lent'.. Through.. moral suasion,
banks were urged to limit lending .. and interest rate limit was set for
deposits of less than P.S.10,000.. on 13 November, Minimum Lending Rates
were raised to 13 % and an extra 2 % of the bank's liabilities were called
in as special deposits at the Bank of England...on Dec 17th..the supplementary
special deposits scheme " the corset " ..limited bank lending ..by introducing
penalties for banks exceeding prescribed limits."
Labour Prime Minister James
Callaghan in a speech to the Labour Party Conference in September
D.Smith Ibid, p. 59.
""We used to think that you could just spend your way out of a recession,
and increase employment by cutting taxes and boosting government spending,
I tell you in all candour that option no longer exists, and in so far as
it ever did exist, it worked by injecting inflation into the economy. And
each time that happened, the average level of unemployment has risen. Higher
inflation, followed by higher unemployment. That is the history of the
last twenty years.."
The monetarists wished to control the money supply.
As time went on however, they had to continue to refine the notion of :
"What Money?" they were going to control.
Cited, D.Smith. Ibid, p. 65.
Initially it was so-called "broad money"
M3, essentially measures of credit and liquidity.
Sterling M3 was the main
target adopted by the Thatcher Government and is defined as:
""Notes and coin plus all sterling sight and time deposits held by
the banking system ( current and deposit accounts)."
But this proved inadequate and was then refined to include
D.Smith Ibid, p. 173.
""A measure of narrow money (measures which typically only contain
a small proportion of interest bearing deposits) in Britain - it
is defined as the notes and coins in circulation plus all private sector
sight deposits ie. withdrawable on demand, in sterling. At any one time
a large proportion of these sight deposits are on the move between different
bank accounts as cheque are written. The Bank of England includes 60 %
of these so called transit items in measuring M1."
The difficulties the Thatcher Government experienced
in meeting its own monetary targets, caused much debate in monetarist circles.
The government sought the options of a fiscal approach,(ie. reduce public
spending whilst increasing direct and indirect taxation) first. This heralded
the destruction of Britain's infra-structure.
D. Smith Ibid, p. 174.
""A measure of the monetary base, described as the wide monetary base.
It comprises notes and coins in circulation and held in bank tills plus
bank deposits with the Banking Dept of the Bank of England. These deposits
are of two kinds: some are placed there for operational purposes, the rest
so that the banks can maintain appropriate cash ratios."
D.Smith, Ibid, p. 174.
""A measure of the money stock which attempts to assess the amount available
at any time for transaction purposes. In Britain it comprises notes and
coins in circulation with the public, plus non-interest- bearing sight
deposits with the banks (current accounts ) plus so called retail deposits,
which bear interest, with the banks m the building societies and the National
Saving Bank. It measures that amount of money that the public can readily
obtain in order to spend." D.Smith Ibid, p. 174.
Consequently, the Treasury tried to restrain growth
of the money supply by pushing the Minimum Lending Interest Rate to 17
%, but this only kept the money supply down temporarily. The Bank of England
did not wish to lose this potential control over the economy and resisted
the full scale introduction of control over the momentary base.
This provoked the scorn of Milton
Friedman, the erst-while guru of monetarism. As he put it to
the Treasury and Civil Service Committee in 1980, commenting on a Green
""I could hardly believe my eyes when I read in the summary:
These discussions lead to tightening of the money supply
further, using Alan Waters's advice
to extend control from M3 to M0 and M1. In addition the Bank of England
was enjoined to give up control over interest rates. This did not last
long because of a run on the pound, forced by international speculators.
"The principal mean of controlling the money supply must be fiscal
policy - both public expenditure and tax policy, and interest rates."
Interpreted literally this sentence is simply wrong. Only A Rip Van
Winkle, who had read any of the flood of literature during the past decade
.. could have possibly written that. Direct control of the monetary base
is an alternative to fiscal policy and interest areas as a means of controlling
Cited, D. Smith, Ibid, p. 95.
In the USA attempts by the Reagan
administration to control the money supply by an aggressive fiscal approach
( cutting welfare spending and public administrative spending ) were combined
with "Supply side"
economics. This entailed cutting
taxes to enable a so-called "encouragement to business to invest" which
would allow some riches to "trickle down", to the less wealthy. In fact
simultaneously with this the President:
""Sanctioned the largest increase ever seen in US defence spending.
This rose from 120 billion in 1980 to $ 265 billion in 1986...the scale
of the external deficit which in 1986 was predicted at best to plateau
out at around $170 billion in 1987, was seen by the international community
as the biggest single obstacle in the way of a world economic recovery..in
an attempt to finance both the budget and the external trade deficit, the
administration .... pursued ... high-interest rates. these reached historically
high real levels during the 1980's when the US absorbed no less than one-tenth
of the gross savings of the rest of the world.."
Even with all these refinements on definition of what
constitutes money, the Central Bankers and Governments were always one
step behind the speculative creations of the individual financiers. These
revolved around innovations in banking and money. Many of these innovations
were spurred by the huge rise in oil prices engineered by the "7
Sisters" Oil Companies of the West:
Palmer Ibid, p. 72-3.
""That each year transferred an extra $150 billion to the coffers of
the Organisation of Petroleum Exporting Countries (OPEC) from 1974 onwards.."
p. 23 Hamilton. Ibid.
The Bank of England Quarterly Bulletin 21(2) July 1981;(Cited
by R.T.Naylor, Dominion of Debt, Montreal, 1985, p.184 ); estimated that
by 1974, there had been a near doubling of the sum of world current account
balances, just after the Oil Prices Rise of 1973-4.
We have elsewhere dealt with the history and motives
underlying this (Alliance Issue 2 ).
To recap briefly, the oil prices rise allowed huge surplus profits for
the oil companies, but also dealt the competitors of the USA a major blow
as they were more dependent upon foreign source of oil power. The competitors
were the European capitalists, especially Germany; and Japan.
This influx of cash into the Middle East was simply
recycled into international banking and provided an explosive rise in syndicated
loans; and also forced the development of banking that was truly international.
The main bulk of this monetary circulation was in the Eurodollar market
discussed above (under part 4), and thus the term Petrodollar
market was coined. Coupled with this was the rise of creative
approaches to money. The problem for the Central Banks and their respective
capitalist governments, is that all these have been fundamental changes
in money circulation. These are summarised below.
The laws of money supply point out that there is a relationship
between the available money supply, demand, and velocity of circulation.
This can be summarised as the Quantity Theory
of Money Equation:
""MV = PY;
This has been the net effect of the recirculation
of the pool of money flowing into the Middle East. Effectively
the circulation time of money has been dramatically cut. Thus the money
supply has gone up. Money now flows around the world in search of more;
driven by the Creosus like financiers.
whereby Money ( M ), multiplied by its velocity ( V ), gives us national
income in current prices ( P Y )."
D.Smith : " The Rise and Fall of Monetarism." Middlesex, 1987. p.6.
This has made notions of a fixed
interest rate, by which the old style banks used to control
money flows, redundant.
The actual failures of the Monetarist experiments
in both the USA and Britain can be seen in the accompanying graphs. These
show the velocity of money ( Nominal
GNP divided by the money stock ) for both M1 and M2 in the USA and for
Britain, M0 and M3. They show convincingly that in practice the governments
were unable to control the money supply.
FAILED CONTROL OF THE MONEY SUPPLY USA
Two Figures: from p. 151 Smith
and 136 Smith.
Both only in the hard copy version
Money is now grown well beyond its old terms of reference,
to include many new forms. The old "paper money" was of course already
rare in the heady world of finance. It was largely unseen and traded upon
with fixed interest rates. But now, this "gentlemanly affair," has been
superseded by many new instruments.
These include: Floating-rate
notes (FNR) which allow exactly that ie. a variable interest rate
dependent upon the market; London Interbank Offered
Rate (LIBOR) which also allow fluctuating interest rates; Certificates
of Deposit (Cds) issued by each and every bank; Revolving
Underwriting Facility (RUF) " allowing a company medium term funds
at short term rates through the issuance of commercial paper (Hamilton
Ibid. p. 66 Ibid); commercial paper issues etc. In addition to these are
the various means by which one trade on "futures"
or "options" for the future. This in effect
means buying shares whose profit is based on what the prices will be for
the commodities (including money) at a defined tine in the future.
This has also undergone a revolution. Now, the old market
place is becoming far too narrow for the modern day Croesus:
3. The Technology of trading
""Dealing rooms of the money markets are being revolutionised by the
video text services of such companies as Reuters and Telerate.. offering
client terminal that would not only display prices fed to them by banks,
brokers and dealers but also could change the information live or on-line
at the originators' request...the range of instruments could be displayed
on a single screen and the number of institutions dealing in the market
was relatively clearly defined. ...the stock markets have been equally
challenged by the development of NASDAQ developed by the National Association
of Securities Dealers in response to the crisis of over excess demand for
over - the- counter (OTC) shares in the late 1960's.. the NASDAQ system
installed in 1971 consists of 20,000 miles of leased telephone lines connecting
terminals in every dealers office and tied into a central computing system
that recorded prices, deals, and other information.. all the buyer or seller
had to do was to look on the screen.. the effect was dramatic. Within the
next dozen years the share volume rose by more than 16 times, and the number
of terminals in use rose from barely a few thousand in 1972 to 40,000 in
1978 and more than 120,000 in 1985. By then the volume of share trading
at more than 16 billion shares with a value of some $200 billion made NASDAQ
the third largest stock exchange in the world, smaller only than those
of New York and Tokyo."
Of course all these innovations together make the control
of the money supply an impossible task for one Central Bank. Therein lies
the necessity of the frequent meetings of the "G7" central bankers. In
1986, a special study group of the Bank for International Settlements in
Basle, concluded that the overall effect was to transfer ownership of credit
from banks ( and therefore the Central Bank of that country ) away to institutions
outside of that control. They had this to say about the new innovations:
Hamilton Ibid, p.41-43.
""A sharp acceleration in the pace of innovation, de-regulation and
structural changes in recent years has transformed the international financial
system in important ways. Major new financial instruments - mostly taking
the form of off-balance sheet commitments- have either been created or
have dramatically increased their role in the financial structure : international
credit flows have shifted away from loans through large international banks
into direct credit markets; the volume of daily transactions has multiplied;
financial markets have become far more closely integrated worldwide; capital
has become much more mobile."
In October 1986, the Bank of England's Governor, Robin
Leigh-Pemberton drew the conclusion that monetary targets were
useless, in a lecture at Loughborough University :
Cited. D.Smith, Ibid. p. 159.
""It cannot be said that our experience with our chosen framework for
operating monetary policy has been satisfactory".
The harder the bankers tried to target one measure of
the money supply, the more other measures escaped from their control. A
law describing this phenomenon was even enunciated, being Goodhart's
Reviewing the factors that had rendered the control of broad money
, sterling M3 difficult, he conceded that the record for control when set
against the targets had been poor... and it was now time to consider whether
it was worth setting monetary targets at all.."
Cited in D.Smith, Ibid. p. 128.
""Coined in 1981.. by Professor Charles Goodhart, then chief economic
advisor to the Bank of England, is a sort of Murphy's Law of economic policy.
It says that any monetary aggregate which the authorities try to control
automatically becomes subject to distortions which render such control
difficult in the extreme..."
Latterly, after the recent troubles of Maastrict, the
situation is so perplexing to the central bankers that:
D.Smith, Ibid. p. 103.
""US Federal Reserve Board chairman Alan Greenspan
Documentary sources first record international credit
transfers in 12th Century Genoa, and by the end of the 14th century bills
of exchange were common between trading states, themselves the forerunners
of nations. (See "A History of Money"; E.V.Morgan; Harmondsworth, 1965).
Though the Bill of Exchange itself did not greatly change in international
payments over the next 500 years, there has been a sudden change in the
last 20 years in international banking and currency movements. These are
linked with the advent of new forms of money, and the technical changes
accelerating trading and currency movements, and the process of deregulation.
These processes are all intertwined with the capitalist conundrum in the
post war world: ie. How to keep the economy going without causing rapid
inflation; and how to slow the economy down when inflation has taken a
grip without causing unemployment.
"they have changed enough that reliance on the old models is inadequate.
We are being forced to look at different structures.. No models can explain
the types of patterns we are having," referring to the sluggish economic
growth in the USA and elsewhere, despite the fact that interest rates have
been sharply cut in most countries."
This is really a quite extraordinarily difficult type of environment."
Globe And Mail Business. Toronto. 16th Oct. 1992. p.B3.
9. The Exchange Rate Mechanism
"Modern conditions make a system of flexible
or floating exchange rates - exchange rates freely determined in an open
market primarily by private dealings and, like other market prices, varying
from day to day - absolutely essential"
Cited by Nikitin, Ibid. p. 120.
"What the critics of deregulation miss is the
simple point that market changes have developed not because of the whims
of government or the greed of practitioners but because events have forced
change and consumers have wanted it....exchange rates were freed in the
1970s because technology , the rise of private financial flows and the
disparate rates of inflation made maintenance of rigid controls impossible.
...Exchange control has been abolished in most countries because when a
currency did come under pressure as it did for the dollar and sterling
at different times in the 1970s, it became increasingly difficult to stop
the money pouring out , with or without controls.." Hamilton
A, The Financial Revolution, Harmondsworth, 1986. p.20, 232.
"The post war record shows the extent to which
it is necessary to deviate from domestic monetary objecties and to
intervene in the exchange market to achieve a given impact on the exchange
rate depends above all on the market's perception of the degree of the
government's political commitment to achieving a given outcome for its
Marris S; Ibid; p.240.
The essence of international money rates and their
corresponding values is no different than for any other commodity. This
is a simple relationship between supply and demand:
""What determines the rate of exchange of a commodity in a competitive
market? Supply and demand, which may cause the rate of exchange to fluctuate
above or below its value. If there is a shortage of cloth, those who wish
to obtain it offer more than its value in order to get some for themselves.
On the other hand if there is a glut of cloth, those who wish to dispose
of it offer to do so at less than its value in order to not to have it
left on their hands. However if the rate of exchange of cloth is above
its value as a result of shortage, the production of the cloth yields exceptionably
high returns, so that more people go in for weaving it, the production
of cloth increases and its rate of exchange goes down towards its value.
The reverse process operates if the rate of exchange of cloth is below
its value as a result of supply exceeding "demand"; the production of this
commodity yields exceptionally low returns, so that less is woven and the
rate of exchange rises towards its value. Thus in a competitive market,
there is a tendency for the rate of exchange of each commodity to correspond
in the long term to its value....."
But superimposed on this simplicity have been attempts
to gain control over competitor capitalist countries. The Bretton
Woods Agreement performed this trick for the USA, as outlined
above. That the competitor countries (Germany, France etc) recognised this
Combat, Principles of Marxism-Leninism Ibid. p.7.
""The setting of a floating rate of exchange between the West German
mark and the US dollar, it seems, really did impede to some extent the
import of inflation into the FRG. ..Former President of the Bundesbank,
Otmar Emminger wrote:
In any case, it was clear for reasons other than the
unwillingness of the foreign competitors that Bretton Woods and a fixed
exchange rate mechanism had to be temporarily discarded. Even the Guru
of Monetarism, Milton Friedman had
been forced by events to recognise that unless the Central Banks were able
to control the world's hot money, they would be unable to effectively control
the money supply. (See Quote above). But in fact, it was not to be so simple.
""In my view, ' floating' has worked well and stood its test during
a very difficult period...In West Germany we date the beginning of successful
stabilization policies from March 1973 ie. The beginning of floating; for
only since then have we been able to regain control over our domestic money
Cited Nikitin. p. 121.
We have above traced some of the developments forcing
rapid "Hot Money " circulation around
the world. This had consequences on the exchange rate that had not been
"The Bretton Wood Agreement of 1944, signed by all the major industrial
powers of the West in New Hampshire was intended to and indeed did, open
the post-war world to free trade and the convertibility of currencies.
But it was convertibility based on fixed exchange rates, backed by the
provision of short term aid from the new International Monetary Fund (
IMF ) to tide any country over short term problems. The collapse of the
Agreement in 1971, when it was no longer able to cope with the strains
being put on the dollar ( the reference currency ) and the successive devaluations
of various countries, opened up a quite different era of floating rates
that ultimately made it more difficult to control exchange rates. First
the USA at the beginning of the decade, then the major European countries
including Britain in 1979, and finally Japan at the beginning of the 1980's
abolished exchange controls. Banks and institutions were now free to invest
freely abroad, and to switch their funds to whatever offered the greatest
return or the least risk. Alongside this freedom of capital, came increasingly
volatile exchange rates as inflation took hold.. and economic performance
of the industrial nations.. diverged..."
This relates to the deregulation of financial controls
that have occurred as a result of pressures by financial speculators on
the exchange rates of certain currencies. The Eurocurrency market being
deregulated has allowed the rapid flows of money. Since this demonstration
of effectiveness in profiteering, other countries have also deregulated
their banking systems and control of currency exchange. This has had the
effect of again increasing the amount of money flowing around the world
in search of a good profit.
A. Hamilton, Ibid. p. 52.
For example Japan:
""The abolition of exchange controls and the easing of regulations
on institutional investment abroad..have released a huge surge of pent-up
portfolio investment money seeking higher returns abroad. Instead of the
USA's huge balance-of-trade deficit with Japan - some $40 billion in 1984
- leading to arise in the value of the yen and hence to a rise in the price
of Japanese imports into America, the current account was more than matched
by an even greater flow of capital out of japan and into the dollar. This
actually lowered the value of the yen..The irony for the USA has been that
its own efforts to enforce liberalisation of the Japanese markets has only
made matters worse. The more the US negotiators on the Yen-Dollar Committee
have insisted on a freeing of controls to allow the yen to become a more
widely used currency in trade, and to thus to share in the burden of the
dollar, the more this has had the opposite effect. Japanese companies have
kept up their export earning in dollars. Ever greater volumes of investment
yen have flowed out into the dollar. And the same has been true of the
dollar's relationship with the stronger European currencies, the Deutschmark
and the Swiss Franc..."
Obviously, though the money flows easily, it is not
always in the direction that the capitalists of each nation necessarily
wants. The behaviour of the money markets is reminiscent of Marx's observation
that there is often a shortage of cash/money just at the very time and
place it is most needed:
A. Hamilton, Ibid, p. 201-02.
""During economic crises, a drop in the metal reserves of central banks
as a result of outflow of gold abroad resulted in a catastrophic shortage
of means of payment and exacerbated the " money famine ". As Marx put it,
" the quantity of circulating medium is reduced precisely at a time when
the largest quantity is most needed."
Central Bankers are aware of this phenomenon:
K.Marx Capital Vol III, Moscow. Cited Nikitin, Ibid. p. 29.
""As we continue to draw so heavily on world savings there is a drag
on internally generated expansion elsewhere."
Capitalists and their representatives elsewhere were
very much inclined to applaud this trick of the USA:
Paul Volcker, President of Federal
reserve., 1985. Cited by Deficits and the Dollar, Marris.S. Institute for
International Economics. Washington, 1987. p.60.
""I rejoice at what Reagan is doing.
He has broken all the rules, and all the economists are furious... Five
million new jobs.. and at the same time inflation has been kept quite low.
It is a miracle; the House should know how it has been done. I think I
know how it has been done: it is because they have had the sense to make
somebody else pay for it.. In a word Reagan (to reverse Keynes) has called
in the resources of the old world in order to finance the expansion of
We have thus far not dealt very much with the Interest
Rates. But this is a key feature of the Monetarist approach
to control the money supply. To deter ' loose ' spending, the monetarist
raises interest rates; and in the process raises the financiers profits.
This upsets the industrialist and may set off the down turn in investment,
such as seen in the Rusting of industries in Britain and the USA.
Earl Stockton, Harold Macmillan,
Maiden Speech to the House of Lords. November 1984. Cited by Marris S.
Ibid. p. 1.
However, it may also drag money into the country
by foreign investors. This will have three main effects, all unpredictable.
may be a source of funds available to be invested by the capitalists in
whose country the foreign currency is lodged. This will tend to counteract
the "money famine" that Marx was referring
to. This is then in general a favourable effect for the capitalist class
of the country to which foreign capital is attracted. However, to keep
the investor's money there it will need to yield for the investor a better
rate of profit than elsewhere. If other foreign countries raise their interest
rates, they will entice the investor away from where they are currently
investing. Thus the movement of the money is very volatile.
the foreign country is itself only raising interest rates in order to keep
the inflation rate down by driving down the money supply, then this country
will not be able to be in control of the money supply since the higher
it raises its interest rates to deter the circulation of money; the more
foreign monies will flow in. This is in general a net unfavourable effect
of money to the capitalist class of the country to which foreign capital
very fact that the currency being sought out for trading is ultimately
backed by the real resources of the country will not be unnoticed by the
investor. Thus the investor weighs how realistic is the pricing of the
currency. If the interest rates are high enough, despite an apparent lack
of relation to the industrial and productive base; this may keep the investor
in that currency. But at the slightest hint of political trouble reflecting
the real status of that country, the money will fly. This very unpredictability
leads to a major difficulty in financial planning.
But, there is a Catch - 22 situation here.
Either monies flow out of the country because interest rates are
too low, and possibly the speculators become aware that the currency is
rated too high. This leads to money famine. Or, the interest rates are
high to deter private spending and keep the 'corset' around the money supply.
But this high interest rate is like a magnet and sucks in cash/money stocks
around the world.
At certain times, either one of the two risks
outlined are slightly more preferable than the other, to the capitalist
Two examples are discussed to illustrated
how current capitalist economies have been circling these tricky reefs.
The USA Economy in the years 1980-85, and the
International Plaza currency Deals constitute the first example.
During the Reagan years, USA fiscal policy was contradictory.
The attempt to shore up monetarism with supply-side economics was unsuccessful
as explained above on p 27-29. However, as we noted the dollar was
rising on the international exchange rates despite a very serious balance
of payments deficit. In other words the USA was spending more than it was
earning. This can be seen in the figure below.
GRAPH 5. USA DEFICITS
( from Dollar and the Deficit. by S.Marris. Ibid. p. xxvii.).
Only in hard copy version.
The relationship between interest rate and the exchange
rates was not quite perfect, since in 1978 the US interest rate was higher
than the European, but the dollar went down. Foreign investors were not
enticed because they believed the "Fundamentals" were wrong. But the USA
government realised that it had to push their interest rates even higher
to overcome the traders' focus on the "fundamentals". This is when they
embarked on the plan to raise the dollar in 1981. This can be seen below
(Figure 6). This graph plots over the years 1930-1984 the interest rate
difference between the USA and (the ROECD ie the rest of the OECD countries),
in the top panel; the rate of the dollar in the middle panel; and the US
current balance in the bottom.
GRAPH 6 : INTEREST RATE SPREADS USA AND ROECD
(From Marris,S. Ibid. p. 23.)
Only in hard copy version.
David Smith has been cited above, in stating that
the reason for the rise was the influx of foreign capital. This was drawn
essentially by a rise in US interest rates. The money markets thought that
there were likely to be more borrowing, and a strong growth. Yet the potential
risk of higher inflation was thought to be unlikely with Volcker at the
Federal Reserve Board. Foreign capital was obtaining good yields on the
dollar assets, and it seemed as though the dollar was climbing for the
The influx of foreign private capital can be seen
in the GRAPH 7:
GRAPH 7 INFLUX CAPITAL INTO USA
(From The Dollar and the Deficit. Marris,S. Ibid. p. xxx).
In hard copy version only.
But as this graph 7 above shows, by 1986 there was
a sudden change in the amount of inflow into the USA of foreign private
capital. By this time there was an appreciation that the deficit was itself
causing serious systemic problems in the USA. But far more significant
was the realisation that the current recession was in a vicious down spin:
"Faster US growth sucked in imports while slower growth in the rest
of the world curbed US exports. In 1982 with a more severe recession the
USA than abroad, this factor worked the other way. But for the period as
a whole it accounted .. for about $25 billion of the deterioration in the
US current balance. This phenomenon was aggravated by the debt crisis.
The imports of many heavily indebted countries fell by more than could
be attributed to their slower growth because they had to impose import
controls or carry through sharp real devaluations. This is estimated to
have cut US exports by $10 billion because of slow growth in the rest to
the world, the strong dollar, and the decline in the US net investment
position.." Marris.S. Ibid. p. 13-4.
The effects on the economy were not uniform. Thus services
and construction were not affected. However traditional industry an capital
goods exports were profoundly affected. As soon as the rise of the dollar
was clearly hurting US exports in such a profound way, the dollar had to
be brought down.
The Secretary of State, George
P.Schultz, acknowledged the situation:
"The dollar's strength.. is altering the character of the American
economy in a basic and in my view, undesirable way.."
All this undercut President Reagan's view that the dollar
was rightly valued by the market. As the Financial Times put it reality
was hitting home:
Speech 1985, Cited Marris S. Ibid. p. 54.
"A slowdown in the US economy - especially if it is accompanied by
a major weakening of the dollar.. will cut through some of the more extreme
forms of laissez-faire rhetoric which have vitiated serious discussion
of international policy coordination.."
Throughout this period the competitors of the USA were
clearly benefiting from the lowered export capability of the USA. But,
they were still suffering from the pressure being exerted on their currencies
by the rising dollar:
15 April 1985. Financial Times Editorial.
"In terms of economic welfare, a rise in Gross National Product (GNP)
generated by rising net exports obtained at the cost of a deterioration
in the terms of trade is not a particularly good bargain...they would have
been unambiguously better off in welfare terms if its recovery weak as
it was, had been based more on domestic demand and less on net exports.."
Moreover because all the lending and borrowing for the
USA was in dollars, the risk of the foreign exchange rate changes was always
run by foreigners. And as much of this risk had originated outside of the
country and at the end of the day were not redeemable by the USA; but other
countries. The USA after all in the last analysis could simply print more
dollars if the worst cam to the worst. Other countries with bad debts could
not do so, and had to earn their dollar credits (Marris S. Ibid. p.96).
The holders of these potentially bad dollar debts were primarily the Europeans
and the Japanese who did not like this.
Marris S. Ibid. p. 73-4.
So there was a combination of forces that tended
to see the need for the dollar to be pushed down. The European and Japanese
were finding that money famine in their countries was beginning and that
their investment risks were high. The Americans were finding that their
policy was hurting American exporters. An additional push to this step
was the realisation that protectionism which was being discussed by the
USA industrialists could have a profound negative effect on all the capitalists
of the world.
"The political trigger for the change in official attitudes was concern
about rising protectionist pressures in the USA, which became intense after
the summer of 1985. Since this concern was shared by the US administration
and its major trading , it provided a strong mutual incentive to do something
about the excessively strong dollar...for the first time, the Reagan administration
acknowledged that markets are not always right especially foreign exchange
markets- and that government action was required to bring the dollar down
to a more reasonable level.."
Even now the foreign Central Bankers had to push the
USA Laissez Faire extremists. They did this by announcing to the international
markets that they would push the dollar down:
Marris,S. Ibid. p.L
"On Feb 27th 1985, with a suddenness which left the foreign exchange
market reeling, central bank selling sent the dollar sharply lower. In
two hours the dollar fell almost 20 pfennigs from its peak of just above
D-M3.45. In the space of a few days the Central Banks led by the German
Bundesbank sold in excess of $10 billion..serious questions remained in
the minds of foreign exchange dealers...Would Paul Volcker at the Federal
Reserve Board of the USA be willing to stand by and allow the dollar to
fall..The answer came fairly quickly. In May the Federal Reserve cut the
So finally, an agreement between the USA and the other
developed countries to bring the dollar down was made. It is clear that
the USA were trying to get the German Bankers in particular to try another
method of realigning currencies, that is to raise interest rates in Germany.
At that stage they refused, having been consistently and strictly monetarists.
As Karl Otto Pohl, the President of
the Deutsche Bundesbank said:
Smith D. Ibid. p. 143-4.
"Of course we have not committed ourselves to raise our interest rate
level and thus narrow the gap with the US rates and achieve a correction
of the dollar thorough this means. Nobody would have demanded this nor
would I have agreed."
To perform the correction, a joint Front of the Central
bankers was required, in order to confront the international traders, and
convince them that the Central Banks wished and would ensure the dollar
stayed down. James Baker Treasury Secretary
of the USA met with the Group of Five Central bankers and finance ministers
at the Plaza Hotel in New York, on 22 September:
Financial Times, 15.11.85.p.19. Cited Marris S. Ibid,p. 243.
"For the rest of September and in October another $10 billion was spent
driving the dollar down, $3.2 billion of it by the USA. This time the foreign
exchanges got the message. The dollar which had paused in its slide began
to fall again...The dollar fell from 265 in February 1985 to 150 in September
1986. And the chorus of protest shifted from America's industrial heartland
across the oceans to industrialists in Japan and Germany, who were complaining
that they could not live with their currencies at such levels."
The capitalist governments were certainly convinced
enough to drop Laissez Faire tactics:
Smith. Ibid. p. 144.
"A key factor was the definite shift that has occurred since the Plaza
meeting toward giving exchange rate mechanisms a more important role in
the conduct of national monetary policy. The lead came from the Bank
of Japan. In Oct 1985 it clearly signalled to the markets its readiness
to give a high priority to yen appreciation by raising interest rates.
Then as exchange rates expectations shifted, the bank moved aggressively
to lower interest rates despite its concern abut the high level of liquidity
( ie money supply -ed) in the domestic economy.."
The second example to illustrate the means
in which the capitalists try to squeeze out advantages of the exchange
rate mechanism will be dealt with below under Maastricht.
In brief, it appears that the newly unified Germany
is in an acute cash shortage position. Thus its' very high interest rates
are designed to curb domestic spending, but will also bring in money to
help re-finance the build up of Germany. Especially former East Germany,
where under revisionism, the people and infra-structure was so impoverished.
To conclude this section, the interaction of the
exchange rate mechanism with the control of the money supply is profound:
"Thus in terms of achieving the key objective of low inflation and
growth, keeping the exchange rate within a sensible range is as important
as eg. keeping the growth of the money supply within a sensible range..
floating exchange rates have become just as powerful a channel of transmission
from monetary policy to the level of domestic output and prices as the
traditional channels of liquidity wealth and interest rates....."
It is so profound an interaction that it is difficult
to tinker with one and not affect the other parameters. In general Marx's
dictum that the capitalist class is unable to remedy its' desperate position
except for short term periods, rings truer and truer. Another dictum that
Marx held is also being borne out more and more. This was that capital
puts fetters on the development of ways of harnessing the technology breakthroughs
of the world. The 'fetters' of old banking have been broken, to enable
the new technology to have its day. But this has led to more problems for
the capitalists of the world.
Marris S. Ibid. p. 237-8.
There continues to be serious struggles between different
national capitalists; even those in "alliance". Thus one of the reasons
that the European alliance still needs time to overcome its old rival of
the USA, is that the various national capitalists are still fighting internally
over whether to fully align themselves with complete European Union or
not. This has been made clear by Maastrict
(see below). Even within the French ruling circles (one of the more anxious
of the capitalist classes in Europe to have full Economic unity) uncertainty
10. Contradictions Within The Capitalist Class
""French business is split about the prospect of EEC Maastrict Treaty.
Both Mr. Sard and Mr. Calvet ( Peugot and Alcatel Alstholm engineering
and Telecommunication giants, ) fear that the treaty's freemarket policies
will throw Europe open to their industrial competitors without obtaining
any thing in return, possibly killing some struggling strategic sectors.
They are not alone .."
But even more complicating and fundamental is
the fact that there has been a change in the nature of the alliance between
the wings of capital within one nation. Thus Lenin identified that:
Financial Times, Tuesday Sep 8th 1992.p.2.
But the majority of the French capitalist class wish to obtain union:
""..In France's boardrooms, currency stabilisation is the most commonly
cited advantage seen in the Maastrict Plan. " This will place us on an
equal footing with the Americans and give us the world's top currency,"
predicts Mr. Jerome Monod. Chinaman of Lyonniase des-Eaux- Dumez.. Mr.
Jean Rene Gortou, chairman of Rhone Poulenc the state owned chemical giant
adds that Maastrict is " also the creation of monetary union founded upon
the creation of a monetary union founded on especially healthy principles:
the fight against inflation, a limit on budget deficits and mastering state
debts. Despite the rifts at the top the impression that French voters will
be offered today is that the business establishment is on balance in favour
of monetary and political union for simple economic self interests.. "
p. 2 Financial Times, Sep 8th, 1992.
"" Imperialism ..is marked by ..the merging or coalescence of banking
with industry.." V.I.Lenin, " Imperialism the highest stage of capitalism
But Lenin emphasised that, despite merging of
bank and industrial capital in imperialism, this stage brings about an
increasing separation between industry and its main sources of financial
investment, and an increasing dependence of the former upon the latter:
""Generally speaking, under capitalism.. money capital is separate
from industrial or productive capital; the rentier living entirely on income
obtained from money capital is separated from the entrepreneur.. Imperialism,
or the rule of finance capital, is the highest stage of capitalism in which
this separation reaches vast proportions. The supremacy of finance capitals
over all other forms of capital means the rule of the rentier and of the
In the same work, Lenin drew attention to the:
V.I.Lenin, op cit; p. 53.
""The extraordinary growth of .. the category of bondholders ( rentiers
).. who take no part in production, whose profession is idleness, The export
of capital one of the essential bases of imperialism, still more completely
isolates the rentiers from production and sets the seal of parasitism on
the whole country that lives by the exploitation of the labour of several
overseas countries and colonies.. The world has become divided into a handful
of money-lending states on the one hand and a vast majority of debtor states
on the other.. The rentier state is a state of decaying capitalism.. "
However, nowadays the Banks are not the prime source of finance for capitalist
industry. In Britain for example, banks (mainly merchant banks) own only:
V.I.Lenin, op cit.
""0.3% ..of company shares".
Furthermore, banks in Britain provide only 6% of the
external funding of industry in the form of loans and these have been traditionally
short term loans to provide:
Cited in Combat, Communist League, London, Data from "Stock Exchange
Official Year Book: 1984- 85"; London; 1985. p. 969.
""Working (as opposed to investment) capital.."
Industry is itself financing much of its own investments.
The huge multi-nationals have such currency reserves that they have eroded
the power of the banks to some extent:
G.Ingham "Capitalism Divided", Basingstoke, UK.1984. p.67-8.
""The old economy is highly leveraged and deeply in debt. The emerging
New Economy isn't..There has been enormous structural changes since the
era not long ago, when the US corporate sector regular incurred large financial
deficits.. In the first quarter of 1992, Corporate America generated a
financial surplus of $109.6 billion (US) - the largest such surplus in
US history (Surplus is cash flow minus capital spending and working capital
requirements)..Today's huge surpluses stem from the fact that corporate
cash flows in the New Economy - in industries like pharmaceutical, software
and computers - exceed internal requirements to finance capital spending
inventory and the like.. the shift to surplus is driving interest rates
lower.. Gone are the days when the US sector was a net user of the personal
saver's savings.. The corporate sector is driving the US economy to a degree
unthinkable in the old economy. Conventional wisdom that the economy is
driven by consumer spending is no longer as true as it once was."
These divisions between the wings of capital are recognised
overtly by the business community. Thus when the U.S. Democrats were resistant
to a monetary policy, preferring to have their own representative, an industrialist
Mr.G.William Millar at the Federal
Globe And Mail, Business News. p.B26, Sep 22,1992.
""Was seen by many within and outside the Federal Reserve System as
being too closely tied to President Carter and insufficiently attuned to
the needs of the financial sector, was replaced by Paul Volcker. As the
Wall Street Journal later reported it:
In fact the relation between the profits of the financial
capitalist class, and the industrial capitalist class are inversely related.
"'Wall Street shoved Volcker down Carter's throat."
G.Epstein, 'Federal Reserve Behaviour and the limits of monetary policy
in the current economic crisis.' Contained in "The Imperiled Economy. Book
One." New York;1987;
This can be seen for the USA in the accompanying
graph, on this page (Graph 8).
GRAPH 8: PROFITS OF NON-FINANCIAL &
COMMERCIAL BANK CAPITAL USA 1973-1984.
Inflation adjusted. From: "Federal Reserve Behaviour
& The Limits of Monetary Policy in the Current Economic Crisis"; G.Epstein
p.253; In: "The Imperiled Economy"; New York; 1987.
After the breakdown of the Bretton
Woods System, the policy of the Federal Reserve Bank of the
USA was to take advantage of the floating exchange rates in order to increase
industrial profit and international competitiveness. Thus:
""The Federal reserve pursued an accommodating monetary policy which
would alow the dollar to depreciate relative to other currencies and make
United States products more competitive. ..The policy was successful in
certain respects. The dollar depreciated dramatically and the US balance
was stabilised after having been declining for years. Moreover the profitability
of the non-financial corporations increased over the period. But..the problem
was that accommodating monetary policy highly inflationary ..in the crisis
ridden US economy..the resulting acceleration of inflation and the rapidly
depreciating dollar undermined the profitability of financial institutions..Paul
Volcker's ascendancy at the Federal Reserve ( in 1979 ) marked the end
of the expansionary/depreciation era ..it also marked the a return to the
historically more common dominance of the financial sector in the making
of US monetary policy."
But this "tight money"
policy ultimately led to an exacerbation in the industrial decline of the
USA - the so called "Rusting of America".
Tremendous pressure began to develop for protectionism against foreign
competition. The Federal Reserve undertook then to drive the dollar down
with the consent of the other Central Bankers of the world under the Plaza
Agreement. ( See above).
G.Epstein, contained in The Imperilled economy Ibid. p. 253.
11. Recent Troubles Of the European Capitalists
Since the Maastrict Treaty was agreed to, there have
been a few major changes in European political realities. Of these perhaps
2 are particularly important. These changes have resulted in a major
open rupture between the various factions of the capitalist class.
"The biggest Maastrict problem is its call
for a single European currency. The Europeans collectively have a fixation
on currency values, manifested by their decades -long obsession with the
need for fixed exchange rates. Their attempts to lock their various currencies
into permanent relationships routinely unravel in devaluations and currency
crises, mainly because most of the major nations- Italy, Britain, Sweden,
Spain - refuse to discipline themselves. ...Each nation wishes to enjoy
the economic benefits of being fixed to a high-value German mark while
quietly debasing it's own currency through inflationary polices at home.
The attempt to create a single currency is merely another attempt to do
jointly what they cannot bring themselves to accomplish separately.."
T.Corcoran. Globe and Mail Business. 22.09.92.
The first new reality is the burden that the unity
of Germany is imposing on the erstwhile West German economy. The "locomotive"
of Europe that was Germany is now somewhat slower. Despite this it does
surely remain the best economic prospect in Europe; and the long term gain
from the crumbled Eastern revisionist States is likely to fall very much
into German hands.
The second is the major difficulty that capitalists
governments have nowadays in dictating their own terms to the world's money
In attempting to move the erst while East German
economy parallel to the West German counterpart, there have been temporary
problems. The Bundesbank (ie the State Bank of the German Republic, which
is mandated by law to prevent inflation; and can be considered to represent
the finance capital wing of the West German State) has been particularly
anxious not to allow inflation to be the means by which this can occur.
The Bundesbank further argued against the large scale subsidies of the
""Attempting to shift part of the responsibility for last months's
3/4 % point rise in the discount rate to the government, the Bundesbank
says Eastern subsidies are blunting the effects of it's monetary policy...The
East German economy is almost totally shielded from the effects of the
interest rate policy.. this impairs the efficacy of monetary policy instruments
and the monetary braking distance becomes longer.." "Bundesbank criticises
East German subsidies."
As explained above, when money "costs more", there is
less available for the industrialist who wishes to have credit available
for investment. Thus it hurts the industrial wing of capital, but is beneficial
for the financier. For the financier, "costly" money means more return
on the credit they loan out.
Financial Times 19th Aug. 1912. p. 14.
The relationship to inflation is also explained
As a surrogate for control of the money supply,
the international imperialists have attempted to use fixed exchange rates
in the same manner, to control the flows of money into their own countries.
But a new factor has begun to supervene in this method of control of their
own money supply. That is that huge pools of currency are now available
to be switched around from country to country by individual capitalist
As explained above this leads to confusion about
what constitutes the money supply in practice, and how to control it:
""The paradox for European monetary policy is that few apart from the
Germans believe in the wisdom of targeting broad money. But all believe
in the importance of fixed exchange rates.. So willy nilly everyone in
Europe is a monetarist. When D mark broad money misbehaves everyone must
pay the price.. The Bundesbank is not simple minded it knows that broad
money can be distorted by distress borrowing during an economic showdown
by changes in wealth holdings in response to the structure of interests
rates and by increased demands for D-Marks. But it judges these various
factors to account for no more than 1% point. The principal motor of M3
expansion is credit expansion.. In the last 6 months the Bundesbank complains
that the annual rate of credit expansion of the private sector was 11 %..
The Germans argue that effect of subsidies to lending in Eastern Germany
not merely increases the demand for credit but reduces its sensitivity
to interest rates.. Unhappily a change of heart in Bonn does not seem at
all imminent. For the moment high interest rates remain certain.." Editorial
Financial Times. 21.08.92 "German Money"; p. 12 .
In North America, the business press see the situation
rather more bluntly than the Financial Times in this context. They see
that the Europeans wished the advantages of liaison with the German locomotive,
but cannot avoid the wheels of the locomotive running over some of their
""The question is: are you as committed to European Monetary Union
as you say you are?.. That question has grown much harder to answer. Rising
German interest rates have forced every government to raise rates or watch
its own currency fall against the Deutchsmark.. Germany knows.. that devaluation
in the face of competitive international pressures is a false remedy; that
a depreciating currency cannot cover up inflationary wage and cost increases
forever; that there is no easy substitute for the hard work of raising
By the middle of September 1992, it was clear that the
battle between British and German interests was not going to be easily
resolved, and the issue was being pushed into the public arena, precipitating
market speculation. Furthermore the high interest rate policy of the Bundesbank
was clearly sucking money flow into Germany at the expense of other countries
including Britain. The Tory MP was quite right in his remark below. It
was repeating the trick the US had played before:
(Not that) monetary policy should in every case be subordinated to
defending a given exchange rate: what matters is controlling domestic inflation.
Europe's fixed rate regimen is intended in part as an external means of
enforcing internal discipline. Given Germany's dominant position in Europe,
pegging against the German mark means nothing more less than adopting German
monetary policies. The ERM's other members were quite keen to piggyback
on German creditability as they watched their own interest rates fall to
German levels. They cannot now escape the costs of that association, and
still expect the benefits. Globe and Mail Editorial, Toronto, Sep 14th,
""The view as one Tory MP put it that "we are paying for East German
reconstruction and the industrial expansion of Germany into Eastern Europe"
- has widespread resonance.. in Britain.. In the last 3 weeks comments
by Bundesbank officials have come close to direct political interference
in the UK economy. On Aug 24th Mr. Reimut Jochimsen a member of the Bundesbank's
policy making council sent tremors through the markets by suggesting that
an ERM shake up could be in the offing.. Reports cited senior German figures
as saying that they had offered to cut rates substantially for a general
ERM realignment was quoted by the markets as an important influence in
the crash in the confidence of the pound."
The more far seeing of the British capitalist class
saw that the Bundesbank was not the real enemy. The real culprit was Britain's
appalling slump in productivity.
Financial Times Sep 17th 1992. p.2.
""No British government can long defend a parity at the price of a slump..
The ERM is naked. Its dilemma is the conflict between the results of German
unification on the one hand and the aspirations of the peripheral countries
on the other hand. What has been needed is a way of accommodating the Bundesbank's
desire for lower inflation with the hope of the rest of Europe for sustainable
economic growth. This conflict of objectives had not created purely economic
difficulties but also political difficulties."
Financial Times Editorial: Sterling hangs by a thread. 17.9.92 p. 18.
""In prestige and pride performance and power the German Bundesbank
is an exceptional central Bank. Prestige stems from its statutory mandate
to maintain German price stability independent of Government instructions..
The D-Mark is the anchor of the European monetary system, The Bank which
in all but name has become Europe's Central Bank is not a machine.. Mr.
Karl Otto Pohl the President between 1980 and 1991 forecast in Sep 1990
that if it tried to link sterling to the D-Mark " for all time " the UK
could face " mass unemployment and enormous payment problems..".. Britain
cannot blame the Bundesbank for its economic problems..""
Market forces were relentless, and showed how difficult
they were to deter from an accurate assessment of the true value of the
pound. The inevitable revaluation of the pound was accompanied by much
"The Bundesbank and Britain " Editorial 17.9.92. p.18.
""Non-UK monetary officials believe Britain bungled the weekend revaluation
by refusing to realign sterling's D-Mark parity. Admittedly that would
have been politically very damaging, but the scale of intervention in recent
days shows how unexpectedly large speculation forces have become. The Bundesbank
and the Bonn did not get the revaluation D-Mark they wanted. The Germans
wanted a differentiated realignment that would have involved more countries,
in return for an interest rate cut. But the UK refused to make concessions
on sterling's parity in return for lower German interest rates. The German
line reflected a growing feeling that economic convergence in Europe is
not sufficiently developed for the EMS to be treated as a fixed rate system.
While the Germans accept that the French franc should be pinned down to
the D_Mark as for political as well as for economic reasons, they watched
with disquiet how governments have aspired to fix currencies such as the
pound and Spanish peseta and the Portuguese escudo to the D-Mark."
The General view outside of Britain was that Britain
was only taking a long overdue correcting of the pound:
17.9.92. Financial Times; "Impaled on Sterling Skewer"; p.4.
""There is a recognition of the huge sacrifices being made to stamp
out inflation, but some G7 officials ask whether that is not too rigorous
an approach given that some high interest rates are stifling business activity
and prolonging recession. There has also been resentment among the other
ERM members at the way the UK has frequently appeared to reluctant to take
the unpleasant medicine sometimes associated with EMS membership.."
Of course this has all exacerbated inter-national capitalist
conflict within the EEC:
Financial Times.London. 17.9.92. p.4.
""There was barely concealed fury at the Bundesbank. Two weeks ago
Mr.Lamont was winning plaudits for
organising coordinated EEC assault on the German central bank's refusal
to cut interests rates. The view now in Downing St, is that the Bundesbank
has been wreaking its revenge with persistent hints that it believed sterling
should be devalued.."
The other effects on the markets were astounding. Sweden
dramatically increased its interest rates:
Financial Times. Sep 17th, 1992. p.4.
"Sweden raised its marginal rate lending to a staggering 500% yesterday,
the highest level ever, in an effort to reverse the huge outflow of capital
seen earlier this week..."
Thus being linked with Germany had its problems. But
the trouble was, being outside of German help via the ERM was also fraught
FT Sep 17th 1992.p.2.
""Cohabition with Germany inside the Exchange Rate Mechanism when the
D-Mark is prone to powerful upward lurches against the dollar is no picnic.
Living outside the ERM while trying to abide by its rules is even worse,
to judge by the maelstrom that has consumed the Nordic economies.. Sweden
built its post war success.. through competitive devaluation and welfare
state.. Yet its present plight derives from having too much of these two
good things.. Today Sweden shares with its neighbours the highest rates
of interests in Europe and a lower rate of inflation than Germany. It is
now trying to reduce a budget deficit now approaching 8% GDP. Yet the present
disinflationary policy of shadowing the ECU is ill designed to permit a
significant transfer of resources into the tradeable goods sector, without
which the economic growth that will make the public finances manageable
is unlikely to be forthcoming.. no doubt Sweden wishes to keep its options
open in relation to the EEC.But the cost is high and the message for others
In an Editorial, the Financial Times recognised the
inevitability of it all, and the different perspectives that the Germans
had from the other nations, and the different views of what money to control:
Nordic Paths Diverge. Editorial FT 9.9.92.p.16.
""German Money" The paradox for European monetary policy is that few
apart from the Germans believe in the wisdom of targeting broad money.
But all believe in the importance of fixed exchange rates..So willy nilly
everyone in Europe is a monetarist. When D mark broad money misbehaves
everyone must pay the price..The Bundesbank is not simple minded it knows
that broad money can be distorted by distress borrowing during an economic
showdown by changes in wealth holdings in response to a the structure of
interests rates and by increased demands for D-Marks. But it judges these
various factor to account for no more than 1% point. The principal motor
of M3 expansion is credit expansion,,In the last 6 months the Bundesbank
complains that he annual rate of credit not merely increase the demand
for credit but reduce its sensitivity to interest rates..Unhappily a change
of heart in Bonn does not seem at all imminent. For the moment high interest
rates remain certain.." 21.08.92 p.18 .
At the time of writing, it is still not clear how the
final outcome will be. But it is very likely that the process of amalgamating
forces under the EEC and ultimately a single currency will remain the target
of the European capitalists. The current GATT talks reflect the increasing
intensity of the negotiations around protectionism. Recent moves towards
North American Free Trade Association; and ASEAN Free Trade Association
highlight the new imperatives to redivision of the world.
In these manoeuvres of the imperialists, they are
interested in applying the new slogan of the day: "Your markets are also
my markets; but my markets are only mine".
Thus the tension between Protectionism and Free
Trade, is only a strategic one for them. For the working class, the new
re-division of the world ultimately cannot but depress their living standards
1. The Home Market and the
Protection of markets is seen by capitalists as
part of their exclusive "right to exploit" their "own working class". They
do not want to share this with capitalist competitors of other countries.
Under this policy, " their " workers suffer higher prices than with competition
from foreign imperialists. This policy is used especially in situations
where the capitalist class is aware that the countries industries are weak
and unable to compete with foreign capitalist exports.
This tends to drive down living standards of the
workers. But because of the capitalist need to ultimately drive down the
workers wages, in order to gain the maximum brake on the tendency of profit
to fall; this potential benefit of free trade is limited.
Capitalists accompany this protectionist policy
with chauvinist exhortations to "buy home goods". They try to convince
the workers that they also have a vested interest in protectionism. This
is sold to the workers in the guise of saving jobs. This is often true.
Witness for example the loss of jobs in the auto industry in Canada following
the so called Free Trade Pact with the USA.
2. Strategic considerations of the working
In such countries the working class should decide its
attitude to protectionism according to other criteria than bourgeois appeals
to chauvinism. More than short term gains in living standard are very unlikely
to occur as the capitalist will use the opportunity to drive down the effective
wage in order to defend the falling rate of profit. The class's attitudes
then should be based on strategic considerations of the working class.
In the current late decay of imperialism, appeals
to protection are driven by an increasing tendency to form larger markets.
The Marxist-Leninist consideration should in these circumstances be aimed
at whether or not:
The current epoch is one of a disintegration of the
power of the USA imperialists and an increase in power of the German and
thereby European imperialists and the Japanese imperialists. Each of these
competitors strive to create a super trading bloc; within whose
borders free trade (or ' freer trade') occurs. Outside of the bloc,
protectionism is the policy.
These policies result from the major crisis of over-production
that the world is experiencing. The final rupture of the Comecon capitalist
block offers the only untapped market; and so the Blocks are trying to
extend themselves into the ex-Comecon markets.
In the case of the USA Free Trade Bloc being
set up between Mexico, the USA and Canada; the Block is clearly under the
domination of the USA. Here there is no effective balance between opposing
international imperialism. The differences between the European imperialists
do allow for a certain balance; this is not achievable between the USA
and Canada; and less os between USA and Mexico. In fact, part of the strategic
plan of the USA currently is to weaken the federalism of Canada to the
point where it's effectiveness as a separate State is disintegrated.
The European Economic Community is more delicately
balanced between the competing imperialists. Of the nations within the
fold, only Britain ( now a junior partner ) has significant allegiance
to the USA. The others are far more committed to the EEC; even risking
domination by Germany.
In the Far East, it is likely that a massive
trading block between Japan and China is going to make it impossible
for many of the Pacific basin nations not to enter an alliance dominated
by the Japanese imperialists.
These manoeuvres are the first salvoes of the next
The correct policy for Marxist-Leninists in these countries
can be therefore legitimately considered as being parallel to the attitudes
of Marxist-Leninists in war. That is a two fold policy whereby they should
i) Initially, retard the capitalist
forces that tend towards market concentration, by fighting the political
steps that accompany such conglomeration. Such was the policy of the Communist
League in the UK towards the early days of the European Common Market.
This was also the line of many progressives that accompanied the so-called
Free Trade talks between Canada and the USA.
Marxist-Leninists recognise that this process of conglomeration
is an inevitable tendency under the present phase of monopoly imperialist
development. If their strategic attempt to weaken the process fails; they
should fight to protect living standards within these markets. At the level
of trade they should support international free trade. But more importantly
they should form multi-national trade union links to ensure worker unity
within the trading block.
ii) If the struggle to prevent
conglomeration of the powers into one giant trading block is unsuccessful,
the policy of Marxist-Leninists in that country should be to preserve living
standards of the working class. This is akin to defeat of "their own bourgeoisie".
On no account can the class struggle be muted because of bourgeois cries
that the country is becoming "uncompetitive".
This is the current situation within the European
Common Market. There are advantages in this policy for the less well developed
labour movements. Thus in the EEC, it is recognised that working conditions
are much poorer in Britain, Ireland and Portugal than they are in the countries
such as Germany and France.
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