Number 3, October 1992

Cover Picture Only in Hard copy: George Grosz: "Inflation"  ca.1952

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.

    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.

    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, at best.

    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:

    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 :     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" :     Marx places his analysis of Free Trade within the basic class antagonism that cannot be leavened by Free Trade:     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.     He thus ended with a very limited vote for free trade:     The new phase of capitalism was identified by Hobson as:     Lenin adopted John Hobson's and Rudolf Hilferding's view of Imperialism as the development of capitalism.
    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 industry:     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:     In his analysis of imperialism, Lenin defines imperialism by "five essential features ":     In regards to free trade, or free competition:     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:     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:     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 :     This difference between industrial and financial capital was characteristic of capitalism at that time:     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 States possible.     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.

    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:

    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.

    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 dollar. However:

    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 :     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 : 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 gold ".
    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. This served:     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.

    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.

    In addition the competitor economies had begun to be reconstructed enough to pose a challenge again.     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:

    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.

    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:

    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:     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.
TABLE 1. Cited by Nikitin. Ibid, p. 116-7. Drawn from Krause L.B and Salant W.S. Brookings Institution Washington 1977, p.186.
Increase in components of reserve money, billions of national currency units:
1) Net Foreign asset central bank;













 2) Net domestic assets of Central Bank 794 6754 6.7 29.73 2 24.2
3) Reserve of Money, Total 1435 6734 49.6 45.31 4686 22.4
Increase in components of reserve money, &money supply (%age)
1) Net Foreign asset central bank; 25.0 -0.6 121.6 45.1 644.9 111.4
2) Net domestic assets of Central Bank 12.1 184.1 57.8 69.5 -- 45.3
3) Reserve of Money, Total 36.0 93.5 106.2 58.5 140.0 32.8
4) Money supply 49.9 143.6 62.8 54.7 156.0 37.0
5) Money supply & quasi-money 75.1 104.1 92.6 106.0 144.4 55.6
Increase in indicators of GNP (%)
GNP-Current Prices 66.7 72.1 71.6 81.6 115.2 49.8
Real GNP (1970 prices) 15.9 23.5 28.4 33.7 58.0 18.8
 GNPdeflator (1970-100) 43.8 39.4 33.6 35.8 36.2 26.2

    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:

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:     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 developed where:     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.

    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.

    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.
    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 Secretary said:
    "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 .."
    Cited Palmer, Ibid, p. 85.
    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:
    "I think something has changed between our two countries( ie France and Britain )."
    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.

    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 :
    ""To address the problem of the weakness of Central European economic by establishing a " federation because of the region formed a " natural economic unit".
    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.

    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:
    ""The building of a new Europe."
    Laxer, Ibid, p. 33
    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).
    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 entailed:
    ""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 years.."
    Laxer, Ibid, p. 43.
    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 reached.
    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.

    6. Fall of the Rate Of Profit.

    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.

    USA Year         Pre-Tax         Britain Year       Pre-Tax         Japan Year Pre-tax

    1948-50             16.2 %                 1950-54             16.5                 1963         12.5%
    1951-55             14.3                     1955-59             14.7                  1965         11.9
    1956-60               12.2                   1960-64             13.0                 1968         14.7
    1961-65                14.1                  1965-69             11.7                 1972         13.0
    1966-70                12.9                 1968                   11.6                 1974         11.9
    1970                       9.1                 1969                   11.1
    1971                       9.6                 1970                     9.7
    1972                       9.9
    1973                     10.5
    ( See E.Mandel, Second Slump. London, 1980. pp 22-25).
    SEE ALSO GRAPH 2: Only in hard copy.

    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".
    ""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 constant capital."
    Principles of Marxism-Leninism. Communist League issue of Combat, no. 4. Aug. 1976. London. p. 8.
    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.
    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' direction:
    ""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. 8.
    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 as:
    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 capital.

    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.

    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:
    ""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."
    David Hume, cited by Smith D. "The rise and fall of monetarism"; Middlesex, 1987. p.5. 

    7. Controlling The Money Supply

    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.

    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 capital.

    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:

    Labour Prime Minister James Callaghan in a speech to the Labour Party Conference in September 1976 said: 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.
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:

    But this proved inadequate and was then refined to include 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.

    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 Paper :

    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.
    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:     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:     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:     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.
    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.
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:     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:     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 :     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 Law:     Latterly, after the recent troubles of Maastrict, the situation is so perplexing to the central bankers that:     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.

    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:

    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 was clear:     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.
    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 foreseen:     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.
    For example Japan:     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:     Central Bankers are aware of this phenomenon:     Capitalists and their representatives elsewhere were very much inclined to applaud this trick of the USA:     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.

However, it may also drag money into the country by foreign investors. This will have three main effects, all unpredictable.
    Firstly there 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.
    Secondly, if 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 is invested.
    Finally, the 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 class.
    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.
( 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.
(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 foreseeable future.
    The influx of foreign private capital can be seen in the GRAPH 7:
(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:

    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:     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:     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:     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.
    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.     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:     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:     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:     The capitalist governments were certainly convinced enough to drop Laissez Faire tactics:     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:     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.     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 was displayed: 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: 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:     In the same work, Lenin drew attention to the: However, nowadays the Banks are not the prime source of finance for capitalist industry. In Britain for example, banks (mainly merchant banks) own only:     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:     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:     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 Reserve Board:     In fact the relation between the profits of the financial capitalist class, and the industrial capitalist class are inversely related.
    This can be seen for the USA in the accompanying graph, on this page  (Graph 8).
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:

    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).     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 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 speculators.
    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 West Germans:     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.
    The relationship to inflation is also explained above.
    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 speculators.
    As explained above this leads to confusion about what constitutes the money supply in practice, and how to control it:     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 own feet:     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:     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.     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 finger pointing:     The General view outside of Britain was that Britain was only taking a long overdue correcting of the pound:     Of course this has all exacerbated inter-national capitalist conflict within the EEC:     The other effects on the markets were astounding. Sweden dramatically increased its interest rates:     Thus being linked with Germany had its problems. But the trouble was, being outside of German help via the ERM was also fraught with problems!     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:     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 even further.     1. The Home Market and the metropolitan bourgeoisie.
    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.     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 World War.     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 act to:     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.
    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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