Chapter 17 : Capital Formation and Foreign Trade

The increasingly organized character of the mixed economy has induced some economists and sociologists to speak of it as a “post capitalist” system. The possibility of an organized capitalist economy either pleased or worried many social theoreticians before – Rudolf Hilferding,^[1] most notably, envisioned a completely organized capitalism based on a class-antagonistic system of distribution. However, a noncompetitive capitalism, though perhaps conceivable on a national level, is quite inconceivable as a world-wide phenomenon and for that reason could be only partially realized on a national level. What national economic organization there is has arias en mainly in response to international competition; and the more such organization has entered into and transformed the market mechanism, the more chaotic and destructive the capitalist system has become. Capitalistic property relations preclude any effective form of social organization of production. Only where these property relations have been destroyed, as for instance in Russia, has it proved possible to have some measure of central economic control. But even here, the character of the planned economy is still determined by international competition and, to that extent, its organized nature helps perpetuate the general anarchy of capital production.

Although Keynes’ theory evolved out of the consideration of a closed system, it had to relate itself to the real world of capital production. Keynes felt that by insisting on the self nature of the market, laissez-faire doctrine condemned society to depressions and the decline of international trade which they brought. He hoped that an enlightened self-interest would induce national capitals to expand production by way of government intervention, and then to extend their newly-won more comprehensive point of view to international trade and finance. It is now quite generally held that governmental policies can control the behavior of the national economy. But this confidence does not extend t the international economy which, from time to time, is raked by trade payments difficulties, such as the so-called dollar-gap after the Second World War and the more recent payments difficulties of England and the United States – not to speak of the rather permanent trade and payments problems of the capitalistically underdeveloped nations.

For Marx it was not trade but the process of capital accumulation which was the source of capitalistic crisis; the expansion and contraction of trade merely expressed the needs of the process of capital accumulation, as did expansion and contraction in other spheres of economic activity. He did not share the classical illusion that international free trade benefits all nations equally by bringing about an international division of labor in harmony with both natural conditions and the economic needs of men. Marx held that the international division of labor that developed through trade was largely determined by capital accumulation. Therefore, “just as everything became a monopoly, there are also some branches of industry which prevail over all others, and secure the nations which especially favor them the command of the markets of the world.”^[2] This position is simultaneously an exploitative position. Marx was not surprised that the “free-traders cannot understand how one nation can grow rich at the expense of another, since these same gentlemen also refuse to understand how in the same country one class can enrich itself at the expense of another.”^[3] He declared himself in favor of free trade nonetheless, for in his day, “the protective system was conservative, while the free trade system worked destructively,” and “carried the antagonism of proletariat and bourgeoisie to the uttermost point.^[4]”

Economic development “has been a process of growth from a center in which the countries outside the center have owed their development (and often their very existence) to the movement of factors, as well as of goods, from the center; and the center countries have in turn owed their development primarily to this movement.”^[5] Under these conditions it is true that international trade constitutes an “economic gain.” However, the gain accrues largely and disproportion ally to a few capitalist nations and transforms the world market into their dominion; so that the fortunes of the international market depend on the expansion of these few countries or, at times, of a particular nation.

In a world without tariffs, quotas and other restrictions, trade faces a discriminatory situation, for the strength of different nations varies according to level of productivity, degree of industrial development, and possession of natural resources. Over a period of time, “If there are divergent rates of growth of productivity, the trade will be progressively less favorable to the countries less rapidly advancing in productivity.”^[6] Thus “Free Trade” was the watchword of the more advanced capitalist nations, and the “free-traders themselves were only concerned with making trade free so long a this meant an expanding economy and a growing world market. This specific freedom of trade, in turn, prepared the conditions for new waves of protectionism, which emerged as soon as capital formation began to decline.

Large-scale and diversified economies are less dependent on the extension of international trade than are more specialized small scale economies. The dependence of the American economy upon the products of other nations is relatively limited: what other nations produce can, in most cases, also be produced in the Unite States; and what cannot be produced can often be dispensed with or replaced by substitutes. Of course, the large-scale economies will use their “autarchic” possibilities only in an “emergency situation.” Since capital recognizes only profitability as a border to its expansion. But since these economies suffer least by a deterioration international trade, they can set the conditions under which it carried on. And though it is clear that the economic advantage foreign trade does not consist in getting rid of exports but in obtaining the maximum value of imports in exchange for them, countries in absolute need of imports are often forced to engage in trade practices quite contrary to their "economic interests."

Having one nation in a monopolistic position in the world economy does not necessarily impair international trade: indeed, in the nineteenth century, England's exceptional capital strength, accompanied by large capital exports, fostered trade. Yet structural changes in world capitalism may affect both capital accumulation and international trade negatively. It has often been said that America's relatively limited capital exports and the low percentage of exported goods to total production testify to her lack of “economic imperialism”; and that, consequently, American competition cannot be blamed for the economic difficulties besetting the world.

From a consistently capitalistic point of view, however, it would be just this lack of "economic imperialism” - whatever its cause - which would account for the contraction of the world market. During the period from 1870 to 1913, for example, “Britain invested abroad about two-fifths of her savings, i.e., something like one-tenth of her income. By 1913 her foreign investments, equal to nearly four-ninths of her home investments represented one-third of all European investments and contributed one-tenth of her national income.”^[7] Expressed in terms of the scale of the now dominating American economy, "the equivalent would be an American foreign investment of about $600 billion yielding $30 billion a year income and growing somewhat like $15 billion a year.”^[8] Instead, United States private foreign investments after the Second World War were for a long time at a rate of less than $1 billion a year, representing less than one-third of one per cent of her national income, and only slowly rising to $3 billion in 1957 and to $4.5 billion in the years thereafter.

The world's recurrent trade and payments dilemma dates back to the First World War and acquired an apparently insoluble character in the wake of World War II. The consistently unfavorable trade and payments positions of the European nations were largely the result of the two wars, which led to the loss of most of their foreign holdings, their indebtedness for American supplies, and the shrinkage of their traditional markets. The relative scarcity of food-stuffs and raw materials during and after the wars turned the terms of trade against the European nations. The situation was further aggravated by the deterioration of East-West trade which resulted in part from political changes but in even greater part from the industrialization of countries that formerly had been producers almost exclusively of primary products. America’s dominating position in the world economy, as not only the largest industrial but also the largest agricultural producer, dislodged still further the already precarious “international economic balance.”

A payments balance may be lost through commodity exchange, through capital movements, or through the requirements of war. Deficit countries may balance their foreign transactions in various ways. They may draw upon their foreign assets and reserves. They may alter their exchange-rates, thereby affecting both imports and exports. They may encourage exports to gain foreign exchange and discourage activities that lead to a loss of foreign exchange. They may also get help in form of foreign credits and aid. A trade and payments balance – by itself – means only that, and does not necessarily imply healthy and prosperous conditions. A persistent imbalance in foreign exchange transactions, however, points towards the dissolution of the market system. After the Second World War, America became a creditor-nation unable to collect and Europe a conglomeration of debtor-nations unable to pay. Between 1946 and 1952, the deficit of the “free” nations with respect to the United States rose to about $34 billion. Some $4 billion were covered by European gold and dollar reserves; over $30 billion by American aid.

Offset by loans and grants, America’s “favorable balance” was plainly fictitious, for, as a United States Senator expressed it, it “is obviously an imbecility to attach the word ‘favorable’ to a situation in which the outgo exceeds the income….. It was unfavorable, but unavoidable, in the years when we were a debtor nation and had to ship out in servicing our debt more than we received. We are now a creditor nation and continue that practice. Anything which expands our imports and/or diminishes our exports tends to mitigate our silly practice of shipping aboard stuff that can’t be paid for.”^[9] However, this “silly practice” reflected the indispensable interdependency of international capitalism. Requiring the maintenance of private enterprise systems elsewhere, America’s economic foreign policy could not follow the rules of good business.

Capitalism has always been at once a productive and a destructive social system, not only in everyday competition, but, in an accelerated and concentrated form, in times of crisis and war. The destruction of capital values both in peaceful competition and in competition by way of war was instrumental in bringing about new upswings in capital production. To serve as instruments accumulation however, the destructive aspects of capital production must retain a certain definite relationship to its productive powers. The destruction of capital values in a depression affects only an amount of capital in its physical form. The material productive apparatus remains largely intact; it is merely concentrated into fewer hands. War, on the other hand, destroys capital in both its physical and its value form; and if too much is destroyed in its material form, the surviving capitals find themselves thrown back to an “earlier” stage of capital development in which their own advanced characteristics become an anachronism. Because their own profits are bound up with a definite mass of world production, too great a reduction of the latter is likely to reduce the surviving capitals’ own profitability. The disproportionalties caused by the destruction and dislocations of war must be overcome before the general process of capital accumulation can again proceed.

The United States’ favorable balance of trade in 1948 was $5.5 billion and her production in the same year exceeded that of 1937 by 70 per cent. The deficit of the Marshall Plan countries was $5.1 billion and their production was still below the pre-war level. Their share in American imports had dropped from 2 per cent of the American gross national product at the turn of the century to less than 0.5 per cent in 1948. Under such conditions, the trade and payments question could not be left to the vicissitudes of market events. The unbusinesslike procedure of shipping more out in aid than was received by way of trade was unavoidable.

International capital movements after the Second World War were dominated by the United States, and most of the American flow consisted of government funds. American aid enabled European governments to adopt much more expansionary programs of recovery than would otherwise have been possible. This aid was an extension of government-induced production to the international scene. Just as government-induced production in the domestic economy is intended to secure that amount of economic activity considered necessary for social stability, so government aid to foreign nations finds its rationale in the inescapable need to sustain the private-enterprise system abroad. In both cases, it is expected that current non-profitable expenditures will be recouped at a later time through a general upswing of economic activity.

In order to accelerate the general expansion of capital and to enlarge its markets, an economic integration of the nationally-dispersed European economies appeared indispensable and found strong American support. Economic integration can mean different things – the “automatism” of a free world market, as well as political unification with planned supra-national interventions in the economy. The latter type of “integration” was incorporated in the Nazi vision of a Europe under German control. During the war, English voices were raised for a United Europe under British tutelage. But the war reduced Great Britain to a secondary power, despite her far-flung but decaying Commonwealth connections. The future and character of continental Europe seemed now to be determined by the evolving power struggle between Russia and the United States. For the latter to win, or even to hold her own, a rapid European recovery was necessary. This induced the Marshall Plan and forced the United States to accept economic policies discriminatory to her own strictly economic interests.

Although the conception of “integration” of the European economies was at once economic and political, at its start it was a purely monetary matter in accordance with the Keynesian view of things which considers all economic activities mainly from the monetary angle. Several hundred changes in exchange-rates in concurrence with different degrees of inflation in various countries had led into an impenetrable jungle of inconvertibility. To restore at least partial convertibility was then regarded as the starting point for an increase of trade and a consequent rise in production. The first attempt in this direction was the European Payments Union, modeled after the International Clearing Union proposed by Keynes during World War II. It was to make possible a better transfer of European currencies, which was regarded as a precondition for the elimination of import restrictions, export subsidies, and other measures that hampered intra-European trade. It was also regarded as a way-station on the road to universal convertibility in an altogether free-trading world.

European trade and payments problems were soon superseded, however, by the overriding issues of Western defense and Germany’s incorporation into the Atlantic Pact. In the years since Potsdam it had become clear that the extensive destruction and holding-down of German industry’ played into the hands of the new Russian adversary. In the spring of 1951 the Western allies revised the Occupation Statute in exchange for guarantees that Germany would honor her pre-war and postwar debts and for the assurance that she would cooperate to the limits of her capacity in the Western defense effort.

The decision to revive Germany’s economic power implied different things for France and England than for the United States. For the latter, it was first of all a military decision, a preparation for a possible new march on Moscow with the “experienced” German army as the spearhead of a European force covered by the immense productive power of America. The revival of Germany, both industrial and military, was acceptable to France only if it was accompanied by guarantees that assured France a dominating position in Europe. Yet France’s actual weakness and inability to oppose American policies induced French politicians to anticipate the dangerous aspects of this development and to answer them in advance with the Schuman Plan.

The purpose of the Schuman Plan, the conception of a European Coal and Steel Community, was to create a single market for coal and steel in all of Western Europe. Adherence of France and Germany made participation by the smaller nations practically mandatory. Britain associated herself merely for the exchange of information, without surrendering control over her own coal and steel affairs. The new supra-national institution was hailed as the beginning of a new era in intra-European relations, as the harbinger of better things to come. The drawing into the single market of other products besides coal and steel, and the creating of an European atomic energy program, were to culminate in a Western European Federation, a United States of Europe.

In a more prosaic mood, however, the Coal and Steel Community appeared to be merely an extension of the European steel cartel of pre-Hitler days. Coal and steel in France and Germany lie close to the borders of these nations in the Saar, in Lorraine and the Ruhr. To combine the iron ore of Lorraine with the coal of the Ruhr has been the concern of both countries for a hundred years. The European steel cartel, which lasted until the Second World War, was a price-fixing arrangement whose existence indicated the relative capital stagnation at that time. And in 1950, when the Schuman Plan was born, there were signs of impending surpluses of coal and steel; so that the Plan was probably inspired in part by the desire to avoid another period of cutthroat competition. Yet, at the time of its ratification and during the period immediately preceding it, the situation had already changed in favor of a general expansion of coal and steel production. There was now a need for German and French collaboration not so much to secure the given market as to assure a larger production. Whatever the future would bring, the Coal and Steel Community satisfied all those engaged in its foundation. For America it increased the war-potential of the West; for Germany it offered a chance for a quicker recovery; and for France it provided the opportunity to partake in the control of the inevitable development of Germany’s productive power and war-making ability.

In one sense the ratification of the Schuman Plan was also a result of the German recovery, which came to be widely regarded as a “miracle” and a manifestation of capitalism’s undiminished power of expansion. This “miracle” was, of course, the result of the colossal destruction of capital, which both allowed for and necessitated an enormous amount of reconstruction. Recovery was aided by a radical currency reform, by American aid and investments, and by political conditions under which mere survival was incentive enough for the workers to endure the greatest degree of exploitation. Working-hours were longer in Germany than any where in Europe. While German wages were half of British wages, investments in Germany were 25 per cent of the national income as against Britain’s 16 per cent. Per capita consumption of the West German population was only 60 per cent of that of Britain; in no country in Western Europe was a smaller percentage of the gross national product employed for personal needs than in Germany. This exceptional rate of exploitation tended, of course, towards the European average; but while in effect, it did restore Germany’s economic position within the European economy.

What is, perhaps, of special interest in this connection is the close association between the German revival, the European recovery, and innovations such as the Payments Union and the Schuman Plan with the Western defense program under American leadership. In fact, the Coal and Steel Community and the European Defense Community were at first supposed to share the same Court and the same Assembly charged with the creation of a European Army, a supra-national force with a supreme commander under the terms of the North Atlantic Treaty. However, this concept of the Defense Community could not be realized, and the difficulties that arose with respect to the Defense Community found their reflection in changed attitudes toward the Coal and Steel Community. Although the latter became effective in the summer of 1952, no real progress towards a Common Market was made. To be sure, the single market was to be realized only in stages, with regard to both the varying conditions in the member nations and the variety of products brought forth by their industries. Italian steel and Belgian coal were kept out of the Common Market for five years and some coal and coke subsidies were continued. The recession of 1954 impeded the development still further and the High Authority soon had to admit that it was able neither to develop real competition in the steel industry nor to regulate the prices in accordance with the terms of the Community’s constitution. The Market was a common market only in a formal sense. “If the Community were abolished tomorrow,” it was said, “nothing would be changed and nobody would feel that a living thing had been killed.^[10]

However, the Community’s activities were speeded up soon after the Korean war. Its control was extended to all types of energy. A series of tariff reductions in 1959 were coupled with the proclaimed intention of reaching a single, six-nation, tariff-less market by 1965 or 1970. Although the first tariff reductions were not of great significance, they did help initiate a rash of economic changes of greater importance. A series of industrial agreements within the Community led to many capital mergers within and between the member nations. These encompassed joint selling and production, the pooling of resources, specialization and rationalization.

As in previous periods of prosperity, the ensuing economic upswing created a climate of optimistic readiness to forego some of the stifling measures of protectionism. But as the removal of trade barriers is bound to increase both competition and protection against competition, it fosters capital concentration. Less productive enterprises made room for more productive ones, thus strengthening the competitive ability of the European Community’s industries. While this spelled “progress” for the six-nation economies, it also pointed to sharper international competition. But competition in a generally unfolding economy merely accelerates the upward swing. European production expanded and exports increased, cutting the United States trade surplus to its narrowest margin since the end of the Second World War. By 1959 the Common Market nations were prospering, with virtually full employment.

With the Common Market a reality, England joined six other nations^[11] in a European Free Trade Association to counteract the possible competitive advantages of the six-nation trading bloc. Retaining full control over their national economic policies, including tariffs with countries outside the Free Trade Association, these seven nations pledged themselves to low tariffs within the Association, to fair competition, to the equalization of supply conditions, and to a full employment policy. The trading blocs created as many problems as they solved. While they increased trade across national boundaries, they tended to obstruct world-wide trade. And the new free-trade areas disrupted the trade patterns which had grown up from earlier patterns of production. While capital flowed more easily within the separate trading blocs, it flowed less easily from one bloc to another. The realization of the two trading blocs probably appeared as the first and only possible step toward unifying the world market; but it has also come to demonstrate the hopelessness of this task. Although these new institutions were regarded as preliminary steps in the direction of world-wide market integration, they are themselves constantly endangered by the particularistic and changing needs or opportunities of the participating nations, as is illustrated by recurrent crises within the Common Market. Celebrated by some as so many signs that narrow uneconomical nationalism is in the process of being overcome, these institutions are adjudged by others as futile because their sectional character tends to block rather than further word-wide integration.

Whatever the expectations or apprehensions associated with the rise of the separate European market systems, one thing is clear: their existence points out that it is becoming increasingly impossible to maintain purely national economic policies, and that the “free” world market is not likely to return. This fact will not prevent futile attempts in either direction. Nations always tend to insulate their economies against the detrimental effects of international capital, when this is necessary. Yet they cannot cease hoping for, and working toward, the restoration of an “automatically” or otherwise-internationally-integrated economy. Regional groupings constitute a kind-of “compromise” between these extremes, so as to overcome the limitations of national economy in a world not susceptible to disinterested international controls. The European trade blocs initiated a general (though largely illusory) movement from Africa to Latin America for customs unions and intra-national market arrangements. But while the regional “solution” seems the only one available, it is a “solution” only on the assumption that it will move toward, and not away from, world wide integration.

The “final” solution to the world’s trade and payments problem is, then, conceived of as a merger of all the various trade areas and the “economic fusion of the free world’s nations.”^[12] It is recognized, of course, that such a “fusion,” involving the elimination of tariffs and other trade restrictions, would aggravate the problem of nations competing with the United States. But this is to be dealt with by a “relatively unimpeded movement of capital and labor,” by agreement on the part of the “strong” nations to “extend great blocs of credit, weaker nations to tide them over their balance-of-payments difficulties,” and by the creation of “an international fund to ease the pain of unemployment and of capital liquidation in segments of any economy hard-hit by the process of integration.”^[13]

However, the “relatively unimpeded” movement of capital works in two directions. A great flow of capital from a “stronger” to a “weaker” nation will, no doubt, improve the balance-of-payments position of the latter. The recent spur in American capital exports, or instance, is decreasing the balance-of-payments difficulties of capital-importing nations for the time being; but at a later time may have the opposite effect. For the outflow of profits and interests to the capital-exporting country may well exceed the amount of new investments her capital creates. Profits made in foreign countries must find their way back to the American base. If not the exported capital ceases to be American capital and functions as foreign capital in competition with America and the rest of the world

While it may be immaterial to a nation s economy whether its capital investment is of domestic or foreign origin (provided the rate of capital formation is not affected by the transfer of profits to the foreign investors) it is not immaterial to the domestic capitalists that their own traditional sphere of capital expansion is invaded by foreign capital They could do likewise of course by sending their investment capital to foreign lands so that there would be numerous European owners of American industries and numerous American owners of European industries as well as both European and American owners of industries in other countries profits would flow (as they do) from Europe to America and vice versa, capitalist enterprises would have changed places of operation but nothing else would change unless this very process proved to be more advantageous for one than for another capitalist group or nation.

Capital movements take place due to considerations of profitability and security the most profitable economies attract most of the capital and thus become still more profitable this diminishes the competitive ability of less productive nations, making them still less profitable areas. The general flow of capital is decreased as capital is concentrated in nations which are already highly capitalized. The movement of capital from less profitable and less secure to more profitable and more secure nations cannot have an equilibrating quality as it is bound to increase the gap between the strong and the weak countries. To have a capital movement of an “equilibrating” nature implies the sacrifice of the profitability principle; that is it implies not the free movement of capital but a rational allocation of capital according to the actual requirements of world economy seen from the point of view of general human needs. This clearly transcends the possibilities of the private enterprise economy and even minimum requirements in this direction – enough to assure a necessary degree of social stability and international intercourse – depend upon government interventions which “socialize” the losses thereby engendered.

Although socio-economic problems appear as market and money problems, they find their real source in the growing incompatibility of the prevailing property relations and the national form of capitalism with the changing forces of production and the pressing need to integrate world production and distribution on principles other than that of profitability. What the world experiences is not so much a crisis of its monetary and trading system as a crisis of capital. For the adherents of the system, of course, it is not the system itself but its temporary imbalances which have to be attended to; either by avoiding all interferences in the market mechanism, as in laissez-faire theory, or by governmental interventions in the mechanism, as in Keynesian doctrine. But whatever the theory and practice, trade and payments problems continue to agitate the capitalist world and will do so as long as production remains the production of capital.

For many years after the Second World War, as related above, the European nations had nothing to sell, but a lot to buy, and no money to but it with. Most of their foreign investments, as well as their gold and dollar holdings, had been sacrificed to the war. Due to a persistent favorable balance of trade, gold flow to the United States until, in 1949, she had an excessive 70 per cent of the world’s monetary gold. At this point, however, the situation began to change. America’s aid program, foreign military commitments, and capital exports created this change. By 1965, America’s gold reserve had been reduced to about $15 billion.

Foreign central banks as well as individuals hold dollars in their own countries and also in the United States in form of deposit accounts and securities which can be turned into dollars. There are far more dollars in the hands of foreigners than are covered by the gold in the United States. The owners of these dollars can at any time convert dollars into gold, for the United States is committed sell gold to foreign central banks at $35 an ounce. Normally, the gold reserve need not be large enough to cover all dollar holdings of foreign banks, merchants, and investors, for normally, the conversion of dollars into gold does not make much sense. Gold, as such, yields no profit, whereas the invested dollar does; and if a “run on gold” develops it is because confidence in the convertability of the dollar has been lost.

The United States left the gold standard in 1933. The Gold Reserve Act of 1934 gave the U. S. Treasury title to all the gold in the Federal Reserve banks. All circulating gold coins were recalled and their possession by individuals was declared illegal. The dollar was devaluated by raising the price of gold from $21 an ounce to $35 an ounce, a price which still prevails at this writing. By 1937 the United States, the United Kingdom and France agreed upon a gold exchange standard under which they settled international financial business on a gold basis, while conducting domestic money policies in accordance with their individual needs. The fixed gold price determines the value of the dollar and the values of other currencies are pegged to the value of the dollar.

Whereas in 1934 gold had been over-evaluated relative to the dollar, it is now under-evaluated, since prices have meanwhile risen in dollar terms. However, there is always the possibility that the price of gold will be raised, as it was in 1934, thus devaluating the dollar. The dollar and, to a lesser extent, sterling serve and world money. Both are reserve currencies; so that the stability of the world’s monetary system depends on the actions the United States takes, either unilaterally or in concert with Great Britain. If the different national monetary authorities were certain that the dollar price of gold would increase, they would not hold dollars; and if they were certain that there would not be such an increase, they would most likely stick to their dollar and sterling reserves. But there is no certainty; and, consequently, central banks rush out of currency and into gold whenever the stability of the reserve currencies is in doubt. Their preference for gold reflects their desire to protect their reserves against the hazards of depreciation.

For some time now the American payments deficit has ranged between $2 billion and $4 billion yearly. The deficit is the difference between the inflow and outflow of money in all international transactions. In part it is caused by American capital exports. Usually, capital movements are considered a positive factor in that they lead investments where they are most productive, i.e., most profitable. Funds not employed in the United States have gone in great bulk to Europe, accentuating an already-existing expansionary trend. This brought an increasing number of European enterprises as new foreign enterprises located in Europe into American hands. In terms of money, it meant that American investors received real property for dollars which went to Europe. These dollars, it is true, are convertible into commodities or currencies, as well as into gold. For the individuals and firms involved in these transactions, all this is, without doubt, sound business. But from a “national point of view,” the final result is that the European nations wind up with large dollar and gold reserves, while American investors wind up with productive, that is, profit able property – with capital.

The re-capitalizing European economies proved more profitable than the relatively stagnating American economy. For the same reason – profit being the determining element – no real incentive arose for European capital to offset America’s penetration of the European economies with European capital exports to the United States. It is still expected, of course, that once the European reconstruction boom is over, capital movements will again change direction through the repurchase of assets now owned by Americans, the purchase of American securities, and European direct investments in American industry. And this could well happen; there is no reason why the current difference in economic activity between the West European nations and the American economy should be a permanent affair. Meanwhile, however, European governments are increasingly less inclined to welcome capital imports from the United States, even though – since they are capital-exporting nations themselves – they cannot directly oppose the international movement of capital.

There is no limit to the creation of dollars other than that which the American money authorities impose on themselves. The American capital export is an indirect extension of American government credit to the international scene, but it places profits made in other nations into the hands of American capitalists. It has led to a vast international accumulation of dollar debts. Foreign claims against the United States amounted to about $13 billion by 1965. They soon add up to a sum exceeding the gold reserve. Even if the United States intends to pay its debts to other nations “down to the last bar of gold,” it may not be able to do. But unless convertible into gold it is the depreciating dollar, the fixed gold which stands behind the foreign claims on the United States.

It is basically the profitability of capital and the rate of capital formation which determine the state of the international payments system insofar as it relates to capital imports and exports. Money which cannot be capitalized in the stagnating United States is capitalistically applied in the expanding nations. Since the higher rate of growth in the latter is offset by a lower rate in the United States, the general growth rate is obviously too low for a generally profitable expansion of world capital. Since only a few nations generate an increasing demand for capital, the available capital flows to these nations and helps in the creation of an imbalance in the international payments system.

It is not very different with respect to international trade. If a country shows a persistent payments deficit, it obviously buys more from abroad than it sells to other nations. Its own production cannot compete with that of other nations. For example, England, once the leader in industrial development, utilized her dominant position to become the monopolistic intermediary of world trade and international investments. Her own industrial development was increasingly neglected in favor of her financial dominance in world economy – a dominance based on the great money reserves accumulated during her industrial ascendancy. But the world’s financial structure, with England as its center, was undone during decades of depression and war, through the dissolution of the Empire and the financial ascendancy of other, more productive, nations. Once the banker of the world, Britain became a debtor nation, going from one payments crisis to another and overcoming each only temporarily by borrowings from abroad. There is no monetary means of escape from this precarious position, founded in fact on insufficient capital formation. The payments deficit is here actually a deficit of capital production.

A payments deficit can be ended only by ending the conditions that gave rise to it. If a deficit arises because of large capital exports, these exports can be halted by government decree, or by a variety of economic penalties which make them less attractive. Equally, if a government fears that capital imports lead to an undesirable state of inflation and to the gradual displacement of native by foreign capital, it can prohibit capital imports or subject them to discouraging sanctions. In both cases, the prevailing situation can be changed by government interventions. To the extent, however, that a government restricts the import of capital it will also limit its country’s economic activity and, in consequence, limit the overall production of the world economy. In part at least, the recent West European expansion was due to the American payments deficit insofar as it resulted from the export of capital cutting the American deficit by restricting the export of capital means the reduction of economic activity in capital-importing nations. The possible end, or decisive reduction, of deficits due to capital movements may make money scarce even where it is still capable finding profitable employment, and the achievement o an international payments balance may coincide with a general contraction of economic activity.

However, payments deficits are only partly caused by capital exports and, as far as the United States is concerned, not at all by trade. To some extent this holds true also for England, where the deficit is partly a result of her attempt to keep the Sterling Area and the remnants of her vanishing Empire under British control. The steady outflow of money for these purposes cannot be compensated for by an inflow of money such as results sooner or later from the export of capital. Britain and America cannot eliminate these “extra-economic” expenses without changing their foreign policies and renouncing their imperialistic ambitions and power positions. Short of fundamental social changes, these changes are not to be expected.

Gold is still the only fully acceptable means of international payments. The reserve currencies, sterling and the dollar, are acceptable only because of their assured convertibility into gold. If confidence in this convertibility should be lost, these currencies could not function as international means of payment. And this confidence weakens with the persistence of the payments deficits of the two nations whose monetary units substitute for gold. When both the purchasing power of their currencies an their gold reserves decline, confidence in the gold exchange mechanism is bound to diminish. It seems, then, that resolving the payments problems of the deficit nations could prove just as disastrous as allowing them to continue. For the former course threatens to destroy inter national “liquidity,” i.e., the availability of money for an expanding capital and commodity market. To escape this dilemma, all of monetary reforms have been proposed. The more dramatic of these proposals suggested a return to the old gold standard, the complete de-monetization of gold, and the de-nationalization of monetary reserves through their administration by international institutions such as the International Monetary Fund.

The least realistic of these proposals, suggested by Jacques Rueff, is the return to the old gold standard. This was, perhaps, advocated more as a rationalization of France’s recent policy of changing her dollar holdings into gold than as a serious belief in the workability of a resurrected gold standard. Why the gold standard should now operate better than in the past was not made clear, save for the hopeful assertion that it would end the age of inflation to which all countries are now subjected. In all nations, however, inflation has become the major policy for coping with the problems of capitalist production under conditions of a declining rate of private capital formation.

The suggested resurrection of the gold standard prompted a counter-proposal: the de-monetization of gold was to solve the difficulties encountered with the gold exchange mechanism. If America unilaterally refused to buy and hold gold for monetary purposes, it was asserted, the world could be forced into accept a dollar standard without a gold base. Once this happened, gold would become a mere commodity, subject to the law of supply and demand. Since the private demand for gold is limited, the released monetary gold would flood the market, which would drive its price below its production costs.^[*] The reduction in the price of gold, it was argued, would make the dollar the more desirable item; and the dollar would become the ultimate international medium of exchange. This audacious plan overlooked one important fact: the real conditions of American capitalism make it impossible for that country to come close to full use of its productive resources without continuously devaluating its money. If gold should be come unacceptable, a steadily depreciating dollar would be even more so.

A partial though quite limited, de-nationalization of monetary reserves has already been achieved through the establishment of the International Monetary Fund, which, among other things, bears witness to the contradictory forces that work within the international private enterprise economy. On the one hand, the capitalists of each nation compete with capitalists of other nations by all avail able means, including monetary means. On the other hand, there is a general desire to limit this competition through international arrangements that will bring a modicum of regulation and stability into trade and money relations. The I.M.F. was to help its member nations alleviate their payments problems by supplementing their reserves. Its gold and currency holdings are available to member nations on the basis of an agreed-upon quota system. Countries in payments difficulties may draw upon the Fund’s resources to avoid introducing restrictive measures at home while awaiting a reversal of the payments situation. Deficits are thought of as temporary occurrences. But if they should be prolonged, a country’s credit with the Fund will exhaust itself, and its borrowings from this source will deepen its payments dilemma. However, the I.M.F has worked reasonably well in its limited way. For this reason it has been suggested that the I.M.F become the sole trustee of its member nations’ money resources.

Proposals with regard to the establishment of such an international monetary authority differ in details, such as the spacing of the transformation period from the national to international monetary controls and the nature of the reserves, i.e., if they should involve a total de-monetization of gold, or continue to use gold as monetary reserves in some fashion or another. But whatever the peculiarities of the various suggestions brought forth, the schemes are basically extensions of the national manipulated monetary system to the international scene. In order for them to succeed, the international monetary authority would have to be as free as national governments are now to create money at its own discretion, to supply it to the member nations in accordance with their particular and changing needs, and to determine economic activity over the whole area comprising its 106 member nations. In brief, it would have to function as a financial world government – an unrealizable capitalist utopia. To turn the I.M.F. into a gigantic central bank, holding the reserves of all nations, and empowered to create money, would make the further keeping of gold reserves superfluous. The gold base of money could be replaced by international law. The gold in the vaults of the World Bank would belong to all and nobody; commodity-money would have come to an end. The elimination of gold as monetary reserve would mean the elimination of money “reserves” altogether. Only so long as money retains at least in part the form of commodity-money will it retain its character as the independent form of exchange-value, as capital.

The international money reform finally agreed upon in 1967 (subject to government ratifications) paid no attention to the multitude of preliminary proposals, including those modeled on Keynes’ International Clearing Union, or world bank, seen as an instrument capable of providing for all the changing monetary needs of world commerce. But it did agree upon the deliberate creation of a new type of money with which to bolster the reserves of the member nations of the I.M.F., so as to help them overcome arising payments difficulties. The new “money” consists of so-called Special Drawing Rights, or SDR’s, which are allotted to the nations in proportion to their previously established I.M.F. quotas. This new “money” is, of course, credit money; but it has been provided with a gold guarantee to give it the semblance of real money. The money resources of the I.M.F., i.e., gold, dollars and other currencies, provide a “monetary pool” from which member nations can draw short-time loans to bridge a negative payments situation. In contrast, the SDRs are not borrowings but “additions” to the world’s money supply, even though they have no material counter part such as gold or convertible currencies. The money pool of the I.M.F. has not previously been used as a base for issuing new money; in fact, it was part of the “money reserves” of all its members in form of their subscriptions to the Fund. This same money is now allowed to function as an independent “international money reserve” and as a backing for the SDRs. It is a further reduction of the real money base of credit money on an international scale, or the dilution of the monetary character of the “enlarged reserves” of the nations of the International Monetary Fund.

Presumably, the theory behind the reform is based on the fear that international trade might contract due to monetary troubles, which would then lead to a contraction of production. Increasing world trade, it is said, requires a growing money supply. While domestically governments can arrange an increase of the money supply in accordance with the growing volume of business, it has not been possible to manage the international money supply. The Special Drawing Rights are a first attempt in this direction. They are necessary, it is said, because the increase of the ii money supply via the growth of reserves has been dependent on gold production and the gold market, which not only are highly erratic but also expand far more slowly than the volume and value of international transactions. Actually, however, the world’s gold reserves have increased in accordance with the increase of international trade. If gold stocks fall behind the increasing requirements of international trade it is not so much because of an actual impossibility of increasing the production of gold, as because of a reluctance to immobilize capital by holding it in the form of gold. Be this as it may, the SDRs are supposed to take the place of gold as the ultimate resource for purchasing other currencies. “Gold reserves” are thus created without the production of gold, which can only mean that the total gold cover is being decreased to the same extent as the total money supply is increased.

Of course, after it is generally accepted to create monetary reserves out of thin air rather than by producing them, the SDRs will function as reserve supplements in the same way that paper money functions as commodity-money. Instead of gold, SDRs can then be transferred from one country to another in exchange for currencies to straighten out disparities in payments balances. But like the supply of gold, supply of SDRs is also limited, and nations with a persistent unfavorable payments balance are in danger of exhausting both their conventional reserves and their allotment of SDR countries with a persistent favorable payments balance will accumulate the supplementary SDRs as well as the monetary gold. Other processes will merely take a longer time. There is always the idea that trade and payments disbalances are only temporary occurrences, to be ended sooner or later by the self-assertion of the equilibrium tendencies of the market. But as this seems now to happen rather later than sooner, time must be won. The access to greater monetary reserves is to give nations more time to reverse an unfavorable trade and payments position, and to enable them to do so more gradually, so as to avoid the shock of sudden retrenchments and the consequent contraction of international trade.

Just as deficit-financing on the national scale finds its rationale in its postponement effect – that is, in the idea that the mere delay of a crisis situation by government-induced production may lead into a new business upswing capable of bringing forth profits large enough to compensate for the non-profitable part of production – so the managed international money supply is thought to postpone a monetary crisis and by doing so perhaps avoid it altogether. But manipulation of the international money supply, just like deficit-financing, is necessarily limited by the market character of the capitalist economy. If it were not limited, payments would not need to balance and world trade would lose its private-property nature; debts would not be paid and profits not collected, and trade would have lost its capitalist character. As it is, however, the postponement of monetary crises makes sense only on the assumption, contrary to all evidence that there is a tendency toward external equilibrium which will work itself out if given a chance to do so.

There is no need to go into the suggested administrative details of the projected monetary reform, the less so because it is not at all certain that it will become a reality. Even if it does, it may still undergo many alterations to fit the special needs or policies of particular nations. What is of interest is the wide-spread recognition, implied in the reform, that the nationally managed economy requires some degree of international manipulation in addition to and above the “regulatory” market forces. However, the contemplated attempt at managing the international money supply is a rather modest yearly increase of reserves by between 1.4 and 2.8 per cent of the existing reserves which, in 1967, amounted to about $71 billion. Over a projected five-year period this would increase monetary reserves by between 5 and 10 billion dollars. The use as well as the acceptance of SDR’s is limited and proportional with respect to other reserves, and their acceptance is to be rewarded by a small rate of interest in an attempt to make them preferable to gold. The need for larger reserves rests on the assumption that international trade expand in the near future as it has in the recent past, that is, at an average rate of between 7 and 10 per cent a year, and on the parallel assumption that this increase of trade will complicate rather than ease the payments problems.

Reserves must still be held in gold or in acceptable international money; and money is acceptable only so long as it is convertible into gold. Most European nations keep the great bulk of their reserves in gold. Some nations, Canada and Japan for instance, keep the smaller part of their reserves in gold. Elsewhere in the world nations have much smaller total reserves and out of these smaller reserves much lower proportions in gold. Until 1961, the United States kept its reserves entirely in gold. Presently, she holds some small amount in convertible foreign currencies. As a result of America’s payments deficit, monetary gold stocks are now more evenly distributed, the American share amounting to about 37 per cent of the “free world’s” monetary gold – approximately the same as it was thirty years ago.

The gold cover of the American dollar was legally set at 25 per cent of the total amount of Federal Reserve notes in circulation and the total deposits of member banks in the Federal Reserve System. “By the end of 1964, the total deposits came to 19 billion dollars and the notes in circulation to 35 billion. The combined total of 54 billion dollars called for a gold reserve of 13.5 billion. This left at the time only about 1.5 billion dollars of free gold as a reserve against the official and unofficial foreign claims. Since the total required reserves tended to increase at the rate of approximately 750 million a year because of the normal rise in business activity and bank credit as well as Federal Reserve notes, this meant that the margin of free gold would have virtually disappeared some time in 1966.”^[14]

Previously under American law, the gold reserve put an upper limit to the reserve-creating and note-issuing powers of the Federal Reserve System. This reserve requirement has been removed and the entire gold reserve serves now only the international convertibility of dollars into gold. Still, there are only $15 billion of monetary gold. With the continuous conversion of foreign claims into gold, resulting from the continuing American payments deficit and the decreasing value of the dollar – not in relation to gold but in its actual buying-power – the steady decrease of the gold holdings would imply the decline of the dollar as international money and as a reserve substitute for gold.

Though it is not immediately necessary, the United States must halt the drain of monetary gold as a long-run trend. With inflation no longer checked by reserve requirements, the dollar will be less and less acceptable for the settlement of international accounts, and dollar holdings will be more readily converted into gold. America, then, must have an adequate money supply to cope with the problem of non-profitable government-induced production – now accentuated by the war in Vietnam – and an adequate gold reserve to assure the dollar’s international position. But these are contradictory needs; because the very process which increases the supply of dollars also reduces the gold reserve.

It is because of her declining gold reserve that the United States supported the projected international money reform more enthusiastically than other nations. European countries, with ampler reserves, did not see the urgency of the need for new and imaginary reserves at a time when America’s sizable balance of payments deficit provides the necessary “liquidity” for the given international trade. Under these conditions, the creation of new “reserves” might reduce efforts on the part of the United States and other deficit nations to overcome their payments difficulties which, in time, would diminish international trade even more effectively than a reduction of America’s foreign expenditures and capital exports. But as the continued profitability of American capital demands external expansion, and consequently the expenditures of imperialism, there is no chance to overcome the American deficit except by an increase of income from abroad through capital imports and by an increase of America’s favorable balance of trade.

However, all capitalist nations share these needs, for which reason Europe’s recovery, however necessary, could only be of dubious benefit to the United States. Notwithstanding all declarations, and even actual policies, to the contrary, it cannot be America’s objective to bring about a well-functioning world economy at the expense of her own superior position. America’s dominance is the result not only of her own productive efforts but also of the occurrence of two world wars which left the European economies far behind the American. At least in part, the United States owes her exceptional growth to exceptional circumstances. Some of the blessings of these circumstances are disappearing as the recovery of the European economies narrows the gap between European and American production and productivity. Because European expansion is by sheer necessity geared to the world market, its continued profitability depends on a successful penetration of American and extra-American markets. European capital must compete with American capital and with the Eastern power bloc, whose existence sets further limits to the external expansion of both European and American capitalism. With increasing competition from Europe and the East, America’s exceptional position during the first half of the twentieth century seems to be drawing to a close.

The war and postwar disruptions of the “traditional pattern” of trade were to be ended by a return to “normalcy” achieved through the stabilization of exchange-rates and the gradually of all discriminatory trade practices. Although the formation of the European trading blocs was accompanied by hopes that they would eventually merge and extend European free-trade into a free-trading world, neither expectation has been realized. The goal of an all-European market becomes more distant with every year of the trading blocs’ existence. Newly evolving patterns of competition and control tend to harden, and the breaking-up of established regional arrangements may prove even more difficult than over coming national protective practices. If one group should gain exceptional advantages by virtue of the regional arrangement, it will not sacrifice this advantage to the principle of free trade, even if restricted to the intra-European market. For instance, Great Britain’s current readiness to enter the Common Market, in order to partake in the more rapid expansion of the West-European economy and to find refuge behind the common tariff wall, not only is sabotaged by the powers profiting both economically and politically by existing arrangements but may well disappear if and when the Common Market economies begin to stagnate.

Tariffs and trade in the postwar world were to be determined multilaterally, with due consideration to both the special but “temporary” needs of individual nations and the common goal of a tariff-free world. Under the General Agreement on Tariffs and Trade (GATT), there began in 1947 a process of multilateral tariff reductions which, 20 years later, (in the so-called Kennedy Round negotiations) brought tariffs among industrial nations to their lowest point. However, the agreements were hardly made public when new protectionist measures were introduced in the American Congress. Rigid import quotas were asked for more than a third of all dutiable imports, including items such as steel, oil, chemicals lead, textiles, meat, and dairy-products – this despite the fact that America still exports more than she imports. If enacted, of course, such measures would lead to retaliations by all countries affected and the expected increase of trade by way of tariff reductions would not materialize. In any case, the liberalization of trade cannot alter existing economic difficulties, for these difficulties led to the trade restrictions in the first place.

The growth of international trade during the last decade, reaching in 1967 the equivalent of $200 billion, was of course due to the expansion of production. In the industrial nations the rate of increase in trade was even faster than that in production, indicating the growing international specialization of industrial production and the rise of multinational corporations. However, although profits are realized in circulation, they must first be made at the point of production. If profit-production declines, the realizable profits also decline. Government-induced production can maintain a necessary volume of production despite its partial loss of profitability. Although the end-product of government-induced production (with some exceptions) is not marketable, its intermediary processes enter into national and international market relations. The fact that trade increases with the increase of production, and lately even faster than production, alters in no way the decreasing profitability of capital. The profits to be realized on the market by way of trade are no larger than those brought forth by the profitable sector of the economy. The increase of trade under these conditions is thus a sign not of advancing capital production but merely of a larger production, and indicates an intensifying competition for the shrinking profits of a growing world production. While the rate of increase of international trade is determined by that of production, the mixed character of present-day capitalism excludes an effective control of market and payments relations. The mixture of free and controlled production, of free and controlled trade, excludes both an “automatic” and a “controlled” integration of world economy. It does not exclude economic manipulation, to be sure; but this manipulation, which can only attend particularistic interests, will not serve the actual needs of the world economy.

1. Hilferding, Das Finanzkapital, Wien, 1910.

2. K. Marx, Free Trade, New York, 1921, p. 42.

3. Ibid.

4. Ibid.

5. J. H. Williams, Economic Stability in a Changing World, New York, l p. 24

6. Ibid., p. 38.

7. W. L. Thorp, Trade, Aid, or What?, Amherst, 1954, p. 183.

8. Ibid.

9. R. E. Flanders, The American Century, Cambridge, 1950, p. 49.

10. P. Ricard, Head of the French Steel Federation, in the New York Times, February 22, 1955.

11. Austria, Denmark, Norway, Portugal, Sweden, Switzerland

12. R. Vernon, Trade Policy in Crisis, Princeton, 1958, p. 21

13. ibid

*. In the spring of 1968, this suggestion became half a reality” through the establishment of a two-price system for gold. In order to arrest the rising price of gold without selling monetary gold on the gold market, the monetary authorities participating in the London gold pool decided to let the gold price in the private market be determined by supply and demand while central banks would continue to buy and sell gold to one another at the fixed United States price of $35 an ounce. This move was expected to bring the gold price down without a further depletion of the monetary gold stock. While higher prices in the private market would make central banks and private financial institutions less willing to hold dollars, gold prices below the official rate would devaluate the gold held in monetary reserves. It is hoped, however, that the commodity price of gold will not deviate too far in either direction from the monetary price. But with the growing demand for gold and the continuing depreciation of the dollar, the free market gold price of more than $35 an ounce will most probably be sustained and the disparity between official and free market price is bound to recreate the old difficulties that led to the two-price system for gold.

14. P. Douglas, America in the Market Place, New York, 1966, p. 291.