THE INTERNATIONAL MONETARY CRISIS(August 15, 1971- )

At a more abstract level -but present in every mutation of the monetary system- not only does money embody the basic power structure of social relations but any appearance of monetary disfunctionality can be discovered to be a manifestation of underlying crises in that structure. The following articles show the evolution of discussion and institutional change at the level of money itself but often include indications of the underlying political factors. The object in this section will be both to understand the evolution of the international monetary arrangements and to dig beneath the surface appearance of nation-state interactions to discover how the often conflicting positions of various national governments reflect their own efforts to cope with local moments of the underlying crisis in social relations.

*Peter Tosh, "The Day the Dollar Die," Mystic Man, Rolling Stone Records, 1979.

A striking Third World view of the dollar (and everything that goes with it) and of the benefits of its crisis and potential collapse.

Showing the evolution of the value of the dollar in terms of other currencies in recent years. Is the dollar, as Peter Tosh hoped,dying?

An historical chronology of the evolution of the international monetary system with emphasis on the crisis period from 1971. Designed to help you keep track of what happened, when.

Technical jargon definitions with a tiny bit of history.

A. COLLAPSE AND RECONSTRUCTION

Like it says. Early reaction and analysis of Nixons's unhitching of the dollar from gold and fixed exchange rates. (This article is included with Section I materials.)

Trilateral Commission's man on the money crisis.

"A renovated international monetary system cannot offer a panacea for all economic ills. In particular, its contribution to solving the problem of world inflation, which is fundamentally domestic in origin, is positive but not decisive. . . A renovated system must command acceptance by all major participants, and it must contain a certain degree of resilience against major economic disturbances of all kinds, including mistakes in economic policy, which are bound to occur from time to time under the political pressures and counterpressures of democratic regimes and the struggles to achieve or maintain power in nondemocratic ones. A rennovated system must also address the question of what inernational currency is to prevail in the world, since one or another is bound to emerge, and what will be the conventions governing capital movements." (pp. 4-5)

Pre Jamaica attack on potential dangers of gold revaluation and its return to prominence in international reserves. Bergsten became Undersecretary of Treasury for International Affairs in the Carter Administration. He is currently the director of the new Institute for International Economics in Washington, D.C. (see "Promoting World Recovery" below) Compare with Trilat's view and deVries on what happened.

Partly a review of breakdown and reaction through 1971 to January 1976 meeting in Jamaica. But mainly an analysis of the meaning of the Jamaica agreements and their failure to deal with exchange rate systems changes or the regulation of international reserves.

An account of the problems of floating exchange rates after three years. Not only about "dirty floats," the article laments the "spreading belief that even if governments knew what to do few are sufficiently in comand to apply necessary remedies."

Marxist analysis of the shift to flexible exchange rates and the new role of the IMF in the capitalist counterattack on the real wage.

Radical analysis of breakdown in Bretton Woods and more recent developments. Roughly along line of Marazzi article.

B. THE DOLLAR CRISIS AND THE EUROPEAN MONETARY CRISIS

Analysis of enormous growth in dollar reserves since 1971 (partly due to U.S. government borrowing abroad) and of the European Monetary System created to help stabilize EEC exchange rates and to support domestic austerity programs. "Officials and public opinion in the United States are prone to ascribe most of the blame for the crisis of the dollar, and of the international monetary system built upon it, to the quintupling of oil prices at the end of 1973. In fact, the world inflation began well before then, and the abrupt rise in oil prices was, in part at least, prompted by it, although, of course, the oil price increase accentuated it in the following years. . . the enormous and mounting U.S. deficits abroad, which flooded the world monetary system, doubling world reserves from the end of 1969 to the end of 1972, i.e., increasing them by as much in this short span of three years as in all previous centuries in recorded history. . . . The end of dollar convertibility solved -after a fashion- the gold problem of the United States, but it did not arrest the inflationary proclivity of the dollar-exchange standard for America as well as the rest of the world. . . . International monetary reserves doubled from 1969 ($79 billion) to 1972 ($159 billion); they doubled again in the following five years (to $319 billion at the end of 1977). . . . This huge overflow of dollars into foreign countries reserves slowed down inflationary developments at home in the United States by transmitting them in part to the rest of the world. . . .This fantastic increase in international liquidity . . . is undoubtedly the biggest factor in triggering the worst global inflation in history. . . . [He then describes the EMS and goes on to argue] "Indeed, the main purpose of the agreement is to promote domestic policies combating inflation as well as deflation, to achieve a better equilibrium in each country's balance of payments, and to reduce thereby exchange- rate instability among the member currencies." [my emphasis] Triffin also argues for anti-inflation policies in the U.S. and potential usefulness of EMS in stabilizing US/European relations during international negotiations of international monetary reform.

Review of new Carter anti-inflation programs and implications for the situation of the dollar.

Carter's dollar support program to raise interest rates and mobilize support credits for the dollar.

"More than a supersnake, but less than a Eurocurrency Union," World Business Weekly, December 11, 1978, pp. 19-20.

"Gold set to glitter again as EMS is due for launch," World Business Weekly, December 25, 1978, pp. 5-6.

Articles describing the nature of and difficulties in forming the new European Monetary System to buttress efforts to impose austerity in Europe. Compare with Triffin's Foreign Affairs article.

C. REASSESSMENT AT THE BEGINNING OF THE 1980s.

An analysis of failure of flexible exchange rates and gradual monetary restraint to deal with inflation and favor investment. Attack on IMF lending that forshadows Reagan. Supply side analysis of growth problems. Call for price stabilization via monetary shock treatment, strict control of money supply.

An article that situates changes in the American role in the international monetary system within the broader framework of the Atlantic alliance, detente and the Mideast. Calleo locates sources of international disequilibrium in American failure to contain domestic demands or to adapt to the revival of Europe and declining US hegemony. Good overview.

Review of tight money policies in the U.S. and elsewhere and their impact on international monetary situation. Solomon evokes underlying social and political problems and calls for fighting inflation and wages via an incomes policy rather than simply relying on the Fed.

Critique of Reagan policy as one which by being totally focused on domestic economic issues, ignored and harmed the rest of the world and America's relations with it. Also critiqued for being unilateral, inconsistent, too protectionist, unable to grasp interdependence, and "mesmerized by its own rhetoric."

D. THE GOLD BUGS THAT WOULDN'T DIE

This conservative Columbia University professor's contribution to the rennaissance of discussion about returning to the gold standard -- a discussion flowing mainly from Reagin's supply-siders who want to extend monetary discipline to the international level.

Gold bugs et.al., get together to discuss monetary reform.

Article on Treasury Secretary James Baker's suggestion that a basket of commodity prices be used as one index of global inflation to guide the "secret economic planning process the big countries use to coordinate their economic policies and stabilize exchange rates." N.B.: box with recent chronology.

Discussion of current "managed float" (read "dirty float") and possible usefulness of Baker's commodity index.

Critique of Baker's proposed commodity index: 1) an index based on commodities is not a good indicator: "Alas, an increase in the price of gold or other commodities need not signal a flight into real assets stemming from inflationary expectations. Price increases can come about through changes in industrial demand or the domestic or international political climate. . . . they can just as well follow supply shocks. The proposed commodity-price indicator is incapable of differentiating between these causes - but correct monetary policy will have to distinguish between them." , 2) inclusion of gold is a surrepitious reentry of gold into the system: "Not more comforting is the contention by Rep. Jack Kemp that Mr. Baker's gold index proposal is 'a victory for those of us who have been working to restore a sound dollar'", and 3) focus on monetary policy is too narrow: "Attention should finally be given to United States domestic fiscal policy, the magnitude of the public sector's debt and borrowing requirements and the linksages between them, interest rates and the external imbalances". Kaufman is professor of economics at Queens College, N.Y.

Discussion of current, coordinated order, and question of meaning of return of gold into discussions. As an example of joint management of the dirty float: "Having agreed last February that the dollar's value stay put, they [G-7] spent billions of their own currencies to buy dolars from the market and keep its price up in the face of heavy selling pressure. As a result the dollar has remained stable in relation to the German mark and has slipped only about 7 percent against the Japanese yen." However, " Japan and Germany in recent weeks have been letting interest rates rise, to the fury of the Reagan adminstration because their increases have contributed to interest rate increases in the United States. and to turmoil in the American stock and bond markets". "Mr. Baker added that he thought that bringing gold back would make the system even better. During a speech here at the end of September, he proposed that the seven countries use commodity prices to guage how their economies are performing especially regarding inflation. One of the commodities would be gold. The remark brought disbelief from many economists. . . some proponents of such a system -such as Robert A. Mundell . . . see his proosal as a an important step in that direction. . . . Gold, Mr. Baker said, by enabling countries to measure the value of their respective currencies against something other than other currencies, helps avoid the delusion that occurs when inflation is rising everywhere while all currencies still seem stable. . . . John Kenneth Galbraith [on the other hand] said Mr. Baker's speech last month was a marvelous exercise in fantasy and obfuscation."

Commodity index is a bad idea 1) is preoccupied with inflation when real object should be growth and 2) commodity prices are poor indicater of inflation. What world needs is lower interest rates and higher growth.

E. THE FALL 1987, U.S./GERMAN CONFLICT

Declaration of intention to continue Louvre Accord.

Baker threatens to violate Louvre Accord by pushing dollar down because of recent German moves to increase interest rates. "Since July, West Germany has raised an influential interest rate four times, with the latest increase on Wednesday. . . . The rate increases tend to dampen the German economy. That prevents stronger demand for American goods and hurts the United States' trade situation. In addition, the rises create pressure for higher interest rates in the United States [to avoid capital outflow, support continued foreign finance of U.S. Federal government budget deficit]. . . . In the last two days, fears of higher interest rates have caused a sharp drop in stock and bond prices. [NB: all this is shortly before the Stock Market Crash on Oct. 29, 1987] . . . One approach would be to have the Federal Reserve buy and sell dollars in foreign-exchange markets, as central banks have done largely successfully since they reached an economic accord at a conference at the Louvre in February. . . . A weaker dollar would hurt the already soft West German eocnomy by making it harder for its industries to export goods to the United States. . . The secretary's singling out of West Germany marks a new round in the periodic tugs-of-war between that nation and the United States. Seeking to shrink the huge American trade deficit, Washington has often appealed to West Germany to speed up its economy to increase demand for American goods, while Bonn has replied that the trade deficit and many world problems would fade away if the United States reduced its budget deficits more."

Baker carries through with threat. "In an abrupt shift from its policy of the last eight months, the United States is allowing the dollar to decline against the West German mark . . [Bakers announcement of the change in dollar policy came during comments on: "Dow Jones industrial average that plunged 9.5 percent this week, or 235.48 ponts, and the largest weekly loss since World War II and whose one-day 108.36 drop on Friday alone wiped out $145 billion in the value of investors stocks"] . . . By allowing the dollar to decline further against the mark, the Administration hopes to counter the impact of the higher [interest] rates abroad. A cheaper dollar raises the prices of imports sold in the United States, making it easier for American manufacturers to compete at home. It also helps them by lowering the prices of the goods they sell abroad. . . There is the risk, however, that the stock market . . . might erode further with a falling dollar. Foreign investors have been a major reason for the market's big move this year. That was due in part ot their confidence that when they wanted to repatriate their funds, they would not suffer from a currency exchange. . . . In Bonn, German officials have expressed dismay with Mr. Bankers' jawboning . . . They maintain that the rate increases [in Germany] are miniscule -in total they add up to less than a percentage point - and are driven by forces in the markets, not by the government."

*Peter T. Kilborn, "U.S. Dollar Policy Backed by Analysts," New York Times, October 19, 1987. Available through ERes

Reaction to U.S. move to let dollar drop. Only alternative to raising interest rates says C. Fred Bergsten. N.B.: dollar chart 1985-87.

Drop in dollar will reduce attractiveness of US securities to foreigners which will cause problems for financing US trade deficit and budget deficit.

Post crash policy of expanding money and lower interest rates threatens foreign capital flight, dollar drop accentuates this, but domestic concerns seem to outweigh worries over foreign financing.

After abandoning Louvre Accords in fact, the desireability of stable dollar value is now underattack in theory --given current situation of international imbalance.

Classic manoeuvre of devaluation to cure trade deficit supported by some, called crazy by others.

Top adminstration priority is staving off post-crash recession. Drop will also attack Bonn.

European reaction to U.S. deficit reduction plan passed by Congress and signed by Reagan is positive, but inadequate, calls for international meeting to renew agreements on coordinated policy.

Dollar drop: hurts consumers, helps business/trade. Most important policy objective should be to "continue the corporate restructuring of the last few years by moving beyond cost reduction to improved production techniques." Quotes businessman that "balance between technology and worker participation is critical and extremely difficult to come by."

Drop may result in more inflation, increased efficiency of foreign companies, competitive devaluations and global recession. So much for the Wall Street Journal's claim that majority of economists support drop.

Bonn capitulates to US pressure by cutting interest rates?

Before reading this article test your understanding of economics by explaining to Mr. Reagan what is wrong with his statement: "a sudden surge of cutting interest rates in some of our trading allies abroad, did have the effect again of making the dollar fall. But that was their doing, not ours." This is the president of the U.S. speaking???

The return to coordination after the US unilateral violation of Louvre Accords.

Coordinated dollar buying raises dollar value after US prompted fall.

The dollar floats upward under strict dirty management. N.B.: charts.

Intervention in exchange markets may be doomed without more substantive policy changes --this of course is major problem of managed floats.

F. THE FALL 1992-WINTER 1993, EMS CRISIS

Bundesbank board member Otmar Issing calls Germany's 4% inflation "highly unsatisfactory" (double the desired 2% level) and attacks recent 6.4% wage deal in the steel industry as contributing not only to inflation but also to unemployment (by reducing profits). He called for "cuts in social spending" saying that there is a need for "unpopular and courageous decisions". Thus the need for continued monetary restriction and high interest rates -which continues to irritate other European countries by forcing them to do the same which inhibits efforts to fight stagnation and high unemployment.

"Last week's tumultuous chaos in the European money markets shook every government in Europe and derailed Europe's ambitious dreams of a united currency by the end of the decade. . . . The Germans, as usual, have the hardest lessons to learn. Germans have lived with a lie for some time - that there was no contradiction between Germany's national interests and the construction of the European Union. But this isn't true. Germany's massive obligations in the East - $100 billion a year to keep the old East Germany on economic life support - were the root cause destabilizing Europe's money markets last week. To save East Germany, the country had to borrow massively from around the world; this drove up German interest rates, and thanks to the ERM, its European partners were forced to follow suit to save their currencies from collapse. As the British pointed out in a series of acerbic statements last week, the Germans used the ERM system to tax the rest of Europe to support national objectives. . . . Europe's turmoil is likely to translate into slower growth. That means smaller markets for U.S. Exports in the world's biggest and richest single market. That, in turn, postpones the day when the United States will emerge from its current economic stagnation."

Economics Minister of Germany defends high interest rates, partly by pointing out role of Bundesbank in setting a "standard for politicians throughout the European Community in their attempts to cut budget deficits and reign in inflations, often against the fierce opposition of domestic vested-interest groups". (p. 25)

"the turmoil on European financial markets has revealed how poorly prepared the Continent really is for monetary union . . . So why did Europe's policy elite think it could go all the way to monetary union? The reason is that fixed exchange rates worked far better than anyone expected . . These nations needed a strong anchor, both to discipline themselves [i.e., their workers] and to convince markets that fighting inflation [i.e., wages] was really their top priority. . . .Germany chose to borrow most of the money rather than impose huge tax increases. This deficit financing threatened a revival of inflation. To combat this, Germany's central bank raised interest rates. But other European nations, obliged tomatch the German rate rise, found themselves pushed deeper into recession."

This professor of international relations gives a concise overview of the tensions in Europe in the wake of the Maastricht agreement, including the failure to deal with the breakup of Yugoslavia, the crisis of the EMS and the problems of new entrants North, East and South.

Good overview of internal German social crisis that lies behind Germany's high interest rates and willingness to risk collapse of EMS. Note: this article was one of those assigned.

British policy makers struggles to use monetary policy to "reignite" their depressed economy after pulling out of the ERM of the EMS last September. They have cut interest rates some five percentage points "to their lowest level since 1977".

"Germany's budget deficit and rapid wage increases have prompted its central bank, the Bundesbank, to keep interest rates high as a way of holding down inflation, even as those high rates aggravate Europe's economic slump. [leading England and Italy to opt out of ERM] in September. . . . French politicians are desperate for lower interest rates, as March parliamentary elections approach. . . . Denmark . . . is under similar pressure."

"The immediate cause of the European uproar is the decision in the past few days by several big U.S. and other multinational companies to lay offworkers in high-cost, pro-unon France and move jobs to lower-cost sites in Britain and elsewhere in Europe . . . EC Commission President Jacques Delors . . . urged EC ministers in Burssels mOnday to avoid cross-border job-poaching. . . . With labor costs lower, and unions willing to concede benefits to get job guarantees, the case for investing in Britain can seem stronger than in higher-cost locations."

Attack on French and EC arguments for "leveling up" the "economic playing field" instead of bringing it down to "the lowest comon denominator" [e.g., lowest wages and benefits]. NB: unusually frank argument in support of world wide use of "competition" to undermine the standards of living of the strongest workers by those of the weakest, not only in Europe but everywhere.

"Yielding to political and eocnomic pressure, Germany's central bank grudgingly trimmed key interest rates . . . but . . . nobody expects it to ease the ongoing currency crisis for long. . . . The Bundesbank move caught many economists by surprise. That's because it came in the absence of conclusive signs of new fiscal controls by the German federal government or wage moderation. Fears of runaway wage demands, on top of Bonn's huge unity-related budget deficits, have been the chief factors behind the Bundesbank's inflation fears."

De Benedetti: "the currency is always the consequence of an economic event; it's not the cause of an economic event."

"With French unemployment approaching 11%, the beleaguered Socialist government, which faces elections in six weeks, is pulling out all the stops in the Hoover case."

When bundesbank cut rates in 1975 and 1982 after much resistance, it cut them a lot. Moreover, cuts may be possible because "German Unions are finally cracking, which is helpful for the cause of lower interest rates." However, worker resistance remains as IG Metall "refuses to agree to postpone a contractual reduction in the official working week to 36 hours per workers from 37 hours in April. [etc]"

Zero corporate profits measure depth of crisis, prospects good for pitting cheap labor in Eastern Europe, S. E. Asia and the XUSSR against West European labor, Europe "must hammer away at high wages". Note: this was an assigned article.

A German view of the pressures tearing at Germany from within and without, pressures which are affecting its foreign policy, including its monetary policy and role within the EMS. Of particular interest are the comments about the high percentage of German aid to Eastern Germany which is being consumed rather than invested: "a full two-thirds has been used to support consumption, not to improve the east's economic potential".

G. Winter 1994-1995: The Peso Crisis
(December, 1994 Winter-Spring 1995)

What appeared, however, to be a purely monetary crisis turns out, upon closer examination to have been very much a "political economic" crisis with the ultimate emphasis needing to be placed on the "political." Behind the crisis of December lay a year in which not only was the Mexican government's efforts to sustain the value of the peso becoming more and more untenableas its foreign exchange reserves dwindled steadilybut the major sources of that trend lay in Mexico's internal political situation.

The year 1994 had begun with a shocking indigenous rebellion in the southern state of Chiapas, a rebellion which touched off a much widespread upsurge in demands for democratization in the country. The demands for a change in the one-party(PRI)-state system through which Mexico had been governed for decades had been growing for years and had, in fact, led to the defeat of the ruling party's candidate in the 1988 elections. The PRI avoided losing power at that time by using fraud to steal the election from the opposition candidate (and by subsequently assassinating over 200 of his militants). But this had only deepened public dissatisfaction, a dissatisfaction that explode with the Zapatista rebellion of January 1, 1994.

The story of the "Peso Crisis," therefore, is a story that interweaves an economic history with a political one. And this is case during the leadup, during the moment of crisis and during the subsequent attempts to restabilize both the Mexican financial markets and the country more generally.

I have put together a collection of readings, mostly taken from the Internet that was the only place where it was possible to keep track of what what going on with any consistency during the crisis. You will find both analysis of events and causes, and descriptions of reactions and mobilizations, both on the part of governments and at the grassroots. (This last ties in with the section in the Crisis of Diplomacy on grassroots challenges to official policy.)