The dollar wars of the 1960s

Instead, their dollars fl owed out of the United States to grab up, ‘on the cheap,’ already-operating industrial companies in western Europe, South America or the emerging economies of Asia. At Ford Motor Company itself, Robert McNamara, an accountant, had taken over corporate control by the end of the 1950s.

Increasingly, after the 1957 crisis, large U.S. industries and banks began to follow the ‘British model’ of industrial policy. Systematic cheating on product quality became the fashion of the day. Milton Friedman and other economists preferred to call this ‘monetarism,’ but it was nothing other than the wholesale infestation of Britain’s post-1846 ‘buy cheap, sell dear’ methods into America’s productive base. Pride in workmanship and commitment to industrial progress began to give way to the corporate fi nancial ‘bottom line,’ a goal calculated every three months for corporate stockholders.

The average American needed to look no further than his family automobile to see how it worked. After 1957, rather than making the required change to more modern plant and equipment to increase its technological productivity, Detroit began manipulating instead. By 1958, the amount of steel used in a General Motors Chevrolet was cut to half that of the 1956 model. Needless to say, highway death rates soared as one result. The domestic steel industry also refl ected this big drop. U.S. blast furnaces poured out 19 million tons of steel for automotive use in 1955, but by 1958 this had fallen to 10 million tons. By the early 1960s, ‘what’s good for General Motors’ was becoming bad for America and for the world.

And the American worker paid a lot more for that 1958 Chevy. Slick Madison Avenue advertising, ever-larger tail fi ns and chrome trim served to hide the reality. U.S. industry had been persuaded to commit systematic suicide, cheating the customer to make up for falling profi ts. But, like the drunk falling from a 20-story window, who imagines at fi rst that he is enjoying the free fl ight, most Americans would not realize the real implications of this 1960s ‘post-industrial’ drift for another ten or twenty years.

THE DOLLAR WARS OF THE 1960s

With higher interest rates to be earned abroad by buying up operating western European companies on the cheap, New York bankers began to turn their back on the United States. Europe was suffering a huge shortage of capital because of the war and the collapse of industry. As a result, Europe was forced to pay excessively high interest rates to

attract the only ‘international’ currency then available—U.S. dollars from the large New York banks.

For their part, Chase Manhattan, Citibank and the others took the chance to make windfall profi ts in Europe, often doubling what their money would have earned if they had invested in municipal bonds to rebuild U.S. sewage systems, bridges or housing stock. The problem was that Washington, fearful of alienating the powerful New York fi nancial community, refused to address this vital problem in any serious way. The money fl ed U.S. shores for higher profi ts abroad.

By early 1957, for the fi rst time since the Second World War, funds began to fl ow out of the United States in amounts greater than those coming in. During the period 1957 to 1965, U.S. annual net capital export into western Europe mushroomed from less than $25 billion to more than $47 billion, a staggering sum at the time.

But if it were only American dollars which were leaving U.S. shores, that would have been one problem. The added problem was that U.S. gold reserves also began what became, increasingly after 1958, a continuous and at times precipitous decline. The breakdown of the postwar Bretton Woods monetary system was rapidly approaching, but American policy makers refused to take heed. They were listening to the voices of the New York banks, the big oil companies and the large American corporations, which were beginning, after the 1957 recession, to turn to cheap labor production outside the United States to improve their profi t margins.

By the end of the 1950s, what had been the overwhelming advantage of the postwar Bretton Woods system, the United States dollar as the world’s reserve currency, had turned into a liability— with a vengeance. As western Europe began to achieve independent industrial stature again, with far higher rates of productivity than the aging U.S. economy, this only dramatized the growing weakness of the U.S. economic position by the time of President Kennedy’s inauguration in early 1961.

When the American negotiators at Bretton Woods set down their terms for the postwar international monetary order in 1944, they established it on a basis which contained a fatal fl aw. Bretton Woods established a ‘gold exchange standard’ under which all member countries of the new International Monetary Fund agreed to fi x the value of their currency, not directly to gold, but directly to the U.S. dollar, which in turn had fi xed its value to a fi xed weight of gold— $35 per fi ne ounce.

This $35 per ounce was the price at which the dollar had been fi xed ever since Roosevelt set it in 1934, during the depths of the Great Depression. The ratio of the dollar to gold had not been altered in more than a quarter century, despite an intervening world war and the dramatic postwar developments in the world economy.

As long as the United States remained the only strong economic power in the Western world, these fundamental fl aws could be ignored. In the decade after the war, Europe urgently needed dollars to fi nance reconstruction and the purchase of American and British oil for its economic recovery. The U.S. also held the vast bulk of world gold reserves. But by the beginning of the 1960s, as Europe began to grow at rates outpacing that of the United States, it was becoming clear to many that something had to change in the fi xed Bretton Woods arrangement.

But Washington, under the growing infl uence of the powerful New York banking community, refused to play by the very rules it had imposed on its allies in 1944. New York banks began to invest abroad in new sources of higher profi ts. The failure of Washington effectively to challenge this vast outfl ow of vital investment capital, under both Eisenhower and his Democratic successor, Kennedy, was at the center of a problem which turned the decade of the 1960s into a succession of ever worsening international monetary crises.

What New York’s international bankers were not eager to advertise was the fact that they were earning huge profi ts by walking away from investing in America’s future. Between 1962 and 1965, U.S. corporations in western Europe earned between 12 and 14 per cent return, according to a January 1967 presidential report to Congress. The same dollar investment in U.S. industry earned less than half of that!

The banks quietly lobbied Washington to keep their game going. They kept their dollars in Europe rather than repatriating the profi ts to invest in American development. This was the beginning of what came to be known as the Eurodollar market. It was to be the cancer which, by the late 1970s, threatened to destroy its entire host—the world monetary system.

It would, of course, have been far better for the nation, and also for the rest of the world, had the U.S. Congress and the White House insisted on tax and credit policies to channel those billions, at fair rates of return, into new U.S. plant and equipment, advanced technologies, transportation infrastructure, modernization of the rotting rail system, and developing the untapped industrial market