Sterling, the weak link, breaks

The newly created U.S. Offi ce of Economic Opportunity weakened the political voice of traditional American labor and the infl uential urban constituency machines. The targeted white blue-collar industrial operatives, only a decade earlier hailed as the lifeblood of American industry, were suddenly labeled ‘reactionary’ and ‘racist’ by the powerful liberal media. These workers were mostly fearful and confused as they saw their entire social fabric collapsing in the wake of the disinvestment policy of the powerful banks.

Harvard Dean McGeorge Bundy had run the Vietnam War as Kennedy’s, and later as Johnson’s White House national security adviser. By 1966 Bundy had gone to New York to turn the United States into a new ‘Vietnam,’ as head of the infl uential Ford Foundation. Black was pitted against white, unemployed against employed, in this new Great Society, while Wall Street bankers benefi ted from slashed union wages and cuts in infrastructure investment, or funneled investment overseas to cheap labor havens in Asia or South America. This writer had direct personal experience of this sad chapter in American history.

STERLING, THE WEAK LINK, BREAKS

By the early 1960s, de Gaulle’s independent policy initiatives were not the only major problem facing the fi nancial interests governing New York and the City of London. In 1959, the external liabilities of the United States still approximated the total value of her offi cial gold reserves, some $20 billion for both. By 1967, the year the sterling crisis threatened to break the entire Bretton Woods fabric, the U.S. total of external liquid liabilities had soared to $36 billion, while her gold reserves had plummeted to only $12 billion, one third the liability sum.

As U.S. short-term liabilities abroad began to exceed her gold stock, certain astute fi nancial institutions reckoned, quite correctly, that something sooner or later had to break. In his fi rst State of the Union Address to Congress in January 1961, President Kennedy noted that,

since 1958 the gap between the dollars we spend or invest abroad and the dollars returned to us has substantially widened. This overall defi cit in our balance of payments increased by nearly $11 billion in the last three years, and holders of dollars abroad

converted them to gold in such a quantity as to cause a total outfl ow of nearly $5 billion of gold from our reserve.

There are indications that President Kennedy seriously tried to tackle the growing dollar drain. Shortly before his death, in a message to Congress of July 18, 1963, Kennedy had proposed redressing the growing U.S. balance-of-payments problem through a series of measures aimed at increasing U.S. manufactures’ exports and through a controversial Interest Equalization Tax. The aim was to impose a tax of up to 15 per cent on American capital invested abroad, in order to encourage domestic investment of American capital, rather than foreign.

Kennedy was not to live to see through his version of the Interest Equalization Tax legislation. When it was fi nally passed in September, 1964, certain powerful New York and London fi nancial interests had inserted a seemingly innocent amendment, which exempted one country from the effects of the new tax—Canada, a key part of the British Commonwealth! Montreal and Toronto thereby became the vehicle for an enormous loophole which ensured that the U.S. dollar outfl ow continued, mediated through London-controlled fi nancial institutions. It was one of the more skillful fi nancial coups of British history.

In addition, bank loans made by foreign branches of American banks to foreign residents were exempt from the new U.S. tax. American banks scrambled to establish branches in London and other appropriate centers. Once again, the City of London had maneuvered to become a centerpiece of world fi nance and banking through development of the vast new ‘Eurodollar’ banking and lending market, with its center in London.7

London’s sagging fortunes began once more to brighten as the former ‘world’s banker’ began to corner the market in expatriate U.S. dollars. The Bank of England and London’s Sir Siegmund Warburg, with the assistance of his friends in Washington, especially Undersecretary of State George Ball, had cleverly lured the dollars into what was to become the largest concentration of dollar credit outside of the United States itself—the London Eurodollar market, by the 1970s an estimated $1.3 trillion pool of ‘hot money,’ all of it ‘offshore,’ that is, beyong the control of any nation or central bank. New York banks and Wall Street brokerage houses set up offi ces in London to manage the blossoming new Eurodollar casino, away from the prying eyes of the U.S. tax authorities. U.S. banks obtained

cheap funds from the Eurodollar market as well as from the large multinational corporations. During the early 1960s, Washington willingly allowed the floodgates to be opened wide to a flight of the dollar from American shores into the new ‘hot money’ Eurodollar market.

Buyers of these new Eurodollar bonds, called Eurobonds, were anonymous persons, cynically called ‘Belgian dentists’ by the London, Swiss and New York bankers running this new game. These Eurobonds were ‘bearer’ bonds, i.e. buyers’ names were not registered anywhere, so they became a favorite for so-called Swiss investors seeking to evade taxes, or even for drug kingpins wanting to launder illegal profi ts. What better than to hold your black earnings in Eurodollar bonds, with interest paid by General Motors?

As an astute Italian analyst of this Eurodollar process, Marcello De Cecco, noted, ‘the Eurodollar market was the most important fi nancial phenomenon of the 1960’s, for it was here that the fi nancial earthquake of the early 1970’s originated.’8

But in contrast to the benefi ts to London’s international fi nancial stature, due to the Canadian loophole and the resulting deposits of American dollars in select London-based banks, the industrial economy of Great Britain by the mid 1960s was a rotting mess and getting worse.

Confi dence in Britain’s pound sterling, the second ‘pillar’ of the original postwar Bretton Woods system after the American dollar, was eroding rapidly. Britain’s external trade balance and general economic situation had been precarious for some time, with rising offi cial commitments abroad to maintain vestiges of empire, a rotting industrial base and woefully inadequate reserves. When the Labour Party took offi ce in October 1964 the crisis had become more or less chronic.

After the war, under Bretton Woods, Britain, through her sterling bloc ties with colonies and former colonies, had been able to make the pound sterling a strong currency, in many parts of the world regarded the equal of the dollar as a stable reserve currency. Member countries in the British Commonwealth were required, among other ‘courtesies,’ to deposit their national gold and foreign exchange reserves in London and to maintain sterling balances in City of London banks. Britain’s quota share in the IMF was second only to that of the United States. Therefore the pound was disproportionately important to the stability of the Bretton Woods dollar order in the 1960s, despite the clearly depleted condition of her economy.

During the 1960s, Britain, like America, was a net exporter of fi nancial funds to the rest of the world, despite the fact that her technologically stagnant industrial base created increasing trade defi cits. Continental European economies, through growth of trade within the new Common Market and their productive advantages from strong investment in technology, grew vigorously.

Thus Britain’s defi ciencies and her lack of new technological investment grew ever larger by comparison. The powerful fi nancial interests of the City of London again preferred to focus singlemindedly on drawing the world’s fi nancial fl ows into London banks by maintaining the highest interest rates of any major industrial nation throughout the mid 1960s. Industry went into a slump, unable to borrow for essential technological innovations.

By 1967, the British position was becoming alarming. Despite several large emergency borrowings from the IMF to help stabilize the pound, British foreign debts continued to grow, rising another $2 billion, or some 20 per cent, in that year alone. In January 1967, de Gaulle’s principal economic adviser, Jacques Rueff, came to London to deliver a proposal for raising the offi cial price of gold held by the leading industrial nations. The United States and Britain refused to hear such arguments, which would have meant a de facto devaluation of their currencies.

Throughout 1967, Bank of England gold reserves were falling, as foreign creditors, sensing an obvious imminent devaluation of the weakening pound, scrambled to redeem paper for gold, which they calculated must rise in value. By June 1967, de Gaulle’s government announced that France had withdrawn from the American-instigated ‘gold pool.’ In 1961, under Washington pressure, the central banks of ten leading industrial countries had created the Group of Ten, as it became known. In addition to the United States, Britain, France, Germany and Italy, the group included Holland, Belgium, Sweden, Canada and Japan. The Group of Ten had agreed in 1961 to pool reserves in a special fund, the gold pool, to be administered in London by the Bank of England. Under the arrangement, temporary remedy at best, as events revealed, the U.S. central bank contributed only half the costs of continuing to maintain the world price of gold at the artifi cially low $35 per ounce price of 1934. The other nine, plus Switzerland, had agreed to pay the second half of such ‘emergency’ interventions, on the understanding that the situation would be temporary.

But the ‘emergency’ had become chronic by 1967, as Washington refused to bring its war-spending defi cits under control and sterling continued to weaken along with the collapsing British economy. De Gaulle withdrew from the gold pool, not wanting to lose further French central bank gold reserves to the bottomless pit of interventions. The American and British fi nancial press, led by the London Economist, began a heightened attack against French policy.

But de Gaulle made one tactical blunder in the process. On January 31, 1967, a new law came into effect in France which allowed unlimited convertibility for the French franc. At the time, with French industrial growth among the strongest in Europe, and the franc, backed by strong gold reserves, one of the strongest currencies, convertibility was seen as a confi rmation of France’s successful economic policy since de Gaulle took offi ce in 1958. But it was soon to become the Achilles’ heel which fi nished de Gaulle’s France at the hands of AngloAmerican fi nancial interests.

French Prime Minister Georges Pompidou, in a public speech in February 1967, reaffi rmed French adherence to a gold-backed monetary system as the only way to avoid international manipulations, adding that the ‘international monetary system is functioning poorly because it gives advantages to countries with a reserve currency [i.e., the United States]: these countries can afford infl ation without paying for it.’ In effect, the Johnson administration and the Federal Reserve simply printed dollars and sent them abroad in place of its gold.

The lines were becoming sharper through 1967 as France’s central bank determined to exchange its dollar and sterling reserves for gold, leaving the voluntary 1961 gold pool arrangement. Other central banks followed. The situation assumed near panic dimensions, as some 80 tons of gold were sold on the London market toward the end of the year in an unheard-of period of fi ve days, in an unsuccessful effort to stop the speculative attack. Fear grew that the entire Bretton Woods edifi ce was about to fall apart at its weakest link, the pound sterling.

Financial speculators by the second half of 1967 were selling pounds and buying dollars or other currencies which they then used to buy commercial gold in all possible markets from Frankfurt to Pretoria, sparking a steep rise in the market price of gold, in contrast to the $35 per ounce offi cial U.S. dollar price. The sterling crisis indirectly focused attention on the growing vulnerability at the core of the international monetary system, the U.S. dollar itself.