To the Editors:
I agree with the Passell-Ross assessment (NYR, September 23) of the domestic impacts of Nixon’s economic melodrama, but I’m troubled by their analysis of its international ramifications. If I read them correctly, the authors are saying that while the President’s “foreign economic package is puzzling in motive and effect,” it seems on balance to reflect a wrongheaded attachment to neomercantilist political economy—it represents “an act of nationalist self-assertion” blended with “a curious kind of banker’s morality,… the traditional dogma of financial orthodoxy.”
I’m afraid that it’s hardly that simple—or puzzling (and as far as ideological zealotry goes, the President’s stunning reversal of his long-cherished “game plan” should bury that theory). For beneath the Nixon rhetoric lie a core of real interests and a scale of carefully constructed political priorities. Passell and Ross are surely right in implying that the situation brought about by the August 15 Diktat is a dangerous one that could trigger an international chain reaction resembling the tariff and currency warfare of the 1930s, but meanwhile the actions of this Administration are no more a result of blind ideological hangup than was the Vietnam escalation for LBJ and his advisers. In both cases something very concrete was, or appeared to be, at stake. In the present instance it is nothing less than America’s “number one” world ranking, to quote our leader.
Specifically, the world’s “number one” capitalist nation is entitled, thanks to its “key currency” which other countries are obliged to accept as official international reserves, to run foreign spending deficits, for whatever purposes, to an extent that other nations cannot (chronic balance of payments deficits would soon force them to “put their houses in order” or devalue their currencies, as Britain, France, and Italy have done on more than one occasion). But now, as Passell and Ross point out, there are so many dollars sloshing around foreign exchange markets after eleven years of towering US balance of payments deficits that the inexorable bankers’ logic is finally being applied to us. Against this backdrop, Nixon’s coup de théâtre is an obvious attempt “to have his cake and eat it too” (as his Treasury Secretary is reported to have boasted in one of those off-the-record Washington skull sessions).
The aim is to force the world into accepting a reconstitution of an enormous US surplus on trade account—that is, an excess of merchandise exports over imports. This would allow us to continue two foreign deficit activities which our corporations, banks, State and Defense Departments have no intention of giving up: foreign investment and military spending. An extraordinarily large surplus of exports over imports would, of course, tend to counterbalance the outflow of dollars caused by foreign investing and overseas military expenditures, and it is highly significant that neither of these two areas has been called upon to share in the ennobling “sacrifices” Nixon now offers the rest of us.
During the week of September 5, it now turns out, US Treasury Undersecretary Paul Volcker told a Paris meeting of the “group of ten,” the world’s major capitalist trading powers, that the United States requires a $10 to $12 billion improvement in its trade balance. “America’s nine partners understandably emerged in a state of shock,” in the words of The New York Times’s Robert Kleiman (September 12). A US merchandise trade surplus of such magnitude means that other countries must see their own trade balances deteriorate by an equivalent amount. The Europeans and Japanese were thus “stunned by the alleged dimension of the future American payments gap [we insist] they alone must close.” On September 15, US Treasury Secretary Connally, in a formal “group of ten” meeting in London, officially upped the ante to $13 billion. A $13 billion “turnabout,” he explained, would produce a trade surplus of at least $8 billion “needed to carry out the duties [the United States] saw necessary in the world.” In other words, it would permit US “capital exports” and “government disbursements” (i.e., military) of $6 billion plus what Federal Reserve Board Chairman Arthur Burns called “a certain margin of safety”—$2 billion, no less.
Actually, our merchandise trade has brought home surpluses as great as $5 to $8 billion, in the 1950s and early 1960s. With the postwar recovery of Western Europe and Japan, however, we could not have realistically expected such fat trade surpluses to go on indefinitely. As late as last year the United States still enjoyed a merchandise surplus of $2 billion. And even now our trade balance with Europe remains in the black; Japan and Canada are the major deficit sources. For 1971, we may wind up with a deficit on the over-all trade account, for the first time since 1893.
So what? A zero trade balance is nothing shameful, and neither is a trade deficit if it is offset from one year to the next by a corresponding inflow of dividends, interest, profits, “invisible” service income, and foreign capital, as was the case with Britain from around 1880 to 1914 and as might be the case with the United States if—if military spending and foreign investing by monopolistic corporations were not so large as to turn a small, manageable, and non-chronic balance of payments deficit into a staggering, perennial one.
But it is precisely these two activities in which Nixon and his political constituency intend to maintain a free hand. Hence the power play designed to reduce imports and increase exports enough to cover war, military “posture,” and corporate business expansion abroad. Here is why a modest trade surplus or deficit isn’t good enough for us—for most countries yes, but not for the “number one” international power whose multinational corporations and military establishment must have unrestricted Lebensraum.
We may be sure that none of this has been lost on our “free world allies.” On August 24, and again on September 10, the European Common Market commissioners told Washington that it cannot hope to solve its balance of payments problems simply by running a mounting surplus on trade with the rest of the world and that it must take action to stop the long-term drain caused by US corporate takeovers abroad and military expenditures in some forty-odd countries. Whether the Europeans will be able to back up their words with a unified political and monetary front against Nixon remains to be seen. Until they do, the United States can be expected to continue exercising its prerogative as “number one”: when you’re losing, change the rules of the game.
Richard B. Du Boff
Bryn Mawr College
Bryn Mawr, Pennsylvania
Peter Passell and Leonard Ross replies:
Professor Du Boff quite correctly notes the virtues of the dollar standard for American overseas interests. United States foreign investments and military operations have helped generate billions of dollars in payments deficits. But thanks to the special position of the dollar, American consumers have not had to foot the bill. Our deficits have simply been reflected in mounting European accumulations of dollars.
Imperialist motives do not, however, explain why the United States took the initiative in destroying a system which worked to its advantage.
Professor Du Boff says that an improvement in the trade balance was necessary to permit us to continue the deficit activities of foreign investment and military spending. But, until the Europeans took countermeasures, we could simply have kept on running a deficit. And if the likely European countermeasure would have been an upward revaluation of their currencies, there is no obvious reason why we should have beaten them to the punch. Nixon could have continued military spending and foreign investment, letting the Europeans decide whether it should be financed by their credit or by increased American exports.
There is, however, another possibility, which would confirm Professor Du Boff’s theory. The Nixon Administration might have feared that the Europeans would choose to restrict the outflow of American capital rather than revalue their currencies. Nixon, on this theory, chose to lower the value of the dollar rather than give Europe this option; better to make Americans pay more for Volkswagens than interfere with the plans of Chase Manhattan and Coca-Cola.
Conceivably the Administration followed this line of reasoning, but it is not a very persuasive one. Europeans have been ambivalent about American investment, in much the same way as they have been of two minds about American deficits. American capital has strong attractions for European businessmen. Because of the conservative nature of European bankers, it is often easier for a German industrialist to borrow funds in New York than in Frankfurt. US banks and their overseas subsidiaries are better at their jobs than their clubby local rivals.
The American banks also provide a method for European businessmen to escape anti-inflationary, tight money policies at home. When denied a loan in Paris, the Frenchman has recourse in New York. Hence many politically powerful business firms in Europe would be hurt by restrictions on US banks and bond underwriters.
Direct American business investments also have influential friends abroad. Europe has relied on American enterprises to provide new technology in a number of key industries: while domestic competitors squirmed, IBM made advanced computers available to Common Market industries. Thus when Lyndon Johnson restricted US direct investments in 1968, European outrage at American business reversed itself. A number of nations protested the decline of the dollar invasion: the Europeans did not like US deficits, but they disliked the possible ways of reducing those deficits even more.
No doubt Richard Nixon is more vigilant for the interests of David Rockefeller than for those of the Silent Majority. But the New Economic Policy simply does not represent shrewd strategy for a well-informed imperialist.
All this, however, relates mainly to the motivation of the Nixon policy. Its effects may yet prove benign. A permanent end to the convertibility of the dollar into gold would represent an epochal advance in world financial arrangements. It would, as we argued, allow nations to pursue their objectives—including reprehensible ones—with greater freedom from international economic constraints. But these constraints have rarely stopped militarism in the past; their relaxation should not encourage it in the future. It is America’s prosperity, not its overseas aggressiveness, that has been crucified on a cross of gold.
November 4, 1971