U.S. International Payments Deficit

      The U.S. international payments deficit is a direct factor leading to the dollar crisis.

      The international balance of payments is a country’s income and expenditure in trade, non-trade and capital transactions with other countries in a specified period of time. Items entering the balance of payments are generally grouped under two headings—current account and capital account. The former consists of trade and non-trade items; the latter, investments and transfer of capital. A country has a favourable international balance of payments when its foreign receipts exceed expenditures and an unfavourable balance when the latter exceeds the former.

      In the past, the United States always had a favourable balance of payments in trade and a slightly favourable balance in non-trade transactions, which are made up of insurance, freight, interest, tourism and overseas remittances. In the eight years from 1960 to 1967, for example, the annual favourable U.S. balance of payments for trade and non-trade was above 4,000 million dollars while its balance of payments in the capital account showed a huge deficit resulting from foreign military expenditures and heavy capital exports. This deficit usually exceeded the favourable balance for current transactions by 1,000 million to 3,000 million dollars. Therefore, with the exception of some years, postwar United States always had a deficit of 1,000 million to 3,000 million dollars in its international balance of payments.

      In 1971, the United States incurred a deficit of over 2,010 million dollars in foreign trade and this deficit rose to 6,300 million dollars in 1979. With huge deficits in its current transactions on top of its annual deficit in capital transactions, 1971 and 1972 saw the United States saddled with 22,000 million dollars and over 13,000 million dollars respectively in the red.

      The United States has favourable trade balances with all parts of the world except for Japan, the Federal Republic of Germany and Canada. Of these three countries, Japan had the largest trade surplus with the United States, reaching over 4,000 million dollars in 1972, which for the United States was two-thirds of its foreign trade deficit for that year. Next comes Canada with which the United States had a deficit of 2,000 million dollars in 1972 and then the F.R.G. with which the U.S. deficit stood at more than 900 million dollars that year.

      In these circumstances, the United States recently devalued the dollar to improve its competitive capabilities in international trade. In particular, it stressed the need for the revaluation of the Japanese yen so as to reduce Japanese exports to the United States and increase U.S. exports to Japan.

U.S. Investments in Western Europe

      As a special feature of its capital exports in the postwar years, the United States has been exporting capital to industrially developed regions on a larger scale and at an accelerated tempo, while continuing to invest in Asia, Africa and Latin America.

      Private direct U.S. investments have remained the heaviest in Latin America, Europe and Canada.

      In the early postwar years, Latin America ranked first in the volume of U.S. investments, with Canada second and Europe third. In the mid-1950s, taking advantage of Britain’s partial withdrawal from its overseas activities, U.S. capital started infiltrating into Canada in a big way. By the end of 1957, private direct U.S. investments in Canada ran to 8,600 million dollars, in Latin America to 8,100 million dollars, and in Western Europe to only 4,200 million dollars.

      In the 1960s, the United States which tried to bypass tariff barriers erected by the West European countries after the founding of the Common Market pushed its way into their domestic markets and increased its investments there. The bulk of U.S. investments gradually shifted. By 1969 American investments in Western Europe had already topped those in other parts of the world. Private direct U.S. investments there climbed to 21,600 million dollars, or 30.5 per cent of the total, while in Canada they reached 21,100 million dollars (or 29.8 per cent), and in Latin America, 13,800 million dollars (or 19.5 per cent).

      In 1971, private direct American investments in Western Europe increased further to 27,600 million dollars, or 32 per cent of the total.

Facts on File

The Ten Crises

      Ten U.S. dollar crises have occurred since World War II:

      (1) October 1960. The U.S. balance of payments began to show deficits following its war of aggression in Korea. As the position of the dollar declined, the first large-scale postwar dollar crisis broke out in October 1960. To shore up the dollar, the United States and seven West European countries in 1961 formed the Gold Pool for the joint purchase and sale of gold on the market in order to stabilize its price at the official rate of 35 dollars an ounce.

      (2) March 1968. Following escalation of the U.S. war of aggression in Viet Nam, financial and monetary problems mounted and the U.S. balance-of-payments position deteriorated. This led to outflow of the dollar in huge amounts. In March 1968, a second and bigger dollar crisis erupted. This compelled the United States to discontinue supplying the London market with gold at the official price. A system of two tiers and two exchange rates was adopted. Thus, in addition to the official price market, in which only foreign central banks were entitled to present dollars to the U.S. Treasury for converting into gold at the official rate, a free market was set up in which the price of gold was allowed to fluctuate in response to the dictates of supply and demand. This in practice meant devaluation of the dollar.

      (3) Mid-November 1968. At that time, revaluation of the mark and devaluation of the franc were being bruited about. In the Western markets holders of francs, pounds and dollars started dumping them in a rush for gold and marks.

      (4) April 1969. Talk about devaluation of the franc led to dumping the franc, pound and dollar, severely undermining them, in a rush for gold and the mark.

      (5) September 1969. A new wave of selling the dollar, pound and franc for the mark swept financial markets in Western Europe and the United States. The Federal Republic of Germany was obliged to close its foreign exchange market and give way to a system of floating exchange rates. In October there was nothing for it but to upvalue the mark by 8.5 per cent, raising the parity rate of 4 to 1 between the mark and the dollar to 3.66 to 1.

      (6) May 1971. Serious financial and economic difficulties in the United States, the worsening inflation there, rapid deterioration in the U.S. balance of payments and the weakening position of the dollar stampeded the principal financial markets in Western Europe into a flight from the dollar in favour of gold, the mark and other West European currencies. This time the dollar was the only currency on the run. Its value fell by a wide margin, while the price of gold rose steeply. The major foreign exchange markets of Western Europe were thrown into a turmoil.

      (7) Late July 1971. The storm of the dollar crisis struck again, with increased havoc. The price of the dollar plunged, with the price of gold climbing unchecked. The U.S. Government was compelled to announce a “new economic policy” on August 15, including suspension of convertibility. In mid-December the same year, the United States depreciated the value of the dollar in terms of gold by 7.89 per cent through an increase of the official price of gold from 35 dollars an ounce to 38 dollars. This official announcement of devaluation was the first since 1934.

      (8) June 1972. The outbreak of the pound crisis prompted the British Government to float the pound. This led to hectic sales of the dollar and a rush for gold.

      (9) Late January-Early February 1973. Another monetary crisis broke out with a flight from the dollar and a rush for the mark and the yen. On February 12, the U.S. Government announced a 10 per cent dollar devaluation. This was the second postwar devaluation of the dollar.

      (10) February-March 1973. The dollar devaluation neither increased the dollar’s credibility nor ended the extreme instability in the capitalist money markets. A rush for gold took place in Western Europe. The free market price of gold, which stood at 69 dollars an ounce at the time of the dollar devaluation on February 12, reached a high of 96 dollars in London on February 23.

      Another wave of unloading the dollar in a stampede for the mark and other currencies erupted in the West European foreign exchange markets in late February and early March. About 4,000 million dollars were dumped on March 1 alone. Pounded by the storm of the crisis, the foreign exchange markets in Western Europe and Japan were closed on March 2.