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New International, September 1949


Duncan Farley

Devaluation and the Dollar Crisis

Behind the Fall of the British Pound


From The New International, Vol. XV No. 7, September 1949, pp. 199–204.
Transcribed & marked up by Einde O’Callaghan for ETOL.


The devaluation of the pound sterling by some 30 per cent has set off a chain reaction. Virtually every currency in the world has been devalued against the American dollar. What has happened therefore in September 1949 may be termed the revaluation of the American dollar – an event comparable in significance in the economic history of the world to the abandonment of the gold standard by the British in September 1931.

It has taken but eighteen crowded years of depression and war for the permanent crisis of capitalism to destroy the supremacy of the British pound and to enthrone the American dollar as the monetary ruler of the world. This is the central fact that emerges as we examine the wreckage of the world’s currencies. It is principally this belated recognition of the dominant position of the dollar, an inevitable concomitant of the growing hegemony of American imperialism in the capitalist world, that we propose to analyze in some of its theoretical and practical implications.

To speak solely of the reduction in the value of the pound sterling from $4.03 to $2.80, of the desperate efforts of the British government to increase exports to dollar countries, of the inevitable rise in the cost of living within Britain, or even of the pathetic bankruptcy of the British Labor Party’s program of making gestures in the direction of socialism while preserving intact the foundations of capitalism, is to obscure the real meaning of the recent devaluation and to make impossible a real understanding of the historic significance of the world’s dollar crisis.

It is true that British action precipitated the wave of devaluation; it may even be true, as Cripps asserts, that the British took this action on their own initiative without any pressure from Washington. But it was the economic pressure exerted by American imperialism, increasingly stronger as compared with a declining British imperialism, that forced a realignment of the world’s currencies more or less in keeping with the higher exchange value that the dollar had attained in the recent postwar years.

The black markets and free markets, especially in New York, Zurich and Tangiers, have been saying for some time that the $4.03 exchange rate, to which the British pegged the pound in 1946, was too high. They have been selling pounds for less than $3.00 for a couple of years. While such markets are distorted reflections of erstwhile free and competitive markets, they do measure fairly accurately the true exchange values of most currencies and commodities. They are able to assess trends in foreign trade, changes in balances of payments and, above all, in productivity levels in various countries. While the British, and the sterling area as a whole, have been plagued with a dollar shortage and were forced to devalue their currencies to halt the complete depletion of gold and dollar reserves, America requires a lifting of currency and trade restrictions so as to promote capital investments and to increase imports. The long-term interests of American imperialism coincided with the immediate need of British imperialism to increase exports and to obtain more dollars. Thus, aside from the pique of the French at the extent of the British devaluation, there was complete agreement on the measure in all the major capitals of the capitalist world and all the devaluations have been duly approved by the International Monetary Fund.

Had the British and other currency devaluations been unwanted by American imperialism, Washington could simply have devalued the dollar by any desired amount and preserved the competitive advantage enjoyed by American exports in the world market. That no such action was taken supports the veracity of the rumors that the American government for some time had been urging devaluation upon the British. It also reinforces our major thesis that the creditor position of American imperialism demands an increase in imports.

One could speculate on why no attempt was made to achieve the same result by revaluing the American dollar directly through reducing the price of gold paid by the U.S. government and increasing the gold content of the dollar. This would have reversed the process of 1934 when the price of gold was increased from $20.67 to $35.00 an ounce and the dollar was devalued by slightly more than 40 per cent. Ultimately, had the British and the others balked at devaluation, Washington would have been forced to take such action.

Politically, however, it was far better, from the American point of view, to achieve the necessary revaluation of the dollar through the devaluation of rival currencies. Other governments can manipulate their currencies by executive decree; revaluation of the dollar by American action would require approval by the Congress, encouraging political division. Why should Washington run the risks of political debate and dissension when the British would have to take the onus of the entire action? Now, if American exporters, especially farmers, complain that it is more difficult for them to sell their products abroad, the answer will automatically be that “America is not responsible for the British devaluation.”

Moreover, currency manipulation, to have any lasting effect, must be subject to mutual agreement. Otherwise, the result would be competitive devaluation and increasing chaos. Once the British had been forced to reduce the exchange value of the pound against the dollar, it was simple enough, with American support, to obtain the needed general agreement, which certainly would not have been forthcoming if America had taken the reverse action herein discussed. In the absence of exchange controls – which do prevail in every other country to a greater or lesser extent – a reduction in the price of gold would be required in order to revalue the dollar by direct American action. This could hardly be popular in South Africa and other gold-producing countries. There was no other choice. The pound had to be devalued.

The British Dollar Crisis

The relative strength of any capitalist imperialist power can readily be seen from the position of its monetary unit. This is particularly evident in the case of England, which is now the classic example of the rise and decline of a capitalist power. During the entire nineteenth century and the early part of the twentieth century, Britain was the dominant imperialist power in the world. She was the leading manufacturing and trading nation. Her investments exceeded by far those of any other nation, even in areas outside the far-flung British Empire. Her ships carried most of the world’s commerce. The gold standard, adopted in 1816, made the pound sterling, as the British monetary unit, the most coveted currency in the world. Everything was measured in terms of the pound and the bankers of Lombard Street were the real rulers of the world.

While the challenges of French, Dutch and other minor imperialisms had been easily beaten back by the British, by the turn of the twentieth century American imperialism had become a factor on the world scene; above all, an aggressive German imperialism had arisen belatedly to challenge mighty Britain on the continent and to demand its share of the world market.

The cornerstones of British imperial policy were free trade, achieved in 1847 through the repeal of the Corn Laws (which abandoned British agriculture to its fate by the removal of protective tariffs), and the maintenance of the gold standard. British manufactures penetrated every nook and corner of the world. British investments soared to dizzy heights, reaching the colossal total of $20 billion in 1914. The rest of the world, by and large, paid off its obligations to Britain by exporting agricultural products and raw materials to England and by entertaining British tourists. London was the political, economic and cultural capital of the world. The dividends of empire were great. Wars were few and isolated affairs. This was the golden age of capitalist democracy.

But Britain’s rate of industrial progress began to slow down, as she became soft and conservative in an economic sense. The British civil and foreign services alone, excellent though they were, could not defend British markets against increasing competition, especially from Germany, whose manufacturing productivity began to exceed that of England. While German imperialism was defeated in World War I, an unfortunate occurrence from the point of view of the historic interests of capitalism as a world system, British imperialism had passed its peak. Some investments were liquidated; debts increased; the obsolescence of British industry became more apparent; the October Revolution in Russia tore a huge chunk out of the capitalist world market and created a new stage in the evolution of the class struggle. The pound staggered under all these blows until it fell from its established par of $4.87 to $3.20 in January 1920. British tenacity and American loans helped the British to cling to free trade and the gold standard, but the United States was rapidly becoming the leading manufacturing nation of the world as well as the major source of capital investment. The pound recovered, but the dollar was beginning to eclipse it. The world crisis that began in 1929 made this abundantly clear.

Empires, however, as a general rule do not passively allow themselves to disintegrate. The British reversed their traditional policy, went off the gold standard, abandoned free trade, and created a system of empire tariff preferences and the sterling bloc. Sixteen months later Hitler came to power in Germany and again the imperialist conflicts could only be decided by war. The devaluation of the American dollar in 1934 permitted a de facto stabilization of the pound-dollar exchange rate at almost $5.00 to the pound. At the outbreak of World War II the British stabilized at an effective rate of about $4.00 to the pound, but the once proud pound sterling emerged from the holocaust battered and weakened to an unbelievable extent.

The $4.03 rate was fictitious. Machinery, capital equipment and other purchases were being obtained in American markets. More than $14 billion worth of British net foreign investments were liquidated in the Second World War. England had to import large quantities of wheat and other agricultural products to feed her population. The bulk of these imports required dollars. The British Empire was losing one position after another, in India, in Palestine, in fact throughout the world.

The American loan of $4 billion in 1946 was quickly dissipated in less than two years. British austerity could not close the dollar gap or increase sufficiently the productivity of British industry. With an effective dollar deficit during the past year of almost $1 billion, time was running out. Not even the Marshall Plan could stay the tide.

The devaluation of the pound was inevitable, but it reveals that British imperialism is today a second-rate power. It was perhaps an unwillingness to admit this historic fact publicly, as it were, that explains the constant denials over the past several months that the pound would be devalued.

We have stressed, however, that the major significance of the devaluation in not so much the weakness of British imperialism, but the growing absolute and relative strength of American imperialism. Difficult as things were for world capitalism after the First World War, they are infinitely worse after the Second World War. Stalinist imperialism does not constitute the same kind of threat as did Russian Bolshevism, but it is none the less serious. It has already taken another huge bite out of the world market in Eastern Europe and in China, and it is questionable whether its voracious appetite can be satisfied even with such huge morsels to digest. Even more serious, however, is the extent of collapse in the capitalist sector. American imperialism has had no choice; to save itself it must try to shore up the entire capitalist world. Here we find the basic motivation for the Marshall Plan.

The World Dollar Crisis

It is one thing to give billions of dollars away. It is quite another thing, however, to try to organize the capitalist world so that it becomes a functioning organism and a real “defense against communism.” Since not even American imperialism can afford indefinitely to give away billions of dollars, some type of equilibrium must be achieved. Perhaps the British dollar crisis was the most acute, but it was the world dollar crisis that perplexed Washington. Virtually every country in the world with which American capitalism does business has had difficulty in acquiring dollars. Some, like France and Italy, have been more fortunate (and perhaps smarter) in attracting American tourist dollars. Even they, however, have experienced a sizable dollar deficit.

If the dollar crisis had been limited to Britain, it would be a far simpler problem to solve. Another loan might have been in order. In any case, if it came to devaluation, it would be only the British pound whose exchange value would be lowered in relation to the dollar. Such events have occurred before, notably in the case of the French devaluations in 1936–38. It is precisely the world-wide character of the present devaluation that gives it such historic significance. While throughout the sterling bloc, whose currencies are linked to the British pound, the devaluation has been from 30 to 31 per cent, with the British devaluation actually 30½ per cent (thus preserving the relative status of the nations belonging to the sterling area), the French franc has (so far) been devalued by only 8 per cent, the Belgian franc by 13 per cent and the Portuguese escudo (one of the more stable currencies) also by 13 per cent. Even the Czechoslovak crown has been devalued against the dollar and it has been reported that the Russian ruble has been devalued against the pound. The Canadian dollar has been devalued by 10 per cent against the American dollar. And the devaluation of the Argentine peso is only the forerunner of others in Latin America. These differential depreciations of foreign currencies could not have been achieved had the American dollar been revalued as a consequence of American action, for in that case there would have been a uniform reduction in the exchange value of all foreign currencies against the American dollar.

In other words, virtually every country in the world has experienced difficulty in obtaining the necessary dollars to pay for its imports from the United States. The one exception has really been Switzerland, but the Swiss franc, in spite of its ranking with the American dollar as an equivalent hard currency, is already being buffeted about in the currency markets, and devaluation may well follow if Switzerland is to maintain its trade position with the sterling and non-sterling-non-dollar areas.

It was therefore the generalized character of the capitalist world’s post-war crisis, reflected in low production levels, little capital accumulations, excessive currency controls, widespread black markets and clogged trade channels, that made the Marshall Plan an economic necessity for American imperialism. The Marshall Plan has unquestionably helped to bring about large-scale industrial recovery, with many countries already exceeding pre-war levels. It has also provided a convenient outlet for billions of dollars’ worth of American commodities that have helped to sustain a high level of economic activity in this country.

With the experience of the past year, the full dimensions of the problem have become more discernible. The United States has been accumulating capital, at a terrific rate. Profitable opportunities for investment at home are beginning to disappear. At the same time, the American favorable balance of trade has exceeded $5 billion annually, substantially more than the annual appropriations under the Marshall Plan. If these trends were to continue, by 1952, at the end of the Marshall Plan, there would be severe economic dislocation on a world scale which American imperialism simply cannot permit. So far as Washington is concerned, the choice was either a permanent Marshall Plan or an attempt to stabilize the capitalist world in a traditional imperialist manner. A revalued American dollar will have more opportunities for profitable investment abroad, for its competitive advantage against domestic or other foreign capital will be considerable. This, of course, implies a need for freer world trade, less currency restrictions, relative economic and political stability and, above all, furnishing opportunities for other countries to pay for American investments by increasing their exports.

A permanent Marshall Plan apparently is unattractive. It certainly would be very unpopular with the American bourgeoisie. Europe would hardly be enthusiastic about the prospect of permanently being rationed by America. Moreover, it would be very expensive. In any case, however conscious the analysis may or may not have been, the fact of the matter is that the Administration has made its choice. There is to be no permanent Marshall Plan. Instead, American imperialism is to be encouraged to increase capital investments abroad and presumably the United States will adjust its entire economic position to conform to its status as the world’s largest creditor nation. Whether Congress and the “public” will accept this perspective remains to be seen.

Requirements of American Imperialism

The decline of British imperialism has been accompanied by the rise of American imperialism. The fact, however, that American imperialism did not dominate the capitalist world until capitalism had visibly begun to decay, has posed certain problems which have not yet been solved and which may never be solved. The chief imperialist characteristic of a capitalist imperialist nation is that it exports capital. The United States first began to acquire this key characteristic during World War I. In 1917, American capitalism shifted its status from a debtor to a creditor nation; that is, on balance more American capital was invested abroad than foreign capital was invested in the United States. This trend continued with amazing rapidity following the end of World War I. By 1929, the net creditor position of American capitalism was estimated at some $17 billion. The interest and dividends on these investments alone ran to a sizable sum. At the same, time, the United States continued to export more than it imported, thus making it impossible for foreign nations to pay for all of their imports of American capital or to remit the profits earned by these investments.

To have solved this contradiction would have required a low tariff policy and the virtual abandonment of American agriculture, for the rest of the world could pay largely in raw materials and agricultural products only. Instead, the Smoot-Hawley tariff was passed in 1930 which made it practically impossible for any foreign nation to export any commodity to the United States. The result was the worldwide abandonment of the gold standard and the rapid development of state intervention in all the economies of the world.

An era had passed, an era in which the British pound presided over automatic adjustments in rates of exchange and balances of payments. The dollar came to power, as it were, in a period of capitalist decline on a world scale, which was manifested in ever-increasing governmental manipulation of exchange rates and growing currency restrictions. The Roosevelt New Deal managed to evade this central contradiction of American imperialism by attracting and burying under Fort Knox the bulk of the world’s gold supply. To some extent, also, the reciprocal trade policy and the policy of agricultural price supports helped to mitigate the situation and softened the opposition of the politically powerful farm bloc.

In more ways than one, however, the advent of World War II was a fortunate economic event. It meant the postponement of the world’s dollar crisis. No longer did American capitalists have to worry about obtaining gold or commodities in payment for their investments. The war economy provided bigger and better profits. Moreover, British imperialism, the chief competitor of American imperialism, was forced to liquidate most of its investments to pay for necessary war supplies. Lend-lease was instituted only after the British had disgorged a large portion of their investments. There was, in addition, a phenomenal increase in the productivity of American capitalism simultaneous with large-scale destruction of the capital plant of all of America’s major imperialist rivals. Even the American merchant marine supplanted the British and actually carried more tonnage during the war than all the rest of the world together.

American imperialism consequently emerged from World War II as the colossus of the capitalist world. The rest of the capitalist world was torn and shaken to its foundations and could not survive, much less recover, without large-scale aid from American imperialism. The relative superiority of American imperialism over all its capitalist competitors was now far greater than had ever been achieved by British imperialism in its heyday. Only Stalinist imperialism presented a formidable obstacle to the achievement of true world hegemony by American imperialism. By the same token, of course, only American imperialism presented a real barrier to the fulfillment of the Kremlin’s dream of world conquest, a subject outside the scope of this article except in so far as this mortal conflict provides justification and impetus for the development of the permanent war economy, and therefore alters the requirements of American imperialism in attempting to solve the growing contradiction of a creditor nation with a large favorable balance of trade.

The case of the American farmer illustrates the new contradiction that has developed, making it impossible to solve the old contradiction. Under a “normal” capitalist imperialist solution, price supports and tariffs on agricultural products would be abolished. American financial and industrial capital investments abroad and exports would be paid for by American imports of agricultural products. The American farmer would find it impossible to meet this competition and, while not being reduced to the status of the vanishing Indian, would lose virtually all his exports and eventually be restricted to providing for only a small portion of the domestic market for food and allied commodities. This, it will be remembered, was the classic method used by the British in the middle of the nineteenth century to solve a comparable problem. The possibility, however, of the conflict with Stalinist imperialism resulting in a “hot” war requires, at a minimum, that the American farmer be able to take care of the entire domestic need for foodstuffs and agricultural products. Certainly, no reliance can be placed on any area outside of the western hemisphere to supply necessary minerals, raw materials or agricultural products for, in the event of war, Europe, Asia and most of Africa might very well be cut off within weeks after the outbreak of hostilities. In a very real sense, therefore, the American farmer today owes his continued existence not only to his disproportionate political power but also to the development of Stalinist imperialism as a major world power.

Two trends will now become evident. On the one hand, American imperialism will resort to a number of traditional methods. Capital investment abroad will be pushed. Point Four is only an indication of the gestures that will be made in this direction. American exports of agricultural products will decline. American imports of raw materials, minerals and light manufactures will increase. There will be some decline in the American merchant marine. There will be further efforts to reduce tariff barriers and to promote freer and multilateral trade. Above all, there will be a conscious effort at currency stabilization and the re-establishment of currency convertibility.

Hand in hand with these trends, which, by themselves and only by themselves, signify less state intervention, there will be an attempt to organize the largest possible portion of the capitalist world as outposts of American imperialism in anticipation of World War III. There will be increasing efforts toward the stockpiling of strategic materials. War research will be accelerated. There will be increasing exports of armaments. The trend toward a permanent war economy Will become more pronounced. Direct and indirect war outlays will consume an increasing portion of the national product. All of these developments point in the direction of increasing state intervention. To some extent, particularly in the initial period, these divergent trends will not appear to be in contradiction. Basically, however, they are, and at each crisis the growing power of state monopoly capitalism in the United States will become apparent.

Impact of Devaluation

In the long run devaluation solves nothing, although without it existing problems would simply become more acute. Devaluation, like any monetary manipulation, is merely a symptom of a disordered and sick world. Its immediate effects, however, are to impose a capitalist solution on the problems of world trade and finance. This is not to say that, any other government in England could have avoided devaluation. On the contrary, we agree that devaluation was inevitable, but because it takes place in a capitalist framework and as a capitalist measure it becomes a prop for a dying capitalist order. Socialists do not have to vote against devaluation, but neither do they have to take responsibility for administering a capitalist state. The British Labor Party will certainly not find its popularity increasing as a result of devaluation. The knowledge that devaluation would be unpopular, especially with its own ranks, undoubtedly contributed to the procrastination and double-talk of Cripps & Co.

And well might the Labor Party bureaucracy have hesitated for, while British exports will increase to some extent, the cost of British imports will increase substantially. If, for example, prices remain the same in the United States, it will require 44 per cent more pounds to buy the same quantities of wheat, cotton, machinery, etc., that are essential to the maintenance of life in England. It is also clear that part of the competitive advantage secured by the act of devaluation will be lost through rising domestic price levels in Britain. In prospect is a 15 per cent increase in the cost of manufacturing, with perhaps a 10 per cent decline in the standard of living of the British workers – hardly a pleasant prospect to face on the eve of an election.

Neither the British, nor the rest of the capitalist world, can begin to narrow their dollar trade gap without a genuine lowering of production costs. This, however, is impossible without either a lowering of real wages or an increase in the productivity of labor. Efforts, of course, will be made in both directions – with, at best, dubious chances of success.

On the other hand, prices will certainly tend to fall in the United States. This will be especially true in such highly competitive items as men’s clothing. American exports will tend to decline and imports will increase. In other words, the immediate effects of devaluation are precisely opposite in the countries whose currencies have been devalued compared with the United States, whose currency has been revalued. In countries of devaluation, the immediate effect will be inflationary. In the United States the immediate effect will be deflationary.

To be sure, in a complex commodity civilization such as ours the revaluation of the dollar on a world scale will have disproportionate effects from industry to industry and from country to country. It may temporarily ease the British situation. It may promote greater American exports of capital. It will probably result in a net increase in the volume of world trade. It will certainly encourage an even larger number of American tourists to spend dollars abroad in 1950 than was the case in 1949. These are perhaps important but essentially surface phenomena. But then devaluation does not cure any of the fundamental ills of capitalism.

We shall undoubtedly hear further from bankers and others that “the time has now come for the restoration of the gold standard.” Such talk is slightly premature, to say the least. It was precisely the abandonment of the gold standard that revealed how sick the capitalist world had become. State-managed currencies, the very antithesis of the gold standard, were required to prevent complete collapse. The trend toward statism has not been reversed, or even halted, by the revaluation of the dollar. A restoration of the international gold standard is precluded by the nature and depth of the capitalist crisis. The more interesting question, as we have indicated, is how far, and to what extent, will American imperialism be able to go in functioning as a typical creditor nation? If these adjustments could not be effectuated in 1929, how much less likely are they as realistic political possibilities in 1949?

At any rate, the conflicts between the attempts of American imperialism to function in a traditional manner and, its attempts to meet the requirements of a permanent war economy will provide the setting for the major economic, and therefore the key political, problems of the next period.

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