5. INTERNATIONAL RELATIONS AND THE INTERLINKING OF THE NATIONAL FORMATIONS OF CENTRAL CAPITALISM

The Economic Theory of Equilibrium in the Balance of Payments

Equilibrium in the balance of payments, which, at best, exists only as a tendency, is dependent on a permanent adjustment of the international structures.

Is a momentary deficit in a country’s balance of payments, whatever its cause, whether transient or structural, capable of being reabsorbed on its own by influencing the level of the rate of exchange, prices, and economic activity? Economic theory answers this question in the affirmative.

Adam Smith allowed only the price mechanism to enter into the construction of international equilibrium. In this he was following, on the one hand, the old, mercantilist tradition of Bodin, Petty, Locke, and Cantillon, who had observed that disequilibrium in the trade balance was compensated by movements of gold, and, on the other, the quantity-theory tradition according to which it was the movement of gold that in turn determined the general price level. Disequilibrium ought therefore to become reabsorbed on its own. It was only one step from there to declaring that the only possible cause of external disequilibrium was “internal in­flation” — a step that the Bullionists were to take, under Ricardo’s leadership, at the beginning of the nineteenth century.

It was Wicksell who brought out, at the end of the nineteenth century, the role played by changes in demand in the mechanism of international equilibrium. A deficit in the balance was analyzed as a transfer of purchasing power. This extra purchasing power would enable the foreign country concerned to increase its imports, while the defιcitary country would have to reduce its imports. International equilibrium would be achieved without any altera­tion in prices. This revolutionary theory was taken up by Ohlin, who claimed, on this basis, that it was possible for German reparations to be paid. The extent to which the classical theory of price-effects (connected with the quantity theory) continued to be influential, however, can be appreciated from the fact that so eminent a thinker as Keynes refused to give up the old outlook. If he alleged that it was impossible for Germany to pay reparations, this was because he believed that the working of the price elastic­ities of German exports and imports would bring about a “perverse” rather than a “normal'' effect. It was only the post-Keynesians who incorporated in the theory of international equilibrium the essence of the method inaugurated by Bosanquet.

These two ways of looking at the problem — the “price” way and the “income” way — are often presented as being mutually exclusive. Yet these are merely two aspects of the same phenomenon, namely, demand. Does demand depend on price, or on income? The entire construction of Walras’s “general equilibrium” remains based upon the law of supply and demand. It was with the intention of replacing the labor theory of value by the utility­theory that the first analysts of the market, Say in particular, put forward the law of demand.

Analyses of the price elasticities of external trade are of the same order as the former analyses of supply and demand. They assume that the national incomes of the partners in exchange are stable, and thereby they lose all power to explain the real move­ments of international trade.

The introduction of the responses, of supply and demand to variations in income in general, and of the responses of external trade to variations in the national income in particular, was a veritable revolution. But economists are still content to note that, the level of incomes being so much at a certain period, the level of exchanges of a certain product is so much. It is noted that, at a later period, the incomes, prices, and quantities exchanged are different. This provides a description of the changes that take place, but does not explain them.

The theory of price-effects. The classical theory of price-effects was worked out at the beginning of the nineteenth century in the context of assumptions corresponding to the reality of that time (the gold standard) and on the basis of the quantity theory of money.

general decline in internal prices resulting from this drain, and, consequently, the decline in the prices of exports, as compared with the stability of foreign prices, and, consequently, the stability of the prices of imports, discourages the latter, favors the former, and enables equilibrium eventually to be restored. It is the worsening of the terms of trade that does this.

Recently it has been perceived that the alteration in the terms of trade, which, on the one hand, favored (or disfavored) exports, also lowered (or raised) their unit prices. An internal increase in prices, like a fall in these prices, may affect the state of the balance for better or for worse, depending on the level of elasticities. The same is true, but the other way around, where imports are concerned. Analysis of the effects of different combinations of price elasticities has become commonplace today. The best formu­lation has been given by Joan Robinson, who takes account of these four elasticities: that of the national supply of exports, that of the foreign supply of imports, that of the national demand for imports, and that of the foreign demand for exports. It should be recalled that, long before the Keynesians, Nogaro had criticized Augustin Cournot’s theory of the exchange, which assumed what had to be proved, namely, that price elasticities are such that devaluation makes it possible to reabsorb the deficit.

If the economy is perfectly integrated, a change in the price of imports must entail a proportional change in all internal prices, and, consequently, in the price of exports. Is not the relatively higher price of imports bound to influence all prices in an upward direction? Aftalion showed that the level of the exchange itself had an effect, in some cases, on the internal price level.

True, it can be quoted on the other side that, during the nineteenth century in Europe, the gold standard and the compen­satory monetary policy of manipulating discount rates proved effective. But, if this happened, was it not merely because in the long run the balance of payments was in equilibrium, with dis- equilibria never more than momentary, Conjunetural incidents?

The theory of exchange-effect. Given the assumption of incon­vertible currencies, the existence of a rate of exchange that can vary widely at the whim of the balance of payments, does this not bring us back to the price-effect without the quantity theory coming into the argument? In this case, indeed, the alteration in the rate of exchange entails an alteration in the price of imports, but there is no reason why the price of home-produced goods and the price of exports, which must relate to internal prices, should alter. This is because the quantity of money continues to be stationary, say the quantitativists. Others say-it is because the rate ofexchange does not always necessarily influence internal prices.

The analysis needs to be completed. On the one hand, depending on price elasticities, the alteration in the rate of exchange may have “normal” effects or “perverse" ones. On the other, the price of imports may, here, too, influence the level of internal prices, and thereby that of exports, and in the same way— via costs, via the behavior of the dominant income, and via the transmission of price structures.

Here, too, short-term capital movements may prevent alteration in the rate of exchange (and in prices), just as formerly it prevented the movement of gold (and of prices). If the central bank raises the interest rate, it attracts foreign short-term capital, just as under a gold system, and for the same reason. In the event of a temporary deficit in the balance it can thus prevent devaluation (and the consequent increase in prices), just as under a gold system it could prevent a drain of gold (and the consequent decrease in prices). But this action comes up against the same limit as before. If the deficit is structural, chronic, and profound, the inflow of foreign capital will not succeed in neutralizing it — all the less because the prospect of losing on the exchange in the event of devaluation does not attract many speculators ready to be content with a small profit due to the increase in the interest rate.

Finally, what are we to conclude from the analysis of price-effects? First, that there are no price-effects but only an exchange-effect. Disequilibrium in the external balance does not influence prices directly, through the quantity of money. It affects the rate of exchange, and this in turn affects all prices. It follows from this that alterations in the rate of exchange can never, whatever the price elasticities may be, resolve the difficulties of a structural disequilibrium, since at the end of a certain period things are back as they were at the start. Second, it must be realized that, even in the transition period, fluctuations in the exchange do not necessarily improve the situation of the external balance, owing to the existence of critical price elasticities.

If we consider that, in the countries of the periphery, the elasticity of demand for imports is slight owing to the impossibility of substituting local production for foreign production; that in these countries the incomes of exporters are all the more important in proportion to the degree of the country’s integration; that the influence of these incomes on demand is supplemented by decisive psychological considerations that link the internal value of the currency to its external value; and that there is a mechanism whereby the price structure of the dominant economy is transmitted to the dominated one — then we may conclude that, in nine cases out of ten, devaluation will in no way resolve the chronic disequi­librium of the balance of payments, either in the short run or, a fortiori, in the long, but that on the contrary this devaluation will worsen the external situation in the short run.

The theory of income-effect. Wicksell and Ohlin presented the mechanism of the income-effect in a very simple form. The deficit in the external balance is settled by a transfer abroad of purchasing power. This fresh purchasing power must enable the economy that benefits from it to import more than before. On the other hand, the transfer obliges the deficit economy to reduce its demand for imports. As for the transfer of gold that takes place under the gold-standard system, this provides support for the transfer of purchasing power, and nothing more. Obviously if we assume that convertibility and flexible exchanges have been abandoned, then disequilibrium, which is on the one hand a transfer of purchasing power, has on the other an effect on the rate of exchange. These secondary effects of disequilibrium on the rate of exchange may obstruct the working of the re-equilibration mechanism — for instance, by canceling out the transfer of purchasing power through a price increase. But the mechanism remains essentially of the same nature as before.

The advantage of Ohlin’s theory over the previous one is that it. enables us to explain the re-equilibration that takes place in the balance, however the terms of trade may evolve. According to the classical theory it is the alteration in these terms in a Oertain direction that re-establishes equilibrium. Now, experience has proved many times over that re-equilibration has taken place despite a perverse evolution of the terms of trade. The theory of transfer of purchasing power also has the merit of bringing out the point that there is only a tendency for equilibrium to be restored. Nothing ensures that the increase in purchasing power resulting from a surplus in the external balance will be wholly concentrated on demand for imports.

Keynesian thinking, by putting in the forefront the multiplier effects of a primary increase in income, was to make possible the final perfecting of the theory. This was done by the post­Keynesians, in particular Metzler and Machlup. Reduced to its simplest terms, the.mechanism is as follows. A positive net external balance operates like an independent demand; it determines, through the working of the multiplier mechanism, a greater increase in the national income, which, given the propensity to import, makes possible a readjustment of the external balance. Conversely, a negative net external balance determines a shrinkage in total income, which facilitates a reduction in imports, which then con­tributes to bringing the external balance back to equilibrium.

The models put forward by Machlup and Metzler enable one to take account simultaneously of the effects of variations in country A’s balance upon country B, and of the reciprocal effects of B’s balance upon that of A. Let me mention straight away an interesting case, namely, that in which the contraction of national income in the “paying” and “receiving” countries is such that the debtor country is unable to settle its debt: the possibility of international equilibrium thus depends in this case on the value of the propen­sities to consume and to invest in the two countries concerned. This example shows that equilibrium in the external balance merely reflects a structural adjustment of the economies that confront each other, the conditions for which it makes apparent. The question of what the different propensities are, together with the reasons why they are stable and the changes that affect them, is not a question of “empirical fact” but a fundamental theoretical question. What, in reality, is meant by the structural adjustment that conditions equilibrium in external payments? This adjustment is ex­pressed precisely through changes in propensities, in particular propensities to import. We are therefore not free to imagine whatsoever “models” we may choose, in an arbitrary way — we need to know how and why propensities change.

In rejecting the multiplier analysis, modern writers have mostly gone back to the traditional price-effect, at least where the under­developed countries are concerned. During depression, the prices of exports fall, even though the local currency stands firm (in a case of monetary integration, for example). Should it not be concluded from this that the underdeveloped countries prove the possibility of a direct price-effect? That in these countries the fluctuations in the balance of payments entail fluctuations in prices through the intermediary of international currency move­ments? Not at all. Prices fluctuate at the mercy of demand in the underdeveloped countries just as in the developed ones. If the prices of the underdeveloped countries’ exports fall, say, in a depression period, this is not due to the deficit in the external balance but to a decline in the demand for these goods, a demand that mainly lies abroad. The volume and the price of exports fall together and for the same reason. The deficit in the balance has nothing to do with causing this fall: on the contrary, it results from it.

The conclusions at which we arrive, where the theory of the readjustment of the balance of payments is concerned, are thus wholly negative. In the first place, despite appearances, the price­effect no more functions in the underdeveloped countries than it does in the developed ones. Secondly, the exchange-effect does not tend to restore equilibrium. Alterations in the rate of exchange are often, especially in the underdeveloped countries, effective only for a limited period, until the internal increase in prices has become general and proportional to the fall in the rate of exchange, and are often effective in a perverse direction (owing to the price elasticities). Thirdly, the income-effect is only a tendency, and implies the presence of a structural adjustment that constitutes the very essence of the problem. There is, then, no mechanism that automatically re-equilibrates the external balance. All that can be said for certain is that imports, in general, transfer pur­chasing power abroad in a precise monetary form, and that this transfer naturally tends to make possible subsequent exports. But this tendency is very general in character. It is similar to that by which, in a market economy, any purchase makes possible a subsequent sale. Just as the existence of this profound tendency does not justify the "law of markets,” so it does not justify the construction of a theory of automatic international equilibrium.

Equilibrium exchange rate or structural adjustment? The real features of two economic systems in contact with each other may thus be such' that the balance of payments cannot be equilibrated in the context of freedom of exchange. Since the automatic mech­anisms do not function, it seems that in this situation there is no equilibrium rate of exchange. What is, in fact, called the equi­librium exchange rate is a rate that ensures equilibrium in the balance of payments without restrictions on imports and the “natu­ral" movement of long-term capital. Ifit is said that the mechanisms that readjust incomes have only a tendency to operate, this amounts merely to saying that such a rate does not always exist. To put it more precisely, as the mechanisms of the exchange belong to the short term, whereas structural readjustment is a long-term matter, there is not always an equilibrium rate of exchange, and still less a “natural” and “spontaneous” one.-

Yet one gets the impression that an equilibrium rate did exist throughout the nineteenth century. “Par” was certainly at that time, from one point of view, the “normal” rate of exchange between two currencies that were both convertible into gold. Buying and selling of gold by the banks of issue, at a fixed price and in unlimited amounts, confined the fluctuations of the exchange rate between the narrow limits of the gold points. Convertibility into gold gave the world system sufficient solidity for the mechanisms of structural adjustment to function. However, this structural adjustment, submitted to by the weak and imposed by the strong, had nothing harmoious about it; on the contrary, it reflected the gradual shaping of the world in an ever more uneven way.

What happens, though, to the theory of the exchange if convert­ibility is suspended? As the purpose of this theory is to explain the ratio that obtains between the values of two currencies, one’s general conception regarding the value of money is what ultimately determines one’s conception of the fundamental nature of the ex­change. This is why marginalism, which defined the value of money as its purchasing power, arrived at the theory, on the question of the exchange, of the parity of purchasing powers. And just as it ended up with the quantity theory in the internal domain, so also was it to end up with an international quantity theory, determining an international distribution of gold that would ensure the equilibrium of the exchanges at the level of purchasing powers.

According to my analysis, in which I reject the quantity theory, it is necessary, when determining the internal value of money, to distinguish the case of convertibility from that of inconvertibility. In the former case, the real cost of gold production is what ulti­mately sets limits to variations in the value of money. In this sense, par did indeed constitute the normal rate of exchange. When convertibility is abandoned, so that the central bank is no longer buying and selling gold in unlimited amounts and at a fixed price, this price may itself be drawn into the general upward movement, so that sight is lost of the concatenation of mechanisms that now seem perfectly reversible. Just as there is no longer a normal price level, so there is no longer a normal rate of exchange. Where the currency is inconvertible, a structural deficit in the balance of payments makes it necessary to devalue.

The devaluation of an inconvertible currency gives rise in its turn to a wave of inflation that brings the situation back to where it was before. Once again it becomes clear that chronic disequi­librium cannot be avoided except by way of control over external trade and capital movements, by direct influence on real movements. When the currency has become inconvertible, the system no longer possesses the solidity it needs in order to wait for the income-effect to exhaust its consequences and for equilibrium to be restored. The tendency to disequilibrium entails permanent instability.

Some economists lay down an additional condition when defining the equilibrium exchange rate, namely, that it must ensure full em­ployment. The connection established between the level of employ­ment and the rate of exchange is, at bottom, highly artificial. It follows from an almost caricatural simplification of the Keynesian analysis. Joan Robinson links the level of the national income to the rate of interest in a mechanical way, so that, in her view, there is always a level of interest that ensures full employment — whereas Keynes rightly insisted on showing that it was possible for unemployment to become an insoluble problem. Mrs. Robinson then links, in an equally artificial way, the international movement of capital with the rate of interest — whereas these movements are dictated by the absolute and relative volume of incomes from property, and prospects of profitability of investment, which are largely independent of fluctuations in the rate of interest. She.goes on to show how to each level of interest (and therefore of employment) there corresponds a level of the exchange that equil­ibrates the balance of payments. This way of considering that one of a group of variables can always be fixed arbitrarily because the others then adjust themselves to this arbitrary value is typical of the method employed by the analysts of “general equilibrium.” It is liable to all the criticism that can be made of the empiricist method in economics. It is thoroughly formalist, and denies the existence of causal relations that are fundamentally irreversible.

In reality, such an “equilibrium” rate of exchange may very well be — and certainly is, in relations between developed and underdeveloped countries — an exchange rate of “domination.” To each level of the exchange there Correponds a certain distri­bution of relative profitability Ofinvestments in the different sectors. But, in reality, it is not the exchange that determines the volume of absorption of foreign capital by the underdeveloped country. On the contrary, capital flows in to the extent that the developed countries have free capital to dispose of, and that general “real” conditions make these external investments profitable; and, by weighing upon the balance of payments, they determine an “equi­librium” level of the exchange — in other words, a level that makes possible payment of interest on imported capital and pay­ment for the volume of imports determined by the degree to which the underdeveloped countries are integrated into the inter­national market: that is, determined by the demand for foreign goods that the volume of exports (bound up with this degree of integration) makes possible. In other words, the mechanism of the exchange enables the structure of the underdeveloped country to be adjusted to that of the dominant country. In this sense, a “better” equilibrium, meaning one that makes possible an altera­tion of this structure, necessitates restrictions on imports. Clearly, in this case, too, when the protection constituted by the gold standard has been removed, a passing change in conditions of trade or movement of capital entails an alteration in the rate of exchange which, by bringing about a different distribution of relative prof­itability between different sectors of the underdeveloped economy, influences the orientation of foreign investments and, consequently, the conditions of domination. But what always happens is an adjustment of the underdeveloped structure to the developed one.

The Economic Theory of International Transmission of the Conjuncture

The economic theory of “automatic equilibrium” of the balance of payments forms the basis upon which conventional economics has erected the theory of international transmission of the conjunc­ture.

This theory was first given systematic form by Haberler, who argues for three propositions, basing the distinctions he makes upon the monetary systems of the partners brought into relationship.

First, in the case in which the two countries, A and B, which are brought into contact with each other are subject to the gold- standard system, the transmission of fluctuations from one country to another is perfectly symmetrical. This transmission reduces the intensity of the fluctuations in the originating country by spreading wider the area over which the cycle exerts its effects. In a period of prosperity in country A, its imports develop more rapidly than its exports. This country has to face a drain of gold that reduces in­flationary tendencies within it, while reinforcing them in country B.

Second, if country B has adopted the foreign-exchange standard system, the cycle will not be propagated from the dominated country to the dominant one, but in the opposite direction this effect is reinforced. In a period of prosperity in the country that is dominated monetarily, this country pays for the deficit in its balance of payments in the currency of country A. The volume of credit exerts no stimulating influence in the dominant country because no transfer of gold, the ultimate form of money, has taken place. But, on the other hand, the natural development of prosperity in the dominant economy is not checked by a drain of gold, whereas the influx of foreign currency into the dominated country is reflected in a real increase in advances of credit in this economy.

Third, in the case in which each of the two countries has an independent managed currency, cyclical fluctuations are no longer transmitted at all. A boom in one of the two economies in contact entails a disequilibrium in the balance of payments which, since it cannot be adjusted by an export of gold or foreign exchange, has to be adjusted by an alteration in the rate of exchange. This adjustment reduces excessive imports to the level of possible exports.

This is certainly an analysis of a narrowly monetarist type. In the nineteenth century, colonial and metropolitan countries used the same metallic currency. Yet the direction in which the cyclical movement was transmitted was always the same: from metropolis to colony.

The post-Keynesian school has abandoned this monetarist theory of transmission. It is now claimed that the fluctuations are trans­mitted not through the channel of the flow of gold and foreign exchange that they engender, but directly, through the channel of commodity movements. The cyclical oscillations in one country are, in fact, transmitted to another in a real movement of exports and imports. Prosperity in some countries, by resulting in imports that are greater than exports, directly fosters the development in others of the inflationary tendencies characteristic of economic euphoria. The deficit in the balance is settled by way of foreign credits alone. No movement of gold or foreign exchange is necessary. No alteration takes place in the rate of exchange. Under these conditions, the quantity-theory mechanism does not function.

This new way of looking at the matter has enjoyed a great vogue, thanks to the elaborated form given to it by the theory of the foreign-trade multiplier. Colin Clark’s study of the Australian cycle is typical from this standpoint. The theory of the foreign- trade multiplier declares that a favorable trade balance (a surplus of exports) plays the same role as an independent inducement to investment. But this theory remains at the descriptive and mech­anistic level. Actually, the state of the conjuncture does not have a clearly defined effect on the trade balance. Prosperity brings about a parallel growth in exports and imports. Its effect on the balance varies: sometimes it causes improvement, at other times deterioration. While it is true that the balance of payments (not that of goods) tends to be favorable for the developed countries in a depression period, this is due to the cessation of the export of capital far more than to improvement in the trade balance. Similarly, for the underdeveloped countries, it is this cessation of the flow of capital, not the worsening of the trade balance, that causes the balance of external payments to show a deficit. It is for this reason that the alternation that is clearly apparent in the twentieth century, between a deficit balance and a surplus balance, depending on the state of the conjuncture, did not exist in the nineteenth century, before the movement of capital had assumed the dimensions to which it later grew. Even at that time, however, it was never observed that a period of prosperity in Europe produced, through the appearance of a favorable balance for Europe (a perverse effect, but a frequent one), a depression in the lands beyond the seas — or vice versa.

The International Monetary System and the Present Crisis

Our epoch is marked by a new, growing contradiction between the worldwide character of the activities of the firms that are most decisive in economic life (the transnational companies) and the national character of the institutions, particularly the monetary institutions, within which the economic policies of states are deter­mined. It is the development of this new contradiction that accounts for the specific form assumed by the present crisis of the system, that is, for its appearance in the monetary sphere.

The international liquidity crisis. Since the end of the Second World War, the international monetary system has been based on the employment of three types of reserves: gold; certain.key cur­rencies (the dollar and the pound sterling) together with, to a subordinate extent, other “hard” currencies; and the credits granted by the IMF, either conditionally or unconditionally.

Between 1951 and 1965 the total amount Ofinternational reserves defined in this way, for the world as a whole — excluding the Come- cpn countries, China, Vietnam, Korea, Albania, and Cuba — grew from $49 to $70 billion, at the rate of 2.6 percent per year. During this same period, international exchanges increased at the rate of 6 percent per year, reducing the relative amount of the reserves from 67 percent to 43 percent of the value of imports. After 1965, this tendency was intensified: the international reserves increased to $93 billion in 1970, but this amount no longer represented more than 33 percent of the volume of world trade.

Was this reduction in the relative amount of international reserves the cause of the crisis? Not necessarily, at least where the central capitalist countries are concerned, for three essential reasons, namely: (1) because the volume of reserves needed does not depend on that of the exchanges effected but on the balances that have to be settled, and while, immediately after the Second World War, the structure of international trade was very unbalanced, it is a great deal less so today; besides, in 1913, monetary reserves (which mainly consisted of gold) covered no more than 37 percent of world imports; (2) because it is not only the stock of international liquidities that has to be considered but also their velocity of circulation, just as with an internal monetary situation; and (3) because procedures have been devised that enable the amount of necessary reserves to be reduced, such as bilateral swap arrange­ments — the ceiling of mutual credits arranged in this way increased from $1.7 billion in 1961 to $16 billion in 1970.

In reality, the crisis has arisen from the growing disequilibrium in. the proportion of the different component elements of the reserves. While the gold component, which was $34 billion in 1951, and $42 billion in 1965, fell to $37 billion in 1970, the dollar component increased from $4.2 billion in 1951 to $14.8 billion in 1965 and $32.8 billion in 1970, with an annual growth rate of 9.4 percent between 1951 and 1965 and 17.5 percent between 1965 and 1970 — a much higher rate of growth than that of the reserves as a whole. Between 1965 and 1970 the currency element in the international reserves (mostly consisting of dollars) increased from $23.8 billion (33 percent of the total) to $44.5 billion (48 percent). As for the reserves issued by the IMF, the third element in the system, these remained modest: $1.7 billion in 1951 (3.4 percent of the total), $5.4 billion in 1965 (7.6 percent), and $10.8 billion in 1970 (11.8 percent).

The increase in the amount of dollars held abroad gradually weakened the position of the United States, whose gold reserves fell from $24.3 billion in 1951 to only $14.7 billion in 1965 and $11.1 billion in 1971. Along with this reduction, the gross ex­ternal indebtedness of the United States increased from $8.3 billion in 1951 to $25.2 billion in 1965, and the country’s net indebtedness (external debts offset by credits to foreign borrowers) increased from $6.9 to $13 billion. After 1965 the situation of the United States worsened at a more rapid rate. The country’s current external liabilities increased from $29 billion in 1965 to $64 billion in 1971, while the short-term loans to its credit increased merely from $7.7 to $13.3 billion. In other words, whereas in 1951, the United States’s holdings of gold represented 3.5 times the amount of the country’s net short-term indebtedness, in 1971 these holdings covered no more than 22 percent of this external debt.

Thus, through the working of the international monetary system, : the United States occupied a privileged position: its national • currency being accepted as an international reserve, it did not have to worry about its balance of payments — in other words, the deficit in the country’s balance of payments was automatically covered by a credit advanced to the United States by the rest of the world.

This asymmetrical working of the system to the advantage of the North American center was accepted so long as the United States held a position of strength in relation to the other developed capitalist countries. In fact, so long as the United States’s industrial superiority in all fields was expressed in a permanent tendency for that country’s external balance to show a surplus, a “hunger for dollars” was general in the world, and the system could function. Since then, however, Europe and Japan have made substantial progress, and in some fields have become competitors of the United States. Also, the United States has engaged in a world­wide policy of intervention that has exceeded its real strength, as is shown by the defeat of the Americans in Vietnam. These two ; factors have led to the United States’s external balance becoming. defιcitary. Dollars are thus accumulating to the credit of foreigners in ’,quantities far greater than the latter wish to hold. Placed in relation to the United States’s holdings of gold, these credits are now seen to be plainly inconvertible, and even perhaps hard to recover in any way: confidence in the dollar has been shaken, and the international monetary system is crumbling.

Analysis of the causes to which the world monetary crisis has been attributed, and examination of the solutions advocated, pro­vide valuable lessons. The best experts in the Western countries admit that the crisis is due not to an overall shortage of inter­national liquidities but to the anarchy that reigned in the evolu­tion of the different components of the international stock of reserves. They refrain, however, from analyzing the significance of this anarchy in terms of conflicts between the nations at the center of the capitalist system, conflicts that emerge whenever the equilibrium of relations of strength is challenged by the uneven development of the different capitalisms in question. The solutions they recommend are either ineffectual or else express pious wishes that assume the conflicts of interest have been settled.

The tendency for the United States’s balance of payments to show a surplus in the period after the Second World War did not express a particularly “fortunate” structural equilibrium but rather a disequilibrium over which American domination had been imposed. The dollar as a universally accepted international reserve currency expressed this domination. In the last ten years this situation has been challenged by the rapid advance of Europe (particularly West Germany) and Japan. The new balance of forces is no more harmonious than the old, but it is different. It is also expressed in a tendency to disequilibrium in the external balances of the powers, but the other way around from previously: it is the balances of West Germany, Japan, and some other countries that now tend to show a surplus, while that of the United States shows a deficit. Defenders of the United States such as Kindleberger deny that the American balance of payments is “really” a deficit, considering that the deficit is only “apparent,” merely a reflection of the use of the dollar as a reserve currency. If this were so, there would be no crisis. The fact that there is a crisis — expressed in the devaluation of the dollar in 1971 — proves that dollars are accumulating in excess of the desire for cash holdings of dollars on the part of the economic agents. Few experts acknowledge that the crisis reflects a reversal of the direction of the system’s permanent structural disequi­librium, the balance having tipped the other way during the ; 1960s, because to do this would necessitate recognizing that the ■ world system is based upon a structural adjustment of the weaker ' to the stronger.

Reversal of the tendency in the world balance of strength is not, of course, something that happens in an instant, and it would be a mistake to conclude that American capitalism has lost all its vitality. This is why the controversy regarding the evolution of the United States’s balance of payments continues to be confused. It is not to be denied that the flow of American capital exported to Europe forms one of the elements in the American deficit, nor that this flow has been, at least in part, caused by the dis­criminatory measures taken by the European Economic Community and the European Free Trade Association against American goods, measures that have been got around by the installation of Amer­ican firms in Europe itself. These measures constitute, however, a means by which Europe has re-established its position, a weapon from the Continent’s arsenal brought into action in order to change the unfavorable balance of forces resulting from the war. It is a means that, in conjunction with others, has proved effective. The flow of capital originating from the United States does not testify only to the continued vitality'θf American capitalism but also to the difficulties facing accumulation within the United States, that is, the disequilibrium of the American economy. It ultimately results in a slowing down of growth in the United States and an acceleration of growth in Europe, and thus forms one element in the process of change in the balance of forces. What has shocked the Europeans is that the international monetary system, based on principles derived from a period now left behind, has enabled the Americans to finance their exports of capital so cheaply. Indeed, the use of the dollar as international currency has made it easy for them to borrow the capital with which they have financed their investments in Europe. Now, the rate of interest paid on these somewhat “forced” loans is a modest one (less than 3 percent), whereas the rate of profit realized thanks to the investment that they make possible is substantial (between 7 and 15 percent). This mechanism of transference of value toward the dominant center is classical, being no different from that which is normally expressed in relations between the center and the periphery, in a monetary zone of the colonial or neocolonial type. It is being challenged precisely because the way the balance of strength is evolving does not justify any longer such an excessive advantage in favor of the United States.

Refusal to consider the change in the relations of strength as what underlies the reversal in the direction of a permanent struc­tural disequilibrium explains the disorderly and contradictory character, as well as the theoretical feebleness, of the solutions being recommended. These solutions all belong either to the catego­ry of Hexiblechanges ortothat of a universal currency. Those in the first category are ineffective; those in the second are impossible.

Flexible changes cannot be introduced if the system suffers from structural Hisequilibria, which is the case, for they bring about permanent disorder. “Creeping parities” or margins of fluctuation permitted to operate within the framework of a regime of fixed exchange rates constitute palliatives, not solutions. As for the adoption of a universal curency, that is, an instrument issued by a supranational authority, this assumes that the problem has already been solved, with the conflict of interests settled at the level of this supranational authority. The return to the gold standard — in other words, a concerted restoration of the value of gold — would in theory enable the volume of international liquidity to be increased, but the way these liquidities were distributed would still be inadequate, and the evolution of this distribution would remain subject to that of the balance of strength. Furthermore, the system would not rid the world of the practice of using the national currencies of the dominant countries as international reserves. It has been pointed out to those who look back nostal­gically to the nineteenth century that the gold-standard system was also, de facto, a sterling-standard system, sterling being the national currency of the dominant country of that time. Any alteration in the international balance of forces would therefore result in the role of key currency being transferred from one currency to another. Moreover, it is hard to see what power would w^,ish to initiate this worldwide revaluation of the yellow metal, since the two chief beneficiaries would be South Africa and the USSR. If gold is revalued, it will happen only because the creeping inflation of our time demands this, so long as gold continues to be used as one of the means of international payment.

The idea of a universal credit money is not new. Keynes advocated it in 1945, with quasi-automatic issue of “bancors” in response to international disequilibria. Even though the granting of these credits would be subject to conditions, the system could operate only in cases where, because the disequilibria were transient, the monetary policies laid down by the issuing agency could be effective; or else in cases where, the disequilibria being structural, the agency was endowed with a considerable supranational authority, such as to enable it effectively to lay down the direction to be taken by the growth policies of the states concerned and to impose a worldwide policy of har­monious development. Triffin takes up this utopian scheme at the point at which Keynes abandoned it. The reconciliation he under­takes between the evolution of the international system and that of the national currency systems, formerly based on gold, to which are juxtaposed fiduciary currencies issued by a multitude of institutions that are gradually subordinated to a single center, the central bank, is not in itself an absurd idea. But the “one and only reserve center" that he proposes, on the world scale, which would be the bank for the central banks and would create reserves in such forms as to ensure that their volume and distribution were constantly adapted to the needs of world trade, assumes that conflicts between nations no longer take place.

The system has thus remained based upon gold and the key currencies. The drawing rights of the IMF are credits granted in these key currencies, and nothing more. So long as the dollar was the only key currency, the IMF was merely an executive agency of the U.S. Treasury. As soon as other currencies began to aspire to this role, the IMF became one of the scenes of conflict between these currencies and the dollar. The creation in 1969 of special drawing rights has not altered the situation at all. Triffin may well be scandalized by the rule according to which these special drawing rights are automatically distributed in accordance with quotas, so that 72 percent is reserved for the United States and Great Britain and less than 20 percent allotted as “manna” for eighty underdeveloped countries, just as he may find “revolting” the use of these credits to finance national policies (actually, American war policy in Vietnam). But none of this ought to excite surprise, for the crisis is not an expression of some abstract conflict between a “palaeonationalist” ideology, equally shared by all nations, and the lofty ideal of a universal order. It expresses a concrete conflict, that which counterposes the dollar, inheritor of a dominant position with all its advantages, to the candidates for a “more equitable” sharing of these advantages — first and fore­most,'the German mark and the Japanese yen.

Europe’s experience bears witness, moreover, to the nature of the conflict. After 1964 the EEC considered a system of free exchange rates, accompanied by measures of monetary solidarity secured by the operation of short-term stabilization policies. This type of “concertation” has proved effective, however, only where there has been no major conflict of interest. The crisis of 1968 put an end to illusions, and it is now accepted that a common currency — or, what comes to the same thing, unlimited convertibility at a fixed rate — necessitates a single decision-making center, ensuring the operation of a single economic and social policy on the scale of Europe as a whole.

While there is no supranational authority on the world or the European scale, there are, however, some transnational authorities, namely, the multinational corporations. But these constitute not a group with a single purpose but a variety of conflicting interests whose conflicts cross frontiers and are superimposed upon the conflicts between national capitalisms. This is why it is no longer possible to be satisfied, as was the case twenty years ago, with arguing in terms of national conflicts without examining the strat­egies of the multinational corporations. The appearance of “Euro­dollars,” first observed in 1957, the development of the market in ι these liquidities with the subsequent rise of similar markets for ¾ other currencies, namely, the mark and the yen, testify to the > increasing role played by the multinational corporations. These ; assets, payable in dollars (and now in other currencies as well), - held by nonresidents in the United States (or in the other relevant / country), and deposited outside the United States (or other rele-; vant country) are derived to a large extent from the treasuries of; the great multinational corporations. These holdings, which are extremely mobile, are not those of a multitude of “small specu- ■ Iators,” as was formerly the case with the bulk of floating capital. ∣ Their mobility is due to their origin — the multinational corpora­tions being able, by mere internal book entries, to transfer them withoutany difficulty. The scale on which Eurodollars, Euromarks, Euroyens, and so on enter into international reserves is consider­able: in 1971 it was of the order of $12 billion. The communication between the different currency markets they make possible certainly undermines the effectiveness of national monetary policies, and thereby introduces an additional factor of instability into the system..

The international monetary crisis must therefore be interpreted as the specific form taken in our epoch by a crisis of a deeper kind. The phase of rapid growth that characterized the center as a whole after 1950 is coming to an end. The slackening of growth rates shows this, with "stagflation” (stagnation despite inflation) replacing growth accompanied by inflation. Contradictions sharpen between nations as between multinational groups and corporations, and, with this development, the struggle for external markets becomes a battle. At the same time, the balance of forces that was characteristic of the postwar period, based on domination by the United States, is changing fast. Hence the twofold crisis: the underlying crisis in the equilibrium between production and con­sumption, and the superficial crisis of the international monetary system.

The underdeveloped countries and the international monetary crisis. The underdeveloped countries have no say in the matter of the international monetary system. Formally, of course, they are members of the IMF, but whereas in some other international bodies they do occupy a few jump seats, so to speak, in the IMF they are wholly supernumerary. The quota of each member-state being paid (to the extent of at least three-quarters of the total amount) in its own national currency, their contribution has only symbolic significance — and the resources effectively utilizable by the IMF are less than the total of the quotas consisting of these valueless contributions, since their national currencies are not means of international payment, as are the key currencies (the dollar and the pound sterling), or the other hard currencies (the mark, the yen, the Swiss franc, etc.), some of which aspire to join the dominant group.’ This is why IMF policy is actually decided by the more exclusive “Group of Ten,” which constitutes the real international monetary system.

Admission of the underdeveloped countries to the IMF fulfils, in fact, two functions. The first is that of constituting a manoeu- verable reserve force to which the advocates of different policies within the Group of Ten can appeal: at the 1967 Rio conference the United States secured acceptance of “special drawing rights” by making play with the fact that a small share in these rights would be available to those of the eighty "poor” members of the Fund who would submit to whatever policies the latter might recommend.

The second function of the IMF is, indeed, to keep the monetary! behavior of the periphery within the bounds set by the needs ∂f' the international system. Thecolonial powers possessed, and some-; times still possess, much more effective instruments for this purpose’ — the currency zones (sterling, franc, escudo, etc.) and the network constituted by their commercial banks. Immediately after the Second World War, the whole of Africa and nearly the whole of Asia were still dominated by the pound sterling, and to a smaller extent by the French franc. This still-important authority possessed by the pound, out of proportion with the place of Great Britain in the world economy, was one of the main reasons why this currency was consecrated by the IMF as the second-ranking key currency. At that time, however, Latin America was still, as a whole, free from any formal monetary control from outside. Furthermore, the United States aimed to establish a footing in the parts of Asia and the Middle East that were becoming politically independent.t The IMF provided the framework needed for the United States to proceed with this takeover. The policy proved successful: gradually, Latin America became drawn into the dollar area, while Asia and the Middle East left the sterling area. When, in 1960, large parts of Africa acquired political sovereignty, they could not be refused admission to the. Fund, even though such membership meant little to those countries which, like those of the franc area, lacked the minimum of monetary independence that would enable them to pursue any sort of monetary policy of their own.

In order to understand how the Fund carries out this function for the system where the countries of the periphery are concerned, it is necessary to remember, first of all, that the underdeveloped countries suffer almost permanent difficulties in their external payments, reflecting the fundamental structural disequilibrium between center and periphery, and the systematic transfer of value from the latter to the former.

While we possess more or less adequate information on the volume and evolution of the reserves, both gross and net, held by the developed countries, we still know little about the situation in this respect of most of the underdeveloped countries. The gross reserves of the monetary system have been counted, but the degree of indebtedness of the underdeveloped countries is not well known. The distinction between short-term debts (the only kind that, to some extent, are recorded in bank records) and medium- and long-term debts is in this sphere a fluctuating one with little significance. A far from negligible part of long-term indebtedness serves, in fact, to cover the immediate needs of current consumption, which is largely made up of imported goods. The debts of the monetary system are thus supplemented by those of the state and of both private and public enterprises. Considerable sums, moreover, are represented by the holdings of “residents” (including nationals of these countries) illegally deposited abroad, which nevertheless do not form part of the nation’s reserves, because in no case are these holdings destined for repatriation.

Observing the state and evolution of the gross reserves held by the Third World, as shown in IMF statistics, one may, therefore, get the impression that the underdeveloped countries do not, as a whole, suffer from a shortage of international liquidities.

As regards the Asian countries, the gross international reserves of twelve states that are not oil-producing, for which comparable statistics have been available since 1948, fell from $5.4 billion in 1948 to $3.7 billion in 1951 and $3.6 billion in 1966, while these countries’ imports increased from $4.4 to $5.1 billion and then to $9.5 billion between these same dates. Asia, which after the war possessed considerable reserves, in particular the sterling balances held by India (amounting to more than £1.2 billion for India and Pakistan together), saw these reserves melt away rapidly between 1948 and 1951 (the ratio of reserves to imports fell from 122 percent to 73 percent), and then more slowly, but steadily, after that date (the ratio was 38 percent in 1966). The reserves of large countries such as India and Pakistan no longer cover more than a quarter’s imports. The reserves of smaller states have behaved better, notably those of Thailand, which increased by $0.7 billion between 1948 and 1966. The reserves held by the oil-producing countries of the Middle East have markedly increased: those of Iran and Iraq from $0.3 billion in 1951 to $0.7 billion in 1966, while those of Kuwait (reserves of the Currency Board and the government) rose to the figure of $1.1 billion and those of Saudi Arabia (Saudi Arabia Monetary Agency) to $0.8 billion.

In Latin America calculations for sixteen countries for which we have comparable statistics show that the ratio of reserves to imports, which was about 50 percent in 1948 (when reserves amounted to $2.5 billion and imports to $5 billion) remained unchanged until 1953. Imports were then $5.9 billion and reserves $2.8 billion, Mexico having contributed almost single-handedly to this improvement in reserves. After 1953, however, the situation steadily worsened. In 1962 reserves did not exceed $2.3 billion while imports stood at $7.9 billion (so that the reserves-to-imports ratio had become less than 30 percent). True, between 1962 and 1967 the situation seems to have improved, since, although imports rose to $9.5 billion, reserves rose to $3.1 billion. This improvement came almost entirely from two sources: the increase in the reserves held by Venezuela, a large oil producer (an increase of $254 million in five years), and, especially, by Argentina (which rose from $132 million in 1966 to $625 million in 1967) as a result of that country’s policy of deflation. Apart from these two countries, the reserves-imρorts ratio continued to decline, falling from 30 percent in 1962 to 23 percent in 1967 (reserves: $1.6 billion, imports: $5.1 billion).

As regards Africa the statistics for the twenty-eight countries for which we have comparable series from 1960 onward show a reduction in gross international reserves from $2.9 billion in 1960 to $2.2 billion in 1965, while their imports grew between these dates from $4 to $5.9 billion.

Between 1964 and 1970 the evolution of the ratio between gross reserves and imports seems to have been favorable to the underdeveloped countries. Gross reserves rose from $9.9 billion in 1964 ($2.2 billion being contributed by the chief oil-exporting countries) to $18.1 billion in 1970 ($4.2 billion being contributed by the oil-exporting countries), whereas their imports increased from 35.5 to 55.6 billion. These countries’ gross reserves thus rose from 28 percent of their imports in 1964 to 32 percent in 1970.

If we look, however, at their net reserves, that is, their reserves after deduction of short-term external debts, we find a definite worsening of the situation between 1950 and 1970. For example, for the twenty-eight African countries under consideration, the ratio of net external reserves to imports fell from 60 percent in 1960 to 23 percent in 1965. The same is true of Asia and Latin America, where net reserves represent about two-thirds of gross reserves, with indebtedness increasing faster than the volume of gross reserves.

How, in these circumstances, have the underdeveloped countries managed to meet their external obligations? Partly it has been done by a mobilization of their “conditional reserves.” Drawing rights on the IMF constitute the first type of reserves made available to certain countries of the Third World that have agreed to submit to the Fund’s advice, embodied in “stabilization plans.” The second type of conditional reserves results from bilateral agreements: these credits have been granted for purchases of goods (often specified in the agreement in question) to be made in the country that grants them. Although the figures concerning these agreements have not always been published in full and comparable form, we know that the volume of these conditional assets has considerably increased over the last decade. Finally, some countries have no problem, strictly speaking, as regards international liquidities. This is the case, for instance, with the African countries of the franc area, since any deficit that may occur in their balance of payments is automatically covered by the metropolitan country. On the other hand, however, these countries possess no means of managing their currencies, either internally or externally.

In general, any serious attempt at development made by a country of the periphery leads inevitably to difficulties in external payments. If powerful means of controlling these external relations and of guiding the strategy of transition are not brought into play in good time, the crisis thus caused gives an opportunity to the “great powers” and to the international institutions dependent on them to intervene and impose a “stabilization” that always deliberately sacrifices the purposes of development to the requirements of short-term solvency — in other words, to maintenance of the status quo.

For a Scientific Theory of the Structural Adjustments Between National Formations

Inspired by ideological concern to discover mechanisms that ensure harmonious equilibrium, conventional theory excludes from its field of investigation the real problem, which is that of the struc­tural adjustment by which certain national formations are subjected to others, being shaped in accordance with the needs of these others. This problem of structural adjustment is seen to be funda­mental when we examine relations between the.center and the periphery, but also when we study the way relations between the different central formations evolve.

Conventional theory has proved to be bankrupt, for it cannot prove what it is supposed to prove, namely: (1) that a mechanism ■exists whereby the balance of payments tends toward a spontaneous equilibrium; (2) that to this equilibrium.there corresponds one rate of exchange and only one; and (3) that this equilibrium, and the rate of exchange that corresponds to it, are independent of any structural changes that may take place in either of the partners. If, indeed, different equilibria are possible, depending on the structural conditions of the partners, then no “pure theory of international relations” is possible. The “economic policies” recom­mended that are based on this “theory” must therefore be ineffective — or, more precisely, the results achieved will be independent of the policies pursued, with successes, like failures, having their real causes elsewhere.

What then is left of the conventional economistic theory of international relations? Practically nothing. The ideological char­acter of this pseudo-science is clearly perceived. Its mechanistic formalism prevents it from grasping the real problem: on the contrary, its function is to evade this real problem in order to provide justification for the international system based on inequality and to ascribe to it a harmony that it does not possess. Franςois Perroux and Thomas Balogh have not hesitated to criticize severely the “international monetary policies” based upon this set of "non- Scientific prejudices.”

The real problem lies elsewhere — in historical analysis of the evolution of social formations; in the analysis of their respective dynamics and their specific contradictions; in the real, historical, concrete conditions of uneven development.