Friday, December 21, 2012

HEGEMONY OR VULNERABILITY? - Giscard, Ball, and the 1962 Gold Standstill Proposal

Giscard, Ball, and the 1962 Gold Standstill Proposal
Francis J. Gavin and Erin Mahan

"What was the character of America's international monetary relations with Europe during the early 1960's, and how were they related to the larger power political questions of the day? There is a standard interpretation of this question. During this pre-Vietnam war period, the argument runs, the United States strove to maintain hegemonic power visà- vis Western Europe "based on the role of the dollar in the international monetary system and on the extension of its nuclear deterrent to include its allies." Since this economic dominance resulted from the structure and rules of the Bretton Woods monetary system, the Americans had no interest in reforming arrangements that were "a prerequisite for continued American global hegemony."2 "Because it was interested in preserving the privileges it derived from the operation of the Bretton Woods regime," the United States would not "condone a structural reform" of the system that threatened "the continued preeminence of the dollar."3 And while most of "America's allies acquiesced in a hegemonic system that accorded the United States special privileges to act abroad unilaterally to promote U.S. interests," the French did not.4 The Fifth Republic government, led by Charles de Gaulle, deeply resented the privileges they believed the system conferred upon the American dollar and actively exploited America's balance of payments position in an attempt to force the United States to abandon the Bretton Woods system. The United States, the conventional wisdom holds, was able to thwart this French effort, until the American deficit ballooned in the late 1960's and early 1970's as a result of massive "guns and butter" inflation.

The real story is rather different. American policymakers had no great love for the Bretton Woods system. It was associated in their minds not with American hegemony, but with American vulnerability. The United States was running a payments deficit; the Europeans were in effect financing that deficit and were thus enabling the Americans to live beyond their means. But the Americans did not view this as a source of strength: the growing European dollar balances, which, under the rules of the system, could be cashed in for gold at any time, were a kind of sword of Damocles hanging over their heads. The U.S. government felt vulnerable and it did not like it. Kennedy feared that if the system was not reformed, then the Europeans might come to the conclusion that "my God, this is the time… if everyone wants gold we’re all going to be ruined because there is not enough gold to go around."

The most surprising fact to emerge from French and American documents is that for a brief period in 1962, the French appeared willing to help the United States out of its monetary difficulties. Instead of hostility towards the dollar, Minister of Finance Valéry Giscard d'Estaing, was, for a time, cooperative. Inspired by Giscard's hints of support, Undersecretary of State George Ball and key members of the Council of Economic Advisors (CEA) crafted a monetary plan that would have essentially ended Bretton Woods while providing the Americans with time and protection to end their balance of payments deficits. The key provision of this plan was a gold standstill agreement, whereby the European surplus countries would agree to hold US deficit dollars and formally limit their gold purchases from the American Treasury. In return, the United States would move aggressively to end its balance of payments deficit. At the end of the agreement (likely to be two years), a new international monetary arrangement would be negotiated with the Europeans. Surprisingly, many within the Kennedy administration were willing to sacrifice the central role of the dollar and its "seigneurage" privileges in any new system, a position that would have had much appeal for the Europeans. While elements of the administration were enthusiastic about Giscard's hints and Ball's plan, the more financially orthodox members from the Department of Treasury and the Federal Reserve vehemently opposed the arrangement. Given the poor state of Franco-American political relations in the summer of 1962, the President was himself unsure of French motives, and in the end formal negotiations never began. Was Giscard's offer a missed opportunity? U.S. officials at the time were perplexed and scholars since then have neglected it entirely..."

"...The key to any plan was getting the Europeans to maintain the same or a smaller proportion of their reserves in gold. James Tobin of the Council of Economic Advisers (CEA) produced a plan to accomplish this.63 To meet Giscard’s demand for similar conversion policies among the European nations, Tobin suggested that the leading industrial countries determine a uniform ratio of gold to foreign exchange to which all countries would have to adhere. This would require countries with gold in excess of this ratio to sell a part of their gold for foreign exchange. Instead of only using the dollar and sterling as the reserve currency, the currencies of all participating countries (assumed to be the Paris club) would be equally acceptable. That provision would satisfy French demands that the franc be treated as a reserve currency on par with the dollar. Each country would provide a gold guarantee for their currency against devaluation. Tobin laid out several different ways this could be done, but they would all involve the U.S. selling gold for foreign exchange and retiring dollar liabilities. Some European countries would also have to sell or buy gold. Over time, the non-gold component of reserves would decrease, and the currencies of the participating countries would increasingly share the burden borne solely by the dollar. Removing the wide variations in gold ratios would make the international monetary mechanism more predictable and manageable...."

"...The President was keenly interested in these plans, and commissioned a small, inter-departmental group from State, the CEA, and Treasury to come up with an outline of an interim international monetary agreement based on Ball's and Tobin’s ideas. The group produced a plan that focused on protecting the American gold supply and strengthening the dollar. The report claimed that cyclical forces would combine with measures already taken to bring America's balance of payments into equilibrium within a few years. The heart of the plan was a proposed standstill agreement between the ten members of the Paris club and Switzerland whereby the participants would agree not convert the official dollar balances they held at the start of the agreement into gold. In order to accommodate increases in the dollar balances of the participants over the two years of the plan, $10 billion would be mobilized from a variety of financial sources. This would include $1 billion of American gold sales, a massive $5 billion drawing on the IMF, $2.5 billion in swaps and direct borrowings from Europe, and up to $1.5 billion in forward exchange operations taken by the Treasury department. The purpose of this agreement was two-fold: to get the countries of Western Europe to “extend more credit to the U.S. than they might voluntarily” and to dampen speculative attacks on the dollar..." 

"Even with the plan in place, there were all sorts of potential difficulties. The two years had to be used to eliminate the “basic” deficit, and there would certainly be large-scale reshuffling and uncertainty when the arrangement ended. To make the plan work, it had to be acceptable to the Europeans, and in fact, had to be initiated by the Europeans, so that it did not look like an act of American weakness. The report did not suggest how the Europeans could be brought to accept let alone propose such a plan."


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