Even in 1960 the dollar was the victim of its own success. The real problem was to get the Americans to let the dollar be used as the world’s currency. That meant the printing of dollars for world (especially European) purposes. If any country bought more abroad — mainly of course in the USA — than it sold, its currency might become weak, and an International Monetary Fund came into existence, mainly with American contributions, to lend that country money to tide it over while it managed its affairs better, and sold more. The classic case of that was Germany, though the money came not from the International Monetary Fund but from other sources such as the Marshall Plan or the European Payments Union. There was also, from Bretton Woods, a World Bank (‘International Bank for Reconstruction and Development’) with, at the time, very limited resources. These institutions were meant to encourage world trade, made a brave start, encountered the Cold War and the troubles of western Europe, and stalled. Under the European Payments Union, a more limited system did emerge, and trade between the recovering (or booming) European countries was greatly promoted by it. If any country was in deficit on trade, its currency was supported by the country with the surplus. That way, the weaker country could go on buying. That system worked in the 1950s only in Europe. At the time, European currencies were still weak, and there was very limited credit; neither Frankfurt, the German financial capital, nor Paris had well-developed financial institutions such as a stock exchange, and in Germany most firms notoriously raised their own money from a bank or even from family savings. The system was closed to the dollar, as the European currencies could not be converted into dollars without enormous bureaucratic involvement. However, as trade grew, and as European prosperity rose, these restrictions came under pressure. In the first place, the Americans, using paper dollars, invested in Europe — in 1956 private dollars more than government ones. Conversion was therefore much easier for Europeans, especially Germans. But there were also easy ways round the restrictions: false invoicing, for instance, by which buyers and sellers agreed as to the recording of a figure for a purchase that was not true, the hidden balance then transferred, in dollars or Swiss francs, to some bank outside the system, in Switzerland for preference, though Luxemburg also made itself useful.
The Germans had been exporting successfully to the USA — their surplus on trade in 1958 amounted to $6bn — and had collected dollars. But dollars also went from the USA to Germany (and other European countries) because of the profits that investors could make there — greater than in the USA. There was a further problem. Some very large American firms established themselves overseas, partly to take advantage of cheaper labour costs, and partly to get over protectionist barriers. In France, especially, a desire to build up native industries meant that foreign goods were kept out. It was obvious, in that case, for the first of the great American electronic-computer firms, IBM or Xerox, to set up factories in France and elsewhere. These firms also represented a dollar outflow to Europe. The result was that in Europe there were large sums of money in dollars, the ‘eurodollar’.
In theory these dollars could be exchanged for gold, at $32 per ounce, and efforts were made to control the gold market somehow. If these dollars were at any stage sent back to the USA, with a demand for them to be exchanged into gold at the fixed rate, it might go beyond what the USA could stand. This eventually happened in summer 1971, and it was the end of the extraordinary quarter-century of prosperity that had followed the Marshall Plan of 1947. To stop this meant the Americans’ keeping their own government spending in reasonable bounds, and it also meant international co-operation: the European banks would have to buy up the spare dollars. A Belgian economist, Robert Triffin, who had migrated to Yale, had foreseen this problem — the Americans, required to send dollars abroad, would lose control of their own currency, and it could then slide in value. By 1960 eurodollars were already greater in value than the gold held in reserve at Fort Knox. With the British pound, which still accounted for half of the world’s trade, the problem was much greater, given the weakness of the British economy and the extent of British overseas commitments, with garrisons ‘east of Suez’ to keep some kind of control over the petrol reserves, or, for instance, to deter the Indonesians from invading Malaysian territory. As Europe recovered in the 1950s, these problems were under control, but by 1958 there was a deficit in the American balance of payments — $5bn — and $2bn went abroad in foreign investment.
American business was still enormously successful and the great firms — Ford, which was all over the place, but many others — were all doing well, setting up overseas. The eurodollar problem was still easily under control, and the problem would have gone away altogether if a dollar devaluation had been allowed, or some revaluation of the Mark, which was anyway very low. The German exporters themselves did not want such a revaluation, because they thought that, if their prices rose, they would lose customers; and in any case holders of eurodollars did not want their value to be reduced. Instead of a serious readjustment, various hand-to-mouth expedients were used. The International Monetary Fund’s resources were too low to be very useful — they were still, in 1958, at the same level as ten years before, despite the huge increase in trade. Instead, a group of trading industrial countries was set up, the G10, in 1960. This happened just when, for the first time, people sold their dollars for German Marks. Gold on the free market also rose above $32 per ounce. This did not worry Kennedy. In his first year, a decision was taken to increase spending, and to take on a deficit. It was the first point at which post-war financial management broke with old prudent ways. Not many people objected, at the time. As a leading expert, Barry Eichengreen, comments, it was all rather clumsily done, yesterday’s problems being solved by the creation of tomorrow’s. He adds, ‘the array of devices to which the Kennedy and Johnson administrations resorted became positively embarrassing. They acknowledged the severity of the dollar problem while displaying a willingness to address only the symptoms.’ Americans were not allowed to own gold coins; visas became easier to encourage tourism, the virtues of Disneyland advertised. Besides, the low official price of gold, and the difficulties set up about using it, discouraged output and so made the potential problem worse. In the USA inflation in the sixties ran to 30 per cent, the very problem that Keynes’s critics had identified.
What was at stake, in these very technical transactions, was the base of the enormous prosperity that the fifties had seen. Oil cost $1 per barrel — almost absurdly cheap, and fuelling a great automobile boom in the West, especially Germany and the USA (where cars became boat-like). Other raw materials were also very very cheap, partly because the market had been glutted, partly because, during the war, men had understood how to make more of them go round. Once the dollar fell in value, those raw materials would rise in price. Wise old heads did shake, but this was not a period when wise old heads counted for much. Keynes had sneered at them as the ‘orthodoxy’. In the 1960s the world financial system, which in a sense he had inspired, did work. The central bankers regularly met, at the Bank for International Settlements in Basle, and they knew the rules. The dollar and pound were the essential trading currencies for the world, and if their value became unclear, trade might suffer. Therefore, the central bank of a country with a strong currency, the Mark being the obvious one, would not sell a currency that others (‘speculators’) might already be selling: instead, the central banks would buy it and so keep up its value. They did not exchange dollars for gold, and in 1961 there were ‘swap arrangements’ for immediate support of the pound ($1bn, with another $3bn in 1964). The Germans refused to revalue the Mark, thinking that their trade might suffer, but they did forbid the payment of interest on foreign accounts and they (like the Swiss) co-operated to keep the dollar price of gold at or near the low official rate (the ‘Gold Pool’). Of course, the basis of it all was that the Americans were chief defenders of the West in NATO with the British as loyal seconds, and when the whole system became weak later on a German chancellor even spelled it out — in supporting the dollar the Germans were defending themselves. NATO developed its own military-financial complex, and the central banks were part of it. The ‘American Peace’ ruled and the world gave Kennedy a good welcome. The ‘New Frontier’ books became bestsellers, endlessly discussed, and the New York Review of Books made the timing. But do these books now survive, except as remembered titles?