Chapter 55 The British pound finally can't stand it anymore

By the early 1960s, de Gaulle's policy of independence and autonomy was not the only critical issue facing the financial world in New York and London. In 1959, the foreign debt of the United States was still close to the total value of her official gold reserves, both around $20 billion.By 1967, when the British pound crisis threatened the entire Bretton Woods system, the total overseas current debt of the United States had risen sharply to 36 billion U.S. dollars, but its gold reserves had plummeted to 12 billion U.S. dollars, only three times the total debt. one-third. As short-term foreign debt in the United States begins to outstrip gold reserves, some astute financial institutions reckon that sooner or later some rules will be broken. In January 1961, President Kennedy pointed out in his first address to both houses of Congress that since 1958 the difference between the dollars we spend or invest abroad and the dollars that come back to us has increased dramatically.Over the past three years, our total trade deficit has increased by nearly $11 billion, and holders of foreign dollars have converted them into gold, an amount so large that it will drain nearly $5 billion from our gold reserves.

There are signs that President Kennedy is serious about addressing the growing dollar outflow.Shortly before his death, Kennedy, in a report to Congress on July 18, 1963, proposed a series of measures aimed at increasing U.S. manufacturing exports, as well as a controversial "earnings equalization tax" measure, to combat the growing adjustments to the trade deficit.Taxes of up to 15% on U.S. capital invested abroad are intended to encourage U.S. money to be invested at home rather than abroad. Kennedy did not live to see his Gains Equalization Tax Act passed.When the law was finally passed in September 1964, some powerful figures in the New York and London financial circles had inserted a seemingly innocuous amendment that provided that there would be one country exempt from the new wealth tax, the country It is Canada, an important part of the Commonwealth of Nations.In this way, Montreal and Toronto have become pipelines of huge loopholes, and through the mediation of financial institutions controlled by London, the continued outflow of US dollars can be ensured.It was one of the oldest financial coups in British history.

Also, loans made by foreign branches of U.S. banks are exempt from the new U.S. tax.American banks raced to establish branches in London and other suitable central cities.Once again, the British financial community made London the center of world finance and banking by developing a new giant "Eurodollar" bank and lending market. When the former "world bankers" began hoarding the diverted American dollars, London saw the light of day again.The Bank of England and Sir Sigmund Wahlberg of London, with the help of his friends in Washington, especially Under Secretary of State George Power, very skillfully lured dollars into the Eurodollar market in London, where it would become Largest concentration of dollar credit outside of the United States.By the 1970s, an estimated $13 trillion was pooled in "short-term liquidity," all of which was "offshore," that is, not bound by any country or central bank.New York banks and Wall Street brokerage houses set up offices in London to handle the booming new Eurodollar market, eluding the prying eyes of the US tax authorities and getting cheap money from the Eurodollar market and the big multinationals.In the early 1960s, Washington readily opened the door, allowing dollars to flow from America's shores to Europe's new market for dollar "short-term liquidity."

Buyers of these new Eurodollar bonds—called Eurobonds—were anonymous, and bankers dubbed them “Belgian dentists,” and London, Switzerland, and New York ran the new game.These Eurobonds are "bearer" bonds, that is, the buyer's name is not registered anywhere, which is very important for so-called Swiss investors looking for opportunities to evade taxes, or even drug lords who want to make illegal profits through money laundering. popular.What could be better than having black income on Eurodollar bonds paid by General Motors? Marcello Seco, an Italian analyst who is very sensitive to Eurodollar, emphasized: "The Eurodollar market was the most important financial phenomenon in the 1960s, and it was the cause of the financial turmoil in the early 1970s."

But, contrary to the interests of international financiers in London, by the mid-1960s Britain's industrial economy was becoming increasingly disorganized and increasingly Oops. Confidence in sterling, the second pillar of the post-war Bretton Woods system after the dollar, also collapsed rapidly.For a period of time, Britain's foreign trade balance and overall economic situation have been unstable. Officials have always promised to maintain the status of the empire, but the industrial base has been destroyed and the reserves are obviously insufficient.After the Labor Party came to power in October 1964, the crisis became more or less protracted.

After the war, under the Bretton Woods system, Britain, through its links with its colonies and the sterling bloc of former colonies, could have made the pound a hard currency, a stable reserve currency in many parts of the world, rivaling the dollar.The United Kingdom requires members of the Commonwealth of Nations (gentlemen on the surface, of course) to deposit their respective countries' gold and foreign exchange reserves in London to maintain the London Bank's sterling balance.Britain's quota in the International Monetary Fund is second only to the United States.Thus, the stability of sterling was very important to maintain the dollar order in the Bretton Woods system of the 1960s, even though its economic conditions had clearly deteriorated.

In the 1960s, Britain, like the United States, was a net exporter of capital to the rest of the world in financial capital, despite the fact that its industry and technology had stagnated, creating a growing trade deficit.Instead, the Continent's economies prospered thanks to growing trade within the new common market and the production advantages gained from heavy investment in technology. In comparison, the UK's investment in new technologies is obviously insufficient.London's financial interests were always keen to attract money, and throughout the mid-1960s, by maintaining interest rates higher than those of all major industrial nations, attracted world money to flow into London banks, while industry was in decline and unable to lend for the necessary technological innovation.

By 1967, Britain's position had become fraught.Despite several attempts to stabilize the pound with emergency borrowing from the International Monetary Fund, the UK's external debt continued to grow, rising another $2 billion, or about 20%, this year alone. In January 1967, Jacques Ruyff, de Gaulle's chief economic adviser, came to London to propose raising the official price of gold in the major industrial countries.The U.S. and U.K. rejected the proposal because it effectively meant devaluing their currencies. Throughout 1967, the Bank of England's gold reserves had been decreasing. Once foreign creditors learned that the increasingly weak pound was about to depreciate sharply, they would definitely exchange paper money for gold. They believed that the price of gold would definitely rise. In June 1967, the de Gaulle government announced that France had withdrawn from the "gold reserve pool" instigated by the United States. In 1961, under intense pressure from Washington, the central banks of ten major industrial nations formed what came to be known as the G-10.In addition to the US, UK, France, Germany and Italy, this group also includes the Netherlands, Belgium, Sweden, Canada and Japan. In 1961, the G10 agreed to pool their reserves in a specific fund, the Gold Reserve Pool, managed by the Bank of England in London.According to the rules, when an emergency occurs, it is best to take temporary measures to remedy, and the US central bank only bears half of the cost of maintaining the world gold price at the artificially low price of 35 US dollars per ounce in 1934.If only temporarily, nine other countries, including Switzerland, agreed to cover the other half of the cost of an "emergency" intervention.

By 1967, the "emergency" had turned protracted, with Washington refusing to rein in its war spending deficit, and with the continued weakening of the pound as the British economy collapsed.De Gaulle withdrew from the gold reserve pool, and did not want to invest more gold reserves of the French Central Bank into the bottomless pit.The American and British financial press, headed by The Economist in London, began to strongly criticize the French policy. In the process, however, de Gaulle made a tactical error. On January 31, 1967, France passed a new law allowing unfettered convertibility of francs in France.At the time, French industrial growth was among the highest in Europe, and the franc was backed by the strongest gold reserves, and its convertibility was seen as a testament to the success of French economic policy since de Gaulle took office in 1958.But it quickly became the fate of de Gaulle-era France to Anglo-American financial interests.

In a public speech in February 1967, French Prime Minister Georges Pompidou reiterated that France insisted on a monetary system backed by gold as the only means of avoiding international manipulation, adding that "the reason why the international monetary system does not work effectively is that Because it gives some advantage to countries with reserve currencies (such as the United States): these countries can afford the consequences of inflation without paying the price.” In fact, the Johnson government and the Federal Reserve System only need to print dollars to replace gold, and then Send them abroad.

The conflict became more acute in 1967 when France's central bank decided to convert its dollar and sterling reserves into gold, withdrawing from the 1961 agreement on a voluntary gold reserve pool.Other central banks followed suit.The situation bordered on panic as by the end of the year some 80 tonnes of gold had been sold on the London market, which had not been done in five years, and efforts to stem speculation were ineffective.Fears are growing that the whole of Bretton House is about to collapse before its weakest chain, the pound. Financial speculators in the second half of 1967 were busy selling pounds in all possible markets, buying dollars or other currencies that could buy commercial gold from Frankfurt to Pretoria, causing a sharp rise in the price of gold, and then Nor is it the official U.S. price of $35/oz.The sterling crisis indirectly directed attention to an increasingly glaring vulnerability at the heart of the international monetary system - the dollar. By November 18, 1967, despite strong pressure from Washington, Britain's Harold Wilson Labor government resigned to its fate and announced a 14% depreciation of the pound, from $28 to $24 per pound, the most since 1949. The pound depreciated for the first time.The sterling crisis is over, but the dollar crisis has just begun. Once the pound depreciated, the speculative pressure immediately turned to the dollar.International dollar holders go to the gold discount window of the Federal Reserve System in New York to demand legal exchange for gold.As a result, the market price of gold rose sharply. Although the US Federal Reserve System sold gold reserves to the market to prevent the price from rising, it was difficult to save the situation.Washington, manipulated by the dollar-based Bank of New York, steadfastly refused to adjust the official gold price of $35 an ounce.But the withdrawal of France, one of the largest holders of gold, from the G10 gold reserve pool exacerbated the problem.By the end of the year, Washington's official gold reserves had fallen by another $1 billion, to just $12 billion.